Shareholder liability under Russian legislation could cause us to become liable for the obligations of our subsidiaries.
The Civil Code and the Joint-Stock Companies Law generally provide that shareholders in a Russian joint-stock company are not liable for the obligations of the joint-stock company and bear only the risk of loss of their investment. This may not be the case, however, when one entity is capable of determining decisions made by another entity. The entity capable of determining such decisions is deemed an “effective parent.” The entity whose decisions are capable of being so determined is deemed an “effective subsidiary.” Under the Joint-Stock Companies Law, an effective parent bears joint and several responsibility for transactions concluded by the effective subsidiary in carrying out these decisions if:
this decision-making capability is provided for in the charter of the effective subsidiary or in a contract between such entities; and
In addition, an effective parent is secondarily liable for an effective subsidiary’s debts if an effective subsidiary becomes insolvent or bankrupt due to the fault of an effective parent resulting from its action or inaction. This is the case no matter how the effective parent’s ability to determine decisions of the effective subsidiary arises. For example, this liability could arise through ownership of voting securities or by contract. Other shareholders of the effective subsidiary may claim compensation for the effective subsidiary’s losses from the effective parent which caused the effective subsidiary to take action or fail to take action knowing that such action or failure to take action would result in losses. Accordingly, we could be liable in some cases for the debts of our subsidiaries. This liability could have a material adverse effect on our business, financial condition, results of operations and prospects.
Shareholder rights provisions under Russian law could result in significant additional obligations on us.
As a general rule, Russian law provides that shareholders that vote against or do not participate in voting on certain matters have the right to request that the company redeem their shares at value determined in accordance with Russian law. The decisions of a general shareholders’ meeting that trigger this right include:
decisions with respect to a reorganization;
consent or subsequent approval by shareholders of a “major transaction,” which in general terms, is a transaction involvinginvolves property in excess of 50% of the balance sheet value of the company’s assets calculated according to the Russian accounting standards, regardless of whether the transaction is actually consummated (including those which are simultaneously interested party transactions), except for transactions undertaken in the ordinary course of business;
the amendment of the company’s charter or approval of a new version of the company’s charter that limits shareholder rights; and
the amendment of the public company’s charter which eliminates indication that the company is public, simultaneously with the decision on applying to the CBR on release from obligation to disclose information under the laws of the Russian Federation on securities and the decision on applying for delisting of shares and equity securities convertible into shares.
Our and our Russian subsidiaries’ obligation to purchase shares in these circumstances, which is limited to 10% of our or the subsidiary’s net assets, respectively, calculated in accordance with the Russian accounting standards at the time the matter at issue is voted upon, could have a material adverse effect on our business, financial condition, results of operations and prospects due to the need to expend cash on such obligatory share purchases.
The lack of a central and rigorously regulated share registration system in Russia may result in improper record ownership of our shares and ADSs.
Ownership of Russian joint-stock company shares (or, if the shares are held through a nominee or custodian, then the holding of such nominee or custodian) is determined by entries in a share register and is evidenced by extracts from that register. Currently, there is no single central registration system in Russia. Share registers can be maintained only by licensed registrars located throughout Russia. Regulations have been adopted regarding the licensing conditions for such registrars, as well as the procedures to be followed by licensed registrars when performing the functions of registrar. In practice, however, these regulations have not been strictly enforced, and registrars generally have relatively low levels of capitalization and inadequate insurance coverage. Moreover, registrars are not necessarily subject to effective governmental supervision. Due to the lack of a central and rigorously regulated share registration system in Russia, transactions in respect of a company’s shares could be improperly or inaccurately recorded, and share registration could be lost through fraud, negligence or oversight by registrars incapable of compensating shareholders for their misconduct. This creates risks of loss not normally
associated with investments in other securities markets. Furthermore, the depositary, under the terms of the deposit agreements governing record keeping and custody of our ADSs, is not liable for the unavailability of shares or for the failure to make any distribution of cash or property with respect thereto due to the unavailability of the shares. See “Item 10. Additional Information — Description of Capital Stock — Registration and transfer of shares.”
Characteristics of and changes in the Russian tax system could materially adversely affect our business, financial condition, results of operations and prospects and the value of our shares and ADSs.
Generally, Russian companies are subject to numerous taxes. These taxes include, among others:
income tax;
value-added tax (“VAT”);
mineral extraction tax; and
property and land taxes.
Laws related to these taxes have been in force for a short period relative to tax laws in more developed market economies and few precedents with regard to the interpretation of these laws have been established. Global tax reforms commenced in 1999 with the introduction of Part One of the Tax Code of the Russian Federation, as amended (the “Russian Tax Code”), which sets general taxation guidelines. Since then, Russia has been in the process of replacing legislation regulating the application of major taxes such as the corporate profitincome tax, VAT and property tax with new chapters of the Russian Tax Code.
In practice, the Russian tax authorities generally interpret the tax laws in ways that rarely favor taxpayers, who often have to resort to court proceedings to defend their position against the tax authorities. Events within the Russian Federation suggest that the tax authorities may be taking a more assertive position in their interpretations of the legislation and assessments. Contradictory interpretations of tax regulations exist within government ministries and organizations at the federal, regional and local levels, creating uncertainties and inconsistent enforcement. Tax declarations and documentation such as customs declarations, are subject to review and investigation by relevant authorities, which may impose severe fines, penalties and interest charges. Generally, in a tax audit, taxpayers are subject to inspection with respect to the three calendar years which immediately preceded the year in which the audit is carried out. Previous audits do not completely exclude subsequent claims relating to the audited period because Russian tax law authorizes upper-level tax inspectorates tore-audit taxpayers which were audited by subordinate tax inspectorates. In addition, on July 14, 2005, the Russian Constitutional Court issued a decision that allows the statute of limitations for tax liabilities to be extended beyond the three-year term set forth in the tax laws if a court determines that a taxpayer has obstructed or hindered a tax audit. As a result of the fact that none of the relevant terms are defined, tax authorities may
have broad discretion to argue that a taxpayer has “obstructed” or “hindered” a tax audit and ultimately seek back taxes and penalties beyond the three year term. In some instances, new tax regulations have been given retroactive effect.
Since May 2009, in connection with the proposal expressed by the Russian President in his Budget Message regarding the budget policy for 2010-2012, an overhaul of the anti-avoidance mechanism of double tax treaties has begun. In November 2014, Russian legislation was significantly revised in order to prevent unlawful usethe misuse oflow-tax jurisdictions for tax evasion in the Russian Federation. The amendmentsChanges in the legislation set out the rules for the taxation of income of a foreign organization that is deemed to berecognized as a controlled foreign company. ASuch foreign organization is recognized as a controlled foreign company if it is not a tax resident of the Russian Federation, and the participation interest of the controlling Russian legal entities or individuals in the organization is more than 25% (in some cases, more than 10%). The transition period providesStarting with the calculation of the profits of controlled foreign companies for a gradual reduction in the size of non-taxable profit, in particular, to 50 million rubles, 30 million rubles and 10 million rubles in 2015, 2016 and 2017 and thereafter, respectively.profits in the amount of not more than RUB 10 million are not subject to income tax. Russian tax law also provides for certain conditions under which the income of controlled companies qualifies as tax exempt. Starting from 2015, these changes in tax regulations could increase2016, the tax burden on companies which are recognizedtaxable income of the controlling party is increased by the profits of the controlled foreign company earned in the financial year ended prior to be controlling of foreign companies.the reporting year. In addition, Russian companies are required to disclose
information about controlled foreign companies to the Russian tax authorities. All of these measures are intended to ensure the transparency of economic transactions, including foreign trade transactions. Disclosure of beneficial ownership, beneficial recipients of income and tax residence of legal entities at their actual place of business is, according to the new legislation, a prerequisite for the application of tax preferences, including reduced tax rates under international double tax treaties. In November 2014, Russia ratifiedJuly 2015, the Convention on Mutual Administrative Assistance in Tax Matters whichbecame effective. The Convention provides for the potential exchange of tax information, including simultaneous tax inspections with Member States of the Council of Europe and member countries of the Organization for EconomicCo-operation and Development (OECD)(“OECD”), which signed the convention, as well as for assistance in the collection of taxes on their territories. Furthermore, starting from June 30, 2014, the Federal LawNo. 173-FZ entered into force, which regulates the procedure of interaction of financial market entities with foreign tax authorities, primarily within the bounds of the U.S. law Foreign Account Tax Compliance Act (FATCA)(“FATCA”).
On November 16, 2011, the Russian President signed the Law on Amendment of Part One and Part Two of the Tax Code of the Russian Federation in Connection with the Formation of a Consolidated Group of Taxpayers. The main provisions of the law came into force on January 1, 2012. The law provides for formation of a consolidated group of taxpayers for the purposes of profitincome tax calculation and payment on the basis of the combined business performance of the members of such group. However, the law sets forth a number of requirements for the formation of a consolidated group of taxpayers. Starting from 2013, 16 companies of our group have formed a consolidated group of taxpayers, with Mechel being a responsible party. The formation of the consolidated group of taxpayers allowed us to determine the taxable income with profit and loss offset of all the companies included in the consolidated group of taxpayers and to pay profitincome tax from total aggregate income under the consolidated group of taxpayers, starting from January 1, 2013. In 2014, there have been some changes in the composition of the consolidated group of taxpayers as a result the number of members has increased to 20 companies. Due to changes inUnder current Russian tax legislation, starting in 2015 the consolidated tax base does not include any profit received from controlled foreign companies by a member of the consolidated group of taxpayers (such member being the controlling entity of such controlled foreign companies and the responsible party for paying profitincome tax in respect of the profits of controlled foreign companies irrespective of the profitincome tax of the consolidated group of taxpayers).
However, regardless of being a member of the consolidated group of taxpayers or not, Mechel and our Russian subsidiaries pay Russian taxes on dividends they receive from other companies in our group. The tax rate on dividend income amounts to 0% or 13% (depending on whether the recipient of dividends qualifies for Russian participation exemption rules) if being distributed to Russian companies, and 15% (or lower, subject to benefits provided by relevant double tax treaties) if being distributed to foreign companies which are not controlled foreign companies. Dividends from foreign companies to Russian companies are subject to a tax of 13%. Taxes paid in foreign countries by Russian companies may be offset against payment of these taxes in the Russian Federation up to the maximum amount of the Russian tax liability. In order to apply the offset, the company is required to confirm the payment of taxes in
the foreign country. The confirmations must be authorized by the tax authority of the foreign country if taxes were paid by the company itself, and the confirmation must be authorized by the tax agent if taxes were withheld by the tax agent under foreign tax law or an international tax agreement.
In 2017, due to changes in Russian tax legislation, the order ofset-off of tax loss accumulated by Russian companies, including companies within the consolidated group of taxpayers significantly changed. Such changes have led to an increase in the Mechel’s tax burden. During the period from 2017 to 2020, the amount of recognized loss for previous tax periods cannot exceed 50% of the tax base of the current period. In 2021, this limitation will cease to apply and the recognition of accumulated losses in full will be possible again. At the same time, the previously existing10-year limit on the transfer of losses was cancelled.
The limitation in the amount of recognized loss is also applied to the members of the consolidated group of taxpayers with respect to current year loss of its members. Such limitation equals to 50% of the consolidated tax base of the consolidated group of taxpayers for the current reporting (tax) period. In respect of losses incurred in previous tax periods (before January 1, 2017), the consolidated tax base of the current tax period may be reduced by the amount of such losses, but also by no more than 50%. These changes in accounting the loss of the consolidated group of taxpayers have increased the tax burden on companies included in the consolidated group of taxpayers.
In 2018, Russian tax law introduced an indefinite ban on the registration by the tax authorities of agreements on the formation of a consolidated group of taxpayers, the extension of their validity and the introduction of changes related to the accession of new members or withdrawal from the consolidated group of taxpayers, unless such member ceases to comply with tax legislation requirements. In addition, January 1, 2023 is the expiration date of all agreements on the formation of a consolidated group of taxpayers.
In addition, application of current Russian thin capitalization rules and the developing negative court practice on such disputes, includingespecially at the level of the Presidium of the Supreme Arbitrazh Court of the Russian Federation, may affect our abilityrequire us to paywithhold dividend taxes in Russia upon payment of interest on loans in full.loans. In particular, taking into account the requirements of Russian law and negative court practice on thin capitalization, it is practicable to withhold as a dividend tax a part of the interest on borrowings of our subsidiaries which are either received from Mechel or received from independent banks and guaranteed by Mechel. In addition, part of interest on these borrowingsMechel may be classified as dividends and may not be treated as expenses for tax purposes under certain conditions provided by thin capitalization rules. In February 2016, a law which significantly changes the current approach applicable to thin capitalization rules application was adopted. At present, it is difficultWe believe that thin capitalization rules are not applicable to assessMechel’s loans starting from May 2016. However, there can be no assurance that in case of a change of the existing thin capitalization rules and the applicable practice, we will not be subject to the risks specified above.
In accordance with amendments to the Russian Tax Code which entered into force on November 30, 2016, the tax consequencesauthorities are entitled to seek in court payment of taxes by the company’s dependent persons, including dependent individuals, for example, the owners, founders or shareholders of such company, if these persons received cash or property from the company which has outstanding tax amounts within the amounts received by them. Taking into account the requirements of Russian law and negative court practice at the level of the adoptionConstitutional Court of this law.the Russian Federation, there can be no assurance that we will not be subject to the risks specified above.
The foregoing conditions create tax risks in Russia that are more significant than typically found in countries with more developed tax systems, imposing additional burdens and costs on our operations, including management resources. In addition to our tax burden, these risks and uncertainties complicate our tax planning and related business decisions, potentially exposing us to significant fines and penalties and enforcement measures despite our best efforts at compliance. See also “— Risks Relating to the Russian Federation — Legal risks and uncertainties — Selective government action could have a material adverse effect on the investment climate in Russia and on our business, financial condition, results of operations and prospects and the value of our shares and ADSs.”
The lackDifferences in interpretation of established practice with respect to Russian new transfer pricing rules exposesin the jurisdictions in which we operate, as well as the lack of developed law enforcement practice with regard to the Russian transfer pricing rules expose our business to the risk of significant additional liabilities.
Transfer pricing rules control related party transactions pricing. The fundamental principle of the rules is the ‘arm’s length’ principle, according to which organizations must enter into transactions with related parties on the same terms as they would enter into transactions with independent parties.
Transfer pricing rules apply in most countries in which we operate. Many countries participating in the OECD employ a unified approach to transfer pricing, however in certain jurisdictions, including Russia, transfer pricing rules have some specifics. As such, the tax authorities of different countries can take advantage of the ambiguous interpretation of transfer pricing rules which can lead to claims on their part or additional tax inspections. The Russian transfer pricing rules effective since 1999, gave Russian tax authorities the right to control prices for transactions between related parties and certain other types of transactions between unrelated parties, such as foreign trade transactions or transactions with significant price fluctuations, if the transaction price deviated by more than 20% from the market price.
In July 2011, Russian transfer pricing legislation was substantially amended. The new rulesthat entered into force on January 1, 2012. 2012 should help to achieve consistency between domestic rules and the OECD principles.
The newRussian transfer pricing rules require taxpayers to notify the tax authorities on controlled transactions that are performed from January 1, 2012. Controlled transactions mean any transactions between related parties both domestic and cross-border, as well as certain transactions between unrelated parties. The tax legislation eliminatedparties, subject to certain conditions, including the existed 20% safe harbor for price deviations.size of profit received under such transactions within a calendar year. The rules also introduce specific pricing methods, and documentation requirements for proving market prices. EstablishedCurrently established practice in applying the new rules has only startsstarted to develop and in some cases decisions are being pronounced not in favor of taxpayers, therefore we cannot predict now what effect the new transfer pricing rules will have on our business. If the tax authorities impose significant additional tax assessments as a result of changes in transfer pricing regulation and we are unable to successfully challenge them in court or make symmetrical adjustments provided by the newthese rules, it could have a material adverse effect on our business, financial condition, results of operations and prospects.
Expansion of limitations on foreign investment in strategic sectors could affect our ability to attract and/or retain foreign investments.
On April 29, 2008,Our group is subject to limitations imposed by Russian legislation that restricts the rights of foreign entities to invest in certain Russian companies and in the subsoil sector under the Strategic Investment Laws of the Russian Federation, including the Federal Law “On the Procedure for Foreign Investment in Companies with Strategic Impact on the National Defense and Security of the Russian Federation” was adopted. See “Item 4. Information on the Company — Regulatory Matters — The (the “Strategic Industries Law.Law”
). As at the date hereof, our subsidiarysubsidiaries Southern Urals Nickel Plant, which holds the subsoil license on land plots with nickel and cobalt ore deposits, which are included in the official list of subsoil plots of federal importance published on March 5, 2009 in the Russian official newspaperRossiyskaya Gazeta as amended (the “Strategic Subsoil List”), it qualifies as a Strategic Company and is subject to special regulation. Our subsidiaries Urals Stampings Plant and Port Posiet which are included in the register of natural monopolies and therefore are also Strategic Companies. Furthermore, entities producing and distributing industrial explosives are deemed to be Strategic Companies. Thus, our subsidiaries Yakutugol, Elgaugol, Vzryvprom and Korshunov Mining Plant also qualify as Strategic Companies, as theywhich hold licenses to carry out activities related to the handling of industrial explosives.explosives are considered Strategic Companies.
Therefore, any transfer, directly or indirectly, to a foreign investor or its group of entities (except for the transfer to a foreign investor controlled by the Russian Federation, the constituent entity of the Russian Federation and/or Russian nationals provided such Russian nationals are Russian tax residents and do not have other nationality) of a stake or certain rights in or fixed assets (equal to 25% or more of the balance sheet value of the relevant entity) of Southern Urals Nickel Plant, Yakutugol, Elgaugol, Vzryvprom, Korshunov Mining Plant, Urals Stampings Plant and Port Posiet, which, according to the Strategic Industries Law, is deemed to transfer control, as described in “Item 4. Information on the Company — Regulatory Matters — The Strategic Industries Law,”
will be subject to prior approval from the state authorities. Likewise, a sale to a foreign investor or its group of entities of a stake in Mechel which provides control (as defined in the Strategic Industries Law) over Southern Urals Nickel Plant, Yakutugol, Elgaugol, Vzryvprom, Korshunov Mining Plant, Urals Stampings Plant and Port Posiet, will also be subject to prior approval in accordance with the Strategic Industries Law.
In addition, in case a foreign investor or its group of entities which is a holder of securities of Southern Urals Nickel Plant, Yakutugol, Elgaugol, Vzryvprom, Korshunov Mining Plant, Urals Stampings Plant and Port
Posiet, becomes a holder of voting shares in amount which is considered to give them direct or indirect control over these companies in accordance with the Strategic Industries Law due to the allocation of voting shares as a result of certain corporate procedures provided by Russian law (e.g., as a result of abuy-back by the relevant company of its shares, conversion of preferred shares into common shares, or holders of preferred shares becoming entitled to vote at a general shareholders’ meeting in cases provided under Russian law), such shareholders will have to apply for approval within three months after they acquired such control.
Furthermore, starting from July 2017 the Strategic Industries Law was amended so that production and sale of metals, alloys with special features or raw materials that are used in production of weapons and military equipment is also deemed a strategic activity. Considering the fact that the amendments are vague and ambiguous and may be construed broadly, certain other our group companies may be qualified as Strategic Companies.
In this connection, there is a risk that the requirement to receive prior or subsequent approvals and the risk of not being granted such approvals might affect our ability to attract foreign investments, create joint ventures with foreign partners with respect to our companies that qualify as Strategic Companies or effect restructuring of our group which might, in turn, materially adversely affect our business, financial condition, results of operations and prospects.
For a more detailed discussion of implications of the Strategic Investment Laws, see “Item 4. Information on the Company — Regulatory Matters — The Strategic Industries Law.”
Land use rights regulation in Russia is subject to uncertainty and contradiction.
The main law governing the title to land is the Land Code of the Russian Federation introduced by the Federal Law “On Introduction of the Land Code,” dated October 25, 2001, as amended (the “Land Code”), which establishes the principles of land legislation and determines relations governed by land legislation.
In MarchStarting from 2015, the Land Code wasand a number of other legislative acts regulating the land use have been significantly amended in part concerning the procedure for allotment of land plots by public authorities to citizens and legal entities. Law enforcement practice, taking into account changes in the applicable legislation, has not yet been formed;is currently under development; therefore, risks associated with uncertainty of regulatory aspects of the allotment of land plots by public authorities exist.
In addition, there is a general risk of seizure of land plots for state needs for the implementation of governmental programs and projects, which means creation and construction of complexes within the framework of such federal programs. Moreover, if the land plots owned or leased by us are found not to be in compliance with all applicable approvals, consents, registrations or other regulations, we may lose the use of such land plots.
The ambiguous interpretation of land law and/or a potential seizure of our land plots for state needs or for other reasons may have a material adverse effect on our business, financial condition, results of operations and prospects.
Item 4.Information on the Company
Overview
We are a vertically integrated group with revenues of RUB 253,141312,574 million in 20152018, RUB 299,113 million in 2017 and RUB 243,992276,009 million in 2014,2016, with operations organized into three industrial segments: mining, steel and power, each of which has a management company that performs the functions of respective executive management bodies of the companies within the segment, as described below.
Our group includes a number of logistical and marketing companies that help us to deliver and market our products. We have freight seaports in Russia on the Sea of Japan (Port Posiet) and on the Sea of Azov (Port Temryuk) and, as well as a freight river port on the Kama River, a tributary of the Volga River in central Russia (Port Kambarka). We have a fleet of freight railcars, locomotives and long-haul trucks, and operate a rail line to our Elga coal deposit in the Sakha Republic.
We have a network of overseas subsidiaries, branches, warehouses, service centers and agents to market our products internationally, and we have a Russian domestic steel retail and service subsidiary with regional offices in 3841 cities throughout Russia.
Mechel PAO is a public joint-stock company incorporated under the laws of the Russian Federation. From the date of our incorporation on March 19, 2003 until July 19, 2005, our corporate name was Mechel Steel Group OAO. We conduct our business through a number of subsidiaries. We are registered with the Federal Tax Service of the Russian Federation under the main state registration number (OGRN) 1037703012896. Our principal executive offices are located at Krasnoarmeyskaya Street, 1, Moscow 125167, Russian Federation. Our telephone number is +7 495 221 8888. Our Internet addresses arewww.mechel.com andwww.mechel.ru. Information posted on our website is not a part of this document. We have appointed CT Corporation System, located at 111 Eighth Avenue,28 Liberty Street, New York, New York 10011,10005, as our authorized agent upon which process may be served for any suit or proceeding arising out of or relating to our shares, ADSs or the deposit agreements.
Mining Segment
Our mining segment produces metallurgical coal (coking coal, PCI and anthracite), steam coal, iron ore and iron ore concentrate, coke and limestone.chemical products.
The segment primarily consists of our coal, iron ore and coke production facilities in Russia. It also includes limestone operations and certain transportation and logistics facilities and engineering operations.
Our subsidiary Southern Kuzbass Coal Company and its subsidiaries operate coal mines located in the Kuznetsky basin, near Mezhdurechensk in Western Siberia. These mines include four open pit mines and three underground mines. Another of our subsidiaries, Yakutugol, operates coal mines located in the Sakha Republic in Eastern Siberia, consisting of twothree open pit mines and one underground mine.mines. Yakutugol also holds subsoil licenses for three iron ore deposits, located in close proximity to its coal mining operations. In August 2013, we established Elgaugol which holds the subsoil license for the Elga coal deposit, located in the Sakha Republic in Eastern Siberia. Our mining segment also provides coal washing services to our coal mining subsidiaries.
Korshunov Mining Plant operates two open pit iron ore mines and a washingconcentrating plant located near Zheleznogorsk-Ilimsky, a town in the Irkutsk region in Eastern Siberia.
The mining segment also produces significant amounts of coke, both for use by our subsidiaries in the steel segment and for sales to third parties. We have the flexibility to supply our own steel mills with our mining products or to sell such mining products to third parties, depending on price differentials between local suppliers and foreign and domestic customers.
In April 2008, we established Mechel Mining, a wholly-owned subsidiary, in which we consolidated coal, iron ore and coke assets of our mining segment (Southern Kuzbass Coal Company, Korshunov Mining Plant, Yakutugol, Moscow Coke and Gas Plant and Mechel Coke and certain other companies).
Mechel Mining Management, a wholly-owned subsidiary of Mechel Mining, acts as the sole executive body of our subsidiaries in the mining segment.
Steel Segment
Our steel segment produces and sells semi-finished steel products, long products of a wide range of steel grades, carbon and stainless flat steel products and high value-added metal products, including wire products, stampings and forgings.forgings, structural shapes, beams and rails.
Our steel segment production facilities in Russia include one integrated steel mill, one steel-makingsteelmaking mill, a wire products plant and forgingsstampings and stampingsforgings mill in the southern part of Ural Mountains, and a wire products plant in northwestern Russia near the border with Finland.Finland and a ferrosilicon plant in Eastern Siberia. We also have a wire products plant in Lithuania and a steel mill in Ukraine.
In 2014, to further optimize the structure of our group, we transferred our ferrosilicon producing subsidiary Bratsk Ferroalloy Plant to the steel segment.Lithuania.
Mechel-Steel Management, a wholly-owned subsidiary of Mechel, acts as the sole executive body of our main subsidiaries in the steel segment.
Our steel segment also includes our distribution network in Russia and abroad, which consists of Mechel Service Global and its subsidiaries in Russia, the CIS and Europe.Mechel Service Global.
Power Segment
The power segment was formed in April 2007, when we acquired a controlling interest in Southern Kuzbass Power Plant located in Kaltan in the Kemerovo region, and itwhich sells electricity and capacity to the wholesale market, as well as supplies electricity within our group.market. In June 2007, we acquired a controlling interest in Kuzbass Power Sales Company, the largest power distribution company in the Kemerovo region. Our power segment enables us to market high value-added products made from our steam coal, such as electricity and heat energy, and to increasemaintain the electric power self-sufficiency of our mining and steel segments. Mechel Energo acts as the sole executive body of Southern Kuzbass Power Plant in our power segment.
Competitive Strengths
Our main competitive strengths are the following:
Leading mining and metals group by production volume with strong positions in key businesses
We are the second largest coking coal producer and the third largest coking coal concentrate exporter by volume in Russia.
In 2015,2018, we were the second largest coking coal producer in Russia, with an approximately 16.7%a 13.9% share of Russia’s total coking coal production by volume, according to the Central Dispatching Department of Fuel and Energy Complex (“(the “Central Dispatching Department”), a Russian information agency reporting on the fuel and energy industry. In 2015,2018, our export sales of coking coal concentrate were the secondthird largest by volume among Russian companies, according to RasMin OOO (“RasMin”), a private information and research company focusing on the coal mining industry.MMI.
We have a large coal reserve base and a broad-range offering of high-quality metallurgical coals, as well as steam coals of various grades.
Our total coal reserves amounted to 3,051.42,953.5 million tonnes as of December 31, 2015,2018, as accounted pursuant to SEC Industry Guide 7.
Our coal reserves allow us to supply steel producers and coke makers globally with a fullwide range of coal grades to make quality metallurgical coke or to use inPCI-assisted and sintering-assisted steel manufacturing. In addition to metallurgical coals, we supply steam coals of various grades. In particular, Southern Kuzbass Coal Company produces semi-hardsemi-soft and semi-softsemi-hard coking coal, PCI, anthracite and steam coal. Most of the coking and steam coal grades of Southern Kuzbass Coal Company are sold in Russia, while PCI and anthracite are generally exported. Yakutugol produceslow-volatile hard coking coal used by customers both in the Asia-Pacific region and in Russia, as well as steam coal which is sold primarilydomestically to local municipal services and electric power stations and for power generation.export. Elgaugol produces high-quality hard coking coal of high-volatile content and steam coal which are primarily supplied to the Russian domestic market and for export. The ability to serve our customers with a broad range of metallurgical and steam coal grades gives us a competitive advantage in entering the new markets and establishing long-term relationships with the customers.
By production volume we are Russia’s second largest producer of long steel products and Russia’s largest producer of wire products.
According to Metal Expert, a source for global steel and raw materials market news and analytics, in 20152018 by production volume we were Russia’s second largest producer of long steel products (excluding square billets), thirdfourth largest producer of reinforcement bars (rebar) and largest producer of wire rod. Our long steel products business has particularly benefited from the increased infrastructure and construction activity in Russia over the last 10 years.Russia. Our share of Russia’s total production volume of rebar in 20152018 was approximately 18.6%16.2%, according to Metal Expert. According to Metal Expert and Chermet, a Russian ferrous metals industry association (“Chermet”), we are Russia’s fourth largest producer of special steel by production volume, accounting for 13.0%11.2% of Russia’s total special steel output in 2015.2018. Our product range in special steel is broader and more comprehensive than other Russian producers, giving us an added advantage in our markets. According to Metal Expert, we are Russia’s largest producer of wire products by production volume, accounting for 25.5%20.9% of Russia’s total wire products output in 2015.2018.
High degree of vertical integration
Our steel segment is able to source most of its raw materials from our group companies, which provides a hedge against supply interruptions and market volatility.
We believe that our internal supplies of coke, iron ore concentrate and ferrosilicon give us advantages over other steel producers, such as higher stability of operations, better quality control of end products, reduced
production costs, improved flexibility and planning latitude in the production of our steel and value-added steel products and the ability to respond quickly to market demands and cycles. In 2015,2018, we were fully self-sufficient with respect to coke and ferrosilicon; we were approximately 36%54% self-sufficient with respect to iron ore concentrate; and we satisfied approximately 29%31% of our electricity needs internally. We believe that the level of our self-sufficiency in raw materials gives our steel business a competitive advantage.
We view our ability to source most of our inputs internally not only as a hedge against potential supply interruptions, but as a hedge against market volatility. From an operational perspective, since our mining and power assets produce the same type of inputs that our manufacturing facilities use, we are less dependent on third partythird-party vendors and less susceptible to supply bottlenecks. From a financial perspective, this also means that if the market prices of our steel segment’s inputs rise, putting pressure on steel segment margins, the margins of our mining and power segmentssegment will tend to increase. Similarly, while decreases in commodity prices tend to reduce revenues in our mining segment, they also create an opportunity for increased margins in our steel business.
Furthermore, we work on improving the quality of our steel products and reducing the costs for raw materials. Depending on prevailing market conditions, we evaluate the efficiency of use of our own raw materials and the raw materials purchased from third parties to be able to generate additional income.
The ability to internally source our materials also gives us better market insight when we negotiate with our outside suppliers, and improves our ability to manage our raw materials costs.
Our logistics capability allows us to better manage infrastructure bottlenecks, to market our products to a broader range of customers and to reduce our reliance on trade intermediaries.
We are committed to maximum efficiency in delivering goods to consumers and have been actively developing our own logistics network. Using our own transportation capacity enables us to save costs as we are less exposed to market fluctuations in transportation prices and are able to establish flexible delivery schedules that are convenient for our customers. Our logistics capacities are currently comprised of two seaports (Port Posiet and Port Temryuk) and a river port (Port Kambarka), as well as freight forwarding companies (Mecheltrans, Mecheltrans VostokMecheltransVostok and Mecheltrans Auto) which manage rail and motor transportation of our products and carry out the overall coordination of our sea, rail and motor transportation logistics. These companies not only transport our products but also provide transportation services to third parties.
We own two seaports and a river port and we have our own rail rolling stock. Port Posiet in the Russian Far East, on the Sea of Japan, gives us easy access to the Asia-Pacific seaborne market and provides a delivery terminal for the coal mined by our subsidiaries Yakutugol and Elgaugol in Yakutia. We are in the process of the Port Posiet’s modernization, which enabledwill enable us to expand the cargo-handling capacity of the port up to 7.09.0 million tonnes per annum. Port Temryuk on the Sea of Azov, an inlet of the Black Sea basin, is primarily used for coal and metal transshipment and provides us access to the emerging market economies of the Black Sea and Mediterranean basins. Port Kambarka on the Kama River in the Republic of Udmurtia (a Russian administrative region also known as Udmurtia) is connected to the Volga River basin and the Caspian Sea, by canal to the Don River and the Sea of Azov, as well as by the Volga-Baltic Route to the Baltic Sea. As part of our railcar fleet upgrade program, Mecheltrans acquired 142 new open cars through both purchases and financial leasing in late 2018. As of December 31, 2015,2018, our subsidiaries Mecheltrans and Mecheltrans Auto owned and leased 12,45511,165 freight transportation units, including 12,41011,120 railcars and 45 long-haul trucks that we use to ship our products. In order to enhance transportation security in conditions of a shortage of railcars, which negatively affects the volumes of transportation of our cargoes, we plan to acquire additional open cars in 2019.
In June 2008, pursuant to the terms of our subsoil license for the Elga coal deposit we began construction of a private rail line, which we own and control subject to applicable regulation. In December 2011, we finished laying track for the rail line in accordance with the terms of the license. The 321 kilometer-long rail line is now in operation and we are able to use it for transportation of coal currently produced at the Elga deposit. The rail
line connects the Elga coal deposit with the Baikal-Amur Mainline (at the Ulak railway station), which, in turn, provides access to the Russian rail network in general,generally and access to Pacific Ocean ports, in particular. We will further develop the rail line to increase its capacity in line with our coal production plans. We anticipate that the Elga rail
line will not only provide an avenue for delivery of coal produced at the Elga coal deposit, but will eventually serve as the transport route for coal, iron ore and other raw materials mined in the adjacent deposits.
One of the lowest-cost metallurgical coal producers
According to CRU International Limited (“CRU”), our Russian metallurgical coal operations are in the first quartile of the global business cost curve (CFR basis). In 2015, approximately 89% of our coking coal production was mined from open pit mines, which we believe is one of the highest rates among our Russian competitors. Open pit coal mining is generally considered safer, cheaper and faster than the underground method of mining. Most of our mines and processing facilities have long and established operating histories. We view strict cost management and increases in productivity as fundamental aspects of our day-to-day operations, and continually reassess and improve the efficiency of our mining operations.
Strategically positioned to supply key growth markets
Our mining and logistical assets are well-positioned to expand sales to the Asia-Pacific seaborne market.
Eastern Siberian coal mines of Yakutugol and Elga coal deposit, which are part of our mining segment, are strategically located and will enable us to expand exports of our products to key Asian markets. Yakutugol and Elgaugol are located within the shortest distance among Russian coking coal producers to Port Posiet and Port Vanino in the Russian Far East. We view the proximity of these mining and logistical assets to the Asian economies as aone of the key competitive advantageadvantages which allowsallow us to diversify our sales, provides us with additional growth opportunities and acts as a hedge in the event of a decrease in demand from customers in Russia. Moreover, due to our integration, experience and location in Russia, which has some of the largest deposits of coal and iron ore in the world, we believe we are better positioned than many of our international peers to secure future production growth.
Our steel mills are well-positioned to supply Russian infrastructure projects.
Russia is our core steel market and we have significant domestic market shares in main types of carbon and special steel long products. We believe we have established a strong reputation and brand image for Mechel within Russia, just as we have with our international customers. The location of a number of our core steel segment assets in the southern Urals positions us advantageously, from a geographical and logistical perspective, to serve the areas in the west of the Urals as this region is a large consumer of long steel products in Russia, according to Metal Expert. The construction industry has been a major source of our revenue and we have captured a large portion of the market. According to Metal Expert, our share of Russia’s total production volume of construction rebar in 20152018 was approximately 18.6%16.2%.
Established distribution and sales platform
We have a non-retailOur sales and distribution network representedactivities in relation to exports of mining products are conducted by our Swiss subsidiariessubsidiary Mechel Trading andCarbon. Mechel Carbon with representative officesis customer oriented and experienced in various countries, as well asthe trade of metallurgical coals, steam coal, coke and chemical products. Mechel Carbon Singapore. This network facilitated sales constituting 24.1%accounted for 76.1% of our mining segment sales and 23.6% of our total sales in 2015.2018.
We also have a distribution network consisting of Mechel Service Global’s distribution networkand Mechel Service Global which conductsconduct sales of our steel products in Russia, the CIS and Europe. Through our distribution network in Russia and the CIS we sell a whole range of steel products manufactured by our plants. In case of sales to the European Union, we focus on sales of high value-added products, primarily high-quality rolled steel products, forgings and forgingsstructural shapes produced by our Urals plants, through Mechel Service Belgium. Our companies in Germany, Austria and the Czech Republic provide customers with a wide range of services for metal processing. Mechel Service and Mechel Service Global sales accounted for 48.0%50.5% of our steel segment sales and 27.7%30.3% of our total sales in 2015. Approximately 91.9% of Mechel Service Global sales were sold domestically. Sales to companies within our group accounted for 1.2% of total sales of Mechel Service Global (including intra-group sales) in 2015.2018.
Our direct access to end customers allows us to obtain real-time market intelligence and improve production planning at our steel facilities, which in turn allows us to improve the efficiency of our existing operations through the optimization of our sales structure.
Strong and focused management team
Our current management team has significant experience in all aspects of our businesses. Mr. Zyuzin, one of the founders of our group and our Chairman and largest shareholder, has led our successful transformation from a
small coal trading operation to a large integrated mining and metals group. Mr. Zyuzin has over 2930 years of experience in the coal mining industry and holds a Ph.D. in technical sciences in the coal mining field. Our divisional management also has long-tenured experience in the mining and metals industry. See “Item 6. Directors, Senior Management and Employees — Directors and Executive Officers.”
Business Strategy
Our goal is to become one of the largest producers of metallurgical coal and steel products by realizing potential of the vertical integration and maximizing synergies between our performing assets underlying our business model.
Our strategy is aimed at extracting the maximum value from our mining and steel assets. We intend to concentrate on efficiency improvements and modernization of the business lines, which we expect will increase the business’ overall profitability.
In the mining segment, we will continue to develop our existing coal reserves, particularly in order to sell more high-quality metallurgical coal and coal products to third parties. We intend to prioritize the development of the Elga coal deposit, one of the largest global metallurgical coal reserves. Our coking coal and iron ore production form a solid platform for our steel business. Steam coal can beis used to feed our power generating business which enables us to market high value-added products, such as electricity and heat energy, and to increasemaintain the electric power self-sufficiency of our mining and steel segments. However, even as we develop our internal sourcing capability, we intend to adhere to our long-standing approach of purchasing inputs from third partythird-party suppliers and selling products, including raw materials, to domestic and international customers in a way that we believe createsto create the most advantageous profit opportunities for our group.
In the steel segment, we plan to focus on the Russian rail, engineering and construction markets. The launch of the universal rail and structural rolling mill at Chelyabinsk Metallurgical Plant allowed us to widen our portfolio of high value-added products such as structural shapes and rails, as well as significantly improve our competitive advantage as a full product range supplier to the construction sector and as an important supplier to the Russian Railways. In 2015 and 2018, we successfully went through the certification of rail products in accordance with technical regulations of the Customs Union resulting in obtainmentthe issuance of threefive certificates of conformityconformity. The certificates allow free circulation of rail products imported into the territory of the Customs Union. The increase in sales volume of the universal rolling mill products will occur along with the development and certification of new types of products and will enable us to realize the import substitution strategy. We intend to increase our group’s output and improve the quality of high value-added steelmetal products in order to preserve our leadership in special and stainless steels and wire products in Russia. For some of these products, we hold a unique market niche, which serves as the basis for further improvement of our market share and growth of our customer base.
Our sales and distribution network provides us with a strong platform for further development of our sales. In the current economic situation, we are capableable to quickly respond to changing market conditions and, if necessary, redirect deliveries of our products not only in Russia but also abroad, thereby allowing us to obtain additional profit.
Another strategic priority is development of our logistics capabilities. OurWe own our railcar fleet is to ensure themaintain a balance between transportation security and cost efficiency. Development of the cargo-handling capacity of Port Posiet is crucial for continuous shipments of our coal products in the Asia-Pacific region. Growing production of
export-oriented coal in our mining segment will require further expansion of port capacities on our main export routes.routes, as well as the increase in our own railcar fleet.
With a focus on improving the efficiency improvements of our main businesses, we may also consider selective disposal of assets in order to minimize opportunity costs, as well as attract financial or strategic investors to our key assets in order to reduce the debt burden and contribute to business development.
Our History and Development
We trace our beginnings to a small coal tradingcoal-trading operation in Mezhdurechensk in the southwestern part of Siberia in the early 1990s. See “Item 5. Operating and Financial Review and Prospects — History of Incorporation.” Since that time, through strategic acquisitions in Russia and abroad, Mechel has developed into one of the world’sa leading mining and metals companies,company, comprising producers of coal, iron ore, coke, steel, rolled products, ferrosilicon, heat energy and electricity, with operations and assets in Russia, the CIS and Europe. We intend to retain a controlling voting interest in each of our subsidiary holding companies as we continue to build upon our business model of vertical integration among our assets.
Mining Segment
Our mining segment produces coking coal and other types of metallurgical coal (anthracite and coal for pulverized, or finely crushed, coal injection (PCI))PCI), steam coal, middlings, coking coal and steam coal concentrates, as well as coke and chemical products, iron ore and iron ore concentrate and limestone.concentrate. Our mining segment also includes certain transportation and logistics facilities and engineering operations. Our coal operations consist of Southern Kuzbass Coal Company, Yakutugol and Elgaugol, which together produced 13.812.3 million tonnes of raw coking coal, 6.95.0 million tonnes of raw steam coal and 2.51.5 million tonnes of raw anthracite in 2015.2018. Our coke operations consist of Moscow Coke and Gas Plant and Mechel Coke, which together produced 3.02.6 million tonnes of coke in 2015.2018. Our iron ore operations consist of Korshunov Mining Plant which produced 7.86.8 million tonnes of iron ore and 2.72.0 million tonnes of iron ore concentrate in 2015. Our limestone operations consist of Pugachevsky Open Pit which produced 1.6 million tonnes of limestone in 2015.2018.
Description of key products
Coking coal and metallurgical coal. Southern Kuzbass Coal Company produces high-quality bituminous coal, which is washed to reduce the ash content. The premier product is a high-quality, low phosphorous, low sulfur semi-soft to semi-hard coking coal used to produce coke for the iron and steel industry. Other products produced by Southern Kuzbass Coal Company include PCI and anthracite. Yakutugol produces hard coking coal oflow-volatile content. content, and Elgaugol produces high-quality hard coking coal of high-volatile content.
Steam coal. Southern Kuzbass Coal Company, Yakutugol and Elgaugol produce high-energy steam coal as part of their product mix. Steam coal is primarily used for the generation of electricity in coal-fired power stations.
Coke. Coke is used in the blast furnacefurnaces as a main source of heat, as a reducing agent for iron and as a raising agent for charging material in the smelting process. It is a product prepared by pyrolysis (heating in the absence of oxygen) oflow-ash,low-phosphorus andlow-sulfur coal charging material. We offer customers coke from our Moscow Coke and Gas Plant and Mechel Coke.
Chemical products. Chemical products are hydrocarbon products obtained as aby-product of the production of coke.coke production. We produce chemical products in our subsidiaries Moscow Coke and Gas Plant and Mechel Coke. We offer our customers coal tar, naphthalenecoal benzene and other compounds. Worldwide, coal tar is used in diverse applications, including in the production of electrode pitch, pitch coke,coal-tar oils, naphthalene, as well as boiler fuel. Naphthalene, a product of the distillation of coal tar,Coal benzene is used by the chemical industry to produce chemical compounds used as raw materials in organic synthesis in the production of synthetic dyes, solvents, plasticizersfibers, as well as in the paint and other products.varnish industry.
Iron ore concentrate. From our Korshunov Mining Plant, we offer iron ore concentrate with a standard iron content of 62%. Additionally, Yakutugol holds subsoil licenses for three iron ore deposits located in Yakutia. These deposits contain high-quality iron ore, which will allow to produceproduction of iron ore concentrate with 65% iron content.
Limestone. The processed limestone produced by our Pugachevsky Open Pit is segregated into three main size fractions: 0-40 millimeters, 40-70 millimeters and 70-120 millimeters. Further processing of 0-40 millimeters fraction limestone allows to obtain aggregate limestone of 0-5 millimeters, 5-20 millimeters and 20-40 millimeters categories.
Mining process
Coal. At our Russian mines, coal is mined using open pit or underground mining methods. Following a drilling and blasting stage, a combination of shovels and draglines is used for moving coal and waste at our open
pit mines. Production at the underground mines is predominantly from longwall mining, a form of underground coal mining where a long wall of coal in a seam is mined in a single slice. After mining, depending upon the amount of impurities in the coal, the coal is processed in a washing plant, where it is crushed and impurities are removed by gravity methods. Coking coal concentrate is then transported to coking plants for conversion to coke for use in pig iron smelting at steel plants. Steam coal is then shipped to power utilities, which use it in furnaces for steam generation to produce electricity. Among theThe advantages of our mining business areinclude the high quality of our coking coal and the low level of volatile matter in our steam coal.
Iron ore. At our Korshunov Mining Plant, ore is mined using the open pit mining method. Following a drilling and blasting stage, ore is hauled by dump trucks and rail hopperdumping cars to the washingconcentrating plant. At the washingconcentrating plant, the ore is crushed and ground to a fine particle size, then separated into an iron ore concentrate slurry and a waste stream using wet magnetic separators. The iron ore is upgraded to a concentrate that contains aboutapproximately 62% elemental iron. Tailings are pumped to a tailings dam facility located adjacent to the washingconcentrating plant. The concentrate is sent to disk vacuum filters which remove the water from the concentrate to reduce the moisture level, enabling shipment to customers by rail during warmer months;months, while, in colder periods, the concentrate must be dried further to prevent freezing in railcars. The Korshunov Mining Plant operates its own drying facility with a dry concentrate production capacity of up to 16,000 tonnes per day. In 2011-2012, Yakutugol obtained subsoil licenses for the Pionerskoye iron ore deposit, the Sutamskaya iron ore area and the Sivaglinskoye iron ore deposit in Yakutia. We plan to develop all new iron ore deposits with the open pit mining method, using excavators and dump trucks.
Limestone. Limestone is mined using the open pit mining method. Following a drilling and blasting stage, mined rock is quarried with shovels and transported to the crushing and screening plant for segregation by size fraction.
Coal production
Our coal production consists of the following mines in Russia:
Subsidiary (Location) | Surface | Underground | ||
Yakutugol (Sakha Republic, Russia) | Neryungrinsky Open Pit | |||
| Kangalassky Open Pit | ||||
| Dzhebariki-Khaya Open Pit | ||||
Elgaugol (Sakha Republic, Russia) | Elga Open Pit | |||
Southern Kuzbass Coal Company (Kuzbass, Russia) | Sibirginsky Open Pit Tomusinsky Open Pit Olzherassky Open Pit Krasnogorsky Open Pit | V.I. Lenina Underground Sibirginskaya Underground Olzherasskaya- Novaya Underground |
Our coal mines are primarily located in the Kuznetsky basin, a major Russian coal-producing region, and in the Sakha Republic in Eastern Siberia.
The table below summarizes ourrun-of-mine (“ROM”) coal production by type of coal and location of mines for the periods indicated.
| 2015 | 2014 | 2018 | 2017 | 2016 | ||||||||||||||||||||||||||||||||||||
| Tonnes | % of Production | Tonnes | % of Production | Tonnes | % of Production | Tonnes | % of Production | Tonnes | % of Production | |||||||||||||||||||||||||||||||
| (In millions of tonnes)(1) | (In millions of tonnes)(1) | |||||||||||||||||||||||||||||||||||||||
Coking Coal | ||||||||||||||||||||||||||||||||||||||||
Yakutugol | 7.8 | 8.9 | 6.4 | 7.3 | 8.9 | |||||||||||||||||||||||||||||||||||
Elgaugol | 2.6 | 0.7 | 3.4 | 3.5 | 2.8 | |||||||||||||||||||||||||||||||||||
Southern Kuzbass Coal Company | 3.4 | 4.3 | 2.5 | 1.9 | 2.5 | |||||||||||||||||||||||||||||||||||
Bluestone(2) | — | 0 | ||||||||||||||||||||||||||||||||||||||
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Total Coking Coal | 13.8 | 59.5 | % | 13.9 | 61.5 | % | 12.3 | 65.4 | % | 12.7 | 61.6 | % | 14.2 | 62.7 | % | |||||||||||||||||||||||||
Steam Coal | ||||||||||||||||||||||||||||||||||||||||
Yakutugol | 1.4 | 0.5 | 0.6 | 1.0 | 1.0 | |||||||||||||||||||||||||||||||||||
Elgaugol | 1.3 | 0.5 | 1.5 | 0.7 | 0.9 | |||||||||||||||||||||||||||||||||||
Southern Kuzbass Coal Company | 4.2 | 5.4 | 2.9 | 4.0 | 4.2 | |||||||||||||||||||||||||||||||||||
Bluestone(2) | — | 0 | ||||||||||||||||||||||||||||||||||||||
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Total Steam Coal | 6.9 | 29.7 | % | 6.4 | 28.3 | % | 5.0 | 26.6 | % | 5.7 | 27.7 | % | 6.1 | 26.8 | % | |||||||||||||||||||||||||
Anthracite | ||||||||||||||||||||||||||||||||||||||||
Yakutugol | — | — | — | — | — | |||||||||||||||||||||||||||||||||||
Elgaugol | — | — | — | — | — | |||||||||||||||||||||||||||||||||||
Southern Kuzbass Coal Company | 2.5 | 2.3 | 1.5 | 2.2 | 2.4 | |||||||||||||||||||||||||||||||||||
Bluestone(2) | — | — | ||||||||||||||||||||||||||||||||||||||
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Total Anthracite | 2.5 | 10.8 | % | 2.3 | 10.2 | % | 1.5 | 8.0 | % | 2.2 | 10.7 | % | 2.4 | 10.5 | % | |||||||||||||||||||||||||
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Total Coal | 23.2 | 100 | % | 22.6 | 100 | % | 18.8 | 100 | % | 20.6 | 100 | % | 22.7 | 100 | % | |||||||||||||||||||||||||
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| (1) | Volumes are reported on a wet basis. |
The coking coal produced by our Russian mines is predominatelylow-sulfur (0.3%) bituminous coal. Heating values for coking coal range from 6,861 to 8,488 kcal/kg on a moisture- andash-free basis. Heating values for steam coal range from 6,627 to 8,286 kcal/kg on a moisture- andash-free basis.
The table below summarizes our saleable coal production by type of coal and location of mines for the periods indicated.
| 2015 | 2014 | |||||||||||||||
| Tonnes | % of Production | Tonnes | % of Production | |||||||||||||
| (In millions of tonnes) | ||||||||||||||||
Coking Coal | ||||||||||||||||
Yakutugol | 5.1 | 25 | % | 5.7 | 26 | % | ||||||||||
Elgaugol | 1.6 | 8 | % | 0.2 | 1 | % | ||||||||||
Southern Kuzbass Coal Company | 2.7 | 13 | % | 4.0 | 19 | % | ||||||||||
Bluestone(1) | — | — | 0 | 0 | % | |||||||||||
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Total Coking Coal | 9.4 | 46 | % | 9.9 | 46 | % | ||||||||||
PCI | ||||||||||||||||
Yakutugol | — | — | — | — | ||||||||||||
Elgaugol | — | — | — | — | ||||||||||||
Southern Kuzbass Coal Company | 2.0 | 9 | % | 2.6 | 12 | % | ||||||||||
Bluestone(1) | — | — | — | — | ||||||||||||
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Total PCI | 2.0 | 9 | % | 2.6 | 12 | % | ||||||||||
Anthracite | ||||||||||||||||
Yakutugol | — | — | — | — | ||||||||||||
Elgaugol | — | — | — | — | ||||||||||||
Southern Kuzbass Coal Company | 2.1 | 10 | % | 1.5 | 7 | % | ||||||||||
Bluestone(1) | — | — | — | — | ||||||||||||
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Total Anthracite | 2.1 | 10 | % | 1.5 | 7 | % | ||||||||||
Steam Coal | ||||||||||||||||
Yakutugol | 3.5 | 17 | % | 2.9 | 14 | % | ||||||||||
Elgaugol | 1.6 | 8 | % | 0.5 | 2 | % | ||||||||||
Southern Kuzbass Coal Company | 2.0 | 10 | % | 4.2 | 19 | % | ||||||||||
Bluestone(1) | — | — | 0 | 0 | % | |||||||||||
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Total Steam Coal | 7.1 | 35 | % | 7.6 | 35 | % | ||||||||||
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Total Coal | 20.6 | 100 | % | 21.6 | 100 | % | ||||||||||
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| 2018 | 2017 | 2016 | ||||||||||||||||||||||
| Tonnes | % of Production | Tonnes | % of Production | Tonnes | % of Production | |||||||||||||||||||
| (In millions of tonnes) | ||||||||||||||||||||||||
Coking Coal | ||||||||||||||||||||||||
Yakutugol | 3.7 | 25 | % | 4.6 | 28 | % | 5.9 | 30 | % | |||||||||||||||
Elgaugol | 1.7 | 12 | % | 1.6 | 10 | % | 1.6 | 8 | % | |||||||||||||||
Southern Kuzbass Coal Company | 1.9 | 13 | % | 1.8 | 11 | % | 3.1 | 16 | % | |||||||||||||||
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Total Coking Coal | 7.3 | 50 | % | 8.0 | 49 | % | 10.6 | 54 | % | |||||||||||||||
PCI | ||||||||||||||||||||||||
Yakutugol | — | — | — | — | — | — | ||||||||||||||||||
Elgaugol | — | — | — | — | — | — | ||||||||||||||||||
Southern Kuzbass Coal Company | 1.2 | 8 | % | 1.3 | 8 | % | 1.4 | 7 | % | |||||||||||||||
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Total PCI | 1.2 | 8 | % | 1.3 | 8 | % | 1.4 | 7 | % | |||||||||||||||
Anthracite | ||||||||||||||||||||||||
Yakutugol | — | — | — | — | — | — | ||||||||||||||||||
Elgaugol | — | — | — | — | — | — | ||||||||||||||||||
Southern Kuzbass Coal Company | 1.1 | 8 | % | 1.5 | 9 | % | 1.8 | 9 | % | |||||||||||||||
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Total Anthracite | 1.1 | 8 | % | 1.5 | 9 | % | 1.8 | 9 | % | |||||||||||||||
Steam Coal | ||||||||||||||||||||||||
Yakutugol | 2.4 | 16 | % | 2.7 | 17 | % | 3.2 | 17 | % | |||||||||||||||
Elgaugol | 1.5 | 10 | % | 1.2 | 7 | % | 1.3 | 7 | % | |||||||||||||||
Southern Kuzbass Coal Company | 1.2 | 8 | % | 1.7 | 10 | % | 1.2 | 6 | % | |||||||||||||||
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Total Steam Coal | 5.1 | 34 | % | 5.6 | 34 | % | 5.7 | 30 | % | |||||||||||||||
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Total Coal | 14.7 | 100 | % | 16.4 | 100 | % | 19.5 | 100 | % | |||||||||||||||
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Yakutugol mines
Our Yakutugol coal mines are located in the Sakha Republic. The Sakha Republic is located in Eastern Siberia and covers an area of 3.1 million square kilometers. It has a population of fewer than one million inhabitants. Its capital, Yakutsk, is located on the Lena River in south central Yakutia.
Our Yakutugol mines include twothree open pit mines and one underground mine:mines: Neryungrinsky Open Pit, Kangalassky Open Pit and Dzhebariki-Khaya Underground.Open Pit. Neryungrinsky Open Pit is located in the South-Yakutsky basin which covers an area of 25,000 square kilometers and lies near the southern border of Yakutia. Neryungrinsky Open Pit is located near the town of Neryungri, one of the main industrial centers of Yakutia and its second largest city. Kangalassky Open Pit and Dzhebariki-Khaya UndergroundOpen Pit are located in the Lensky basin which covers an area of 750,000 square kilometers and lies near Yakutsk.
The table below sets forth certain information regarding the subsoil licenses for our Yakutugol coal mines.
Mine | License (plot) | Area (sq. km) | Mining Method | Life of Mine | License Expiry Date | Status(1) | Year Production Commenced | Surface Land Use Rights | License (plot) | Area (sq. km) | Mining Method | Life of Mine | License Expiry Date | Status(1) | Year Production Commenced | Surface Land Use Rights | ||||||||||||||||||||||||||||||||||||||||
Neryungrinsky Open Pit |  12336  (Moshchny seam) | 15.3 | Open pit | 2029 | Dec 2024 | In production | 1979 | Ownership |  12336  (Moshchny seam) | 15.3 | Open pit | 2029 | Dec 2024 | In production | 1979 | Ownership | ||||||||||||||||||||||||||||||||||||||||
Kangalassky Open Pit | 15017 (Kangalassk) | 7.7 | Open pit | 2100 | Dec 2027 | In production | 1962 | Ownership | 15017 (Kangalassk) | 7.7 | Open pit | 2100 | Dec 2027 | In production | 1962 | Ownership | ||||||||||||||||||||||||||||||||||||||||
Dzhebariki-Khaya Underground | 15061 (Dzhebariki-Khaya) | 14.8 | Underground | 2036 | Dec 2023 | In production | 1972 | Ownership | ||||||||||||||||||||||||||||||||||||||||||||||||
Dzhebariki-Khaya Open Pit | 15061 (Dzhebariki- | 1.1 | Open pit | 2024 | Dec 2023 | In production | 2017 | Ownership | ||||||||||||||||||||||||||||||||||||||||||||||||
| (1) | “In production” refers to sites that are currently producing coal. |
The earliest production at our Yakutugol mines was in 1962, although we acquired these mines and license areas in October 2007. Neryungrinsky Open Pit produceslow-volatile hard coking coal and steam coal which are sold bothprimarily in the Asia-Pacific region and domestically. Neryungrinsky Open Pit has a railway spur connected to the Russian rail system, which is controlled by Russian Railways. Kangalassky Open Pit produces steam coal that is generally sold as fuel for boiler plants in Yakutia. It is accessible through anall-weather road from Kangalassy and through a highway from Yakutsk. Dzhebariki-Khaya UndergroundOpen Pit produces steam coal, most of which is sold to state housing and municipal services. Dzhebariki-Khaya UndergroundOpen Pit is accessible only by means of the Aldan River.
The table below summarizes ROM coal production of our Yakutugol mines by mine and type of coal for the periods indicated.
| 2015 | 2014 | 2018 | 2017 | 2016 | ||||||||||||||||||||||||||||||||||||
Mine | Tonnes | % of Total Production | Tonnes | % of Total Production | Tonnes | % of Total Production | Tonnes | % of Total Production | Tonnes | % of Total Production | ||||||||||||||||||||||||||||||
| (In millions of tonnes)(1) | (In millions of tonnes)(1) | |||||||||||||||||||||||||||||||||||||||
Coking Coal | ||||||||||||||||||||||||||||||||||||||||
Neryungrinsky Open Pit | 7.8 | 8.9 | 6.4 | 7.3 | 8.9 | |||||||||||||||||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||||||||
Total Coking Coal | 7.8 | 84.9 | % | 8.9 | 94.7 | % | 6.4 | 91.4 | % | 7.3 | 88.0 | % | 8.9 | 89.9 | % | |||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Steam Coal | ||||||||||||||||||||||||||||||||||||||||
Neryungrinsky Open Pit | 0.7 | 0.1 | 0.0 | 0.7 | 0.4 | |||||||||||||||||||||||||||||||||||
Dzhebariki-Khaya Underground | 0.5 | 0.3 | ||||||||||||||||||||||||||||||||||||||
Dzhebariki-Khaya Open Pit(2) | 0.4 | 0.2 | 0.4 | |||||||||||||||||||||||||||||||||||||
Kangalassky Open Pit | 0.2 | 0.1 | 0.2 | 0.1 | 0.2 | |||||||||||||||||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||||||||
Total Steam Coal | 1.4 | 15.1 | % | 0.5 | 5.3 | % | 0.6 | 8.6 | % | 1.0 | 12.0 | % | 1.0 | 10.1 | % | |||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Total Coal | 9.2 | 100 | % | 9.4 | 100 | % | 7.0 | 100 | % | 8.3 | 100 | % | 9.9 | 100 | % | |||||||||||||||||||||||||
|
|
|
|
|
|
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|
|
| |||||||||||||||||||||||||||||||
| (1) | Volumes are reported on a wet basis. |
| (2) | The data included for the year ended December 31, 2016 refers to Dzhebariki-Khaya Underground, mining operations of which were discontinued in August 2016. |
The table below sets forth coal sales volumes of our Yakutugol mines by type of coal and destinations for the periods indicated.
Coal Type | Region | 2015 | 2014 | Region | 2018 | 2017 | 2016 | |||||||||||||||||||
| (In thousands of tonnes) | (In thousands of tonnes) | |||||||||||||||||||||||||
Coking coal | Asia | 3,609.7 | 5,268.1 | Asia | 2,694.6 | 3,307.1 | 3,942.6 | |||||||||||||||||||
| Russia | 894.5 | 11.6 | Russia | 509.8 | 786.2 | 1,136.1 | ||||||||||||||||||||
| CIS | 9.8 | 60.1 | CIS | 4.1 | 13.2 | 22.3 | ||||||||||||||||||||
| Europe | 0.5 | 0.0 | Europe | 0.0 | 2.2 | 19.1 | ||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||
Total | 4,514.5 | 5,339.8 | 3,208.5 | 4,108.7 | 5,120.1 | |||||||||||||||||||||
Steam coal | Russia | 776.8 | 630.4 | Russia | 614.2 | 930.5 | 703.2 | |||||||||||||||||||
| Asia | 124.7 | 0.0 | Asia | 51.4 | 498.1 | 622.5 | ||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||
Total | 901.5 | 630.4 | 665.6 | 1,428.6 | 1,325.7 | |||||||||||||||||||||
Middlings | Russia | 1,647.9 | 1,705.2 | Russia | 1,512.3 | 1,087.9 | 1,758.9 | |||||||||||||||||||
| Asia | 476.1 | 662.7 | Asia | 394.6 | 732.1 | 459.4 | ||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||
Total | 2,124.0 | 2,367.9 | 1,906.9 | 1,820.0 | 2,218.3 | |||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||
Total | 7,540.0 | 8,338.1 | 5,781.0 | 7,357.3 | 8,664.1 | |||||||||||||||||||||
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| ||||||||||||||||||||||
Elgaugol mine
Our Elga Open Pit is located in the South-Yakutsky basin of the Toko Coal-Bearing region in the Sakha Republic. This coal region was first discovered and explored in 1952 with the first geological surveys being conducted infrom 1954 through 1956. The closest inhabited localities are Verkhnezeysk village located(located 320 kilometers south of the deposit,deposit) and the town of Neryungri located(located 415 kilometers to the west.west). Since 1998, there have been several studies on the Elga coal deposit, including geology and resources, mine planning and feasibility studies. Overburden removal at the Elga deposit commenced in November 2010. Coal mining at Elga Open Pit commenced in August 2011.
Our subsidiary Elgaugol was established on August 14, 2013 under the laws of the Russian Federation with Yakutugol and Mechel Mining as participants for the purpose of raising project financing from Vnesheconombank. In September 2013, Vnesheconombank’s Supervisory Board approved a $2.5 billion project financing for the construction of the first stage of the Elga coal complex and the relevant loan agreements were signed in March 2014.
In August 2013, the board of directors of Yakutugol decided to transferElgaugol holds the subsoil license for the Elga coal deposit to Elgaugol. In January 2014, Elgaugol obtained the respective subsoil license.deposit.
The table below sets forth certain information regarding the subsoil license for our Elgaugol mine.
Mine | License (plot) | Area (sq. km) | Mining Method | Life of Mine | License Expiry Date | Status(1) | Year Production Commenced | Surface Land Use Rights | License (plot) | Area (sq. km) | Mining Method | Life of Mine | License Expiry Date | Status(1) | Year Production Commenced | Surface Land Use Rights | ||||||||||||||||||||||||||||||||||||||||||||||||
Elga Open Pit |
|  03730  (Elga) |
| 144.1 | Open pit | 2100 | May 2020 | In production | 2011 | Lease |  03730  | (Elga) | 144.1 | Open pit | 2100 | Dec 2033 | In production | 2011 | Lease | |||||||||||||||||||||||||||||||||||||||||||||
| (1) | “In production” refers to sites that are currently producing coal. |
Elga Open Pit produces two types of coal: high-quality hard coking coal (high-volatile) and steam coal. It also produces middlings (by-product(aby-product of the coking coal washing process). Coking coal and steam coal and middlings are sold both domestically andprimarily in the Asia-Pacific market with transshipment in ports of the Russian Far East.
The table below summarizes ROM coal production of our Elgaugol mine by type of coal for the periods indicated.
| 2015 | 2014 | 2018 | 2017 | 2016 | ||||||||||||||||||||||||||||||||||||
Mine | Tonnes | % of Total Production | Tonnes | % of Total Production | Tonnes | % of Total Production | Tonnes | % of Total Production | Tonnes | % of Total Production | ||||||||||||||||||||||||||||||
| (In millions of tonnes)(1) | (In millions of tonnes)(1) | |||||||||||||||||||||||||||||||||||||||
Coking Coal | ||||||||||||||||||||||||||||||||||||||||
Elga Open Pit | 2.6 | 0.7 | 3.4 | 3.5 | 2.8 | |||||||||||||||||||||||||||||||||||
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|
| ||||||||||||||||||||||||||||||||||||
Total Coking Coal | 2.6 | 66.7 | % | 0.7 | 58.3 | % | 3.4 | 69.4 | % | 3.5 | 83.3 | % | 2.8 | 75.7 | % | |||||||||||||||||||||||||
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| |||||||||||||||||||||||||||||||
Steam Coal | ||||||||||||||||||||||||||||||||||||||||
Elga Open Pit | 1.3 | 0.5 | 1.5 | 0.7 | 0.9 | |||||||||||||||||||||||||||||||||||
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|
|
| ||||||||||||||||||||||||||||||||||||
Total Steam Coal | 1.3 | 33.3 | % | 0.5 | 41.7 | % | 1.5 | 30.6 | % | 0.7 | 16.7 | % | 0.9 | 24.3 | % | |||||||||||||||||||||||||
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|
|
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| |||||||||||||||||||||||||||||||
Total Coal | 3.9 | 100 | % | 1.2 | 100 | % | 4.9 | 100 | % | 4.2 | 100 | % | 3.7 | 100 | % | |||||||||||||||||||||||||
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| |||||||||||||||||||||||||||||||
| (1) | Volumes are reported on a wet basis. |
The table below sets forth coal sales volumes of our Elgaugol mine by type of coal and destinations for the periods indicated.
Coal Type | Region | 2015 | 2014 | Region | 2018 | 2017 | 2016 | |||||||||||||||||||
| (In thousands of tonnes) | (In thousands of tonnes) | |||||||||||||||||||||||||
Coking coal | Asia | 11.8 | 34.6 | Asia | 441.6 | 426.3 | 242.6 | |||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||
Total | 11.8 | 34.6 | 441.6 | 426.3 | 242.6 | |||||||||||||||||||||
Steam coal | Asia | 1,201.5 | 319.9 | Asia | 1,296.6 | 1,088.8 | 1,429.2 | |||||||||||||||||||
| Russia | 209.0 | 149.1 | Russia | 26.3 | 1.0 | 1.2 | ||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||
Total | 1,410.5 | 469.0 | 1,322.9 | 1,089.8 | 1,430.4 | |||||||||||||||||||||
Middlings | Asia | 152.8 | 164.7 | |||||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||
Total | 152.8 | 164.7 | 1,764.5 | 1,516.1 | 1,673.0 | |||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||
Total | 1,575.1 | 668.3 | ||||||||||||||||||||||||
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| |||||||||||||||||||||||||
In 2009, the general scheme of the Elga coal complex development and the plan for initial mine block development were prepared. The plan for initial mine block development was subsequently approved by governmental authorities. In 2011, the project documentation of the first stage of the Elga coal complex construction was prepared and subsequently approved by governmental authorities. In November 2011, we concluded a contract for engineering, procurement and construction of a permanent housing complex for 3,000 miners and workers who will operate the Elga coal complex. Construction works are in progress, and miners live in a temporary settlement with all necessary amenities. In late 2014, we completed the construction of a pilot washing plant with a capacity of up to 2.7 million tonnes per annum and the capability to operate year-round.
In December 2011, we finished laying track for the rail line to the Elga deposit. TheThis 321 kilometer-long rail line is now in operation, and we are able to use it for transportation of coal produced at Elga Open Pit. The rail line connects Elga Open Pit with the Baikal-Amur Mainline (at the Ulak railway station), which, in turn, provides access to the Russian rail network in general,generally and access to Pacific Ocean ports, in particular. We will further develop the rail line to increase its capacity in line with our production plans. In March 2016, we contributed the production capacity requirementsUlak-Elga rail line to the registered capital of the newly established company Elga-road.
In October 2012, we launched a pilot seasonal washing plant for Elga subsoil license and our production plans.
Currently, Elga has an electricity substation with diesel power generatorsOpen Pit with a total installedseasonal capacity of 9 megawatts (“MW”). 2.0 million tonnes per annum. In late 2014, we completed the transfer of the pilot seasonal washing plant to year-round operation with an annual capacity of up to 2.7 million tonnes.
Federal Grid Company, the state-owned operator of the unified national electric grid, is installing high-voltage transmission lines to deliver electricity from the Zeysky hydro power plant located
270 kilometers from the site, and we are constructing electricity-receiving infrastructure capable of receiving 134 MW.infrastructure. We expect to start receiving electricity from this power plant in the fourth quarter of 2017.2019.
In accordance with the order of the Federal Agency for Subsoil Use (“Rosnedra”) No. 177 dated February 27, 2015 “On the conducting of aone-time updating of subsoil licenses,” we filed an application with the Department for Subsoil Use for the Sakha Republic (Yakutia) regarding conduct of an update procedure relating to the terms of the subsoil license for the Elga coal deposit. In December 2015, the Department for Subsoil Use for the Sakha Republic (Yakutia) made a decision to update the existing terms and issued an amendment to the subsoil license. The amendments provideThis amendment provided that the level of coal extraction and deadlines offor reaching the design capacity arewould be determined by the deposit development technical plan. In September 2016, based on the decision of Rosnedra, the subsoil license for the Elga coal deposit was extended until December 31, 2033.
In the event of significant deviations from the design solutions, we can prepare and duly approve the adjustment of the current technical plan in order to avoid violation of the terms of subsoil use. Thus, the amended license terms allow us to manage licensing risks by adjusting the project documentation which significantly reduces the risk of suspension of the subsoil license in the event of a deviation from the design solutions. See also “Item 3. Key Information — Risk Factors — Risks Relating to Our Business and Industry — The development of the Elga coal deposit is subject to certain risks due to the substantial amount of capital costs involved in developing the required infrastructure.”
Southern Kuzbass mines
The Kuznetsky basin, or Kuzbass, is located in the southeastern part of Western Siberia and is one of the largest coal mining areas in the world, covering an area of around 70,000 square kilometers. Coal-bearing seams extend over an area of 26,700 square kilometers and reach a depth of up to 1,800 meters. Coal was discovered in 1721, and systematic mining started in 1851. During the Soviet era, Kuzbass was the second largest regional coal producer. According to the Central Dispatching Department, Kuzbass (Kemerovo region) now accounts for about 58% of Russia’s total coal production.
All of our Southern Kuzbass mines are located in southeast Kuzbass around the town of Mezhdurechensk in the Kemerovo region, with the exception of the Yerunakovskaya mine area, which is located about 100 kilometers northwest of Mezhdurechensk.
The earliest production at our Southern Kuzbass mines was in 1953, although we acquired these mines and license areas starting in the 1990s. The Southern Kuzbass mines include four open pit mines and three underground mines and one underground mine under development:mines: Sibirginsky Open Pit, Tomusinsky Open Pit, Olzherassky Open Pit, Krasnogorsky Open Pit, V.I. Lenina Underground, Sibirginskaya Underground and Olzherasskaya-Novaya Underground and Yerunakovskaya-1 Underground (project).Underground.
Our Southern Kuzbass mines and the related washing plants produce semi-soft and semi-hard coking coal, anthracite, PCI and steam coal. Our Kuzbass operations are connected by rail to the Trans-Siberian Mainline and substantially all products are shipped by rail. Products are generally shipped by rail to Russian customers, to Balticnorthwestern Russian ports for European customers, to Port Posiet and Port Vanino for export to Asia and to Port Temryuk for customers in the Black Sea and Mediterranean basins.
The table below sets forth certain information regarding the subsoil licenses for our coal mines in Kuzbass, all of which are held by our subsidiary Southern Kuzbass Coal Company, unless otherwise noted.
Mine | License (plot) | Area (sq. km) | Mining Method | Life of Mine | License Expiry Date | Status(1) | Year Production Commenced | Surface Land Use Rights | License (plot) | Area (sq. km) | Mining Method | Life of Mine | License Expiry Date | Status(1) | Year Production Commenced | Surface Land Use Rights | ||||||||||||||||||||||||||||||
Krasnogorsky Open Pit |
(Tomsk, Sibirginsk) | 22.4 | Open pit | 2055 | Jan 2021 | In production | 1954 | Lease |  14016  (Tomsk, Sibirginsk) | 22.4 | Open pit | 2055 | Jan 2021 | In production | 1954 | Lease | ||||||||||||||||||||||||||||||
 13367 (Sorokinsk, Tomsk, Sibirginsk) | 2.8 | Nov 2025 | In production | 2012 | Lease | 13367 (Sorokinsk, Tomsk, Sibirginsk) | 2.8 | Nov 2025 | In production | 2012 | Lease | |||||||||||||||||||||||||||||||||||
Olzherassky Open Pit | 01374 (Raspadsk, Berezovsk, Sosnovsk) | 9.3 | Open pit | 2050 | Dec 2029 | In production | 1980 | Lease | 01374 (Raspadsk, Berezovsk, Sosnovsk) | 10.1 | Open pit | 2050 | Dec 2029 | In production | 1980 | Lease | ||||||||||||||||||||||||||||||
| 12939 (Raspadsk)(2) | 3.5 | Dec 2024 | Development | n/a | Lease | 12939 (Raspadsk)(2) | 3.5 | Dec 2024 | Development | n/a | Lease | |||||||||||||||||||||||||||||||||||
| 12940(Berezovsk-2, Berezovsk, Olzherassk) | 4.8 | Dec 2024 | In production | 2007 | Lease | 12940 (Berezovsk-2, Berezovsk, Olzherassk) | 4.8 | Dec 2024 | In production | 2007 | Lease | |||||||||||||||||||||||||||||||||||
| 01917 (Berezovsk Gluboky) | 7.4 | Aug 2035 | Exploration and development | n/a | Lease | 01917 (Berezovsk Gluboky) | 7.4 | Aug 2035 | Exploration and development | n/a | Lease | |||||||||||||||||||||||||||||||||||
Tomusinsky Open Pit | 13312 (Tomsk)(3) | 6.7 | Open pit | 2028 | Dec 2020 | In production | 1959 | Lease | 13312 (Tomsk)(3) | 6.7 | Open pit | 2028 | Dec 2020 | In production | 1959 | Lease | ||||||||||||||||||||||||||||||
Sibirginsky Open Pit | 13639 (Sibirginsk, Kureinsk, Uregolsk) | 17.7 | Open pit | 2055 | Dec 2032 | In production | 1970 | Lease | 13639 (Sibirginsk, Kureinsk, Uregolsk) | 16.4 | Open pit | 2055 | Dec 2032 | In production | 1970 | Lease | ||||||||||||||||||||||||||||||
| 01557 (New-Uregolsk) | 2.4 | Apr 2031 | In production | 2011 | Lease |
Uregolsk) | 2.4 | Apr 2031 | In production | 2011 | Lease | |||||||||||||||||||||||||||||||||||
Sibirginskaya Underground |
|
| 5.9 |
| Underground |
| 2058 |
| Dec 2024 | In production |
| 2002 |
|
| Lease |
|
|
| 5.9 |
| Underground |
| 2058 |
| Dec 2024 | In production |
| 2002 |
| Lease | ||||||||||||||||
| 15463(Sibirginsk-2, Sibirginsk, Kureinsk) | 0.9 | Dec 2032 | In production | 2014 | Lease |
(Sibirginsk-2, Sibirginsk, Kureinsk) | 0.9 | Dec 2032 | In production | 2014 | Lease | |||||||||||||||||||||||||||||||||||
| 01914(Sibirginsk-3) | 7.6 | Aug 2035 | Exploration and development | n/a | — | 01914 (Sibirginsk-3) | 7.6 | Aug 2035 | Exploration and development | n/a | Lease | |||||||||||||||||||||||||||||||||||
V.I. Lenina Underground | 14060 (Olzherassk) | 10.0 | Underground | 2050 | Dec 2032 | In production | 1953 | Lease |
|
| 10.0 |
| Underground |
| 2050 |
| Dec 2032 | In production |
| 1953 |
| Lease | ||||||||||||||||||||||||
| 01701 (Granichny, Olzherassk) | 1.2 | Feb 2033 | Exploration and development | n/a | — | 01701 (Granichny, Olzherassk) | 1.2 | Feb 2033 | Exploration and development | n/a | Lease, Ownership | |||||||||||||||||||||||||||||||||||
Olzherasskaya-Novaya Underground | 14199 (Raspadsk) | 1.2 | Underground | 2035 | Dec 2021 | In production | 2008 | Lease | 14199 (Raspadsk) | 1.2 | Underground | 2035 | Dec 2021 | In production | 2008 | Lease | ||||||||||||||||||||||||||||||
| 01471(Olzherassk-2, Raspadsk) | 0.03 | Jan 2030 | In production | 2010 | Lease |
(Olzherassk-2, Raspadsk) | 0.2 | Jan 2030 | In production | 2010 | Lease | |||||||||||||||||||||||||||||||||||
| 13366 (Razvedochny, Raspadsk) | 14.6 | Nov 2025 | In production | 2010 | Lease |
(Razvedochny, Raspadsk) | 14.6 | Nov 2025 | In production | 2010 | Lease | |||||||||||||||||||||||||||||||||||
Yerunakovskaya-1 Underground (project) |
|
|
8.4 |
|
Underground |
|
2033 |
|
Jun 2025 |
Development |
|
n/a |
|
|
Lease |
|
|
| 8.4 |
| Underground |
| 2033 |
| Jun 2025 | Development |
| n/a |
| Lease | ||||||||||||||||
Yerunakovskaya-3 Underground (prospect) |
|
|
7.1 |
|
Underground |
|
2115 |
|
Jun 2025 |
Development |
|
n/a |
|
|
— |
|
|
| 7.1 |
| Underground |
| 2115 |
| Jun 2025 | Development |
| n/a |
| — | ||||||||||||||||
Yerunakovskaya-2 Underground (prospect) |
|
|
7.3 |
|
Underground |
|
2051 |
|
Jul 2025 |
Development |
|
n/a |
|
|
— |
| ||||||||||||||||||||||||||||||
Olzherasskaya-Glubokaya Underground (prospect) | 13365 (Olzherassk) | 19.2 | Underground | 2211 | Nov 2025 | Development | n/a | — |
|
| 19.2 |
| Underground |
| 2211 |
| Nov 2025 | Development |
| n/a |
| — | ||||||||||||||||||||||||
Usinskaya Underground (prospect) | 14093 (Olzherassk) | 3.6 | Underground | 2071 | Dec 2033 | Conservation | n/a | — |
|
| 3.6 |
| Underground |
| 2071 |
| Dec 2033 | Conservation |
| n/a |
| Ownership | ||||||||||||||||||||||||
| (1) | “In production” refers to sites that are currently producing coal. “Development” refers to sites where preliminary work |
| (2) | We failed to commence commercial production in 2009 as required by the subsoil license due to unfavorable mine economics. |
| (3) | License held by Tomusinsky Open Pit, a subsidiary of Southern Kuzbass Coal Company. |
| (4) | We failed to commence commercial production in 2011 as required by the subsoil license due to unfavorable mine economics. |
| (5) | We failed to commence commercial production in 2012 as required by |
The table below summarizes ROM coal production of our Southern Kuzbass mines by mine and type of coal for the periods indicated.
| 2015 | 2014 | 2018 | 2017 | 2016 | ||||||||||||||||||||||||||||||||||||
Mine | Tonnes | % of Total Production | Tonnes | % of Total Production | Tonnes | % of Total Production | Tonnes | % of Total Production | Tonnes | % of Total Production | ||||||||||||||||||||||||||||||
| (In millions of tonnes)(1) | (In millions of tonnes)(1) | |||||||||||||||||||||||||||||||||||||||
Coking Coal | ||||||||||||||||||||||||||||||||||||||||
Sibirginsky Open Pit | 0.5 | 1.2 | 0.3 | 0.2 | 0.2 | |||||||||||||||||||||||||||||||||||
Tomusinsky Open Pit | 0.8 | 0.9 | 0.4 | 0.4 | 0.8 | |||||||||||||||||||||||||||||||||||
V.I. Lenina Underground | 0.4 | 0.7 | 0.6 | 0.5 | 0.8 | |||||||||||||||||||||||||||||||||||
Sibirginskaya Underground | 1.1 | 1.0 | 0.5 | 0.4 | 0.2 | |||||||||||||||||||||||||||||||||||
Olzherassky Open Pit | 0.6 | 0.5 | 0.7 | 0.4 | 0.5 | |||||||||||||||||||||||||||||||||||
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Total Coking Coal | 3.4 | 33.7 | % | 4.3 | 35.8 | % | 2.5 | 36.2 | % | 1.9 | 23.5 | % | 2.5 | 27.5 | % | |||||||||||||||||||||||||
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Steam Coal | ||||||||||||||||||||||||||||||||||||||||
Krasnogorsky Open Pit | 2.7 | 2.8 | 1.6 | 1.7 | 1.8 | |||||||||||||||||||||||||||||||||||
Sibirginsky Open Pit | 0.5 | 0.8 | 0.1 | 0.3 | 0.3 | |||||||||||||||||||||||||||||||||||
Olzherassky Open Pit | 0.0 | 0.1 | 0.0 | 0.0 | 0.0 | |||||||||||||||||||||||||||||||||||
Olzherasskaya-Novaya Underground | 0.3 | 0.8 | 0.8 | 1.5 | 1.5 | |||||||||||||||||||||||||||||||||||
Tomusinsky Open Pit | 0.7 | 0.9 | 0.4 | 0.5 | 0.6 | |||||||||||||||||||||||||||||||||||
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Total Steam Coal | 4.2 | 41.6 | % | 5.4 | 45.0 | % | 2.9 | 42.0 | % | 4.0 | 49.4 | % | 4.2 | 46.1 | % | |||||||||||||||||||||||||
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Anthracite | ||||||||||||||||||||||||||||||||||||||||
Krasnogorsky Open Pit | 2.5 | 2.3 | 1.5 | 2.2 | 2.4 | |||||||||||||||||||||||||||||||||||
Sibirginsky Open Pit | — | — | — | — | — | |||||||||||||||||||||||||||||||||||
Olzherassky Open Pit | — | — | — | — | — | |||||||||||||||||||||||||||||||||||
Olzherasskaya-Novaya Underground | — | — | — | — | — | |||||||||||||||||||||||||||||||||||
Tomusinsky Open Pit | — | — | — | — | — | |||||||||||||||||||||||||||||||||||
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Total Anthracite | 2.5 | 24.7 | % | 2.3 | 19.2 | % | 1.5 | 21.8 | % | 2.2 | 27.1 | % | 2.4 | 26.4 | % | |||||||||||||||||||||||||
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Total Coal | 10.1 | 100 | % | 12.0 | 100 | % | 6.9 | 100 | % | 8.1 | 100 | % | 9.1 | 100 | % | |||||||||||||||||||||||||
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| (1) | Volumes are reported on a wet basis. |
The table below sets forth Southern Kuzbass mines’ coal sales volumes by type of coal and destinations for the periods indicated.
Coal Type | Region | 2015 | 2014 | Region | 2018 | 2017 | 2016 | |||||||||||||||||
| (In thousands of tonnes) | (In thousands of tonnes) | |||||||||||||||||||||||
Coking coal | Russia | 492.2 | 1,407.2 | Asia | 461.4 | 261.7 | 179.3 | |||||||||||||||||
| Asia | 227.4 | 955.7 | Russia | 146.4 | 0.0 | 242.0 | ||||||||||||||||||
| CIS | 0.0 | 40.1 |
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Total | 719.6 | 2,403.0 | 607.8 | 261.7 | 421.3 | |||||||||||||||||||
Anthracite | Europe | 1,241.2 | 1,200.5 | Europe | 729.3 | 971.4 | 892.6 | |||||||||||||||||
| Asia | 321.7 | 336.5 | ||||||||||||||||||||||
| Other | 73.4 | 76.2 | Asia | 177.9 | 256.3 | 224.9 | ||||||||||||||||||
| CIS | 68.2 | 183.3 | Russia | 46.4 | 52.1 | 32.6 | ||||||||||||||||||
| Russia | 42.3 | 36.3 | CIS | 11.1 | 54.6 | 108.6 | ||||||||||||||||||
| Middle East(1) | 14.9 | 24.5 | Other | 0.0 | 61.2 | 255.9 | ||||||||||||||||||
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| ||||||||||||||||||||
Total | 1,761.7 | 1,857.3 | 964.7 | 1,395.6 | 1,514.6 | |||||||||||||||||||
PCI | Asia | 1,684.3 | 1,870.8 | Asia | 1,217.3 | 1,433.6 | 1,571.9 | |||||||||||||||||
| Europe | 473.5 | 837.8 | Middle East(1) | 20.2 | 31.2 | 10.4 | ||||||||||||||||||
| Middle East(1) | 91.5 | 338.5 | Europe | 0.0 | 0.0 | 37.8 | ||||||||||||||||||
| Russia | 4.7 | 0.0 |
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| CIS | 0.0 | 4.1 | ||||||||||||||||||||||
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Total | 2,254.0 | 3,051.2 | 1,237.5 | 1,464.8 | 1,620.1 | |||||||||||||||||||
Steam coal | Asia | 122.2 | 26.2 | Asia | 598.9 | 1,001.9 | 845.6 | |||||||||||||||||
| Middle East(1) | 96.7 | 152.2 | Europe | 22.8 | 36.7 | 4.6 | ||||||||||||||||||
| Russia | 30.4 | 38.6 | Russia | 13.3 | 12.2 | 12.7 | ||||||||||||||||||
| CIS | 15.5 | 392.8 | Middle East(1) | 0.0 | 8.9 | 44.9 | ||||||||||||||||||
| Europe | 11.6 | 13.9 |
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Total | 276.4 | 623.7 | ||||||||||||||||||||||
Middlings | Asia | 0.0 | 94.0 | |||||||||||||||||||||
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Total | 0.0 | 94.0 | 635.0 | 1,059.7 | 907.8 | |||||||||||||||||||
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Total | 5,011.7 | 8,029.2 | 3,445.0 | 4,181.8 | 4,463.8 | |||||||||||||||||||
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| (1) | Includes Turkey only. |
Coal washing plants
We operate six coal washing plants and one processing unit in Russia: fourRussia. Four of these coal washing plants and one processing unit are located near our coal mines in Southern Kuzbass,Kuzbass. Additionally, one coal washing plant is located near Neryungrinsky Open Pit, and one coal washing plant is at Elga Open Pit.
Our four coal washing plants and one processing unit located near our coal mines in Southern Kuzbass have an aggregate annual capacity of approximately 17.017.3 million tonnes of ROM coal. These are Krasnogorskaya Washing Plant, Sibir Washing Plant, Tomusinskaya Washing Plant, Kuzbasskaya Washing Plant and Sibirginskaya Processing Unit. These washing plants have aggregate storage capacity for saleable products of 175,200 tonnes, including 77,000142,700 tonnes, of additional capacity, of which 27.5%34% is covered storage.
Neryungrinskaya Washing Plant located near Neryungrinsky Open Pit has an annual capacity of 9.0 million tonnes. The plant produces coking coal concentrate and middlings.
In October 2012, we launched a pilot seasonal washing plant for Elga Open Pit, which operated in the warmer months of April to October only, with a seasonal capacity of 2.0 million tonnes per annum. In late 2014, we completed the transfer of the pilot seasonal washing plant to year-round operation with aan annual capacity of up to 2.7 million tonnes per annum.tonnes.
All of the coal feedstock enriched byIn 2018, our washing plants in 2015 (20.2enriched 17.0 million tonnes) was supplied bytonnes of our own mining operations.coal feedstock.
Coke and chemical products production
The following table lists the various types and grades of coke and chemical products we produce and sell. We also produce and sell coke gas.
Plant | Products | |
Moscow Coke and Gas Plant | Coke +60 mm, Coke +40 mm, Coke25-40 mm, Coke nut10-25 mm, Coke breeze0-10 mm, Coal benzene, Coal tar, Coke gas | |
Mechel Coke | Coke +40 mm, Coke +25 mm, Coke25-40 mm, Coke nut10-25 mm, Coke breeze0-10 mm, Coal benzene, Coal tar, Ammonium sulfate, Coke gas |
We have two coke plants, one of which is located in the city of Chelyabinsk and the other in the Moscow region. Coke is prepared by pyrolysis (heating in the absence of oxygen) oflow-ash,low-phosphorus andlow-sulfur coal. Coke is used in the blast furnace as a main source of heat, a reducing agent for iron and a raising agent for charging material in the smelting process.
In addition, we produce coke nut, which is smaller in size than metallurgical coke and is principally used as a reducing agent in ferroalloys production and for other purposes, and coke breeze, which is even smaller in size and is principally used for sintering iron ore concentrate prior to its use in blast furnaces or as fuel. Coke production and sales volumes figures presented herein include, among others, coke nut and coke breeze. Additional chemical products, such as coal benzene, coal tar and ammonium sulfate, are obtained asby-products in the coke production process.
The table below summarizes our production of coke, chemical products and coke gas for the periods indicated.
| 2015 | 2014 | |||||||
(Coke and chemical products in thousands of tonnes) (Coke gas in millions of cubic meters) | ||||||||
Mechel Coke | ||||||||
Coke (6% moisture) | 2,313 | 2,586 | ||||||
Chemical products | 112 | 119 | ||||||
Coke gas | 851 | 835 | ||||||
Moscow Coke and Gas Plant | ||||||||
Coke (6% moisture) | 723 | 799 | ||||||
Chemical products | 38 | 41 | ||||||
Coke gas | 319 | 367 | ||||||
Total | ||||||||
Coke (6% moisture) | 3,036 | 3,385 | ||||||
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Chemical products | 150 | 160 | ||||||
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Coke gas | 1,170 | 1,202 | ||||||
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(Coke and chemical products in thousands of tonnes) (Coke gas in millions of cubic meters) Mechel Coke Coke (6% moisture) Chemical products Coke gas Moscow Coke and Gas Plant Coke (6% moisture) Chemical products Coke gas Total Coke (6% moisture) Chemical products Coke gas 2018 2017 2016 2,040 2,269 2,244 109 121 110 744 798 824 542 561 742 29 29 38 235 237 328 2,582 2,830 2,986 138 150 148 979 1,035 1,152
The table below summarizes our sales volumes of coke and chemical products for the periods indicated.
| 2015 | 2014 | 2018 | 2017 | 2016 | ||||||||||||||||
| (In thousands of tonnes) | (In thousands of tonnes) | |||||||||||||||||||
Coke | 985 | 1,262 | 697 | 771 | 894 | |||||||||||||||
Chemical products | 155 | 173 | 131 | 140 | 146 | |||||||||||||||
The following table sets forth the capacity, the capacity utilization rate and the planned increase in capacity for Moscow Coke and Gas Plant’s principal production area.
Production Area | Capacity in 2015 | Capacity Utilization Rate in 2015 | Planned Increase (2016-2018) | Capacity in 2018 | Capacity Utilization Rate in 2018 | Planned Increase (2019-2021) | ||||||||||||||||||
| (In thousands of tonnes) | (In thousands of tonnes) | |||||||||||||||||||||||
Coke (6% moisture) | 976 | 74.1 | % | — | 625 | 86.7 | % | — | ||||||||||||||||
The following table sets forth the capacity, the capacity utilization rate and the planned increase in capacity for Mechel Coke’s principal production area.
Production Area | Capacity in 2015 | Capacity Utilization Rate in 2015 | Planned Decrease (2016-2018) | Capacity in 2018 | Capacity Utilization Rate in 2018 | Planned Increase (2019-2021) | ||||||||||||||||||
| (In thousands of tonnes) | (In thousands of tonnes) | |||||||||||||||||||||||
Coke (6% moisture) | 3,044 | 76.0 | % | 155 | 2,939 | 69.4 | % | — | ||||||||||||||||
Our own production facilities purchase a substantial majority of our coke production. For the years ended December 31, 20152018, 2017 and 2014,2016, purchases of our coke by our own production facilities amounted to 1.7 million tonnes, 1.9 million tonnes and 2.01.9 million tonnes, respectively, which represented 66%71%, 71% and 61%68% of our total coke sales volumes (including intra-group sales) for those periods.
We purchase some coking coal from other producers in order to produce coke. TheOur need to purchase coking coal from third parties for coke production varies from period to period, depending on customer demand for particular products and the availability of suitable coal grades from our own mines.
Iron ore and concentrate production
Our iron ore operations consist of Korshunov Mining Plant, which operates Korshunovsky Open Pit, Rudnogorsky Open Pit and Korshunovskaya Washing Plant, andthe Korshunovsky concentrating plant, as well as the three subsoil licenses held by Yakutugol for the Pionerskoye iron ore deposit, the Sivaglinskoye iron ore deposit and the Sutamskaya iron ore area in Yakutia.
Korshunovskaya Washing PlantThe Korshunovsky concentrating plant is located outside of the town of Zheleznogorsk-Ilimsky, 120 kilometers east of Bratsk in the Irkutsk region. Korshunovsky Open Pit is located near the washingconcentrating plant, and Rudnogorsky Open Pit is located about 85 kilometers to the northwest of the washingconcentrating plant. We have operated these iron ore mines and the washingconcentrating plant since 2003 when we acquired Korshunov Mining Plant. Both mines produce a magnetite ore (Fe3O4), and the washingconcentrating plant produces iron ore concentrate with a standard iron content of 62%. Product is shipped by rail to domestic customers as well as for export sales.our customers. All of the sites are served by regional public highways and a nearby federal motorway. The area is served by the Baikal-Amur Mainline, which connects the Trans-Siberian Mainline with China and Yakutia.
The table below sets forth certain information regarding the subsoil licenses for our iron ore mines, all of which are held by our subsidiary Korshunov Mining Plant.
Mine | License (plot) | Area (sq. km) | Mining Method | License Expiry Date | Status(1) | Year Production Commenced | Surface Land Use Rights | License (plot) | Area (sq. km) | Mining Method | License Expiry Date | Status(1) | Year Production Commenced | Surface Land Use Rights | ||||||||||||||||||||||||||||||||
Korshunovsky Open Pit |
|  14051  (Korshunovsk) |
| 4.2 | Open pit | Apr 2019 | In production | 1965 | Lease |  03333  (Korshunovsk) | 4.3 | Open pit | Dec 2026 | In production | 1965 | Lease | ||||||||||||||||||||||||||||||
Rudnogorsky Open Pit |
| 14052 (Rudnogorsk) |
| 5.1 | Open pit | Jan 2028 | In production | 1984 | Ownership | 03334 (Rudnogorsk) | 5.3 | Open pit | Jan 2028 | In production | 1984 | Ownership | ||||||||||||||||||||||||||||||
| (1) | “In production” refers to sites that are currently producing iron ore. |
The table below summarizes our ROM iron ore and iron ore concentrate production for the periods indicated.
| 2015 | 2014 | 2018 | 2017 | 2016 | ||||||||||||||||||||||||||||||||||||
Mine | Tonnes | Grade (% Fe) | Tonnes | Grade (% Fe) | Tonnes | Grade (% Fe) | Tonnes | Grade (% Fe) | Tonnes | Grade (% Fe) | ||||||||||||||||||||||||||||||
| (In millions of tonnes)(1) | (In millions of tonnes)(1) | |||||||||||||||||||||||||||||||||||||||
Korshunovsky Open Pit | 3.3 | 24.2 | % | 4.8 | 23.5 | % | 3.6 | 23.4 | % | 3.6 | 23.2 | % | 4.1 | 23.6 | % | |||||||||||||||||||||||||
Rudnogorsky Open Pit | 4.5 | 30.6 | % | 4.4 | 29.6 | % | 3.2 | 27.8 | % | 4.4 | 26.2 | % | 4.1 | 27.9 | % | |||||||||||||||||||||||||
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Total ore production | 7.8 | 27.9 | % | 9.2 | 26.4 | % | 6.8 | 25.5 | % | 8.0 | 24.8 | % | 8.2 | 25.8 | % | |||||||||||||||||||||||||
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Iron ore concentrate production | 2.7 | 63.2 | % | 3.2 | 63.2 | % | 2.0 | 62.8 | % | 2.5 | 62.8 | % | 2.7 | 62.8 | % | |||||||||||||||||||||||||
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| (1) | Volumes are reported on a wet basis. |
In 2011-2012, we obtained subsoil licenses for three iron ore deposits: the Pionerskoye deposit, the Sivaglinskoye deposit and the Sutamskaya area which are held by Yakutugol. The Pionerskoye deposit is located in Yakutia about 127 kilometers from the town of Neryungri. TheThis area is well connected to the regional transportation network with a federal motorway located 5 kilometers to the east of the deposit. The Sivaglinskoye deposit is 120 kilometers away from Neryungri and located close to the Pionerskoye deposit. The Sutamskaya area is located 210 kilometers south-east of Neryungri. These deposits contain high-quality iron ore, which will allow to produceproduction of iron ore concentrate with 65% iron content.
The table below sets forth certain information regarding the subsoil licenses for our iron ore deposits, all of which are held by our subsidiary Yakutugol.
Deposit | License (plot) | Area (sq. km) | Mining Method | License Expiry Date | Status(1) | Year Production Commenced | Surface Land Use Rights | |||||||||||||||
Pionerskoye |  03034  (Pionersk) | 9.95 | Open pit | Aug 2031 | Exploration | n/a | Lease | |||||||||||||||
Sivaglinskoye | 03153 (Sivaglinsk) | 2.23 | Open pit | Mar 2022 | Exploration | n/a | Lease | |||||||||||||||
Sutamskaya area | 03158 (Sutamskaya area) | 731.32 | Open pit | Mar 2037 | No activity | n/a | — | |||||||||||||||
| (1) | “Exploration” refers to sites where drilling for calculation of mineral reserves is being carried out. |
Limestone production
The Pugachevsky limestone quarry is an open pit mine located approximately nine kilometers southwest of Beloretsk in the Ural Mountains. The mine has a railway spur connected to the Russian rail system, which is controlled by Russian Railways. The quarry was developed in 1951 to support Beloretsk Metallurgical Plant’s steel-making facilities, which are currently closed. Pugachevsky Open Pit, which we acquired in 2002, was
owned by our Beloretsk Metallurgical Plant until the second half of 2011. In the second half of 2011, a 100% interest in Pugachevsky Open Pit was transferred to our subsidiary Mechel Materials. The current subsoil license is valid until January 2034.
The quarry produces both high-grade flux limestone for use in steel-making and ferronickel production and aggregate limestone for use in road construction. The flux limestone and aggregate limestone are the same grade of limestone, but they are produced in different fraction sizes, which determine their suitability for a particular use. In 2015, approximately 47.5% of the limestone produced at Pugachevsky Open Pit was used internally as auxiliary, with 45.4% shipped to Chelyabinsk Metallurgical Plant, 1.2% to Izhstal and 0.9% to other our group companies; approximately 16.8% was sold to third parties; and approximately 35.7% remained in the warehouse and partly was used for internal needs of the quarry. We are capable of internally sourcing 100% of the limestone requirements of our steel operations.
The table below summarizes our limestone production for the periods indicated.
| 2015 | 2014 | |||||||
| (In thousands of tonnes) | ||||||||
Pugachevsky Open Pit | 1,637 | 1,762 | ||||||
Sales of mining segment products
The following table sets forth sales of mining segment products (by volume) and as a percentage of total sales of these products (including intra-group sales) for the periods indicated.
Product | 2015 | 2014 | 2015 | 2014 | 2018 | 2017 | 2016 | 2018 | 2017 | 2016 | ||||||||||||||||||||||||||||||
| (In thousands of tonnes)(1) | (% of total sales, including intra-group) | (In thousands of tonnes)(1) | (% of total sales, including intra-group) | |||||||||||||||||||||||||||||||||||||
Coking coal concentrate | 5,246.0 | 7,777.4 | 63.9 | % | 77.1 | % | 4,257.7 | 4,796.8 | 5,784.0 | 59.6 | % | 60.4 | % | 66.8 | % | |||||||||||||||||||||||||
Steam coal and middlings | 4,880.3 | 4,375.6 | 74.4 | % | 74.6 | % | 4,537.9 | 5,403.9 | 5,927.2 | 85.8 | % | 88.0 | % | 84.7 | % | |||||||||||||||||||||||||
Anthracite and PCI | 4,066.7 | 4,996.1 | 94.0 | % | 96.6 | % | ||||||||||||||||||||||||||||||||||
PCI and Anthracite | 2,205.5 | 2,865.0 | 3,139.0 | 91.7 | % | 93.1 | % | 92.6 | % | |||||||||||||||||||||||||||||||
Iron ore concentrate | 488.9 | 1,168.7 | 17.4 | % | 37.5 | % | 139.8 | 30.2 | 26.3 | 7.1 | % | 1.2 | % | 1.0 | % | |||||||||||||||||||||||||
Coke | 984.8 | 1,262.0 | 33.8 | % | 39.0 | % | 696.6 | 770.6 | 893.5 | 28.5 | % | 28.7 | % | 31.5 | % | |||||||||||||||||||||||||
Chemical products | 154.7 | 173.0 | 98.8 | % | 99.7 | % | 130.8 | 140.0 | 146.3 | 95.8 | % | 93.3 | % | 96.4 | % | |||||||||||||||||||||||||
| (1) | Includes resale of mining segment products purchased from third parties. |
The following table sets forth revenues by product, as further divided between domestic sales and exports (including as a percentage of total mining segment revenues) for the periods indicated. We define exports as sales by our Russian and foreign subsidiaries to customers located outside their respective countries. We define domestic sales as sales by our Russian and foreign subsidiaries to customers located within their respective countries. See note 2826 to the consolidated financial statements.
| 2015 | 2014 | 2018 | 2017 | 2016 | ||||||||||||||||||||||||||||||||||||
Product | Amount | % of Revenues | Amount | % of Revenues | Amount | % of Revenues | Amount | % of Revenues | Amount | % of Revenues | ||||||||||||||||||||||||||||||
| (In millions of Russian rubles, except for percentages) | (In millions of Russian rubles, except for percentages) | |||||||||||||||||||||||||||||||||||||||
Coking coal concentrate | 27,209.6 | 33.7 | % | 30,645.3 | 38.5 | % | 43,633.3 | 45.0 | % | 43,656.4 | 43.6 | % | 38,743.9 | 43.2 | % | |||||||||||||||||||||||||
Domestic Sales | 28.0 | % | 17.5 | % | 17.8 | % | 20.4 | % | 21.6 | % | ||||||||||||||||||||||||||||||
Export | 72.0 | % | 82.5 | % | 82.2 | % | 79.6 | % | 78.4 | % | ||||||||||||||||||||||||||||||
Steam coal | 7,236.0 | 9.0 | % | 4,337.1 | 5.5 | % | 9,935.0 | 10.2 | % | 13,446.7 | 13.4 | % | 12,587.3 | 14.1 | % | |||||||||||||||||||||||||
Domestic Sales | 30.0 | % | 37.6 | % | 13.7 | % | 15.2 | % | 17.1 | % | ||||||||||||||||||||||||||||||
Export | 70.0 | % | 62.4 | % | 86.3 | % | 84.8 | % | 82.9 | % | ||||||||||||||||||||||||||||||
PCI and Anthracite | 24,989.9 | 31.0 | % | 22,411.6 | 28.2 | % | 19,687.1 | 20.3 | % | 21,436.7 | 21.4 | % | 18,737.1 | 20.9 | % | |||||||||||||||||||||||||
Domestic Sales | 1.3 | % | 0.8 | % | 2.3 | % | 2.3 | % | 1.3 | % | ||||||||||||||||||||||||||||||
Export | 98.7 | % | 99.2 | % | 97.7 | % | 97.7 | % | 98.7 | % | ||||||||||||||||||||||||||||||
Middlings | 4,750.5 | 5.9 | % | 4,990.6 | 6.3 | % | 6,766.9 | 7.0 | % | 5,800.9 | 5.8 | % | 5,189.8 | 5.8 | % | |||||||||||||||||||||||||
Domestic Sales | 55.2 | % | 46.9 | % | 68.6 | % | 43.2 | % | 68.0 | % | ||||||||||||||||||||||||||||||
Export | 44.8 | % | 53.1 | % | 31.4 | % | 56.8 | % | 32.0 | % | ||||||||||||||||||||||||||||||
Coke | 9,428.9 | 11.7 | % | 8,427.0 | 10.6 | % | 11,243.6 | 11.6 | % | 11,379.3 | 11.4 | % | 9,341.5 | 10.4 | % | |||||||||||||||||||||||||
Domestic Sales | 53.9 | % | 62.0 | % | 22.3 | % | 47.8 | % | 64.1 | % | ||||||||||||||||||||||||||||||
Export | 46.1 | % | 38.0 | % | 77.7 | % | 52.2 | % | 35.9 | % | ||||||||||||||||||||||||||||||
Chemical products | 2,327.4 | 2.9 | % | 2,421.9 | 3.0 | % | 2,961.5 | 3.1 | % | 2,367.9 | 2.4 | % | 1,988.0 | 2.2 | % | |||||||||||||||||||||||||
Domestic Sales | 55.4 | % | 84.5 | % | 65.8 | % | 59.6 | % | 54.8 | % | ||||||||||||||||||||||||||||||
Export | 44.6 | % | 15.5 | % | 34.2 | % | 40.4 | % | 45.2 | % | ||||||||||||||||||||||||||||||
Iron ore concentrate | 1,844.0 | 2.3 | % | 4,010.7 | 5.0 | % | 838.9 | 0.9 | % | 220.2 | 0.2 | % | 125.9 | 0.1 | % | |||||||||||||||||||||||||
Domestic Sales | 7.6 | % | 52.9 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||||||||||||||||||||||||
Export | 92.4 | % | 47.1 | % | 0.0 | % | 0.0 | % | 0.0 | % | ||||||||||||||||||||||||||||||
Other(1) | 2,846.0 | 3.5 | % | 2,264.4 | 2.9 | % | 1,816.0 | 1.9 | % | 1,821.2 | 1.8 | % | 2,934.6 | 3.3 | % | |||||||||||||||||||||||||
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Total | 80,632.3 | 100.0 | % | 79,508.6 | 100.0 | % | 96,882.3 | 100.0 | % | 100,129.3 | 100.0 | % | 89,648.1 | 100.0 | % | |||||||||||||||||||||||||
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Domestic Sales | 25.9 | % | 26.1 | % | 21.0 | % | 22.2 | % | 25.4 | % | ||||||||||||||||||||||||||||||
Export | 74.1 | % | 73.9 | % | 79.0 | % | 77.8 | % | 74.6 | % | ||||||||||||||||||||||||||||||
| (1) | Includes revenues from transportation, distribution, construction and other miscellaneous services provided to local customers. |
Marketing and distribution
In 2015,2018, our Russian domestic sales were conducted directly by our own production facilities, and our export sales were conducted by Mechel Carbon, based in Baar, Switzerland, and Mechel Carbon Singapore.Switzerland. We generally do not involve traders in the sales and distribution of our mining products and we have had long-standing relationships with end users of our mining products.
The following table sets forth by percentage of sales revenue by the regions in which our mining segment products were sold for the periods indicated.
Region(1) | 2015 | 2014 | 2018 | 2017 | 2016 | |||||||||||||||
Asia | 47.5 | % | 49.4 | % | 60.8 | % | 61.3 | % | 58.2 | % | ||||||||||
Russia | 25.9 | % | 26.1 | % | 21.0 | % | 22.2 | % | 25.4 | % | ||||||||||
Europe | 19.6 | % | 15.1 | % | 12.9 | % | 11.6 | % | 11.3 | % | ||||||||||
CIS | 2.7 | % | 5.5 | % | 2.3 | % | 2.5 | % | 2.1 | % | ||||||||||
Middle East(2) | 3.2 | % | 2.9 | % | 3.0 | % | 2.0 | % | 0.8 | % | ||||||||||
United States | 0.3 | % | 0.1 | % | 0.0 | % | 0.0 | % | 0.3 | % | ||||||||||
Other | 0.8 | % | 0.9 | % | 0.0 | % | 0.4 | % | 1.9 | % | ||||||||||
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Total | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||||
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| (1) | The regional breakdown of sales is based on the geographic location of our customers, and not on the location of the end users of our products, as our customers are often distributors that resell and, in some cases, further export our products. |
| (2) | Includes Turkey |
The following table sets forth information about the five largest customers of our mining segment, which together accounted for 30.2%approximately 40.4% of our total mining segment sales in 2015.2018.
Customer | % of Total Mining Segment Sales | Product | % of Total Products Sales | % of Total Mining Segment Sales | Product | % of Total Products Sales | ||||||||||||||
ArcelorMittal | 9.8 | % | PCI and Anthracite | 31.5 | % | |||||||||||||||
POSCO | 6.2 | % | PCI and Anthracite | 7.9 | % | 14.7 | % | Coking coal concentrate | 19.5 | % | ||||||||||
| Coking coal concentrate | 10.4 | % | PCI and Anthracite | 26.4 | % | |||||||||||||||
| Middlings | 3.8 | % | Middlings | 7.2 | % | |||||||||||||||
Baosteel Group Corporation | 4.9 | % | Coking coal concentrate | 14.6 | % | |||||||||||||||
JFE Steel Corporation | 4.8 | % | PCI and Anthracite | 4.1 | % | |||||||||||||||
Sojitz Corporation | 10.1 | % | Coking coal concentrate | 17.2 | % | |||||||||||||||
| Coking coal concentrate | 10.6 | % | PCI and Anthracite | 11.9 | % | |||||||||||||||
MMK | 4.5 | % | Coking coal concentrate | 13.4 | % | 6.5 | % | Coking coal concentrate | 14.1 | % | ||||||||||
| Iron ore concentrate | 11.6 | % | ||||||||||||||||||
Batek Resources | 4.7 | % | Steam coal | 39.4 | % | |||||||||||||||
| Middlings | 9.0 | % | ||||||||||||||||||
Far-Eastern Generating Company JSC | 4.5 | % | Middlings | 63.4 | % | |||||||||||||||
| Steam coal | 0.6 | % | ||||||||||||||||||
Domestic sales
We ship our coking coal concentrate from our coal washing facilities, located near our coal mines, by railwayrail directly to our customers, including steel producers. In 2015,2018, our largest domestic customer for our coking coal concentrate was MMK, accounting for 13.4%14.1% of our total coking coal concentrate sales and 4.5%6.4% of our total mining segment sales.
We sell coking coal concentrate domestically on the basis of annual framework contracts with monthly or quarterly adjustments to price and quantity.
We ship our steam coal from our warehouses by railwayrail directly to our customers, which are predominantly local municipal services and electric power stations. Our supply contracts for steam coal are generally concluded with customers on a long-term basis with quantities and prices either fixed for the whole term or adjusted monthly. Some of our steam coal is consumed within our group; for example, sales of steam coal and middlings from our Southern Kuzbass Coal Company to our Southern Kuzbass Power Plant were 1,345.7RUB 516.4 million rubles in 2015.2018. In total, 585.0122.0 thousand tonnes of steam coal was sold within our group in 2015.2018. SUE HCS Sakha Republic
(Yakutia) is our largest domestic customer of steam coal, accounting for 14.6%8.2% of our total steam coal sales and 1.3%0.8% of our total mining segment sales in 2015.
IronWe ship our iron ore concentrate is shipped via railwayby rail directly from our Korshunov Mining Plant to customers. In 2015,2018, iron ore concentrate was sold primarily within our group. We set our prices on a monthly basis, which is in line with the current practice in the Russian market of iron ore feed.
The majority of coke is sold domestically to our subsidiaries Chelyabinsk Metallurgical Plant and Bratsk Ferroalloy Plant, which accounted for 65.9%71.4% of our total coke sales (including intra-group sales) by volume in 2015.2018. Major third partythird-party customers include pig iron, steel and ferroalloy producers located in the Central Region and in the Urals of Russia. SalesGenerally, sales in Russia are conducted pursuant to framework agreements with monthly adjustments of quantities and prices.
Our subsidiary Mecheltrans is a railway freight forwarding company, which owns its own rail rolling stock, consisting of 1,1291,785 open cars and 57 pellet cars, and leases 3,9273,923 open cars 101 pellet cars and 144272 dumpcars under operating leases and 7,0255,083 open cars under finance leases. In 2015,2018, Mecheltrans transported domestically approximately 28.321.1 million tonnes of our cargo, approximately 71.7%72.2% of which was comprised of coal and iron ore concentrate. Our subsidiary Mecheltrans Auto is a motor freight forwarding company, which owns 45 long-haul trucks. In 2015, Mecheltrans Auto transported domestically approximately 682.1 thousand tonnes of our cargo.feed.
Export sales
We export coking coal concentrate, PCI and anthracite, iron ore concentrate,steam coal and coke and steam coal.chemical products.
In 2015,2018, the largest foreign customer of our mining segment was ArcelorMittal,POSCO, accounting for 9.8%14.7% of our total mining segment sales. ArcelorMittalPOSCO purchases consisted of PCI, coking coal concentrate and anthracite.middlings.
We were Russia’s secondthird largest exporter of coking coal concentrate in 2015,2018, according to RasMin.MMI. Our exports of coking coal concentrate arewent primarily to China, Japan and South Korea.Korea in 2018. In 2015, Baosteel2018, Sojitz Corporation, POSCO, Xiamen Xiangyu Logistics Group Corporation, Shunshun Development (Hongkong)Yancheng Materials Group Co., Ltd., JFE and Kobe Steel, Corporation, POSCO and CNBM International CorporationLtd. were our largest foreign customers of coking coal concentrate, accounting for 53.6%54.8% of our total coking coal concentrate sales and 18.1%24.7% of our total mining segment sales. Shipments are generally made by rail to seaports and further by sea, except for certain shipments to Ukraine, PolandEastern Europe and northeast China that are made only by rail.
OurIn 2018, our exports of PCI and anthracite arewere primarily to Europe, China, South Korea, Japan and Japan,China, which together accounted for 86.9%96.4% of our total PCI and anthracite sales and 26.9%19.6% of our total mining segment sales in 2015.sales. In 2015,2018, our largest foreign customers of PCI and anthracite were POSCO, ArcelorMittal, POSCO, JFE SteelSojitz Corporation, Tata SteelSumitomo Corporation and Aminco International Limited.Mitsui & Co.
OurIn 2018, our exports of steam coal arewere primarily to China, TurkeyVietnam and South Korea,Japan, which together accounted for 68.5%72.2% of our total steam coal sales and 6.1%7.4% of our total mining segment sales in 2015.sales. In 2015,2018, our largest foreign customers of steam coal were Batek Resources Limited, Jidong DevelopmentCreative Centre International Group LS NetworksLimited, Shandong Zikuang Coal Transportation and Marketing Co., Ltd., Suifenhe Guolin Wood Industry ParkLtd, Itochu Corporation and CFPC (Singapore)Galaxy Energy and Resources Co. Pte. Ltd.
PCI, anthracite and steam coal are shipped to customers from our warehouses by railwayrail and further by sea from Russian and Baltic ports.sea.
In 2015,2018, we used annual contracts for export sales of coal. Coal not shipped under annual contracts was sold on the spot marketmarket.
In 2018, we exported coke, including coke breeze, and chemical products primarily to Chinese customers.
We sold iron ore concentrate to customers in China during 2015,Europe, which accounted for 92.4%35.2% of our total iron ore concentratecoke and chemical products sales and 2.1%5.2% of our total mining segment sales in 2015. We ship iron ore concentrate to China by rail.
We export coke, including coke breeze, primarily to Europe and Ukraine, which together accounted for 32.7% of our total coke sales and 3.8% of our total mining segment sales in 2015.sales.
From Port Posiet, we shipshipped primarily coking coal concentrate, steam coal and PCI to Japan, South Korea and China.China in 2018. In 2015,2018, our Port Posiet processed 5.15.3 million tonnes of coal;coal with its warehousing capacity is
limited to 200 thousand tonnes per month forone-time storage of no more than four grades of coal. In order to expand the cargo-handling capacity of the port, we constructed a modern transshipment complex and put into operation a mechanized coal loosening complex. The first stage of the Port Posiet’s modernization enabled us to expand the cargo-handling capacity of the port up to 7.0 million tonnes per annum in 2016. Further modernization envisagesWe further envisage the completionconstruction of construction ofa deepwater berth and an approach channel.channel, as well as the installation of a shiploader. The port’s proximity to roads and rail links to key product destinations and transshipment points in China and Russia make it a cost-effective link in the logistical chain for bringing our coal products to the market.
In 2015,2018, Mecheltrans transported for export approximately 14.59.2 million tonnes of our cargo, approximately 83.8%86.6% of which was comprised of coal and iron ore concentrate.coal.
Market share and competition
Coal
According to the Central Dispatching Department, in 2015,2018, the Russian coal mining industry was represented by 192176 companies, which operated 7157 underground mines and 121119 open pit mines. As a result of the privatization of 1990s and subsequent mergers and acquisitions, the Russian coal mining industry has become more concentrated. Based on the Central Dispatching Department’s data and our estimates, the ten largest coal mining companies in Russia produced approximately 74%70% of the overall coal production volume in 2015.2018.
According to data from the Central Dispatching Department, from companies’ websites and from our estimates, in 2015,2018, we were the second largest coking coal producer in Russia, with an approximately 16.7%a 13.9% share of total coking coal production by volume, and we had a 6.2%4.3% market share with respect to overall Russian coal production by volume. The following table lists the main Russian coking coal producers in 2015,2018, the industrial groups to which they belong, their coking coal production volumes and their share of total Russian production volume.
Group | Company | Coking Coal Production (Thousands of Tonnes) | % of Coking Coal Production by Volume | Company | Coking Coal Production (Thousands of Tonnes) | % of Coking Coal Production by Volume | ||||||||||||||
EVRAZ plc | Raspadskaya OAO | 10,352 | 12.5 | % | Raspadskaya PAO | 12,740 | 13.5 | % | ||||||||||||
| Yuzhkuzbassugol Coal Company OAO | 10,231 | 12.4 | % | UCC Yuzhkuzbassugol JSC | 10,360 | 11.0 | % | |||||||||||||
| EVRAZ Total | 20,583 | 24.9 | % | EVRAZ Total | 23,100 | 24.5 | % | |||||||||||||
Mechel PAO | Yakutugol JSHC | 7,770 | 9.4 | % | Yakutugol JSHC | 6,357 | 6.8 | % | ||||||||||||
| Southern Kuzbass Coal Company PAO | 3,348 | 4.1 | % | Elgaugol OOO | 3,446 | 3.7 | % | |||||||||||||
| Elgaugol OOO | 2,619 | 3.2 | % | Southern Kuzbass Coal Company PJSC | 3,291 | 3.5 | % | |||||||||||||
| Mechel Total | 13,737 | 16.7 | % | Mechel Total | 13,094 | 14.0 | % | |||||||||||||
Severstal PAO | Vorkutaugol AO | 13,160 | 16.0 | % | Vorkutaugol AO | 9,621 | 10.2 | % | ||||||||||||
SUEK JSC | SUEK-Kuzbass JSC | 7,192 | 7.6 | % | ||||||||||||||||
| Arcticheskie razrabotki OOO | 494 | 0.5 | % | |||||||||||||||||
| SUEK Total | 7,686 | 8.1 | % | |||||||||||||||||
Sibuglemet Holding | Mezhdurechye OAO | 4,056 | 4.9 | % | Mezhdurechye AO | 4,392 | 4.7 | % | ||||||||||||
| Bolshevik Mine OAO | 1,066 | 1.3 | % | Bolshevik Mine AO | 1,619 | 1.7 | % | |||||||||||||
| Antonovskaya Mine ZAO | 750 | 0.9 | % | Antonovskaya Mine AO | 890 | 1.0 | % | |||||||||||||
| Sibuglemet Total | 5,872 | 7.1 | % | Sibuglemet Total | 6,901 | 7.4 | % | |||||||||||||
UMMC | Kuzbassrazrezugol Coal Company OAO | 5,763 | 7.0 | % | ||||||||||||||||
SUEK AO | SUEK-Kuzbass OAO | 5,357 | 6.5 | % | ||||||||||||||||
| Arctic development OOO | 189 | 0.2 | % | |||||||||||||||||
| SUEK Total | 5,546 | 6.7 | % | |||||||||||||||||
Stroyservis ZAO | Berezovskiy Open-Cut Mine OOO | 2,342 | 2.8 | % | ||||||||||||||||
| Barzasskoye tovarischestvo OOO | 862 | 1.1 | % | |||||||||||||||||
| Shestaki Open-Cut Mine OAO | 743 | 0.9 | % | |||||||||||||||||
| Shahta No. 12 OOO | 614 | 0.7 | % | |||||||||||||||||
| Stroyservis Total | 4,561 | 5.5 | % | |||||||||||||||||
MMK OAO | Belon OAO | 3,583 | 4.3 | % | ||||||||||||||||
Other | 9,705 | 11.8 | % | 33,790 | 35.8 | % | ||||||||||||||
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Total | 82,510 | 100.0 | % | 94,192 | 100.0 | % | ||||||||||||||
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| Source: | Central Dispatching Department, companies’ websites and our estimates. |
According to data from the Central Dispatching Department, companies’ websites andMetal Expert, in 2018, our estimates, in 2015, we were the seventh largestshare of Russia’s total production volume of steam coal producerwas 1.5%. The main producers in Russia, with a 3.3% share of total production by volume. The following table lists the main Russian steam coal producers in 2015, the groups to which they belong, theirindustry include SUEK, UMMC (Kuzbassrazrezugol Coal Company) andSDS-Coal, accounting for 53.9% of total steam coal production volumes and their share of total Russian steam coal production volume.in 2018, according to Metal Expert.
Group | Company | Steam Coal Production (Thousands of Tonnes) | % of Steam Coal Production by Volume | |||||||
SUEK AO | SUEK-Kuzbass OAO | 24,695 | 8.5 | % | ||||||
| Borodinsky Open Pit AO | 18,783 | 6.5 | % | |||||||
| Tugnuisky Open Pit OAO | 12,250 | 4.2 | % | |||||||
| SUEK-Khakassia OOO | 12,006 | 4.1 | % | |||||||
| Berezovsky Open Pit AO | 6,263 | 2.1 | % | |||||||
| Urgalugol OAO | 5,600 | 1.9 | % | |||||||
| Primorskugol OAO | 4,348 | 1.5 | % | |||||||
| Nazarovsky Open Pit AO | 3,428 | 1.2 | % | |||||||
| Kharanorsky Open Pit OAO | 2,889 | 1.0 | % | |||||||
| Chitaugol OOO | 944 | 0.3 | % | |||||||
| Vostochnoe Mine Office ZAO | 810 | 0.3 | % | |||||||
| Arctic development OOO | 195 | 0.1 | % | |||||||
| SUEK Total | 92,211 | 31.7 | % | |||||||
UMMC | Kuzbassrazrezugol Coal Company OAO | 38,630 | 13.3 | % | ||||||
| Baikaimskaya Shaft Mine OOO | 84 | 0.0 | % | |||||||
| UMMC Total | 38,714 | 13.3 | % | |||||||
SDS Holding Company | Chernigovets AO | 6,353 | 2.2 | % | ||||||
| Mayskoe Mine Office OOO | 5,385 | 1.8 | % | |||||||
| Listvyazhnaya Shaft Mine OOO | 4,769 | 1.6 | % | |||||||
| Salek ZAO | 4,230 | 1.4 | % | |||||||
| Kiselevsky Open Pit Mine OOO | 2,555 | 0.9 | % | |||||||
| Yuzhnaya Shaft Mine OAO | 2,283 | 0.8 | % | |||||||
| Sibenergougol OOO | 2,016 | 0.7 | % | |||||||
| Prokopyevsky Open Pit Mine ZAO | 1,342 | 0.5 | % | |||||||
| SDS Total | 28,933 | 9.9 | % | |||||||
En+ Group | Vostsibugol OOO (Irkutsk region) | 10,894 | 3.8 | % | ||||||
| Vostsibugol OOO (Irbeysky Open Pit Mine) | 1,843 | 0.6 | % | |||||||
| Tuvinskaya Mining Company OOO | 683 | 0.2 | % | |||||||
| En+ Total | 13,420 | 4.6 | % | |||||||
Russian Coal OAO | Krasnoyarskkraiugol OAO | 5,340 | 1.9 | % | ||||||
| Stepnoy Open Pit Mine AO | 4,038 | 1.4 | % | |||||||
| Amurugol AO | 3,293 | 1.1 | % | |||||||
| Sayano-Partizanskiy Open Pit OOO | 604 | 0.2 | % | |||||||
| Russian Coal Total | 13,275 | 4.6 | % | |||||||
Kuzbasskaya Toplivnaya Company PAO | Kuzbasskaya Toplivnaya Company | 11,002 | 3.8 | % | ||||||
Mechel PAO | Southern Kuzbass Coal Company PAO | 6,734 | 2.3 | % | ||||||
| Yakutugol JSHC | 1,377 | 0.5 | % | |||||||
| Elgaugol OOO | 1,332 | 0.5 | % | |||||||
| Mechel Total | 9,443 | 3.3 | % | |||||||
Zarechnaya Coal Company | Zarechnaya Mine OAO | 5,043 | 1.7 | % | ||||||
| Alexievskaya Mine OAO | 2,501 | 0.9 | % | |||||||
| Karagaylinskoye Mine Office OOO | 1,007 | 0.3 | % | |||||||
| Zarechnaya Total | 8,551 | 2.9 | % | |||||||
Sibuglemet Holding | Mezhdurechye OAO | 2,705 | 0.9 | % | ||||||
| Yuzhnaya Coal Company OAO | 2,332 | 0.8 | % | |||||||
| Sibuglemet Total | 5,037 | 1.7 | % | |||||||
Other | 70,267 | 24.2 | % | |||||||
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Total | 290,853 | 100.0 | % | |||||||
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Source: Central Dispatching Department, companies’ websites and our estimates.
In the domestic coal market, we compete primarily on the basis of price, as well as on the basis of the quality of coal, which in turn depends upon the quality of our production assets and the quality of our mineral reserves. Competition in the steam coal market is also affected by the fact that most steam power stations were built near specific steam coal sources and had their equipment customized to utilize the particular type of coal produced at the relevant local source. Outside of Russia, competition in the steam coal market is largely driven by coal quality, including volatile matter and calorie content.
Iron ore
The Russian iron ore market is generally characterized by high demand and limited sources of supply, with product quality as the main factor driving prices. According to Metal Expert, the market is dominated by relatively few producers, with the top three mining groups being Metalloinvest, NLMK and Severstal, and NLMK, representing 70%70.9% of total production of iron ore concentrate. Weconcentrate production. According to Metal Expert, we were seventh in production volume in 20152018 with 2.72.0 million tonnes of iron ore concentrate, representing 2.8%2.0% of total production of iron ore concentrate in Russia.
Mineral reserves (coal, iron ore and limestone)
Coal and iron ore
Our coal and iron ore reserves are based on exploration drilling and geological data, and are that part of a mineral deposit which could be economically and legally extracted or produced at the time of the reserve determination. Each year we update our reserve calculations based on actual production and other factors, including economic viability and any new exploration data. Our coal and iron ore reserves are presented in accordance with the criteria for internationally recognized reserve and resource categories of the “Australasian Code for Reporting Mineral Resources and Ore Reserves” (as amended) published by the Joint Ore Reserves Committee (“JORC”) of the Australasian Institute of Mining and Metallurgy, Australian Institute of Geoscientists and the Minerals Council of Australia (the “JORC Code”), and meet the standards set by the SEC in its Industry Guide 7. Information on our mineral reserves has been prepared by our internal mining engineers as of December 31, 2015.2018. To prepare this information our internal mining engineers used resource and reserve estimates, actual and forecast production, operating costs, capital costs, geological plan maps, geological cross sections, mine advance maps in plan and cross section and price projections.
Our coal and iron ore reserve estimates contained herein inherently include a degree of uncertainty and depend to some extent on geological assumptions and statistical inferences which may ultimately prove to have been unreliable. Consequently, reserve estimates should be regularly revised based on actual production experience or new information and should therefore be expected to change. Notably, should we encounter mineralization or formations different from those predicted by past drilling, sampling and similar examinations, reserve estimates may have to be adjusted and mining plans may have to be altered in a way that might adversely affect our operations. Moreover, if the price of metallurgical coal, steam coal or iron ore declines, or stabilizes at a price lower than recent levels, or if production costs increase or recovery rates decrease, it may become uneconomical to recover reserves containing relatively lower grades of mineralization and consequently our reserves may decrease. Conversely, should the price of metallurgical coal, steam coal or iron ore stabilize at a materially higher price than currently assumed, or if production costs decrease or recovery rates increase, it may become economical to recover material at lower grades than that assumed here and consequently our reserves may increase.
The calculation of our reserves in Russia is based on the expected operational life of each deposit based onlife-of-mine plans, which in many cases exceed the relevant license period for the deposit. Russian subsoil licenses are issued for defined boundaries and specific periods, generally about 20 years. Our declared reserves
are contained within the current license boundary. Our Russian subsoil licenses expire on dates falling in 20192020 through 2037. However, in many cases, the life of the deposit is well beyond the license term. Based on Russian law and practice, as evidenced by our experience and publicly available information, including a number of court
cases, it is reasonably likely that an incumbent subsoil user will be granted license extension through the end of the expected operational life of the deposit, provided that the licensee is not in violation of the material terms of the license. The cost for the license extension is not substantial. See “— Regulatory Matters — Subsoil Licensing in Russia — Extension of licenses.” We have received extension of certain of our subsoil licenses which expired and we intend to extend the licenses for all deposits expected to remain productive subsequent to their license expiry dates. However, license extension is not guaranteed and is to a certain extent subject to the discretion of regulatory authorities. See “Item 3. Key Information — Risk Factors — Risks Relating to Our Business and Industry — Our business could be adversely affected if we fail to obtain or extend necessary subsoil licenses and permits or fail to comply with the terms of our subsoil licenses and permits,” “Item 3. Key Information — Risk Factors — Risks Relating to the Russian Federation — Legal risks and uncertainties — Deficiencies in the legal framework relating to subsoil licensing subject our licenses to the risk of governmental challenges and, if our licenses are suspended or terminated, we may be unable to realize our reserves, which could materially adversely affect our business, financial condition, results of operations and prospects” and “— Regulatory Matters — Subsoil Licensing in Russia.”
As of December 31, 2015,2018, we had coal reserves totaling 3,051.42,953.5 million tonnes, of which approximately 75%76% was coking coal. The table below summarizes our coal reserves as of December 31, 2015.2018.
Company | Proved Reserves(1) | Probable Reserves(1) | Total | % in Open Pit | Proved Reserves(1) | Probable Reserves(1) | Total | % in Open Pit | ||||||||||||||||||||||||
| (In thousands of tonnes) | (In thousands of tonnes) | |||||||||||||||||||||||||||||||
Yakutugol | 205,519 | 1,298 | 206,817 | 95.4 | % | 182,231 | 555 | 182,786 | 100.0 | % | ||||||||||||||||||||||
Elgaugol | 1,739,777 | 503,461 | 2,243,238 | 100.0 | % | 1,726,974 | 503,461 | 2,230,435 | 100.0 | % | ||||||||||||||||||||||
Southern Kuzbass Coal Company | 575,457 | 25,849 | 601,306 | 74.1 | % | 514,443 | 25,786 | 540,229 | 79.1 | % | ||||||||||||||||||||||
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Total | 2,520,753 | 530,608 | 3,051,361 | 94.6 | % | 2,423,648 | 529,802 | 2,953,450 | 96.2 | % | ||||||||||||||||||||||
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| (1) | Reserves include adjustments for loss and dilution modifying factors. |
The table below summarizes our reserves by coal type as of December 31, 2015.2018.
Company | Category | Coking Coal | Steam Coal | Anthracite | Lignite | Total(1) | Category | Coking Coal | Steam Coal | Anthracite | Lignite | Total(1) | ||||||||||||||||||||||||||||||||||||
| (In thousands of tonnes) | (In thousands of tonnes) | |||||||||||||||||||||||||||||||||||||||||||||||
| Proved | 110,323 | 11,915 | 0 | 83,281 | 205,519 | Proved | 91,463 | 7,984 | 0 | 82,784 | 182,231 | |||||||||||||||||||||||||||||||||||||
| Probable | 458 | 840 | 0 | 0 | 1,298 | Probable | 263 | 292 | 0 | 0 | 555 | |||||||||||||||||||||||||||||||||||||
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Yakutugol | Total | 110,781 | 12,755 | 0 | 83,281 | 206,817 | Total | 91,726 | 8,276 | 0 | 82,784 | 182,786 | ||||||||||||||||||||||||||||||||||||
| Proved | 1,478,127 | 261,650 | 0 | 0 | 1,739,777 | Proved | 1,468,363 | 258,611 | 0 | 0 | 1,726,974 | |||||||||||||||||||||||||||||||||||||
| Probable | 462,257 | 41,204 | 0 | 0 | 503,461 | Probable | 462,257 | 41,204 | 0 | 0 | 503,461 | |||||||||||||||||||||||||||||||||||||
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Elgaugol | Total | 1,940,384 | 302,854 | 0 | 0 | 2,243,238 | Total | 1,930,620 | 299,815 | 0 | 0 | 2,230,435 | ||||||||||||||||||||||||||||||||||||
| Proved | 212,058 | 246,452 | 116,947 | 0 | 575,457 | Proved | 205,081 | 198,478 | 110,884 | 0 | 514,443 | |||||||||||||||||||||||||||||||||||||
| Probable | 18,529 | 7,217 | 103 | 0 | 25,849 | Probable | 18,529 | 7,154 | 103 | 0 | 25,786 | |||||||||||||||||||||||||||||||||||||
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Southern Kuzbass Coal Company | Total | 230,587 | 253,669 | 117,050 | 0 | 601,306 | Total | 223,610 | 205,632 | 110,987 | 0 | 540,229 | ||||||||||||||||||||||||||||||||||||
| Proved | 1,800,508 | 520,017 | 116,947 | 83,281 | 2,520,753 | Proved | 1,764,907 | 465,073 | 110,884 | 82,784 | 2,423,648 | |||||||||||||||||||||||||||||||||||||
| Probable | 481,244 | 49,261 | 103 | 0 | 530,608 | Probable | 481,049 | 48,650 | 103 | 0 | 529,802 | |||||||||||||||||||||||||||||||||||||
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Total | 2,281,752 | 569,278 | 117,050 | 83,281 | 3,051,361 | 2,245,956 | 513,723 | 110,987 | 82,784 | 2,953,450 | ||||||||||||||||||||||||||||||||||||||
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| (1) | Reserves include adjustments for loss and dilution modifying factors. |
The table below sets forth reserves attributable to our Yakutugol mines as of December 31, 2015.2018.
Mine | Proved Reserves | Probable Reserves | Total(1)(2) | Heat Value(3) | % Sulfur | Proved Reserves | Probable Reserves | Total(1)(2) | Heat Value(3) | % Sulfur | ||||||||||||||||||||||||||||||
| (In thousands of tonnes) | (In kcal/kg) | (In thousands of tonnes) | (In kcal/kg) | |||||||||||||||||||||||||||||||||||||
Neryungrinsky Open Pit | 112,702 | 1,298 | 114,000 | 8,794 | 0.11 - 0.30 | 97,184 | 555 | 97,739 | 8,794 | 0.11 - 0.30 | ||||||||||||||||||||||||||||||
Kangalassky Open Pit(5) | 83,281 | 0 | 83,281 | 6,834 | 0.40 | 82,784 | 0 | 82,784 | 6,834 | 0.40 | ||||||||||||||||||||||||||||||
Dzhebariki-Khaya Underground(5) | 9,536 | 0 | 9,536 | 7,490 | 0.29 | |||||||||||||||||||||||||||||||||||
Dzhebariki-Khaya Open Pit(5) | 2,263 | 0 | 2,263 | 7,500 | 0.22 | |||||||||||||||||||||||||||||||||||
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Total | 205,519 | 1,298 | 206,817 | 182,231 | 555 | 182,786 | ||||||||||||||||||||||||||||||||||
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| (1) | Reserves reported on a wetin-situ basis and include adjustments for loss and dilution modifying factors. |
| (2) | These reserves amounts are based on the quantities that could be extracted economically using current operating costs and certain estimated future prices. In estimating the reserves, we used the following average prices: |
| (3) | Heat value is reported on a moisture- andash-free basis. |
| (4) | Mined coking coal is processed at |
| (5) | Steam coal is sold as ROM without processing. |
The table below sets forth reserves attributable to our Elgaugol mine as of December 31, 2015.2018.
Mine | Proved Reserves | Probable Reserves | Total(1)(2) | Heat Value(3) | % Sulfur | Proved Reserves | Probable Reserves | Total(1)(2) | Heat Value(3) | % Sulfur | ||||||||||||||||||||||||||||||
| (In thousands of tonnes) | (In kcal/kg) | (In thousands of tonnes) | (In kcal/kg) | |||||||||||||||||||||||||||||||||||||
Elga Open Pit(4) | 1,739,777 | 503,461 | 2,243,238 | 7,000-8,600 | 0.25 | 1,726,974 | 503,461 | 2,230,435 | 7,000-8,600 | 0.25 | ||||||||||||||||||||||||||||||
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Total | 1,739,777 | 503,461 | 2,243,238 | 1,726,974 | 503,461 | 2,230,435 | ||||||||||||||||||||||||||||||||||
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| (1) | Reserves reported on a wetin-situ basis and include adjustments for loss and dilution modifying factors. |
| (2) | These reserves amounts are based on the quantities that could be extracted economically using current operating costs and certain estimated future prices. In estimating the reserves, we used the following average prices: |
| (3) | Heat value is reported on a moisture- andash-free basis. |
| (4) | Mined coal is processed at |
The table below sets forth reserves attributable to our Southern Kuzbass mines as of December 31, 2015.2018.
Mine | Proved Reserves | Probable Reserves | Total(1)(2)(3)(4) | Heat Value(5) | % Sulfur | Proved Reserves | Probable Reserves | Total(1)(2)(3)(4) | Heat Value(5) | % Sulfur | ||||||||||||||||||||||||||||||
| (In thousands of tonnes) | (In kcal/kg) | (In thousands of tonnes) | (In kcal/kg) | |||||||||||||||||||||||||||||||||||||
Krasnogorsky Open Pit | 202,561 | 194 | 202,755 | 8,075 | 0.37 | 191,367 | 194 | 191,561 | 8,100 | 0.33 | ||||||||||||||||||||||||||||||
Olzherassky Open Pit | 55,135 | 5,963 | 61,098 | 8,170 | 0.30 | 53,456 | 5,963 | 59,419 | 8,363 | 0.30 | ||||||||||||||||||||||||||||||
Tomusinsky Open Pit | 8,911 | 4,400 | 13,311 | 8,350 | 0.30 | 5,915 | 4,337 | 10,252 | 8,390 | 0.30 | ||||||||||||||||||||||||||||||
Sibirginsky Open Pit | 168,333 | 45 | 168,378 | 8,483 | 0.33 | 166,286 | 45 | 166,331 | 8,530 | 0.30 | ||||||||||||||||||||||||||||||
Sibirginskaya Underground | 39,162 | 4,024 | 43,186 | 8,440 | 0.29 | 38,710 | 4,024 | 42,734 | 8,513 | 0.28 | ||||||||||||||||||||||||||||||
V.I. Lenina Underground | 28,840 | 11,223 | 40,063 | 8,431 | 0.33 | 26,997 | 11,223 | 38,220 | 8,588 | 0.35 | ||||||||||||||||||||||||||||||
Olzherasskaya-Novaya Underground | 35,532 | 0 | 35,532 | 7,900 | 0.30 | 31,712 | 0 | 31,712 | 7,902 | 0.20 | ||||||||||||||||||||||||||||||
Yerunakovskaya-1 Underground (project) | 36,983 | 0 | 36,983 | 8,150 | 0.50 | — | — | — | — | — | ||||||||||||||||||||||||||||||
Yerunakovskaya-3 Underground (prospect) | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||
Yerunakovskaya-2 Underground (prospect)(6) | — | — | — | — | — | |||||||||||||||||||||||||||||||||||
Olzherasskaya-Glubokaya Underground (prospect)(6) | — | — | — | — | — | |||||||||||||||||||||||||||||||||||
Usinskaya Underground (prospect)(6) | — | — | — | — | — | |||||||||||||||||||||||||||||||||||
Olzherasskaya-Glubokaya Underground (prospect)(7) | — | — | — | — | — | |||||||||||||||||||||||||||||||||||
Usinskaya Underground (prospect)(7) | — | — | — | — | — | |||||||||||||||||||||||||||||||||||
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Total | 575,457 | 25,849 | 601,306 | 514,443 | 25,786 | 540,229 | ||||||||||||||||||||||||||||||||||
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| (1) | Reserves reported on a wetin-situ basis and include adjustments for loss and dilution modifying factors. |
| (2) | These reserves amounts are based on the quantities that could be extracted economically using current operating costs and certain estimated future prices. In estimating the reserves, we used the following average prices (FCA basis): |
| (3) | Reserves are presented on an assumed 100% basis. |
| (4) | Mined coal is processed at |
| (5) | Heat value is reported on a moisture- andash-free basis. |
| (6) | The extraction is considered uneconomic based on a feasibility study developed in 2017. |
| (7) | Not considered in the review because these prospects presently do not have mine plans. |
As of December 31, 2015,2018, we had iron ore reserves (proved and probable) totaling 162.8139.8 million tonnes at an average iron grade of 27.6%26.9%. The table below summarizes iron ore reserves by mine as of December 31, 2015.2018.
Mine | Proved Reserves | Probable Reserves | Total(1)(2)(3) | Grade (Fe%)(4) | Proved Reserves | Probable Reserves | Total(1)(2)(3) | Grade (Fe%)(4) | ||||||||||||||||||||||||
| (In thousands of tonnes) | (In thousands of tonnes) | |||||||||||||||||||||||||||||||
Korshunovsky Open Pit | 55,311 | 37,622 | 92,933 | 24.5 | 50,916 | 30,722 | 81,638 | 24.1 | ||||||||||||||||||||||||
Rudnogorsky Open Pit | 41,613 | 28,233 | 69,846 | 31.8 | 31,317 | 26,853 | 58,170 | 30.8 | ||||||||||||||||||||||||
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Total | 96,924 | 65,855 | 162,779 | 27.6 | 82,233 | 57,575 | 139,808 | 26.9 | ||||||||||||||||||||||||
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| (1) | Reserves reported on a wetin-situ basis and include adjustments for loss and dilution modifying factors. |
| (2) | These reserves amounts are based on the quantities that could be extracted economically using current operating costs and certain estimated future prices. In estimating the reserves, we used the average price of |
| (3) | Reserves are presented on an assumed 100% basis. |
| (4) | Mined iron ore |
Limestone
Our limestone mineral reserves are based on exploration drilling and geological data, and are that part of a mineral deposit which could be economically and legally extracted or produced at the time of the reserve determination. Each year we update our limestone mineral reserve calculations based on actual production and other factors, including economic viability and any new exploration data. Our reserves, consisting of proven and probable reserves, meet the requirements set by the SEC in its Industry Guide 7. Information on our limestone mineral reserves has been prepared by our internal mining engineers as of December 31, 2015. To prepare this information our internal mining engineers used resource and reserve estimates, actual and forecast production, operating costs, capital costs, geological plan maps, geological cross sections, mine advance maps in plan and cross section and price projections.
Proven reserves presented in accordance with Industry Guide 7 may be combined with probable reserves only if the difference in the degree of assurance between the two classes of reserves cannot be readily defined and a statement is made to that effect. Our limestone proven and probable reserves are presented as combined in this document because, though our deposits have been drilled to a high degree of assurance, due to the methodology used in Russia to estimate reserves the degree of assurance between the two categories cannot be readily defined.
The subsoil license for our limestone mineral reserves is issued for defined boundaries and expires in January 2034. Our declared limestone reserves are contained within the current license boundary.
As of December 31, 2015, we had limestone reserves (proven) totaling 11.4 million tonnes at 55.2% calcium oxide. This estimation is made using the tonnages that are expected to be mined, taking into account losses, an average price of $4.10 per tonne of commodity limestone and currency conversions are carried out at average official exchange rates of the CBR.
Steel Segment
Our steel segment comprises the production and sale of semi-finished steel products, long products of a wide range of steel grades, carbon and stainless flat steel products and high value-added metal products, including wire products, stampings and forgings, structural shapes, beams and rails. Within these product groups, we are further able to tailor various steel grades to meet specificend-user requirements. It also comprises the production of ferrosilicon, both for internal use and for sales to third parties. Our steel segment is supported by our mining segment, which includes coke and iron ore concentrate and limestone.concentrate.
Our steel segment has production facilities in Russia Lithuania and Ukraine.Lithuania. Our total steel output was 3.9 million tonnes in 2018, 4.3 million tonnes in 20152017 and 4.3 million tonnes in 2014.
In 2014, we transferred our ferrosilicon producing subsidiary Bratsk Ferroalloy Plant to the steel segment. Bratsk Ferroalloy Plant’s2016. Our ferrosilicon production amounted to 92.376.1 thousand tonnes in 2015 and 90.32018, 68.6 thousand tonnes in 2014.2017 and 88.5 thousand tonnes in 2016.
Description of key products
Pig iron. Pig iron is an iron alloy with usual carbon content oftypically above 2%, which is produced from smelting iron ore feed (sinter, pellets and other ore materials) in the blast furnace. Liquid pig iron is used as an intermediate product in the manufacturing of steel. Pig iron in molten state and cold pig iron can be used as charging material for steel manufacturing in basic oxygen furnaces, electric arc furnaces and in the manufacturing of cast iron in cupolas. Cold pig iron is brittle. We sell small volumes of pig iron from our Chelyabinsk Metallurgical Plant to third parties.
Semi-finished products. Semi-finished products typically require further milling before they are useful to end consumers. We offer semi-finished billets, blooms and slabs. Billets and blooms are precursors to long products and have a square cross section. The difference between billets and blooms is that blooms have a larger cross-section which is more than eight inches and is broken down in the mill to produce rails,I-beams,H-beams and sheet piling. Slabs are precursors to flat products and have a rectangular cross section. Such types of products can be produced both by continuous casting of liquid steel and by casting of liquid steel in casting forms with subsequent drafting on blooming mills. We offer our customers billets and blooms produced by Izhstal and Chelyabinsk Metallurgical Plant, as well as slabs produced by Chelyabinsk Metallurgical Plant.
Long steel productsproducts.. Long steel products are rolled products used in many industrial sectors, particularly in the construction and engineering industries. They include various types of products, for example, rebar, structural shapes (channels, flange beams, rails, special sections and others), calibrated long steel products and wire rod, which could be supplied both in bars and coils in a wide range of sizes. Our long steel products are manufactured at Chelyabinsk Metallurgical Plant, Izhstal and Beloretsk Metallurgical Plant.
We offer our customers a wide selection of long products produced from various steel grades including rebar, calibrated long steel products, steel angles, round products, surface-conditioned steel products, wire rodat Chelyabinsk Metallurgical Plant, Izhstal and others.Beloretsk Metallurgical Plant.
Flat steel products. Flat steel products are manufactured by multiple drafting slabs in forming rolls with subsequent coiling or cutting into sheets. Plates are shipped after hot rolling or heat treatment. Coiled stock can be subject to cutting lengthwise into slit coils or crosswise into sheets. Stainless steel is used to manufacture plates and cold-rolled sheets in coils and flat sheets.Hot-rolled plates and carbon and alloyed coiled rolled products are manufactured at Chelyabinsk Metallurgical Plant.
Stampings and forgings. Stampings are special parts stamped from metal billets. Forgings are special products made through the application of localized compressive forces to metal. Forged metal is stronger than cast or machined metal. Our forgingsstampings and stampingsforgings are offered on amade-to-order basis according to minimum
batches depending on the products’ sizes. Our product offerings include rollers and axles used in vehicle manufacturing; gears and wheels; bars; and others. Our stampings and forgings are produced at Urals Stampings Plant, including its branch in Chelyabinsk.
Wire products. Wire products are the result of processing ofprocessed from wire rod whichand are ready for use in manufacturing and consumer applications. Our wire products are manufactured at Beloretsk Metallurgical Plant, Vyartsilya Metal Products Plant and Izhstal in Russia and Mechel Nemunas in Lithuania. Our wide-ranging wire products line includes spring wire; rope wire; bearing wire; microwire; precision alloy wire; high and low carbon concrete reinforcing wire; galvanized wire; copper-coated and bright welding wire; strand of various application; various types of nails; steel wire ropes specially engineered for the shipping, aerospace, oil and gas and construction industries; steel wire ropes for passenger and freight elevators; general-purpose wire; steel straps and clips; chain link fences; welded (reinforcing) meshes; and others.
Ferrosilicon. Ferrosilicon is used in ferrous metallurgy as a deoxidizer or as an alloying element for production of electrotechnical, spring wire, corrosion-resistant and heat resistant steel grades, or as a pig iron modifier. In nonferrous metallurgy, ferrosilicon is used as a reducing agent for production of nonferrous metals and alloys. We produce two types of ferrosilicon: with 65% and 75% silicon content in the alloy. We offer our customers ferrosilicon produced by Bratsk Ferroalloy Plant.
The following table sets out our production volumes by primary steel product categories and main products within these categories.
| 2015 | 2014 | |||||||||||||||||||
Product | 2018 | 2017 | 2016 | |||||||||||||||||
| (In thousands of tonnes) | (In thousands of tonnes) | |||||||||||||||||||
Pig Iron | 4,065 | 3,946 | 3,690 | 4,029 | 4,053 | |||||||||||||||
Semi-Finished Steel Products, including: | 1,098 | 970 | 953 | 833 | 936 | |||||||||||||||
Carbon and Low-Alloyed Semi-Finished Products | 1,081 | 966 | 943 | 828 | 926 | |||||||||||||||
Long Steel Products, including: | 2,463 | 2,721 | 2,538 | 2,769 | 2,768 | |||||||||||||||
Stainless Long Products | 12 | 14 | 11 | 12 | 12 | |||||||||||||||
Alloyed Long Products | 121 | 278 | 30 | 65 | 127 | |||||||||||||||
Rebar | 1,543 | 1,575 | 1,200 | 1,319 | 1,509 | |||||||||||||||
Rails | 245 | 358 | 304 | |||||||||||||||||
Structural Shapes | 455 | 411 | 213 | |||||||||||||||||
Wire Rod | 230 | 402 | 219 | 241 | 249 | |||||||||||||||
Low-Alloyed Engineering Steel | 557 | 452 | 377 | 360 | 353 | |||||||||||||||
Flat Steel Products, including: | 481 | 435 | 318 | 477 | 464 | |||||||||||||||
Stainless Flat Products | 10 | 18 | 6 | 4 | 6 | |||||||||||||||
Carbon and Low-Alloyed Flat Products | 471 | 417 | 312 | 472 | 457 | |||||||||||||||
Forgings, including: | 49 | 61 | 49 | 40 | 41 | |||||||||||||||
Stainless Forgings | 3 | 5 | 1 | 2 | 3 | |||||||||||||||
Alloyed Forgings | 34 | 39 | 33 | 26 | 26 | |||||||||||||||
Carbon and Low-Alloyed Forgings | 11 | 17 | 15 | 12 | 11 | |||||||||||||||
Stampings | 69 | 84 | 143 | 95 | 75 | |||||||||||||||
Wire Products, including: | 628 | 695 | 577 | 575 | 602 | |||||||||||||||
Wire | 580 | 603 | 526 | 522 | 549 | |||||||||||||||
Ropes | 37 | 45 | 42 | 43 | 43 | |||||||||||||||
Steel manufacturing process and types of steel
The most common steel manufacturing processes are production in a basic oxygen furnace (“BOF”) and production in an electric arc furnace (“EAF”).
In BOF steel manufacturing, steel is produced with less than 2% carbon content. The principal raw materials used to produce steel are liquid pig iron and scrap metal. The molten steel, depending on the products in which it
will be used, undergoes additional refining and is mixed with manganese, nickel, chrome, titanium and other components to give it special properties. Approximately 72%74% of the world’s steel output is made in BOFs, according to CRU.Wood Mackenzie.
In EAF steel manufacturing, steel is generally produced from remelted scrap metal. Heat to melt the scrap metal is supplied from high-voltage electricity that arcs within the furnace between graphite electrodes and the scrap metal. This process is suitable for producing almost all steel grades, including stainless steel; however, it is limited in its use for production of high-purity carbon steel. Approximately 28%26% of the world’s steel output is made in EAFs, according to CRU.Wood Mackenzie.
Steel products are broadly subdivided into two categories — flat and long products. Flat products arehot-rolled or cold-rolled coils and sheets that are used in the engineering, pipe and manufacturing industries, as well as in the white goods and automotive industries. Long products are used for construction-type applications (beams, rebar) and the engineering industry. To create flat and long products, molten steel is cast in continuous-casting machines or casting forms (molds). The molten steel crystallizes and turns into semi-finished products in the form of blooms, slabs or ingots. Ingots and blooms have a square cross-section and are used for further processing into long products. Slabs have a rectangular cross-section and are used to make flat products. All
semi-finished products are rolled at high temperatures, a process known as hot rolling. They are drawn and flattened through rollers to give the metal the desired dimensions and strength properties. Some flat steel products go through an additional step of rolling without heating, a process known as cold rolling and is used to obtain certain mechanical properties of the steel. After cold rolling, annealing in reheating furnaces with cooling that stress-relieves the metal is periodically required. Oil may be applied to the metal surface for protection from rust.
The properties of steel (strength, solidity, plasticity, magnetization, corrosion-resistance) may be modified to render it suitable for its intended future use by the addition by smelting of small amounts of other metals into the structure of the steel, varying the steel’s chemical composition. For example, the carbon content of steel can be varied in order to change its plasticity, or chrome and nickel can be added to produce stainless steel. Resistance to corrosion can be achieved through application of special coatings (including polymeric coatings), galvanization, copper coating or tinning, painting and other treatments.
Ferrosilicon manufacturing process
Ferrosilicon is produced in EAFs in a continuous ore smelting process. Silicon is reduced from quartzite with coke and coal carbon and alloyed with steel cutting iron. Ferrosilicon is discharged from the furnace periodically. After cooling, metal ingots are split and sorted into various commercial fractions.
Steel segment production facilities
Most of our metallurgical plants have obtained a certificate of quality under ISO international standards.standards set by the International Organization for Standardization (“ISO”). For example, the main manufacturing processes at Chelyabinsk Metallurgical Plant, Izhstal, Beloretsk Metallurgical Plant and Urals Stampings Plant are ISO 9001:20082015 certified. Chelyabinsk Metallurgical Plant has also obtained a certificate of compliance with international standards of the environmental management system ISO 14001:2015 and a certificate of compliance with the international standard of the occupational health and safety management system BS OHSAS 18001:2007.
Chelyabinsk Metallurgical Plant
Chelyabinsk Metallurgical Plant is an integrated steel mill which produces flatlong and longflat carbon and stainless steel products, rail and beamstructural sections and semi-finished products. Semi-finished products are used for further processing in Russia or our internal needs. Chelyabinsk Metallurgical Plant also produces pig iron which is used in the manufacturing of steel. The plant sources all of its metallurgical coke needs from Mechel Coke and most of its iron ore concentrate needs from Korshunov Mining Plant. Its customer base is largely comprised of companies from the construction and engineeringrailways construction and repair industries, as well as ferrous metallurgy. We acquired Chelyabinsk Metallurgical Plant in 2001.
Chelyabinsk Metallurgical Plant’s principal production lines include a BOF workshop equipped with three converters; two EAF workshops equipped with EAFs of 100 and 125 tonnes, respectively; five concasting machines; a blooming mill for200-320 millimeter billets; five long products rolling mills for6.5-190 millimeter round bars and75-156 millimeter square bars, wire rod, rebar steel, bands and long products; a universal rail and structural rolling mill for structural shapes of different types and sizes and rail products; ahot-rolled flat products workshop with a thick sheet continuous rolling mill forhot-rolled sheets of up to 1,800 millimeters wide and up to 20 millimeters thick; a semi-continuous rolling mill for up to 1,500 millimeters wide and up to 6 millimeters thickhot-rolled coils; a cold-rolled product workshop for0.3-4 millimeter cold-rolled stainless sheet. In addition, we have at our Chelyabinsk Metallurgical Plant four sintering machines and three blast furnaces. The following table sets forth the capacity, the capacity utilization rate and the planned increase in capacity for each of Chelyabinsk Metallurgical Plant’s principal production areas.
Production Area | Capacity in 2015 | Capacity Utilization Rate in 2015 | Planned Increase (2016-2018) | Capacity in 2018 | Capacity Utilization Rate in 2018 | Planned Increase (2019-2021) | ||||||||||||||||||
| (In thousands of tonnes, except for percentages) | (In thousands of tonnes, except for percentages) | |||||||||||||||||||||||
Sintering | 5,252 | 96.1 | % | — | 5,000 | 89.1 | % | — | ||||||||||||||||
Pig iron | 4,300 | 94.5 | % | — | 4,112 | 89.7 | % | — | ||||||||||||||||
Steel-making | 5,177 | 79.1 | % | — | ||||||||||||||||||||
Steelmaking | 4,920 | 73.3 | % | — | ||||||||||||||||||||
Rolling | 4,750 | 79.7 | % | — | 4,601 | 72.0 | % | — | ||||||||||||||||
Chelyabinsk Metallurgical Plant produced approximately 4.13.6 million tonnes of raw steel and 3.83.3 million tonnes of rolled products, of which 245.2 thousand tonnes were rail products in 2015.2018.
In 2008, we initiated construction of a universal rail and structural rolling mill at the Chelyabinsk Metallurgical Plant. The project is aimed at producing new types of large section structural shapes (including beams, angles, rails, channels and special sections) with total output 1.1 million tonnes per annum. Italian Danieli & C. Officine Meccaniche S.p.A. (“Danieli”) is the equipment supplier and Chinese Minmetals Engineering Co. Ltd. (“Minmetals”) is the general contractor. Investments will amount to 23.1 billion rubles.RUB 21.6 billion. In July 2013, the universal rail and structural rolling mill was launched. At present, phasedwe are developing production of both guarantee tests of the equipment with the development of productionproducts and new products, as well as certification of rails areproducts for the Russian and European markets is being carried out. ThreeFive certificates of conformity of the Customs Union and two certificates of compliance with the TSI safety standards for the EU countries were obtained on certain types of rails.rails; preparatory work for further certification of rails for the Russian Federation and the European Union is in progress.
The main target customers for the universal rolling mill products are Russian Railways, construction industry and different manufacturing companies. On November 13, 2008, Chelyabinsk Metallurgical Plant and Russian Railways signed an agreement for the supply of rails for the period until 2030. The annual supply volume is fixed at up to 400 thousand tonnes of rails. Therails annually until 2030. Under the agreement, we supply rails with annual adjustment of volumes based on production and economic factors. Additionally, we expect an increase in sales volume of the universal rolling mill products, which will occur along with the development and certification of new types of products.
In December 2010, Mechel Materials started assembling the main manufacturing equipment of the grinding-mixing complex for Portland blast-furnace slag cement production with 1.6 million tonnes capacity per annum in the territory of Chelyabinsk Metallurgical Plant. The main raw material is blast furnace slag produced by Chelyabinsk Metallurgical Plant. This complex is the first Russian facility to produce high-quality Portland blast-furnace slag cement of certain grades (CEMIII/A, CEMIII/B, CEMIII/C). Portland blast-furnace slag cement is widely used in the construction industry for the production of reinforced concrete structures. The general contractor is Austrian FMW GmbH. The amount to be invested is 5,092 million rubles. In 2013, construction and assembly and commissioning works on the basic process equipment were completed and production in the mode of experimental-industrial testing commenced. In 2014-2015, we mastered production of three grades of cement (CEMIII/A-32,5N, CEMIII/A-42,5N, CEMII/A-42,5N) and ground granulated blast-furnace slag which is a new material for concrete and cement production. In 2015, most of the main technological equipment was commissioned. Production of experimental products in the mode of experimental-industrial testing amounted to 105.9 thousand tonnes in 2015.
Izhstal
Izhstal is a special steel producer located in the western Urals city of Izhevsk, in the Republic of Udmurtia, a Russian administrative region also known as Udmurtia. Its customer base is largely comprised of companies from the aircraft, defense, engineering, metal-processing and automotive industries. We acquired Izhstal in 2004.
Izhstal’s principal production facilities include two EAFs of 25 and 40 tonnes; two ladle furnaces and a ladle vacuum oxygen decarburizer; a concasting machine; a blooming mill for100-220 millimeter billets; twomedium-sized long products rolling mills for30-120 millimeter round bars,30-90 millimeter square bars, bands and hexagonal bars; and one continuous small sort wire mill for5.5-29 millimeter round,12-28 millimeter square
and12-27 millimeter hexagonal light sections, reinforced steel and bands. In June 2011, wire products production, which includes various drawing machines, a pickling line, bell furnaces and patenting lines, was spun-off into a branch of Beloretsk Metallurgical Plant. The following table sets forth the capacity, the capacity utilization rate and the planned increase in capacity for each of Izhstal’s principal production areas.
Production Area | Capacity in 2015 | Capacity Utilization Rate in 2015 | Planned Increase (2016-2018) | Capacity in 2018 | Capacity Utilization Rate in 2018 | Planned Increase (2019-2021) | ||||||||||||||||||
| (In thousands of tonnes, except for percentages) | (In thousands of tonnes, except for percentages) | |||||||||||||||||||||||
Steel-making | 351 | 55.3 | % | — | ||||||||||||||||||||
Steelmaking | 328 | 81.4 | % | — | ||||||||||||||||||||
Rolling | 420 | 59.8 | % | — | 652 | 66.8 | % | — | ||||||||||||||||
Wire products | 6 | 7.6 | % | — | 4 | 9.4 | % | — | ||||||||||||||||
Izhstal produced approximately 194.0267.2 thousand tonnes of raw steel, 251.0435.3 thousand tonnes of rolled products (of which, 434.9 thousand tonnes were long products) and approximately 0.50.4 thousand tonnes of wire products in 2015.2018.
Beloretsk Metallurgical Plant
Beloretsk Metallurgical Plant is a wire products plant in Beloretsk, in the southern part of Ural Mountains, which produces wire rod and a broad range of wire products from semi-finished products supplied by Chelyabinsk Metallurgical Plant and third party suppliers.Izhstal. Its customers are largely from the construction, mining, engineering and relatedother industries. We acquired Beloretsk Metallurgical Plant in 2002.
Beloretsk Metallurgical Plant’s principal production lines include a rolling workshop equipped with a wire mill for production of5.5-13.5 millimeter wire rod; a number of wire products workshops equipped with drawing, rewinding, wire stranding, cabling, and closing machinesgrinding equipment and heat treatment furnaces, wire annealing and galvanizing, patenting and galvanizing lines; low relaxation prestressed concrete wire and rope lines; cold-worked rebar line and cold strand lines and a coldsection rolling line. In June 2011, wire products production facilities were transferred to Beloretsk Metallurgical Plant from Izhstal. In September 2014, in order to optimize costs these production facilities were moved to Beloretsk Metallurgical Plant.mills. The following table sets forth the capacity, the capacity utilization rate and the planned increase in capacity for each of Beloretsk Metallurgical Plant’s principal production areas.
Production Area | Capacity in 2015 | Capacity Utilization Rate in 2015 | Planned Increase (2016-2018) | Capacity in 2018 | Capacity Utilization Rate in 2018 | Planned Increase (2019-2021) | ||||||||||||||||||
| (In thousands of tonnes, except for percentages) | (In thousands of tonnes, except for percentages) | |||||||||||||||||||||||
Rolling | 630 | 93.6 | % | — | 630 | 79.2 | % | — | ||||||||||||||||
Wire products | 599 | 80.4 | % | — | 600 | 76.3 | % | — | ||||||||||||||||
Beloretsk Metallurgical Plant produced a total of 481.7457.8 thousand tonnes of wire products in 2015.2018. Rolled products production in 20152018 amounted to a total of 589.3498.9 thousand tonnes, of which 473.6435.8 thousand tonnes were further processed into wire products and 115.763.1 thousand tonnes constituted the output volume of wire rod for third partythird-party customers.
Vyartsilya Metal Products Plant
Vyartsilya Metal Products Plant is a wire products plant in the Republic of Karelia, an administrative region in the northwest of Russia near the Finnish border that produces low carbon welding, general-purpose and structural wire, nails and steel bright and polymeric-coated chain link fences. The plant uses wire rod supplied by Chelyabinsk Metallurgical Plant and Beloretsk Metallurgical Plant. The plant’s customers are largely from the construction industry and ferrous metallurgy. We acquired Vyartsilya Metal Products Plant in 2002.
Vyartsilya Metal Products Plant’s principal production facilities include drawing machines, annealing furnaces, chain linking machines, nail-making presses and cutting machines. The following table sets forth the capacity, the capacity utilization rate and the planned increase in capacity for Vyartsilya Metal Products Plant’s principal production area.
Production Area | Capacity in 2015 | Capacity Utilization Rate in 2015 | Planned Increase (2016-2018) | Capacity in 2018 | Capacity Utilization Rate in 2018 | Planned Increase (2019-2021) | ||||||||||||||||||
| (In thousands of tonnes, except for percentages) | (In thousands of tonnes, except for percentages) | |||||||||||||||||||||||
Wire products | 123 | 60.6 | % | — | 81 | 82.0 | % | — | ||||||||||||||||
Vyartsilya Metal Products Plant produced 74.666.4 thousand tonnes of wire products in 2015.2018.
Urals Stampings Plant
Urals Stampings Plant produces stampings and forgings from special steels and heat-resistant and titanium alloys for the aerospace, oil and gas, heavy engineering, power and other industries. Urals Stampings Plant sources its special steel needs from Chelyabinsk Metallurgical Plant.Plant and Izhstal. We acquired Urals Stampings Plant in 2003.
Principal production facilities of Urals Stampings Plant and its branch in Chelyabinsk include1.5-25 tonne swages and hydraulic presses. The following table sets forth the capacity, the capacity utilization rate and the planned increase in capacity for Urals Stampings Plant’s principal production area.
Production Area | Capacity in 2015 | Capacity Utilization Rate in 2015 | Planned Increase (2016-2018) | Capacity in 2018 | Capacity Utilization Rate in 2018 | Planned Increase (2019-2021) | ||||||||||||||||||
| (In thousands of tonnes, except for percentages) | (In thousands of tonnes, except for percentages) | |||||||||||||||||||||||
Stampings and forgings | 100 | 69.2 | % | — | 240 | 80.8 | % | — | ||||||||||||||||
Urals Stampings Plant produced 69.2194.0 thousand tonnes of special steel stampings and forgings in 2015.2018.
Mechel Nemunas
Mechel Nemunas is a Lithuanian wire products plant located in Kaunas that produces hard-drawn, annealed, electrode and concrete reinforcementcalibrated wire, nails, steel wire fiber and chain link fences. The plant uses wire rod supplied by Chelyabinsk Metallurgical Plant and Beloretsk Metallurgical Plant. Its customers are primarily from the construction industry of Europe and Baltic countries. We acquired Mechel Nemunas in 2003.
Mechel Nemunas’s principal production facilities include drawing machines, nail-making presses,and thread-rolling machines, equipment for fiber production, chain linking machines and bell furnaces. The following table sets forth the capacity, the capacity utilization rate and the planned increase in capacity for Mechel Nemunas’s principal production area.
Production Area | Capacity in 2015 | Capacity Utilization Rate in 2015 | Planned Increase (2016-2018) | |||||||||
| (In thousands of tonnes, except for percentages) | ||||||||||||
Wire products | 90 | 79.8 | % | — | ||||||||
Production Area Wire products Capacity
in 2018 Capacity
Utilization
Rate in 2018 Planned
Increase
(2019-2021) (In thousands of tonnes, except for percentages) 82 63.8 % —
Mechel Nemunas produced 71.752.2 thousand tonnes of wire products in 2015.2018.
Bratsk Ferroalloy Plant
Bratsk Ferroalloy Plant is the largest enterprise in Eastern Siberia producing high-grade ferrosilicon. Ferrosilicon is used in the steel-makingsteelmaking industry as a deoxidizer for manufacturing of most steel grades, including
carbon and stainless steel grades; or as an alloying element for the production of insulating, acid-proof and heatproof steel grades; or as a pig iron modifier; andor as a reducing agent for the production of nonferrous metals and alloys. Approximately5-6 kg of ferrosilicon is used in every tonne of steel produced. We acquired Bratsk Ferroalloy Plant in 2007.
The main production facilities of the plant include threeore-thermal furnaces with a capacity of25 megavolt-amperes (“MVA”) and oneore-thermal furnace with a capacity of 33 MVA. In October 2010, we signed contracts with Siberian Plant of Electrothermal Equipment (Sibelectrotherm JSC, Novosibirsk) for the supply of fourore-thermal furnaces with a capacity of 33 MVA each to replace the existing furnaces. We commenced commercial operations of the first new furnace in the second quarter of 2013. Currently, the second furnace assemblage is suspended. The launch of this furnace is expected in 2017.2019. Following the commissioning of the second new furnace, Bratsk Ferroalloy Plant’s production capacity is expected to increase by 15%5%.
The following table sets forth the capacity, the capacity utilization rate and the planned increase in capacity for Bratsk Ferroalloy Plant’s principal production area.
Production Area | Capacity in 2015 | Capacity Utilization Rate in 2015 | Planned Increase (2016-2018) | Capacity in 2018 | Capacity Utilization Rate in 2018 | Planned Increase (2019-2021) | ||||||||||||||||||
| (In thousands of tonnes, except for percentages) | (In thousands of tonnes, except for percentages) | |||||||||||||||||||||||
Ferrosilicon | 92.9 | 99.3 | % | — | ||||||||||||||||||||
Ferrosilicon (65% silicon content in the alloy) | 88 | 86.4 | % | — | ||||||||||||||||||||
Bratsk Ferroalloy Plant produced 92.376.1 thousand tonnes of ferrosilicon with 65% and 75% silicon content in 2015.the alloy in 2018.
Sales of steel segment products
The following table sets forth our revenues by primary steel segment product categories and our main products within these categories (including as a percentage of total steel segment revenues) for the periods indicated.
| 2015 | 2014 | 2018 | 2017 | 2016 | ||||||||||||||||||||||||||||||||||||
Product | Amount | % of Revenues | Amount | % of Revenues | Amount | % of Revenues | Amount | % of Revenues | Amount | % of Revenues | ||||||||||||||||||||||||||||||
| (In millions of Russian rubles, except for percentages) | (In millions of Russian rubles, except for percentages) | |||||||||||||||||||||||||||||||||||||||
Pig Iron | 1,287.4 | 0.9 | % | 3,251.5 | 2.3 | % | 133.1 | 0.1 | % | 113.9 | 0.1 | % | 679.2 | 0.4 | % | |||||||||||||||||||||||||
Semi-Finished Steel Products, including: | 5,027.2 | 3.4 | % | 2,834.5 | 2.0 | % | 54.4 | 0.0 | % | 491.9 | 0.3 | % | 3,433.5 | 2.1 | % | |||||||||||||||||||||||||
Carbon and Low-Alloyed Semi-Finished Products | 4,139.8 | 2.8 | % | 2,281.7 | 1.6 | % | 8.5 | 0.0 | % | 326.8 | 0.2 | % | 2,730.4 | 1.7 | % | |||||||||||||||||||||||||
Long Steel Products, including: | 73,853.0 | 50.6 | % | 71,063.7 | 51.3 | % | 105,722.0 | 56.3 | % | 96,768.0 | 56.0 | % | 89,575.0 | 55.5 | % | |||||||||||||||||||||||||
Stainless Long Products | 1,711.9 | 1.2 | % | 1,053.0 | 0.8 | % | 2,698.1 | 1.4 | % | 2,190.6 | 1.3 | % | 2,055.2 | 1.3 | % | |||||||||||||||||||||||||
Other Long Products | 28,151.8 | 19.3 | % | 26,316.3 | 19.0 | % | 50,871.9 | 27.1 | % | 48,729.7 | 28.2 | % | 39,098.9 | 24.2 | % | |||||||||||||||||||||||||
Rebar | 39,980.2 | 27.4 | % | 39,537.9 | 28.5 | % | 48,000.2 | 25.6 | % | 42,734.5 | 24.7 | % | 45,204.1 | 28.0 | % | |||||||||||||||||||||||||
Wire Rod | 4,009.1 | 2.7 | % | 4,156.5 | 3.0 | % | 4,151.8 | 2.2 | % | 3,113.2 | 1.8 | % | 3,216.8 | 2.0 | % | |||||||||||||||||||||||||
Flat Steel Products, including: | 17,490.1 | 12.0 | % | 14,646.0 | 10.6 | % | 22,786.2 | 12.1 | % | 22,504.8 | 13.0 | % | 18,230.2 | 11.2 | % | |||||||||||||||||||||||||
Stainless Flat Products | 2,564.6 | 1.8 | % | 3,502.0 | 2.6 | % | 1,382.3 | 0.7 | % | 1,198.0 | 0.7 | % | 1,507.7 | 0.9 | % | |||||||||||||||||||||||||
Carbon and Low-Alloyed Flat Products | 14,925.5 | 10.2 | % | 11,144.0 | 8.0 | % | 21,403.9 | 11.4 | % | 21,306.8 | 12.3 | % | 16,722.5 | 10.3 | % | |||||||||||||||||||||||||
Forgings, including: | 5,248.6 | 3.6 | % | 4,421.8 | 3.2 | % | 3,976.6 | 2.1 | % | 4,101.4 | 2.4 | % | 4,416.9 | 2.8 | % | |||||||||||||||||||||||||
Stainless Forgings | 1,368.4 | 0.9 | % | 1,145.2 | 0.8 | % | 810.4 | 0.4 | % | 1,125.8 | 0.7 | % | 1,385.2 | 0.9 | % | |||||||||||||||||||||||||
Other Forgings | 3,880.2 | 2.7 | % | 3,276.6 | 2.4 | % | 3,166.2 | 1.7 | % | 2,975.6 | 1.7 | % | 3,031.7 | 1.9 | % | |||||||||||||||||||||||||
Stampings | 6,917.6 | 4.7 | % | 7,421.2 | 5.3 | % | 11,871.1 | 6.3 | % | 8,146.1 | 4.7 | % | 7,235.1 | 4.5 | % | |||||||||||||||||||||||||
Wire Products, including: | 23,442.6 | 16.0 | % | 22,396.5 | 16.2 | % | 30,040.4 | 16.0 | % | 27,577.6 | 16.0 | % | 24,579.8 | 15.2 | % | |||||||||||||||||||||||||
Wire | 15,560.9 | 10.7 | % | 14,968.3 | 10.8 | % | 19,589.8 | 10.4 | % | 17,498.4 | 10.1 | % | 15,530.4 | 9.6 | % | |||||||||||||||||||||||||
Ropes | 2,254.9 | 1.5 | % | 2,069.0 | 1.5 | % | 3,916.5 | 2.1 | % | 3,374.4 | 2.0 | % | 3,075.7 | 1.9 | % | |||||||||||||||||||||||||
Other Wire Products | 5,626.8 | 3.8 | % | 5,359.2 | 3.9 | % | 6,534.1 | 3.5 | % | 6,704.8 | 3.9 | % | 5,973.7 | 3.7 | % | |||||||||||||||||||||||||
Steel Pipes | 3,308.3 | 2.3 | % | 3,390.7 | 2.4 | % | 3,230.2 | 1.7 | % | 2,733.1 | 1.6 | % | 3,286.2 | 2.0 | % | |||||||||||||||||||||||||
Ferrosilicon | 3,527.7 | 2.4 | % | 2,712.6 | 2.0 | % | 3,927.0 | 2.1 | % | 2,807.1 | 1.6 | % | 3,367.5 | 2.1 | % | |||||||||||||||||||||||||
Other | 5,929.4 | 4.1 | % | 6,521.3 | 4.7 | % | 6,176.7 | 3.3 | % | 7,516.0 | 4.3 | % | 6,835.3 | 4.2 | % | |||||||||||||||||||||||||
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Total | 146,031.9 | 100.0 | % | 138,659.8 | 100.0 | % | 187,917.7 | 100.0 | % | 172,759.9 | 100.0 | % | 161,638.7 | 100.0 | % | |||||||||||||||||||||||||
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The following table sets forth by percentage of sales revenue by the regions in which our steel segment products were sold for the periods indicated.
Region(1) | 2015 | 2014(2) | 2018 | 2017 | 2016 | |||||||||||||||
Russia | 68.1 | % | 68.2 | % | 69.7 | % | 74.4 | % | 72.3 | % | ||||||||||
Europe | 15.9 | % | 16.0 | % | 16.9 | % | 14.4 | % | 14.8 | % | ||||||||||
CIS | 12.4 | % | 12.6 | % | 11.5 | % | 9.8 | % | 10.4 | % | ||||||||||
Asia | 1.3 | % | 1.4 | % | 1.6 | % | 1.1 | % | 1.2 | % | ||||||||||
Middle East | 1.1 | % | 0.9 | % | 0.1 | % | 0.1 | % | 0.5 | % | ||||||||||
Other | 1.0 | % | 0.5 | % | 0.1 | % | 0.0 | % | 0.5 | % | ||||||||||
United States | 0.2 | % | 0.4 | % | 0.1 | % | 0.2 | % | 0.3 | % | ||||||||||
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Total | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||||
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| (1) | The regional breakdown of sales is based on the geographic location of our customers, and not on the location of the end users of our products, as our customers are often distributors that resell and, in some cases, further export our products. |
| (2) |
| Our steel segment sales to Middle East primarily go to Turkey, which accounted for |
In 2015,2018, the five largest customers of our steel products were Russian Railways (long steel products and wire products), EVRAZ (flat steel products, long steel products ropes), Pervouralsk New Pipe Plant (long steel products, cold pig iron, semi-finished products, flat steel products, forgings), Dream Holding International LTD (long steeland wire products), Metallservice OAO (long steel products, flat steel products and wire products, pipes) andproducts), Steel Industrial Company AO (long steel products, wire products, flat steel products, pipes)pipes and semi-finished products) and United Wagon Company Trading House OOO (stampings), which together accounted for 6.2%10.7% of our total steel segment sales.
In 2015,2018, the five largest customers of ferrosilicon were MMK,Severstal, Mitsui & Co., Severstal, Globalalloy Technologies Co. Ltd., LtdNLMK and Scanalloys Limited,Ltd., which together accounted for 1.7%1.6% of our total steel segment sales.
The majority of our steel segment export sales are made to end users innon-sanctioned countries on a CFR and CPT basis. countries. The remainder of our steel products is exported to independent distributors and traders on an FOB basis.traders. We refer to such salestransactions as “indirectindirect sales.” Contracts with distributors and traders generally specify certain portslocations to which we must deliver our products. The distributors and traders take delivery of our products at these locations, and furtheron-sell the products to other distributors or end users. When theseGenerally, when dealing with distributors take delivery of our products,and traders, we are provided in certain instances with documentation showingdo not have information about the further destinationend users of our products. In case of indirect sales, we do not have control over the final destination of our products, contractually or otherwise.
Based on suchthe available documentation, we are aware that certain of our products aremay be sold into and can bere-sold to countries that are subject to international trade restrictions or economic embargoes that prohibit and/or materially restrict certain persons (for instance, U.S. incorporated entities and U.S. citizens or residents) from engaging in commercial, financial or trade transactions with such countries, including Iran, Syria, Sudan, North Korea and BelarusCuba (the “Sanctioned Countries”). We estimate that approximately 0.5% of our total sales in 2015 were sold in Belarus, of which 0.2% were indirect sales by independent distributors and traders to other distributors or end users and 0.3% weredid not have any direct sales to end users.the Sanctioned Countries in 2018.
We are aware of governmental initiatives in the United States and elsewhere to adopt laws, regulations or policies prohibiting or materially restricting transactions with or investment in, or requiring divestment from, entities doing business with the Sanctioned Countries. We recognize that acts prohibiting or restricting the foregoing can sometimes be applied to our company and that dealings with the Sanctioned Countries can have an adverse effect on our business reputation.
The following table sets forth information on our domestic and export sales of our primary steel segment product categories for the periods indicated. We define exports as sales by our Russian and foreign subsidiaries to customers located outside their respective countries. We define domestic sales as sales by our Russian and foreign subsidiaries to customers located within their respective countries. See note 2826 to the consolidated financial statements.
Product | 2015 | 2014 | 2018 | 2017 | 2016 | |||||||||||||||
| (In millions of Russian rubles, except for percentages) | (In millions of Russian rubles, except for percentages) | |||||||||||||||||||
Pig Iron | 1,287.4 | 3,251.5 | 133.1 | 113.9 | 679.2 | |||||||||||||||
Domestic Sales | �� | 35.6 | % | 51.2 | % | 100.0 | % | 100.0 | % | 82.7 | % | |||||||||
Export | 64.4 | % | 48.8 | % | 0.0 | % | 0.0 | % | 17.3 | % | ||||||||||
Semi-Finished Steel Products | 5,027.2 | 2,834.5 | 54.4 | 491.9 | 3,433.5 | |||||||||||||||
Domestic Sales | 63.0 | % | 53.4 | % | 65.7 | % | 93.3 | % | 63.7 | % | ||||||||||
Export | 37.0 | % | 46.6 | % | 34.3 | % | 6.7 | % | 36.3 | % | ||||||||||
Long Steel Products | 73,853.0 | 71,063.7 | 105,722.0 | 96,768.0 | 89,575.0 | |||||||||||||||
Domestic Sales | 83.1 | % | 82.4 | % | 87.9 | % | 90.3 | % | 88.6 | % | ||||||||||
Export | 16.9 | % | 17.6 | % | 12.1 | % | 9.7 | % | 11.4 | % | ||||||||||
Flat Steel Products | 17,490.1 | 14,646.0 | 22,786.2 | 22,504.8 | 18,230.2 | |||||||||||||||
Domestic Sales | 88.9 | % | 86.8 | % | 84.4 | % | 89.2 | % | 88.5 | % | ||||||||||
Export | 11.1 | % | 13.2 | % | 15.6 | % | 10.8 | % | 11.5 | % | ||||||||||
Forgings | 5,248.6 | 4,421.8 | 3,976.6 | 4,101.4 | 4,416.9 | |||||||||||||||
Domestic Sales | 63.3 | % | 75.1 | % | 56.7 | % | 61.3 | % | 72.0 | % | ||||||||||
Export | 36.7 | % | 24.9 | % | 43.3 | % | 38.7 | % | 28.0 | % | ||||||||||
Stampings | 6,917.6 | 7,421.2 | 11,871.1 | 8,146.1 | 7,235.1 | |||||||||||||||
Domestic Sales | 92.2 | % | 93.5 | % | 91.1 | % | 92.1 | % | 95.4 | % | ||||||||||
Export | 7.8 | % | 6.5 | % | 8.9 | % | 7.9 | % | 4.6 | % | ||||||||||
Wire Products | 23,442.6 | 22,396.5 | 30,040.4 | 27,577.6 | 24,579.8 | |||||||||||||||
Domestic Sales | 84.4 | % | 84.8 | % | 82.5 | % | 85.5 | % | 84.0 | % | ||||||||||
Export | 15.6 | % | 15.2 | % | 17.5 | % | 14.5 | % | 16.0 | % | ||||||||||
Steel Pipes | 3,308.3 | 3,390.7 | 3,230.2 | 2,733.1 | 3,286.2 | |||||||||||||||
Domestic Sales | 90.5 | % | 91.5 | % | 93.4 | % | 93.8 | % | 90.2 | % | ||||||||||
Export | 9.5 | % | 8.5 | % | 6.6 | % | 6.2 | % | 9.8 | % | ||||||||||
Ferrosilicon | 3,527.7 | 2,712.6 | 3,927.0 | 2,807.1 | 3,367.5 | |||||||||||||||
Domestic Sales | 57.1 | % | 56.3 | % | 49.5 | % | 53.1 | % | 47.2 | % | ||||||||||
Export | 42.9 | % | 43.7 | % | 50.5 | % | 46.9 | % | 52.8 | % | ||||||||||
Other | 5,929.4 | 6,521.3 | 6,176.7 | 7,516.0 | 6,835.3 | |||||||||||||||
Domestic Sales | 86.4 | % | 87.0 | % | 86.8 | % | 83.3 | % | 81.2 | % | ||||||||||
Export | 13.6 | % | 13.0 | % | 13.2 | % | 16.7 | % | 18.8 | % | ||||||||||
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Total | 146,031.9 | 138,659.8 | 187,917.7 | 172,759.9 | 161,638.7 | |||||||||||||||
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Domestic Sales | 82.3 | % | 82.2 | % | 85.4 | % | 87.9 | % | 86.0 | % | ||||||||||
Export | 17.7 | % | 17.8 | % | 14.6 | % | 12.1 | % | 14.0 | % | ||||||||||
The end users of our steel products vary. Our rebar is principally used in the construction industry. The main end users of our wire rod are construction companies and hardware production works.wire products producers. Our other long steel products are used in various moving parts manufactured by the automotive industry, as well as the engineering, pipe, construction and railway construction industries. Our flat steel products are used in the construction (covers, floor plates) and pipe industries. Our forgingsstampings and stampingsforgings are primarily used in the engineering and pipe industries. The main end users of our wire products are the construction, mining, engineering and other industries.
The following table sets forth bydescribes, in percentage a breakdown of ourterms, Russian domestic shipment volumes of allour steel products produced in Russiafurther broken down by industry sector within the Russian market in 2015.sector.
Use by Industry | Construction | Metals Trading | Ferrous Metallurgy | Engineering and Metalworking | Vehicles Manufacturing | Railways Construction and Repair | Other Industries(1) | Construction | Metals Trading | Ferrous Metallurgy | Engineering and Metalworking | Vehicles Manufacturing | Railways Construction and Repair | Other Industries(1) | ||||||||||||||||||||||||||||||||||||||||||
Semi-Finished Steel Products | 0.0 | % | 0.6 | % | 99.1 | % | 0.3 | % | 0.0 | % | 0.0 | % | 0.0 | % | 3.5 | % | 20.2 | % | 71.5 | % | 0.0 | % | 2.3 | % | 0.0 | % | 2.5 | % | ||||||||||||||||||||||||||||
Long Steel Products | 24.2 | % | 32.4 | % | 8.9 | % | 3.1 | % | 4.0 | % | 11.1 | % | 16.3 | % | ||||||||||||||||||||||||||||||||||||||||||
Flat Steel Products | 7.4 | % | 29.3 | % | 17.9 | % | 4.4 | % | 1.3 | % | 0.0 | % | 39.7 | % | ||||||||||||||||||||||||||||||||||||||||||
Forgings | 0.0 | % | 58.3 | % | 26.5 | % | 13.9 | % | 1.3 | % | 0.0 | % | 0.0 | % | 0.0 | % | 76.6 | % | 8.7 | % | 14.5 | % | 0.2 | % | 0.0 | % | 0.0 | % | ||||||||||||||||||||||||||||
Stampings | 0.0 | % | 11.7 | % | 0.0 | % | 3.4 | % | 84.9 | % | 0.0 | % | 0.0 | % | ||||||||||||||||||||||||||||||||||||||||||
Wire Products | 24.5 | % | 40.6 | % | 9.1 | % | 5.9 | % | 2.2 | % | 2.3 | % | 15.4 | % | 15.8 | % | 37.4 | % | 15.8 | % | 3.6 | % | 2.6 | % | 5.3 | % | 19.5 | % | ||||||||||||||||||||||||||||
Flat Steel Products | 14.0 | % | 37.7 | % | 17.0 | % | 5.6 | % | 3.0 | % | 0.0 | % | 22.7 | % | ||||||||||||||||||||||||||||||||||||||||||
Long Steel Products | 35.7 | % | 29.1 | % | 10.2 | % | 7.5 | % | 2.7 | % | 0.0 | % | 14.8 | % | ||||||||||||||||||||||||||||||||||||||||||
Steel Pipes | 70.0 | % | 17.5 | % | 3.2 | % | 0.8 | % | 0.1 | % | 0.0 | % | 8.4 | % | 9.4 | % | 64.5 | % | 13.7 | % | 2.6 | % | 0.2 | % | 0.0 | % | 9.6 | % | ||||||||||||||||||||||||||||
Stampings | 0.0 | % | 5.6 | % | 0.1 | % | 16.0 | % | 78.1 | % | 0.0 | % | 0.2 | % | ||||||||||||||||||||||||||||||||||||||||||
| (1) | Including mining and power industries and consumer goods sector. |
Marketing and distribution
We use flexible sales strategies that are tailored to our customers and the markets we serve. Our overall sales strategy is to develop long-term, close partnershippartnerships with the end users of our products. As part of ourend-user strategy, we research sales to distributors to identify the end user and directly market our steel capabilities and products to these customers. With respect to our largest end users, we have established working committees, composed of our manufacturing engineers and customer personnel. These committees meet quarterly to monitor the performance of our products and ensure that our customers’ specifications and quality requirements are consistently met. These committees also provide customers with the opportunity to discuss their future needs with us. Our sales force also regularly follows up with these and many of our other customers. We attend industry conferences and advertise in industry periodicals to market our products and capabilities. Through these efforts, we have established a strong brand identity for Mechel in Russia, the CIS, Central Europe, South-East Asia and the Middle East.
We have a distribution network consisting of Mechel Service and Mechel Service Global through its subsidiaries, provideswhich provide end users in Russia, the CIS and Europe with our steel products. Mechel Service Global’s subsidiariesand Mechel Service Global help us to develop and service our long-standing customer relationships by providing highly specialized technical sales and service to our customers.
In 2015, most of2018, our production facilities handled their domestic sales independently, and our export sales were marketed throughconducted by Mechel TradingService and Mechel Service Global, respectively, as well as conducted directly by our own production facilities.
Domestic sales
Our Russian steel production facilities Chelyabinsk Metallurgical Plant, Izhstal and Urals Stampings Plant are located in large industrial areas and have long-standing relationships with local wholesale customers. Mechel Service, a Russianour steel sales and service subsidiary, of Mechel Service Global, has 5452 storage sites in 3841 cities throughout Russia to serve our end users, which helps us to establish long-standing customer relationships by virtue of proximity to both production and customers. In 2018, Mechel Service had 1,370 employees assold 1.3 million tonnes of December 31, 2015.our steel products.
Ferrosilicon sales are conducted directly by our Bratsk Ferroalloy Plant. We supply ferrosilicon on the Russian market under annual contracts with monthly adjustment of prices and volumes, as well as on the spot market (under monthly tenders).
Export sales
Most of the exports in our steel segment are made to end users innon-sanctioned countries, with the rest sold to independent distributors and traders, which then resell our products to end users. Our export sales are carried out by Mechel Trading, directly by our own production facilities and through Mechel Service Global’s distribution network.
Our production facilities supply high-quality rolled steel products to the subsidiaries of Mechel Service Global in Western Europe either directly, or through the logistics center in the Port of Antwerp. Our logistics center in the Port of Antwerp also allows us to sell high-quality rolled steel products to manufacturing and service companies on awalk-in basis.
In 2015,2018, ferrosilicon sales outside of Russia were principally to Japan. Deliveries to Japanese customers were carried outmade on cost insurance and freight (“CIF”) delivery terms (including transportation by railway,rail, handling in ports of Nakhodka, Vladivostok and Vostochny and use of major container lines toin major Japanese ports and insurance). We sell ferrosilicon based both on long-term contracts and on a spot basis.
Distribution
Rail transportation is used for most shipments from our production facilities and warehouses to our end customers, wholesale warehouses or seaports.
Market share and competition
In our core export markets, we primarily compete with other Russian producers, as well as producers from China,Germany, Kazakhstan, Ukraine Belarus, Turkey and Kazakhstan.the Czech Republic. The leading global steel manufacturers have been increasingly focused on value-added and higher-priced products. The principal competitive factors include price, distribution, product quality, product range and customer service.
In the Russian market, we compete on the basis of price and quality of steel products, their added value, product range and service, technological innovation and proximity to customers. The Russian steel industry is characterized by a relatively high concentration of production, with the six largest integrated steel producers, including ourselves, accounting for 83.7%84.2% of overall domestic crude steel output in 2015,2018, according to Metal Expert.
The following is a brief description of Russia’s five largest steel producers excluding ourselves:
| • | Novolipetsk Steel PAO(“NLMK”) is Russia’s largest steel manufacturer by volume, accounting for |
| • |
| Severstal PAO(“Severstal”) is Russia’s |
| • | Magnitogorsk Iron & Steel Works PAO (“MMK”) is Russia’s third largest steel manufacturer by volume, accounting for 16.1% of the volume of Russian commodity steel products output (including long products, flat products and semi-finished products) in 2018. MMK’s product mix is comprised mostly of flat products, which accounted for 84.8% of its commercial steel products output (including |
semis) in 2018. Domestically, MMK controls a significant portion of the supplies to the oil and gas and automotive sectors. MMK exported 34.2% of its output in 2018. Its production facilities are located in Magnitogorsk in the southern Urals. MMK also controls coking coal producer Belon. |
| • | EVRAZ plc(“EVRAZ”), which includes Russian steel producers EVRAZ NTMK and EVRAZ ZSMK, had a |
| • | Metalloinvest Holding Company AO(“Metalloinvest”), whose Russian assets consist of |
Source: CompanyCompanies’ websites; Metal Expert.
These six companies, including ourselves, can be divided into two groups by product type. MMK, Severstal and NLMK focus mainly on flat products, while we, EVRAZ and Metalloinvest produce primarily long products. Mechel is the fourth largest and most comprehensive producer of special steel and alloys in Russia, accounting for 13.0%11.2% of total Russian special steel output by volume in 2015,2018, according to Chermet and Metal Expert. We are also the second largest producer of long steel products (excluding square billets) in Russia by volume, with significant market shares in both regular long steel products and special steel long products, according to Metal Expert.
In the Russiannon-special steel long products category, our primary products and our market position by production volume in 20152018 were as follows, according to Metal Expert:
| • | Reinforcement bars (“rebar”) — In rebar, we compete in the6-40 millimeters range. In |
| • | Wire rod— There were five major producers of wire rod in Russia in |
OEMK, an EAF steel mill specializing in carbon and special steel long products and our nearest special steel competitor, is located in the southwest of Russia and serves customers in the pipe, engineering and ball-bearing industries.
According to Metal Expert and Chermet, we were one of the leading producers in Russia of special steel long products (bearing, tool,(tool, high-speed and stainless long steel) in 2015,2018, producing 9.1%9.3% of the total Russian output by volume, and we held significant shares of Russian production volumes in 20152018 of stainless long products (17.3%(20.6%), tool steel (29.0%(30.5%) and high-speed steel (58.0%(30.7%).
The following tables set forth additional information regarding our 20152018 market sharesshare in Russia for various categories of steel products.
All long products (excluding square billets)
Manufacturer | Production | Market Share by Production Volume | Production | Market Share by Production Volume | ||||||||||||
| (In thousands of tonnes, except for percentages) | (In thousands of tonnes, except for percentages) | |||||||||||||||
EVRAZ | 5,088 | 29.0 | % | 4,806 | 25.6 | % | ||||||||||
Mechel | 2,960 | 16.9 | % | 3,127 | 16.7 | % | ||||||||||
NLMK | 2,147 | 12.2 | % | 2,453 | 13.1 | % | ||||||||||
Severstal | 1,717 | 9.8 | % | 1,911 | 10.2 | % | ||||||||||
MMK | 1,686 | 9.6 | % | 1,643 | 8.8 | % | ||||||||||
Metalloinvest | 609 | 3.5 | % | 1,104 | 5.9 | % | ||||||||||
Other | 3,328 | 19.0 | % | 3,726 | 19.7 | % | ||||||||||
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Total | 17,535 | 100.0 | % | 18,770 | 100.0 | % | ||||||||||
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Source: Metal Expert.
Long products — Wire rod(1)
Manufacturer | Production | Market Share by Production Volume | Production | Market Share by Production Volume | ||||||||||||
| (In thousands of tonnes, except for percentages) | (In thousands of tonnes, except for percentages) | |||||||||||||||
Mechel | 816 | 31.4 | % | 835 | 26.7 | % | ||||||||||
NLMK | 586 | 18.7 | % | |||||||||||||
MMK | 480 | 18.5 | % | 497 | 15.9 | % | ||||||||||
Severstal | 391 | 12.5 | % | |||||||||||||
EVRAZ | 404 | 15.6 | % | 305 | 9.8 | % | ||||||||||
NLMK | 396 | 15.2 | % | |||||||||||||
Severstal | 377 | 14.5 | % | |||||||||||||
Other | 125 | 4.8 | % | 512 | 16.4 | % | ||||||||||
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Total | 2,598 | 100.0 | % | 3,126 | 100.0 | % | ||||||||||
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Source: Metal Expert.
| (1) | Including wire rod further processed into wire and other products within the same holding company. |
Long products — Rebar
Manufacturer | Production | Market Share by Production Volume | Production | Market Share by Production Volume | ||||||||||||
| (In thousands of tonnes, except for percentages) | (In thousands of tonnes, except for percentages) | |||||||||||||||
NLMK | 1,730 | 20.6 | % | 1,812 | 23.9 | % | ||||||||||
Severstal | 1,298 | 17.2 | % | |||||||||||||
EVRAZ | 1,637 | 19.5 | % | 1,225 | 16.2 | % | ||||||||||
Mechel | 1,560 | 18.6 | % | 1,223 | 16.2 | % | ||||||||||
Severstal | 1,091 | 13.0 | % | |||||||||||||
MMK | 471 | 5.6 | % | 359 | 4.7 | % | ||||||||||
Other | 1,912 | 22.7 | % | 1,655 | 21.8 | % | ||||||||||
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Total | 8,401 | 100.0 | % | 7,572 | 100.0 | % | ||||||||||
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Source: Metal Expert.
Flat stainless steel
Manufacturer | Production | Market Share by Production Volume | Production | Market Share by Production Volume | ||||||||||||
| (In thousands of tonnes, except for percentages) | (In thousands of tonnes, except for percentages) | |||||||||||||||
VMZ Red October | 15.7 | 55.8 | % | 10.7 | 55.7 | % | ||||||||||
Mechel | 9.8 | 34.8 | % | 5.7 | 29.9 | % | ||||||||||
Other | 2.7 | 9.4 | % | 2.8 | 14.4 | % | ||||||||||
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Total | 28.2 | 100.0 | % | 19.2 | 100.0 | % | ||||||||||
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Source: Metal Expert.
Wire products
Manufacturer | Production | Market Share by Production Volume | ||||||
| (In thousands of tonnes, except for percentages) | ||||||||
Mechel | 441.7 | 25.5 | % | |||||
MMK-Metiz | 414.0 | 23.9 | % | |||||
Severstal-Metiz | 397.1 | 22.9 | % | |||||
NLMK-Metalware | 271.8 | 15.7 | % | |||||
EVRAZ | 206.9 | 12.0 | % | |||||
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Total | 1,731.5 | 100.0 | % | |||||
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Wire products — Spring wire
Manufacturer | Production | Market Share by Production Volume | Production | Market Share by Production Volume | ||||||||||||
| (In thousands of tonnes, except for percentages) | (In thousands of tonnes, except for percentages) | |||||||||||||||
Mechel | 32.1 | 58.5 | % | 529.3 | 20.9 | % | ||||||||||
MMK-Metiz | 524.7 | 20.7 | % | |||||||||||||
Severstal-Metiz | 19.4 | 35.3 | % | 440.9 | 17.4 | % | ||||||||||
MMK-Metiz | 3.4 | 6.2 | % | |||||||||||||
NLMK-Metalware | 256.4 | 10.1 | % | |||||||||||||
EVRAZ | 201.3 | 7.9 | % | |||||||||||||
Other | 585.9 | 23.0 | % | |||||||||||||
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Total | 54.9 | 100.0 | % | 2,538.5 | 100.0 | % | ||||||||||
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Source: Metal Expert.
Wire products — High-tensile wire
Manufacturer | Production | Market Share by Production Volume | Production | Market Share by Production Volume | ||||||||||||
| (In thousands of tonnes, except for percentages) | (In thousands of tonnes, except for percentages) | |||||||||||||||
Severstal-Metiz | 39.3 | 55.7 | % | 46.2 | 45.7 | % | ||||||||||
Mechel | 27.9 | 39.6 | % | 35.5 | 35.0 | % | ||||||||||
MMK-Metiz | 3.3 | 4.7 | % | 19.5 | 19.3 | % | ||||||||||
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Total | 70.5 | 100.0 | % | 101.2 | 100.0 | % | ||||||||||
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Source: Metal Expert.
According to Metal Expert, MechelBratsk Ferroalloy Plant is the fourth largest Russian producer of ferrosilicon by volume. In 2015,2018, we had a 13.6%12.9% market share by volume of Russian ferrosilicon production.
Following is a brief description of Russia’s other largest ferrosilicon producers, according to Metal Expert and the companies’ data:
| • | Kuznetsk Ferroalloys |
| • | Chelyabinsk |
| • | Yurginsk Ferroalloy Plant AO(“Yurginsk Ferroalloy Plant”) is the third largest Russian ferrosilicon producer, with a 14.0% market share by production volume in 2018. Yurginsk Ferroalloy Plant also produces microsilica. It is export-oriented, having exported 99.3% of its ferrosilicon production volume in 2018. |
The following table sets forth additional information regarding our 20152018 ferrosilicon market share in Russia.
Manufacturer | Region | Production | Market Share by Production Volume | Region | Production | Market Share by Production Volume | ||||||||||||||||
| (In thousands of tonnes, except for percentages) | (In thousands of tonnes, except for percentages) | |||||||||||||||||||||
Kuznetsk Ferroalloys | Kemerovo | 257.0 | 40.4 | % | Kemerovo | 282.1 | 47.2 | % | ||||||||||||||
ChEMK | Chelyabinsk | 156.4 | 24.6 | % | Chelyabinsk | 120.6 | 20.2 | % | ||||||||||||||
Yurginsk Ferroalloys Plant | Kemerovo | 95.0 | 14.9 | % | ||||||||||||||||||
Yurginsk Ferroalloy Plant | Kemerovo | 83.7 | 14.0 | % | ||||||||||||||||||
Bratsk Ferroalloy Plant | Irkutsk | 86.1 | 13.6 | % | Irkutsk | 77.3 | 12.9 | % | ||||||||||||||
NLMK | Lipetsk | 23.5 | 3.7 | % | Lipetsk | 24.2 | 4.0 | % | ||||||||||||||
Serov Ferroalloys Plant | Sverdlovsk | 17.7 | 2.8 | % | Sverdlovsk | 10.4 | 1.7 | % | ||||||||||||||
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Total | 635.7 | 100.0 | % | 598.3 | 100.0 | % | ||||||||||||||||
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Source: Metal Expert.
Raw materials
The principal raw materials we use in pig iron production are iron ore products (sinter of our own production and purchased oxidized pellets), coke and limestone.fluxing additions. Pig iron is made in blast furnaces. For sinter production, we use iron ore concentrate. Iron ore concentrate is converted into sinter at Chelyabinsk Metallurgical Plant. In 2015,2018, our steel-makingsteelmaking operations used 6.45.6 million tonnes of iron ore feed, approximately 16%25% in the form of pellets and 84%75% in the form of sinter, and we internally sourced approximately 36%32% of our total iron ore concentrate requirements during this period.feed requirements. In 2018, Korshunov Mining Plant supplied our steel segment with 2.31.8 million tonnes of iron ore concentrate in 2015.concentrate. In 2015,2018, we purchased most of the remaining part of our iron ore feed from Russian suppliers such as Kachkanarsky GOK, Kovdorsky GOK, Lebedinsky GOK, Vysokogorsky GOK, Mikhailovsky GOK and Bakalskoye Rudoupravlenie under monthly quarterly and annual contracts on market terms.
We process coking coal concentrate into coke at Mechel Coke and Moscow Coke and Gas Plant. In 2015,2018, our production facilities used 3.83.3 million tonnes of coking coal concentrate (including 2.92.6 million tonnes used by Mechel Coke and 0.90.7 million tonnes used by Moscow Coke and Gas Plant), and 75%87% of total usage was sourced internally. Coke is used both in pig iron production at Chelyabinsk Metallurgical Plant and in ferrosilicon production at Bratsk Ferroalloy Plant. In 2015,2018, we produced and internally used approximately 2.11.9 million tonnes of coke as well as produced for sale to third parties another approximately 1.00.7 million tonnes of coke.
We are capable of internally sourcing all of the limestone requirements from ourOur Pugachevsky Open Pit. In 2015, we supplied approximately 769.1 thousand tonnes ofPit produces limestone towhich, after processing into lime and flux, is used by our own steel production facilities. In 2018, our limestone production amounted to 1.7 million tonnes.
We produce 89.3%96.1% of steel in basic oxygen furnaces.BOFs. In steel-making,steelmaking, scrap is used in the composition of feedstock, and we are approximately 54.3%86.6% self-sufficient in this raw material, which amounts to 410.7324.1 thousand tonnes of scrap, sourcing the balance from various scrap traders. We generate our scrap supply through, among others, Mechel Vtormet, our scrap metal processing company.
In 2015, we used nickel sourced from Ufaleynickel and Normetimpex JSC in the production of stainless and other special steels. In 2015,2018, our production facilities used 1.9 thousand tonnes of nickel.
In 2015, our production facilities used 28.928.7 thousand tonnes of ferrosilicon (including 27.022.4 thousand tonnes at Chelyabinsk Metallurgical Plant, 0.23.7 thousand tonnes at the Chelyabinsk branch of Urals Stampings Plant and 1.72.6 thousand tonnes at Izhstal), almost all of which was supplied by Bratsk Ferroalloy Plant.
Steel-making
Steelmaking requires significant amounts of electricity to power EAFs, ladle furnaces and rolling mills and to produce sinter. In 2015,2018, our steel segment operations consumed approximately 3.2 billion kWh of electricity, of which approximately 1.9 billion kWh was used at Chelyabinsk Metallurgical Plant.electricity. Chelyabinsk Metallurgical Plant, Moscow Coke and Gas Plant and Urals Stampings Plant have powerco-generation facilities, which are operated by Mechel Energo. In 2015, these facilities produced 1.3 billion kWh ofproduce electricity yielding approximately 29% self-sufficiency overall for internal consumption. Overall, our group which consumed 4.7approximately 5.0 billion kWh of electricity in 2015. The balance was purchased in the wholesale and retail electricity markets.2018. Aside from Southern Kuzbass Power Plant, which ranruns on steam coal in 2015,and middlings, our power-generatingpower generating facilities work on blast furnace and coke gas, which areby-products of our steel-makingsteelmaking and coke-chemical operations, and natural gas, which we purchase from Novatek and Gazprom.third parties. In 2015,2018, we consumed 1.72.1 billion cubic meters of blast furnace gas, 565.5449.0 million cubic meters of coke gas and 992.5954.1 million cubic meters of natural gas. In 2015,2018, Southern Kuzbass Power Plant consumed 1.81.3 million tonnes of steam coal and middlings sourced mostlyboth from our own coal mining assets.assets and from third parties.
Large amounts of water are also required in the production of steel. Water serves as a re-solvent, accelerator and washing agent. Water is used to cool equipment components, to carry away waste, to help produce and distribute heat and power and to dilute liquids. One of the principal sources of water is rivers, and many of our production facilities recirculate a portion of water used for their production needs. For example, Chelyabinsk Metallurgical Plant sources 88.6%88.1% of its water needs from recirculated water and the rest from a local river. Izhstal sources 85.0%84.0% of its water needs from recirculated water, 7.2%8.4% from recycled water and the rest from a storage reservoir. Beloretsk Metallurgical Plant sources 73.5%74.7% of its water needs from recirculated and recycled water and the rest from a storage reservoir and a local river.
Transportation costs are a significant component of our production costs and a factor in our price-competitivenessprice competitiveness in export markets. Rail transportation is our principal means of transporting raw materials from our mines to processing facilities and products to domestic customers and to ports for shipment overseas. For a description of our railway freight and forwarding subsidiary, see “— Mining Segment — Marketing and distribution” above.
For a description of how seasonal factors impact our use and reserve levels of raw materials, see “Item 5. Operating and Financial Review and Prospects — Trend Information.Seasonality.”
Trade restrictions
Trade restrictions inIn July 2018, the formEuropean Union introduced a system of tariffsimport quotas, according to which the import of steel to the European Union until July 2021 is limited to specific volumes established for 26 categories of steel products. For each category of steel products, the import quota is calculated on the basis of the average volume of all imports of these products to the European Union over the past three years. If the quota is exceeded, a duty of 25% will be charged. Each product category consists of several types of products. Quotas apply to all suppliers of steel to the European Union, and dutiesfor certain product categories, quotas are widespread inset for different countries. Our steel products supplied to the steel industry. However, weEuropean Union are less exposed than most other Russian steel producerssubject to these trade restrictions as restrictions on Russian exports have mainly been directed against flatquotas. During the period from July 2018 to February 2019, the quota for the product category that includes beams produced by Chelyabinsk Metallurgical Plant amounted to 167.8 thousand tonnes, and the quota for the product category that includes rolled products whereas most of our exports consist of long products and semi-finished products.In addition, the abolitionproduced by the Russian government of steel export duties in 2002 has also effectively improved exports of Russian steel. In the future the Russian government may restore export duties on steel products and may also impose export duties on some raw materials, such as coal and iron ore concentrate.Izhstal amounted to 728.3 thousand tonnes.
In February 2008, an antidumping duty in the amount of 17.8% was imposed on exports to the European Union of ferrosilicon produced by our subsidiary Bratsk Ferroalloy Plant for a period of five years. In February 2013, the European Commission initiated an expiry review of the antidumping measures applicable to imports of ferrosilicon. In April 2014, the antidumping duty was extended for another five years.
Quartzite Production
We hold the subsoil license for the Uvatskoye deposit of quartzite and quartzite sandstones, a raw material used for ferrosilicon production. The deposit is accessible by unpaved road and located 20 kilometers southwest of Nizhneudinsk in the Irkutsk region. In 2011, we conducted successful technological tests of an experimental batch of quartzite for smelting of ferrosilicon. We completed the exploration of the alluvial part of the southern area of the Uvatskoye deposit and applied to the Department for Subsoil Use for the Irkutsk region (“
(“Irkutsknedra”) with a plan for the pilot commercial development of the alluvial part of the southern area. Irkutsknedra agreed to the plan and recommended further geologic exploration within the entire license area of the Uvatskoye deposit. In 2012, drilling and sampling activities were conducted. Since 2013, we have been carrying out the pilot commercial development of the alluvial part of the southern area of the Uvatskoye deposit, with a view to develop the processing methods and technical and economic parameters of the deposit. Currently, in order to determine the qualitative characteristics of the mineral,In 2017, laboratory studies of selected cores of the bedrock of the deposit are being conducted. We also continuewere completed. In 2018, the temporary exploration conditions of the other two areasdeposit were approved. At present, a feasibility study of the Uvatskoye deposit.deposit’s permanent conditions is being worked out. In light of the above, we are not able to state the amount of provenproved reserves for the Uvatskoye quartzite deposit.
The table below sets forth certain information regarding the subsoil license for our quartzite and quartzite sandstones deposit.
License Area | License Holder | License Expiry Date | Status(1) | Area (sq. km) | Year Production Commenced | Surface Land Use Rights | ||||||||||||||
Uvatskoye | Bratsk Ferroalloy Plant | July 2033 | Exploration and development | 18.21 | n/a | Lease | ||||||||||||||
| (1) | “Exploration and development” refers to sites where preliminary work and drilling for calculation of mineral reserves are being carried out. |
Power Segment
Our power segment generates and sellssupplies electricity, heat energy and other power resources to our group companies and to external customers.consumers. It enables us to market high value-added productselectricity and heat energy made from our steam coal, such as electricity and heat energy, and to increasemaintain the electric power self-sufficiency of theour mining and steel segments of our business.segments. Our power segment consists of a power generating plant Southern Kuzbass Power Plant with installed capacity of 554 MW, power co-generation facilities at Chelyabinsk Metallurgical Plant, Moscow Coke and Gas Plant and Urals Stampings Plant with installed capacity of 229 MW, 24.7 MW and 3.5 MW, respectively, and a power distribution company Kuzbass Power Sales Company.Our subsidiary Mechel Energo manages our power business.
The following table sets out total volumes of electricity production by our power segment.group.
| 2015 | 2014 | |||||||
| (In million kWh) | ||||||||
Electricity | 4,137.4 | 3,682.1 | ||||||
Electricity 2018 2017 2016 (In million kWh) 3,250.6 3,427.4 3,378.2
Southern Kuzbass Power Plant
Southern Kuzbass Power Plant is located in Kaltan in the Kemerovo region, which is in the southern part of Russia’s coal-rich Kuzbass district. It has a total installed capacity of 554 MW and installed heat capacity of 506 Gcal/h. In 2015,2018, the plant generated 2,435.51,693.0 million kWh of electricity and 661.6852.9 thousand Gcal of heat energy. We acquired Southern Kuzbass Power Plant in 2007.
Southern Kuzbass Power Plant uses steam coal and middlings as fuel, which isare supplied to it mostly from local sources, including our Southern Kuzbass Coal Company. In 2015,2018, it consumed 1.6 million631.5 thousand tonnes of steam coal and middlings sourced from Southern Kuzbass Coal Company.Company, Elgaugol and Yakutugol.
The generation facilities of Southern Kuzbass Power Plant are listed below:
Generation Unit No. | Year of Manufacture | Month and Year of Commissioning at Southern Kuzbass Power Plant | Installed Capacity (MW) | Electricity Production in 2015 (million kWh) | Year of Manufacture | Month and Year of Commissioning at Southern Kuzbass Power Plant | Installed Capacity (MW) | Electricity Production in 2018 (million kWh) | ||||||||||||||||||||||
VK-50-2 LMZ | 1950 | April 1951 | 53 | 123.7 | 1950 | April 1951 | 53 | 73.7 | ||||||||||||||||||||||
VK-50-2 LMZ | 1950 | November 1951 | 53 | 325.6 | 1950 | November 1951 | 53 | 0 | ||||||||||||||||||||||
VK-50-2 LMZ | 1950 | August 1952 | 53 | 97.8 | 1950 | August 1952 | 53 | 197.8 | ||||||||||||||||||||||
VK-50-2 LMZ | 1952 | February 1953 | 53 | 333.4 | 1952 | February 1953 | 53 | 215.2 | ||||||||||||||||||||||
T-115-8,8 LMZ | 1996 | December 2003 | 113 | 336.2 | 1996 | December 2003 | 113 | 427.5 | ||||||||||||||||||||||
T-88/106-90 LMZ | 1953 | July 1954 | 88 | 529.2 | 1953 | July 1954 | 88 | 88.7 | ||||||||||||||||||||||
VK-50-2 LMZ | 1954 | December 1954 | 53 | 101.8 | 1954 | December 1954 | 53 | 183.5 | ||||||||||||||||||||||
T-88/106-90 LMZ | 1953 | September 1956 | 88 | 587.7 | 1953 | September 1956 | 88 | 506.6 | ||||||||||||||||||||||
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Total | 554 | 2,435.5 | 554 | 1,693.0 | ||||||||||||||||||||||||||
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The plant sells electricity and capacity on the wholesale market only, as well as heat energy directly to consumers. In Russia, it is common for thermal power plants to produce and sell heat energy, sometimes in the form of industrial steam and sometimes in the form of hot water, for business and residential heating and household use, which is distributed in towns and cities by a network of hot water distribution pipes. Southern Kuzbass Power Plant’s heat energy is distributed at regulated prices in the form of hot water in the cities of Kaltan, Osinniki and Mezhdurechensk.
Kuzbass Power Sales Company
Kuzbass Power Sales Company is the largest power distribution company in the Kemerovo region. Its marketed power volume in 20152018 amounted to approximately 11.09.9 billion kWh. We acquired Kuzbass Power Sales Company in 2007. The addition of Kuzbass Power Sales Company, along with Southern Kuzbass Power Plant, allows us to improve the utilization ofincrease revenues in our existing power co-generation capabilities and provides a base for growth in the power industry.segment.
Kuzbass Power Sales Company sells electricity on the retail market.and wholesale markets. The company sells electricity to households, social infrastructure companies, housing and public utilities and large industrial companies. Due to its area of operation, its primary industrial customersconsumers are in the mining and processing industries. It supplies electricity to end-consumersend consumers directly and also through one regional agent.
The company is included in the Register of Guaranteeing Suppliers of the Kemerovo region. For a discussion of guaranteeing suppliers, see “— Regulatory Matters — Regulation of Russian Electricity Market — Sales of electricity — Retail electricity market.”
Mechel Energo
Mechel Energo’s core activity is the generation and salesupply of electricity, capacity and heat energy in the form of hot water and steam.steam, compressed air, oxygen, nitrogen, liquid nitrogen and liquid oxygen. In addition, it coordinates the supply of energy to our production facilities. The company has a separate business unit in Izhevsk, as well as branches in Chelyabinsk (including production department in Chebarkul), Beloretsk and Vidnoye. Mechel Energo also performs the functions of the sole executive body of its subsidiary Southern Kuzbass Power Plant.
Mechel Energo supplies heat energy (in the form of hot water and steam) at regulated prices to its consumers, including residential consumers and commercial customers, in the cities of Vidnoye, Chelyabinsk, Chebarkul, Beloretsk and Izhevsk.
Mechel Energo has co-generation facilities and operates using mainly blast furnace gas and coke gas, which is a by-product of steel-making, and natural gas, which we purchase from Novatek and Gazprom.
Mechel Energo’s sales amounted to approximately 4.03.5 billion kWh of electricity purchased in the wholesale and retail electricity markets and 3.8 million Gcal of heat energy in 2015.2018.
Capital Investment Program
We continually review our capital investment program in light of our cash flow, liquidity position, results of operations and market conditions. In light of the above factors, we may adjust our capital investment program. Our planned capital expenditures for 2016 are increased by approximately 117% as compared to 2015. See “Item 3. Key Information — Risk Factors — Risks Relating to Our Financial Condition and Financial Reporting — We will require a significant amount of cash to fund our capital investment program.” For further information on funding of capital investments, see “Item 5. Operating and Financial Review and Prospects — Liquidity and Capital Resources.”
Our capital investment program includes capital spending of up to 27.4RUB 33.0 billion rubles for 2016-2018.2019-2021. Our capital investment program is primarily targeted at expanding the mining segment and increasing the efficiency of the steel segment, and includes, among others,including,inter alia, investments of approximately 16.1RUB 22.0 billion rubles in mining and approximately 8.3RUB 8.1 billion rubles in steel. However, our ability to fully realize our capital investment program is constrained by our ability to generate cash flow, obtain additional financing and refinance or restructure existing indebtedness. We may be limited in our ability to obtain financing on a project finance basis which may impose further restrictions on the operations of the project or require the economic returns of the project to be shared with investors or lenders.
In the mining segment, we expect to direct approximately 6.3RUB 5.9 billion rubles tofor the development of the Elga coal deposit in 2016-2018.2019-2021. We will invest approximately 1.9 billion rublesRUB 147.9 million in 2016-20182019-2021 for increasing coal production at Sibirginskaya Underground, which is part of Southern Kuzbass Coal Company.
The steel segment projects are targeted at expanding the shareproportion of high value-added products which we produce, while maintaining existing output, and are mainly focused on Chelyabinsk Metallurgical Plant. The main project, initiated in 2008, is the construction of a universal rail and structural rolling mill with a capacity of 1.1 million tonnes, which allows us to reduce the proportion of lower-value semi-finished products sales by increasing the production of high-quality rolled steel products and rails. The universal rail and structural rolling mill was launched in July 2013.
The table below sets forth the major items of our capital expenditures by segment and facility for 2016-20182019-2021 (including cumulatively the expenditures made since the launch of the relevant project):
Planned Increase in Capacity and/or Other Improvement | Approximate Total Planned Expenditures(1) | Year of Project Launch | Estimated Year of Completion | Planned Increase in Capacity and/or Other Improvement | Approximate Total Planned Expenditures(1) | Year of Project Launch | Estimated Year of Completion | |||||||||||||||||||||
| (In millions of Russian rubles) | (In millions of Russian rubles) | |||||||||||||||||||||||||||
Mining Segment | ||||||||||||||||||||||||||||
Maintenance expenditures | Maintaining current coal and iron ore mining and coal and iron ore concentrate production | 5,967 | 2016 | 2018 | Maintaining current coal and iron ore mining and coal and iron ore concentrate production | 13,358 | 2019 | 2021 | ||||||||||||||||||||
Elgaugol | ||||||||||||||||||||||||||||
Construction of a rail line to the Elga coal deposit and the development of the Elga coal deposit | Providing access to and the development of the coal deposit with increase of production capacity to 11.7 million tonnes per annum | 6,255 | 2009 | 2018 | ||||||||||||||||||||||||
Construction of the Elga coal complex facilities | Development of the coal deposit with increase of production capacity to 11.7 million tonnes per annum | 18,060 | 2009 | 2021 | ||||||||||||||||||||||||
Elga-road | ||||||||||||||||||||||||||||
Construction of the rail line to the Elga deposit | Providing access to the coal deposit | 66,509 | 2009 | 2021 | ||||||||||||||||||||||||
Southern Kuzbass Coal Company | ||||||||||||||||||||||||||||
Increase of coal production at Sibirginskaya Underground | Increase production output to 2.4 million tonnes per annum | 1,869 | 2009 | 2018 | Increase of production output to 2.4 million tonnes per annum | 4,569 | 2009 | 2019 | ||||||||||||||||||||
Steel Segment | ||||||||||||||||||||||||||||
Maintenance expenditures | Maintaining current output capacity | 1,756 | 2016 | 2018 | Maintaining current output capacity | 2,709 | 2019 | 2021 | ||||||||||||||||||||
Chelyabinsk Metallurgical Plant | ||||||||||||||||||||||||||||
Construction of rolling facilities in blooming building | Introducing new types of rolled products for construction industry with a design capacity of 1.1 million tonnes per annum | 1,870 | 2009 | 2018 | Introducing new types of rolled products for construction industry with a design capacity of 1.1 million tonnes per annum | 21,602 | 2009 | 2019 | ||||||||||||||||||||
Reconstruction of oxygen-converter production | Increase of cast weight to 152 tonnes | 2,030 | 2009 | 2018 | Increase of cast weight to 152 tonnes | 5,319 | 2009 | 2021 | ||||||||||||||||||||
Power segment | ||||||||||||||||||||||||||||
Maintenance expenditures | Maintaining current output capacity | 896 | 2016 | 2018 | Maintaining current output capacity | 1,294 | 2019 | 2021 | ||||||||||||||||||||
Transport division | ||||||||||||||||||||||||||||
Maintenance expenditures | Maintaining current output capacity | 1,208 | 2016 | 2018 | Maintaining current output capacity | 598 | 2019 | 2021 | ||||||||||||||||||||
Port Posiet | ||||||||||||||||||||||||||||
Technical modernization of Port Posiet | Increase of cargo-handling capacity to 9.0 million tonnes per annum | 717 | 2009 | 2018 | Increase of cargo-handling capacity to 9.0 million tonnes per annum | 4,549 | 2009 | 2021 | ||||||||||||||||||||
| (1) | We estimate that approximately |
Research and Development
We maintain research programs at the corporate level and at certain of our business units to carry out research and applied technology development activities. At the corporate level, we have a Department of Technology Development at Mechel-Steel Management (two employees) and a Production and Technical Department at Mechel Mining Management (11(13 employees). In December 2008, we established Mechel Engineering with a headcount of 321 employees(219 employees) to carry out design and engineering works to increase the efficiency of our mining business. The head office of Mechel Engineering has a head officeis located in Novosibirsk and two offices in Russia’s regions.Novosibirsk. Geological services provided by
Mechel Engineering include: (1) geological survey work related to prospecting and developing minerals and coal deposits; (2) hydrogeological survey work; (3) monitoring of geological environment; (4) preparation of geological materials for feasibility studies and preparation of geological reports with reserves estimation; (5) test drilling (methane drainage borehole);drilling; and (6) computer simulation of coal and ore deposits.
In the course of our research and development, we also contract with third partythird-party consultants and Russian research institutions.
In addition to these activities performed at our corporate level, each of Chelyabinsk Metallurgical Plant, Beloretsk Metallurgical Plant and Urals Stampings Plant have specialized research divisions with a total of 163131 employees involved in the improvement of existing technologies and products.
Our research and development expenses in the years ended December 31, 20152018, 2017 and 20142016 were not significant.
Insurance
Most of our Russian production facilities have no comprehensive insurance coverage against the risks associated with the business in which we operate, other than insurance required under Russian law, existing collective bargaining agreements, loan agreements or other undertakings. Our Russian facilities have a number of compulsory insurance policies: liability of the owner of a hazardous facility for injury in an accident at a hazardous facility, third-party liability motor vehicle insurance and other forms of insurance. Some of our facilities provide their workers with medical insurance and accident and health insurance in accordance with existing collective bargaining agreements. In addition, most of our Russian facilities have voluntary motor vehicle insurance, and some of our facilities have cargo insurance, property insurance (real property and machinery) and certain types of third-party liability insurance.
Some of our international production facilities are not covered by comprehensive insurance typical for such operations in Western countries. However, they all have the compulsory insurance coverage required under the law of their respective jurisdictions: motor vehicle liability insurance, pollution liability insurance, employer liability, etc. Furthermore, some of our international facilities carry insurance coverage for their property (real property and machinery, inventory, motor vehicle), liability (third-party liability, professional and product liability), cargo (including freight insurance), accounts receivable, financial losses related to the abuse of the employees, as well as medical insurance, litigation insurance and accident insurance for their workers.
Environmental Protection
Similar to other companies operating in the industries in which we operate, our activities may have an adverse impact on the environment due to emission of coal and coke dust and other pollutants and hazardous materials into the atmosphere, discharge of polluted waste water into the environment and generation of waste and hazardous materials that need to be disposed of or reused without serious damage to the environment.
Our environmental policy has the following key components:
implement formal environmental management systems that are aligned with applicable international standards;
identify, assess, monitor, control and manage significant environmental risks;
establish clear and meaningful environmental objectives and targets aimed at continuous improvement;
implement, maintain and regularly test emergency response plans;
identify potential environmental emergencies; and
comply with all applicable laws and regulations and when practicable, strive to exceed those requirements.
We have been developing and implementing environmental programs at all of our mining, steel and power subsidiaries. Such programs include measures to enforce our adherence to the requirements and limits imposed on air and water pollution, as well as disposal of industrial waste, introduction of environmentally friendly industrial technologies, the construction of purification and filtering facilities, the repair and reconstruction of industrial water supply systems, the installation of metering systems, reforestation and the recycling of water and industrial waste.
Regulatory Matters
Licensing of Operations in Russia
We are required to obtain numerous licenses, authorizations and permits from the Russian governmental authorities for our operations. Some of our companies need to obtain licenses, authorizations and permits to carry out their activities, including, among other things, for:
the use of subsoil, which is described in more detail in “— Subsoil Licensing in Russia” below;
the use of water resources;
the emission and discharge of pollutants into the environment;
the handling of waste of aI-IV hazard class;
the handling of industrial explosives;
operation of explosive and fire and chemically hazardous production facilities of aI-III hazard class;
fire control and security;
medical operations;
mine surveying;
loading and unloading operations relating to dangerous goods;operations;
transportation activities;
collection, processing, storage processing and sale of ferrous andnon-ferrous scrap;
works with information classified as state secret;
manufacturing of equipment for nuclear facility; and
operation of radiation source.
The Federal Law “On Licensing of Certain Types of Activities,” dated May 4, 2011, as amended (the “Licensing Law”), as well as other laws and regulations, sets forth the activities subject to licensing and establish procedures for issuing licenses.
Under the Licensing Law, generally, licenses may be issued for an indefinite term. LicensesSome licenses, in particular, licenses for the use of natural resources may be issued for various periods. Upon the expiration of a license, it may be extended upon application by the licensee, provided the licensee is not in violation of the terms and conditions of the license and the relevant regulations.
In accordance with amendments to the Federal Law “On the Electric Power Industry”No. 35-FZ dated March 26, 2003, as amended (the “Electric Power Industry Law”) and other legislative acts which entered into force on December 25, 2018, power sales activity related to the sale of electricity in the retail electricity market is subject to compulsory licensing since July 1, 2020. The Electric Power Industry Law does not provide for licensing procedures, instead the Russian government shall enact an order setting out procedures for obtainment of an electric power sales activity license, which is outstanding as of the date hereof. We aim to file for a license once the procedures are enacted.
Regulatory authorities maintain considerable discretion in the timing of issuing licenses and permits. The requirements imposed by these authorities may be costly, time-consuming and may result in delays in the commencement or continuation of exploration or extraction operations. Further, private individuals and the public at large possess rights to comment on and otherwise participate in the licensing process, including through challenges in the courts. For example, individuals and public organizations may make claims or applications to Rosnedra and Rosprirodnadzor regarding subsoil abuse, damage to the subsoil and general environmental issues. Rosnedra isand Rosprirodnadzor are required by law to review such claims and applications and to respond to those who file them. The agency can initiate further investigation in the course of reviewing claims and applications, and such investigations can lead to suspension of the subsoil license if the legal grounds for such suspension are identified in the course of the investigation. In addition, citizens may make claims in court against state authorities for failing to enforce environmental requirements (for example, if a breach by the licensee of its license terms caused damage to an individual’s health, legal interests or rights), and pursuant to such a claim the court may order state authorities to suspend the subsoil license. Accordingly, the licenses we need may not be issued, or if issued, may not be issued
in a timely fashion, or may impose requirements which restrict our ability to conduct our operations or to do so profitably.
As part of their obligations under licensing regulations and the terms of our licenses and permits, some of our companies must comply with numerous industrial standards, employ qualified personnel, maintain certain
equipment and a system of quality controls, monitor operations, maintain and make appropriate filings and, upon request, submit specified information to the licensing authorities that control and inspect their activities.
Subsoil Licensing in Russia
In Russia, mining minerals requires a subsoil license from Rosnedra with respect to an identified mineral deposit. In addition to a subsoil license, a subsoil user needs to obtain rights (through ownership, lease or other right) to use a land plot covering the surface of the area where such licensed mineral deposit is located. In addition, as discussed above, operating permits are required with respect to specific mining activities.
The primary law regulating subsoil licensing is the Federal Law “On Subsoil,” dated February 21, 1992, as amended (the “Subsoil Law”), which sets out the regime for granting licenses for the exploration and extraction of mineral resources. The Procedure for Subsoil Use Licensing, adopted by Resolution of the Supreme Soviet of the Russian Federation on July 15, 1992, as amended (the “Licensing Regulation”), also regulates the licensing of exploration and extraction of mineral resources. According to both the Subsoil Law and the Licensing Regulation, subsurface mineral resources are generally subject to the jurisdiction of the federal authorities.
Among different licenses required for mining minerals in Russia, the two major types of licenses are: (1) an exploration license, which is a non-exclusive license granting the right of geological exploration and assessment within the license area, and (2) an extraction license, which grants the licensee an exclusive right to produce minerals from the license area. In practice, many of the licenses are issued as combined licenses, which grant the right to explore and produce minerals from the license area. A subsoil license defines the license area in terms of latitude, longitude and depth. The subsoil user has the right to develop and use, including sell, mineral resources extracted from the license area for a specified period. The Russian Federation, however, retains ultimate state ownership of all subsoil mineral resources.
There are twothree major types of payments with respect to the extraction of minerals: (1) alump-sum payment for granting the right to use subsoil; (2) periodic payments for the use of subsoil under the Subsoil Law; and (2)(3) the mineral extraction tax under the Russian Tax Code. Failure to make these payments could result in refusal to grant the right to use subsoil or the suspension or termination of the subsoil license. The SubsoilLaw-mandated payments are not material to our mining segment’s results of operations. For coal, the basic rate of the mineral extraction tax ranges from RUB 11 to RUB 57 rubles per tonne depending on the type of coal. At the same time, the actual rate of tax in respect of extracted coal is subject to indexation on a quarterly basis taking into account deflator coefficients adopted by the Ministry of Economic Development of the Russian Federation.
For iron ore, and for nickel, the mineral extraction tax is 4.8% and 8%, respectively.. In 2015,2018, mineral extraction taxes amounted to 1,026RUB 1,227 million, rubles, which are included in the consolidated statement of incomeprofit (loss) and other comprehensive income as extraction related overheads.
Currently, extraction licenses and combined licenses are awarded, generally, by tender or auction conducted by special auction commissions of Rosnedra. While such tender or auction may involve a representative of the relevant region, the separate consent of regional authorities is generally not required in order to issue subsoil licenses. The winning bidder in a tender is selected on the basis of the submission of the most technically competent, financially attractive and environmentally sound proposal that meets published tender terms and conditions. At an auction, the success of a bid is determined by the attractiveness of the financial proposal. In limited circumstances, extraction licenses may also be issued without holding an auction or tender, for instance to holders of exploration licenses who discover mineral resource deposits through exploration work conducted at their own expense. Regional authorities may issue extraction licenses for “common” mineral resources, such as clay, sand or limestone.
Pursuant to the Subsoil Law, a subsoil plot is provided to a subsoil user as a “mining allotment,” i.e. a geometric block of subsoil. Preliminary mining allotment boundaries are determined at the time the license is issued. Following the development and approval of a technical plan in accordance with established procedure, documents defining the adjusted mining allotment boundaries are incorporated as an integral part into the license. Pursuant to Resolution No. 118 of the Government of the Russian Federation dated March 3, 2010, as amended, a special commission comprised of representatives from the Ministry of Natural Resources and Ecology, Rosnedra, Rosprirodnadzor, Rostekhnadzor and relevant local authorities approve development plans and other project documentation relating to the use of subsoil plots.
The term of the license is set forth in the license. Under the Subsoil Law, exploration licenses are generally issued for a term of up to five years and up to 10 years for geological surveys of internal sea waters, territorial sea waters or the continental shelf of the Russian Federation. In accordance with amendments to the Subsoil Law that entered into force in January 2014, exploration licenses with respect to subsoil plots partially or fully located in certain constituent entities of the Russian Federation can be issued for a term of up to seven years. Extraction licenses are issued for the term of the expected operational life of the field based on a feasibility study that provides for rational use and protection of the subsoil. In the event that a prior license with respect to a particular field is terminated early (for example, when a license is withdrawn due tonon-usage of the licensed subsoil), an extraction license may have a one year term until a new licensee is determined, but is generally granted to another user for the term of the expected operational life of the field based on a feasibility study. Licensees are also allowed to apply for extensions of such licenses for the purposes of completing the exploration and development of the field, or remediation activities in the absence of violations of the terms and conditions of the license. The term of a subsoil license runs from the date the license is registered with Rosnedra.
Issuance of licenses
Subsoil licenses are issued by Rosnedra. Most of the currently existing extraction licenses owned by companies derive from:(1) pre-existing rights granted during the Soviet era and up to the enactment of the Subsoil Law to state-owned enterprises that were subsequently reorganized in the course of post-Soviet privatizations; or (2) tender or auction procedures held in the post-Soviet period. The Civil Code, the Subsoil Law and the Licensing Regulation contain the major requirements relating to tenders and auctions. The Subsoil Law allows extraction licenses to be issued without a tender or auction procedure only in limited circumstances, such as instances when a mineral deposit is discovered by the holder of an exploration license at its own expense during the exploration phase.
Extension of licenses
The Subsoil Law permits a subsoil licensee to request an extension of an extraction license for the term of the expected operational life of the subsoil plot in order to complete the extraction from the subsoil plot covered
by the license or the procedures necessary to vacate the land once the use of the subsoil is complete, provided the user is not in violation of the terms and conditions of the license and the relevant regulations.
In order to extend the period of a subsoil license, a company must file an application with territorial authorities of Rosnedra to amend the license. In addition, as we have seen in practice, a subsoil licensee may be required to prepare and provide to the authority amended technical documentation and development plan of the deposit under the license justifying the requested extension. The costs associated with the license extension are generally not substantial and mainly relate to preparing amendments to the technical documentation and development plan of the subsoil plot. Application to extend the period of subsoil license is typically made six months before its expiration.
To the best of our knowledge, derived from publicly available information, the relevant governmental authorities when determining whether to approve an amendment (including an extension) of a license consider the following: (1) the grounds for the amendments, with specific information as to how the amendments may
impact payments by the licensee to the federal and local budgets; (2) compliance of the licensee with the conditions of the license; and (3) the technical expertise and financial capabilities that would be required to implement the conditions of the amended license. We have successfully extended certain of our subsoil licenses which were due to expire for the entire term of the expected operational life of the subsoil plots. The terms of the licenses were extended in accordance with the amendments we made to the development plans of the subsoil plots. Furthermore, as evidenced by a number of court cases during the past several years, license extensions are being rejected predominantly on the grounds of subsoil users being in violation of the material terms of the licenses. Though current regulation does not specify what license terms are material, current practice suggest that regulatory authorities tend to treat as material terms of the license the terms related to license payments, production levels and operational milestones.
The factors that may, in practice, affect a company’s ability to obtain the approval of license amendments (including extensions) include: (1) its compliance with the license terms and conditions; (2) its management’s experience and expertise relating to subsoil issues; and (3) the relationship of its management with federal and/or local governmental authorities, as well as local governments. For a description of additional factors that may affect Russian companies’ ability to extend their licenses, see “Item 3. Key Information — Risk Factors — Risks Relating to Our Business and Industry — Our business could be adversely affected if we fail to obtain or extend necessary subsoil licenses and permits or fail to comply with the terms of our subsoil licenses and permits.” See also “Item 3. Key Information — Risk Factors — Risks Relating to the Russian Federation — Legal risks and uncertainties — Deficiencies in the legal framework relating to subsoil licensing subject our licenses to the risk of governmental challenges and, if our licenses are suspended or terminated, we may be unable to realize our reserves, which could materially adversely affect our business, financial condition, results of operations and prospects” and “Item 3. Key Information — Risk Factors — Risks Relating to the Russian Federation — Legal risks and uncertainties — Weaknesses relating to the Russian legal system and legislation create an uncertain investment climate.”
Transfer of licenses
Licenses may be transferred only under certain limited circumstances that are set forth in the Subsoil Law, including the reorganization or merger of the licensee or in the event that an initial licensee transfers its license to a newly established legal entity in which it has at least a 50% ownership interest, provided that the transferee possesses the equipment and authorizations necessary to conduct the exploration or extraction activity covered by the transferred license.
Maintenance and termination of licenses
A license granted under the Subsoil Law is accompanied by a licensing agreement. The law provides that there will be two parties to any subsoil licensing agreement: the relevant state authorities and the licensee. The licensing agreement sets out the terms and conditions for the use of the subsoil.
Under a licensing agreement, the licensee makes certain environmental, safety and extraction commitments. For example, the licensee makes an extraction commitment to bring the field into extraction by a certain date and to extract an agreed-upon volume of natural resources each year. The licensing agreement may also contain commitments with respect to the social and economic development of the region. When the license expires, the licensee must return the land to a condition which is adequate for future use. Although most of the conditions set out in a license are based on mandatory rules contained in Russian law, certain provisions in a licensing agreement are left to the discretion of the licensing authorities and are often negotiated between the parties. However, commitments relating to safety and the environment are generally not negotiated.
The fulfillment of a license’s conditions is a major factor in the good standing of the license. If the subsoil licensee fails to fulfill the license’s conditions, upon notice, the license may be terminated or the subsoil user’s
rights may be restricted by the licensing authorities. However, if a subsoil licensee cannot meet certain deadlines or achieve certain volumes of exploration work or extraction output as set forth in a license, it may apply to amend the relevant license conditions, though such amendments may be denied.
The Subsoil Law and other Russian legislation contain extensive provisions for license termination. A licensee can be fined or the license can be suspended or terminated for repeated breaches of the law, upon the occurrence of a direct threat to the lives or health of people working or residing in the local area, or upon the occurrence of certain emergency situations. A license may also be terminated for violations of “material” license terms. Although the Subsoil Law does not specify which terms are material, failure to pay subsoil taxes and failure to commence operations in a timely manner have been common grounds for limitation or termination of licenses. Consistent underproduction and failure to meet obligations to finance a project would also be likely to constitute violations of material license terms. In addition, certain licenses provide that the violation by a subsoil licensee of any of its obligations may constitute grounds for terminating the license.
Rosprirodnadzor routinely conducts scheduled and unscheduled inspections for compliance by subsoil users with the terms of their licenses and reports violations to Rosnedra. Rosnedra examines Rosprirodnadzor’s reports and, if it finds that these violations constitute sufficient grounds for terminating the license, the Commission for Termination of Subsoil Licenses considers the nature of these violations and recommends that Rosnedra either (i) revoke the license; (ii) notify the subsoil user about the identified violations and potential termination of the license if the subsoil user fails to rectify the identified violations within a prescribed period of time; or (iii) consider that the actions described in (i) and (ii) above are unreasonable and accept the information provided by the subsoil user.
If the licensee does not agree with a decision of the licensing authorities, including a decision relating to the termination of a license or the refusal to change an existing license, the licensee may appeal the decision through administrative or judicial proceedings. In certain cases prior to termination, the licensee has the right to attempt to cure the violation within three months of its receipt of notice of the violation. If the issue has been resolved within such a three monththree-month period, no termination or other action may be taken.
Land Use Rights in Russia
Russian legislation prohibits the carrying out of any commercial activity, including mineral extraction, on a land plot without appropriate surface land use rights. Land use rights are needed and obtained for only the portions of the license area actually being used, including the plot being mined, access areas and areas where other mining-related activity is occurring.
Under the Land Code, companies generally have ownership or lease rights with regard to land in the Russian Federation.
A majority of land plots in the Russian Federation is owned by federal, regional or municipal authorities who, through bidding (carried out in the form of an auction) or without bidding, can sell, lease or grant other use rights to the land to third parties.
Companies may also have a right of perpetual use of land that was obtained prior to the enactment of the Land Code; however, the Federal Law “On Introduction of the Land Code,” dated October 25, 2001, as amended, with certain exceptions (such as for the land plots occupied with transportation, communications and utilities lines, for which companies may re-register the right of perpetual use until January 1, 2016), required companies using land pursuant to rights of perpetual use by July 1, 2012 either to purchase the land from, or to enter into a lease agreement relating to the land with, the relevant federal, regional or municipal authority acting as owner of the land. Failure to transfer the title by January 1, 2013 triggers administrative liability. In case of the lease, the companies can still purchase such land after July 1, 2012 provided that they have registered the lease relating to the land.
Our mining subsidiaries generally have entered into long-term lease agreements for their surface land within the specified license mining area. Under Russian law, a lessee generally has a right to enter into a new land lease agreement with a lessor upon the expiration of a land lease. In order to renew a land lease agreement, the lessee must apply to the lessor (usually state or municipal authorities) for a renewal prior to the expiration of the agreement. Any land lease agreement for a term of one year or more must be registered with the relevant state authorities.
Environmental Legislation in Russia
We are subject to laws, regulations and other legal requirements relating to the protection of the environment, including those governing the emission and discharge of substances into the air and water, the formation, distribution and disposal of hazardous substances and waste, the cleanup of contaminated sites, flora and fauna protection and wildlife protection. Issues of environmental protection in Russia are regulated primarily by the Federal Law “On Environmental Protection,”Protection” dated January 10, 2002, as amended (the “Environmental Protection Law”), as well as by a number of other federal, regional and local legal acts.
Since 2008, the Ministry of Natural Resources and Ecology has been working on significant amendments to the Environmental Protection Law and other regulations. These amendments were codified in the Federal Law No. 219-FZ, dated July 21, 2014, the Federal Law No. 458-FZ, dated December 29, 2014 and the Federal Law No. 404-FZ, dated December 29, 2015, which have already come into force or are gradually coming into force. The purpose of the amendments is to strengthen liability for companies’non-compliance with environmental laws and regulations, as well as to improve the distribution of functions amongbetween state environmental agencies at both the federal and regional levels.levels, to increase the role of public control over compliance with environmental standards, as well as to stimulate the use of the best available environmental technologies in production processes.
The amendments, in particular, divide objects that have a negative impact on the environment into four categories depending on the degree of impact on the environment. The environmental protection requirements that apply differ depending on the relevant impact category and include environmental impact charges, permission documents and control procedures. The first category includes objects that have a significant negative impact on the environment (to which, therefore, the strictest environmental protection requirements apply) and the fourth category includes objects that have minimal environment impact. Among other things, the adopted amendments contemplate that starting from 2020 charges for environmental impact exceeding regulatory thresholds will increase. Furthermore, the liability for certain environmental violations has been enhanced recently, and the fines for certain environmental offenses, for example, in connection with violations of water use requirements, increased by 15 times the current amounts. See “Item 3. Key Information — Risk Factors — Risks Relating to Our Business and Industry — More stringent environmental laws and regulations or more stringent enforcement or findings that we have violated environmental laws and regulations could result in higher compliance costs and significant fines and penalties, cleanup costs and compensatory damages, or require significant capital investment, or even result in the suspension of our operations, which could have a material adverse effect on our business, financial condition, results of operations and prospects.”
Pay-to-pollute
The Environmental Protection Law and other Russian environmental protection legislation establish a “pay-to-pollute”“pay-to-pollute” regime administered by federal and local authorities. “Pay-to-pollute”“Pay-to-pollute” (or payments for environmental pollution) is a form of mandatory reimbursement to the Russian government for damage caused to the environment.
The Russian government has established standards relating to the permissible impact on the environment and, in particular, standards of permissible emissions and discharges and waste disposal limits. In case ofnon-compliance with the statutory standards a company may obtain temporary approved limits on emissions and discharges on the basis of permits valid only during the period of implementation of environmental measures. The establishment of limits is allowed only upon the availability of a plan for emissions and discharges reduction
agreed with Rosprirodnadzor. The emissions and discharges reduction plan is required to be implemented within a specific period with an annual submission of a report on its implementation to Rosprirodnadzor.
Rosprirodnadzor may revoke the limits, if the company fails to implement measures to reduce emissions and discharges in a timely manner. If, by the end of that period, the company’s emissions and discharges are still in excess of the statutory standards, a new plan must be submitted to Rosprirodnadzor for review and approval in order to receive new limits.
Fees for the emission/discharge per tonne of each contaminant into air and water and fees for waste disposal are established by governmental authorities. These fees are determined on a sliding scale for both the statutory standards and individually approved limits on emissions and discharges, as well as for pollution in excess of these limits: the lowest fees are imposed for pollution within the statutory standards, intermediate fees are imposed for pollution within the individually approved temporary limits (within limit fees; exceed the fees within the statutory standards by 5 times) and the highest fees are imposed for pollution exceeding such limits (above-limit fees; exceed the fees within the individually approved temporary limits by 5 times). Thus, above-limit fees exceed the fees within the statutory standards by 25 times. In accordance with recent amendments to the Environmental Protection Law, starting from 2020, environmental impact charges exceeding regulatory thresholds in certain cases will be increased by up to 100 times current fees as statutorily prescribed. Payment of above-limit fees does not relieve the company from the responsibility as provided by Russian law, as well as the development and implementation of environmental measures aimed at reducing the negative impact on the environment. In 2015,2018, we incurred above-limit fees and penalties in Russia in the amount of approximately 94.9 million rubles.RUB 127.5 million.
Environmental expert review
According to the Federal Law “On Environmental Expert Review” dated November 23, 1995, as amended (the “EER Law”), environmental expert review is a process of verifying the compliance of business or operationalproject documentation with environmental standards and technical regulations for the purpose of preventing a negative environmental impact of such business or operations.impact. The EER Law provides for the main principles for conducting environmental expert review and for the type of documentation which is subject to such review.
In relation to our operating companies, all documentation underlying the issuance of some of our licenses is subject to environmental expert review.
Review of documentation related to capital construction is regulated under the Urban Development Code.Code, dated December 29, 2004, as amended (the “Urban Development Code”). The Urban Development Code provides for governmental inspection to verify the compliance of project documentation with relevant technical regulations, including sanitary-epidemiological and environmental regulations, requirements for the protection of objects of cultural heritage, as well as fire, industrial, nuclear and other kinds of safety requirements, and compliance with the results of engineering surveys with relevant technical regulations.
Environmental enforcement authorities
Currently state environmental regulation is administered by several federal services and agencies and their regional subdivisions, in particular, Rosprirodnadzor, the Federal Service for Hydrometrology and Environmental Monitoring, Rosnedra, the Federal Agency for Forestry, the Federal Agency for Water Resources and some others. Included in these agencies’ sphere of responsibility are environmental preservation and control, enforcement and observance of environmental legislation, drafting and approving regulations and filing court claims to recover environmental damages. The statute of limitations for such claims is 20 years.
The Russian federal government and the Ministry of Natural Resources and Ecology are responsible for coordinating the work of the federal services and agencies engaged in state environmental regulation.
The structure of environmental enforcement authorities described above was established in 2004. This structure was subjected to certain changes in 2008 and 2010. In particular, the Ministry of Natural Resources was
transformed into the Ministry of Natural Resources and Ecology. In late 2010, this structure was further changed and the powers previously held by Rostekhnadzor in the field of environmental protection regarding the limitation of negative industrial impact, waste treatment and state environmental impact assessments were transferred to Rosprirodnadzor which is coordinated by the Ministry of Natural Resources and Ecology.
Environmental liability
If the operations of a company violate environmental requirements or cause harm to the environment or any individual or legal entity, a court action may be brought to limit or ban these operations and require the company to remedy the effects of the violation. Any company or employees that fail to comply with environmental regulations may be subject to administrative and/or civil liability, and individuals may be held criminally liable. Courts may also impose cleanup obligations on violators in lieu of or in addition to imposing fines or other penalties to compensate for damages.
Subsoil licenses generally require certain environmental commitments. Although these commitments can be substantial, the penalties for failing to comply and the reclamation requirements are generally low; however, failure to comply with reclamationenvironmental requirements can result in a suspension of mining operations.
Reclamation
We conduct our reclamation activities for land damaged by production in accordance with the Basic Regulation on Land Reclamation, Removal, Preservation, and Rational Use of the Fertile Soil Layer, approved by Order No. 525/67 of December 22, 1995, of the Ministry of Natural Resources.current environmental legislation. In general, our reclamation activities involve both a technical stage and a biological stage. In the technical stage, we backfill the pits, grade and terrace mound slopes, level the surface of the mounds, and add clay rock on top for greater adaptability of young plants. In the biological stage, we plant conifers (pine, larch, cedar) on horizontal and gently sloping surfaces and shrubs and bushes to reinforce inclines. Russian environmental regulations do not require mines to achieve the approximate original contour of the property as is required, for example, in the United States. Generally, reclamation should ensure the restoration of disturbed lands for their further use in agricultural, forestry, water management, recreational and other purposes. In 2015,2018, we incurred reclamation costs in Russia of approximately 403 million rubles.RUB 77 million.
Kyoto Protocol and the United Nations Framework Convention on Climate Change
In December 1997, in Kyoto, Japan, the signatories to the United Nations Convention on Climate Change established individual, legally binding targets to limit or reduce greenhouse gas emissions by developed nations. This international agreement, known as the Kyoto Protocol, came into force on February 16, 2005. At the Doha 2012 United Nations Climate Change Conference Russia, Japan and some other countries announced suspension of their participation in the Kyoto Protocol. Therefore, we do not currently anticipate that further implementation
In December 2015 at the Paris climate conference, 196 countries adopted the United Nations Framework Convention on Climate Change which is due to enter into force in 2020. The agreement sets out a global action plan to avoid climate change. The Russian Federation shall develop a long-term plan to reduce greenhouse gas emissions and shall establish a strategy on adaptation to climate change. In 2015-2017, the Ministry of Natural Resources and Ecology of the Kyoto Protocol will have any material impactRussian Federation has approved a number of methodology guidelines for the quantification of the amount of greenhouse gas emissions by organizations conducting business and other activities in Russia. In 2018, the Ministry of Economic Development of the Russian Federation proposed a draft law on our business.state regulation of greenhouse gas emissions. This draft law, if enacted, would establish target limits for greenhouse gas emissions, general rules and guidelines for emitters and introduce permits for greenhouse gas emissions. The draft law is at an early stage of development, and it is hard to predict if or when it would be adopted into a law.
Technical Regulations
We are subject to various technical regulations and standards which apply to industrial manufacturing businesses. The Federal LawNo. 184-FZ “On Technical Regulation” dated December 27, 2002, as amended (the
“Technical Regulation Law”) has introduced a new regime for the development, enactment, application and enforcement of mandatory rules applicable to production, manufacturing, storage, transportation, sales and certain other operations and processes, as well as new regulations relating to the quality of products and processes, including technical regulations, standards and certification. It was expected that these rules or technical regulations would replace the previously adopted state standards (theso-called GOSTs). Currently, national and interstate standards which would standardize technical regulations are being developed. However, mostconsiderable part of technical regulations have not been implemented yet, and, in the absence of such technical regulations, the existing federal laws and regulations, including GOSTs, that prescribe rules for different products and processes
remain in force to the extent that they protect health, property, the environment and/or consumers. In addition, the federal standardization authority has declared GOSTs and interstate standards adopted before July 1, 2003 to be the applicable national standards.
In certain circumstances, companies are required to obtain certification of compliance with applicable technical regulations, standards and terms of contracts. A number of our products must be certified. Where certification is not mandatory, a company may elect voluntary certification by applying for a compliance certificate from the relevant certification authorities. Following the issuance of such certificate, the applicant has the right to use the relevant compliance mark on its products.
Health and Safety Regulations in Russia
Due to the nature of our business, much of our activity is conducted at industrial sites bywith a large numbersnumber of workers, and industrial safety and workplace safety issues are of significant importance to the operation of these sites.
The principal law regulating industrial safety is the Federal Law “On Industrial Safety of Hazardous Production Facilities,” dated July 21, 1997, as amended (the “Safety Law”). The Safety Law applies, in particular, to production facilities and sites where certain activities are conducted, including sites where liftingload-lifting machines are used, where alloysmelts of ferrous and nonferrous metals are produced, used, stored and transported, where hazardous substances are stored and used (including allowed concentrations) and where certain types of mining is done. There are also regulations that address safety rules for coal mines, the production and processing of ore, the blast-furnace industry, steel smelting, alloy production and nickel production. Additional safety rules also apply to certain industries, including fuel and energy complex, metallurgical and coke chemical enterprisescoke-chemical industries and the foundry industry.
The Safety Law provides for hazardous production facilities of four classes from class IV to class I, with class IV being less hazardous and class I being the most hazardous. The safety and compliance requirements set up by the Safety Law apply to each facility depending on their class of hazard. Each existing hazardous production facility was to bere-registered with the state register by January 1, 2014 and be assigned with a hazard class. Were-registered hazardous production facilities at our operations in accordance with the applicable law.
Any construction, reconstruction, liquidation or other activities in relation to regulated industrial sites is subject to a state industrial safety review. Any deviation from project documentation in the process of construction, reconstruction or liquidation of industrial sites is prohibited unless reviewed by a licensed expert organization and approved by Rostekhnadzor.
In addition, the Safety Law establishes an alternative form of industrial safety regulation that is based on risk assessment rather than prescriptions of obligatory requirements and standards imposed by Rostekhnadzor. A company that operates a hazardous production facility may develop a safety case, a document which describes that the facility has been designed and operated in a way to limit any risks of major accident. The Safety Law considers that in drafting the safety case, the relevant companies will be able to refer to specific safety arrangements and safety analyses as confirmation of having certain safety measures in place. To make these arrangements fully operational further changes will need to be introduced into relevant laws and regulations.
Companies that operate such production facilities and sites have a wide range of obligations under the Safety Law and the Labor Code of Russia of December 30, 2001, as amended (the “Labor Code”). In particular, they must limit access to such sites to qualified specialists, maintain industrial safety controls and carry insurance for third-party liability for injuries caused in the course of operating industrial sites. Russian regulations require these companies to enter into contracts with professional emergency response units or create their own emergency response services in certain cases, conduct personnel trainings and drills, create systems to cope with and notify the authorities of accidents and maintain these systems in good working order. Effective from January 1, 2014, companies that operate industrial sites of hazard classes I and II must implement industrial
safety management systems to prevent accidents and incidents at hazardous production facilities and develop certain emergency response plans.
Companies that operate production sites of hazard classes I and II and handle hazardous substances in quantities set by the lawSafety Law must also prepare declarations of industrial safety which summarize the risks associated with operating a particular production site and measures the company has taken and will take to mitigate such risks and use the site in accordance with applicable industrial safety requirements. Such declarations must be adopted by the chief executive officer of the company, who is personally responsible for the completeness and accuracy of the data contained therein. The industrial safety declaration as well as a state industrial safety review are required for the issuance of a license permitting the operation of a hazardous production facility.
Rostekhnadzor has broad authority in the field of control and management of industrial safety. In case of an accident, a special commission led by a representative of Rostekhnadzor conducts a technical investigation of the cause. The company operating the hazardous production facility where the accident took place bears all costs of an investigation. Rostekhnadzor officials have the right to access production sites and may inspect documents to ensure a company’s compliance with safety rules. Rostekhnadzor may suspend for up to 90 days or initiate a court decision to terminate operations of companies and/or impose administrative liability on officers of such companies. Moreover, new rules on public control came into force in 2017. This type of control is performed on a voluntary basis by public inspectors who comply with certain qualification requirements.
Any company or individual violating industrial safety rules may incur administrative and/or civil liability, and individuals may also incur criminal liability. A company that violates safety rules in a way that negatively impacts the health of an individual may also be obligated to compensate the individual for lost earnings, as well as health-related damages.
Russian Antimonopoly Regulation
The Federal Law “On Protection of Competition,” dated July 26, 2006, as amended (the “Competition Law”), provides for a mandatorypre-approval by the FAS of the following actions:
other than in respect to financial organizations, such as banks, an acquisition by a person (or its group) of more than 25% of the voting shares of a Russian joint-stock company (or one-third of the interests in a Russian limited liability company), except upon incorporation, and the subsequent increase of these stakes to more than 50% of the total number of the voting shares and more than 75% of the voting shares (one-half and two-thirds of the interests in a Russian limited liability company), or acquisition by a person (or its group) of ownership or rights of use with respect to the core production assets (other than land and non-industrial buildings, constructions, premises and parts thereof or constructions in progress) and/or intangible assets of an entity which are located in Russia if the balance sheet value of such assets exceeds 20% of the total balance sheet value of the core production and intangible assets of such entity, or obtaining rights to determine the conditions of business activity of a Russian entity or to exercise the powers of its executive body by a person (or its group), or an acquisition by a person (or its group) of more than 50% of the voting shares (interests) of a foreign entity, which has supplied goods, works and/or services to Russia in an amount exceeding RUB 1 billion rubles in the preceding year, or other rights to determine the conditions of business activity of such entity or to exercise the powers of its executive body, if, in any of the above cases, the aggregate asset value of an acquirer and its group together with a target and its group (excluding the asset value of the seller and its group, if as a result of the acquisition the seller and its group cease to determine the conditions of business activity of the target) exceeds 7 billion rubles and at the same time the total asset value of the target and its group exceeds 250 million rubles, or the total annual revenues of such acquirer and its group, and the target and its group for the preceding calendar year exceed 10 billion rubles and at the same time the total asset value of the target and its group exceeds 250 million rubles;
rights to determine the conditions of business activity of such entity or to exercise the powers of its executive body, if, in any of the above cases, the aggregate asset value of an acquirer and its group together with a target and its group (excluding the asset value of the seller and its group, if as a result of the acquisition the seller and its group cease to determine the conditions of business activity of the target) exceeds RUB 7 billion and at the same time the total asset value of the target and its group exceeds RUB 400 million, or the total annual revenues of such acquirer and its group, and the target and its group for the preceding calendar year exceed RUB 10 billion and at the same time the total asset value of the target and its group exceeds RUB 400 million; |
mergers and consolidations of entities, other than financial organizations, if their aggregate asset value (the aggregate asset value of the groups of persons to which they belong) exceeds RUB 7 billion, rubles, or total annual revenues of such entities (or groups of persons to which they belong) for the preceding calendar year exceed RUB 10 billion rubles;billion;
entering into joint venture agreements between competitors, if their aggregate asset value (the aggregate asset value of the groups of persons to which they belong) exceeds RUB 7 billion, rubles, or total annual revenues of such entities (or groups of persons to which they belong) for the preceding calendar year exceed RUB 10 billion rubles.billion.
The above requirements for a mandatorypre-approval by the FAS will not apply if the transactions are performed by members of the same group, if the information about such a group of persons was disclosed to the antimonopoly authority and there were no changes within one month prior to the date of the transaction within that group of persons. In such cases, the FAS must be notified of the transactions subsequently in accordance with Russian anti-monopoly legislation. Furthermore, the requirement for a mandatory approval of transactionstransactions/actions described in the first bullet point above will not apply if the transactionstransactions/actions are performed by members of the same group where a company and individual or an entity, if such an individual or an entity holds (either due to its participation in this company or based on the authorities received from other persons) more than 50% of the total amount of votes in the equity (share) capital of this company.
A transaction entered into in violation of the above requirements may be invalidated by a court decision pursuant to a claim brought by the FAS if the FAS proves to the court that the transaction leads or could lead to the limitation of competition in the relevant Russian market. The FAS may also issue binding orders to companies that have violated the applicable antimonopoly requirements and bring court claims seeking liquidation,split-up orspin-off of business entities if a violation of antimonopoly laws was committed by such business entities. In addition, a company may be subject to the administrative fine of an amount from 150RUB 150,000 to 250 thousand rublesRUB 250,000 for the failure to file a FAS post-transactional notification and from 300RUB 300,000 to 500 thousand rublesRUB 500,000 for the failure to file an application for FASpre-approval of the transaction.
Under the Competition Law, a company with a dominant position in the relevant market is prohibited from misusing its dominant position. Specifically, such company is prohibited from:
establishing and maintaining monopolistically high or monopolistically low prices of goods;
withdrawing goods from circulation, if the result of such withdrawal is an increase in the price of goods;
imposing contractual terms upon a counterparty which are unprofitable for the counterparty or not related to with the subject matter of agreement (i.e., terms that are economically or technologically unjustified);
reducing or terminating, without economical or technological justification, production of goods if there is a demand for the goods or orders for their delivery have been placed and it is possible to produce them profitably;
refusing or evading, without economical or technological justification, to enter into a contract with customers in cases when the production or delivery of the relevant goods is possible;
establishing unjustifiably high or unjustifiably low price of a financial service by a financial organization;
creating discriminatory conditions;
creating barriers to entry into the market for the relevant goods or forcing other companies to leave the market;
violating pricing procedures established by law; and
manipulating prices in the wholesale and/or retail electricity (capacity) markets.
In 2016, as a result of amendments to the Competition Law, the register of entities with a market share exceeding 35% in the relevant market was abolished. Inclusion of a company in the register implied that it might be subject to additional FAS oversight, but at the same time provided the company with information on the occupied market share. The abolition of the register creates additional antimonopoly risks to the company.
In order to prevent the creation of discriminatory conditions, the Government of the Russian Federation can establish rules fornon-discriminatory access to goods that are produced and/or sold by a business entity holding a dominant position and not included into the register of natural monopolies whose share exceeds 70% in the relevant market. Such rules may be established in case a decision of the antimonopoly authority on the fact of abuse of a dominant position by such business entity entered into force.
In the event of a breach of any terms of business conduct required by the FAS, the FAS may initiate proceedings to investigate a breachviolations of antimonopoly laws.legislation. If a breachviolation of the antimonopoly lawslegislation is identified, the FAS may initiate administrative proceedings which may result in the imposition of a fine calculated on the basis of the annual revenues received by the company in the market where such breachviolation was committed. Such fines may include an administrative fine of an amount from 300 thousandRUB 300,000 to oneRUB 1 million rubles or, if such violation has led or may lead to the prevention, limitation or elimination of competition, an administrative fine of up to 15% of the proceeds of salesfrom sale of all goods, works and services in the market where such violation was committed, but not more than 2% of grossthe aggregate amount of proceeds offrom sale of all goods, works and services for the year preceding the yearin case of abuse of a dominant position and not more than 4% of the violation.aggregate amount of proceeds from sale of all goods, works and services in case of conclusion of an inadmissible agreement according to the law. Russian legislation also provides for criminal liability of company managersexecutives for violations of certain provisions of antimonopoly legislation. Furthermore, for systematic violations, a court may order, pursuant to a suit filed by the FAS, a compulsorysplit-up orspin-off of the violating company, and no affiliation can be preserved between the new entities established as result of such a mandatory reorganization.
The FAS has determined certain of our companies to have a dominant position in certain markets and these companies are subject to directive issued by the FAS which impose certain restrictions on their commercial activities. See “Risk Factors — Risks Relating to Our Business and Industry — Antimonopoly regulation could lead to sanctions with respect to the subsidiaries we have acquired or established or our prices, sales volumes and business practices.”
The Strategic Industries Law
The Strategic Industries Law, dated April 29, 2008, as amended, regulates foreign investments in companies with strategic importance for the national defense and security of the Russian Federation (“Strategic Companies”). The Strategic Industries Law provides an exhaustive list of strategic activities, engagement in which makes a company subject to restrictions. Among others, the list of such activities includes exploration and/or production of natural resources on subsoil plots of federal importance. Subsoil plots of federal importance include plots with deposits of uranium, diamonds, high-purity quartz ore, nickel, cobalt, niobium, lithium, beryllium, tantalum, yttrium-group rare-earth metals and platinoid metals. They also include deposits of oil, gas,
vein gold and copper which are above certain size limits specified in the Subsoil Law, as well as subsoil plots of the internal sea, territorial sea and continental shelf; and subsoil plots, the use of which requires the use of land plots included in the category of national defense and security land. The Strategic Subsoil List was first officially published inRossiyskaya Gazeta on March 5, 2009. Services rendered by business entities included into the register of natural monopolies pursuant to the Federal Law “On Natural Monopolies,” dated August 17, 1995, as amended, with certain exceptions, are also considered to constitute strategic activity. Furthermore, the activity of a business entity which is deemed to occupy a dominant position in the production and sale of metals, and alloys with special features whichor raw materials that are used in production of weapons and military equipment is also deemed to be a strategic activity.activity starting from July 2017. The production and distribution of industrial explosives is also deemed to be activity of strategic importance for national defense and homeland security.
Investments resulting in a foreign investor or a group of entities obtaining control over a Strategic Company, or acquiring fixed assets of a Strategic Company representing 25% or more of its balance sheet value, require prior approval from state authorities. The procedure for issuing such consent will involve a special governmental commission on the control of foreign investments (the “Governmental Commission”), which was established by a government resolution dated July 6, 2008 as the body responsible for granting such consents, and the FAS, which is authorized to process applications for consent from foreign investors and to issue such consents based on the decisions of the Governmental Commission. “Control” for these purposes means an ability to determine, directly or indirectly, decisions taken by a Strategic Company, whether through voting at the general shareholders’ (or limited liability company interest-holders’) meeting of the Strategic Company, participating in the board of directors or management bodies of the Strategic Company, or acting as the external management organization of the Strategic Company or otherwise. Thus, generally, “control” will be deemed to exist if any foreign investor or a group of entities acquires more than 50% of the shares (or limited liability interests) of a Strategic Company, or if by virtue of a contract or ownership of securities with voting rights it is able to appoint more than 50% of the members of the board of directors or of the management board of a Strategic Company. However, there are special provisions for Strategic Companies involved in the exploration or extraction of natural resources on plots of federal importance (“Subsoil Strategic Companies”): a foreign investor or group of entities is considered to have control over a Subsoil Strategic Company when such foreign investor or group of entities holds directly or indirectly 25% or more of the voting shares of the Subsoil Strategic Company or holds the right to appoint its sole executive officer and/or 25% or more of its management board or has the unconditional right to elect 25% or more of its board of directors. At that, pursuant to the amendments to the Strategic Industries Law, which were adopted on May 31, 2018 and entered into force on June 12, 2018, foreign investors which do not submit to the FAS information on their beneficiaries, beneficial owners and controlling parties, or organizations controlled by such foreign investors, are prohibited from obtaining control over a Strategic Company or acquiring fixed assets of a Strategic Company representing 25% or more of its balance sheet value.
Furthermore, in case a foreign investor or its group of entities which is a holder of securities of a Strategic Company, Subsoil Strategic Company or other entity which exercises control over these companies becomes a direct or indirect holder of voting shares in amount which is considered to give them direct or indirect control over these companies in accordance with the Strategic Industries Law due to a change in the allocation of votes resulting from the procedures provided by Russian law (e.g. as a result of abuy-back by the relevant company of its shares, conversion of preferred shares into common shares or holders of preferred shares becoming entitled to vote at a general shareholders’ meeting in cases provided by Russian law), such shareholders will have to apply for state approval of their control within three months of receiving such control. If the Governmental Commission refuses to grant the approval the shareholders shall sell the relevant part of their respective shares or participatory interest, and if they do not comply with this requirement, a Russian court can deprive such foreign investor or its group of entities of the voting rights in such Strategic Company upon a claim of the competent authority. In such cases, the shares of the foreign investor are not counted for the purposes of establishing a quorum and reaching the required voting threshold at the general shareholders’ meeting of the Strategic Company.
Any transfers of a stake, or certain rights, in a Strategic Company or in a Subsoil Strategic Company to foreign investors that are (i) companies controlled by the Russian Federation, the constituent entity of the Russian Federation or (ii) companies controlled by Russian nationals, provided that such Russian nationals are Russian tax residents and do not have other nationality, will not require prior approval from the state authorities.
If a foreign investor or its group of entities obtains control over a Strategic Company in violation of the Strategic Industries Law, the relevant transaction is void, and in certain cases a Russian court can deprive such foreign investor or group of entities of the voting rights in such Strategic Company upon a claim by the competent authority. In addition, resolutions of the general shareholders’ meetings or other management bodies of a Strategic Company adopted after a foreign investor or group of entities obtained control over the Strategic Company in violation of the Strategic Industries Law, as well as transactions entered into by the Strategic Company after obtaining such control, may be held invalid by a court upon a claim by the competent authority. See “Item 3. Key Information — Risk Factors — Risks Relating to the Russian Federation — Legal risks and uncertainties — Expansion of limitations on foreign investment in strategic sectors could affect our ability to attract and/or retain foreign investments.”
Employment and Labor Regulations in Russia
Labor matters in Russia are governed primarily by the Labor Code. In addition to this core legislation, relationships between employers and employees are regulated by federal laws, such as the Law “On Employment in the Russian Federation,” dated April 19, 1991, as amended, and the Law “On Compulsory Social Insurance Against Industrial Accidents and Occupational Diseases,” dated July 24, 1998, as amended; legal acts of executive authorities; and local government acts related to labor issues.
Employment contracts
As a general rule, employment contracts for an indefinite term are entered into with all employees. Russian labor legislation generally disfavors fixed-term employment contracts. However, an employment contract may be entered into for a fixed term of up to five years in certain cases where labor relations may not be established for an indefinite term due to the nature of the duties or the conditions of the performance of such duties, as well as in other cases expressly identified by the Labor Code or other federal law. In some cases it is also possible to enter into an employment contract for the employee to perform specified tasks. All terms and conditions of employment contracts are regulated by the Labor Code.
Under Russian law, employment may be terminated by mutual agreement between the employer and the employee at the end of the term of a fixed-term employment contract or on the grounds set out in the Labor Code as described below. An employee has the right to terminate his or her employment contract with a minimum of
two weeks’ notice (or one month’s notice for a company’s chief executive officer), unless the employment contract is terminated before the notice period ends by mutual agreement between employer and employee.
An employer may terminate an employment contract only on the basis of the specific grounds enumerated in the Labor Code, including,inter alia:alia:
liquidation of the enterprise or downsizing of staff;
failure of the employee to comply with the position’s requirements due to incompetence, as confirmed by the results of an attestation;
repeated failure of the employee to fulfill his or her work duties without valid reason, provided that the employee has been disciplined previously;
entering the workplace under the influence of alcohol, narcotics or other intoxicating substances;
a single gross breach by an employee of his or her work duties, including truancy;
disclosure of state secrets or other confidential information, which an employee has come to know during fulfillment of his professional duties;
embezzlement, willful damage or destruction of assets, and misappropriation as confirmed by a court decision or a decision by another competent governmental authority;
provision by the employee of false documents upon entry into the employment contract.
An employee dismissed from an enterprise due to downsizing or liquidation is entitled to receive compensation and salary payments for a certain period of time, depending on the circumstances.
The Labor Code also provides protections for specified categories of employees. For example, except in cases of liquidation of an enterprise and other events specified in the Labor Code, an employer cannot dismiss minors, pregnant women, mothers with a child under the age of three, single mothers with a child under the age of 14 or other persons caring for a child under the age of 14 without a mother.
Any termination by an employer that is inconsistent with the Labor Code requirements may be invalidated by a court, and the employee may be reinstated. Lawsuits resulting in the reinstatement of illegally dismissed employees and the payment of damages for wrongful dismissal are increasingly frequent, and Russian courts tend to support employees’ rights in most cases. Where an employee is reinstated by a court, the employer must compensate the employee for unpaid salary for the period between the wrongful termination and reinstatement, as well as for mental distress.
Work time
The Labor Code generally sets the regular working week at 40 hours. Any time worked beyond 40 hours per week, as well as work on public holidays and weekends, must be compensated at a higher rate.
For employees working in hazardous or harmful conditions, the regular working week is decreased by four hours in accordance with government regulations.hours. Some of our production employees qualify for this reduced working week.
Annual paid vacation leave under the law is 28 calendar days. Our employees who work in mines and pits or work in harmful conditions may be entitled to additional paid vacation ranging from 7 to 42 business days.
TheSince January 1, 2019, the retirement age in the Russian Federation is 6065 years for males and 5560 years for females. However, employees who work in underground and open pit mines or do other work in potentially harmful conditions have the right to retire at an earlier age. Early retirement ages are established by the applicable legislation.
Salary
TheIn accordance with Russian law, the minimum monthly salary in Russia as established by federal law, is 6,204 rubles. Although the law requires that the minimum wage be at or above a minimum subsistence level, the current minimum wage is generally considered to be less than a minimum subsistence level.RUB 11,280 per month starting from January 1, 2019.
Strikes
The Labor Code defines a strike as the temporary and voluntary refusal of workers to fulfill their work duties with the intention of settling a collective labor dispute. Russian legislation contains several requirements for legal strikes. Participation in a legal strike may not be considered by an employer as grounds for terminating an employment contract, although employers are generally not required to pay wages to striking employees for the duration of the strike. Participation in an illegal strike may be adequate grounds for termination of employment.
Trade unions
Although Russian labor regulations have decreased the authority of trade unions compared with the past, they retain influence over employees and, as such, may affect the operations of large industrial companies in Russia, such as Mechel. In this regard, our management routinely interacts with trade unions in order to ensure the appropriate treatment of our employees and the stability of our business.
The activities of trade unions are generally governed by the Federal Law “On Trade Unions, Their Rights and Guarantees of Their Activity,” dated January 12, 1996, as amended (the “Trade Union Law”). Other applicable legal acts include the Labor Code, which provides for more detailed regulations relating to activities of trade unions.
The Trade Union Law defines a trade union as a voluntary union of individuals with common professional and other interests that is incorporated for the purposes of representing and protecting the rights and interests of its members. National trade union associations, which coordinate activities of trade unions throughout Russia, are also permitted.
As part of their activities, trade unions may:
negotiate collective contracts and agreements such as those between the trade unions and employers, federal, regional and local governmental authorities and other entities;
monitor compliance with labor laws, collective contracts and other agreements;
access work sites and offices, and request information relating to labor issues from the management of companies and state and municipal authorities;
represent their members and other employees in individual and collective labor disputes with management;
organize and participate in strikes; and
monitor redundancy of employees and seek action by municipal authorities to delay or suspend mass layoffs.layoffs; and
appoint representatives of employees authorized to participate in meetings of the collegial management body with a consultative vote.
Russian laws require that companies cooperate with trade unions and do not interfere with their activities. Trade unions and their officers enjoy certain guarantees as well, such as:
legal restrictions as to rendering redundant employees elected or appointed to the management of trade unions;
protection from disciplinary punishment or dismissal on the initiative of the employer without prior consent of the management of the trade union and, in certain circumstances, the consent of the relevant trade union association;
retention of job positions for those employees who stop working due to their election to the management of trade unions;
protection from dismissal for employees who previously served in the management of a trade union for two years after the termination of the office term, except where a company is liquidated or the employer is otherwise entitled to dismiss the employee; and
provision of necessary equipment, premises and vehicles by the employer for use by the trade union free of charge, if provided for by a collective contract or other agreement.
If a trade union discovers any violation of work condition requirements, notification is sent to the employer with a request to cure the violation and to suspend work if there is an immediate threat to the lives or health of employees. The trade union may also apply to state authorities and labor inspectors and prosecutors to ensure that
an employer does not violate Russian labor laws. Trade unions may also initiate collective labor disputes, which may lead to strikes.
To initiate a collective labor dispute, trade unions present their demands to the employer. The employer is then obliged to consider the demands and notify the trade union of its decision. If the dispute remains unresolved, a reconciliation commission attempts to end the dispute. If this proves unsuccessful, collective labor disputes are generally referred to mediation or labor arbitration. Although the Trade Union Law provides that those who violate the rights and guarantees provided to trade unions and their officers may be subject to disciplinary, administrative and criminal liability, no specific consequences for such violations are set out in Russian legislation.
Regulation of Russian Electricity Market
Industry background
The Russian utilities sector landscape has undergone dramatic changes withinfunctioning of the past several years, since the introduction of electricity industry reform under Government Resolution “On Restructuring of Electricity Industryenergy system of the Russian Federation” No. 526 dated July 11, 2001. The monopoly RAOFederation is based on a combination of technological and commercial infrastructure which operates under state control, on the one hand, and organizations engaged in the generation and sale of electricity which interact with each other in a competitive environment, on the other hand.
Pursuant to the Electric Power Industry Law, the electric power industry entities are organizations engaged in the production of electricity, heat energy and capacity, purchase and sale of electricity and capacity, power supply of consumers, rendering services in electricity transmission, operational-dispatching management in the electric power industry, sales of electric energy (capacity), organizing of purchase and sale of electric energy and capacity.
Generating companies carry out generation and sale of electricity in the wholesale or retail markets to sales organizations or end consumers. Sales organizations purchase electricity in the wholesale and retail markets and sell it to end consumers.
Electricity consumers are natural and legal persons who purchase electricity for their own household and/or production needs. Large consumers may purchase electricity directly on the wholesale market provided that they fulfill the requirements for participants of the wholesale electricity and capacity market. Other categories of consumers purchase electricity from power sales companies, including guaranteeing suppliers, as well as may purchase electricity from electricity producers who are not participants of the wholesale electricity and capacity market.
System Operator (SO UPS JSC), which is wholly-owned by the state, performs operational-dispatching management in the Unified Energy System of Russia OAO (the “RAO UES”) was liquidated and separatedRussia. The main function of the System Operator is to control of the compliance of technological parameters of the energy system operation. The System Operator participates in to separate businesses:the maintenance of the wholesale electricity and heat generation, transmission (high voltage trunk grid), distribution (medium-capacity market.
Grid operators transmit electricity through electric grids and low-voltage infrastructure) and supply (salecarry out technological connection of power receiving devices of electricity to customers).
The electricity generation sector is now principally comprisedconsumers, power facilities of six thermal wholesale generating companies (called “OGKs” based on the Russian acronym for Wholesale Generating Company), one hydro wholesale generating company (named RusHydro), 14 territorial generating companies (“TGKs”), RAO Eastern Energy Systems OAO, Inter RAO JSC, various nuclear generation complexes (owned and/or operatedand power grid facilities of other owners to electric grids. Activities of grid operators are a natural monopoly and are regulated by the Rosenergoatom Concern OJSC), as well as a numberstate.
Organizations of independent regional diversified electricity producerscommercial infrastructure include Trading System Administrator JSC, Financial Settling Center JSC and suppliers (Irkutskenergo OAO, Bashkirenergo OAO, Tatenergo OAO, Novosibirskenergo OAO).
PursuantAssociation Nonprofit Partnership Market Council. Association Nonprofit Partnership Market Council was established in order to balance the Federal Law “On Specific Featuresinterests of the Functioningelectricity market participants and to ensure the unity of the Electricity Industry during the Transitional Periodcommercial infrastructure operation. Activities of infrastructure organizations, including pricing and on Introductionconditions of Amendments into Certain Laws of the Russian Federationinteraction with contractors, are subject to state regulation and Abolishing Certain Laws of the Russian Federation in connectioncontrol.
In accordance with the Adoption of the Federal Law “On the Electricity Industry” No. 36-FZ dated March 26, 2003, as amended (the “Transitional Period Law”), companies and individuals, as well as affiliated entities operating within one wholesale market pricing zone, are prohibited from combining activities relating to electricity distribution and/or dispatching with electricity generation and/or sale, through simultaneously owning, or using on any other legal basis, assets which are directly used for electricity distribution and/or dispatching and assets which are directly used for electricity generation and/or sale.
Amendments to the Transitional Period Law adopted in December 2011 introduced an enforcement mechanism with respect to affiliated companies which do not comply with the law. Pursuant to the amendments to the Transitional PeriodElectric Power Industry Law if these requirements are not met, the FASand other legislative acts which entered into force on December 25, 2018, power sales activity is entitledsubject to file an application seeking a court order for forced reorganization to separate the assets in case they are combined within one company, or, in case of they are combined among affiliated companies, for a forced sale at a public auction first, of assets owned and directly used in electricity generation and/or sale and second, ifcompulsory licensing since July 1, 2020. Power sales activity is the sale of electricity generationproduced and/or sale assetspurchased in the retail electricity market both within and outside the unified national electric grid of Russia. A prerequisite for granting a license is not possible, of assets owned and directly used in electricity distribution.compliance with licensing requirements.
Sales of electricity
The Russian electricity market consists of wholesale and retail electricity and capacity markets. The wholesale electricity and capacity market encompasses European territory of the Russian Federation, the Urals and Siberia and is divided into two pricing zones. The first pricing zone includes the European territory of the Russian Federation and the Urals and the second pricing zone includes Siberia. ThisIn addition, there areso-callednon-pricing zones, namely the regions of the Far East, the Arkhangelsk region, the Kaliningrad region and the Komi Republic. Competition in these areas for various technical reasons is not possible yet. Innon-pricing zones sale of electricity in the retail electricity and capacity market is made at regulated prices. The wholesale market provides a
framework for large-scale, often interregional, energy trades. The retail electricity market operates within all Russian regional territories and provides a framework formid-scale andend-consumer energy trades. This market is regulated by the respective Regional Energy Committees (“RECs”).
Wholesale electricity market
The wholesale electricity and capacity market is a systemsphere of contractual relationships between alldistribution of its participants linked together byelectric energy and capacity within the processUnified Energy System of production, transmission, distribution, purchase and sale and consumption of electricity. This unified energy system encompasses six regional unified energy systems, which are the following: North-West, Central, Urals, Mid-Volga, South and Siberia.
Russia. The wholesale market participants mainly include:
The infrastructurean entity of the wholesale market is operated byand act on the Non-profit Partnership Market Council and the Trade System Administrator OAO which organize the trading; a system operator established by the former RAO UES in the formbasis of an open joint-stock company (SO UES JSC); the Russian Grids JSC, which owns and operates the federal and regional transmission networks; and the Financial Settlement Center ZAO, which is a clearance and settlement organization forapplicable rules.
Trading on the wholesale electricity and capacity market.market is conducted in accordance with the agreement on accession to the trading system and wholesale market regulations which are developed and adopted by Association Nonprofit Partnership Market Council.
Electricity trading on the wholesale electricity and capacity market is carried out by means of the classical model of supply and demand balance or through bilateral contracts of purchase and sale of electric energy.
Currently electricity is traded on the basis of the following trading mechanisms:
Regulated bilateral contracts
Regulated contracts are effectivelytake-or-pay obligations at regulated prices defined by the FAS for electricity and capacity volumes. The volumes of electricity to be traded by the generators under regulated
contracts are set up by the FAS annually based on percentages of the volumes of electricity generated in the previous year. The volumes of electricity traded under regulated contracts have gradually declined for the wholesale market when it became fully liberalized in 2011. Starting from January 1, 2011, electricity is traded atnon-regulated prices, except for electricity intended for supply to households.
A generator may provide the volumes of electricity it must sell under regulated contracts either through own generation or through the purchase of electricity on the spot market at market prices. Similarly, its customersconsumers receive electricity at regulated prices in the volumes agreed under the regulated contracts, regardless of their actual needs, and can freely trade the imbalance on the spot market at market prices (either by purchasing additional volumes, if needed, or selling the excess electricity volumes).
Non-regulated bilateral contracts
Electricity supply volumes which are not agreed upon under regulated contracts, as well as all new generation capacity commissioned after January 1, 2007, can be traded by participants of the wholesale market undernon-regulated contracts, on the “one-day-ahead”“one-day-ahead” spot market or on the balancing market. All terms of electricity supply undernon-regulated contracts are subject to free negotiation between sellers and purchasers.
Retail electricity market
The retail market participants include consumers, power supply companies, guaranteeing suppliers, power grid companies and electricity producers which do not supply electricity to the wholesale market.
The retail electricity market operates on the following main principles: (1) end consumers are free to choose between sales companies; (2) end consumers purchase at free prices set on the market, except for contracts with “guaranteeing suppliers”; and (3) “guaranteeing suppliers” cannot refuse to enter into a contract with an end consumer.
“Guaranteeing suppliers” sell electricity under prices that take account of: (1) the prices on the wholesale electricity and capacity market; (2) the sales premium of the particular guaranteeing supplier set by respective regional authorities; and (3) the prices for electricity transmission and distribution through electricity networks.networks; and (4) the prices of services of infrastructure organizations.
Since July 1, 2020, power sales activity in the retail electricity market is subject to compulsory licensing.
Heat market
Heat markets are regional retail marketsmarkets. The market is divided into heat energy in hot water and heat pricesenergy in steam. Prices for heat energy in hot water are regulated and set within the general guidelines provided by the FAS and by regional authorities. Minimum and maximum prices for heat energy in hot water, which is traded on the retail markets, are set by the FAS separately for each administrative region of Russia for a period of at least one year. Regional authorities establish the prices for relevant territories within the range set by the FAS and subject to the types and prices of fuel used to produce the heat and the volumes of heat purchased on the relevant territory. Since January 1, 2019, the market of heat energy in steam that is not for household use is no longer regulated by the FAS.
Our Southern Kuzbass Power Plant delivers heat energy (in the form of hot water) at regulated prices to residential and commercial customers in the cities of Kaltan, Osinniki and Mezhdurechensk. Mechel Energo delivers heat energy (in the form of hot water and steam) at regulated prices to residential and commercial customers in the cities of Vidnoye, Chelyabinsk, Chebarkul, Beloretsk and Izhevsk.
E.U.
EU REACH
On June 1, 2007, the European Union enacted regulations on registration, evaluation, authorization and restrictions of use of chemicals, known as REACH. The purpose of REACH is to ensure a high level of protection of human health and the environment, including the promotion of alternative methods of assessment of hazards of chemical substances.
REACH requires foreign manufacturers importing their chemical substances into the European Union, as well as E.U.EU manufacturers producing such substances in quantities of one tonne or more per year, to register these substances with the ECHA and provide the information about the registered substances usage and utilization to the competent authorities of the E.U.EU Member States and downstream users upon request. To comply with REACH requirements, we have created dedicated internal working groups, procured external consultants’ advice and budgeted for REACH procedures expenses. Prior to December 1, 2008, wepre-registered with the ECHA substantially all of the substances that we intended to export to or produce in the European Union. As a next step, we successfully registered with the ECHA the substances that we export to or produce in the European Union in an amount over 1,000 tonnes per year, and which are subject to REACH registration, namely: ferroalloys, coke-chemicals and pig iron exported to the European Union. This registration was completed prior to December 1, 2010 in compliance with the REACH implementation schedule.
Item 4A.Unresolved Staff Comments
None.
Item 5.Operating and Financial Review and Prospects
The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes and other information in this document. This Item 5 contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed in forward-looking statements as a result of various factors, including the risks described in Item“Item 3. Key Information — Risk FactorsFactors” and under the caption “Cautionary Note Regarding Forward-Looking Statements.”
In this Item 5, the term “domestic” describes sales by a subsidiary within the country where its operations are located. The term “export” describes cross-border sales by a subsidiary regardless of its location. See note 2826 to the consolidated financial statements.
History of Incorporation
Mechel PAO was incorporated on March 19, 2003, as a joint-stock company holding shares and interests in the charter capitals of various mining and steel companies owned by Igor Zyuzin, Vladimir Iorich and companies controlled by them. These individuals acted in concert from 1995 until December 2006 pursuant to an agreement which required them to vote in the same way. During the period from March through December 2006, Mr. Iorich disposed of his entire interest in Mechel PAO to Mr. Zyuzin, and the agreement terminated on December 21, 2006.
Business Structure
Segments
We have organized our businesses into three segments:
the mining segment, comprising the production and sale of coal (metallurgical and steam), coke and chemical products and iron ore and limestone,concentrate, which supplies raw materials to our steel and power segments and also sells substantial amounts of raw materials to third parties, and includes logistical assets, such as our seaports on the Sea of Japan and on the Sea of Azov, and our railway transportation assets;
the steel segment, comprising the production and sale of semi-finished steel products, long products of a wide range of steel grades, carbon and stainless flat products, high value-added metal products, including wire products, stampings and forgings, structural shapes, rails and stampings,others, and ferrosilicon, as well as ferrosilicon, and our river port on the Kama River, a tributary of the Volga River; and
the power segment, comprising power generating facilities,generation and sale of electricity and heat energy, which supplysupplies electricity and heat energy to our mining and steel segments and also sells a portion of electricity and heat energy to third parties.
The table below sets forth by segments our key mining, steel and power subsidiaries, presented in chronological order by date of acquisition.acquisition/date of incorporation.
Name | Location of Assets | Product/Business | Date Control Incorporation | Voting Interest(1) | ||||||||||
Mining Segment | ||||||||||||||
Southern Kuzbass Coal Company | Russia | Coking coal, steam coal, anthracite and PCI | January 1999 | 99.1 | % | |||||||||
Korshunov Mining Plant | Russia | Iron ore concentrate | October 2003 | 90.0 | % | |||||||||
Port Posiet | Russia | Seaport: coal warehousing and transshipment | February 2004 | 97.8 | % | |||||||||
Mechel Coke | Russia | Coke and chemical products | June 2006 | 100.0 | % | |||||||||
Moscow Coke and Gas Plant | Russia | Coke and chemical products | October 2006 | 99.5 | % | |||||||||
|
| |||||||||||||
| Russia | Coking coal, steam coal | October 2007 | 100.0 | % | |||||||||
Port Temryuk | Russia | Seaport: coal and metal transshipment | March 2008 | 100.0 | % | |||||||||
Elgaugol | Russia | Coking coal, steam coal | August 2013 | 51.0 | % | |||||||||
| Elga-road | Russia | Railroad transportation | January 2016 | 51.0 | % | |||||||||
Steel Segment | ||||||||||||||
Chelyabinsk Metallurgical Plant | Russia | Semi-finished | December 2001 | 94.2 | % | |||||||||
Vyartsilya Metal Products Plant | Russia | Wire products | May 2002 | 93.3 | % | |||||||||
Beloretsk Metallurgical Plant | Russia | Long steel products, wire products | June 2002 | 94.8 | % | |||||||||
Urals Stampings Plant | Russia | Stampings and forgings | April 2003 | 93.8 | % | |||||||||
Mechel Nemunas | Lithuania | Wire products | October 2003 | 100.0 | % | |||||||||
Izhstal | Russia | Long steel | May 2004 | 90.0 | % | |||||||||
Port Kambarka | Russia | River port | April 2005 | 90.4 | % | |||||||||
Bratsk Ferroalloy Plant | Russia | Ferrosilicon | August 2007 | 100.0 | % | |||||||||
Power Segment | ||||||||||||||
Mechel Energo | Russia | Power sales | February 2004 | 100.0 | % | |||||||||
Southern Kuzbass Power Plant | Russia | Power generation | April 2007 | 98.3 | % | |||||||||
Kuzbass Power Sales Company | Russia | Electricity distribution | June 2007 | 72.1 | % | |||||||||
| (1) | The percentages provided in this table are as of December 31, |
Intersegment sales
We are an integrated group with operations organized into mining, steel and power segments. Our group companies supply materials to other companies in the same reporting segment or different reporting segments. For example, for the year ended December 31, 2015:2018:
The mining segment supplied approximately 36%32% of the steel segment’s iron ore concentratefeed requirements, 100% of the steel segment’s coke requirements and 89%48% of the power segment’s coal requirements;
The steel segment supplies wires, ropes, wire products and other metal products to the mining segment for use in itsday-to-day operations; and
Ourco-generation facilities supplied approximately 29%31% of our group’s overall electricity requirements.
The prices at which we record these transfers are based on market prices, and these transactions are eliminated as intercompany transactions for the purposes of our consolidated financial statements. For theperiod-on-period discussion of the results of operations by segments, such transfers are included in segment revenues and cost of goods sold.sales.
Recent acquisitions and disposals
Set out below is our key disposal during 2014-2015. There were no significant acquisitions and disposals during 2014-2015. For more detail see notes 6 and 17 to the consolidated financial statements. The financial and sales information for the periods presented herein may not be directly comparable from period to period due to this disposal.
Bluestone. In February 2015, we disposed of 100% of shares in Mechel Bluestone Inc., the holding company of our coal assets in the United States, to a company owned by the Justice family. The total consideration consisted of: (1) an immediate cash payment of $5 million (RUB 330.3 million as of February 12, 2015); (2) future royalty payments on coal mined and sold in the amount of $3.00 (RUB 198.2 as of February 12, 2015) per short ton, capped at $150 million (RUB 9,908.8 million as of February 12, 2015); (3) a portion of a sale price in case of any future sale of Bluestone and/or its assets, amounting to 12.5% or 10% of the total consideration if the sale transaction closes within five or from five to ten years, respectively, of the sale to the Justice family. The results of operations of Bluestone companies are included in the consolidated financial statements as discontinued operations. See note 17 to the consolidated financial statements.2016-2018.
Factors Affecting Our Results of Operations and Financial Condition
Change in reporting currency
Beginning with the period commencing on January 1, 2015, the presentation currency of our consolidated financial statements is the Russian ruble. Before transition to IFRS, U.S. dollar was the presentation currency of our consolidated financial statements prepared under U.S. GAAP. The reason of adopting the Russian ruble as the presentation currency in the consolidated statements under IFRS is to allow a greater transparency of our financial and operating performance.
Cyclical nature of business and impact of macroeconomic factors
Our mining business sells significant amounts of coal to third parties and our revenues depend significantly on these sales. Cyclical and other changes in the world market prices for these productscoal and iron ore affect the results of our mining operations. The changes in these prices result from factors which are beyond our control, such as market supply and demand. The global coal and iron ore supply and demand balance is strongly influenced by interdependent global economic and industrial demand cycles, as well as supply chain-related constraints such as shipping capacity, availability of rolling stock, transportation bottlenecks, production disruptions and natural disasters. Prices for the products of our mining business have varied significantly in the past and could vary significantly in the future. See “— Price trends for products” below. See also “Item 3. Key Information — Risk Factors — Risks Relating to Our Business and Industry — We operate in cyclical industries, and any local or global downturn, whether or not primarily affecting the mining and/or steel industries, may have an adverse effect on our business, financial condition, results of operations and prospects.”
The steel industry is highly cyclical in nature because the industries in which steel customers operate are cyclical and sensitive to changes in general economic conditions. The demand for steel products thus generally correlates to macroeconomic fluctuations in the economies in which we sell our products, as well as in the global economy. The prices of our steel products are influenced by many factors, including demand, worldwide production capacity, capacity utilization rates, raw materials costs, exchange rates, trade barriers and improvements in steel-makingsteelmaking processes. Steel prices also typically follow trends in raw materials prices and increases in market prices for steel may lag behind increases in production costs, including raw materials.
Demand for steel, particularly long steel products, in which we believe we are one of the most competitive producers in the Russian market, is closely tied to the construction industry in the markets in which we sell our products. The construction business in Russia, the principal market for our products, was severely impacted by the global financial crisis and the sharp economic slowdown in Russia. As a result of the critical role of steel in infrastructural and overall economic development, the steel industry tends to track macroeconomic factors such as GDP and industrial output.
Global real GDP grew by 2.6% in 2014 and 2.4% in 2015,2016, 3.0% in 2017 and 3.0% in 2018, according to the World Bank. According to Rosstat, Russia recorded GDP decline of 0.2% in 2016 and GDP growth of 0.6%1.5% in 20142017 and GDP decline2.3% in 2018. In 2016, there was a slight recovery of 3.7% in 2015. In 2014, world markets continued their slowdown amid slowing economic growth in China, the European debt crisis and geopolitical tensions. In 2015, the global economy, was under pressure due to slowing growth in China,the reduction of geopolitical tensions and high levelsthe decline in oversupply reserves of over-productioncrude oil which in turn helped to restore in commodity prices. In 2017, the global economy experienced a cyclical recovery with acceleration of hydrocarbon raw materialsglobal economic activity and as a resultstabilization of low oilcommodity prices, however geopolitical tensions heightened. In 2018, the trends of 2017 continued with intensified competition of global economic systems and it is
expected that in 2016 these trends will continue to have an adverse impact on world markets for our products. Prices for our products fluctuated depending on the level of demand in key consuming industries and supply and demand balance in our key markets. See “— Price trends for products.”trade wars.
Trade and competition
Mining products and many types of steel products are considered commodities and treated as fungible in the world markets. As such, we compete with steel producers and mining companies with operations in different countries. The main competitive advantages that steel producers can secure are based on quality and production costs. Generally, steel producers in economically developed regions compete primarily based on quality of steel, while we and other steel producers in developing countries compete in the international market based primarily on price. With respect to our mining products, such as coal and iron ore, quality, production costs and transportation capabilities are key areas where companies seek a competitive advantage.
We benefit from import tariffs that Russia has in place for certain steel products. See “Risk Factors — Risks Relating to Our Business and Industry — We benefit from Russia’s tariffs and duties on imported steel, many of which have been reduced upon Russia’s WTO membership and may be eliminated in the future.”
Consolidation trends in the steelmining and miningsteel industries
Major strategic mining industry players continued to aim for organic growth in 2018. The global financial crisis sharply slowedM&A activity in the pacemining industry remains weak and is driven mostly by major players targeted to portfolio optimization. The volatility of coal prices will continue to impact consolidation trends in the coal industry globally.
We expect M&A activity in the steel industry. Despitesector to recover in 2019 particularly if China implements a reform to balance supply and demand growth in 2014steel production and slight decrease in 2015, steel-making capacity still exceeds steel demand. There is now significant over-capacity in the global steel sector which is putting pressure on operators’ profitability. Future potential consolidation in the steel industry should enable steel producerstrading disputes begin to maintain more consistent performance through cycles in the steel industry by achieving greater efficiency and economies of scale.
The mining industry has been severely impacted by the decline in coal prices since the end of 2011. Prices have fallen by nearly three times in 2011-2015 while production decline has lagged. Profitability of coal producers has declined. Currently, major mining companies are scaling back acquisitions and looking to divest non-core and underperforming assets, some of which were acquired just several years ago. Diversified mining companies have corrected their strategy to focus on profitable operations and reduce their exposure to coal.settle.
We, along with other Russian steel producers, tend to focus on vertical integration which ensures access to a stable supply of raw materials, particularly coking coal and iron ore. Our vertical integration helps us to better manage the effects of raw materials supply constraints and also provides us with an opportunity to capture higher margins in sales of our mining segment products to third parties.
Price trends for products
Coking coal and steam coal
Throughout 2014, the price forIn 2016, metallurgical coal declined driven by lower demand from Chinese consumers, as well as an increaseprices were extremely volatile, especially in low-cost supplythe second half of the year. According to CRU, in 2016, the premium hard coking coal spot price increased four times from the Australian coking coal producers. As a result,beginning of the year and reached $310 per tonne (FOB Australia) in November. According to CRU, quarterly contract prices fellprice rose from $143$81 per tonne (FOB Australia) in the first quarter of 20142016 to $119$200 per tonne (FOB Australia) in the fourth quarter of 2014,2016. The Chinese government’s actions to reduce coal supply were the primary driver of the metallurgical coal price rally in 2016. By the end of the year, the spot price had fallen by 25% from its peak level in November 2016 and amounted to $230 per tonne due to a reversal in Chinese coal supply policy. The government was attempting to inject supply into the market since October 2016 and this led to an improvement in the availability of domestic metallurgical coal, according to CRU. The average contract price in 20142016 was $125$114 per tonne, 21% below the average price in 2013.according to CRU. The average spot price in 20142016 was $114$140 per tonne (FOB Australia), 23% below the average price in 2013, according to CRU. During 2015, globalIn the second quarter of 2017, quarterly contract benchmark pricing shifted to a system that uses a three-month average of a daily spot price. This had been triggered by the extreme price volatility of
metallurgical coal pricing after cyclone Debbie hit Queensland, Australia. According to CRU, hard coking coal spot prices jumped to $270 per tonne (FOB Australia) inmid-April, as Queensland coal shipments halted after cyclone Debbie. After the cyclone passed, almost all producers and all ports have been slowly resuming operations and prices returned to the previous level. In the third quarter of 2017, another price hike has been driven upwards by heated Chinese demand for seaborne cargoes amid a boom in steel production. In the end of the third quarter of 2017, prices started to decline due to Chinese government’s intention to decrease crude steel output in order to improve ecological situation in the winter months. However, during November and December 2017, prices were moving upwards again as port loading disruptions took place in Australia. The average contract price in 2017 was $206 per tonne, 81% higher than the average contract price in 2016, according to CRU. The average spot price in 2017 was $183 per tonne (FOB Australia), 31% higher than the average spot price in 2016, according to CRU. In the beginning of 2018, spot metallurgical coal prices were under pressurein decline as loading disruptions in Australia eased significantly and due to weaker finished steel demand continuedin China. Throughout the second and the third quarters of 2018, prices held in a relatively stable range. Premium hard coking coal spot prices (FOB Australia) rose to decline and oversupply remained. According to CRU, quarterly contract price dropped from $117$221 per tonne (FOB Australia) in the first quarter of 2015 to $89November 2018, up from $183 per tonne (FOB Australia) in August on the fourth quarterback of 2015. Spot prices declined from $106 per tonne (FOB Australia)continued supply disturbances during the period. Particularly, coking coal availability was affected by the shutdown of Peabody’s North Goonyella mine in the first quarter of 2015 to $78 per tonne (FOB Australia) in the fourth quarter of 2015,Queensland, according to CRU. The average contract price in 20152018 was $102$207 per tonne 18% below(FOB Australia), just 0.5% higher than the average contract price in 2014.2017, according to CRU. The spot price averaged $206 per tonne (FOB Australia) in 2018, which was 12.6% higher than the average spot price in 2015 was $90 per tonne (FOB Australia), 21% below2017, according to CRU.
In the average price in 2014. In this low-price environment, many producers were operating at a loss.
At the beginningfirst five months of 2014,2016, the spot price for steam coal was $83generally stable fluctuating around $46 per tonne (CIF Amsterdam/Rotterdam/Antwerp); by(5,500 NAR CFR China), but starting from June steam coal prices began to rise sharply due to the endChinese government’s coal supply policy, according to Platts. As a result of the year it dropped to $70decreased coal production in China, steam coal prices rose from $50 per tonne accordingin June 2016 to Platts.$87 per tonne (5,500 NAR CFR China) in November 2016, but corrected to $75 per tonne in December 2016. The average price in 20142016 was $59 per tonne (5,500 NAR CFR China), according to Platts. In the first half of 2017, steam coal prices fluctuated around $75 per tonne (CIF Amsterdam/Rotterdam/Antwerp)(5,500 NAR CFR China) and then started to grow reaching $88 per tonne (5,500 NAR CFR China) in October 2017 due to very strong Chinese coal demand during the summer and reduced supply as the focus on improving coal mine safety in China intensified. The average price in 2017 was $79 per tonne (5,500 NAR CFR China), 8% lower34% higher than the average price in 2013,2016, according to Platts. Among the factors which had led to lower prices in the world market for steam coal were the decline in demand from the Chinese and European economies, as well as the growth in supply from Australian producers. The reduction of prices in the steam coal market was also due to a general decline in energy prices in 2014. In 2015, steam coal market was still in oversupply, despite producers’ efforts to cut production. Chinese power generation and consumption growth has slowed significantly in 2015. According to Platts, in 2015 the first four months of 2018, steam coal spot priceprices fell from $97 per tonne to $78 per tonne (5,500 NAR CFR China) due to decreased coal consumption as the winter season came to an end. Prices increased again in June 2018, up to $90 per tonne (5,500 NAR CFR China), due to strong coal demand during the summer peak season. In the second half of 2018, import prices for steam coal was $58in China were generally weak and went down to $71 per tonne (CIF Amsterdam/Rotterdam/Antwerp)(5,500 NAR CFR China) due to a mild winter in January; byChina and stringent import restrictions at the end of the year it declined to $48 per tonne.year. The average price in 20152018 was $56$82 per tonne (CIF Amsterdam/Rotterdam/Antwerp)(5,500 NAR CFR China), 25% lower3.8% higher than the average price in 2014,2017, according to Platts.
Iron ore
During 2014, the2016, iron ore spot prices were generally rising with minor downward corrections inMay-June and September. The iron ore spot price decreasedincreased from a highlow of $128$42 per dry metric tonne (62% Fe, CFR China) in January to a lowhigh of $69$80 per dry metric tonne in December, according to Platts.MMI. Strong Chinese demand for imported iron ore, which hit anall-time high in 2016, was the main reason of the price increase. The average spot price in 20142016 was $97$58 per dry metric tonne, which was 28% lower thanaccording to MMI. The strong Chinese steel sector supported iron ore prices in 2017 and the average price in 2013, according to Platts. The price decrease was due to sharp increase in low-cost supply from the Australian and Brazilian producers. In 2015, this trend continued: a lot of new iron ore capacity came on stream which together with a reduction of steel production in China has led to lower prices. Iron ore spot price declined from $68reached $71 per dry metric tonne (62% Fe, CFR China) which was 22% higher than the average price in January2016, according to $40MMI. Throughout the year prices fluctuated from $54 to $93 per dry metric tonne in December,(62% Fe, CFR China), according to Platts.MMI. Iron ore spot prices slightly decreased in 2018 as a result of slower iron ore imports in China and growing global supply of iron ore. The average spot price in 20152018 was $56$69 per dry metric tonne (62% Fe, CFR China) which was 42%3% lower than the average price in 2014,2017, according to Platts.MMI.
Coke
In 2014,2016, the world marketcoke price showed almost the same dynamics as coking coal prices. According to Platts, coke prices for coke were under pressure due to negative trendsincreased from $109 per tonne (FOB China basis) in the global steel and raw materials market, which resulted in a decrease in prices from $249 per tonne (62% CSR, FOB North China basis) at the beginningfirst quarter of the year to $184$305 per tonne (62% CSR, FOB North(FOB China basis) atin the endfourth quarter of the year, according to Platts. Domesticyear. Such sharp rise of the coke prices managed to stayprice was driven largely by panic buying by steel producers globally. Initially, tightness in the market was created following implementation of the ‘276 working days’ policy at the level of 2013, namely 6,983 rublesChinese coal mines that reduced coal production. The average domestic coke price in 2016 was RUB 12,022 per tonne (including VAT, FCA basis), according to Metal-Courier. By the end of the year, however, domestic coke prices fluctuated around 7,600-8,800 rubles per tonne (including VAT, FCA basis), according to Metal-Courier. The increase in domestic coke prices was due to an increase in demand from Ukrainian consumers and to devaluation of the ruble. In 2015, coke production continued to overshoot demand, Chinese export volume has increased, exacerbating oversupply and displacing market share of other coke producing countries in international markets, thus pressuring prices further. As a result coke prices declined from $179 per tonne (62% CSR, FOB North China basis) in January to $113 per tonne (62% CSR, FOB North China basis) in December, according to Platts. Average domestic coke price in 2015 was 10,892 rubles per tonne (including VAT, FCA basis), 56% higher than the average price in 2014, according to Metal-Courier.Metal Expert. Price growth in the domestic coke market was due to depreciationa sharp rise of Russian ruble, higher coking coal prices in the second half of the year in Russia, which led to cost increases of coke producers and strongincreased coke prices on export markets. In 2017, coke prices were on the rise: prices increased from $270 per tonne (FOB China basis) in the first quarter of 2017 to $330 per tonne (FOB China basis) in the fourth quarter of 2017, according to Platts. In 2017, margins on steel products in China hit multi-year highs, and to take advantages of high prices, steel mills were restocking raw materials in order to ramp up blast furnace production. The average domestic coke price in 2017 was RUB 17,902 per tonne (including VAT, FCA basis), which was 49% higher than the average price in 2016, according to Metal Expert. The sharp price rise was due to higher domestic coking coal prices. The rise in prices continued from 2016 into a third year. In 2018, the world coke price increased from $351 per tonne (FOB China basis) in the first quarter of the year to $366 per tonne (FOB China basis) in the fourth quarter of 2018, according to Platts. There was a recovery in demand from Ukraine.two main markets for Chinese coke: India and Japan last year. The average domestic coke price in 2018 was RUB 17,681 per tonne (including VAT, FCA basis), just 1% lower than the average price in 2017, according to Metal Expert.
Steel
In 2014,2016, the Russian domestic price for rebar declinedincreased to $528 (-12% RUB 30,177 (+20.5%year-on-year) per tonne due to further ruble devaluation, strong export markets and limited supply in the second and fourth quarters. The average export price for square billets remained almost unchanged at $328 (+0.1%year-on-year) per tonne, according to Metal-Courier. In 2017, the Russian domestic price for rebar increased to RUB 30,603 (+1.4%year-on-year) per tonne because of strong export markets of square billets, according to Metal-Courier. The average export price for square billets increased to $436 (+33.1%year-on-year) per tonne as a result of increased competitionupturned export scrap market and the export pricecredit stimulation in China which pushed prices for square billets declined to $481 (-6% year-on-year) per tonne,semi-finished products, according to Metal-Courier. In 2015, the prices have reduced significantly, thus2018, the Russian domestic price for rebar declinedincreased to $345 (-35% RUB 36,513 (+19.3%year-on-year) per tonne because of strong export markets of square billets and thescrap, according to Metal-Courier. The average export price for square billets declinedincreased to $325 (-32% $491 (+12.5%year-on-year) per tonne as a result of decreased oilupturned export scrap market in the first half of the year, which was due to rising raw material costs from a lack of electrodes, as well as high Chinese export prices for billet and scrap prices, low demandlong products during the first and increased competition onsecond quarters of the background of China’s exports growth,year, according to Metal-Courier.
Ferrosilicon
In 2014, ferrosilicon prices decreased throughout the year. In2016, from January 2014,to September, the average price level for Chinese ferrosilicon was $1,475within the range of$1,155-1,195 per tonne (75% Si, CIF Japan). ByIn October and November, the endaverage price for ferrosilicon showed a sharp increase and amounted to $1,285 per tonne (75% Si, CIF Japan). Quotations in the Japanese market increased as the price rose in China. In December, the price stopped rising and amounted to $1,260 per tonne (75% Si, CIF Japan). The average price for ferrosilicon in 2016 was $1,193 per tonne (75% Si, CIF Japan), according to TEX. The first half of 2017 was relatively stable, monthly price fluctuations did not exceed 7%. The price range was at the year, ferrosilicon prices fell to $1,341level of$1,100-1,200 per tonne (75% Si, CIF Japan), according to TEX. In the beginningsecond half of 2015,2017, due to the Chinese government’s introduction of production restrictions in the metallurgical, coal and ferroalloy industries, ferrosilicon prices in the Asia region sharply increased reaching $2,200 per tonne (75% Si, CIF Japan) by December 2017, according to TEX. The average price offor ferrosilicon
continued to fall. In May 2015, the price decline has stopped at $1,242 in 2017 was $1,362 per tonne (75% Si, CIF Japan), an increase of 14% compared to 2016, according to TEX. After a relatively stable position in June-August,In early 2018, ferrosilicon prices resumed falling.began to decline following a sharp rise at the end of 2017. In December 2015, pricesApril 2018, the price dropped to $1,156$1,358 per tonne (75% Si,
CIF Japan), according to TEX. At the end of April 2018, the Ministry of Ecology and Environment of China suspended operation of silica stone mines resulting in a decrease of silicon in the market and an increase in the price of ferrosilicon up to $1,459 per tonne (75% Si, CIF Japan) in May, according to TEX. From the second quarter of 2018 until the end of the year, there were no significant events, and prices gradually decreased. According to TEX, the price reached $1,280 per tonne (75% Si, CIF Japan) in December 2018. The average price for ferrosilicon in 2018 was $1,408 per tonne (75% Si, CIF Japan), an increase of 3.3% compared to 2017, according to TEX.
Freight costs
During 2015, ocean freight ratesIn 2018, the dry bulk market showed at volatility at times but continued to decline, reaching record lowsincrease in freight rates. Such volatility was caused by the fourth quarteruncertainty related to the U.S.-China trade war, Brexit, new ballast water requirements of 2015. In 2015, the U.N. International Maritime Organization (the “IMO”), as well as the upcoming sulfur content fuel regulations of the IMO scheduled to take effect in January 2020. The largest decreaseincrease in the dry bulk sector came from the CapesizeSupramax sector, where the average time charter rate decreasedincreased from $14,842$9,345 per day in 20142017 to $8,127$11,486 per day in 2015, a decrease of 45%.2018. The average Panamax rate was $5,560$11,653 per day in 20152018 compared to $7,718$9,766 per day in 2014. The average rate for Supramax vessels in 2015 was $6,695 per day compared to $9,818 per day in 2014.2017. The average rate for Handysize vessels in 20152018 was $5,381$8,700 per day compared to $7,681$7,636 per day in 2014.
With the exception2017. The average rate for Capesizes in 2018 was $16,528 per day compared to $15,129 per day in 2017. In 2018, deliveries of dry bulk carriers over 20,000 deadweight fell to its lowest in a third quarter spikedecade, coming in freight activity and rates, mostly driven by a surge in Capesize iron ore shipmentsat 266 units equivalent to China, the Baltic Index had a negative trend, finishing the year at record lows. The decrease in freight prices in 2015 was mainly due to sluggish Asian commodities demand, vessel oversupply and the collapse27.3 million deadweight, or 3% of bunker fuel prices, which compromise a substantial part of voyage freight rates. Furthermore, lower bunker prices ended much of the practice of “slow-steaming,” therefore creating even more vessel supply.net fleet growth.
Exchange rates
Our products are typically priced in rubles for Russian and the CIS sales and in U.S. dollars or euros for international sales. Our direct costs, including raw materials, labor and transportation costs are largely incurred in rubles and other local currencies, while other costs, such as interest expenses, are incurred in rubles, euros and U.S. dollars. The mix of our revenues and costs is such that a depreciation in real terms of the ruble against the U.S. dollar tends to result in a decrease in our costs relative to our revenues, while an appreciation of the ruble against the U.S. dollar in real terms tends to result in an increase in our costs relative to our revenues.
Results of Operations
The following table sets forth our consolidated statement of incomeprofit (loss) data for the years ended December 31, 20152018, 2017 and 2014.2016.
| Year Ended December 31, | ||||||||||||||||
| 2015 | 2014 | |||||||||||||||
Revenues | Amount | % of Revenues | Amount | % of Revenues | ||||||||||||
| (In millions of Russian rubles, except for percentages) | ||||||||||||||||
Revenue | 253,141 | 100.0 | % | 243,992 | 100.0 | % | ||||||||||
Cost of goods sold | (151,334 | ) | (59.8 | %) | (153,057 | ) | (62.7 | %) | ||||||||
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Gross profit | 101,807 | 40.2 | % | 90,935 | 37.3 | % | ||||||||||
Selling, distribution and operating expenses, net | (77,739 | ) | (30.7 | %) | (90,048 | ) | (36.9 | %) | ||||||||
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Operating profit | 24,068 | 9.5 | % | 887 | 0.4 | % | ||||||||||
Other income and (expense), net | (131,196 | ) | (51.8 | %) | (131,974 | ) | (54.1 | %) | ||||||||
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Loss before tax from continuing operations | (107,128 | ) | (42.3 | %) | (131,087 | ) | (53.7 | %) | ||||||||
Income tax (expense) benefit | (8,322 | ) | (3.3 | %) | 8,822 | 3.6 | % | |||||||||
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Loss for the year from continuing operations | (115,450 | ) | (45.6 | %) | (122,265 | ) | (50.1 | %) | ||||||||
Profit (loss) after tax for the year from discontinued operations, net | 822 | 0.3 | % | (11,702 | ) | (4.8 | %) | |||||||||
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Loss for the year | (114,628 | ) | (45.3 | %) | (133,967 | ) | (54.9 | %) | ||||||||
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Less: profit (loss) attributable to non-controlling interests | 535 | 0.2 | % | (1,263 | ) | (0.5 | %) | |||||||||
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Loss attributable to equity holders of the parent | (115,163 | ) | (45.5 | %) | (132,704 | ) | (54.4 | %) | ||||||||
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Revenue from contracts with customers Cost of sales Gross profit Total selling, distribution and operating income and (expenses), net Operating profit Total other income and (expense), net Profit before tax from continuing operations Income tax expense Profit for the period from continuing operations Loss after tax for the period from discontinued operations, net Profit for the period Less: profit attributable tonon-controlling interests Profit attributable to equity shareholders of Mechel PAO Year Ended December 31, 2018 2017 2016 Amount % of
Revenues Amount % of
Revenues Amount % of
Revenues (In millions of Russian rubles, except for percentages) 312,574 100.0% 299,113 100.0% 276,009 100.0% (177,756) (56.9%) (160,356) (53.6%) (146,322) (53.0%) 134,818 43.1% 138,757 46.4% 129,687 47.0% (85,038) (27.2%) (81,590) (27.3%) (86,997) (31.5%) 49,780 15.9% 57,167 19.1% 42,690 15.5% (33,563) (10.7%) (41,447) (13.9%) (28,539) (10.3%) 16,217 5.2% 15,720 5.3% 14,151 5.1% (2,681) (0.9%) (3,150) (1.1%) (4,893) (1.8%) 13,536 4.3% 12,570 4.2% 9,258 3.4% — 0.0% — 0.0% (426) (0.2%) 13,536 4.3% 12,570 4.2% 8,832 3.2% 908 0.3% 1,013 0.3% 1,706 0.6% 12,628 4.0% 11,557 3.9% 7,126 2.6%
Year ended December 31, 20152018 compared to year ended December 31, 20142017
Revenues
Consolidated revenues increased by RUB 9,14913,461 million, or 3.7%4.5%, to RUB 253,141312,574 million in the year ended December 31, 20152018 from RUB 243,992299,113 million in the year ended December 31, 2014.2017.
The sales increase was due to an increase in sales prices across our major segments and changes of exchange rates of the U.S. dollar to the Russian ruble.segments.
The following table sets forth our net revenues by segment, including a breakdown by sales to third parties and other segments.
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||
Revenues by Segment | 2015 | 2014 | 2018 | 2017 | ||||||||||||
| (In millions of Russian rubles, except for percentages) | (In millions of Russian rubles, except for percentages) | |||||||||||||||
Mining segment | ||||||||||||||||
To third parties | 80,632 | 79,509 | 96,882 | 100,129 | ||||||||||||
To power segment | 1,800 | 1,658 | 1,030 | 921 | ||||||||||||
To steel segment | 26,291 | 19,391 | 36,519 | 41,365 | ||||||||||||
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Total | 108,723 | 100,558 | 134,431 | 142,415 | ||||||||||||
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Steel segment | ||||||||||||||||
To third parties | 146,032 | 138,660 | 187,918 | 172,760 | ||||||||||||
To power segment | 5,475 | 5,354 | 4,132 | 5,917 | ||||||||||||
To mining segment | 1,497 | 2,853 | 1,733 | 1,705 | ||||||||||||
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Total | 153,004 | 146,867 | 193,783 | 180,382 | ||||||||||||
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Power segment | ||||||||||||||||
To third parties | 26,477 | 25,823 | 27,774 | 26,224 | ||||||||||||
To steel segment | 11,131 | 10,913 | 10,829 | 12,387 | ||||||||||||
To mining segment | 3,858 | 2,818 | 4,642 | 3,951 | ||||||||||||
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Total | 41,467 | 39,554 | 43,245 | 42,562 | ||||||||||||
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Eliminations | 50,052 | 42,986 | 58,885 | 66,246 | ||||||||||||
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Consolidated revenues | 253,141 | 243,992 | 312,574 | 299,113 | ||||||||||||
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% from mining segment | 31.9 | % | 32.6 | % | 31.0 | % | 33.5 | % | ||||||||
% from steel segment | 57.7 | % | 56.8 | % | 60.1 | % | 57.7 | % | ||||||||
% from power segment | 10.5 | % | 10.6 | % | 8.9 | % | 8.8 | % | ||||||||
Mining segment
Our total mining segment sales increasedrevenues decreased by RUB 8,1657,984 million, or 8.1%5.6%, to RUB 108,723134,431 million in the year ended December 31, 20152018 from RUB 100,558142,415 million in the year ended December 31, 2014.2017.
Coking coal concentrate sales to third parties decreased by RUB 3,43623 million, or 11.2%0.1%, to RUB 27,21043,633 million in the year ended December 31, 20152018 from RUB 30,64543,656 million in the year ended December 31, 2014,2017, as a result of a decrease in sales volumes of RUB 9,9754,907 million that was offset by an increase in sales prices of RUB 4,884 million. The average contract price in 2018 was $207 per tonne (FOB Australia), 0.5% higher than the average contract price in 2017, according to CRU. The spot price averaged $206 per tonne (FOB Australia) in 2018, which was 12.6% higher than the average spot price in 2017, according to CRU.
The volume of coking coal concentrate sold to third parties decreased by 539 thousand tonnes, or 11.2%, to 4,258 thousand tonnes in the year ended December 31, 2018 from 4,797 thousand tonnes in the year ended December 31, 2017. The decrease in sales volumes of coking coal concentrate was mainly due to the decreased production of coking coal.
The volume of coking coal concentrate sold to third parties decreased at Yakutugol and increased at Southern Kuzbass Coal Company. Yakutugol’s coking coal concentrate sales volumes decreased by 901 thousand tonnes, or 21.9%, to 3,208 thousand tonnes in the year ended December 31, 2018 from 4,109 thousand tonnes in the year ended December 31, 2017 due to decrease in production and reduction in coking coal concentrate yield. Southern Kuzbass Coal Company’s coking coal concentrate sales volumes
increased by 346 thousand tonnes, or 132.2%, to 608 thousand tonnes in the year ended December 31, 2018 from 262 thousand tonnes in the year ended December 31, 2017 due to increase in production.
Coke sales to third parties decreased by RUB 135 million, or 1.2%, to RUB 11,244 million in the year ended December 31, 2018 from RUB 11,379 million in the year ended December 31, 2017, as a result of a decrease in sales volumes of RUB 1,093 million that was partially offset by an increase in sales prices of RUB 6,539958 million. The growth of prices denominatedIn 2018, the world coke price increased from $351 per tonne (FOB China basis) in Russian rubles for coking coal was due to depreciationthe first quarter of the ruble while export sales of coking coal decreased from 81.8%year to $366 per tonne (FOB China basis) in the year ended December 31, 2014fourth quarter of 2018, according to 73.6% in the year ended December 31, 2015. During 2015, global coal prices were under pressure as demand continued to decline and oversupply remained, therefore coking coal prices continued to decline.Platts. The average contractdomestic coke price in 20152018 was $102RUB 17,681 per tonne 18% below(including VAT, FCA basis), just 1% lower than the average price in 2014. The average spot price in 2015 was $90 per tonne (FOB Australia), 21% below2017, according to Metal Expert.
Coke supplied to the average price in 2014.
The volume of coking coal concentrate sold to third partiessteel segment decreased by 2,531 thousand tonnes, or 32.5%, to 5,246 thousand tonnes in the year ended December 31, 2015 from 7,777 thousand tonnes in the year ended December 31, 2014. The decrease in sales volumes of coking coal in 2015 was mainly caused by decreased sales from Southern Kuzbass Coal Company.
The volume of coking coal sold to third parties decreased both at Yakutugol and Southern Kuzbass Coal Company. Yakutugol’s coking coal sales volumes decreased by 825 thousand tonnes, or 15.5%, to 4,515 thousand tonnes in the year ended December 31, 2015 from 5,340 thousand tonnes in the year ended December 31, 2014. Southern Kuzbass Coal Company’s coking coal sales volumes decreased by 1,693 thousand tonnes, or 70.4%, to 710 thousand tonnes in the year ended December 31, 2015 from 2,403 thousand tonnes in the year ended December 31, 2014 due to suspension of coal extraction at Olzherasskaya-Novaya Underground caused by high concentration of toxic gases.
Coke sales to third parties increased by RUB 1,0021,776 million, or 11.9%6.5%, to RUB 9,42925,420 million in the year ended December 31, 20152018 from RUB 8,42727,196 million in the year ended December 31, 2014, as2017. The decrease was due to a resultdecrease in sales volumes of RUB 2,222 million that was partially offset by an increase in sales prices of RUB 2,853 million that was offset by a decrease in sales volumes of RUB 1,851 million. Average domestic coke price in 2015 was 10,892 rubles per tonne (including VAT, FCA basis), 56% higher than the average price in 2014, according to Metal-Courier. Price growth in the domestic coke market was due to depreciation of the ruble, higher coking coal prices and strong demand from Ukraine.
Coke supplied to the steel segment increased by RUB 6,510 million, or 51.2%, to RUB 19,234 million in the year ended December 31, 2015 from RUB 12,724 million in the year ended December 31, 2014. The increase was due to an increase in sales prices of RUB 6,733 million that was partially offset by a decrease in sales volumes of RUB 223446 million. Coke sales volumes from Mechel Coke to Chelyabinsk Metallurgical Plant slightly decreased by 45170 thousand tonnes, or 2.3%9.0%, from 1,952to 1,727 thousand tonnes in the year ended December 31, 2014 to 1,9072018 from 1,897 thousand tonnes in the year ended December 31, 2015.2017.
Chemical products sales to third parties decreasedincreased by RUB 94593 million, or 3.9%25.1%, to RUB 2,3272,961 million in the year ended December 31, 20152018 from RUB 2,4222,368 million in the year ended December 31, 2014,2017, mainly as a result of an increase in sales prices.
Anthracite and PCI sales to third parties decreased by RUB 1,750 million, or 8.2%, to RUB 19,687 million in the year ended December 31, 2018 from RUB 21,437 million in the year ended December 31, 2017, as a result of a decrease in sales volumes.
Anthracitevolumes of RUB 4,935 million that was partially offset by an increase in sales prices of RUB 3,185 million. The decrease in sales volumes of anthracite and PCI was due to drop in coal extraction as a result of a decrease in transportation capacity.
Steam coal sales to third parties increaseddecreased by RUB 2,5783,512 million, or 11.5%26.1%, to RUB 24,9909,935 million in the year ended December 31, 20152018 from RUB 22,41213,447 million in the year ended December 31, 2014,2017, as a result of a decrease in sales volumes of RUB 3,575 million that was partially offset by an increase in sales prices of RUB 6,748 million that was partially offset by a63 million. The decrease in third-party sales volumes of RUB 4,169 million. The growth of prices denominated in Russian rubles for anthracite and PCI was due to depreciation of the ruble. In 2015, the contract price for metallurgical coal decreased by 28.3% from $99 per tonnedecrease in January 2015 to $71 per tonne in December 2015.
Steam coal sales to third parties increased by RUB 2,899 million, or 66.8%, to RUB 7,236 million in the year ended December 31, 2015 from RUB 4,337 million in the year ended December 31, 2014, as a result of an increase in sales volumes of RUB 2,119 million and an increase in sales prices of RUB 779 million. The growth of prices denominated in Russian rubles for steam coal was due to depreciation of the ruble. In 2015, steam coal market was still in oversupply, despite producers’ efforts to cut production. Chinese power generation and consumption growth has slowed significantly in 2015. The average price in 20152018 was $56$82 per tonne 25% lower(5,500 NAR CFR China), 3.8% higher than the average price in 2014,2017, according to Platts.
Steam coal supplied to the power segment decreased by RUB 27911 million, or 36.8%6.4%, to RUB 479163 million in the year ended December 31, 20152018 from RUB 758174 million in the year ended December 31, 2014,2017, as a result of a decrease in sales volumes. Sales of steam coal to power segment companiesSouthern Kuzbass Power Plant decreased by 35655 thousand tonnes, or 37.9%31.7%, from 937to 120 thousand tonnes in the year ended December 31, 2014 to 5822018 from 175 thousand tonnes in the year ended December 31, 20152017 due to steam coal replacement by middlings.production decrease.
Sales of iron ore concentrate to third parties decreasedincreased by RUB 2,167619 million, or 54%281.0%, to RUB 1,844839 million in the year ended December 31, 20152018 from RUB 4,011220 million in the year ended December 31, 2014,2017, as a result of an increase in sales volumes of RUB 798 million that was partially offset by a decrease in sales prices of RUB 179 million. Iron ore spot prices slightly decreased in 2018 as a result of slower iron ore imports in China and growing global supply of iron ore. The average spot price in 2018 was $69 per dry metric tonne (62% Fe, CFR China) which was 3% lower than the average price in 2017, according to MMI.
Supplies of iron ore concentrate to the steel segment decreased by RUB 2,238 million, or 20.3%, to RUB 8,782 million in the year ended December 31, 2018 from RUB 11,020 million in the year ended December 31, 2017, as a result of a decrease in sales volumes of RUB 2,3332,984 million that was partially offset by an increase in sales prices of RUB 166746 million. Price growth for iron ore wasSales volumes decreased due to depreciation of the ruble. In 2015, new iron ore capacity came on stream which together with a reduction of steel production in China has led to lower prices. Iron ore spot price declined from $68 per dry metric tonne (62% Fe, CFR China) in January to $40 per dry metric tonne in December, according to Platts. The average spot price in 2015 was $56 per dry metric tonne which was 42% lower than the average price in 2014, according to Platts.
Supplies of iron ore to the steel segment increased by RUB 250 million, or 4.5%, to RUB 5,843 million in the year ended December 31, 2015 from RUB 5,593 million in the year ended December 31, 2014, as a result of a RUB 1,070 million increase in sales volumes that was partially offset by a RUB 820 million decrease in sales prices. Sales volumes increased due to the group strategy of redirection of iron ore sales volumes from third parties to group iron ore consumers. The share of iron ore consumed at Chelyabinsk Metallurgical Plant and produced by Korshunov Mining Plant increased from 41.2% in the year ended December 31, 2014 to 52.5% in the year ended December 31, 2015.production.
Excluding intersegment sales, export sales were stable at 74.1%79.0% of mining segment sales in the year ended December 31, 2015,2018, compared to 73.9%77.8% in the year ended December 31, 2014.2017.
Steel segment
Our steel segment revenues increased by RUB 6,13713,401 million, or 4.1%7.4%, to RUB 153,004193,783 million in the year ended December 31, 20152018 from RUB 146,867180,382 million in the year ended December 31, 2014, mainly due2017.
Semi-finished products sales decreased by RUB 438 million, or 89.0%, to RUB 54 million in the year ended December 31, 2018 from RUB 492 million in the year ended December 31, 2017, as a result of a decrease of RUB 471 million in sales volumes and an increase of RUB 33 million in sales prices. The decrease in third-party sales volumes was due to the weakened demand from Russian and European construction, engineering and transport sectors andfact that almost all produced volumes were consumed within our steel segment. In 2018, the declineannual average domestic price for billets (including VAT, FCA basis) was RUB 104,028 per tonne, 303.5% higher than the average domestic price in purchases and resale of products from the former Estar metallurgical plants in 2015. In 2014, Russian rolled steel consumption was at a level of 45.5 million tonnes, in 2015 it declined by 8.7% and amounted to 41.5 million tonnes, according to Metal Expert.2017.
Semi-finishedOther long products sales increased by RUB 2,1932,141 million, or 77.4%4.4%, to RUB 5,02750,872 million in the year ended December 31, 20152018 from RUB 2,83448,731 million in the year ended December 31, 2014,2017, as a result of an increase of RUB 1,0455,716 million in sales prices and an increasethat was partially offset by a decrease in sales volumes of RUB 1,148 million in sales volumes. In 2015, sales prices denominated in Russian rubles increased due to depreciation of the ruble: annual average price for billets (including VAT, FCA basis) was 19,403 rubles per tonne, 18% higher than the average price in 2014. Whereas in 2015 U.S. dollar-denominated prices declined as a result of decreased oil and scrap prices, low demand and increased competition on the background of China’s exports growth, according to Metal-Courier.3,575 million. The increase in third-party sales volumesprices was due to recovery ofincrease in purchase prices for steelmaking raw materials (iron ore feed, coke, ferroalloys, etc.). Sales volumes decreased due to lower demand in the domestic market.Russia.
Other longflat products sales increased by RUB 1,83697 million, or 7.0%0.5%, to RUB 28,15221,404 million in the year ended December 31, 20152018 from RUB 26,31621,307 million in the year ended December 31, 2014,2017, as a result of an increase of RUB 5,4033,839 million in sales prices that was offset by a decrease in sales volumes of RUB 3,742 million. In 2018, the annual average price for flat steel products (including VAT, FCA basis) was RUB 46,479 per tonne, 23.1% higher than the average price in 2017. The sales volume decreased mainly due to temporary suspension of production as a result of equipment repairs.
Wire sales increased by RUB 2,092 million, or 12.0%, to RUB 19,590 million in the year ended December 31, 2018 from RUB 17,498 million in the year ended December 31, 2017, as a result of an increase of RUB 2,352 million in sales prices that was partially offset by a decrease of RUB 3,567 million in sales volumes. The increase in sales prices was mainly due to depreciation of the ruble and, consequently, higher prices for steel-making raw materials (iron ore, coke, coking coal, etc.). Sales volumes decreased due to the decrease in sales volumes of products purchased from the former Estar metallurgical plants and low demand in the Russian market (reduction in the volume of constructions).
Other flat products sales increased by RUB 3,782 million, or 33.9%, to RUB 14,926 million in the year ended December 31, 2015 from RUB 11,144 million in the year ended December 31, 2014, as a result of an increase of RUB 2,660 million in sales prices and an increase of RUB 1,122 million in sales volumes. The increase in ruble-denominated sales prices was driven by depreciation of the ruble against the U.S. dollar: annual average price for flat steel products (including VAT, FCA basis) was 35,892 rubles per tonne, 12% higher than in
2014. Whereas annual average price for hot-rolled coil (Russia exports, FOB Black Sea) in U.S. dollars decreased by 35% to $345 per tonne in the year ended December 31, 2015 from $530 per tonne in the year ended December 31, 2014, according to Metal Expert. The sales volume increased due to the growth in market share and strengthening of consumer demand in the Russian market.
Wire sales increased by RUB 593 million, or 4.0%, to RUB 15,561 million in the year ended December 31, 2015 from RUB 14,968 million in the year ended December 31, 2014, as a result of an increase of RUB 1,883 million in sales prices that was partially offset by a decrease of RUB 1,290260 million in sales volumes. The increase in sales prices was driven by thean increase in the prices of wire rod used as the main input for wire production, as well as by depreciation of the ruble against the U.S. dollar.production. Sales volumes decreaseddeclined due to the weakenedlower demand in Russia and Europe.domestic market.
Rebar sales increased by RUB 4425,265 million, or 1.1%12.3%, to RUB 39,98048,000 million in the year ended December 31, 20152018 from RUB 39,53842,735 million in the year ended December 31, 2014,2017, as a result of an increase of RUB 2,4058,276 million in sales prices that was partially offset by a decrease of RUB 1,9633,011 million in sales volumes. In 2015, the Russian2018, domestic price and export prices in the CIS region for rebar increased mainly due to the ruble depreciation.increase in purchase prices for raw materials. Sales volumes decreased due to lower demandredirection of production in Russian construction sector.favor of high value-added products.
Steel pipes sales decreasedincreased by RUB 83497 million, or 2.4%18.2%, to RUB 3,3083,230 million in the year ended December 31, 20152018 from RUB 3,3912,733 million in the year ended December 31, 2014, as a result of a decrease of RUB 781 million in sales volumes that was offset by an increase of RUB 698 million in sales prices. The price increased due to depreciation of the ruble. The sales volume decreased due to reduction of sales volume of products purchased from the former Estar metallurgical plants and lower demand in the Russian market.
Pig iron sales decreased by RUB 1,964 million, or 60.4%, to RUB 1,287 million in the year ended December 31, 2015 from RUB 3,251 million in the year ended December 31, 2014,2017, as a result of an increase of RUB 175345 million in sales prices and a decrease of RUB 2,139152 million in sales volumes. The decreaseprice increased mainly due to favorable market conditions.
Pig iron sales increased by RUB 19 million, or 16.7%, to RUB 133 million in the year ended December 31, 2018 from RUB 114 million in the year ended December 31, 2017, as a result of an increase of RUB 15 million in sales prices and of RUB 4 million in sales volumes. Pig iron third-party sales volumes was due to the increase independ on consumption within our steel segment.
Stampings sales decreasedincreased by RUB 5033,725 million, or 6.8%45.7%, to RUB 6,91811,871 million in the year ended December 31, 20152018 from RUB 7,4218,146 million in the year ended December 31, 2014,2017, as a result of an increase of
RUB 9673,947 million in sales pricesvolumes that was partially offset by a decrease of RUB 1,470222 million in sales volumes.prices. The increase in sales prices was driven by the increase in domestic prices during 2015. The decrease in sales volumes was due to lowerongoing recovery of demand from the key consuming industries (engineering and transport industries).
Ferrosilicon sales increased by RUB 8151,120 million, or 30.0%39.9%, to RUB 3,5283,927 million in the year ended December 31, 20152018 from RUB 2,7132,807 million in the year ended December 31, 2014,2017, as a result of an increase of RUB 1,172883 million in sales prices that was partially offset by a decreaseand of RUB 357237 million in sales volumes. The increase in sales prices was driven by depreciationthe growth of quotation in the ruble against the U.S. dollar.world market. The decreaseaverage price for ferrosilicon in 2018 was $1,408 per tonne (75% Si, CIF Japan), an increase of 3.3% compared to 2017, according to TEX. The increase in sales volumes was due to the increased competition from the market’s participants.increase in production capacity following furnaces repair at Bratsk Ferroalloy Plant and strong demand for ferrosilicon.
Sales ofnon-core products and services slightly decreased by RUB 5921,339 million, or 9.1%17.8%, to RUB 5,9296,177 million in the year ended December 31, 20152018 from RUB 6,5217,516 million in the year ended December 31, 2014.2017.
Excluding intersegment sales, export sales were 17.7%14.6% of steel segment sales in the year ended December 31, 2015,2018, compared to 17.8%12.1% in the year ended December 31, 2014.2017.
Power segment
Our power segment revenues increased by RUB 1,913683 million, or 4.8%1.6%, to RUB 41,46743,245 million in the year ended December 31, 20152018 from RUB 39,55442,562 million in the year ended December 31, 2014.2017.
Electricity sales to third parties increased by RUB 8961,712 million, or 3.8%7.0%, to RUB 24,52426,009 million in the year ended December 31, 20152018 from RUB 23,62824,297 million in the year ended December 31, 2014,2017, as a result of an increase of RUB 6161,217 million in sales pricesvolumes and an increase of RUB 280496 million in sales volumes.prices.
Other revenue, which consists mostly of capacity and heat energy, decreased by RUB 243162 million, or 11.1%8.4%, to RUB 1,9521,765 million in the year ended December 31, 20152018 from RUB 2,1951,927 million in the year ended December 31, 2014,2017, due to a decrease in capacity sales tariffs and sales volumes.volumes of Southern Kuzbass Power Plant.
Intersegment sales increaseddecreased by RUB 1,259868 million, or 9.2%5.3%, to RUB 14,99015,471 million in the year ended December 31, 20152018 from RUB 13,73116,338 million in the year ended December 31, 2014,2017, mainly as a result of an increase in electricity salestransition to our steel segment by 16.0%.intra-group tolling scheme.
Cost of goods soldsales and gross profit
The consolidated cost of goods soldsales was 59.8%56.9% of consolidated revenues in the year ended December 31, 2015,2018, as compared to 62.7%53.6% of consolidated revenues in the year ended December 31, 2014,2017, resulting in an increasea decrease in consolidated gross profit to 40.2%43.1% in the year ended December 31, 20152018 from 37.3%46.4% for the year ended December 31, 2014.2017. Cost of goods soldsales primarily consists of costs relating to raw materials (including products purchased for resale), direct payroll, depreciation and energy. The table below sets forth cost of goods soldsales and gross profit by segment for the years ended December 31, 20152018 and 2014,2017, including as a percentage of segment revenues.
| Year Ended December 31, 2015 | Year Ended December 31, 2014 | Year Ended December 31, 2018 | Year Ended December 31, 2017 | |||||||||||||||||||||||||||||
Cost of Goods Sold and Gross Profit by Segment | Amount | % of Segment Revenues | Amount | % of Segment Revenues | ||||||||||||||||||||||||||||
Cost of Sales and Gross Profit by Segment | Amount | % of Segment Revenues | Amount | % of Segment Revenues | ||||||||||||||||||||||||||||
| (In millions of Russian rubles, except for percentages) | (In millions of Russian rubles, except for percentages) | |||||||||||||||||||||||||||||||
Mining segment | ||||||||||||||||||||||||||||||||
Cost of goods sold | 51,280 | 47.2 | % | 51,435 | 51.1 | % | ||||||||||||||||||||||||||
Cost of sales | 57,232 | 42.6 | % | 48,952 | 34.4 | % | ||||||||||||||||||||||||||
Gross profit | 57,442 | 52.8 | % | 49,123 | 48.9 | % | 77,199 | 57.4 | % | 93,464 | 65.6 | % | ||||||||||||||||||||
Steel segment | ||||||||||||||||||||||||||||||||
Cost of goods sold | 119,610 | 78.2 | % | 115,485 | 78.6 | % | ||||||||||||||||||||||||||
Cost of sales | 149,349 | 77.1 | % | 146,369 | 81.1 | % | ||||||||||||||||||||||||||
Gross profit | 33,394 | 21.8 | % | 31,382 | 21.4 | % | 44,433 | 22.9 | % | 34,013 | 18.9 | % | ||||||||||||||||||||
Power segment | ||||||||||||||||||||||||||||||||
Cost of goods sold | 30,178 | 72.8 | % | 29,215 | 73.9 | % | ||||||||||||||||||||||||||
Cost of sales | 30,674 | 70.9 | % | 29,838 | 70.1 | % | ||||||||||||||||||||||||||
Gross profit | 11,289 | 27.2 | % | 10,339 | 26.1 | % | 12,571 | 29.1 | % | 12,724 | 29.9 | % | ||||||||||||||||||||
Mining segment
Mining segment cost of goods sold decreasedsales increased by RUB 1558,280 million, or 0.3%16.9%, to RUB 51,28057,232 million in the year ended December 31, 20152018 from RUB 51,43548,952 million in the year ended December 31, 2014.2017. The gross profit percentage increaseddecreased to 52.8%57.4% in the year ended December 31, 20152018 compared to 48.9%65.6% in the year ended December 31, 2014,2017, mainly due to the increase in selling prices denominated in rubles caused by the depreciation of the ruble.stripping costs.
Coal production cash costs per tonne (see “— “Cash Costs per Tonne” Measure”) at Southern Kuzbass Coal Company increased by RUB 263482 per tonne, or 22.0%22.5%, from RUB 1,1972,145 in the year ended December 31, 20142017 to RUB 1,4602,627 in the year ended December 31, 2015,2018, mainly due to the increase in fixed costs share per tonne stimulated by production volumes decrease and growth of purchasing prices caused by the depreciation of the ruble.stripping costs.
ProductionCoal production cash costs of coal at Yakutugol decreasedincreased by RUB 97653 per tonne, or 10.1%78.8%, from RUB 957829 in the year ended December 31, 20142017 to RUB 8601,482 in the year ended December 31, 2015,2018, mainly due to cost cut.increase in fixed costs share per tonne stimulated by production volumes decrease and growth of stripping costs.
Coke production cash costs increased by 8.8%8.7% at Moscow Coke and Gas Plant and by 26.1%6.4% at Mechel Coke following the increase in coking coal concentrate purchase prices caused by the depreciation of the ruble.
ProductionIron ore production cash costs of iron ore increased by 10.5%34.3% mainly due to the increase of share of fixed costsin transportation cost per tonne resulting from a 15.4% decline in iron ore extraction in 2015 compared to 2014.and growth of stripping costs.
Steel segment
Steel segment cost of goods soldsales increased by RUB 4,1252,980 million, or 3.6%2.0%, to RUB 119,610149,349 million in the year ended December 31, 20152018 from RUB 115,485146,369 million in the year ended December 31, 2014.2017. Steel segment cost of goods soldsales was 78.2%77.1% of the segment’s revenues in the year ended December 31, 2015,2018, as compared to 78.6%81.1% in the year ended December 31, 2014.2017. The slight increase in gross profit from 21.4%18.9% to 21.8%22.9% is mainly explainedcaused by the increase in ruble sales prices caused by the depreciationfor most of the ruble.segment’s products.
Power segment
Power segment cost of goods soldsales increased by RUB 963836 million, or 3.3%2.8%, to RUB 30,17830,674 million in the year ended December 31, 20152018 from RUB 29,21529,838 million in the year ended December 31, 2014.2017, due to increase in electricity tariffs and sales volumes. The power segment gross profit percentage increaseddecreased to 27.2%29.1% in the year ended December 31, 20152018 from 26.1%29.9% in the year ended December 31, 20142017 due to salespurchase price increase.
“Cash Costs per Tonne” Measure
In this document, we present cash costs per tonne for coal, coke and iron ore production for each significant production facility of our mining segment. Cash costs per tonne is a performance indicator that is not defined according to IFRS or U.S. GAAP. Cash costs per tonne includes various production costs, such as raw materials, auxiliary materials, wages and social taxes of production personnel, electricity, gas and fuel costs, repairs and maintenance of production equipment, costs of mining works, mineral extraction tax and royalty payments, but excludesnon-cash items such as depreciation depletionand amortization and write-down of inventories to their net realizable value. We use this indicator to evaluate the performance of individual production subsidiaries and their respective ability to generate cash. Cash costs per tonne is a widely used performance indicator in the mining industry to evaluate the cost-effectiveness of mining operations. We believe that investors use this indicator in addition to the financial information prepared in accordance with IFRS to evaluate the performance of our companies. Consequently, this information must be considered supplementary and should not be regarded as a substitute for the performance indicators prepared in accordance with IFRS.
The reconciliation of mining segment production cash costs per tonne for the year ended December 31, 20152018 is presented below:
| In Thousands of Tonnes | Cash Cost, In Thousands of Russian rubles per Tonne | In Millions of Russian rubles | ||||||||||
Coal — Southern Kuzbass Coal Company — sales to third parties | 5,012 | 1.5 | 7,317 | |||||||||
Coal — Southern Kuzbass Coal Company — intersegment sales | 1,674 | 1.5 | 2,444 | |||||||||
Coal — Yakutugol — sales to third parties | 7,540 | 0.9 | 6,483 | |||||||||
Coal — Yakutugol — intersegment sales | — | 0.9 | — | |||||||||
Coal — Elgaugol — sales to third parties | 1,575 | 0.8 | 1,280 | |||||||||
Coal — Elgaugol — intersegment sales | 6 | 0.8 | 5 | |||||||||
Iron ore — Korshunov Mining Plant — sales to third parties | 489 | 2.0 | 983 | |||||||||
Iron ore — Korshunov Mining Plant — intersegment sales | 2,288 | 2.0 | 4,598 | |||||||||
Coke — Moscow Coke and Gas Plant — sales to third parties(1) | 715 | 7.4 | 5,268 | |||||||||
Coke — Moscow Coke and Gas Plant — intersegment sales | 3 | 7.4 | 20 | |||||||||
Coke — Mechel Coke — sales to third parties(2) | 270 | 6.0 | 1,612 | |||||||||
Coke — Mechel Coke — intersegment sales | 1,924 | 6.0 | 11,499 | |||||||||
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| In thousands of tonnes | Cash cost, in thousands of Russian rubles per tonne | In millions of Russian rubles | ||||||||||
Coal — Southern Kuzbass Coal Company — sales to third parties | 3,445 | 2.6 | 9,050 | |||||||||
Coal — Southern Kuzbass Coal Company — intersegment sales | 716 | 2.6 | 1,882 | |||||||||
Coal — Yakutugol — sales to third parties | 5,781 | 1.5 | 8,570 | |||||||||
Coal — Yakutugol — intersegment sales | 44 | 1.5 | 65 | |||||||||
Coal — Elgaugol — sales to third parties | 1,764 | 1.9 | 3,352 | |||||||||
Coal — Elgaugol — intersegment sales | 142 | 1.9 | 270 | |||||||||
Iron ore — Korshunov Mining Plant — sales to third parties | 140 | 3.1 | 427 | |||||||||
Iron ore — Korshunov Mining Plant — intersegment sales | 1,785 | 3.1 | 5,450 | |||||||||
Coke — Moscow Coke and Gas Plant — sales to third parties(1) | 497 | 13.0 | 6,485 | |||||||||
Coke — Moscow Coke and Gas Plant — intersegment sales | 0.2 | 13.0 | 2 | |||||||||
Coke — Mechel Coke — sales to third parties(2) | 199 | 7.4 | 1,481 | |||||||||
Coke — Mechel Coke — intersegment sales | 1,743 | 7.4 | 12,967 | |||||||||
Depreciation and amortization | 6,424 | |||||||||||
Write-down of inventory to their net realizable value | 443 | |||||||||||
Cost of coal produced by third companies andre-sold by our trading subsidiaries, including intersegment sales | 80 | |||||||||||
Stockholding year to year movements, costs of other products and services (coking products, washing services) and costs of other subsidiaries(3) | 284 | |||||||||||
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Total mining segment cost of sales | 57,232 | |||||||||||
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| (1) | Cash costs per tonne for coke |
| (2) | Cash costs per tonne for coke |
| (3) | Costs of other products and |
The reconciliation of mining segment production cash costs per tonne for the year ended December 31, 20142017 is presented below:
| In Thousands of Tonnes | Cash Cost, In Thousands of Russian rubles per Tonne | In Millions of Russian rubles | In thousands of tonnes | Cash cost, in thousands of Russian rubles per tonne | In millions of Russian rubles | |||||||||||||||||||
Coal — Southern Kuzbass Coal Company — sales to third parties | 8,029 | 1.2 | 9,611 | 4,182 | 2.1 | 8,971 | ||||||||||||||||||
Coal — Southern Kuzbass Coal Company — intersegment sales | 1,490 | 1.2 | 1,783 | 833 | 2.1 | 1,788 | ||||||||||||||||||
Coal — Yakutugol — sales to third parties | 8,338 | 1.0 | 7,979 | 7,357 | 0.8 | 6,100 | ||||||||||||||||||
Coal — Yakutugol — intersegment sales | — | 1.0 | — | 0 | 0.8 | 0 | ||||||||||||||||||
Coal — Elgaugol — sales to third parties | 668 | 0.8 | 560 | 1,515 | 1.5 | 2,216 | ||||||||||||||||||
Coal — Elgaugol — intersegment sales | — | 0.8 | — | 87 | 1.5 | 127 | ||||||||||||||||||
Iron ore — Korshunov Mining Plant — sales to third parties | 1,169 | 1.8 | 2,125 | 30 | 2.3 | 69 | ||||||||||||||||||
Iron ore — Korshunov Mining Plant — intersegment sales | 1,920 | 1.8 | 3,492 | 2,448 | 2.3 | 5,566 | ||||||||||||||||||
Coke — Moscow Coke and Gas Plant — sales to third parties(1) | 775 | 6.8 | 5,248 | 556 | 12.0 | 6,670 | ||||||||||||||||||
Coke — Moscow Coke and Gas Plant — intersegment sales | — | 6.8 | — | 1 | 12.0 | 15 | ||||||||||||||||||
Coke — Mechel Coke — sales to third parties(2) | 487 | 4.7 | 2,297 | 214 | 7.0 | 1,497 | ||||||||||||||||||
Coke — Mechel Coke — intersegment sales | 1,961 | 4.7 | 9,249 | 1,914 | 7.0 | 13,384 | ||||||||||||||||||
Depreciation | 5,911 | |||||||||||||||||||||||
Depletion | 1,787 | |||||||||||||||||||||||
Depreciation and amortization | 6,940 | |||||||||||||||||||||||
Write-down of inventory to their net realizable value | 166 | 67 | ||||||||||||||||||||||
Cost of coal produced by third companies and re-sold by our trading subsidiaries, including intersegment sales | 439 | 69 | ||||||||||||||||||||||
Costs of other products and services (coking products, washing services) and costs of other subsidiaries(3) | 788 | |||||||||||||||||||||||
Stockholding year to year movements, costs of other products and services (coking products, washing services) and costs of other subsidiaries(3) | (4,525 | ) | ||||||||||||||||||||||
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Total mining segment cost of sales | 51,435 | 48,952 | ||||||||||||||||||||||
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| (1) | Cash costs per tonne for coke |
| (2) | Cash costs per tonne for coke |
| (3) | Costs of other products and |
Selling, distribution and operating expensesincome and (expenses), net
Selling, distribution and operating expenses decreasedincome and (expenses), net increased by RUB 12,3093,448 million, or 13.7%4.2%, to RUB 77,73985,038 million in the year ended December 31, 20152018 from RUB 90,04881,590 million in the year ended December 31, 2014,2017, as a result of a decreasean increase in administrative and other operating expenses in the mining, steel and power segments and impairment of goodwill and othernon-current assets in the mining and power segments, as well as an increase in allowance for expected credit losses on financial assets in the steel segment,and power segments and a decrease in selling and distribution expenses in the mining segment and allowance for doubtful accounts in the mining, steel and power segments in the year ended December 31, 2015.2018. As a percentage of consolidated revenues, selling, distribution and operating expensesincome and (expenses), net decreased to 30.7%27.2% in the year ended December 31, 20152018 from 36.9%27.3% in the year ended December 31, 2014.2017. Our selling, distribution and operating expensesincome and (expenses), net consist primarily of selling and distribution
expenses, loss onwrite-off ofnon-current assets, impairment of goodwill and othernon-current assets, allowance for expected credit losses on financial assets, taxes other than income taxes, loss on write-off of property, plant and equipment, allowance for doubtful accounts, allowance for amounts due from related parties, impairment of goodwill and other non-current assets and general, administrative and other operating expenses.expenses and other operating income. The table below sets forth these costs by segment for the years ended December 31, 20152018 and 2014,2017, including as a percentage of segment revenues.
| Year Ended December 31, 2015 | Year Ended December 31, 2014 | |||||||||||||||
Selling, Distribution and Operating Expenses by Segment | Amount | % of Segment Revenues | Amount | % of Segment Revenues | ||||||||||||
| (In millions of Russian rubles, except for percentages) | ||||||||||||||||
Mining segment | ||||||||||||||||
Selling and distribution expenses | 28,588 | 26.3 | % | 33,583 | 33.4 | % | ||||||||||
Loss on write-off of property, plant and equipment | 199 | 0.2 | % | 309 | 0.3 | % | ||||||||||
Impairment of goodwill and other non-current assets | — | 0.0 | % | (19 | ) | (0.0 | %) | |||||||||
Allowance for doubtful accounts | 204 | 0.2 | % | 855 | 0.9 | % | ||||||||||
Taxes other than income taxes | 3,706 | 3.4 | % | 4,878 | 4.9 | % | ||||||||||
Allowance for amounts due from related parties | 43 | 0.0 | % | 126 | 0.1 | % | ||||||||||
Administrative and other operating expenses | 8,872 | 8.2 | % | 8,001 | 7.9 | % | ||||||||||
Other operating income | (63 | ) | (0.1 | %) | (329 | ) | (0.3 | %) | ||||||||
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Total | 41,548 | 38.2 | % | 47,404 | 47.1 | % | ||||||||||
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Steel segment | ||||||||||||||||
Selling and distribution expenses | 13,736 | 9.0 | % | 13,394 | 9.1 | % | ||||||||||
Loss on write-off of property, plant and equipment | 492 | 0.3 | % | 242 | 0.2 | % | ||||||||||
Impairment of goodwill and other non-current assets | 16 | 0.0 | % | 8,015 | 5.5 | % | ||||||||||
Allowance for doubtful accounts | 948 | 0.6 | % | 2,290 | 1.6 | % | ||||||||||
Taxes other than income taxes | 2,046 | 1.3 | % | 1,507 | 1.0 | % | ||||||||||
Allowance for amounts due from related parties | — | 0.0 | % | — | 0.0 | % | ||||||||||
Administrative and other operating expenses | 7,825 | 5.1 | % | 7,743 | 5.3 | % | ||||||||||
Other operating income | (123 | ) | (0.1 | %) | (459 | ) | (0.3 | %) | ||||||||
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Total | 24,937 | 16.3 | % | 32,729 | 22.3 | % | ||||||||||
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Power segment | ||||||||||||||||
Selling and distribution expenses | 8,792 | 21.2 | % | 8,685 | 22.0 | % | ||||||||||
Loss on write-off of property, plant and equipment | — | 0.0 | % | 110 | 0.3 | % | ||||||||||
Impairment of goodwill and other non-current assets | 1,444 | 3.5 | % | — | 0.0 | % | ||||||||||
Allowance for doubtful accounts | 312 | 0.8 | % | 526 | 1.3 | % | ||||||||||
Taxes other than income taxes | 103 | 0.2 | % | 86 | 0.2 | % | ||||||||||
Allowance for amounts due from related parties | — | 0.0 | % | — | 0.0 | % | ||||||||||
Administrative and other operating expenses | 603 | 1.5 | % | 571 | 1.4 | % | ||||||||||
Other operating income | (0 | ) | (0.0 | %) | (63 | ) | (0.2 | %) | ||||||||
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Total | 11,254 | 27.1 | % | 9,915 | 25.1 | % | ||||||||||
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Selling, Distribution and Operating Income and (Expenses), Net by Segment Mining segment Selling and distribution expenses Loss onwrite-off ofnon-current assets Impairment of goodwill and othernon-current assets Allowance for expected credit losses on financial assets Taxes other than income taxes Administrative and other operating expenses Other operating income Total Steel segment Selling and distribution expenses Loss onwrite-off ofnon-current assets Impairment of goodwill and othernon-current assets Allowance for expected credit losses on financial assets Taxes other than income taxes Administrative and other operating expenses Other operating income Total Power segment Selling and distribution expenses Loss onwrite-off ofnon-current assets Impairment of goodwill and othernon-current assets Allowance for expected credit losses on financial assets Taxes other than income taxes Administrative and other operating expenses Other operating income Total Year Ended
December 31, 2018 Year Ended
December 31, 2017 Amount % of Segment
Revenues Amount % of Segment
Revenues (In millions of Russian rubles, except for percentages) 29,469 21.9 % 30,551 21.5 % 573 0.4 % 135 0.1 % 3,684 2.7 % 3,801 2.7 % 43 0.1 % 156 0.1 % 2,942 2.2 % 3,329 2.3 % 8,452 6.3 % 7,789 5.5 % (538 ) (0.4 %) (488 ) (0.3 %) 44,625 33.2 % 45,273 31.8 % 14,134 7.3 % 14,266 7.9 % 257 0.1 % 145 0.1 % 819 0.4 % 2,280 1.3 % 161 0.1 % (266 ) (0.1 %) 1,809 0.9 % 1,530 0.8 % 8,068 4.2 % 7,185 4.0 % (646 ) (0.3 %) (281 ) (0.2 %) 24,602 12.7 % 24,859 13.8 % 11,385 26.3 % 10,869 25.5 % 29 0.1 % 41 0.1 % 2,719 6.3 % — 0.0 % 736 1.7 % 442 1.0 % 83 0.2 % 108 0.3 % 1,386 3.2 % 616 1.4 % (527 ) (1.2 %) (618 ) (1.5 %) 15,811 36.6 % 11,458 26.9 %
Mining segment
Selling and distribution expenses consisted almost entirely of transportation expenses related to our selling activities. Such expenses decreased by RUB 4,9941,082 million, or 14.9%3.5%, to RUB 28,55829,469 million in the year ended December 31, 20152018 from RUB 33,58230,551 million in the year ended December 31, 2014,2017, mainly due to the decrease in segment export sales volumes by 19.9%18%. As a percentage of mining segment revenues, selling and distribution expenses decreasedincreased from 33.4%21.5% to 26.3%21.9% due to anthe increase of 35.6% in sales revenue from sales to steel segment and simultaneous decreaserailway tariffs.
Loss onwrite-off of 14.9% in selling and distribution expenses.
Taxes other than income tax decreasednon-current assets increased by RUB 1,172438 million, or 24.0%323.4%, to RUB 3,706573 million in the year ended December 31, 20152018 from RUB 4,878135 million in the year ended December 31, 2014. The decrease was due to several accruals for taxes other than income tax made in the financial statements for the year ended December 31, 2014, namely additional tax liabilities for previous years of RUB 548 million at Tomusinsky Open Pit. There are no similar accruals in 2015. Tax penalties imposed by the tax authorities due to delays in tax payments decreased by RUB 515 million from RUB 697 million in the year ended December 31, 2014 to RUB 181 million in the year ended December 31, 2015.
Allowance for doubtful accounts decreased by RUB 651 million to RUB 204 million in the year ended December 31, 2015 from RUB 855 million in the year ended December 31, 2014,2017, due to the decrease in outstanding accounts receivable at the end of 2015. In accordance with our accounting policy, we apply specific rates to overdue accounts receivable depending on the history of cash collections and events and conditions at the reporting date.
Provisions for amounts due from related parties decreased by RUB 83 million to RUB 43 million in the year ended December 31, 2015 from RUB 126 million in the year ended December 31, 2014 due to repayments. See note 14 to the consolidated financial statements.
Loss on write-off of property, plant and equipment decreased by RUB 110 million, or 35.4%, to RUB 199 million in the year ended December 31, 2015 from RUB 309 million in the year ended December 31, 2014, due to the decreaseincrease in the number of property, plant and equipment objects that are not planned for further use in production process at Yakutugolour mining service subsidiaries.
Impairment of goodwill and othernon-current assets decreased by RUB 117 million, or 3.1%, to RUB 3,684 million in the year ended December 31, 2018 from RUB 3,801 million in the year ended December 31, 2017. In 2017, we recognized impairment of property, plant and equipment and mineral licenses in relation to (i) Korshunov Mining Plant of RUB 2,271 million due to the decline in long-term forecast for iron ore prices and growth of stripping costs required for removal of landslide deformations and (ii) Southern Kuzbass Coal Company.Company of RUB 1,529 million due to the refusal by the regulatory authorities to extend the term of mineral license for exploration and extraction. In 2018, we recognized impairment of property, plant and equipment in relation to (i) Korshunov Mining Plant of RUB 1,151 million since the estimated future cash flows remain negative and (ii) Southern Kuzbass Coal Company of RUB 2,533 million due to changes in management’s plans to invest funds into the ongoing construction projects and, as a result, the inability to generate future economic benefits in the current market conditions. See note 18 to the consolidated financial statements.
General, administrativeAllowance for expected credit losses on financial assets decreased by RUB 113 million to RUB 43 million in the year ended December 31, 2018 from RUB 156 million in the year ended December 31, 2017, due to the decrease in overdue accounts receivable.
Taxes other than income taxes decreased by RUB 387 million, or 11.6%, to RUB 2,942 million in the year ended December 31, 2018 from RUB 3,329 million in the year ended December 31, 2017, as accruals of fines and penalties for taxes other than income tax in 2018 are less than in 2017.
Administrative and other operating expenses consist of payroll and payroll taxes, depreciation, rent and maintenance, legal and consulting expenses, office overheads and other expenses. These expenses increased by RUB 1,135663 million, or 14.8%8.5%, to RUB 8,8078,452 million in the year ended December 31, 20152018 from RUB 7,6727,789 million in the year ended December 31, 2014,2017, mainly as a result of the depreciation of the Russian ruble:an increase in salaries and related social taxes increased by RUB 6901,087 million, or 15.0%24.8%, to RUB 5,2995,473 million in the year ended December 31, 20152018 from RUB 4,6094,386 million in the year ended December 31, 2014; legal and consulting fees and insurance services2017.
Other operating income increased insignificantly by 11.2%RUB 50 million to RUB 278538 million in the year ended December 31, 20152018 from RUB 250488 million in the year ended December 31, 2014; and other administrative and operating expenses increased by RUB 417 million, or 14.6%, to RUB 3,230 million in the year ended December 31, 2015 from RUB 2,813 million in the year ended December 31, 2014.2017.
Steel segment
Selling and distribution expenses consisted almost entirely of transportation expenses related to our selling activities. Such expenses increaseddecreased by RUB 343132 million, or 2.6%0.9%, to RUB 13,73614,134 million in the year ended December 31, 20152018 from RUB 13,39314,266 million in the year ended December 31, 2014,2017, mainly due to the increaseoverall decrease in railway tariffs by 10.0%sales volumes of steel segment products that was partially offset by the decreaseincrease in sales volume.railway tariffs in 2018 as compared to 2017. As a percentage of steel segment revenues, selling and distribution expenses decreased to 9.0%7.3% in the year ended December 31, 20152018 from 9.1%7.9% in the year ended December 31, 2014.2017.
Taxes other than income taxLoss onwrite-off ofnon-current assets increased by RUB 539112 million, or 35.8%77.2%, to RUB 2,044257 million in the year ended December 31, 20152018 from RUB 1,505145 million in the year ended December 31, 2014. As a percentage of
segment revenues, these taxes increased from 1.0% to 1.3%. Property and land taxes increased by RUB 193 million, or 17.7%, to RUB 1,282 million in the year ended December 31, 2015 from RUB 1,089 million in the year ended December 31, 2014, mainly due to revision of the cadastral valuation of land.
Allowance for doubtful accounts decreased by RUB 1,342 million, or 58.6%, to RUB 948 million in the year ended December 31, 2015 from RUB 2,290 million in the year ended December 31, 2014, mainly due to the fact that main provision in relation to certain of the former Estar metallurgical plants had entered into bankruptcy proceedings was recognized in 2014 and in previous years.
Loss on write-off of property, plant and equipment increased by RUB 250 million, or 103.3%, to RUB 492 million in the year ended December 31, 2015 from RUB 242 million in the year ended December 31, 2014,2017, due to the increase in thea number of idled property, plant and equipment written off by our steel production subsidiaries.
Impairment of goodwill and othernon-current assets decreased by RUB 7,9991,461 million, or 99.8%.64.1%, to RUB 819 million in the year ended December 31, 2018 from RUB 2,280 million in the year ended December 31, 2017. In 2014,2017, we recognized impairment of property, plant and equipment and construction in progress in relation to Izhstal of RUB 6,6692,130 million Donetsk Electrometallurgicaland additional impairment in relation to Bratsk Ferroalloy Plant of RUB 1,283 million and Mechel Service Romania of RUB 63 million due to the lack of positive prospects for the recovery of the European market.151 million. In 2015,2018, we recognized reversal ofadditional impairment of other non-current assets in relation to Izhstal of RUB 5,967782 million and recognized additional impairment of other non-current assets in relation to Mechel Materialscompanies of RUB 5,98337 million.
General, administrativeAllowance for expected credit losses on financial assets changed by RUB 427 million, or 160.5%, to RUB 161 million loss in the year ended December 31, 2018 from RUB 266 million income in the year ended
December 31, 2017. In 2017, we recognized income as a result of reversal of allowance recorded as of December 31, 2016, due to the decrease in outstanding doubtful accounts as of December 31, 2017 and collection of certain accounts receivable provided for as of December 31, 2016. In 2018, we recognized losses on financial assets on individual basis due to increase in overdue accounts receivable.
Taxes other expensesthan income taxes increased by RUB 418279 million, or 5.7%18.2%, to RUB 7,7021,809 million in the year ended December 31, 20152018 from RUB 7,2841,530 million in the year ended December 31, 2014. A percentage of segment revenues remained at the level of 5.0%2017, mainly due to increase in the years ended December 31, 2015amount of probable tax risks in respect of VAT in 2018. Property and 2014. Payroll and related socialland taxes slightly increased by RUB 14440 million or 4.0%, to RUB 3,7501,335 million in the year ended December 31, 20152018 from RUB 3,6061,295 million in the year ended December 31, 2014. Social2017.
Administrative and other operating expenses decreasedincreased by RUB 43883 million, or 16.8%12.3%, to RUB 2158,068 million in the year ended December 31, 20152018 from RUB 2587,185 million in the year ended December 31, 2014, due to the cost-cutting measures implemented by our management. Rent2017. Payroll and maintenance, business travel expenses, bank charges and office expensesrelated social taxes increased by RUB 841,545 million, or 9.6%49.6%, to RUB 9594,658 million in the year ended December 31, 20152018 from RUB 8753,113 million in the year ended December 31, 2014. Professional expenses, which include auditing, accounting, legal and engineering fees and insurance services decreased by RUB 122 million, or 27.9%, to RUB 315 million in the year ended December 31, 2015 from RUB 437 million in the year ended December 31, 2014, due to thecost-cutting measures implemented by our management and the decreased involvement of external consultants in 2015.2017. Fines and penalties expenses on breach of trading contracts, increasedprovisions related to claims decreased by RUB 317975 million, or 149.4%66.8%, to RUB 529485 million in the year ended December 31, 20152018 from RUB 2121,460 million in the year ended December 31, 2014.2017, mainly due to recognition of provision related to claim of Minmetals in 2017. Other administrative and operating expenses increased by RUB 38312 million, or 2.0%12.0%, to RUB 1,9342,925 million in the year ended December 31, 20152018 from RUB 1,8962,613 million in the year ended December 31, 2014.2017.
Other operating income increased by RUB 365 million, or 129.9%, to RUB 646 million in the year ended December 31, 2018 from RUB 281 million in the year ended December 31, 2017, mainly due to increase of profit from sales of property, plant and equipment.
Power segment
In 2015, sellingSelling and distribution expenses consisted almost entirely of electricity transmission costs incurred by our Kuzbass Power Sales Company for the usage of the power grid through which electricity is distributed to end consumers. TheseSuch expenses increased by RUB 108517 million, or 1.2%4.8%, to RUB 8,79211,386 million in the year ended December 31, 20152018 from RUB 8,68510,869 million in the year ended December 31, 2014.2017, due to an increase in transmission tariffs and sales volumes.
Taxes other thanOther operating income tax increasedwas recognized in the amount of RUB 527 million mainly as a result of subsidies received from the governmental authorities as a compensation for operating activities (energy tariffs).
Operating profit
Operating profit decreased by RUB 167,387 million, or 18.8%12.9%, to RUB 10349,780 million in the year ended December 31, 20152018 from RUB 8657,167 million in the year ended December 31, 2014, due2017. As a percentage of consolidated revenues, operating profit decreased to the increase in property tax accrued by Southern Kuzbass Power Plant.
Allowance for doubtful accounts decreased by RUB 214 million to RUB 312 million15.9% in the year ended December 31, 20152018 from RUB 526 million19.1% in the year ended December 31, 2014,2017, mainly due to thea decrease in allowance for trade receivables from the former Estar metallurgical plants.
In 2015, as a result of the goodwill impairment test we recognized the impairment loss of Southern Kuzbass Power Plant in the amount of RUB 1,444 million. No impairment loss was recognized in 2014. See note 19 to the consolidated financial statements.
General, administrative and other expenses increased by RUB 32 million, or 5.6%, to RUB 603 million in the year ended December 31, 2015 from RUB 571 million in the year ended December 31, 2014, due to reversal of provisions for legal claims and reduction in personnel expenses as a result of power plants organizational optimization.
Operating profit
Operating profit increased by RUB 23,181 million, or 2,613%, to RUB 24,068 million in the year ended December 31, 2015 from RUB 887 million in the year ended December 31, 2014. Operating profit as a percentage of consolidated revenues was 9.5% in the year ended December 31, 2015 and 0.4% in the year ended December 31, 2014, mainly due to an increase in consolidated gross profit to 40.2%and an increase in the year ended December 31, 2015 from 37.3% in the year ended December 31, 2014administrative and a decrease in losses from allowance for amounts due from related partiesother operating expenses and impairment of goodwill and othernon-current assets as explained above.
The table below sets out operating profit (loss) by segment, including as a percentage of segment revenues.
| Year Ended December 31, 2015 | Year Ended December 31, 2014 | Year Ended December 31, 2018 | Year Ended December 31, 2017 | |||||||||||||||||||||||||||||
Operating Profit (Loss) by Segment | Amount | % of Segment Revenues | Amount | % of Segment Revenues | Amount | % of Segment Revenues | Amount | % of Segment Revenues | ||||||||||||||||||||||||
| (In millions of Russian rubles, except for percentages) | (In millions of Russian rubles, except for percentages) | |||||||||||||||||||||||||||||||
Mining segment | 15,895 | 14.6 | % | 1,718 | 1.7 | % | 32,574 | 24.2 | % | 48,191 | 33.8 | % | ||||||||||||||||||||
Steel segment | 8,456 | 5.5 | % | (1,347 | ) | (0.9 | %) | 19,831 | 10.2 | % | 9,154 | 5.1 | % | |||||||||||||||||||
Power segment | 35 | 0.1 | % | 424 | 1.1 | % | (3,240 | ) | (7.5 | )% | 1,266 | 3.0 | % | |||||||||||||||||||
Elimination of intersegment unrealized (profit) loss(1) | (318 | ) | 91 | |||||||||||||||||||||||||||||
Elimination of intersegment unrealized profit(1) | 615 | (1,444 | ) | |||||||||||||||||||||||||||||
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Consolidated operating profit | 24,068 | 887 | 49,780 | 57,167 | ||||||||||||||||||||||||||||
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| (1) | Our management evaluates the performance of our segments before the elimination of unrealized profit in inventory balances of segments that was generated by the segments but not recognized as profit in our consolidated financial statements until the sale of such inventories to third parties. Therefore, we present our segments before such elimination, and such elimination is presented separately. The change in intersegment unrealized profit adjustment in the year ended December 31, |
Mining segment
Mining segment operating income increasedprofit decreased by RUB 14,17715,617 million, or 825.1%32.4%, to RUB 15,89532,574 million in the year ended December 31, 20152018 from RUB 1,71848,191 million in the year ended December 31, 2014.2017. The operating profit percentage increasedmargin decreased to 14.6%24.2% in the year ended December 31, 20152018 from 1.7%33.8% in the year ended December 31, 2014,2017, mainly due to the increase in selling prices denominated in rublescost of sales caused by the depreciationgrowth of stripping costs that was partially offset by the ruble.increase in selling prices.
Steel segment
Steel segment operating results changedprofit increased by RUB 9,80310,677 million, or 727.8%116.6%, to RUB 8,45619,831 million income in the year ended December 31, 20152018 from RUB 1,3479,154 million loss in the year ended December 31, 2014.2017. The operating profit percentage changedmargin increased to positive 5.5%10.2% in the year ended December 31, 20152018 from negative 0.9%5.1% in the year ended December 31, 2014, mainly2017, due to the factors that affected operating incomeincrease in 2014, such as the recognition of losses from the impairment of non-current assets of Izhstal and Donetsk Electrometallurgical Plant and a provision on trade and other balances due from the former Estar metallurgical plants.sales prices for almost all steel segment products.
Power segment
Power segment operating income decreased(loss) profit changed by RUB 3894,507 million, or 91.8%355.8%, to an operating loss of RUB 353,240 million in the year ended December 31, 20152018 from an operating profit of RUB 4241,266 million in the year ended December 31, 2014.2017. The operating profit percentage decreasedmargin changed to 0.1%negative 7.5% in the year ended December 31, 20152018 from 1.1%positive 3.0% in the year ended December 31, 2014,2017, mainly due to the optimizationimpairment of expensesgoodwill and the increase in sales tariffs.property, plant and equipment at Southern Kuzbass Power Plant and accrual of provision for legal claims.
Other income and expense, net
Other income and expense, net consists of share of profitgain of an associate, finance income, finance costs, other income and other expenses and foreign exchange loss.gain (loss). The table below sets forth these costs for the years ended December 31, 20152018 and 2014,2017, including as a percentage of revenues.
| Year Ended December 31, 2015 | Year Ended December 31, 2014 | Year Ended December 31, 2018 | Year Ended December 31, 2017 | |||||||||||||||||||||||||||||
Other Income and Expense, Net | Amount | % of Revenues | Amount | % of Revenues | Amount | % of Revenues | Amount | % of Revenues | ||||||||||||||||||||||||
| (In millions of Russian rubles, except for percentages) | (In millions of Russian rubles, except for percentages) | |||||||||||||||||||||||||||||||
Finance income | 183 | 0.1 | % | 107 | 0.0 | % | 34,056 | 10.9 | % | 633 | 0.2 | % | ||||||||||||||||||||
Finance costs | (60,453 | ) | (23.9 | )% | (28,110 | ) | (11.5 | )% | (42,052 | ) | (13.5 | )% | (47,610 | ) | (15.9 | )% | ||||||||||||||||
Foreign exchange loss | (71,106 | ) | (28.0 | )% | (103,176 | ) | (42.3 | )% | ||||||||||||||||||||||||
Share of profit of an associate | — | 0.0 | % | 7 | 0.0 | % | ||||||||||||||||||||||||||
Foreign exchange gain (loss) | (25,775 | ) | (8.2 | )% | 4,237 | 1.4 | % | |||||||||||||||||||||||||
Share of gain of an associate | 10 | 0.0 | % | 18 | 0.0 | % | ||||||||||||||||||||||||||
Other income | 526 | 0.2 | % | 684 | 0.3 | % | 512 | 0.2 | % | 1,495 | 0.5 | % | ||||||||||||||||||||
Other expenses | (347 | ) | (0.1 | )% | (1,486 | ) | (0.6 | )% | (314 | ) | (0.1 | )% | (220 | ) | (0.1 | )% | ||||||||||||||||
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Total | (131,196 | ) | (51.8 | )% | (131,974 | ) | (54.1 | )% | (33,563 | ) | (10.7 | )% | (41,447 | ) | (13.9 | )% | ||||||||||||||||
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Finance income increased by RUB 7633,423 million, or 71%5,280.1%, to RUB 18334,056 million in the year ended December 31, 20152018 from RUB 107633 million in the year ended December 31, 2014, mainly2017, due to finesgain recognized as a result of debt restructuring and penalties on overdue accounts receivable and an increase in exchange rates.refinancing.
Finance costs increaseddecreased by RUB 32,3425,558 million, or 115.1%11.7%, to RUB 60,45342,052 million in the year ended December 31, 20152018 from RUB 28,11047,610 million in the year ended December 31, 2014,2017, due to the increasedecrease in the weighted average interest rate from 12.0%rates and repayment of loans in 2018.
In the year ended December 31, 2014 to 15.0% in the year ended December 31, 2015 and the increase of fines and penalties on overdue borrowings and interest payable by RUB 19,288 million.
Foreign2018, we generated foreign exchange loss decreased by RUB 32,070 million, or 31.2%,amounted to RUB 71,10625,775 million compared to foreign exchange gain amounted to RUB 4,237 million in the year ended December 31, 2015 from2017, mainly due to strengthening of the U.S. dollar against the ruble in 2018.
Share of gain of an associate decreased by RUB 103,1768 million, or 44.4%, to RUB 10 million in the year ended December 31, 2014, mainly due to a decline of volatility of the ruble exchange rate in the year ended December 31, 2015 as compared to the year ended December 31, 2014.
Share of profit of an associate decreased by RUB 7 million to RUB nil in the year ended December 31, 20152018 from RUB 718 million in the year ended December 31, 2014. Income earned2017, due to decrease of gain from investments in 2014 related to our share of income from our equity investment of BWS Bewehrungsstahl GmbH (see note 8 to the consolidated financial statements).Tomusinsky Transportation Management Center and Tomusinsky Auto Repair Shop.
Other income decreased by RUB 158983 million, or 23.1%65.8%, to RUB 526512 million in the year ended December 31, 20152018 from RUB 6841,495 million in the year ended December 31, 2014 and other2017, mainly due to gain from waiving of penalties from Novatek — Chelyabinsk OOO in the amount of RUB 442 million in 2017.
Other expenses decreasedincreased by RUB 1,13994 million, or 76.6%42.7%, to RUB 347314 million in the year ended December 31, 20152018 from RUB 1,486220 million in the year ended December 31, 2014, mainly due to a loss related to the failure of a counterparty to a securities repurchase agreement to return certain securities to our group.2017.
Income tax expense (benefit)
Income tax expense changeddecreased by RUB 17,144469 million, or 194.3%14.9%, to RUB 8,3222,681 million expense in the year ended December 31, 20152018 from RUB 8,8223,150 million benefit in the year ended December 31, 2014, due to an overall increase in operating income.2017. Our effective tax rate changeddecreased to positive 7.8%16.5% from negative 6.7%,20.0%. The decrease in current income tax expense is explained by the decrease in profit before tax in 2018. This decrease was partially offset by deferred tax expense from gain recognized as a result of refinancing ofpre-export facilities. Decrease in effective tax rate is due to theeffect of restructuring and increase in loss from continuing operations before income tax.non-deductible expenses.
Net income (loss) from discontinued operationsprofit attributable tonon-controlling interests
Net income (loss) from discontinued operations changedprofit attributable tonon-controlling interests decreased by RUB 12,524105 million, or 107.0%10.4%, to RUB 822908 million income in the year ended December 31, 20152018 from RUB 11,7021,013 million loss in the year ended December 31, 2014,
2017, mainly due to the recognition of Bluestonechange in net profits in respective subsidiaries such as held for sale and recognition of corresponding impairment loss in 2014.
Net income attributable to non-controlling interests
Net income attributable to non-controlling interests changed by RUB 1,798 million, or 142.4%, to a RUB 535 million income in the year ended December 31, 2015 from a RUB 1,263 million loss in the year ended December 31, 2014. The non-controlling interest in the loss of our subsidiaries in the year ended December 31, 2015 was RUB 927 million for Southern Kuzbass Coal Company and RUB 104 million for Izhstal and was partially offset by the non-controlling interest in the income ofChelyabinsk Metallurgical Plant, Urals Stampings Plant, Korshunov Mining Plant, of RUB 113 million, Chelyabinsk Metallurgical Plant of RUB 132 million and Kuzbass Power Sales Company of RUB 155 million.and Southern Kuzbass Coal Company.
Net lossprofit attributable to equity holders of the parent
Net lossprofit attributable to our equity holders decreasedincreased by RUB 17,5411,071 million, or 13.2%9.3%, to RUB 115,16312,628 million in the year ended December 31, 20152018 from RUB 132,70411,557 million in the year ended December 31, 2014,2017, mainly due to the increase in finance income and change in foreign exchange gain (loss).
Year ended December 31, 2017 compared to year ended December 31, 2016
Revenues
Consolidated revenues increased by RUB 23,104 million, or 8.4%, to RUB 299,113 million in the year ended December 31, 2017 from RUB 276,009 million in the year ended December 31, 2016.
The sales increase was due to an increase in sales prices across our major segments.
The following table sets forth our net revenues by segment, including a breakdown by sales to third parties and other segments.
| Year Ended December 31, | ||||||||
Revenues by Segment | 2017 | 2016 | ||||||
| (In millions of Russian rubles, except for percentages) | ||||||||
Mining segment | ||||||||
To third parties | 100,129 | 89,647 | ||||||
To power segment | 921 | 1,370 | ||||||
To steel segment | 41,365 | 30,537 | ||||||
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| |||||
Total | 142,415 | 121,554 | ||||||
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| |||||
Steel segment | ||||||||
To third parties | 172,760 | 161,639 | ||||||
To power segment | 5,917 | 5,693 | ||||||
To mining segment | 1,705 | 1,562 | ||||||
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Total | 180,382 | 168,893 | ||||||
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Power segment | ||||||||
To third parties | 26,224 | 24,723 | ||||||
To steel segment | 12,387 | 11,709 | ||||||
To mining segment | 3,951 | 4,193 | ||||||
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Total | 42,562 | 40,626 | ||||||
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| |||||
Eliminations | 66,246 | 55,064 | ||||||
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Consolidated revenues | 299,113 | 276,009 | ||||||
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| |||||
% from mining segment | 33.5 | % | 32.5 | % | ||||
% from steel segment | 57.7 | % | 58.5 | % | ||||
% from power segment | 8.8 | % | 9.0 | % | ||||
Mining segment
Our mining segment revenues increased by RUB 20,861 million, or 17.2%, to RUB 142,415 million in the year ended December 31, 2017 from RUB 121,554 million in the year ended December 31, 2016.
Coking coal concentrate sales to third parties increased by RUB 4,912 million, or 12.7%, to RUB 43,656 million in the year ended December 31, 2017 from RUB 38,744 million in the year ended December 31, 2016, as a result of an increase in sales prices of RUB 11,525 million that was partially offset by a decrease in sales volumes of RUB 6,613 million. The average contract price in 2017 was $206 per tonne, 81% higher than the average contract price in 2016, according to CRU. The average spot price in 2017 was $183 per tonne (FOB Australia), 31% higher than the average spot price in 2016, according to CRU.
The volume of coking coal concentrate sold to third parties decreased by 987 thousand tonnes, or 17.1%, to 4,797 thousand tonnes in the year ended December 31, 2017 from 5,784 thousand tonnes in the year ended December 31, 2016. The decrease in sales volumes of coking coal concentrate was mainly due to the decreased production of coking coal.
The volume of coking coal concentrate sold to third parties decreased both at Yakutugol and Southern Kuzbass Coal Company. Yakutugol’s coking coal concentrate sales volumes decreased by 1,011 thousand tonnes, or 19.8%, to 4,109 thousand tonnes in the year ended December 31, 2017 from 5,120 thousand tonnes in the year ended December 31, 2016 due to lower coking coal output as a result of unfavorable geological conditions. Southern Kuzbass Coal Company’s coking coal concentrate sales volumes decreased by 159 thousand tonnes, or 37.8%, to 262 thousand tonnes in the year ended December 31, 2017 from 421 thousand tonnes in the year ended December 31, 2016 due to decrease in production.
Coke sales to third parties increased by RUB 2,037 million, or 21.8%, to RUB 11,379 million in the year ended December 31, 2017 from RUB 9,342 million in the year ended December 31, 2016, as a result of an increase in sales prices of RUB 3,323 million that was partially offset by a decrease in sales volumes of RUB 1,286 million. In 2017, coke prices increased from $278 per tonne (FOB China basis) in the first quarter of 2017 to $315 per tonne (FOB China basis) in the fourth quarter of 2017, according to CRU. The average domestic coke price in 2017 was RUB 17,902 per tonne (including VAT, FCA basis), which was 49% higher than the average price in 2016, according to Metal Expert.
Coke supplied to the steel segment increased by RUB 6,110 million, or 29.0%, to RUB 27,196 million in the year ended December 31, 2017 from RUB 21,086 million in the year ended December 31, 2016. The increase was due to an increase in sales prices of RUB 6,589 million that was partially offset by a decrease in sales volumes of RUB 479 million. Coke sales volumes from Mechel Coke to Chelyabinsk Metallurgical Plant slightly decreased by 24 thousand tonnes, or 1.3%, to 1,897 thousand tonnes in the year ended December 31, 2017 from 1,921 thousand tonnes in the year ended December 31, 2016.
Chemical products sales to third parties increased by RUB 380 million, or 19.1%, to RUB 2,368 million in the year ended December 31, 2017 from RUB 1,988 million in the year ended December 31, 2016, mainly as a result of an increase in sales prices.
Anthracite and PCI sales to third parties increased by RUB 2,700 million, or 14.4%, to RUB 21,437 million in the year ended December 31, 2017 from RUB 18,737 million in the year ended December 31, 2016, as a result of an increase in sales prices of RUB 4,335 million that was partially offset by a decrease in sales volumes of RUB 1,635 million. The decrease in sales volumes of anthracite and PCI was due to drop in coal extraction as a result of a decrease in transportation capacity.
Steam coal sales to third parties increased by RUB 860 million, or 6.8%, to RUB 13,447 million in the year ended December 31, 2017 from RUB 12,587 million in the year ended December 31, 2016, as a result of an increase in sales prices of RUB 1,284 million that was partially offset by a decrease in sales volumes of RUB 424 million. In the first half of 2017, steam coal price fluctuated around $75 per tonne (5,500 NAR CFR China) and then started to grow reaching $88 per tonne (5,500 NAR CFR China) in October 2017 due to strong Chinese coal demand during the summer. The average price in 2017 was $79 per tonne (5,500 NAR CFR China), 34% higher than the average price in 2016, according to Platts.
Steam coal supplied to the power segment decreased by RUB 176 million, or 50.3%, to RUB 174 million in the year ended December 31, 2017 from RUB 350 million in the year ended December 31, 2016, as a result of a decrease in sales volumes. Sales of steam coal to Southern Kuzbass Power Plant decreased by 187 thousand tonnes, or 51.6%, to 175 thousand tonnes in the year ended December 31, 2017 from 362 thousand tonnes in the year ended December 31, 2016 due to steam coal production decrease.
Sales of iron ore concentrate to third parties increased by RUB 94 million, or 74.6%, to RUB 220 million in the year ended December 31, 2017 from RUB 126 million in the year ended December 31, 2016, as a result of an increase in sales volumes of RUB 19 million and an increase in sales prices of RUB 75 million. Strong Chinese steel sector supported iron ore prices in 2017 and the average spot price reached $71 per dry metric tonne (62% Fe, CFR China) which was 22% higher than the average price in 2016, according to MMI. Throughout the year prices fluctuated from $54 to $93 per dry metric tonne (62% Fe, CFR China), according to MMI.
Supplies of iron ore concentrate to the steel segment increased by RUB 2,576 million, or 30.5%, to RUB 11,020 million in the year ended December 31, 2017 from RUB 8,444 million in the year ended December 31, 2016, as a result of an increase in sales prices of RUB 3,320 million that was partially offset by a decrease in sales volumes of RUB 744 million. Sales volumes decreased due to decrease in production.
Excluding intersegment sales, export sales were stable at 77.8% of mining segment sales in the year ended December 31, 2017, compared to 74.6% in the year ended December 31, 2016.
Steel segment
Our steel segment revenues increased by RUB 11,489 million, or 6.8%, to RUB 180,382 million in the year ended December 31, 2017 from RUB 168,893 million in the year ended December 31, 2016.
Semi-finished products sales decreased by RUB 2,942 million, or 85.7%, to RUB 492 million in the year ended December 31, 2017 from RUB 3,434 million in the year ended December 31, 2016, as a result of a decrease of RUB 3,075 million in sales volumes and an increase of RUB 133 million in sales prices. The decrease in third-party sales volumes was due to increase in consumption within our steel segment related to expansion of the universal rolling mill’s production. In 2017, the annual average domestic price for billets (including VAT, FCA basis) was RUB 25,780 per tonne, 18.1% higher than the average domestic price in 2016.
Other long products sales increased by RUB 9,632 million, or 24.6%, to RUB 48,731 million in the year ended December 31, 2017 from RUB 39,099 million in the year ended December 31, 2016, as a result of an increase of RUB 5,133 million in sales prices and an increase of RUB 4,499 million in sales volumes. The increase in sales prices was due to increase in purchase prices for steelmaking raw materials (iron ore feed, coke, etc.). Sales volumes increased due to strengthening demand in the Russian market and increase in the range of the universal rolling mill’s products.
Other flat products sales increased by RUB 4,584 million, or 27.4%, to RUB 21,307 million in the year ended December 31, 2017 from RUB 16,723 million in the year ended December 31, 2016, as a result of an increase of RUB 1,636 million in sales prices and an increase of RUB 2,948 million in sales volumes. In 2017, the annual average price for flat steel products (including VAT, FCA basis) was RUB 37,757 per tonne, 4.9% higher than the average price in 2016. The sales volume increased mainly due to strengthening of consumer demand in the Russian market.
Wire sales increased by RUB 1,968 million, or 12.7%, to RUB 17,498 million in the year ended December 31, 2017 from RUB 15,530 million in the year ended December 31, 2016, as a result of an increase of RUB 2,540 million in sales prices that was partially offset by a decrease of RUB 572 million in sales volumes. The increase in sales prices was driven by strong domestic demand and increase in the prices of wire rod used as the main input for wire production. Sales volumes declined due to decrease in production as a result of equipment repairs.
Rebar sales decreased by RUB 2,469 million, or 5.5%, to RUB 42,735 million in the year ended December 31, 2017 from RUB 45,204 million in the year ended December 31, 2016, as a result of a decrease of RUB 4,910 million in sales volumes that was partially offset by an increase of RUB 2,441 million in sales prices. Sales volumes decreased due to high competition between domestic producers for construction sector. In 2017, the Russian domestic price for rebar increased mainly due to increase in purchase prices for raw materials.
Steel pipes sales decreased by RUB 553 million, or 16.8%, to RUB 2,733 million in the year ended December 31, 2017 from RUB 3,286 million in the year ended December 31, 2016, as a result of a decrease of RUB 934 million in sales volumes that was offset by an increase of RUB 381 million in sales prices. The price increased mainly due to an increase in purchase prices for raw materials. The sales volume decreased due to shifting of our focus to high value-added products.
Pig iron sales decreased by RUB 565 million, or 83.2%, to RUB 114 million in the year ended December 31, 2017 from RUB 679 million in the year ended December 31, 2016, as a result of a decrease of RUB 604 million in sales volumes and an increase of RUB 39 million in sales prices. The decrease in third-party sales volumes was due to the increase in consumption within our steel segment.
Stampings sales increased by RUB 911 million, or 12.6%, to RUB 8,146 million in the year ended December 31, 2017 from RUB 7,235 million in the year ended December 31, 2016, as a result of an increase of RUB 2,022 million in sales volumes that was partially offset by a decrease of RUB 1,111 million in sales prices. The decrease in sales prices was driven by the decrease in domestic and export prices during 2017. The increase in sales volumes was due to ongoing recovery of demand from the key consuming industries (engineering and transport industries).
Ferrosilicon sales decreased by RUB 561 million, or 16.7%, to RUB 2,807 million in the year ended December 31, 2017 from RUB 3,368 million in the year ended December 31, 2016, as a result of a decrease of RUB 661 million in sales volumes and an increase of RUB 100 million in sales prices. The increase in sales prices was driven by the growth of quotation in the Asian market. The average price for ferrosilicon in 2017 was $1,362 per tonne (75% Si, CIF Japan), an increase of 14% compared to 2016, according to TEX. The decrease in sales volumes was due to temporary suspension of production as a result of furnaces repair at Bratsk Ferroalloy Plant.
Sales ofnon-core products and services increased by RUB 681 million, or 10.0%, to RUB 7,516 million in the year ended December 31, 2017 from RUB 6,835 million in the year ended December��31, 2016, due to ongoing overall revival of domestic market.
Excluding intersegment sales, export sales were 12.1% of steel segment sales in the year ended December 31, 2017, compared to 14.0% in the year ended December 31, 2016.
Power segment
Our power segment revenues increased by RUB 1,937 million, or 4.8%, to RUB 42,562 million in the year ended December 31, 2017 from RUB 40,625 million in the year ended December 31, 2016.
Electricity sales to third parties increased by RUB 1,770 million, or 7.9%, to RUB 24,297 million in the year ended December 31, 2017 from RUB 22,527 million in the year ended December 31, 2016, as a result of an increase of RUB 251 million in sales volumes and RUB 1,519 million in sales prices.
Other revenue, which consists mostly of capacity and heat energy, decreased by RUB 269 million, or 12.2%, to RUB 1,927 million in the year ended December 31, 2017 from RUB 2,196 million in the year ended December 31, 2016, due to a decrease in capacity sales volumes of Southern Kuzbass Power Plant.
Intersegment sales increased by RUB 435 million, or 2.7%, to RUB 16,338 million in the year ended December 31, 2017 from RUB 15,903 million in the year ended December 31, 2016, mainly as a result of an increase in electricity tariffs.
Cost of sales and gross profit
The consolidated cost of sales was 53.6% of consolidated revenues in the year ended December 31, 2017, as compared to 53.0% of consolidated revenues in the year ended December 31, 2016, resulting in a decrease in consolidated gross profit to 46.4% in the year ended December 31, 2017 from 47.0% for the year ended December 31, 2016. Cost of sales primarily consists of costs relating to raw materials (including products purchased for resale), direct payroll, depreciation and energy. The table below sets forth cost of sales and gross profit by segment for the years ended December 31, 2017 and 2016, including as a percentage of segment revenues.
| Year Ended December 31, 2017 | Year Ended December 31, 2016 | |||||||||||||||
Cost of Sales and Gross Profit by Segment | Amount | % of Segment Revenues | Amount | % of Segment Revenues | ||||||||||||
| (In millions of Russian rubles, except for percentages) | ||||||||||||||||
Mining segment | ||||||||||||||||
Cost of sales | 48,952 | 34.4 | % | 45,040 | 37.1 | % | ||||||||||
Gross profit | 93,464 | 65.6 | % | 76,515 | 62.9 | % | ||||||||||
Steel segment | ||||||||||||||||
Cost of sales | 146,369 | 81.1 | % | 126,745 | 75.0 | % | ||||||||||
Gross profit | 34,013 | 18.9 | % | 42,148 | 25.0 | % | ||||||||||
Power segment | ||||||||||||||||
Cost of sales | 29,838 | 70.1 | % | 29,047 | 71.5 | % | ||||||||||
Gross profit | 12,724 | 29.9 | % | 11,578 | 28.5 | % | ||||||||||
Mining segment
Mining segment cost of sales increased by RUB 3,912 million, or 8.7%, to RUB 48,952 million in the year ended December 31, 2017 from RUB 45,040 million in the year ended December 31, 2016. The gross profit percentage increased to 65.6% in the year ended December 31, 2017 compared to 62.9% in the year ended December 31, 2016, mainly due to the increase in selling prices caused by coal prices dramatic volatility.
Coal production cash costs per tonne (see “— “Cash Costs per Tonne” Measure”) at Southern Kuzbass Coal Company increased by RUB 430 per tonne, or 25.1%, from RUB 1,715 in the year ended December 31, 2016 to RUB 2,145 in the year ended December 31, 2017, mainly due to the increase in fixed costs share per tonne stimulated by production volumes decrease.
Coal production cash costs at Yakutugol increased by RUB 4 per tonne, or 0.5%, from RUB 825 in the year ended December 31, 2016 to RUB 829 in the year ended December 31, 2017, mainly due to the increase in fixed costs share per tonne stimulated by production volumes decrease.
Coke production cash costs increased by 41.8% at Moscow Coke and Gas Plant and 18.8% at Mechel Coke following the increase in coking coal concentrate purchase prices.
Iron ore production cash costs increased by 15.8% mainly due to increase in transportation cost per tonne and growth of stripping costs.
Steel segment
Steel segment cost of sales increased by RUB 19,624 million, or 15.5%, to RUB 146,369 million in the year ended December 31, 2017 from RUB 126,745 million in the year ended December 31, 2016. Steel segment cost
of sales was 81.1% of the segment’s revenues in the year ended December 31, 2017, as compared to 75.0% in the year ended December 31, 2016. The decrease in gross profit from 25.0% to 18.9% is explained by the increase in purchase prices for raw materials (iron ore feed, coke, ferroalloys and electrodes).
Power segment
Power segment cost of sales increased by RUB 791 million, or 2.7%, to RUB 29,838 million in the year ended December 31, 2017 from RUB 29,047 million in the year ended December 31, 2016, due to increase in electricity tariffs and sales volumes. The power segment gross profit percentage increased to 29.9% in the year ended December 31, 2017 from 28.5% in the year ended December 31, 2016 due to sales price increase.
“Cash Costs per Tonne” Measure
In this document, we present cash costs per tonne for coal, coke and iron ore production for each significant production facility of our mining segment. Cash costs per tonne is a performance indicator that is not defined according to IFRS or U.S. GAAP. Cash costs per tonne includes various production costs, such as raw materials, auxiliary materials, wages and social taxes of production personnel, electricity, gas and fuel costs, repairs and maintenance of production equipment, costs of mining works, mineral extraction tax and royalty payments, but excludesnon-cash items such as depreciation and amortization and write-down of inventories to their net realizable value. We use this indicator to evaluate the performance of individual production subsidiaries and their respective ability to generate cash. Cash costs per tonne is a widely used performance indicator in the mining industry to evaluate the cost-effectiveness of mining operations. We believe that investors use this indicator in addition to the financial information prepared in accordance with IFRS to evaluate the performance of our companies. Consequently, this information must be considered supplementary and should not be regarded as a substitute for the performance indicators prepared in accordance with IFRS.
The reconciliation of mining segment production cash costs per tonne for the year ended December 31, 2017 is presented below:
| In thousands of tonnes | Cash cost, in thousands of Russian rubles per tonne | In millions of Russian rubles | ||||||||||
Coal — Southern Kuzbass Coal Company — sales to third parties | 4,182 | 2.1 | 8,971 | |||||||||
Coal — Southern Kuzbass Coal Company — intersegment sales | 833 | 2.1 | 1,788 | |||||||||
Coal — Yakutugol — sales to third parties | 7,357 | 0.8 | 6,100 | |||||||||
Coal — Yakutugol — intersegment sales | 0 | 0.8 | 0 | |||||||||
Coal — Elgaugol — sales to third parties | 1,515 | 1.5 | 2,216 | |||||||||
Coal — Elgaugol — intersegment sales | 87 | 1.5 | 127 | |||||||||
Iron ore — Korshunov Mining Plant — sales to third parties | 30 | 2.3 | 69 | |||||||||
Iron ore — Korshunov Mining Plant — intersegment sales | 2,448 | 2.3 | 5,566 | |||||||||
Coke — Moscow Coke and Gas Plant �� sales to third parties(1) | 556 | 12.0 | 6,670 | |||||||||
Coke — Moscow Coke and Gas Plant — intersegment sales | 1 | 12.0 | 15 | |||||||||
Coke — Mechel Coke — sales to third parties(2) | 214 | 7.0 | 1,497 | |||||||||
Coke — Mechel Coke — intersegment sales | 1,914 | 7.0 | 13,384 | |||||||||
Depreciation and amortization | 6,940 | |||||||||||
Write-down of inventory to their net realizable value | 67 | |||||||||||
Cost of coal produced by third companies andre-sold by our trading subsidiaries, including intersegment sales | 69 | |||||||||||
Stockholding year to year movements, costs of other products and services (coking products, washing services) and costs of other subsidiaries(3) | (4,525 | ) | ||||||||||
|
| |||||||||||
Total mining segment cost of sales | 48,952 | |||||||||||
|
| |||||||||||
| (1) | Cash costs per tonne for coke were reduced byby-products credits. The amount ofby-products credits in the total cash costs per tonne was RUB 125, or 1%, at Moscow Coke and Gas Plant in the year ended December 31, 2017. |
| (2) | Cash costs per tonne for coke were reduced byby-products credits. The amount ofby-products credits in the total cash costs per tonne was RUB 833, or 12%, at Mechel Coke in the year ended December 31, 2017. |
| (3) | Costs of other products and services were increased by the amount ofby-products credits of RUB 799 million in the year ended December 31, 2017. |
The reconciliation of mining segment production cash costs per tonne for the year ended December 31, 2016 is presented below:
| In thousands of tonnes | Cash cost, in thousands of Russian rubles per tonne | In millions of Russian rubles | ||||||||||
Coal — Southern Kuzbass Coal Company — sales to third parties | 4,464 | 1.7 | 7,655 | |||||||||
Coal — Southern Kuzbass Coal Company — intersegment sales | 1,021 | 1.7 | 1,751 | |||||||||
Coal — Yakutugol — sales to third parties | 8,664 | 0.8 | 7,152 | |||||||||
Coal — Yakutugol — intersegment sales | — | 0.8 | — | |||||||||
Coal — Elgaugol — sales to third parties | 1,673 | 0.9 | 1,529 | |||||||||
Coal — Elgaugol — intersegment sales | 44 | 0.9 | 41 | |||||||||
Iron ore — Korshunov Mining Plant — sales to third parties | 26 | 2.0 | 52 | |||||||||
Iron ore — Korshunov Mining Plant — intersegment sales | 2,684 | 2.0 | 5,272 | |||||||||
Coke — Moscow Coke and Gas Plant — sales to third parties(1) | 682 | 8.5 | 5,769 | |||||||||
Coke — Moscow Coke and Gas Plant — intersegment sales | 5 | 8.5 | 40 | |||||||||
Coke — Mechel Coke — sales to third parties(2) | 211 | 5.9 | 1,244 | |||||||||
Coke — Mechel Coke — intersegment sales | 1,938 | 5.9 | 11,405 | |||||||||
Depreciation and amortization | 6,981 | |||||||||||
Write-down of inventory to their net realizable value | 23 | |||||||||||
Cost of coal produced by third companies andre-sold by our trading subsidiaries, including intersegment sales | 170 | |||||||||||
Stockholding year to year movements, costs of other products and services (coking products, washing services) and costs of other subsidiaries(3) | (4,043 | ) | ||||||||||
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Total mining segment cost of sales | 45,040 | |||||||||||
|
| |||||||||||
| (1) | Cash costs per tonne for coke were reduced byby-products credits. The amount ofby-products credits in the total cash costs per tonne was RUB 343, or 4%, at Moscow Coke and Gas Plant in the year ended December 31, 2016. |
| (2) | Cash costs per tonne for coke were reduced byby-products credits. The amount ofby-products credits in the total cash costs per tonne was RUB 755, or 13%, at Mechel Coke in the year ended December 31, 2016. |
| (3) | Costs of other products and services were increased by the amount ofby-products credits of RUB 831 million in the year ended December 31, 2016. |
Selling, distribution and operating income and (expenses), net
Selling, distribution and operating income and (expenses), net decreased by RUB 5,407 million, or 6.2%, to RUB 81,590 million in the year ended December 31, 2017 from RUB 86,997 million in the year ended December 31, 2016, as a result of a decrease in administrative and other operating expenses in the mining and steel segments, selling and distribution expenses in the steel and mining segments and loss onwrite-off ofnon-current assets in the steel and mining segments in the year ended December 31, 2017. As a percentage of consolidated revenues, selling, distribution and operating income and (expenses), net decreased to 27.3% in the
year ended December 31, 2017 from 31.5% in the year ended December 31, 2016. Our selling, distribution and operating income and (expenses), net consist primarily of selling and distribution expenses, loss onwrite-off ofnon-current assets, impairment of goodwill and othernon-current assets, allowance for expected credit losses on financial assets, taxes other than income taxes, administrative and other operating expenses and other operating income. The table below sets forth these costs by segment for the years ended December 31, 2017 and 2016, including as a percentage of segment revenues.
| Year Ended December 31, 2017 | Year Ended December 31, 2016 | |||||||||||||||
Selling, Distribution and Operating Income and (Expenses), Net by Segment | Amount | % of Segment Revenues | Amount | % of Segment Revenues | ||||||||||||
| (In millions of Russian rubles, except for percentages) | ||||||||||||||||
Mining segment | ||||||||||||||||
Selling and distribution expenses | 30,551 | 21.5 | % | 31,132 | 25.6 | % | ||||||||||
Loss onwrite-off ofnon-current assets | 135 | 0.1 | % | 863 | 0.7 | % | ||||||||||
Impairment of goodwill and othernon-current assets | 3,801 | 2.7 | % | 1,335 | 1.1 | % | ||||||||||
Allowance for expected credit losses on financial assets | 156 | 0.1 | % | 83 | 0.1 | % | ||||||||||
Taxes other than income taxes | 3,329 | 2.3 | % | 3,959 | 3.3 | % | ||||||||||
Administrative and other operating expenses | 7,789 | 5.5 | % | 9,538 | 7.8 | % | ||||||||||
Other operating income | (488 | ) | (0.3 | %) | (1,407 | ) | (1.2 | %) | ||||||||
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Total | 45,273 | 31.8 | % | 45,503 | 37.4 | % | ||||||||||
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Steel segment | ||||||||||||||||
Selling and distribution expenses | 14,266 | 7.9 | % | 15,392 | 9.1 | % | ||||||||||
Loss onwrite-off ofnon-current assets | 145 | 0.1 | % | 1,089 | 0.6 | % | ||||||||||
Impairment of goodwill and othernon-current assets | 2,280 | 1.3 | % | 3,866 | 2.3 | % | ||||||||||
Allowance for expected credit losses on financial assets | (266 | ) | (0.1 | %) | 231 | 0.1 | % | |||||||||
Taxes other than income taxes | 1,530 | 0.8 | % | 1,826 | 1.1 | % | ||||||||||
Administrative and other operating expenses | 7,185 | 4.0 | % | 8,569 | 5.1 | % | ||||||||||
Other operating income | (281 | ) | (0.2 | %) | (356 | ) | (0.2 | %) | ||||||||
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Total | 24,859 | 13.8 | % | 30,617 | 18.1 | % | ||||||||||
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Power segment | ||||||||||||||||
Selling and distribution expenses | 10,869 | 25.5 | % | 9,710 | 23.9 | % | ||||||||||
Loss onwrite-off ofnon-current assets | 41 | 0.1 | % | 1 | 0.0 | % | ||||||||||
Impairment of goodwill and othernon-current assets | — | 0.0 | % | — | 0.0 | % | ||||||||||
Allowance for expected credit losses on financial assets | 442 | 1.0 | % | 443 | 1.1 | % | ||||||||||
Taxes other than income taxes | 108 | 0.3 | % | 129 | 0.3 | % | ||||||||||
Administrative and other operating expenses | 616 | 1.4 | % | 685 | 1.7 | % | ||||||||||
Other operating income | (618 | ) | (1.5 | %) | (91 | ) | (0.2 | %) | ||||||||
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Total | 11,458 | 26.9 | % | 10,877 | 26.8 | % | ||||||||||
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Mining segment
Selling and distribution expenses consisted almost entirely of transportation expenses related to our selling activities. Such expenses decreased by RUB 581 million, or 1.9%, to RUB 30,551 million in the year ended December 31, 2017 from RUB 31,132 million in the year ended December 31, 2016, mainly due to the decrease in segment export sales volumes by 6%. As a percentage of mining segment revenues, selling and distribution expenses decreased from 25.6% to 21.5% due to an increase in sales prices.
Loss onwrite-off ofnon-current assets decreased by RUB 728 million, or 84.3%, to RUB 135 million in the year ended December 31, 2017 from RUB 863 million in the year ended December 31, 2016, due to the decrease
in the number of property, plant and equipment objects that are not planned for further use in production process at our mining service subsidiaries.
Impairment of goodwill and othernon-current assets increased by RUB 2,466 million, or 184.7%, to RUB 3,801 million in the year ended December 31, 2017 from RUB 1,335 million in the year ended December 31, 2016. In 2017, we recognized impairment of property, plant and equipment and mineral licenses in relation to (i) Korshunov Mining Plant of RUB 2,271 million due to the decline in long-term forecast for iron ore prices and growth of stripping costs required for removal of landslide deformations and (ii) Southern Kuzbass Coal Company of RUB 1,529 million due to the refusal by the regulatory authorities to extend the term of mineral license for exploration and extraction. See note 18 to the consolidated financial statements.
Allowance for expected credit losses on financial assets increased by RUB 73 million to RUB 156 million in the year ended December 31, 2017 from RUB 83 million in the year ended December 31, 2016, due to the increase in overdue accounts receivable.
Taxes other than income taxes decreased by RUB 630 million, or 15.9%, to RUB 3,329 million in the year ended December 31, 2017 from RUB 3,959 million in the year ended December 31, 2016, due to obtainment of property tax benefit in respect of the rail line by Elga-road in 2017.
Administrative and other operating expenses consist of payroll and payroll taxes, depreciation, rent and maintenance, legal and consulting expenses, office overheads and other expenses. These expenses decreased by RUB 1,749 million, or 18.3%, to RUB 7,789 million in the year ended December 31, 2017 from RUB 9,538 million in the year ended December 31, 2016, mainly as a result of a decrease in salaries and related social taxes by RUB 2,067 million, or 32.0%, to RUB 4,386 million in the year ended December 31, 2017 from RUB 6,453 million in the year ended December 31, 2016.
Other operating income decreased by RUB 919 million to RUB 488 million in the year ended December 31, 2017 from RUB 1,407 million in the year ended December 31, 2016, mainly due to insurance compensation for long-lived assets loss and revision of pension obligations and rehabilitation provisions in our mining subsidiaries in 2016.
Steel segment
Selling and distribution expenses consisted almost entirely of transportation expenses related to our selling activities. Such expenses decreased by RUB 1,126 million, or 7.3%, to RUB 14,266 million in the year ended December 31, 2017 from RUB 15,392 million in the year ended December 31, 2016, mainly due to the overall decrease in sales volumes of steel segment products. As a percentage of steel segment revenues, selling and distribution expenses decreased to 7.9% in the year ended December 31, 2017 from 9.1% in the year ended December 31, 2016.
Loss onwrite-off ofnon-current assets decreased by RUB 944 million, or 86.7%, to RUB 145 million in the year ended December 31, 2017 from RUB 1,089 million in the year ended December 31, 2016, due to the decrease in a number of idled property, plant and equipment written off by our steel production subsidiaries.
Impairment of goodwill and othernon-current assets decreased by RUB 1,586 million, or 41.0%, to RUB 2,280 million in the year ended December 31, 2017 from RUB 3,866 million in the year ended December 31, 2016. In 2016, we recognized impairment of goodwill and othernon-current assets in relation to Bratsk Ferroalloy Plant of RUB 3,627 million due to changes in expectations of long-term prices for ferrosilicon and in forecasted production volumes accompanied by increased forecasted costs. In 2017, we recognized impairment of property, plant and equipment and construction in progress in relation to Izhstal of RUB 2,130 million and additional impairment in relation to Bratsk Ferroalloy Plant of RUB 151 million.
Allowance for expected credit losses on financial assets changed by RUB 497 million, or 215.2%, to RUB 266 million income from the effect of reversal in the year ended December 31, 2017 from RUB 231 million loss in the year ended December 31, 2016, due to the decrease in outstanding doubtful accounts as of December 31, 2017 and collection of certain accounts receivable provided for as of December 31, 2016.
Taxes other than income taxes decreased by RUB 296 million, or 16.2%, to RUB 1,530 million in the year ended December 31, 2017 from RUB 1,826 million in the year ended December 31, 2016, mainly due to recognition of probable tax risks in respect of penalties on personal income tax in the amount of RUB 181 million in 2016. In 2017, these risks were reversed based on the tax audit conclusion. Property and land taxes decreased by RUB 34 million to RUB 1,295 million in the year ended December 31, 2017 from RUB 1,329 million in the year ended December 31, 2016.
Administrative and other operating expenses decreased by RUB 1,384 million, or 16.1%, to RUB 7,185 million in the year ended December 31, 2017 from RUB 8,569 million in the year ended December 31, 2016. Payroll and related social taxes decreased by RUB 1,730 million, or 35.7%, to RUB 3,113 million in the year ended December 31, 2017 from RUB 4,843 million in the year ended December 31, 2016, due to optimization of the number of employees. Fines and penalties expenses on breach of trading contracts, provisions related to claims increased by RUB 1,157 million, or 381.8%, to RUB 1,460 million in the year ended December 31, 2017 from RUB 303 million in the year ended December 31, 2016, mainly due to recognition of provision related to claim of Minmetals. Other administrative and operating expenses decreased by RUB 811 million, or 23.7%, to RUB 2,613 million in the year ended December 31, 2017 from RUB 3,424 million in the year ended December 31, 2016, due to cost-cutting measures implemented by our management.
Other operating income decreased by RUB 75 million, or 21.1%, to RUB 281 million in the year ended December 31, 2017 from RUB 356 million in the year ended December 31, 2016, mainly due to revision of rehabilitation provision.
Power segment
Selling and distribution expenses consisted almost entirely of electricity transmission costs incurred by our Kuzbass Power Sales Company for the usage of the power grid through which electricity is distributed to end consumers. Such expenses increased by RUB 1,159 million, or 11.9%, to RUB 10,869 million in the year ended December 31, 2017 from RUB 9,710 million in the year ended December 31, 2016, due to an increase in transmission tariffs and sales volumes.
Other operating income was recognized in the amount of RUB 619 million mainly as a result of subsidies received from the governmental authorities as a compensation for operating activities (energy tariffs).
Operating profit
Operating profit increased by RUB 14,477 million, or 33.9%, to RUB 57,167 million in the year ended December 31, 2017 from RUB 42,690 million in the year ended December 31, 2016. As a percentage of consolidated revenues, operating profit increased to 19.1% in the year ended December 31, 2017 from 15.5% in the year ended December 31, 2016, mainly due to an increase in consolidated gross profit and a decrease in administrative and other operating expenses and loss onwrite-off ofnon-current assets as explained above.
The table below sets out operating profit by segment, including as a percentage of segment revenues.
| Year Ended December 31, 2017 | Year Ended December 31, 2016 | |||||||||||||||
Operating Profit by Segment | Amount | % of Segment Revenues | Amount | % of Segment Revenues | ||||||||||||
| (In millions of Russian rubles, except for percentages) | ||||||||||||||||
Mining segment | 48,191 | 33.8 | % | 31,012 | 25.5 | % | ||||||||||
Steel segment | 9,154 | 5.1 | % | 11,531 | 6.8 | % | ||||||||||
Power segment | 1,266 | 3.0 | % | 701 | 1.7 | % | ||||||||||
Elimination of intersegment unrealized profit(1) | (1,444 | ) | (554 | ) | ||||||||||||
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Consolidated operating profit | 57,167 | 42,690 | ||||||||||||||
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| (1) | Our management evaluates the performance of our segments before the elimination of unrealized profit in inventory balances of segments that was generated by the segments but not recognized as profit in our consolidated financial statements until the sale of such inventories to third parties. Therefore, we present our segments before such elimination, and such elimination is presented separately. The increase in intersegment unrealized profit adjustment in the year ended December 31, 2017 as compared to the year ended December 31, 2016 was due to the increase in gross profit of our mining segment in 2017. |
Mining segment
Mining segment operating profit increased by RUB 17,179 million, or 55.4%, to RUB 48,191 million in the year ended December 31, 2017 from RUB 31,012 million in the year ended December 31, 2016. The operating profit margin increased to 33.8% in the year ended December 31, 2017 from 25.5% in the year ended December 31, 2016, mainly due to the increase in selling prices caused by coal prices dramatic volatility.
Steel segment
Steel segment operating profit decreased by RUB 2,377 million, or 20.6%, to RUB 9,154 million in the year ended December 31, 2017 from RUB 11,531 million in the year ended December 31, 2016. The operating profit margin decreased to 5.1% in the year ended December 31, 2017 from 6.8% in the year ended December 31, 2016, due to the factors that affected operating income in 2017, such as the recognition of losses from the impairment ofnon-current assets of Izhstal and Bratsk Ferroalloy Plant and the increase in cost of sales caused by the increase in purchase prices for main raw materials.
Power segment
Power segment operating profit increased by RUB 565 million, or 80.6%, to RUB 1,266 million in the year ended December 31, 2017 from RUB 701 million in the year ended December 31, 2016. The operating profit margin increased to 3.0% in the year ended December 31, 2017 from 1.7% in the year ended December 31, 2016, mainly due to increase in gross margin caused by the increase in sales prices and receiving of subsidies from the governmental authorities as a compensation for operating activities (energy tariffs).
Other income and expense, net
Other income and expense, net consists of share of gain (loss) of an associate, finance income, finance costs, other income and other expenses and foreign exchange losses, lossesgain. The table below sets forth these costs for the years ended December 31, 2017 and 2016, including as a percentage of discontinuedrevenues.
| Year Ended December 31, 2017 | Year Ended December 31, 2016 | |||||||||||||||
Other Income and Expense, Net | Amount | % of Revenues | Amount | % of Revenues | ||||||||||||
| (In millions of Russian rubles, except for percentages) | ||||||||||||||||
Finance income | 633 | 0.2 | % | 1,176 | 0.4 | % | ||||||||||
Finance costs | (47,610 | ) | (15.9 | )% | (54,240 | ) | (19.7 | )% | ||||||||
Foreign exchange gain | 4,237 | 1.4 | % | 25,947 | 9.4 | % | ||||||||||
Share of gain (loss) of an associate | 18 | 0.0 | % | (17 | ) | 0.0 | % | |||||||||
Other income | 1,495 | 0.5 | % | 598 | 0.2 | % | ||||||||||
Other expenses | (220 | ) | (0.1 | )% | (1,999 | ) | (0.7 | )% | ||||||||
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Total | (41,447 | ) | (13.9 | )% | (28,535 | ) | (10.3 | )% | ||||||||
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Finance income decreased by RUB 543 million, or 46.2%, to RUB 633 million in the year ended December 31, 2017 from RUB 1,176 million in the year ended December 31, 2016, due to waiving of fines and penalties on finance leases as a result of restructuring primarily with Sberbank in 2016. In 2017, restructuring effect was not significant.
Finance costs decreased by RUB 6,630 million, or 12.2%, to RUB 47,610 million in the year ended December 31, 2017 from RUB 54,240 million in the year ended December 31, 2016, due to the restructuring of overdue borrowings in 2016 and decrease in fines and penalties and interest rates in 2017.
Foreign exchange gain decreased by RUB 21,710 million, or 83.7%, to RUB 4,237 million in the year ended December 31, 2017 from RUB 25,947 million in the year ended December 31, 2016, mainly due to moderate appreciation of the ruble against the U.S. dollar in 2017 as compared to 2016.
Share of gain (loss) of an associate changed by RUB 35 million, or 205.9%, to RUB 18 million gain in the year ended December 31, 2017 from RUB 17 million loss in the year ended December 31, 2016, mainly due to loss in the amount of RUB 42 million from investments in Mechel Somani Carbon Private Limited in 2016.
Other income increased by RUB 897 million, or 150.0%, to RUB 1,495 million in the year ended December 31, 2017 from RUB 598 million in the year ended December 31, 2016, mainly due to gain from waiving of penalties from Novatek — Chelyabinsk OOO in the amount of RUB 442 million and a gain on thewrite-off of payable amounts that werewritten-off due to liquidation of the creditors or expiration of the statute of limitation in the amount of RUB 310 million.
Other expenses decreased by RUB 1,779 million, or 89.0%, to RUB 220 million in the year ended December 31, 2017 from RUB 1,999 million in the year ended December 31, 2016. In 2016, there was awrite-off of Vnesheconombank’s commission in the amount of RUB 1,411 million and recognition of a provision fornon-recoverable advances to pension funds in the amount of RUB 408 million. There were no such operations in 2017.
Income tax expense
Income tax expense decreased by RUB 1,743 million, or 35.6%, to RUB 3,150 million in the year ended December 31, 2017 from RUB 4,893 million in the year ended December 31, 2016. Our effective tax rate decreased to 20.0% from 34.6%. The decrease in income tax expense and effective tax rate was mainly due to
recognition of deferred tax asset on tax loss from the consolidated group of taxpayers. This decrease was partially offset by the increase in finance costs.current income tax expense because of the increase in the tax base as a result of the rise in prices. In addition, income tax risk related to the consolidated group of taxpayers was accrued in 2017.
Net profit attributable tonon-controlling interests
Net profit attributable tonon-controlling interests decreased by RUB 693 million, or 40.6%, to RUB 1,013 million in the year ended December 31, 2017 from RUB 1,706 million in the year ended December 31, 2016, mainly due to decrease in net profit attributable tonon-controlling interests in our subsidiaries Chelyabinsk Metallurgical Plant in the amount of RUB 501.2 million (loss) and Izhstal in the amount of RUB 212.8 million (loss).
Net profit attributable to equity holders of the parent
Net profit attributable to our equity holders increased by RUB 4,431 million, or 62.2%, to RUB 11,557 million in the year ended December 31, 2017 from RUB 7,126 million in the year ended December 31, 2016, mainly due to the increase in operating margin.
Liquidity and Capital Resources
Capital requirements
We expect that our principal capital requirements in the near future will be for financing the repayment of maturing debt, interest payments and regular maintenance capital expenditures.
Our business is heavily dependent on machinery for the production of steel and steel products, as well as investments in our mining operations. Investments to maintain and expand production facilities are, accordingly, an important priority and have a significant effect on our cash flows and future results of operations. We intend to focus our capital spending on the implementation of projects that we view as key to carrying out our business strategy and improve free cash flow. See “Item 4. Information on the Company — Capital Investment Program” for the objectives of our capital investment program and its details. Over the next three years, i.e., 2016-2018,2019-2021, we expect our overall capital expenditures on our metals production facilities to total approximately 8,292 million rubles,RUB 33.0 billion, approximately 65% of which will be in 2016-2017,2019-2020 and approximately 35% in 2018. We intend to spend approximately 6,255 million rubles for the development of the Elga coal deposit during the period from 2016 to 2018.2021. We intend to finance our capital investments with cash flow from operations and external long-term financing sources.
Our total outstanding debt as of December 31, 20152018 and 20142017 was RUB 495,982418,832 million and RUB 395,864439,893 million, respectively. See “Item 11. Quantitative and Qualitative Disclosures about Market Risk” for information regarding the type of financial instruments, currency and interest rate structure.
In 20152018 and 2014,2017, we paid dividends on preferred shares of RUB 4.11,386.1 million and RUB 4.1855.6 million, respectively, allrespectively. In each case we could not pay insignificant amounts of which were paid on preferred shares.dividends to those shareholders who did not provide us with their bank account details and/or due to the restriction of shareholders’ rights to receive dividends in certain cases provided for by Russian law. See “Item 8. Financial Information — Dividend Distribution Policy” for a description of our dividend policy.
Capital resources
Our strategy has shifted from growing our business through acquisition and expansion opportunities to extracting the maximum value from our existing core assets. We now intend to concentrate on efficiency improvements and modernization of the business lines, which we expect will increase the business’ overall profitability. We may also consider further selective disposal of assets.
Historically, our major sources of cash have been cash generated from operations, bank loans and public debt, and we expect these sources will continue to be our principal sources of cash in the future. For financing of
our capital investment program we have also relied on financings secured by foreign export credit agency guarantees. We do not useoff-balance sheet financing arrangements.
The table below summarizes our cash flows for the periods indicated.
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||
| 2015 | 2014 | 2018 | 2017 | 2016 | ||||||||||||||||
| (In millions of Russian rubles) | (In millions of Russian rubles) | |||||||||||||||||||
Net cash provided by operating activities | 9,982 | 28,072 | 68,118 | 63,282 | 53,207 | |||||||||||||||
Net cash used in investing activities | (10,062 | ) | (17,739 | ) | (5,647 | ) | (7,138 | ) | (4,969 | ) | ||||||||||
Net cash used in financing activities | (704 | ) | (16,020 | ) | (63,286 | ) | (55,737 | ) | (45,869 | ) | ||||||||||
Net cash provided by operating activities was RUB 9,98268,118 million in the year ended December 31, 20152018 as compared to net cash provided by operating activities of RUB 28,07263,282 million in the year ended December 31, 2014.2017 and RUB 53,207 million in the year ended December 31, 2016. The operating cash inflows were derived from payments received from sales of our mining, steel and power products, reduced by cash disbursements for direct labor, raw materials and parts, selling, distribution and operating expenses, interest expenseincome and (expenses), net and income taxes.
Net cash used infrom operating activities before changes in working capital items was RUB 43,22973,717 million in the year ended December 31, 2015. Net operating cash outflow of discontinued operations2018. Income taxes paid amounted to RUB 1363,562 million. Below we analyze major changes in working capital items which in the aggregate accounted for RUB 2,7872,037 million in cash provided byused in operating activities, resulting in net cash provided by operating activities of RUB 9,98268,118 million.
Working capital items accretive to operating cash flows:
an increase in salesaccounts payable of Mechel Carbon, Mechel Carbon Singapore,RUB 4,150 million of Yakutugol, Southern Kuzbass Coal Company, Elgaugol and Mecheltrans;
an increase in advances received of RUB 485 million of Urals Stampings PlantPlant; and Mechel Service; and
an increase in accrued taxes and other current assetsliabilities of RUB 997683 million primarilymainly due to a decreasechange in VAT and other taxes receivable of Yakutugol, Chelyabinsk Metallurgical Plant and Mecheltrans.tax liabilities.
Working capital items reducing operating cash flows:
an increase in accrued taxes and other liabilitiesinventories of RUB 1,4657,858 million mainly due to positive changean increase in tax liabilities, primarily resulting from a release of tax liability relatedwork in progress, finished goods and goods for the year ended December 31, 2015;
an increase in balances with related partiesother current assets of RUB 275 million.851 million primarily due to an increase in advances paid mainly by Mecheltrans, Yakutugol and Mechel Carbon.
Net cash used infrom operating activities before changes in working capital items was RUB 23,27176,501 million in the year ended December 31, 2014. Net operating cash outflow of discontinued operations2017. Income taxes paid amounted to RUB 7454,530 million. Below we analyze major changes in working capital items which in the aggregate accounted for RUB 22,9958,689 million in cash provided byused in operating activities, resulting in net cash provided by operating activities of RUB 28,07263,282 million.
Working capital items accretive to operating cash flows:
an increase in advances received of RUB 625 million mainly of Chelyabinsk Metallurgical Plant, Kuzbass Power Sales Company and Izhstal due to growth of sales in the year ended December 31, 2017 as compared to the year ended December 31, 2016.
Working capital items reducing operating cash flows:
a decrease in accounts payable of RUB 3,435 million due to the growth of turnover of accounts payable;
an increase in inventories of RUB 14,5654,508 million mainly due to an increase in raw materials and work in progress of Chelyabinsk Metallurgical Plant, Beloretsk Metallurgical Plant, Izhstal and Yakutugol as of December 31, 2017 as compared to December 31, 2016. The main reason for the change was growth of the cost price of raw materials and semi-finished goods in steel and mining segments; and
an increase in other current assets of RUB 895 million primarily due to an increase in VAT on advances received mainly by Chelyabinsk Metallurgical Plant, Beloretsk Metallurgical Plant and Southern Kuzbass Coal Company.
Net cash from operating activities before changes in working capital items was RUB 65,788 million in the year ended December 31, 2016. Net operating cash outflow of discontinued operations amounted to RUB 436 million. Income taxes paid amounted to RUB 2,101 million. Below we analyze major changes in working capital items which in the aggregate accounted for RUB 10,044 million in cash used in operating activities, resulting in net cash provided by operating activities of RUB 53,207 million.
Working capital items accretive to operating cash flows:
an increase in advances received of RUB 588 million of Beloretsk Metallurgical Plant, Mechel Service, Urals Stampings Plant and Izhstal due to growth of sales in the year ended December 31, 2016; and
an increase in accrued taxes and other liabilities of RUB 1,122 million mainly due to change in tax liabilities.
Working capital items reducing operating cash flows:
an increase in accounts receivable of RUB 5,542 million primarily due to the increase in sales of Mechel Carbon and Mechel Service;
a decrease in accounts payable of RUB 4,259 million due to a significant decreasethe growth of turnover of accounts payable and activated payments;
an increase in finished goods andinventories of RUB 1,070 million due to an increase in raw materials held in stock at the warehouses of Mechel Service Global, Mechel Carbon, Southern Kuzbass Coal CompanyCoke, Elgaugol and Chelyabinsk Metallurgical Plant as of December 31, 2014.2016. The main reason for the change in the stock level was the decreaseincrease in production volumes across all ourin steel and mining segments as a result of the continuationgrowth of weak demand in the Europeansales; and Russian markets;
an increase in accrued taxes and other liabilities of RUB 8,771 million due to delays in payments;
Working capital items reducing operating cash flows:
Mecheltrans.
Net cash used in investing activities was RUB 10,0625,647 million in the year ended December 31, 20152018 as compared to net cash used in investing activities of RUB 17,7397,138 million in the year ended December 31, 2014.2017 and RUB 4,969 million in the year ended December 31, 2016. Substantially all of the cash used in investing activities in the years ended December 31, 20152018, 2017 and 20142016 related to capital expenditures and the acquisition of businesses.expenditures. Capital expenditures relating to purchases of property, plant and equipment, purchases of mineral licenses and interest paid, capitalized amounted to RUB 5,9765,912 million, RUB 7,047 million and RUB 16,5065,524 million in the years ended December 31, 20152018, 2017 and 2014,2016, respectively. Expenditures related to the acquisitionPurchases of businesses and investmentsintangible assets amounted to RUB 4,819 million and RUB 3,223150 million in the yearsyear ended December 31, 20152018 as compared to RUB 771 million in the year ended December 31, 2017 and 2014, respectively.RUB nil in the year ended December 31, 2016. Cash provided by investing activities related to disposal of businesses and investments in the amount ofamounted to RUB 1773 million, RUB 568 million and RUB 248 million in the yearyears ended December 31, 2015 as compared to RUB 632 million in the year ended December 31, 2014.2018, 2017 and 2016, respectively.
Net cash used in financing activities was RUB 70463,286 million in the year ended December 31, 20152018 as compared to net cash used in financing activities of RUB 16,02055,737 million in the year ended December 31, 2014. We received debt2017 and RUB 45,869 million in the year
ended December 31, 2016. Expenditures related to deferred consideration payments amounted to RUB 4,597 million, RUB 4,107 million and RUB 4,732 million in the years ended December 31, 2018, 2017 and 2016, respectively. Debt proceeds ofamounted to RUB 13,87576,504 million and we repaid debt of RUB 11,89697,269 million in the year ended December 31, 20152018 as compared to received debt proceeds of RUB 64,46923,200 million and repaidrepayment of debt of RUB 77,76135,033 million in the year ended December 31, 2014.2017; and debt proceeds of RUB 4,002 million and proceeds from the sale of a 49% stake in the Elga coal complex, with a put option granted of RUB 34,300 million and repayment of debt of RUB 42,322 million in the year ended December 31, 2016.
Liquidity
We had cash and cash equivalents of RUB 3,0791,803 million, RUB 3,9832,452 million and RUB 8,9791,689 million as of December 31, 2015, 20142018, 2017 and January 1, 2014,2016, respectively. Our cash and cash equivalents were held in rubles (20.6%(20.0%, 23.3%25.3% and 8.1%40.9% as of December 31, 2015, 20142018, 2017 and January 1, 2014,2016, respectively), U.S. dollars (37.4%(42.1%, 45.3%56.2% and 79.6%28.5% as of December 31, 2015, 20142018, 2017 and January 1, 2014,2016, respectively), euros (37.6%(32.3%, 23.1%12.5% and 7.2%23.9% as of December 31, 2015, 20142018, 2017 and January 1, 2014,2016, respectively) and certain other currencies of the CIS and Eastern Europe.currencies.
The unused portion under the group’s credit facilities as of December 31, 2015, 20142018, 2017 and January 1, 20142016 was RUB 409573 million, RUB 1,879475 million and RUB 9,191373 million, respectively. As of December 31, 2015, 20142018, 2017 and January 1, 2014,2016, the group’s credit facilities provided aggregated borrowing capacity of RUB 496,390419,405 million (of which RUB 316,34042,070 million is repayable during 20162019 and RUB 175,743361,328 million representedlong-term debt that was reclassified as short-term liabilities as of that date because of covenant violations), RUB 397,743440,369 million and RUB 301,520446,181 million, respectively. The group’s borrowings under these credit facilities (except for special-purpose borrowings such aspre-export facilities, Vnesheconombank’s facilitiesfacility as well as factoring and overdraft facilities) carried a weighted average interest rate of approximately 15.0%8.6%, 12.0%9.7% and 9.4%10.3% as of December 31, 2015, 20142018, 2017 and January 1, 2014,2016, respectively. See “— Restrictive Covenants” for further information about our covenant violations.
The following table summarizes our liquidity as of December 31, 2015, 20142018, 2017 and January 1, 2014.2016.
| Year Ended December 31, | ||||||||||||||||||||||||
Estimated Liquidity | December 31, 2015 | December 31, 2014 | January 1, 2014 | 2018 | 2017 | 2016 | ||||||||||||||||||
| (In millions of Russian rubles) | (In millions of Russian rubles) | |||||||||||||||||||||||
Cash and cash equivalents | 3,079 | 3,983 | 8,979 | 1,803 | 2,452 | 1,689 | ||||||||||||||||||
Amounts available under credit facilities | 409 | 1,879 | 9,191 | 573 | 475 | 373 | ||||||||||||||||||
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Total estimated liquidity | 3,488 | 5,862 | 18,170 | 2,376 | 2,927 | 2,062 | ||||||||||||||||||
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Short-term debt (short-term borrowings and current portion of long-term debt) increaseddecreased by RUB 105,15610,239 million, or 27.2%2.4%, to RUB 491,674412,294 million as of December 31, 20152018 from RUB 386,518422,533 million as of December 31, 2014,2017, as a result of the weakeninggain from restructuring of the ruble against the U.S. dollarloans primarily related to VTB Bank, Gazprombank and the increaserefinancing of accrued unpaid interest.pre-export facilities, which was partially eliminated by the foreign exchange loss.
Long-term debt net of current portion decreased by RUB 5,03810,822 million, or 53.9%62.3%, to RUB 4,3086,538 million as of December 31, 20152018 from RUB 9,34617,360 million as of December 31, 2014.2017. The decrease was primary attributable to reclassification into short-term debt as a result of covenant violation, as well as due to the fact that significant part of long-term bonds are approaching maturity and were reclassified into short-term part as of December 31, 2015.approaches maturity.
Our working capital remained negative andbut the deficit during the year decreased by RUB 103,72412,631 million, or 25.1%3.0%, to RUB 517,416404,055 million as of December 31, 20152018 from RUB 413,692416,686 million as of December 31, 2014.2017. The main reasonsreason for the decrease in working capital were the ruble devaluationdeficit was reduction of financial indebtedness as a result of repayment of our debts and the increase of accrued unpaid interest related to loanstrade and finance lease contracts which increased the RUB amount of short-term debt by RUB 105,156 million.other payables.
Restructuring of financial indebtedness
In the first half of 2014, we experienced a shortage of liquidity and difficulties with refinancing of our debt; as a result, we failed to fulfill our payment obligations in connection with the servicing of the interest and the repayment of our indebtedness. Since 2014, we negotiatehave negotiated restructuring terms with our major Russian lenders, such as Gazprombank, Sberbank and VTB Bank, and other lenders. As a result, in August, September and December 2015, we signed agreements with VTB Bank and Gazprombank contemplating, among other things, extension of the loan tenors, decrease in the interest rates, revision of the collateral requirements and dismissal of all court
proceedings, all of which becomes effective upon fulfillment of all conditions precedent and conditions subsequent. proceedings. During the period from December 2015 to April 2016, we signed agreements with Sberbank contemplating, among other things, extension of the loan tenors, decrease in the interest rates and dismissal of all court proceedings, all ofproceedings. These agreements were conditional upon certain undertakings, which becomes effective upon fulfillment of all conditions precedent and conditions subsequent.we have managed to fulfill. See “— Debt Financings in 2016,” “— Debt Financings in 2015,” “— Description of Certain Indebtedness,”Indebtedness” and “Item 10. Additional Information — Material Contracts,” “Item 8. Financial Information — Significant Changes” and “Item 8. Financial Information — Litigation — Debt litigation.Contracts.”
VTB Bank restructuring became effective in October 2015. Gazprombank restructuring became partially effective in the first quarter of 2016 after conversion of the U.S. dollar-denominated credit facilities into Russian rubles. Restructuring under all facilities with Gazprombank will becomebecame effective in June 2016 after obtainment ofobtaining approval on the suretyship provision by Mechel onat our general shareholders’ meeting or we will need to renegotiate this requirement with the bank.meeting. Restructuring agreements with Sberbank came into effect upon signing, however failure to comply with certain conditions will lead to termination of these agreements. Such conditions include payment of 31.5 billion rubles on Southern Kuzbass Coal Company debt, as well as repayment of part of the overdue interest and lease payments to Sberbank and Sberbank Leasing AO in the total amount of 2.8 billion rubles.signing. In April 2016, Southern Kuzbass Coal Company’s debt was assigned from Sberbank to Gazprombank in the amount of 31.5 billion rubles ($423.1 million or 28.4 billion rubles at the CBR exchange rate on April 12, 2016 and 3.1 billion rubles).
In April 2016, we signed option agreements with Gazprombank providing the bank with an option to acquire a 49% stake in the Elga coal complex for a total consideration of 34.3 billion rubles byrubles. According to these agreements, in June 30, 2016. Proceeds2016, we sold to Gazprombank a 49% stake in Elgaugol OOO, the owner of the subsoil license for the Elga coal deposit, a 49% stake in Elga-road OOO, the owner of the Ulak-Elga rail line which had been contributed to the registered capital of this newly established company in March 2016, and a 49% stake in MecheltransVostok OOO, the rail line’s transport operator (collectively, the “target companies”). All proceeds from thisthe sale will beof these stakes were used for repayment of our debt to Gazprombank, Sberbank and Sberbank Leasing AO. Gazprombank has a put option to sell its stakes (in full or in part) in the Elga coal complex within three years following a five-year period or in case of a breach of conditions stipulated by such agreement. Put options were signed by Yakutugol and Mecheltrans (sellers of the stakes in the target companies) and are guaranteed by Mechel Mining and Southern Kuzbass Coal Company. If we fail to perform under these put options Gazprombank will have the right to buy out (call option) the remaining stakes owned by us in the target companies. A 1.99% stake in each of the target companies is pledged in favor of Gazprombank as a security for the call option.
In December 2016, we signed the last set of the agreements with VTB Bank which provide for extension of maturity of our credit lines until April 2022. In April 2017, Gazprombank, VTB Bank and Sberbank confirmed the restructuring terms, including an extension of the repayment grace period until 2020 and the final maturity until 2022, interest rate of the CBR key rate plus 1.5% per year for ruble-denominated credit facilities and 3M LIBOR plus 7% per year for U.S. dollar-denominated credit facilities, and partial capitalization of interest payments.
As part of the restructuring, in January 2017, VTB Capital Plc and Skyblock Limited entered into a call option agreement for 6,937,846 preferred shares representing 5% of issued preferred shares in the share capital of Mechel (the “option shares”), which we have pledged in favor of VTB Capital Plc to secure performance of our obligations under the call option agreement. The strike price is 47.3682 rubles per share. Initially, VTB Capital Plc had a right to exercise this call option during the period from April 1, 2017 to December 31, 2020. In April 2017, VTB Capital Plc exercised its option right to buy all option shares, but we have requested to extend the start date of the option period by one year until April 1, 2018. Skyblock Limited did not fulfill its obligations under the option notice. In August 2017, VTB Capital Plc and Skyblock Limited entered into an amendment
agreement postponing the option period start date until April 1, 2018, revoking the option notice and granting VTB Capital Plc the right to receive a cash sum equal to the higher of RUB 620 million or the amount calculated as a difference between the weighted average market value of preferred shares for the last six months prior to the date of delivery of the option notice and the number of option shares multiplied by the strike price. On August 10, 2018, VTB Capital Plc notified us of its decision to exercise the option and receive cash of approximately 442.5 million rubles. On August 22, 2018, we have paid this amount in full. Following the performance of our obligations under the call option agreement, our preferred shares were released from the pledge.
In September 2017, Vnesheconombank refinanced our existing indebtedness under the project financing for the development of the Elga coal deposit. The loan provides for final repayment in April 2022.
In July 2018, we signed a new euro-denominated loan agreement with VTB Bank to refinance existingpre-export credit facilities with a syndicate of banks. As of December 31, 2018, we had refinanced 99.99% of thepre-export facilities by using funds attracted under the new loan. In January 2019, thepre-export facilities were fully refinanced.
In September 2015, we restructured the debt onunder two series of Russian ruble bonds in an aggregate amount of 10.0 billion rubles. In June-July 2016, we restructured the debt under four series of Russian ruble bonds in an aggregate amount of approximately 18.4 billion rubles. See “— Description of Certain Indebtedness — Russian bonds”Indebtedness” for a description of the terms of restructuring.
During the period from December 2015 to May 2016, we signed settlement agreements with Sberbank Leasing AO which waived our previous defaults and restructured our future payment schedules. The settlement agreements will becomewere approved by the court in March-September 2016. In November 2016 and February 2017, we signed settlement agreements with VTB Leasing JSC which restructured our overdue payments. The settlement agreements became effective upon approval atby the court hearingsin January-April 2017. During 2017, Caterpillar Financial OOO restructured part of our overdue lease payments by means of settlement agreements which are ongoing.were approved by the courts. In 2018, we fully repaid the overdue lease payments to Caterpillar Financial OOO.
We continue to negotiate financial restructuring with international lenders under our Russian and international creditors and are focused on fulfillment of conditions upon which certain restructuring agreements shall come into effect.export credit facility agreements.
Outlook for 20162019
Our objective is to ensure that our group meets its liquidity requirements and payment obligations to creditors, continues capital expenditures, restructures andproperly services its debt, restructures the remainingnon-restructured part of the indebtedness withECA-lenders, and continues as a going concern. To accomplish
Although we have a negative working capital, we believe that cash generated from operations, subject to successful completion of the above-mentioned debt restructuring, improved market conditions and reduced costs, will be sufficient to meet our capital expenditures and debt service payments in 2019. Furthermore, we believe that we will continuehave the flexibility in deferring ournon-critical capital expenditures and in managing our working capital to seek the restructuring of our existing indebtedness in order to alleviate the pressure on our cash flows. This will require aligning the servicing of the debt with operating cash flows by extending grace periods and maturities, converting foreign currency debt into rubles, reducing interest rates and amending the covenant requirements. We also intend to ask for state supportprovide further financial flexibility as an additional source of funding or to reduce other borrowing costs.needed.
We believe we will not be able to obtain significant new borrowings in the near future;future (except for the purpose of refinancing of current liabilities); however we may consider certain divestments and invite financial or strategic investors into our businesses in order to reduce theour debt burden. In 2019, we plan to approach to our lenders to discuss our debt repayment schedules amendment.
Debt Financings in 2019
We believe that cash generatedhave not entered into new material debt financings as of the date hereof. For developments relating to existing financings, please refer to “— Description of Certain Indebtedness” and “Item 10. Additional Information — Material Contracts.”
Debt Financings in 2018
In July 2018, Chelyabinsk Metallurgical Plant entered into a syndicated credit facility agreement with VTB Bank and VTB Bank (Europe) SE for a total amount of up to €950.0 million to refinance the Yakutugol and Southern Kuzbass Coal Companypre-export facilities. The grace period for principal repayment is granted until April 2020. The final maturity of the credit facility is in April 2022. See “Item 10. Additional Information — Material Contracts.”
Debt Financings in 2017
In September 2017, our subsidiary Elgaugol and Vnesheconombank entered into a credit facility agreement for a total amount of up to $190.0 million to refinance our debt obligations under the project financing for the development of the Elga coal deposit. See “— Description of Certain Indebtedness.”
In April 2017, the $100.0 million credit facility obtained by Mechel Trading from operations, subjectSberbank was assigned to successful completionVTB Bank. The terms and conditions of debt restructuring, improved market conditions and reduced costs, as well as foreign currency gains, will be sufficient to meet our capital expenditures and debt service payments in 2016. Furthermore, we believe that we have the flexibility in deferring our non-critical capital expenditures and in managing our working capital to provide further financial flexibility as needed.facility agreement remained unchanged, except for the security package which was not assigned.
Debt Financings in 2016
During the course of 2016, we reached further agreement with VTB Bank to extend the final maturity of the loans until 2022 (similar to our agreements with Gazprombank and Sberbank), finalized the restructuring of Russian ruble bonds, signed settlement agreements with Sberbank which assigned part of Sberbank’s debt to Gazprombank and finalized the restructuring with Gazprombank. See “— Description of Certain Indebtedness” and “Item 10. Additional Information — Material Contracts.”
In December 2016, Yakutugol, Southern Kuzbass Coal Company and Chelyabinsk Metallurgical Plant signed amendments to their credit facility agreements with VTB Bank totaling approximately 25.4 billion rubles (approximately $419.9 million as of December 31, 2016) which provide for an extension of the repayment grace period until April 2020 and the final maturity until April 2022.
In December 2016, Mechel signed an amendment to its credit facility agreement with VTB Bank totaling 44.8 billion rubles (approximately $738.1 million as of December 31, 2016) which provides for an extension of the repayment grace period until April 2020 and the final maturity until April 2022. In addition, in December 2016, Chelyabinsk Metallurgical Plant entered into a credit facility agreement with VTB Bank with a credit limit of 30.0 billion rubles (approximately $494.6 million as of December 31, 2016) to refinance Mechel’s debt under the credit facility agreement with VTB Bank. The facility also has a grace period until April 2020 and the final maturity until April 2022.
In June-July 2016, we restructured the debt under Russian bonds of the 04, 17, 18 and 19 series in the aggregate amount of approximately 18.4 billion rubles.
In June 2016, our subsidiaries amended their credit facility agreements with Gazprombank to capitalize accrued and unpaid interests. We repaid these amounts and interests accrued on them during the period from April 15, 2017 to March 30, 2018.
In April 2016, Southern Kuzbass Coal Company signed new settlement agreements with Sberbank which assigned part of the principal amount to Gazprombank. The principal in the total amountamounts of $423.1 million and 3.1 billion rubles waswere assigned withto Gazprombank and $254.9 million remaining onremained with Southern Kuzbass Coal Company.Company under credit facilities with Sberbank. The remaining debt was restructured with extension of grace period and principalfinal repayment, new interest rates and levels of financial covenants.
In March 2016, Yakutugol’s loan from Gazprombank in the amount of $103.1 million was converted into rubles resulting in the debt of 6.9 billion rubles. Restructuring of this credit facility became effective.
In February 2016, we signed restructuring agreements with Sberbank for Chelyabinsk Metallurgical Plant, Izhstal, Bratsk Ferroalloy Plant, Yakutugol, Korshunov Mining Plant, Mechel Trading and Southern Kuzbass Coal Company facilities totaling approximately 29.3 billion rubles and $100.0 million. Restructuring granted an extension of grace period extended repayments of our debt,and final maturity, new interest rates, partial capitalization of interests, as well as new levels of financial covenants.
In January 2016, part of Gazprombank debt, namely $400.0 million and $200.0 million credit facilities for Southern Kuzbass Coal Company and $385.8 million and $300.0 million credit facilities for Yakutugol were converted into rubles resulting in the total debt of approximately 99.0 billion rubles. Restructuring of these converted facilities became effective.
Debt Financings in 2015
During the course of 2015, we managed to reach an agreement with a part of our major creditors such as VTB Bank, Gazprombank, Sberbank and some others on the restructuring of the group’s loan agreements including but not limited to the extension of the tenor of the loans, partial capitalization of interest payments, extension of the grace period, change of the interest rate calculation. See “— Description of Certain Indebtedness” and “Item 10. Additional Information — Material Contracts” for a summary description of the terms of these facilities.
In December 2015, Southern Kuzbass Coal Company signed settlement agreements with Sberbank on the credit facilities in the total amount of approximately $678.0 million and 3.1 billion rubles. Upon approval of these agreements by the court, all debt under Southern Kuzbass Coal Company facilities became due and payable. In April 2016, new settlement agreements with Sberbank were signed and approved by the court.
In August and December 2015, Mechel Service, Chelyabinsk Metallurgical Plant, Mechel Energo, Beloretsk Metallurgical Plant, Port Posiet, Mechel Coke and Urals Stampings Plant signed amendments to their credit facility agreements with Gazprombank for a total amount of 26.8 billion rubles, (approximately $367.3 million as of December 31, 2015), providing for an extension of the grace period until April 2020 and the final maturity until April 2022. As of the date hereof, restructuring of these credit facilities is not effective as there are some outstanding conditions precedent to be fulfilled.
In August and December 2015, Yakutugol and Southern Kuzbass Coal Company signed amendments to their credit facility agreements with Gazprombank to restructure debt in a total amount of approximately $1.3 billion (approximately 93.7 billion rubles as of December 31, 2015), providing for an extension of the grace period until April 2020 and the final maturity until April 2022, as well as the conversion into Russian rubles. Restructuring of these credit facilities became effective in January 2016.
In August and December 2015, Yakutugol signed amendments to its credit facility agreement with Gazprombank to restructure debt totaling $103.1 million (approximately 7.5 billion rubles as of December 31, 2015), providing for an extension of the grace period until April 2020 and the final maturity until April 2022, as well as the conversion into Russian rubles. Restructuring became effective upon conversion of the loan amount in March 2016.
In November 2015, Mechel Service signed amendments to its credit facilities with Moscow Credit Bank to restructure debt in the total amount of $83.3 million, providing for an extension of the final maturity until February 2017.
In September 2015, Chelyabinsk Metallurgical Plant entered into an approximately 8.0 billion ruble (as calculated based on the market spot rate as of October 27, 2015) credit facility agreement with VTB Bank to refinance debts of Skyblock Limited and HBL Holding GmbH totaling $107.7 million and €14.5 million, respectively, provided by VTB Bank. The facility has a grace period until April 2017 and the final maturity until April 2020.
In September 2015, Yakutugol and Southern Kuzbass Coal Company signed amendments to their credit facility agreements with VTB Bank to restructure debt in the total amount of 15.8 billion rubles (approximately $217.1 million as of December 31, 2015), providing for an extension of the repayment grace period until April 2017 and the final maturity until April 2020. The restructuring came into effect on October 13, 2015.
In September 2015, Southern Kuzbass Coal Company signed an amendment to its credit facility agreement with VTB Bank to restructure debt totaling 1.6 billion rubles (approximately $22.6 million as of December 31, 2015), providing for an extension of the repayment grace period until April 6, 2017 and the final maturity until April 6, 2020. The restructuring came into effect on October 13, 2015.
In September 2015, Mechel signed an amendment to its credit facility agreement with VTB Bank to restructure debt in the total amount of 44.8 billion rubles (approximately $614.3 million as of December 31, 2015), providing for an extension of the repayment grace period until April 2017 and the final maturity until April 2020. The restructuring came into effect on October 13, 2015.
In September 2015, Yakutugol signed a settlement agreement with Eurasian Development Bank to restructure debt in the amount of approximately 1.9 billion rubles (approximately $25.5 million as of December 31, 2015). The final maturity of the credit facility agreement was extended until June 2018.effective.
Debt Financings in 2014
During the course of 2014, we obtained or amended the following major debt financings. See “— Description of Certain Indebtedness” and “Item 10. Additional Information — Material Contracts” for a summary description of the terms of these facilities.
In July 2014, Yakutugol and Southern Kuzbass Coal Company entered into amendments to their credit facility agreements with VTB Bank to refinance debt in the total amount of 15.8 billion rubles (approximately $281.3 million as of December 31, 2014), providing for an extension of the repayment grace period until April 2015 and the final maturity until April 2018. The loan was restructured in October 2015.
In May 2014, Mechel entered into an amendment to its credit facility agreement with VTB Bank to refinance debt in the amount of 40.0 billion rubles (approximately $711.0 million as of December 31, 2014), providing for an extension of the repayment grace period until April 2015 and the final maturity until April 2018. VTB Bank also provided an additional loan for redemption of ruble bonds in the amount of up to 3.8 billion rubles (approximately $67.3 million as of December 31, 2014). The loan was restructured in October 2015.
In May 2014, Southern Kuzbass Coal Company entered into an amendment to its facility agreement with VTB Bank to refinance debt in the amount of 1.6 billion rubles (approximately $28.4 million as of December 31, 2014), providing for an extension of the repayment grace period until April 2015 and the final maturity until April 2018. The loan was restructured in October 2015.
In March 2014, our subsidiary Elgaugol signed two loan agreements for an aggregate amount of $2.5 billion with Vnesheconombank for the project financing of the development of the Elga coal deposit. The loans have a tenor of 13.5 years, with a repayment grace period of 3.5 years.
Debt Financings in 2013
During the course of 2013, we continued our refinancing efforts through extending some of our existing credit facilities, amending financial covenants, including agreeing with the lenders on a covenant holiday for Mechel and Mechel Mining’s ratios of net borrowings to EBITDA for the relevant periods ending in December 31, 2013 and June 30, 2014. See “— Description of Certain Indebtedness” and “Item 10. Additional Information — Material Contracts” for a summary description of the terms of these facilities.
In December 2013, our subsidiaries Yakutugol and Southern Kuzbass Coal Company and a syndicate of banks coordinated by ING Bank N.V., Société Générale and VTB Capital Plc entered into an amendment agreement to the existing pre-export facility agreements for a total amount of $1.0 billion. The amendments provide that the loan, which was entering the repayment phase in December 2013, will be repayable in equal monthly installments until December 2016 following a grace period of 12 months ending in December 2014.
In December 2013, several of our subsidiaries and Sberbank entered into separate amendments to their loan agreements totaling 26.6 billion rubles (approximately $808 million) for the restructuring and refinancing of existing indebtedness and working capital. Of this amount, Chelyabinsk Metallurgical Plant accounted for 21.5 billion rubles (approximately $655.9 million) and Mechel Trading, Izhstal, Southern Kuzbass Coal Company, Yakutugol, Korshunov Mining Plant and Bratsk Ferroalloy Plant accounted for, in the aggregate, 5.1 billion rubles (approximately $156.2 million). The facilities totaling 13.4 billion rubles (approximately $410.7 million) have a tenor of five years with a repayment grace period until March 28, 2015. In February and March 2016, our subsidiaries signed restructuring agreements with Sberbank.
In October 2013, our subsidiary Elgaugol entered into a $150.0 million bridge facility with Vnesheconombank with a tenor of six months for the development of the Elga coal complex. As of December 31, 2015, the overdue principal and the overdue interest amounted to $146.4 million and approximately $3.0 million (approximately 10.7 billion rubles and 215.2 million rubles), respectively. In March 2016, the overdue interest was fully repaid. See also “Item 10. Additional Information — Material Contracts — Project Finance — Credit Facility for Elgaugol from Vnesheconombank.”
In August 2013, Chelyabinsk Metallurgical Plant entered into a revolving credit facility with Alfa-Bank for a total amount of $150.0 million. The facility was provided for working capital financing and was fully drawn as of December 31, 2013. In March 2014, the credit facility was amended providing for full repayment of the loan in five equal weekly installments, the last installment falling due not later than April 25, 2014. In April 2014, the facility was fully repaid.
In April 2013, Mechel entered into a 40.0 billion ruble (approximately $1.3 billion) credit facility agreement with VTB Bank for a period of five years. The facility allowed a 15-month grace period and was to be repaid in equal installments on a quarterly basis. The proceeds were used to refinance existing indebtedness with VTB Bank as well as to refinance other obligations of the companies within our group (including redemption of ruble bonds). In May 2014, we signed amendments with VTB Bank to refinance the facility, providing for an extension of grace period until April 2015 and final maturity until April 2018.
In April 2013, our subsidiaries Beloretsk Metallurgical Plant and Urals Stampings Plant entered into revolving credit facilities with Gazprombank for a total amount of 3.3 billion rubles (approximately $106.9 million). The purpose of the facilities was working capital financing. Initially, the term of the facilities was three years with the term of each tranche of up to 24 months. The credit facility agreements were restructured in August and December 2015.
In April 2013, our subsidiaries Southern Kuzbass Coal Company and Yakutugol entered into separate non-revolving credit facility agreements with Gazprombank for a total amount of $889.0 million: $400.0 million was made available to Southern Kuzbass Coal Company and $489.0 million was made available to Yakutugol, both for a period of up to five years with a three-year grace period obtained for the purpose of funding operational activities and refinancing of short-term debt provided by Gazprombank. As of December 31, 2015, the amount outstanding under the Southern Kuzbass Coal Company facility was $400.0 million and the amount outstanding under the Yakutugol facility was $385.8 million. The credit facility agreements were restructured and converted into rubles in January 2016. As a result, the debt of Southern Kuzbass Coal Company and Yakutugol amounted to a total of approximately 60.9 billion rubles.
In March and April 2013, our subsidiary Mecheltrans entered into two non-revolving credit facilities with Moscow Credit Bank for a total amount of $88 million for a period of one year each with a bullet repayment. The facilities were provided for the purpose of working capital financing. In May 2013, the facilities amount was increased to $105 million. In April 2014, we extended the maturity of the facilities until December 2014 and replaced the borrower with Mechel Service. In December 2014, the maturity of the facilities was extended until February 2016. In November 2015, the maturity was further extended until February 2017.
Debt Financings in 2012
During the course of 2012, we obtained or amended the following major debt financings. See “— Description of Certain Indebtedness” and “Item 10. Additional Information — Material Contracts” for a summary description of the terms of these facilities.
In December 2012, our subsidiaries Yakutugol and Southern Kuzbass Coal Company and a syndicate of banks coordinated by ING Bank N.V., Société Générale, UniCredit, JSCB Rosbank and ABN AMRO Bank N.V. entered into an amendment and restatement agreement to the existing pre-export facility agreements for a total amount of $1.0 billion. The amendments provided an extension of repayment grace period under the loan until December 2013. The loan was subsequently amended in December 2013.
In December 2012, following the repayment of the initial drawdown under a revolving credit line extended to Mechel Trading by Sberbank under a long-term framework agreement entered into in October 2011, Mechel Trading re-drew $100.0 million under this credit line. In December 2013, the facility was restructured for a further period of five years.
In October 2012, Southern Kuzbass Coal Company obtained four non-revolving credit lines for five years from Sberbank for a total amount of 24.0 billion rubles (approximately $772.3 million) with a three-year grace period. The purpose of the credit lines was working capital financing. In December 2015, Southern Kuzbass Coal Company signed settlement agreements which were approved by the court.
In April 2012, we extended our existing loans from VTB Bank for Yakutugol and Southern Kuzbass Coal Company in the total amount of approximately $460.0 million for a period of up to three years. In July 2014, Yakutugol and Southern Kuzbass Coal Company signed amendments to the loan agreements, providing for an extension of grace period until April 2015 and final maturity until April 2018.
In April 2012, our subsidiaries Southern Kuzbass Coal Company and Yakutugol entered into separatenon-revolving credit facility agreements with Gazprombank for a total amount of $500.0 million for a period of up to five years for the purpose of funding operational activities and refinancing our short-term debt. As of December 31, 2015, the amount outstanding under the Southern Kuzbass Coal Company facility was $200.0 million and the amount outstanding under the Yakutugol facility was $300.0 million. The credit facility agreements were restructured and converted into rubles in January 2016. As a result, the debt of Southern Kuzbass Coal Company and Yakutugol amounted to a total of approximately 38.1 billion rubles.
In April 2012, we completed placement of our non-convertible interest-bearing BO-05, BO-06, BO-07, BO-11 and BO-12 series exchange bonds in an aggregate principal amount of 15.0 billion rubles (approximately $506.1 million). The proceeds were used to refinance some of our short-term debt. In April 2013, the bonds were redeemed for the entire amount.
In February 2012, we completed placement of our non-convertible interest-bearing BO-04 series exchange bonds in an aggregate principal amount of 5.0 billion rubles (approximately $167.3 million). The proceeds were used to refinance our short-term debt. In February 2014, this series was redeemed for the total amount of 4.254 billion rubles. In February 2015, this series was fully repaid.
In January 2012, Mechel Trading refinanced its existing loans with Alfa-Bank through a new revolving line in the amount of $150.0 million with the ability to draw tranches and with the final repayment to be made not later than October 2016. The proceeds were used for working capital and trade financing. The facility was fully repaid in September 2013.
Debt Financings in 2011
During the course of 2011, we obtained the following major debt financings. See “— Description of Certain Indebtedness” and “Russian bonds” for a summary description of the terms of these facilities.
In October 2011, Mechel Trading obtained a revolving yearly renewable credit line from Sberbank in the amount of $130.0 million for three years for the purposes of working capital, intra-group and pre-export financing. The credit line was made available under the long-term framework agreement with Sberbank. The initial drawdown was fully repaid in October and December 2012 to allow further drawdowns.
In October 2011, our subsidiary Mechel Energo obtained a credit line for two years from Gazprombank in the amount of 3.0 billion rubles (approximately $102.1 million). The credit line was provided for the purpose of financing our day-to-day operations. In May 2012, we extended the credit line for up to 3.5 years and the amount of the credit line was increased up to 5.0 billion rubles. In December 2015, Mechel Energo’s debt in the amount of 3.6 billion rubles was partially transferred to the other borrowers: 1.4 billion rubles to Chelyabinsk Metallurgical Plant, 2.0 billion rubles to Southern Kuzbass Coal Company and 0.2 billion rubles to Urals Stampings Plant. The rest of 1.4 billion rubles remained at Mechel Energo. The transfer of the debt came into effect on December 4, 2015.
In October 2011, our subsidiary Mechel Trading obtained a credit facility in the amount of $180.0 million to refinance a portion of our short-term loans. The loan was provided by a syndicate of banks, ING Bank N.V., Barclays Capital Inc. and ZAO Unicredit Bank, for a period of three years with 18-month grace period. In May 2014, the facility was fully repaid.
In June 2011, Yakutugol obtained a non-revolving credit line for five years from Eurasian Development Bank in the amount of 2.8 billion rubles (approximately $95.3 million) with a 24-month grace period for the sole purpose of financing the development of the Elga coal deposit. The loan was restructured in September 2015.
In June 2011, we completed placement of our non-convertible interest-bearing bonds of the 17th, 18th and 19th series in the aggregate amount of 15.0 billion rubles. The proceeds were used to refinance our short-term debt.
In March 2011, our subsidiary Chelyabinsk Metallurgical Plant obtained a revolving credit line for a period of 1.5 years from Gazprombank in the amount of 6.0 billion rubles (approximately $204.2 million) for the purpose of working capital financing. In September 2011, the available limit was increased up to 11.0 billion rubles (approximately $374.3 million) and the period was extended up to five years. In May 2012, we extended the credit line for up to five years and the amount of the credit line was reduced to 6.0 billion rubles. The credit facility agreement was restructured in August and December 2015.
In March 2011, our subsidiary Mechel Service obtained a revolving credit line from Gazprombank totaling 3 billion rubles (approximately $102.1 million) for a period of 1.5 years. The purpose of the credit line was working capital financing. In October 2011, we agreed with the lender to increase the amount of the credit line up to 4.0 billion rubles (approximately $136.1 million) and extend its period up to two years. In May 2012, we extended the credit line for up to 3.5 years and the amount of the credit line was increased up to 11.0 billion rubles. In February 2016, Mechel Service’s debt in the amount of 9.6 billion rubles was partially transferred to the other borrowers: 1.4 billion rubles to Chelyabinsk Metallurgical Plant, 6.5 billion rubles to Southern Kuzbass Coal Company, 1.4 billion rubles to Mechel Coke and 0.3 billion rubles to Urals Stampings Plant. The rest of 1.4 billion rubles remained at Mechel Service. The transfer of the debt came into effect on February 4, 2016.
In February 2011, our subsidiary Mechel Trading House obtained a revolving credit line from Gazprombank totaling 3 billion rubles (approximately $102.1 million) for a period of 1.5 years. The purpose of the loan was to finance the working capital of the company. In October 2011, the amount of the credit line was increased up to 4.0 billion rubles (approximately $136.1 million) and the term was extended for a period of up to two years. In April 2012, the parties agreed to terminate the facility.
In February 2011, we completed two placements of our non-convertible interest-bearing bonds of the 15th and 16th series in the aggregate amount of 10.0 billion rubles. The proceeds were used to fund the working capital of our group, to refinance the existing loan agreements, as well as to finance the construction of the Elga coal complex and other investment projects of our group. In 2014-2015, the 15th and 16th series were redeemed for the total amount of approximately 8.3 billion rubles.
On February 7, 2011, our subsidiary Southern Kuzbass Coal Company obtained a credit line in the amount of 6.2 billion rubles (approximately $211.0 million) to finance the construction of the second stage of Sibirginskaya Underground. The loan had been provided by TransCreditBank OAO (now VTB Bank) for a period of five years with an amortized monthly repayment starting on February 2014 until December 2015 and was to be repaid in full by February 6, 2016. In May 2014, we signed amendments to the loan agreement to extend the repayment grace period until April 2015 and the final maturity until April 2018. As of December 31, 2014, the amount outstanding under the facility was 1.6 billion rubles (approximately $28.4 million).
Restrictive Covenants
Almost all of our loan agreements contain a number of covenants and restrictions. Such covenants and restrictions include, but are not limited to, various financial ratios, limitations on amount of debt (including indebtedness of certain companies within our group), minimum value of shareholder equity, various information and certain other covenants,limitations, as well as acceleration and cross-default provisions. The covenants also include limitations on the amount of dividends on our common and preferred shares, and amounts that can be spent for capital expenditures, new investments and acquisitions. Unless a breach is remedied or a waiver is obtained, a breach of such covenants and restrictions generally permits lenders to demand accelerated repayment of principal and interest under their respective loan agreements. In addition, in the event of a payment default or the violation of certain other covenants and restrictions, creditors under other loan agreements can demand accelerated repayment of principal and interest under such other loan agreements pursuant to the cross-default provisions in such other agreements. See “Item 3. Key Information — Risk Factors — Risks Relating to Our Financial Condition and Financial Reporting — Our creditors have accelerated and in the future may accelerate amounts due under our loan agreements due to our failure to comply with theour payment and other obligations, in our credit facilities caused some of our creditors to accelerate amounts due under their loan agreements and such failure, or like failure in the future, may cause the acceleration of our other outstanding debt, which could lead to cross-default under other borrowings and have a material adverse effect on our business, financial condition, results of operations and prospects,” “Item 3. Key Information — Risk Factors — Risks Relating to Our Financial Condition and Financial Reporting — If we areWe may be unable to restructure all of our indebtedness or we may fail to comply with the new terms of the restructured indebtedness, our lenders may claim for accelerated repayment, which could lead to cross-default under other borrowings and have a material adverse effect on our business, financial condition, results of operations and prospects”indebtedness” and “Item 3. Key Information — Risk Factors — Risks Relating
to Our Financial Condition and Financial Reporting — We have a substantial amount of outstanding indebtedness with restrictive financial covenants and most shares and assets in our subsidiaries are pledged.”
The table below sets out the requirements ofrestrictive financial covenants we were required to comply with under our most significant restrictive debt covenants and the actual ratios/amountsloan agreements with Russian state banks as of December 31, 2015.2018.
Restrictive Covenant | Requirement | Actual as of | ||||
| ||||||
Mechel’s Net Borrowings | ||||||
| Shall not exceed | 6.39:1 | ||||
Mechel’s Total Borrowings to EBITDA ratio | Shall not exceed | 6.25:1 | ||||
Mechel’s EBITDA(2) to Net Interest Expense ratio | Shall not be less than | 1.79:1 | ||||
Mechel’s EBITDA to Consolidated Financial Expense ratio | Shall not be less than | 1.82:1 | ||||
Mechel’s Cash flow from operating activities to EBITDA ratio | Shall not be less than 0.8:1 | 0.90:1 | ||||
Mechel’s EBITDA to Revenues ratio | Shall not be less than 0.2:1 | 0.24:1 | ||||
| (1) | Net Borrowings and Total Borrowings are calculated according to the respective definitions set by the credit agreements. Generally, Total Borrowings includes outstanding loans, finance lease, bonds and other financial liability balances; Net Borrowings is equal to Total Borrowings less cash and cash equivalents. |
| (2) | EBITDA is calculated according to the respective definitions set by the credit agreements and may differ from the disclosed Consolidated Adjusted EBITDA. |
As of December 31, 2015,2018, we were in breach of almost all majorcompliance with the financial covenants contained in the group’s restructured loan agreements with Russian state banks, except for the targeted amount of Net Borrowings.
As of December 31, 2015, Mechel Mining’sBorrowings to EBITDA ratio and the Total Borrowings to EBITDA ratio which were breached. We have requested the relevant lenders to waive our financial covenants were not tested.
breaches. As of December 31, 2015 and as of the date hereof, we did not remedy or obtain the required waivers with respect to the breaches of the financial covenants.
Our restructured loan agreements contain a number ofnon-financialcovenants, underincluding but not limited to restrictions on new debt, intra-group loans, new guarantees and/or security, maximum level of indebtedness in respect of various payment obligations, minimum level of net assets, maximum allowed level of legal claims, various information and certain other covenants. The covenants also include limitations on the applicable loan agreements.amount of dividends on our common and preferred shares, and amounts that can be spent for capital expenditures, new investments and acquisitions.
In addition, asAs of December 31, 2015,2018, we were in breach of a number ofnon-financial covenants under most of our credit facilities, including but not limited to facilities from VTB Bank, Gazprombank and Sberbank, as well as under the Pre-Export Facility Agreements.restructured loan agreements. Such covenant breaches include, among others, the violation of negative pledge restrictions, the breach of maximum thresholds for unpaid liabilities and the existence of dispute resolution proceedings against various companiesminimum level of the group with claims exceeding permitted thresholds.borrowers’ net assets, share pledge without the prior consent of the lenders and guarantees provision. We have requested the lenders to waive certain breaches of thenon-financial covenants under the group’s restructured loan agreements.
Finally, asAs of December 31, 2015,2018, we failed to pay scheduled principal and interest amounts withinand we were in breach of most financial andnon-financial covenants under the prescribed grace periods under most of our loans, including butgroup’snon-restructured loan agreements withECA-lenders. In particular, financial covenants we were not limitedin compliance with include the Net Borrowings to loans from GazprombankEBITDA ratio and Sberbank,the EBITDA to Net Interest Expense ratio, as well as under the Pre-Export Facility Agreements, and such amounts exceeded permitted thresholds.
Astargeted amount of December 31, 2015 and asAdjusted Shareholder Equity. As of the date hereof, we did not remedy or obtain the required waivers with respect to the failure to pay the amounts due and the breaches of the financial andnon-financial covenants under the applicable loan agreements.
The failure to pay the scheduled principal and interest amounts as described above, as well as the breach of financial and other covenants in our loan agreements, which were not remedied by us or waived by our creditors, permit the creditors under those loan agreements to accelerate the payment of principal and interest under those loan agreements, as well as trigger cross-default provisions under a number of other facilities, permitting the respective lenders under such other facilities to accelerate the payment of principal and interest under their loans. For a more detailed description of the current terms of our loan agreements, see “— Description of Certain Indebtedness” and “Item 10. Additional Information — Material Contracts.”
The failure to pay amounts due, thenon-compliance with financial andnon-financial covenants and the triggering of the cross-default provisions resulted in the reclassification of our group’s long-term debt into short-term liabilities in the amount of RUB 175,743361,328 million as of December 31, 2015.2018.
For a more detailed description of the existing payment defaults, breaches of covenants and restrictions, as well as other matters, see “Item 13. Defaults, Dividend Arrearages and Delinquencies.”
Our ability to meet the debt covenants has been estimated on the basis of our short-term budgets and long-term projection (the “Projection”) of the company. The Projection combines production plans by entities, key products and cost items price dynamics, maintenance and project capital investment program, loans portfolio and repayment schedule and other budgeted and projected items. It includes income and cash flow statements both on separate entities and consolidated level which is being used for purposes of debt covenants calculation. The Projection is prepared using assumptions that comparable market participants would use.
To forecast key product prices, exchange rates dynamics and inflation rates we use a wide variety of sources including the following institutions: Ministry of Economic Development of the Russian Federation, leading investment banks, Platts, CRU, Metal Expert, RasMin, Rudprom,MMI, World Bank, Oxford Economics, Consensus Economics, etc. — along with our own estimates.
As of December 31, 2015,2018, we projected the following financial covenant ratios for the forthcomingsix-month and12-month periods, which we are required to comply with under our most significant loan agreements:
Restrictive Covenant | Requirement | Projection as of June 30, | Projection as of December | |||||||
| ||||||||||
Mechel’s Net Borrowings to EBITDA ratio | Shall not exceed | 6.2:1 | 5.7:1 | |||||||
Mechel’s Total Borrowings to EBITDA ratio | Shall not exceed | 6.3:1 | 5.7:1 | |||||||
Mechel’s EBITDA to Net Interest Expense ratio | Shall not be less than | 2.4:1 | 2.6:1 | |||||||
Mechel’s EBITDA to Consolidated Financial Expense ratio | Shall not be less than | 2.4:1 | 2.6:1 | |||||||
Mechel’s Cash flow from operating activities to EBITDA ratio | Shall not be less than 0.8:1 | 0.9:1 | 0.8:1 | |||||||
Mechel’s EBITDA to Revenues ratio | Shall not be less than 0.2:1 | 0.22:1 | 0.21:1 | |||||||
The significant assumptions underlying our debt covenant determination are projected product prices, sales volumes, cost dynamics, inflation rates and discount rates. Some of these assumptions may materially deviate from our historical results primarily due to the market downturns and economic slowdownsupturns in the recent years. All these material assumptions are based on our projections and are subject to risk and uncertainty. See “Item 3. Key Information — Risk Factors — Risks Relating to Our Financial Condition and Financial Reporting — Our creditors have accelerated and in the future may accelerate amounts due under our loan agreements due to our failure to comply with theour payment and other obligations in our credit facilities caused some of our creditors to accelerate amounts due under their loan agreements and such failure, or like failure in the future, may cause the acceleration of our other outstanding debt, which could lead to cross-default under other borrowings and have a material adverse effect on our business, financial condition, results of operations and prospects.obligations.”
Description of Certain Indebtedness
See “Item 10. Additional Information — Material Contracts” for a summary description of material contracts related to our indebtedness. In addition, we have described below certain additional contracts related to our indebtedness. For more information, see “Item 5. Operating and Financial Review and Prospects — Liquidity and Capital Resources — Restrictive Covenants,” “Item 13. Defaults, Dividend Arrearages and Delinquencies” and “Item 8. Financial Information — Litigation — Debt litigation.”note 11.1 to the consolidated financial statements.
Credit Facility Agreement for Yakutugol from Gazprombank
General
On February 6, 2009, our subsidiary Yakutugol entered into a credit facility agreement with Gazprombank for a total amount of $550.0 million for the purposes of funding financial and operating activities, including funding affiliates and credit repayments. The facility was initially repayable in quarterly installments starting from the first quarter of 2010 through the first quarter of 2012, however in February 2010 the final maturity was extended until February 2015.
As of December 31, 2014, the amount outstanding under the credit facility was $103.1 million. In August and December 2015, Yakutugol signed amendments to the credit facility agreement with Gazprombank to restructure debt totaling $103.1 million, providing for an extension of the grace period until April 2020 and the final maturity until April 2022.million. In March 2016, the loan amount was converted into rubles resulting in the debt of 6.9 billion rubles. Restructuringrubles, and the restructuring of the credit facility became effective.
AsIn June 2016, Yakutugol entered into an amendment to its credit facility agreement under which accrued and unpaid interest in the amount of December 31, 2015,584.7 million rubles was capitalized. We repaid this amount and interest accrued on it during the overdue principal and the overdue interest under the facility amountedperiod from April 15, 2017 to $103.1 million and $8.2 million (approximately 7.5 billion rubles and 594.1 million rubles), respectively. All overdue interest shall be repaid until the end of March 2017.30, 2018.
Interest rate and interest period
Starting from the effective date, the interest is payable monthly at the CBR key rate plus 1.5% per year. The lender may change the interest rate on the CBR key rate plus 3.5% per year if the borrower fails to meet certain additional conditions, including obtaining similar terms with Sberbank and VTB Bank.
During the grace period, we apply thepayable interest rate of 8.75% for interest repayment. The remaining unpaid interests areinterest is being capitalized and paid in accordance with the principal repayment schedule. Payable interest rate: 8.75% if our Total Borrowings/EBITDA ratio is equal to 6.01 or above; 9.50% if our Total Borrowings/EBITDA ratio is equal to or above 5.01 and less than 6.00; and 10.50% if our Total Borrowings/EBITDA ratio is equal to or above 4.01 and less than 5.00. If our Total Borrowings/EBITDA ratio is 4.00 or less, the accrued interest shall be paid in full. In all of the above cases, payable interest rate shall not exceed the CBR key rate plus 1.5% per year.
Repayment and prepayments
The final maturity date is April 20, 2022. Repayment is to be made in equal monthly installments starting from April 4,15, 2020. The lender may change the final maturity date on April 20, 2020 if the borrower fails to meet certain additional conditions, including obtaining similar terms with Sberbank and VTB Bank. In this case repayment is to be made in equal monthly installments starting from April 4, 2017.
The borrower may prepay the loan in full or in part with a 30 day prior notice to the lender.
Guarantee
The borrower’s obligations under the credit facility are guaranteed by Mechel Mining, Mechel Carbon, Korshunov Mining Plant, Urals Stampings Plant, Chelyabinsk Metallurgical Plant, Mechel and Southern Kuzbass Coal Company.
Security
The borrower’s obligations are secured by a pledge of 25%+1 share in each of Southern Kuzbass Coal Company, Korshunov Mining Plant, Port Posiet, Izhstal, Chelyabinsk Metallurgical Plant, Beloretsk Metallurgical Plant and Urals Stampings Plant, 45%+1 share of Southern Kuzbass Coal Company, 50%+1 share inof Yakutugol, 25%+1 share of Mechel Mining and 25% inof registered capital of Port Temryuk. In March 2016, we mortgaged the Ulak-Elga rail line under the credit facility agreement.
Covenants and other matters
For the relevant period ending on December 31, 2015,2018, we were not in compliance with certain financial andnon-financial covenants.
Under the credit facility agreement, Mechel group’s ratio of total borrowingsTotal Borrowings to EBITDA shall not exceed 7.5:1 in 2016, 5.5:1 in 2017, 4.5:1 in 2018, 3.5:1 in 2019 and 3.0:1 in 2020. Mechel group’s ratio of EBITDA to consolidated financial expenseConsolidated Financial Expense shall not be less than 1.25:1 in 2016, 1.50:1 in 2017, 1.75:1 in 2018, 2.0:1 in 2019 and 2.5:1 in 2020. During the period from 2017 to 2020, we also have to comply with the ratios of operational cashCash flow from operating activities to EBITDA and EBITDA to revenuesRevenues at the levels of 80% and 20%, respectively.
The credit facility contains certain customary representations and warranties, affirmative covenants, notice provisions and events of default, including change of control provisions and cross-defaults relating to other debt.
The credit facility agreement is governed by Russian law.
Credit Facility Agreements for Yakutugol and Southern Kuzbass Coal Company from VTB Bank
General
In September 2010, our subsidiaries Yakutugol and Southern Kuzbass Coal Company each entered into agreements further amending theone-year credit facility agreements executed with VTB Bank in November 2008 and further amended in November 2009, for the total amount of 13.6 billion rubles (approximately $422.4 million).rubles. In April 2012, we amended the credit facility agreements to extend their term until 2015 and change certain financial covenants.
In April 2014, VTB Bank converted the 13.6 billion ruble loan into U.S. dollars; as a result the debt of Yakutugol and Southern Kuzbass Coal Company amounted to $461.8 million. In July 2014, the debt was converted back into rubles and Yakutugol and Southern Kuzbass Coal Company signed amendments to the credit facility agreements in the amount of 5.8 billion rubles and 10.0 billion rubles (approximately $103.4 million and $177.9 million as of December 31, 2014), respectively, providing for an extension of the repayment grace period until April 2015 and the final maturity until April 2018.
In September 2015, Yakutugol and Southern Kuzbass Coal Company signed amendments to their credit facility agreements with VTB Bank to restructure debt in the total amount of 15.8 billion rubles (approximately $217.1 million as of December 31, 2015), providing for an extension of the repayment grace period until April 2017 and the final maturity until April 2020. The restructuring came into effect on October 13, 2015.
As ofIn December 31, 2015,2016, Yakutugol and Southern Kuzbass Coal Company had overdue penalty insigned amendments to their credit facility agreements with VTB Bank which provide for an extension of the amount of 1.6 million rublesrepayment grace period until April 2020 and 2.8 million rubles, respectively. We have requested the lender to write off the overdue penalty.final maturity until April 2022.
Interest rate and interest period
Interest under the credit facilities is payable monthly at the CBR key rate plus 2.35%1.5% per year until January 6, 2018; and at the CBR key rate plus 2.99% per year from January 7, 2018.year. The lender may increase the interest rate by 1% per year if the borrowers fail to meet certain obligations under the credit facilities.
During the grace period, we apply payable interest rate for interest repayment. The remaining unpaid interest is being capitalized and paid on the final maturity date. Payable interest rate: 8.75% if our Net Borrowings/EBITDA ratio is equal to 6.01 or above; 9.50% if our Net Borrowings/EBITDA ratio is equal to or above 5.01 and less than 6.00; and 10.50% if our Net Borrowings/EBITDA ratio is equal to or above 4.01 and less than 5.00. If our Net Borrowings/EBITDA ratio is 4.00 or less, the accrued interest shall be paid in full.
Repayment and prepayments
The final maturity of the credit facilities for both Southern Kuzbass Coal Company and Yakutugol is April 6, 2020.2022. Each of the facilities is to be repaid in equal monthly installments starting on April 6, 2017.2020. Prepayment for all or part of the loan amounts is allowed subject to simultaneous compliance with certain requirements.
Guarantee
The borrowers’ obligations are guaranteed by Mechel Mining, Mechel Carbon, Mechel Carbon Singapore, Mechel Trading, Korshunov Mining Plant, Urals Stampings Plant, Chelyabinsk Metallurgical Plant, Mechel and cross guarantee between Southern Kuzbass Coal Company and Yakutugol.
Security
The borrowers’ obligations are secured by a pledge of25%-3 shares of Yakutugol, 25%+1 share of Southern Kuzbass Coal Company, and 25%+1 share of Korshunov Mining Plant, 25%+1 share of Urals Stampings Plant and46.66%-1 share of Chelyabinsk Metallurgical Plant.
Covenants and other matters
For the relevant period ending on December 31, 2015,2018, we were not in compliance with certain financial and non-financial covenants.
Under the credit facility agreements, Mechel group’s ratio of net borrowingsNet Borrowings to EBITDA shall not exceed 9.00:1 until December 31, 2016, 8.00:1 until December 31, 2017, 7.00:1 until December 31, 2018, 6.00:1 until December 31, 2019, 5.00:1 until December 31, 2020 and thereafter. Mechel group’s ratio of EBITDA to net interest expenseNet Interest Expense shall not be less than 1.25:1 until December 31, 2016, 1.50:1 until December 31, 2017, 1.75:1 until December 31, 2018, 2.00:1 until December 31, 2019, 2.25:1 until December 31, 2020 and thereafter. Financial covenants are tested semi-annually.
The credit facility agreements contain certain customary representations and warranties, affirmative covenants, notice provisions and events of default, including change of control and cross-defaults relating to other debt, as well as limitations on payment of dividends, acquisitions and disposals andnon-core transactions.
The credit facility agreements are governed by Russian law.
Credit Facility Agreement for Chelyabinsk Metallurgical Plant from Sberbank
General
On October 13, 2010, Sberbank opened a credit line for Chelyabinsk Metallurgical Plant forin the total amount of 15.0 billion rubles (approximately $493.9 million) to refinance short-term debt. On December 19, 2013, the borrower and Sberbank entered into an amendment to the loan agreement by extending the term of the facility by five years with a repayment grace period until March 30, 2015 and amending the security structure. As of December 31, 2015, the facility was fully drawn.
In February 2016, Chelyabinsk Metallurgical Plant signed an amendment to its credit facility agreement with Sberbank to restructure debt in the total amount of 15.0 billion rubles, providing for an extension of the repayment grace period until April 2017 and the final maturity until April 2020. The grace period will be extended until January 2020 and the final maturity until April 2022, if we obtain similar terms with Gazprombank and VTB Bank.rubles. The amendment became effective upon signing, however, failure to comply with certain terms will lead to termination of the amendment. Alland all overdue interest payments shall bewere capitalized, except for an agreed amount which shallwas paid in June 2016.
In December 2016, part of the principal was restructured to be paid.
As of December 31, 2015,paid according to the overdue principal and the overdue interest under the facility amounted to 9.0agreed schedule (final repayment month is October 2017). In 2016-2017, we repaid 4.5 billion rubles and 994.3reducing the loan principal amount to 10.5 billion rubles. In October 2017, Chelyabinsk Metallurgical Plant entered into an amendment to the credit facility agreement under which we are required to repay 123.6 million rubles respectively.in May 2018 and 4.4 billion rubles starting from January 10, 2020. In May 2018, we repaid the required amount.
Interest rate and interest period
Starting from January 1, 2016, the interestInterest under the credit facility is payable at the CBR key rate plus 3.5% per year, then starting from April 1, 2016, the interest is payablemonthly at the CBR key rate plus 1.5% per year. The lender may change the interest rate to the CBR key rate plus 3.5% per year if the borrower fails to obtain similar terms with Gazprombank and VTB Bank. our Total Borrowings/EBITDA ratio is 4.00 or less.
During the grace period, we apply thepayable interest rate of 8.75% for interest repayment. The remaining unpaid interests areinterest is being capitalized and paid aton the final maturity date. Payable interest rate: (key rate +1.5%)×0.6 if our Total Borrowings/EBITDA ratio is above 6.01; (key rate +1.5%)×0.7 if our Total Borrowings/EBITDA ratio is above 5.01 and equal to or less than 6.01; and (key rate +1.5%)×0.8 if our Total Borrowings/EBITDA ratio is above 4.01 and equal to or less than 5.01. If our Total Borrowings/EBITDA ratio is 4.01 or less, the accrued interest shall be paid in full. In all of the above cases, payable interest rate shall not be less than 8.75% per year.
Repayment and prepayments
Should we obtain similar terms with Gazprombank and VTB Bank, theThe final maturity date shall be extended untilis April 10, 2022. In October 2016, the payment of 3.7 billion rubles shallRepayment is to be made and in October 2017 the
payment of 5.2 billion rubles shall be made. The remaining amount is payable in equal monthly installments starting from April 10, 2017 or January 10, 2020 (if the extension from Gazprombank and VTB Bank is obtained).2020. The borrower may prepay the loan in full or in part with prior notice to the lender.
Guarantee
The borrower’s obligations under the credit facility agreement are guaranteed by Mechel, Mecheltrans, Mechel Service, Bratsk Ferroalloy Plant, Izhstal, Yakutugol, Korshunov Mining Plant, Southern Kuzbass Coal Company Mechel Trading and Mechel Mining.
Security
Starting from March 2016, the credit facility shares one security package with other Sberbank credit facilities: a pledge of 25%+1 share of Mechel Mining, a pledge of 25%+1 share of Beloretsk Metallurgical Plant, pledges of movable assets and mortgage over immovable assets of other Sberbank borrowers within Mechel group.
Covenants and other matters
For the relevant period ending on December 31, 2015,2018, we were not in compliance with certain financial andnon-financial covenants.
Under the credit facility agreement, Mechel group’s ratio of total borrowingsTotal Borrowings to EBITDA shall not exceed 7.5:1 as of June 30, 2016 and December 31, 2016, 5.5:1 as of June 30, 2017 and December 31, 2017, 4.5:1 as of June 30, 2018 and December 31, 2018, 3.5:1 as of June 30, 2019 and December 31, 2019, 3.0:1 as of June 30, 2020 and thereafter. Mechel group’s ratio of EBITDA to consolidated financial expenseConsolidated Financial Expense shall not fall below 1.25:1 as of June 30, 2016 and December 31, 2016, 1.5:1 as of June 30, 2017 and December 31, 2017, 1.75:1 as of June 30, 2018 and December 31, 2018, 2.0:1 as of June 30, 2019 and December 31, 2019, 2.5:1 as of June 30, 2020 and thereafter.
The credit facility agreement contains certain customary representations and warranties, affirmative covenants, notice provisions and events of default, including change of control and cross-defaults to other debt.
The credit facility agreement is governed by Russian law.
Credit Facility for Mechel Trading from SberbankVTB Bank
General
In December 2013, Mechel Trading and Sberbank entered into an amendment to the existing $100.0 million credit facility (two tranches for $25.0 million and $75.0 million) by extending the term of the facility by five years with a repayment grace period until March 2015 and amending the security structure. The purpose of the credit facility was working capital, intra-group andpre-export financing. As of December 31, 2015, the facility was fully drawn.
In February 2016, Mechel Trading signed an amendment to its credit facility with Sberbank to restructure debt totaling $100.0 million, providing for an extension of the repayment grace period until April 2017 and the final maturity until April 2020. The grace period will be extended until January 2020 and the final maturity until April 2022, if we obtain similar terms with Gazprombank and VTB Bank.million. The amendment became effective upon signing, however, failure to comply with certain terms will lead to termination of the amendment. Alland all overdue interest payments shall bewere capitalized, except for an agreed amount which shall be paid.was paid in June 2016.
AsIn April 2017, the credit facility was assigned by Sberbank to VTB Bank. The terms and conditions of December 31, 2015, the overdue principal and the overdue interest under the facility amounted to $20.0 million and $4.3 million (approximately 1.5 billion rubles and 311.2 million rubles), respectively.agreement remained unchanged, except for the security package which was not assigned.
Interest rate and interest period
The interest rateInterest under both tranches is payable quarterlymonthly at 3-month3M LIBOR plus a margin of 7%. Starting from January 1, 2016 and during per year.
During the grace period, we apply thepayable interest rate of 3-month LIBOR plus a margin of 5% for interest repayment. The remaining unpaid interests areinterest is being capitalized and paid aton the final maturity date. Payable interest rate and capitalization depend on the ratio of our Total Borrowings to EBITDA: 3M LIBOR+5% and 2% is being capitalized if Total Borrowings/EBITDA ratio is above 6.01; 3M LIBOR+5.5% and 1.5% is being capitalized if Total Borrowings/EBITDA ratio is above 5.01 and equal to or less than 6.01; and 3M LIBOR+6% and 1% is being capitalized if Total Borrowings/EBITDA ratio is above 4.01 and equal to or less than 5.01. If our Total Borrowings/EBITDA ratio is 4.01 or less, the accrued interest shall be paid in full.
Repayment and prepayments
Should we obtain similar terms with Gazprombank and VTB Bank, theThe final maturity date shall be extended untilis April 10, 2022. The repaymentRepayment is to be made in equal monthly installments starting from April 10, 2017 or January 10, 2020 (if the extension from Gazprombank and VTB Bank is obtained).2020. The borrower may prepay the loan in full or in part with prior notice to the lender.
Guarantee
The borrower’s obligations under the credit facility are guaranteed by Mechel, Mecheltrans, Mechel Service, Bratsk Ferroalloy Plant, Izhstal, Yakutugol, Korshunov Mining Plant, Southern Kuzbass Coal Company, Mechel TradingChelyabinsk Metallurgical Plant and Mechel Mining.
Security
Starting from March 2016, the credit facility shares one security package with other credit facilities: a pledge of 25%+1 share of Mechel Mining, a pledge of 25%+1 share of Beloretsk Metallurgical Plant, pledges of movable assets and mortgage over immovable assets of other Sberbank borrowers within Mechel group.
Covenants and other matters
For the relevant period ending on December 31, 2015,2018, we were not in compliance with certain financial andnon-financial covenants.
Under the credit facility agreement, Mechel group’s ratio of total borrowingsTotal Borrowings to EBITDA shall not exceed 7.5:1 as of June 30, 2016 and December 31, 2016, 5.5:1 as of June 30, 2017 and December 31, 2017, 4.5:1 as of June 30, 2018 and December 31, 2018, 3.5:1 as of June 30, 2019 and December 31, 2019, 3.0:1 as of June 30, 2020 and thereafter. Mechel group’s ratio of EBITDA to consolidated financial expenseConsolidated Financial Expense shall not fall below 1.25:1 as of June 30, 2016 and December 31, 2016, 1.5:1 as of June 30, 2017 and December 31, 2017, 1.75:1 as of June 30, 2018 and December 31, 2018, 2.0:1 as of June 30, 2019 and December 31, 2019, 2.5:1 as of June 30, 2020 and thereafter.
The credit facility agreement contains certain customary representations and warranties, affirmative covenants, notice provisions and events of default, including change of control and cross-defaults to other debt.
The credit facility agreement is governed by Russian law.
Credit Facility Agreement for Chelyabinsk Metallurgical Plant from Sberbank
General
On December 19, 2013, Sberbank opened a credit line for Chelyabinsk Metallurgical Plant in a total amount of 12.4 billion rubles for a period of five years with a repayment grace period until March 28, 2015. The purpose of the credit line was redemption of Mechel’s bonds and financing ofday-to-day operations. As of December 31, 2015, the facility was fully drawn.
In February 2016, Chelyabinsk Metallurgical Plant signed an amendment to its credit facility agreement with Sberbank to restructure debt in the total amount of 12.4 billion rubles, providing for an extension of the repayment grace period until April 2017 and the final maturity until April 2020. The grace period will be extended until January 2020 and the final maturity until April 2022, if we obtain similar terms with Gazprombank and VTB Bank.rubles. The amendment became effective upon signing, however, failure to comply with certain terms will lead to termination of the amendment. Alland all overdue interest payments shall bewere capitalized, except for an agreed amount which shallwas paid in June 2016.
In December 2016, part of the principal was restructured to be paid.
As of December 31, 2015, Chelyabinsk Metallurgical Plant hadpaid according to the overdue principal in the amount of 2.5agreed schedule (final repayment month is July 2017). In 2017, we repaid 1.2 billion rubles andreducing the overdue interest in theloan principal amount of 991.6 millionto 11.2 billion rubles.
Interest rate and interest period
Starting from January 1, 2016, the interestInterest under the credit facility is payable at the CBR key rate plus 3.5% per year, then starting from April 1, 2016, the interest is payablemonthly at the CBR key rate plus 1.5% per year. The lender may change the interest rate to the CBR key rate plus 3.5% per year if the borrower fails to obtain similar terms with Gazprombank and VTB Bank. our Total Borrowings/EBITDA ratio is 4.00 or less.
During the grace period, we apply thepayable interest rate of 8.75% for interest repayment. The remaining unpaid interests areinterest is being capitalized and paid aton the final maturity date. Payable interest rate: (key rate +1.5%)×0.6 if our Total Borrowings/EBITDA ratio is above 6.01; (key rate +1.5%)×0.7 if our Total Borrowings/EBITDA ratio is above 5.01 and equal to or less than 6.01; and (key rate +1.5%)×0.8 if our Total Borrowings/EBITDA ratio is above 4.01 and equal to or less than 5.01. If our Total Borrowings/EBITDA ratio is 4.01 or less, the accrued interest shall be paid in full. In all of the above cases, payable interest rate shall not be less than 8.75% per year.
Repayment and prepayments
Should certain conditions be fulfilled theThe final maturity date is April 10, 2022. In October 2016, the payment of 1.2 billion rubles shallRepayment is to be made. The remaining amount is payablemade in equal monthly installments starting from April 10, 2017 or January 10, 2020 (if the extension from Gazprombank and VTB Bank is obtained).2020. The borrower may prepay the loan in full or in part with prior notice to the lender.
Guarantee
The borrower’s obligations under the credit facility agreement are guaranteed by Mechel, Mecheltrans, Mechel Service, Bratsk Ferroalloy Plant, Izhstal, Yakutugol, Korshunov Mining Plant, Southern Kuzbass Coal Company Mechel Trading and Mechel Mining.
Security
Starting from March 2016, the credit facility shares one security package with other Sberbank credit facilities: a pledge of 25%+1 share of Mechel Mining, a pledge of 25%+1 share of Beloretsk Metallurgical Plant, pledges of movable assets and mortgage over immovable assets of other Sberbank borrowers within Mechel group.
Covenants and other matters
For the relevant period ending on December 31, 2015,2018, we were not in compliance with certain financial andnon-financial covenants.
Under the credit facility agreement, Mechel group’s ratio of total borrowingsTotal Borrowings to EBITDA shall not exceed 7.5:1 as of June 30, 2016 and December 31, 2016, 5.5:1 as of June 30, 2017 and December 31, 2017, 4.5:1 as of June 30, 2018 and December 31, 2018, 3.5:1 as of June 30, 2019 and December 31, 2019, 3.0:1 as of June 30, 2020 and thereafter. Mechel group’s ratio of EBITDA to consolidated financial expenseConsolidated Financial Expense shall not fall below 1.25:1 as of June 30, 2016 and December 31, 2016, 1.5:1 as of June 30, 2017 and December 31, 2017, 1.75:1 as of June 30, 2018 and December 31, 2018, 2.0:1 as of June 30, 2019 and December 31, 2019, 2.5:1 as of June 30, 2020 and thereafter.
The credit facility agreement contains certain customary representations and warranties, affirmative covenants, notice provisions and events of default, including change of control and cross-defaults to other debt.
The credit facility agreement is governed by Russian law.
Credit Facility Agreement for Chelyabinsk Metallurgical Plant from VTB Bank
General
In September 2015, Chelyabinsk Metallurgical Plant entered into an approximately 8.0 billion ruble (as calculated based on the market spot rate as of October 27, 2015) credit facility agreement with VTB Bank to refinance debts of Skyblock Limited totaling $107.7 million, which consistsconsisting of principal and interest in the amount of $101.9 million and $5.8 million, respectively, and of HBL Holding GmbH totaling €14.5 million, provided by VTB Bank. The facility hashad a grace period until April 2017 and the final maturity until April 2020.
In December 2016, Chelyabinsk Metallurgical Plant signed an amendment to its credit facility agreement with VTB Bank which provides for an extension of the repayment grace period until April 2020 and the final maturity until April 2022.
Interest rate and interest period
The interest rateInterest under the credit facility is setpayable monthly at the level of the CBR key rate plus 2.35% per year until January 6, 2018 and from January 7, 2018 at the level of the CBR key rate plus 2.99%1.5% per year. The lender may increase the interest rate by 1% per year if the borrower fails to meet certain obligations under the credit facility.
During the grace period, we apply payable interest rate for interest repayment. The remaining unpaid interest is being capitalized and paid on the final maturity date. Payable interest rate: 8.75% if our Net
Borrowings/EBITDA ratio is equal to 6.01 or above; 9.50% if our Net Borrowings/EBITDA ratio is equal to or above 5.01 and less than 6.00; and 10.50% if our Net Borrowings/EBITDA ratio is equal to or above 4.01 and less than 5.00. If our Net Borrowings/EBITDA ratio is 4.00 or less, the accrued interest shall be paid in full.
Repayment and prepayments
The credit facility is repayable in equal monthly installments starting on April 6, 2017.2020. The final maturity date is April 6, 2020.2022. The borrower may prepay the loan in full or in part subject to simultaneous compliance with certain requirements.
Guarantee
The borrowerborrower’s obligations are guaranteed by Southern Kuzbass Coal Company, Korshunov Mining Plant, Urals Stampings Plant, Mechel, Yakutugol, Mechel Mining, Mechel Trading, Mechel Carbon Singapore and Mechel Carbon.
Security
The borrowerborrower’s obligations are secured by a pledge of25%-3 shares of Yakutugol, 25%+1 share of Southern Kuzbass Coal Company, and 25%+1 share of Korshunov Mining Plant, 25%+1 share of Urals Stampings Plant and46.66%-1 share of Chelyabinsk Metallurgical Plant.
Covenants and other matters
For the relevant period ending on December 31, 2015,2018, we were not in compliance with certain financial and non-financial covenants.
Under the credit facility agreement, Mechel group’s ratio of net borrowingsNet Borrowings to EBITDA shall not exceed 9.00:1 until December 31, 2016, 8.00:1 until December 31, 2017, 7.00:1 until December 31, 2018, 6.00:1 until December 31, 2019, 5.00:1 until December 31, 2020 and thereafter. Mechel group’s ratio of EBITDA to net interest expenseNet Interest Expense shall not be less than 1.25:1 until December 31, 2016, 1.50:1 until December 31, 2017, 1.75:1 until December 31, 2018, 2.00:1 until December 31, 2019, 2.25:1 until December 31, 2020 and thereafter. Financial covenants are tested semi-annually.
The credit facility contains certain customary representations and warranties, affirmative covenants, notice provisions and events of default, including change of control and cross-defaults relating to other debt, as well as limitations on payment of dividends, acquisitions and disposals andnon-core transactions.
The credit facility agreement is governed by Russian law.
Credit Facility for Elgaugol from Vnesheconombank
General
On September 20, 2017, our subsidiary Elgaugol and Vnesheconombank signed a credit facility agreement for a total amount of up to $190.0 million to refinance our debt obligations of approximately $183.1 million under the project financing for the development of the Elga coal deposit. Repayment under the credit facility has started in October 2017. The final maturity date is April 30, 2022.
Interest rate and interest period
Interest is payable quarterly at a fixed rate of 5.45% per year. The lender may increase the interest rate by 1% or2.5-5% per year if the borrower fails to meet certain obligations, including payment obligations, under the credit facility.
Repayment and prepayments
Repayment is to be made in two tranches. The second tranche is repayable in 6 equal monthly installments starting from October 2017. The first tranche is repayable quarterly according to the following schedule: (i) in the amount of $2.5 million plus additional payment which depends on financial results of Elgaugol from January 2018 to October 2019; and (ii) in the amount of $10.0 million from January 2020 to April 2022. The remaining amount is to be paid in April 2022.
Security
The credit facility is secured by a pledge of 49% of registered capital of Elgaugol, 30% of shares of Korshunov Mining Plant, a pledge of Elgaugol proprietary land and land lease rights, a pledge of immovable property of Elgaugol including construction in progress and a pledge over all movable property of Elgaugol with a book value over one million rubles per unit.
Covenants and other matters
Under the credit facility, Debt Service Coverage Ratio shall not fall below 1.05. This financial covenant is tested annually.
The credit facility agreement contains certain customary representations and warranties, affirmative covenants, notice provisions and events of default.
The credit facility agreement is governed by Russian law.
Russian bonds
On July 30, 2009, we placed series 04non-convertible interest-bearing bonds in an aggregate principal amount of 5.0 billion rubles. The bonds arewere registered with the FFMS and admitted to trading and listed at
MICEX.on MICEX (currently Moscow Exchange). The bonds arewere secured by a guarantee from Yakutugol.Yakutugol until July 2016. The proceeds were used to fund the construction of the Elga coal complex. The bonds arewere due on July 21, 2016. The bonds bear a coupon to be paid quarterly. The annual interest rate for the first 12 coupons was set at 19% per annum,, for the13-16 coupons was set at 11.25% per annum,, for the17-22 coupons was set at 13% per annum,, for the23-24 coupons was set at 8% per annum and for the25-28 coupons was set at 2% per annum. We will be entitled to set the interest rates for the following coupon periods at our discretion, in which case the bondholders will have the right to demand that we redeem the bonds at par value before each such coupon period starts. The bondholders are also entitled to demand early redemption of the bonds in certain other cases specified in the decision of issuance of the bonds, including when we fail to pay coupon on any of our bonds for more than 7 days or fail to repay the principal on any of our bonds for more than 30 days, or when we default on or are required to redeem any of our bonds. The bonds are included on the CBR Lombard list; if the CBR excludes the bonds from this list, the bondholders may also demand early redemption of the bonds.. We partially redeemed the bonds ahead of maturity on July 29, 2013 in the amount of 1.349 billion rubles, on January 27, 2014 in the amount of 1.276 billion rubles, on July 28, 2014 in the amount of 858 million rubles, on January 26, 2015 in the amount of 325 million rubles and on July 27, 2015 in the amount of 372.43 million rubles. In July 2016, we restructured the series 04 bonds. On June 20, 2016, we published public irrevocable offers through which the bondholders were proposed to amend current schedules of redemption of the bonds and to waive the right to demand early redemption of the bonds. On July 7, 2016, the majority of the series 04 bondholders approved the new terms at the general meeting of bondholders. On July 28, 2016, the CBR registered amendments to the equity documents, including a schedule of partial redemption of the par value. The maturity of the bonds is extended until July 15, 2021. The annual interest rate is set as follows: for the 29 coupon at 13%, for the 30 coupon at 12.5%, for the 31 coupon at 12.75%, for the 32 coupon at 12.625%, for the 33 coupon at 11.75%, for the 34 coupon at 11.5%, for the 35 coupon at 11.125%, for the 36 coupon at 10.875%, for the 37 coupon at 10.375%, for the 38 coupon at 10.5%, for the 39 coupon at 10.625%, for the 40 coupon at (11%+(the CBR key rate +2.5%))/2, for the41-44 coupons at (10%+(the CBR key rate +2.5%))/2 and for the45-48 coupons at (9%+(the CBR key rate +2.5%))/2. On each of August 11, 2016 and October 20, 2016, we partially redeemed 3.5% of the par value. On each of January 19, 2017 and April 20, 2017, we partially redeemed 4% of the par value. On each of July 20, 2017, October 19, 2017, January 18, 2018, April 19, 2018, July 19, 2018, October 18, 2018 and January 17, 2019, we partially redeemed 5% of the par value. We intend to gradually redeem 5% of the par value of the series 04 bonds on each of April 18, 2019, July 18, 2019, October 17, 2019, January 16, 2020, April 16, 2020, July 16, 2020, October 15, 2020, January 14, 2021, April 15, 2021 and July 15, 2021.
On September 7, 2010, we placed series 13 and series 14non-convertible interest-bearing bonds in an aggregate principal amount of 10.0 billion rubles. The bonds arewere registered with the FFMS and admitted to trading and listed at MICEX.on MICEX (currently Moscow Exchange). The proceeds were used to fund the working capital of our group, refinance the existing loan agreements, as well as to finance the construction of the Elga coal complex and other investment projects of our group. The bonds bear a coupon to be paid on a semi-annual basis. The interest rate for the first 10 coupons was set at 10% per annum. We will be entitled to set the interest rates for the following coupon periods at our discretion, in which case the bondholders will have the right to demand that we redeem the bonds at par value before each such coupon period starts. The bondholders are also entitled to demand early redemption of the bonds in certain other cases specified in the decision of issuance of the bonds, including when we fail to pay coupon on any of our bonds for more than 7 days or fail to repay the principal on any of our bonds for more than 30 days, or when we default on or are required to redeem any of our bonds. In September 2015, we restructured the debt onunder series 13 and series 14 bonds. We were entitled to redeem the bonds on September 3, 2015, but failed to fulfill our obligations. On September 14, 2015, we published public irrevocable offers through which the bondholders were proposed to amend current schedules of redemption of the bonds and to waive the right to demand early redemption of the bonds. On September 17, 2015, the majority of the owners of the bonds series 13 and series 14 bondholders approved the new conditionsterms at the general meeting of bondholders. On October 21, 2015, the CBR registered amendments to the equity documents. The bonds are due on February 25, 2020. The annual interest rate is set as follows: for the11-13 coupons at 15%, for the14-15 coupons at 14%, for the16-17 coupons at 12.25% and for the18-19 coupons at 11.875%. In accordance with the new conditions, the interest rate for the 11 coupon is set at 15% per annum and for the following coupon periods is determined by a formula based on the CBR key rate. The interest rate for the 12-13 coupons is set at (15%+(key rate+4%))/2, for the 14-15 coupons is set at (14%+(key rate +4%))/2, for the 16-17 coupons is set at (13%+(key rate +4%))/2 and for the 18-19 coupons is set at (12%+(key rate +4%))/2. We haveterms, we had to redeem the bonds amounting up to 500 thousand500,000 bonds of each series on September 28, 2015 and amounting up to 250 thousand250,000 bonds of each series on March 1, 2016 and August 31,30, 2016. We will gradually redeem the par valueOn each of both series of the bonds: 10% of par value on February 28, 2017, August 29, 2017 and February 27, 2018, 15%we partially redeemed 10% of the par value onvalue. On each of August 28, 2018 and February 26, 2019, andwe partially redeemed 15% of the par value. We intend to gradually redeem 20% of the par value of both series of the bonds on each of August 27, 2019 and February 25, 2020. The bonds are due on February 25, 2020. On September 28, 2015, we partially redeemed the bonds of both series in the total amount of 999.34 million rubles which equaled to 999,341 bonds. On March 1, 2016, we partially redeemed the bonds of both series in the total amount of 485.1 million rubles which equaled to 485,089 bonds. On August 30, 2016, we partially redeemed the bonds of both series in the total amount of 499.65 million rubles which equaled to 499,654 bonds.
On February 22, 2011, we placed series 15 and series 16non-convertible interest-bearing bonds in an aggregate principal amount of 10.0 billion rubles. The bonds arewere registered with the FFMS and admitted to trading and listed at MICEX.on MICEX (currently Moscow Exchange). The proceeds were used to fund the working capital of our group, refinance the existing loan agreements, as well as to finance the construction of the Elga coal complex and other investment projects of our group. The bonds are due on February 9, 2021. The bonds bear a coupon to be paid on asemi-annual basis. The annual interest rate for the first 6 coupons was set at 8.25% per annum,, for the7-8 coupons was set at 13% per annum and, for the9-11 coupons was set at 8% per annum. We will be entitled toand for the12-20 coupons was set the interest
rates for the following coupon periods at our discretion, in which case the bondholders will have the right to demand that we redeem the bonds at par value before each such coupon period starts. The bondholders have an option to demand early redemption of the bonds at par value commencing on August 12, 2016 until August 16, 2016. We are entitled to redeem such bonds on August 18, 2016. The bondholders are also entitled to demand early redemption of the bonds in certain other cases specified in the decision of issuance of the bonds, including when we fail to pay coupon on any of our bonds for more than 7 days or fail to repay the principal on any of our bonds for more than 30 days, or when we default on or are required to redeem any of our bonds.8%. We partially redeemed the series 15 and series 16 bonds ahead of maturity on February 20, 2014 in the amount of 8.149 billion rubles, on August 21, 2014 in the amount of 75 million rubles and on February 19, 2015 in the amount of 37.2 million rubles. On August 18, 2016, we partially redeemed the series 15 bonds in the amount of 6.16 million rubles. The option to demand early redemption of the series 16 bonds was replaced with the novation agreement approved at the general meeting of bondholders on August 4, 2016.
On June 9, 2011, we placed series 17 and series 18non-convertible interest-bearing bonds in an aggregate principal amount of 10.0 billion rubles. The bonds arewere registered with the FFMS and admitted to trading and listed at MICEX.on MICEX (currently Moscow Exchange). The proceeds were used to refinance our short-term debt. The bonds are due on May 27, 2021. The bonds bear a coupon to be paid on a semi-annual basis. The interest rate for the first 10 coupons was set at 8.40% per annum. We will be entitled to setIn June 2016, we restructured the interest rates for the following coupon periods at our discretion, indebt under series 17 and series 18 bonds. On May 11, 2016, we published public irrevocable offers through which case the bondholders will have the rightwere proposed to demand that we redeemamend current schedules of redemption of the bonds at par value before each such coupon period starts. The bondholders have an optionand to waive the right to demand early redemption of the bondsbonds. On May 25, 2016, the majority of the series 17 and 18 bondholders approved the new terms at the general meeting of bondholders. On June 28, 2016, the CBR registered amendments to the equity documents, including a schedule of partial redemption of the par value. The annual interest rate is set as follows: for the 11 coupon at 13.5%, for the 12 coupon at 13%, for the13-14 coupons at 12.125%, for the15-16 coupons at 10.625%, for the17-18 coupons at (10.5%+(the CBR key rate +2.5%))/2 and for the19-20 coupons at (9.5%+(the CBR key rate +2.5%))/2. We partially redeemed 3.5% of the par value commencing on each of July 12, 2016 and September 1, 2016 and 4% of the par value on each of December 1, 2016 and March 2, 2017. On each of June 1, 2017, August 31, 2017, November 30, 2017, March 1, 2018, May 31, 2018, August 30, 2018, November 29, 2016.
2018 and February 28, 2019, we partially redeemed 5% of the par value. We are entitledintend to gradually redeem 5% of the par value of both series of the bonds on June 6, 2016. The bondholders are also entitled to demand early redemptioneach of the bonds in certain other cases specified in the decision of issuance of the bonds, including when we fail to pay coupon on any of our bonds for more than 7 days or fail to repay the principal on any of our bonds for more thanMay 30, days, or when we default on or are required to redeem any of our bonds.2019, August 29, 2019, November 28, 2019, February 27, 2020, May 28, 2020, August 27, 2020, November 26, 2020, February 25, 2021 and May 27, 2021.
On June 14, 2011, we placed series 19non-convertible interest-bearing bonds in an aggregate principal amount of 5.0 billion rubles. The bonds arewere registered with the FFMS and admitted to trading and listed at MICEX.on MICEX (currently Moscow Exchange). The proceeds were used to refinance our short-term debt. The bonds are due on June 1, 2021. The bonds bear a coupon to be paid on a semi-annual basis. The interest rate for the first 10 coupons was set at 8.40% per annum. We will be entitled to setIn July 2016, we restructured the interest rates for the following coupon periods at our discretion, inbonds series 19. On May 11, 2016, we published public irrevocable offers through which case the bondholders will have the rightwere proposed to demand that we redeemamend current schedules of redemption of the bonds at par value before each such coupon period starts. The bondholders have an optionand to waive the right to demand early redemption of the bondsbonds. On May 25, 2016, the majority of the series 19 bondholders approved the new terms at par value commencing on June 3, 2016. We are entitledthe general meeting of bondholders. On July 21, 2016, the CBR registered amendments to redeem the bonds on June 9, 2016. The bondholders are also entitled to demand earlyequity documents, including a schedule of partial redemption of the par value. The annual interest rate is set as follows: for the 11 coupon at 13.5%, for the 12 coupon at 13%, for the13-14 coupons at 12.125%, for the15-16 coupons at 10.625%, for the17-18 coupons at (10.5%+(the CBR key rate +2.5%))/2 and for the19-20 coupons at (9.5%+(the CBR key rate +2.5%))/2. We partially redeemed 3.5% of the par value on each of August 4, 2016 and September 6, 2016 and 4% of the par value on each of December 6, 2016 and March 7, 2017. On each of June 6, 2017, September 5, 2017, December 5, 2017, March 6, 2018, June 5, 2018, September 4, 2018, December 4, 2018 and March 5, 2019, we partially redeemed 5% of the par value. We intend to gradually redeem 5% of the par value of the series 19 bonds in certain other cases specifiedon each of June 4, 2019, September 3, 2019, December 3, 2019, March 3, 2020, June 2, 2020, September 1, 2020, December 1, 2020, March 2, 2021 and June 1, 2021.
In March 2017, Moscow Exchange registered our30-year exchange-traded bonds program. During the term of this program, we are able to place exchange-traded bonds for a total amount of up to 100.0 billion rubles. However, our ability to implement the program in the decision of issuance offuture is limited by restrictions under the bonds, including when we fail to pay coupon on any of our bonds for more than 7 days or fail to repay the principal on any of our bonds for more than 30 days, or when we default on or are required to redeem any of our bonds.existing loan agreements and market conditions.
Contractual Obligations and Commercial Commitments
The following table sets forth the amount of our contractual obligations and commercial commitments as of December 31, 2015.2018.
| Payments Due by Period | ||||||||||||||||||||
Contractual Obligations and Commercial Commitments | Total | Less Than 1 Year | 2-3 Years | 4-5 Years | More Than 5 Years | |||||||||||||||
| (In millions of Russian rubles) | ||||||||||||||||||||
Short-Term Borrowings and Current Portion ofLong-Term Debt | 491,674 | 491,674 | — | — | — | |||||||||||||||
Long-Term Debt Obligations, Net of Current Portion | 4,308 | — | 1,991 | 2,317 | — | |||||||||||||||
Interest Payable(1) | 1,038 | 1,038 | — | — | — | |||||||||||||||
Operating Lease Obligations | 59,207 | 1,798 | 3,476 | 3,467 | 50,466 | |||||||||||||||
Purchase Obligations(2) | 3,593 | 3,593 | — | — | — | |||||||||||||||
Restructured Taxes Payable | 465 | 328 | 137 | — | — | |||||||||||||||
Rehabilitation provision(3) | 3,704 | 264 | 694 | 464 | 2,282 | |||||||||||||||
Pension obligations(4)(5) | 4,562 | 1,120 | 751 | 759 | 1,932 | |||||||||||||||
Short-Term Finance Lease Obligations | 13,507 | 13,507 | — | — | — | |||||||||||||||
Long-Term Finance Lease Obligations | 481 | — | 461 | 20 | — | |||||||||||||||
Contractual commitments to acquire plant, property and equipment(6) | 23,231 | 23,207 | 24 | — | — | |||||||||||||||
Contractual commitments to acquire raw materials and for delivery of goods and services | 58,604 | 54,201 | 2,047 | 199 | 2,158 | |||||||||||||||
Estimated financial costs(7) | 218,046 | 39,098 | 84,110 | 94,838 | — | |||||||||||||||
Estimated average interest rate(7) | 9.0 | % | 9.9 | % | 8.8 | % | 8.8 | % | — | |||||||||||
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Total Contractual Obligations and Commercial Commitments | 882,419 | 629,827 | 93,690 | 102,064 | 56,838 | |||||||||||||||
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| Payments Due by Period | ||||||||||||||||||||
Contractual Obligations and Commercial Commitments | Total | Less Than 1 Year | 2-3 Years | 4-5 Years | More Than 5 Years | |||||||||||||||
| (In millions of Russian rubles) | ||||||||||||||||||||
Short-Term Borrowings and Current Portion of Long-Term Debt | 402,417 | 402,417 | — | — | — | |||||||||||||||
Long-Term Debt Obligations, Net of Current Portion | 6,538 | — | 6,402 | 104 | 32 | |||||||||||||||
Interest Payable(1) | 7,749 | 7,749 | — | — | — | |||||||||||||||
Fines and Penalties on Credit Facilities(2) | 2,128 | 2,128 | — | — | — | |||||||||||||||
Contractual Commitments to Operating Lease(3) | 60,911 | 2,049 | 4,009 | 3,982 | 50,871 | |||||||||||||||
Purchase Obligations(4) | 3,054 | 2,600 | 454 | — | — | |||||||||||||||
Rehabilitation Provision(5) | 3,908 | 189 | 479 | 550 | 2,690 | |||||||||||||||
Pension Obligations(6) | 4,591 | 772 | 1,250 | 759 | 1,810 | |||||||||||||||
Short-Term Finance Lease Obligations | 5,880 | 5,880 | — | — | — | |||||||||||||||
Long-Term Finance Lease Obligations | 2,413 | — | 1,453 | 960 | — | |||||||||||||||
Fines and Penalties on Finance Lease Contracts(7) | 384 | 384 | — | — | — | |||||||||||||||
Contractual commitments to acquire plant, property and equipment(8) | 11,801 | 5,327 | 806 | 4,118 | 1,550 | |||||||||||||||
Contractual commitments to acquire intangible assets | 110 | 110 | — | — | — | |||||||||||||||
Contractual commitments to acquire raw materials and for delivery of goods and services | 90,839 | 57,779 | 13,977 | 7,159 | 11,924 | |||||||||||||||
Estimated interest expense(9) | 173,635 | 32,007 | 70,944 | 70,684 | — | |||||||||||||||
Estimated average interest rate(9) | 7.9 | % | 7.5 | % | 8.3 | % | 7.6 | % | — | |||||||||||
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Total Contractual Obligations and Commercial Commitments | 776,358 | 519,391 | 99,774 | 88,316 | 68,877 | |||||||||||||||
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| (1) | Interest payable is included in the amount of RUB |
| (2) | In the year ended December 31, 2018, we recognized RUB 858 million penalties on credit facilities. During the period, the amount of RUB 280 million was paid in cash and the finance income in the amount of RUB 17,451 million was recognized due to the effect of restructuring and refinancing of loans. |
| (3) | The future minimum rentals payable includes our operating lease commitments related to non-cancellable land lease to explore or use of mineral deposits and other facilities of RUB 53,398 million. |
| (4) | Accounts payable for capital expenditures. |
See note 23 to the consolidated financial statements. |
Includes RUB |
In the year ended December 31, 2018, we recognized RUB 10 million penalties on finance lease contracts. During the period, the amount of RUB 11 million was paid in cash and the amount of RUB 52 million was waived. |
| (8) | Obligation to be paid within one year in accordance with the contractual terms. See note |
Interest expense is estimated for a five-year period based on (1) estimated cash flows, |
As of December 31, 2015,2018, we guaranteed the fulfillment of obligations to third parties for a total amount of RUB 56 million. These guarantees are given by us under promissory notes, which were transferred by endorsement.
Commitments for capital expenditures were RUB 23,231 million as of December 31, 2015. This amount includes our contractual commitments related to acquisition of property, plant and equipment arising from various purchase and construction agreements in respect of railway construction for the Elga coal complex in the amount of RUB 19,890 million. See note 29 to the consolidated financial statements.nil.
The total carrying and discounted amount of commitments under finance lease contracts as of December 31, 20152018 is equal to RUB nil. See note 2911.6 to the consolidated financial statements.
Inflation
Inflation in the Russian Federation was 12.9%4.3% in 20152018, 2.5% in 2017 and 11.4%5.4% in 2014.2016. Inflation has generally not had a material impact on our results of operations during the period under review in this section. However, we cannot guaranteethere can be no assurance that inflation will not materially adversely impact our results of operations in the future in case inflation accelerates. See “Item 3. Key Information — Risk Factors — Risks Relating to Our Financial Condition and Financial Reporting — Inflation could increase our costs and decrease operating margins.”
Critical Accounting Policies and Estimates
Basis of preparation
Our consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB).
The consolidated financial statements have been prepared on a historical cost basis, except for specific financial assets and liabilities that have been measured at fair value and certain exemptions applied by us under IFRS 1 First-time Adoption of International Financial Reporting Standards (see note 9 to the consolidated financial statements).
Russian associates and subsidiaries of our group maintain their books and records in Russian rubles and prepare accounting reports in accordance with the accounting principles and practices mandated by Russian Accounting Standards (“RAS”). Foreign subsidiaries and associates maintain their books and records in different foreign functional currencies and prepare accounting reports in accordance with generally accepted accounting principles (GAAP) in various jurisdictions. Our and our subsidiaries’ and associates’ financial statements and accounting reports for the purposes of preparation of the consolidated financial statements in accordance with IFRS have been translated and adjusted on the basis of the respective standalone RAS or other GAAP financial statements.
The accompanying consolidated financial statements differ from the financial statements issued for the RAS and other GAAP purposes in that they reflect certain adjustments, not recorded in the statutory books, which are appropriate to present the financial position, results of operations and cash flows in accordance with IFRS. The principal adjustments relate to: (1) purchase accounting; (2) recognition of interest expense and certain operating expenses; (3) valuation and depreciation of property, plant and equipment and mineral licenses; (4) defined benefit plans; (5) foreign currency translation; (6) deferred income taxes; (7) accounting for tax penalties, uncertainties and contingencies; (8) revenue recognition; (9) valuation allowances for unrecoverable assets; and (10) recording investments at fair value.
For all periods up to and including the year ended December 31, 2014, we prepared our financial statements in accordance with generally accepted accounting principles in U.S. GAAP. The accompanying consolidated financial statements for the year ended December 31, 2015 are the first we have prepared in accordance with IFRS. Refer to note 9 for information on how our group adopted IFRS.
The consolidated financial statements are presented in millions of Russian rubles, except when otherwise indicated.
Basis of consolidation
The consolidated financial statements comprise our and our subsidiaries financial statements as of December 31, 2015. Control is achieved when our group is exposed, or has rights,See note 2 to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Specifically, we control an investee if, and only if, we have:
Consolidation of a subsidiary begins when we obtain control over the subsidiary and ceases when we lose control of the subsidiary. Assets, liabilities, income and expenses of a subsidiary acquired or disposed of during the year are included in the consolidated financial statements from the date our group gains control until the date our group ceases to control the subsidiary.
Profit or loss and each component of other comprehensive income (loss) (“OCI”) are attributed to the equity holders of the parent of our group and to the non-controlling interests, even if this results in the non-controlling interests having a deficit balance. When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with our group’s accounting policies. All intra-group assets and liabilities, equity, income, expenses and cash flows relating to transactions between members of our group are eliminated in full on consolidation.
A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity transaction.
If our group loses control over a subsidiary, it derecognizes the related assets (including goodwill), liabilities, non-controlling interest and other components of equity, while any resultant gain or loss is recognized in the statement of profit (loss) and other comprehensive income (loss). Any investment retained is recognized at fair value.
Business combinations and goodwill
Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred, which is measured at acquisition date fair value, and the amount of any non-controlling interests in the acquiree. For each business combination, we elect whether to measure the non-controlling interests in the acquiree at fair value or at the proportionate share of the acquiree’s identifiable net assets. Acquisition-related costs are expensed as incurred and included in administrative expenses.
When our group acquires a business, it assesses the financial assets and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions as of the acquisition date.
Any contingent consideration to be transferred by the acquirer will be recognized at fair value at the acquisition date. Contingent consideration classified as an asset or liability that is a financial instrument and within the scope of IAS 39 Financial Instruments: Recognition and Measurement, is measured at fair value with the changes in fair value recognized in the statement of profit (loss) and other comprehensive income (loss).
Goodwill is initially measured at cost (being the excess of the aggregate of the consideration transferred and the amount recognized for non-controlling interests) and any previous interest held over the net identifiable assets acquired and liabilities assumed. If the fair value of the net assets acquired is in excess of the aggregate consideration transferred, our group re-assesses whether it has correctly identified all of the assets acquired and all of the liabilities assumed and reviews the procedures used to measure the amounts to be recognized at the acquisition date. If the reassessment still results in an excess of the fair value of net assets acquired over the aggregate consideration transferred, then the gain is recognized in the statement of profit (loss) and other comprehensive income (loss).
After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of our group’s cash-generating units that are expected to benefit from the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units.
Where goodwill has been allocated to a cash-generating unit (“CGU”) and part of the operation within that unit is disposed of, the goodwill associated with the disposed operation is included in the carrying amount of the operation when determining the gain or loss on disposal. Goodwill disposed in these circumstances is measured based on the relative values of the disposed operation and the portion of the cash-generating unit retained.
Investments in associates
An associate is an entity over which we have significant influence. Significant influence is the power to participate in the financial and operating policy decisions of the investee, but is not control or joint control over those policies.
The considerations made in determining significant influence are similar to those necessary to determine control over subsidiaries.
Our investments in our associate are accounted for using the equity method.
Under the equity method, the investment in an associate is initially recognized at cost. The carrying amount of the investment is adjusted to recognize changes in our share of net assets of the associate since the acquisition date. Goodwill relating to the associate is included in the carrying amount of the investment and is not tested for impairment separately.
The statement of profit (loss) and other comprehensive income (loss) reflects our group’s share of the results of operations of the associate. Any change in OCI of those investees is presented as part of our group’s OCI. In addition, when there has been a change recognized directly in the equity of the associate, our group recognizes its share of any changes, when applicable, in the statement of changes in equity. Unrealized gains and losses resulting from transactions between us and the associate are eliminated to the extent of the interest in the associate.
The aggregate of our group’s share of profit or loss of an associate is shown on the face of the statement of profit (loss) and other comprehensive income (loss) outside operating profit and represents profit or loss after tax and non-controlling interests in the subsidiaries of the associate.
The financial statements of the associate are prepared for the same reporting period as ourselves. When necessary, adjustments are made to bring the accounting policies in line with those of our group.
After application of the equity method, our group determines whether it is necessary to recognize an impairment loss on its investment in its associate. At each reporting date, we determine whether there is objective evidence that the investment in the associate is impaired. If there is such evidence, our group calculates the amount of impairment as the difference between the recoverable amount of the associate and its carrying value, and then recognizes the loss as ‘Share of profit of an associate’ in the consolidated statement of comprehensive income (loss).
Upon loss of significant influence over the associate, our group measures and recognizes any retained investment at its fair value. Any difference between the carrying amount of the associate upon loss of significant influence and the fair value of the retained investment and proceeds from disposal is recognized in in the consolidated statement of comprehensive income (loss).
Current versus non-current classification
We present assets and liabilities in the consolidated statement of financial position based on current/non-current classification. An asset is current when it is:
All other assets are classified as non-current.
A liability is current when:
We classify all other liabilities as non-current. Deferred tax assets and liabilities are classified as non-current assets and liabilities.
Fair value measurement
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either:
The principal or the most advantageous market must be accessible by our group.
The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest.
We use valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximizing the use of relevant observable inputs and minimizing the use of unobservable inputs.
All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorized within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole:
Level 1 — Quoted (unadjusted) market prices in active markets for identical assets or liabilities.
Level 2 — Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable.
Level 3 — Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable.
For assets and liabilities that are recognized in the financial statements at fair value on a recurring basis, we determine whether transfers have occurred between levels in the hierarchy by re-assessing categorization (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period.
Revenue recognition
Revenue is recognized to the extent that it is probable that the economic benefits will flow to our group and the revenue can be reliably measured, regardless of when the payment is received. Revenue is measured at the fair value of the consideration received or receivable, taking into account contractually defined terms of payment and excluding discounts, rebates, and sales taxes or duty.
Revenues are inflows from sales of goods that constitute ongoing major operations of our group and are reported as such in the statement of profit (loss) and other comprehensive income (loss). Inflows from incidental and peripheral operations are considered gains and are included, net of related costs, in other income in the consolidated statement of profit (loss) and other comprehensive income (loss).
The following criteria are also applicable to other specific revenue transactions:
Sales of goods
Revenue from the sale of goods is recognized when the significant risks and rewards of ownership of the goods have passed to the buyer. Revenue from the sale of goods is measured at the fair value of the consideration received or receivable, net of returns and allowances, trade discounts, associated sales taxes (VAT) and export duties.
Principal vs agent arrangements
We are involved in re-selling goods and services produced or rendered by other entities. Revenues are reported based on the gross amount billed to the customer when our group has earned revenue as a principal from the sale of goods or services, or the net amount retained (that is, the amount billed to the customer reduced by the amount billed by the supplier) when our group has earned a commission or fee as an agent.
Shipping and handling costs
We classify all amounts billed to customers in a sale transaction and related to shipping and handling as part of sales revenue and all related shipping and handling costs as selling and distribution expenses when we are acting as a principal in accordance with the requirements of IAS 18 Revenue.
Sales of power
In the power segment (see note 28 to the consolidated financial statements), revenue is recognized based on unit of power measure (kilowatts) delivered to customers, since at that point revenue recognition criteria are met. The billings are usually done on a monthly basis, several days after each month end.
Interest income
For all financial instruments measured at amortized cost, interest income is recorded using the effective interest rate (“EIR”). The EIR is the rate that exactly discounts the estimated future cash receipts over the expected life of the financial instrument or a shorter period, where appropriate, to the net carrying amount of the financial asset. Interest income is included in finance income in the statement of profit (loss) and other comprehensive income (loss).
Taxes
Current income tax
Current income tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted at the reporting date in the countries where our group operates and generates taxable income.
Uncertain tax positions
Our policy is to comply fully with the applicable tax regulations in the jurisdictions where our operations are subject to income taxes. Our estimates of current income tax expense and liabilities are calculated assuming that all tax computations filed by our subsidiaries will be subject to a review or audit by the relevant tax authorities. We and the relevant tax authorities may have different interpretations of how regulations should be applied to actual transactions. Such uncertain tax positions are accounted for in accordance with IAS 12 Income Taxes and IAS 37 Provisions, Contingent Liabilities and Contingent Assets. We apply single most likely outcome method of uncertain tax positions estimation.
Deferred tax
Deferred tax is provided using the liability method on temporary differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes at the reporting date.
Deferred tax liabilities are recognized for all taxable temporary differences, except:
Deferred tax assets are recognized for all deductible temporary differences, the carry forward of unused tax credits and any unused tax losses. Deferred tax assets are recognized to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry forward of unused tax credits and unused tax losses can be utilized, except:
The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilized. Unrecognized deferred tax assets are re-assessed at each reporting date and are recognized to the extent that it has become probable that future taxable profits will allow the deferred tax asset to be recovered.
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the year when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the reporting date.
Deferred tax relating to items recognized outside profit or loss is recognized in correlation to the underlying transaction either in OCI or directly in equity.
Deferred tax assets and deferred tax liabilities are offset if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority.
Tax benefits acquired as part of a business combination, but not satisfying the criteria for separate recognition at that date, are recognized subsequently if new information about facts and circumstances change. The adjustment is either treated as a reduction in goodwill (as long as it does not exceed goodwill) if it was incurred during the measurement period or recognized in profit or loss.
Foreign currencies
Our consolidated financial statements are presented in Russian rubles, which is also the parent company’s functional currency. For each entity, we determine the functional currency and items included in the financial statements of each entity are measured using that functional currency. The functional currencies for our main Russian, European, Ukrainian and Kazakh subsidiaries are the Russian ruble, euro, the Ukrainian hryvnia and the Kazakh tenge, respectively. The U.S. dollar is the functional currency of our other main international operations. We use the direct method of consolidation and on disposal of a foreign operation, the gain or loss that is reclassified to profit or loss reflects the amount that arises from using this method.
Transactions and balances
Transactions in foreign currencies are initially recorded by our group’s entities at their respective functional currency spot rates at the date the transaction first qualifies for recognition.
Monetary assets and liabilities denominated in foreign currencies are translated at the functional currency spot rates of exchange at the reporting date.
Differences arising on settlement or translation of monetary items are recognized in profit or loss.
Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value is determined.
The following table presents the exchange rates for the functional and operating currencies at various subsidiaries, other than the presentation currency:
Currency | Rates at | Average exchange rates* for the years ended | ||||||||||||||||||
| December 31, | January 1, | December 31, | ||||||||||||||||||
| 2015 | 2014 | 2014 | 2015 | 2014 | ||||||||||||||||
U.S. dollar | 72.88 | 56.26 | 32.73 | 60.96 | 38.42 | |||||||||||||||
Euro | 79.70 | 68.34 | 44.97 | 67.78 | 50.82 | |||||||||||||||
Ukrainian hryvnia | 3.05 | 3.56 | 3.97 | 2.83 | 3.25 | |||||||||||||||
Kazakh tenge | 0.22 | 0.31 | 0.21 | 0.28 | 0.21 | |||||||||||||||
The majority of the balances and operations not already denominated in the presentation currency were denominated in the U.S. dollar and euro.
The Russian ruble is not a convertible currency outside the territory of Russia. Official exchange rates are determined daily by the CBR and are generally considered to be a reasonable approximation of market rates.
Group companies
On consolidation, the assets and liabilities of foreign operations are translated into rubles at the rate of exchange prevailing at the reporting date and their statements of profit (loss) and other comprehensive income (loss) are translated at the weighted average exchange rate for the period. The exchange differences arising on translation for consolidation are recognized in OCI. On disposal of a foreign operation, the component of OCI relating to that particular foreign operation is recognized in profit or loss.
Any goodwill arising on the acquisition of a foreign operation and any fair value adjustments to the carrying amounts of assets and liabilities arising on the acquisition are treated as assets and liabilities of the foreign operation and translated at the spot rate of exchange at the reporting date.
Non-current assets held for sale and discontinued operations
We classify non-current assets (or disposal group) as held for sale if their carrying amounts will be recovered principally through a sale transaction rather than through continuing use. Such non-current assets (or disposal group) classified as held for sale are measured at the lower of their carrying amount and fair value less costs to sell.
The criteria for held for sale classification is regarded as met only when the sale is highly probable and the asset (or disposal group) is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets (or disposal groups). For the sale to be highly probable, the appropriate level of management must be committed to a plan to sell the asset (or disposal group), and an active program to locate a buyer and complete the plan must have been initiated.
Property, plant and equipment and intangible assets are not depreciated or amortized once classified as held for sale.
Assets and liabilities classified as held for sale are presented separately as current items in the statement of financial position.
A disposal group qualifies as discontinued operation if it is a component of an entity that either has been disposed of, or is classified as held for sale, and:
Discontinued operations are excluded from the results of continuing operations and are presented as a single amount as profit or loss after tax from discontinued operations in the statement of profit (loss) and other comprehensive income (loss).
Additional disclosures are provided in note 17. All other notes to the financial statements include amounts for continuing operations, unless otherwise mentioned.
Mineral licenses
Mineral licenses acquired separately are measured on initial recognition at cost. The cost of mineral licenses acquired in a business combination is their fair value at the date of acquisition. Mineral licenses are amortized under a unit of production basis over proven and probable reserves of the relevant area.
In order to calculate proven and probable reserves, estimates and assumptions are used about a range of geological, technical and economic factors, including but not limited to quantities, grades, production techniques, recovery rates, production costs, transport costs, commodity demand, commodity prices and exchange rates. There are numerous uncertainties inherent in estimating proven and probable reserves, and assumptions that are valid at the time of estimation may change significantly when new information becomes available.
We established a policy according to which internal mining engineers review our proven and probable reserves annually. This policy does not change our approach to the measurement of proven and probable reserves as of their acquisition dates as part of business combinations that involve independent mining engineers. Our proven and probable reserve estimates as of the reporting date were made by internal mining engineers and the majority of the assumptions underlying these estimates had been previously reviewed and verified by independent mining engineers.
Property, plant and equipment
Property, plant and equipment and construction in progress are stated at cost, net of accumulated depreciation and accumulated impairment losses, if any. The initial cost of an asset comprises its purchase price or construction cost, any costs directly attributable to bringing the asset into operation, the initial estimate of the rehabilitation provision, and, for qualifying assets (where relevant), borrowing costs and other costs incurred in connection with the borrowings. The purchase price or construction cost is the aggregate amount paid and the fair value of any other consideration given to acquire the asset.
When significant parts of property, plant and equipment are required to be replaced at intervals, we depreciate them separately based on their specific useful lives. Likewise, when a major inspection is performed, its cost is recognized in the carrying amount of the property, plant and equipment as a replacement if the recognition criteria are satisfied. Where a separately depreciated asset, or part of an asset, is replaced, the expenditure is capitalized. Where part of the asset was not separately considered as a component and therefore not depreciated separately, the replacement value is used to estimate the carrying amount of the replaced asset(s) which is immediately written off. All other repair and maintenance costs are recognized in the statement of profit (loss) and other comprehensive income (loss) as incurred.
The capitalized value of a finance lease is also included in property, plant and equipment. The present value of the expected cost for the rehabilitation of an asset after its use is included in the cost of the respective asset if the recognition criteria for a provision are met.
Inventories planned to be used for construction and spare parts with useful lives over one year are recorded within property, plant and equipment.
Mining assets and processing plant and equipment
Mining assets and processing plant and equipment are those assets, including construction in progress, which are intended to be used only for the needs of a certain mine or field, and upon full extraction exhausting of the reserves of such mine or the field, these assets cannot be further used for any other purpose without a capital reconstruction.
Items of production mines are stated at cost, less accumulated depletion and accumulated impairment losses, if any.
Costs of developing new underground mines are capitalized. Underground development costs, which are costs incurred to make the mineral physically accessible, include costs to prepare property for shafts, driving main entries for ventilation, haulage, personnel, construction of airshafts, roof protection and other facilities. Additionally, interest expense subject to allocation to the cost of developing mining properties and to constructing new facilities is capitalized until assets are ready for their intended use.
Exploration and evaluation activity involves the search for mineral resources, the determination of technical feasibility and the assessment of commercial viability of identified proven and probable reserves. Once the legal right to explore has been acquired, exploration and evaluation expenditure is charged to profit or loss as incurred, unless we conclude that a future economic benefit is more likely than not to be realized.
Stripping costs incurred in the development phase of a mine, before the production phase commences, are capitalized as part of cost of constructing the mine. The capitalization of development stripping costs ceases when the mine is commissioned and ready for use as intended by management. Stripping cots undertaken during the production phase of mine are charged to profit and loss as cost of goods sold as incurred.
When mining assets and processing plant and equipment are placed in production, the applicable capitalized costs, including mine development costs, are depleted using the unit-of-production method at the ratio of tonnes of mineral mined or processed to the estimated proven and probable mineral reserves that are expected to be mined during the estimated lives of the mines. The unit-of-production method is used for the underground mine development structure costs as their useful lives coincide with the estimated lives of mines, provided that all repairs and maintenance are timely carried out.
A decision to abandon, reduce or expand activity on a specific mine is based upon many factors, including general and specific assessments of mineral reserves, anticipated future mineral prices, anticipated costs of developing and operating a producing mine, the expiration date of mineral licenses, and the likelihood that we will continue exploration on the mine. Based on the results at the conclusion of each phase of an exploration program, properties that are not economically feasible for production are re-evaluated to determine if future exploration is warranted and that carrying values are appropriate. The ultimate recovery of these costs depends on the discovery and development of economic ore reserves or the sale of the companies owning such mineral rights.
Other property, plant and equipment
Capitalized production costs for internally developed assets include material, direct labor costs, and allocated material and manufacturing overhead costs. When construction activities are performed over an extended period, borrowing costs incurred in connection with the borrowing of funds are capitalized. Construction-in-progress and equipment held for installation are not depreciated until the constructed or installed asset is substantially ready for its intended use.
Property, plant and equipment (apart from railway of the Elga coal deposit) are depreciated using the straight-line method. Upon sale or retirement, the acquisition or production cost and related accumulated depreciation are removed from the consolidated statement of financial position and any gain or loss is included in the statement of profit (loss) and comprehensive income (loss).
The following useful lives are used as a basis for calculating depreciation:
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Leases
The determination of whether an arrangement is (or contains) a lease is based on the substance of the arrangement at the inception of the lease. The arrangement is, or contains, a lease if fulfillment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset or assets, even if that right is not explicitly specified in an arrangement.
A lease is classified at the inception date as a finance lease or an operating lease. A lease that transfers substantially all the risks and rewards incidental to ownership to our group is classified as a finance lease.
Finance leases are capitalized at the commencement of the lease at the inception date fair value of the leased property or, if lower, at the present value of the minimum lease payments. Lease payments are apportioned between finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are recognized in finance costs in the statement of profit (loss) and other comprehensive income (loss).
A leased asset is depreciated over the useful life of the asset. However, if there is no reasonable certainty that we will obtain ownership by the end of the lease term, the asset is depreciated over the shorter of the estimated useful life of the asset and the lease term.
An operating lease is a lease other than a finance lease. Operating lease payments are recognized as an operating expense in the statement of profit (loss) and other comprehensive income (loss) on a straight-line basis over the lease term.
Borrowing costs
Borrowing costs directly attributable to the acquisition, construction or production of an asset that necessarily takes a substantial period of time to get ready for its intended use or sale (a qualifying asset) are capitalized as part of the cost of the respective asset. Borrowing costs consist of interest including exchange differences arising from foreign currency borrowings and other costs that an entity incurs in connection with the borrowing of funds.
Where funds are borrowed specifically to finance a project, the amount capitalized represents the actual borrowing costs incurred. Where the funds used to finance a project form part of general borrowings, the amount capitalized is calculated using a weighted average of rates applicable to relevant general borrowings of our group during the period.
According to IAS 23 Borrowing Costs, borrowing costs may include exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs. Foreign exchange differences on borrowings directly attributable to the acquisition, construction or production of a qualifying asset are considered by us to be eligible for capitalization in the amount of difference between actual amount of interest costs and potential amount of interest costs calculated using a weighted average of rates applicable to ruble-nominated borrowings of our group during the period. All other borrowing costs are recognized in the statement of profit (loss) and other comprehensive income (loss) in the period in which they are incurred.
Intangible assets
Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is their fair value at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortization and accumulated impairment losses.
Intangible assets with determinable useful lives are amortized using the straight-line method over their estimated period of benefit, ranging from two to sixteen years.
Financial instruments — initial recognition and subsequent measurement
A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.
Financial assets
Initial recognition and measurement
Financial assets are classified, at initial recognition, as financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments, available-for-sale (“AFS”) financial assets, or as derivatives. All financial assets are recognized initially at fair value plus, in the case of financial assets not recorded at fair value through profit or loss, transaction costs that are attributable to the acquisition of the financial asset.
Purchases or sales of financial assets that require delivery of assets within a time frame established by regulation or convention in the market place (regular way trades) are recognized on the trade date, i.e., the date that we commit to purchase or sell the asset.
Subsequent measurement
For purposes of subsequent measurement, financial assets are classified in four categories:
Financial assets at fair value through profit or loss
Financial assets at fair value through profit or loss include financial assets held for trading and financial assets designated upon initial recognition at fair value through profit or loss. Financial assets are classified as held for trading if they are acquired for the purpose of selling or repurchasing in the near term. Financial assets at fair value through profit or loss are carried in the statement of financial position at fair value with net changes in fair value presented as finance costs (negative net changes in fair value) or finance income (positive net changes in fair value) in the statement of profit (loss) and other comprehensive income (loss).
Loans and receivables
This category is the most relevant to our group. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. After initial measurement, such financial assets are subsequently measured at amortized cost using the EIR method, less impairment. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR amortization is included in finance income in the statement of profit (loss) and other comprehensive income (loss). The losses arising from impairment are recognized in the statement of profit (loss) and other comprehensive income (loss) in finance costs for loans and in other operating expenses for receivables.
This category generally applies to trade and other receivables. For more information on receivables, refer to note 13.
AFS financial assets
AFS financial assets include equity investments and debt securities. Equity investments classified as AFS are those that are neither classified as held for trading nor designated at fair value through profit or loss. Debt securities in this category are those that are intended to be held for an indefinite period of time and that may be sold in response to needs for liquidity or in response to changes in the market conditions.
After initial measurement, AFS financial assets are subsequently measured at fair value with unrealized gains or losses recognized in OCI and credited in the AFS reserve until the investment is derecognized, at which time, the cumulative gain or loss is recognized in other operating income, or the investment is determined to be impaired, when the cumulative loss is reclassified from the AFS reserve to the statement of profit (loss) and other comprehensive income (loss) in finance costs. Interest earned whilst holding AFS financial assets is reported as interest income using the EIR method.
Derecognition
A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is primarily derecognized (i.e., removed from our consolidated statement of financial position) when:
Impairment of financial assets
Further disclosures relating to impairment of financial assets are also provided in the following notes to the consolidated financial statements: Financial assets (note 11) and Trade and other receivables (note 13).
We assess, at each reporting date, whether there is objective evidence that a financial asset or a group of financial assets is impaired. An impairment exists if one or more events that has occurred since the initial recognition of the asset (an incurred ‘loss event’), has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. Evidence of impairment may include indications that the debtors or a group of debtors is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganization and observable data indicating that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults.
Financial assets carried at amortized cost
For financial assets carried at amortized cost, we first assess whether impairment exists individually for financial assets that are individually significant, or collectively for financial assets that are not individually significant. If our group determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is, or continues to be, recognized are not included in a collective assessment of impairment.
Financial liabilities
Initial recognition and measurement
Financial liabilities are classified, at initial recognition, as financial liabilities at fair value through profit or loss, loans and borrowings, payables, or as derivatives.
All financial liabilities are recognized initially at fair value and, in the case of loans and borrowings and payables, net of directly attributable transaction costs.
Our financial liabilities include trade and other payables, loans and borrowings including bank overdrafts, financial guarantee contracts and derivative financial instruments.
Subsequent measurement
The measurement of financial liabilities depends on their classification, as described below:
Financial liabilities at fair value through profit or loss
Financial liabilities at fair value through profit or loss include financial liabilities held for trading and financial liabilities designated upon initial recognition as at fair value through profit or loss.
Financial liabilities are classified as held for trading if they are incurred for the purpose of repurchasing in the near term. Gains or losses on liabilities held for trading are recognized in the statement of profit (loss) and other comprehensive income (loss).
Financial liabilities designated upon initial recognition at fair value through profit or loss are designated at the initial date of recognition, and only if the criteria in IAS 39 Financial Instruments: Recognition and Measurement are satisfied.
Loans and borrowings
This is the category most relevant to our group. After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortized cost using the EIR method. Gains and losses are recognized in profit or loss when the liabilities are derecognized as well as through the EIR amortization process. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR amortization is included as finance costs in the statement of profit (loss) and other comprehensive income (loss). This category generally applies to interest-bearing loans and borrowings (see note 11 to the consolidated financial statements).
Financial guarantee contracts
Financial guarantee contracts issued by our group are those contracts that require a payment to be made to reimburse the holder for a loss it incurs because the specified debtor fails to make a payment when due in accordance with the terms of a debt instrument. Financial guarantee contracts are recognized initially as a liability at fair value, adjusted for transaction costs that are directly attributable to the issuance of the guarantee. Subsequently, the liability is measured at the higher of the best estimate of the expenditure required to settle the present obligation at the reporting date and the amount recognized less cumulative amortization.
Derecognition
A financial liability is derecognized when the obligation under the liability is discharged or cancelled or expires. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as the derecognition of the original liability and the recognition of a new liability. The difference in the respective carrying amounts is recognized in the statement of profit (loss) and other comprehensive income (loss).
Derivative financial instruments
We use derivative financial instruments, such as cross currency swap and cross currency option. Such derivative financial instruments are initially recognized at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at fair value. Derivatives are carried as financial assets when the fair value is positive and as financial liabilities when the fair value is negative.
For the years ended December 31, 2015, 2014 and as of January 1, 2014, we did not have any derivatives designated as hedging instruments.
Inventories
Inventories are measured at the lower of cost or net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses.
The cost of inventories is determined under the weighted average cost method, and includes all costs in bringing the inventory to its present location and condition. The elements of costs include direct material, labor and allocable material and manufacturing overhead.
Costs of production in process and finished goods include the purchase costs of raw materials and conversion costs such as direct labor and allocation of fixed and variable production overheads. Raw materials are valued at a purchase cost inclusive of freight and other shipping costs.
Coal and iron ore inventory costs include direct labor, supplies, depreciation of equipment, depletion of mining assets and amortization of licenses to use mineral reserves, mine operating overheads and other related costs. Operating overheads are charged to expenses in the periods when the production is temporarily paused or abnormally low.
Impairment of non-current assets
Further disclosures relating to impairment of non-current assets are also provided in the following notes to the consolidated financial statements: Intangible assets (note 20) and Impairment of goodwill and othernon-current assets (note 19).
We assess, at each reporting date, whether there is an indication that an asset may be impaired. If any indication exists, or when annual impairment testing for an asset is required, we estimate the asset’s recoverable amount. An asset’s recoverable amount is the higher of an asset’s or CGU’s fair value less costs of disposal and its value in use. The recoverable amount is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. When the carrying amount of an asset or CGU exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. Our CGUs represent single entities with one component of business in each case. As of December 31, 2015, we had the following number of CGUs by segments for impairment testing purposes: Steel — 9, Mining — 7 and Power — 2.
In assessing value in use, we use assumptions that include estimates regarding the discount rates, growth rates and expected changes in selling prices, sales volumes and operating costs, as well as capital expenditures and working capital requirements during the forecasted period. The estimated future cash flows expected to be generated by the asset, when the quoted market prices are not available, are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. The growth rates are based on our growth forecasts, which are largely in line with industry trends. Changes in selling prices and direct costs are based on historical experience and expectations of future changes in the market. In determining fair value less costs of disposal, recent market transactions are taken into account.
We base our impairment calculation on detailed budgets and forecast calculations, which are prepared separately for each of our CGUs to which the individual assets are allocated. These budgets and forecast calculations generally cover a period of five years. A long-term growth rate is calculated and applied to project future cash flows after the fifth year.
For CGUs involved in mining activity future cash flows include estimates of recoverable minerals that will be obtained from proven and probable reserves, mineral prices (considering current and historical prices, price trends and other related factors), production levels, capital and reclamation costs, all based on the life of mine models prepared by our engineers.
Impairment losses of continuing operations are recognized in the statement of profit (loss) and other comprehensive income (loss) in expense categories consistent with the function of the impaired asset.
For assets excluding goodwill, an assessment is made at each reporting date to determine whether there is an indication that previously recognized impairment losses no longer exist or have decreased. If such indication exists, we estimate the asset’s or CGU’s recoverable amount. A previously recognized impairment loss is reversed only if there has been a change in the assumptions used to determine the asset’s recoverable amount since the last impairment loss was recognized. The reversal is limited so that the carrying amount of the asset does not exceed its recoverable amount, nor exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognized for the asset in prior years. Such reversal is recognized in the statement of profit (loss) and other comprehensive income (loss) unless the asset is carried at a revalued amount, in which case, the reversal is treated as a revaluation increase.
Goodwill is tested for impairment annually as of December 31 and when circumstances indicate that the carrying value may be impaired.
Impairment is determined for goodwill by assessing the recoverable amount of each CGU to which the goodwill relates. When the recoverable amount of the CGU is less than its carrying amount, an impairment loss is recognized. Impairment losses relating to goodwill cannot be reversed in future periods.
Cash and cash equivalents
Cash and cash equivalents in the statement of financial position comprise cash at banks and on hand and short-term deposits with a maturity of three months or less, which are subject to an insignificant risk of changes in value.
For the purpose of the consolidated statement of cash flows, cash and cash equivalents consist of cash and short-term deposits, as defined above, net of outstanding bank overdrafts as they are considered an integral part of our group’s cash management.
Provisions
General
Provisions are recognized when our group has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation including legal or tax proceedings’ obligations and a reliable estimate can be made of the amount of the obligation. The expense relating to a provision is presented in the statement of profit (loss) and other comprehensive income (loss).
If the effect of the time value of money is material, provisions are discounted using a current pre-tax rate that reflects, when appropriate, the risks specific to the liability. When discounting is used, the increase in the provision due to the passage of time is recognized as a finance cost.
Rehabilitation provision
Mine rehabilitation costs will be incurred by us either while operating, or at the end of the operating life of, our facilities and mine properties. We assess our mine rehabilitation provision at each reporting date. Our group
recognizes a rehabilitation provision where it has a legal and constructive obligation as a result of past events, and it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate of the amount of obligation can be made. The nature of these restoration activities includes: dismantling and removing structures; rehabilitating mines and tailings dams; dismantling operating facilities; closing plant and waste sites; and restoring, reclaiming and revegetating affected areas.
The obligation generally arises when the asset is installed or the ground/environment is disturbed at the mining operation’s location. When the liability is initially recognized, the present value of the estimated costs is capitalized by increasing the carrying amount of the related mining assets to the extent that it was incurred as a result of the development/construction of the mine.
Changes in the estimated timing of rehabilitation or changes to the estimated future costs are dealt with prospectively by recognizing an adjustment to the rehabilitation provision and a corresponding adjustment to the asset to which it relates, if the initial estimate was originally recognized as part of an asset measured in accordance with IAS 16 Property, Plant and Equipment.
Any reduction in the rehabilitation provision and, therefore, any deduction from the asset to which it relates, may not exceed the carrying amount of that asset. If it does, any excess over the carrying value is taken immediately to the statement of profit (loss) and other comprehensive income (loss).
Over time, the discounted liability is increased for the change in present value based on the discount rates that reflect current market assessments and the risks specific to the liability. The periodic unwinding of the discount is recognized in the statement of profit (loss) and other comprehensive income (loss) as part of finance costs.
For closed sites, changes to estimated costs are recognized immediately in the statement of profit (loss) and other comprehensive income (loss).
Environmental expenditures and liabilities
Environmental expenditures that relate to current or future revenues are expensed or capitalized as appropriate. Expenditures that relate to an existing condition caused by past operations and do not contribute to current or future earnings are expensed. Liabilities for environmental costs are recognized when a clean-up is probable and the associated costs can be reliably estimated. Generally, the timing of recognition of these provisions coincides with the commitment to a formal plan of action or, if earlier, on divestment or on closure of inactive sites. The amount recognized is the best estimate of the expenditure required. Where the liability will not be settled for a number of years, the amount recognized is the present value of the estimated future expenditure.
Pensions and other post-employment benefits
Defined benefit pension and other post-retirement plans
We have a number of defined benefit pension plans that cover the majority of production employees. Benefits under these plans are primarily based upon years of service and average earnings. We account for the cost of defined benefit plans using the projected unit credit method. Under this method, the cost of providing pensions is charged to the statement of profit (loss) and other comprehensive income (loss), so as to attribute the total pension cost over the service lives of employees in accordance with the benefit formula of the plan.
Our obligation in respect of defined retirement benefit plans is calculated separately for each defined benefit plan by discounting the amounts of future benefits that employees have already earned through their service in the current and prior periods. The discount rate applied represents the yield at the year end on highly ratedlong-term bonds.
Where there is a change in actuarial assumptions, the resulting actuarial gains and losses are recognized directly in the statement of comprehensive income.
For unfunded plans, we recognize a pension liability, which is equal to the projected benefit obligation. For funded plans, our group offsets the fair value of the plan assets with the projected benefit obligations and recognizes the net amount of pension liability. The market value of plan assets is measured at each reporting date.
State pension fund
Our Russian subsidiaries are legally obligated to make defined contributions to the Russian Pension Fund, managed by the Russian Federation Social Security (a defined contribution plan financed on a pay-as-you-go basis). Our contributions to the Russian Pension Fund relating to defined contribution plans are charged to income in the year, to which they relate.
Significant accounting judgments, estimates and assumptions
The preparation of the consolidated financial statements requires management to make judgments, estimates and assumptions that affect the reported carrying amounts of assets and liabilities, and disclosure of contingent assets and liabilities as of the date of the financial statements, and the amounts of revenues and expenses recognized during the reporting period. Estimates and assumptions are continually evaluated and are based on our experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Actual results could differ from those estimates. Uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of assets or liabilities affected in future periods.
Judgments
In the process of applying our accounting policies, management has made the following judgments, which have the most significant effect on the amount recognized in the consolidated financial statements.
Abandoned Activity
As of January 1, 2014, Southern Urals Nickel Plant was recognized as abandoned activity according to a decision to close Southern Urals Nickel Plant without sale. In July 2013, we received an approval from the governmental authorities to abandon the industrial complex. The closure of Southern Urals Nickel Plant is aligned with the revised strategy aimed at restructuring the group’s assets and development of its core businesses. As of December 31, 2015, the works related to closure of the plant are ongoing (see note 17) therefore we excluded the result of Southern Urals Nickel Plant from the continuing operations and reported them as discontinued operations for the year ended December 31, 2015 and prior periods.
Capitalization of Interest Related to the Elga Coal Deposit and Railway Construction
In 2013 and 2014, Elgaugol and Vnesheconombank signed credit agreements for financing of the Elga coal project approved by the Vnesheconombank’s Supervisory Board in September 2013. The use of proceeds under these facilities is limited to the development of the Elga coal project. Borrowing costs under these facilities that are directly attributable to the construction of the Elga coal project are capitalized. Borrowing costs consist of interest including exchange differences arising from revaluation of foreign currency borrowings and other costs that we incur in connection with the debt servicing.
Railway Depreciation Method
In 2015, we commenced to depreciate the railway of the Elga coal deposit using units of production method. In applying the units of production method, depreciation is normally calculated based on produced and delivered
tonnes in the period as a percentage of total expected tonnes to be produced and delivered in current and future periods over the Elga coal deposit life cycle. Our analysis has shown that the consumption of the economic benefits of the asset is linked to production and delivery of coal. We assess the total or ultimate railway capacity in tonnes at least at each financial year end and, if expectations differ from previous estimates, the changes will be accounted for as a change in an accounting estimate in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors.
Principal vs Agent Arrangements
We make significant judgment on gross or net revenue recognition. We evaluate the relevant facts and circumstances and take into consideration the following factors in determining whether to recognize revenue on a gross basis: (1) we have the primary responsibility for providing the goods or services to the customer or for fulfilling the order, for example by being responsible for the acceptability of the products or services ordered or purchased by the customer; (2) we have inventory risk before or after the customer order, during shipping or on return; (3) we have latitude in establishing prices, either directly or indirectly, for example by providing additional goods or services; and (4) we bear the customer’s credit risk for the amount receivable from the customer.
Otherwise, revenues are reported net when our group performs as an agent or a broker without assuming the risks and rewards of ownership of goods. The evaluations of these factors, which at times can be contradictory, are subject to significant judgment and subjectivity. In the situation when we act as a supplier and as a buyer with the same counterparty, we analyze the respective purchase and sales agreements to identify whether these transactions were concluded in contemplation with each other and, therefore, should be combined for accounting purposes deferring the revenue recognition to the point when the earnings process has culminated.
Estimates and Assumptions
The key assumptions concerning the future and other key sources of estimation uncertainty at the reporting date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are described below or in the related accounting policy note. We based our assumptions and estimates on parameters available when the consolidated financial statements were prepared. Existing circumstances and assumptions about future developments, however, may change due to market change or circumstances arising beyond the control of our group.
In particular, we have identified a number of areas where significant estimates and assumptions are required. Further information on each of these areas and how they impact the various accounting policies are described with the associated accounting policy note within the related qualitative and quantitative note as described below.
Deferred Tax Assets and Uncertain Tax Positions
Deferred tax assets are recognized for unused tax losses to the extent that it is probable that taxable profit will be available against which the losses can be utilized. Significant management judgment is required to determine the amount of deferred tax assets that can be recognized, based upon the likely timing and the level of future taxable profits and the existence of taxable temporary differences (see note 21 to the consolidated financial statements). Various factors are considered to assess the probability of the future utilization of deferred tax assets, including past operating results, operational plans, expiration of tax losses carried forward, and tax planning strategies. If actual results differ from these estimates or if these estimates must be adjusted in future periods, the financial position, results of operations and cash flows may be negatively affected. In the event that the assessment of future utilization of deferred tax assets must be reduced, this reduction will be recognized in the statement of profit (loss) and other comprehensive income (loss).
Impairment of Property, Plant and Equipment and Other Non-current Assets
We assess at each reporting date whether there is any indication that an asset may be impaired. If any such indication exists, we make an estimate of the asset’s recoverable amount. An impairment exists when the carrying value of an asset or CGU exceeds its recoverable amount, which is the higher of its fair value less costs of disposal and its value in use. The fair value less costs of disposal calculation is based on available data from binding sales transactions, conducted at arm’s length for similar assets or observable market prices less incremental costs for disposing of the asset. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessment of the time value of money and the risks specific to the assets.
Impairment is based on a large number of factors, such as changes in current competitive conditions, expectations of growth in the industry, increased cost of capital, changes in the future availability of financing, technological obsolescence, and other changes in circumstances that indicate that impairment exists. The determination of the recoverable amount of a cash-generating unit involves the use of estimates by management. Methods used to determine the value in use include discounted cash flow-based methods, which require us to make an estimate of the expected future cash flows from the cash-generating unit and also to choose a suitable discount rate in order to calculate the present value of those cash flows. These estimates, including the methodologies used, may have a material impact on the value in use and, ultimately, the amount of any impairment (see note 19).
Impairment of Goodwill
We determine whether goodwill is impaired at least on an annual basis and when circumstances indicate that the carrying value may be impaired. This requires an estimation of the value in use of the cash generating units to which the goodwill is allocated. Estimating the value in use requires us to make an estimate of the expected future cash flows from the cash-generating unit and also to choose a suitable discount rate in order to calculate the present value of those cash flows. More details of the assumptions used in estimating the value in use of the cash-generating units to which goodwill is allocated are provided in note 19 to the consolidated financial statements.
Useful Lives of Items of Property, Plant and Equipment
We assess the remaining useful lives of items of property, plant and equipment at least at each financial year end and, if expectations differ from previous estimates, the changes are accounted for as a change in an accounting estimate in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. These estimates may have a material impact on the amount of the carrying values of property, plant and equipment and on depreciation expense for the period.
Mineral Reserves
Mineral reserves and the associated mine plans are a material factor in our computation of a depletion charge. Estimation of reserves involves some degree of uncertainty. The uncertainty depends mainly on the amount of reliable geological and engineering data available at the time of the estimate and the interpretation of this data, which also requires use of subjective judgment and development of assumptions. Mine plans are periodically updated which can have a material impact on the depletion charge for the period. More details are provided in note 3(i) to the consolidated financial statements.
Fair Value of Financial Instruments
Where the fair value of financial assets and financial liabilities recorded in the statement of financial position cannot be derived from active markets, their fair value is determined using valuation techniques, including discounted cash flow models. The inputs to these models are taken from observable markets where possible, but when this is not feasible, a degree of judgment is required in establishing fair values. The judgments
include considerations of inputs such as liquidity risk, credit risk and volatility. Changes in assumptions about these factors could affect the reported fair value of financial instruments (see note 10 to the consolidated financial statements).
Provisions
We are subject to various legal proceedings, disputes and claims, including regulatory discussions related to our group’s business, licenses, tax positions and the outcomes are subject to significant uncertainty. Management evaluates, among other factors, the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. Unanticipated events or changes in these factors may require us to increase or decrease the amount recorded or to be recorded for a matter that has not been previously recorded because it was not considered probable (see note 23 to the consolidated financial statements).
Pensions and Other Post-employment Benefits
The cost of defined benefit pension plans and other post-employment benefits and the present value of the pension obligation are determined using actuarial valuations. An actuarial valuation involves making various assumptions which may differ from actual developments in the future. These include the determination of the discount rate, future salary increases, mortality rates and future pension increases. Due to the complexity of the valuation, the underlying assumptions and its long-term nature, a defined benefit obligation is highly sensitive to changes in these assumptions. All assumptions are reviewed at each reporting date. More details are provided in note 24 to the consolidated financial statements.
Rehabilitation Provisions
We review rehabilitation provisions at each reporting date and adjust them to reflect the current best estimate in accordance with IFRIC 1 “Changes in Existing Decommissioning, Restoration and Similar Liabilities.” Rehabilitation provisions are recognized in the period in which they arise and are stated at the best estimate of the present value of estimated future costs. These estimates require extensive judgment about the nature, cost and timing of the work to be completed, and may change with future changes to costs, environmental laws and regulations and remediation practices. Changes in the estimated timing of rehabilitation or changes to the estimated future costs are dealt with prospectively by recognizing an adjustment to the rehabilitation provision and a corresponding adjustment to the asset to which it relates, if the initial estimate was originally recognized as part of an asset measured in accordance with IAS 16 Property, Plant and Equipment (see note 18 to the consolidated financial statements).
Impairment of Financial Assets
We make allowances for doubtful receivables to account for estimated losses resulting from the inability of customers to make required payments. When evaluating the adequacy of an allowance for doubtful accounts, management bases its estimates on the current overall economic conditions, the ageing of accounts receivable balances, historical write-off experience, customer creditworthiness and changes in payment terms. Changes in the economy, industry or specific customer conditions may require adjustments to the allowance for doubtful accounts recorded in the consolidated financial statements.
Determining Net Realizable Value of Inventories
We make write-downs for obsolete and slow-moving raw materials and spare parts. In addition, finished goods of our group are carried at net realizable value (see note 15 to the consolidated financial statements). Estimates of net realizable value of finished goods are based on the most reliable evidence available at the time the estimates are made. These estimates take into consideration fluctuations of price or cost directly relating to events occurring subsequent to the end of the reporting period to the extent that such events confirm conditions existing at the end of the period.
For other judgments, estimates and assumptions and details refer to: Mineral licenses (note 3(i)), Property, plant and equipment (note 3(j)), Recovery of deferred tax assets (note 3(f)), Non-current assets held for sale and discontinued operations (note 3(h)), Inventories (note 3(p)), Impairment of non-current assets (note 3(q)), Pensions and other post-employment benefits (note 3(t)), Provisions (note 3(s)) and Fair value measurement (note 3(d)).
Standards issued but not yet effective
At the end of the reporting period, the following Standards and Interpretations which are relevant to our group’s operations were in issue but not yet effective.
The effect from the application of IFRS 9 Financial Instruments — Classification and Measurement, IFRS 15 Revenue from Contracts with Customers and IFRS 16 Leases and has not yet been assessed.
Management anticipates that the adoption of all other Standards and Interpretations in future periods will have no material impact on the results and financial position presented in these financial statements, other than changes to the disclosures required in the financial statements, except for IFRS 9 Financial Instruments issued in November 2009 and amended in October 2010, December 2011, November 2013 and July 2014. We do not intend to adopt this standard before its effective date.
IAS 39 Financial Instruments: Recognition and Measurement — Amendments to permit an entity to elect to continue to apply the hedge accounting requirements in IAS 39 for a fair value hedge of the interest rate exposure of a portion of a portfolio of financial assets and liabilities when IFRS 9 is applied, and to extend the fair value option to certain contracts that meet the ‘own use’ scope exception (see below when IFRS 9 will be applied).
IFRS 7 Financial Instruments: Disclosures — Additional hedging disclosures (and consequential amendments) resulting from the introduction of the hedge accounting chapter in IFRS 9 (see below when IFRS 9 will be applied).
IFRS 9 Financial Instruments — Classification and Measurement. Finalized version, incorporating requirements for classification and measurement, impairment, general hedge accounting and derecognition (effective for annual periods beginning on or after January 1, 2018).
IFRS 9 introduces new requirements for the classification and measurement of financial assets and financial liabilities and for derecognition:
In particular, for financial liabilities that are designated at fair value through profit or loss, the amount of change in the fair value of the financial liability that is attributable to changes in the credit risk of that liability is recognized in other comprehensive income, unless the recognition of the effects of changes in the liability’s credit risk in other comprehensive income would create or enlarge an accounting mismatch in profit or loss. Changes in fair value attributable to a financial liability’s credit risk are not subsequently reclassified to profit or loss. Previously, under IAS 39 Financial Instruments: Recognition and Measurement, the entire amount of the change in the fair value of the financial liability designated as at fair value through profit or loss was recognized in profit or loss.
IFRS 10 Consolidated Financial Statements and IAS 28 Investments in Associates and Joint Ventures — Amendments regarding the sale or contribution of assets between an investor and its associate or joint venture. This amendment has no impact to us as we do not plan to make any sales or contribution of assets to our associates or joint ventures during the period (effective for annual periods beginning on or after January 1, 2016).
IFRS 10 Consolidated Financial Statements, IFRS 12 Disclosure of Interests in Other Entities and IAS 28 Investments in Associates and Joint Ventures — Amendments regarding the application of the consolidation exception by investment entities. This amendment has no impact to us as we are not an investment entity (effective for annual periods beginning on or after January 1, 2016).
IFRS 11 Joint Arrangements — Amendments regarding the accounting for acquisitions of an interest in a joint operation. Accounting for Acquisitions of Interests in Joint Operations (Amendments to IFRS 11) amends IFRS 11 such that the acquirer of an interest in a joint operation in which the activity constitutes a business, as defined in IFRS 3, is required to apply all of the principles on business combinations accounting in IFRS 3 and other IFRSs with the exception of those principles that conflict with the guidance in IFRS 11 (effective for annual periods beginning on or after January 1, 2016). This amendment has no impact to us as we do not plan to acquire an interest in joint operations.
IAS 1 Presentation of Financial Statements — Amendments resulting from the disclosure initiative. The amendments aim at clarifying IAS 1 to address perceived impediments to preparers exercising their judgment in presenting their financial reports. Management has not yet considered any changes or amendments to be made to the financial reports (effective for annual periods beginning on or after January 1, 2016).
IAS 16 Property, Plant and Equipment and IAS 38 Intangibles — Amendments to IAS 16 and IAS 38 to prohibit entities from using a revenue based depreciation method for items of property, plant and equipment. This amendment has no impact to us as we do not use revenue-based methods to depreciate/amortize our non-current assets (effective for annual periods beginning on or after January 1, 2016).
IAS 7 Statement of Cash Flows — Amendments resulting from the disclosure initiative. The amendments aim at clarifying IAS 7 to improve information provided to users of financial statements about an entity’s financing activities. Management has not yet considered any changes or amendments to be made to the financial reports (effective for annual periods beginning on or after January 1, 2017).
IFRS 15 Revenue from Contracts with Customers. IFRS 15 specifies how and when an IFRS reporter will recognize revenue as well as requiring such entities to provide users of financial statements with more informative, relevant disclosures. The standard provides a single, principles based five-step model to be applied to all contracts with customers (effective for annual periods beginning on or after January 1, 2018). We are currently in the process of assessing the impact of adoption of IFRS 15 on our consolidated financial statements.
IFRS 16 Leases. IFRS 16 specifies how an IFRS reporter will recognize, measure, present and disclose leases. The standard provides a single lessee accounting model, requiring lessees to recognize assets and liabilities for all leases unless the lease term is 12 months or less or the underlying asset has a low value. Lessors continue to classify leases as operating or finance, with IFRS 16’s approach to lessor accounting substantially unchanged from its predecessor, IAS 17 (effective for annual reporting periods beginning on or after January 1, 2019). We are currently in the process of assessing the impact of adoption of IFRS 16 on our consolidated financial statements.
Annual Improvements to IFRSs 2012–2014 Cycle
The “September 2014 Annual Improvements to IFRSs” is a collection of amendments to IFRSs in response to four standards. These improvements are effective from January 1, 2016 and are not expected to have a material impact on our group. It includes the following amendments:
First-time Adoption of IFRS
The accompanying financial statements, for the year ended December 31, 2015, are the first we have prepared in accordance with IFRS. The date of transition to IFRS is January 1, 2014. For periods up to and including the year ended December 31, 2014, we prepared our consolidated financial statements in accordance with U.S. GAAP.“Item 18. Financial Statements.”
Accordingly, we have prepared financial statements that comply with IFRS applicable as of December 31, 2015, together with the comparative period data for the year ended December 31, 2014, as described in the summarySummary of significant accounting policies (seeand standards issued but not effective
See note 3 to the consolidated financial statements). In preparing the financial statements, our opening consolidated statement of financial position was prepared as of January 1, 2014, our date of transition to IFRS. This note explains the principal adjustments made by us in representing our U.S. GAAP financial statements, including the statement of financial position as of January 1, 2014 and the financial statements for the year ended December 31, 2014 in order to comply with IFRS.
The presentation currency of our consolidated financial statements is the Russian ruble. Before transition to IFRS, U.S. dollar was the presentation currency of our consolidated financial statements prepared under U.S. GAAP. The reason of adopting the Russian ruble as the presentation currency in the consolidated statements under IFRS is to allow a greater transparency of our financial and operating performance as it more closely reflects the profile of our revenue and operating income that are generated in Russian rubles. The U.S. GAAP financial information included in the consolidated financial statements as of January 1, 2014 and for the year ended December 31, 2014 previously reported in U.S. dollars has been converted into Russian rubles using the procedures outlined below:
As a first-time adopter of IFRS, we applied IFRS 1 First-time Adoption of International Financial Reporting Standards. The Standard contains a number of voluntary and mandatory exemptions from the requirement to retrospectively apply IFRS, which we have applied as of January 1, 2014.
We have applied the mandatory exceptions and certain optional exemptions as set out below:
Business combinations — We have not applied IFRS 3 Business Combinations retrospectively to the business combinations that occurred before the date of transition to IFRS. As a result, assets recognized and liabilities assumed in the past business combinations under U.S. GAAP have remained unchanged at the date of transition, except for the changes described in the notes below.
Currency translation differences — We have used the IFRS 1 exemption relating to IAS 21 The Effects of Changes in Foreign Currency Rates. As a result, the cumulative translation differences for all of our foreign operations were set to be zero at the date of transition. The gain or loss on a subsequent disposal of any foreign operations will include only exchange differences that arose after the date of transition.
Borrowing costs — We have applied the transitional provisions in IAS 23 Borrowing Costs, and capitalize borrowing costs on qualifying assets after the date of transition, and where the construction was commenced as of and after the date of transition to IFRS according to IAS 23 Borrowing Costs. Borrowing costs capitalized under U.S. GAAP prior to the date of transition have not been adjusted.
Rehabilitation provision — We have elected to use the IFRS 1 exemption relating to recognition of changes in the measurement of rehabilitation provision and therefore measure those in accordance with IFRIC 1 Changes in Existing Decommissioning, Restoration and Similar Liabilities as of January 1, 2014.
Pension obligations — We have elected to recognize all cumulative actuarial gains and losses as at the date of transition in retained earnings. We are not required to re-compute the unrecognized portion of actuarial gains and losses from the inception of the defined benefit plans. Instead, we apply IAS 19 Employee Benefits from the date of transition. Therefore, at the date of transition, we recognize the pension obligations in accordance with IAS 19 Employee Benefits and no unrecognized actuarial gains and losses are presented at the transition date.
Estimates — The estimates as of January 1, 2014 and December 31, 2014 are consistent with those made as of the same dates in accordance with U.S. GAAP apart from the estimates described above.
Changes in the presentation (CP) — We changed the presentation of certain items in the consolidated statement of financial position and statement of profit (loss) and comprehensive income (loss) as compared to the presentation under the previously issued U.S. GAAP financial statements. The most significant changes in the presentation related to:
CP(1) Other accounts receivable (RUB 1,920 million as of January 1, 2014 and RUB 932 million as of December 31, 2014) are presented within Trade and other receivables in the consolidated statement of financial position. Under U.S. GAAP, we reflected Other accounts receivable within Other current assets.
CP(2) Income tax receivable (RUB 2,936 million as of January 1, 2014 and RUB 578 million as of December 31, 2014) is presented as a separate item in the consolidated statement of financial position. Under U.S. GAAP, it was reflected within Prepayments and other current assets.
CP(3) Other current financial assets (RUB 360 million as of January 1, 2014 and RUB 186 million as of December 31, 2014) are presented as a separate item in the consolidated statement of financial position. Under U.S. GAAP, Other current financial assets were reflected within Prepayments and other current assets.
CP(4) Interest payable (RUB 2,051 million as of January 1, 2014 and RUB 14,615 million as of December 31, 2014) is presented as part of Interest-bearing loans and borrowings in the consolidated statement of financial position. Under U.S. GAAP, Interest payable was reflected within Accrued expenses and Other current liabilities.
CP(5) Rehabilitation provision (non-current portion of RUB 1,655 million and current portion of RUB 66 million as of January 1, 2014, non-current portion of RUB 2,459 million and current portion of RUB 195 million as of December 31, 2014) is included in Provisions in the consolidated statement of financial position. Under U.S. GAAP, Rehabilitation provision was presented as a separate item.
CP(6) Provision for taxes other than income tax (RUB 521 million as of January 1, 2014 and RUB 769 million as of December 31, 2014) is included in Provisions in the consolidated statement of financial position. Under U.S. GAAP, Provision for taxes other than income tax was reflected within Taxes and social charges payable.
CP(7) Accrual for unused vacation (RUB 1,618 million as of January 1, 2014 and RUB 1,651 million as of December 31, 2014) is presented within Trade and other payables in the consolidated statement of financial position. Under U.S. GAAP, it was presented within Accrued expenses and other current liabilities.
CP(8) Dividends payable (RUB 108 million as of January 1, 2014 and RUB 104 million as of December 31, 2014) are presented within Trade and other payables in the consolidated statement of financial position. Under U.S. GAAP, Dividends payable were reflected as a separate item.
CP(9) Other current liabilities (RUB 7,233 million as of January 1, 2014 and RUB 27,989 million as of December 31, 2014) are presented within Trade and other payables in the consolidated statement of financial position. Under U.S. GAAP, they were reflected as a separate item.
CP(10) Provision for taxes and other provisions (RUB 325 million as of January 1, 2014 and RUB 1,285 million as of December 31, 2014) are presented within Provisions in the consolidated statement of financial position. Under U.S. GAAP, they were reflected within Accrued expenses and other current liabilities.
CP(11) Income tax payable (RUB 594 million as of January 1, 2014 and RUB 1,272 million as of December 31, 2014) is included in a separate item in the consolidated statement of financial position. Under U.S. GAAP, Income tax payable was reflected within Taxes and social charges payable. Long-term income tax payable in the amount of RUB 3,447 million as of December 31, 2014 is included in a separate item in the consolidated statement of financial position. Under U.S. GAAP, it was reflected within Other non-current liabilities.
CP(12) We adopted net presentation of the input and output VAT on advances against advances issued and received for the purpose of harmonization with the RAS. Under U.S. GAAP, we presented advances and related VAT on advances in gross amounts. The effect of the changes was as follows:
CP(13) Other operating income is presented as a separate item (RUB 851 million for the year ended December 31, 2014) in the consolidated statement of profit (loss) and other comprehensive income (loss). Under U.S. GAAP, it was reflected within Administrative and other operating expenses, net.
CP(14) We presented Other non-current financial assets in a separate line in the statement of financial position. Under U.S. GAAP financial statements, these assets were included in Other non-current assets in the amount of RUB 201 million and RUB 59 million as of December 31, 2014 and January 1, 2014, correspondingly. Investments in associates are presented within Other non-current financial assets. Under U.S. GAAP, they were reflected within Investments in associates (RUB 72 million as of December 31, 2014).
CP(15) We present provisions for legal claims (RUB 367 million as of January 1, 2014 and RUB 36 million as of December 31, 2014) as part of Provisions. Under U.S. GAAP, they were reflected within Other payables.
CP(16) Other income and Other expenses are presented as separate lines (RUB 684 million and RUB 1,486 million for the year ended December 31, 2014, respectively) in the consolidated statement of profit (loss) and other comprehensive income (loss). Under U.S. GAAP, it was reflected together.
Additionally, certain reclassifications have been made to the December 31, 2014 consolidated statement of financial position to conform to the current year presentation. Such reclassifications affect the presentation of certain items in the consolidated statement of financial position, and have no impact on net income or equity of our group.
Adjustments, reclassifications and remeasurement made in order to comply with IFRS
Property, plant and equipment and mineral licenses—Our property, plant and equipment and mineral licenses are recorded at historical cost of acquisition. To arrive at IFRS historical cost we used the historical cost of property, plant and equipment and mineral licenses in accordance with U.S. GAAP as we believe that it reasonably approximates historical values in accordance with IFRS, and adjusted it through retrospective application of the requirements of IAS 16 Property, Plant and Equipment, IAS 36 Impairment of Assets and IFRIC 1 Changes in Existing Decommissioning, Restoration and Similar Liabilities as described in notes C, E, F below.
A — Debt issuance costs
In accordance with IFRS, fees paid on origination of loan facilities are recognized as transaction costs which are deducted from outstanding debt and are amortized using the effective interest rate method. Under U.S. GAAP, debt issuance costs were capitalized as a separate asset and included in Other current or non-current assets and then amortized using the effective interest rate method. The amounts reclassified from other current and non-current assets to remeasure debt liabilities in order to comply with IFRS requirements comprised RUB 2,766 million (current portion of RUB 2,743 million and non-current portion of RUB 23 million) and RUB 4,409 million (current portion of RUB 1,730 million and non-current portion of RUB 2,679 million) as of December 31, 2014 and January 1, 2014, respectively. The differences in effective interest rate method calculations under IFRS and U.S. GAAP resulted in a RUB 1,051 million decrease in the balance ofInterest-bearing loans and borrowings and corresponding decrease in Foreign exchange gain (loss), net in the consolidated statement of profit (loss) and other comprehensive income (loss).
B — Exchange differences
Under U.S. GAAP, we recognized exchange differences on foreign operations in a separate component of equity. Exchange differences for all foreign operations are deemed to be zero as at the date of transition in order to comply with IFRS requirements. A reclassification in equity from Accumulated other comprehensive income (loss) to Accumulated losses of RUB 13,568 million was made as of January 1, 2014.
C — Rehabilitation provision expenses
According to U.S. GAAP, rehabilitation provision (asset retirement obligations) was measured based on the estimated cost of rehabilitation, discounted to its net present value upon recognition. Adjustments to discount rate were not reflected in the provisions under U.S. GAAP unless there was an upward revision in the future cost estimates. We have taken the exemption and applied IFRIC 1 Changes in the Existing Decommissioning, Restoration and Similar Liabilities; correspondingly, the rehabilitation provision as of January 1, 2014 was revalued using current discount rate as of that date. In the subsequent periods, the rehabilitation provision was remeasured using the current discount rate as of the end of each reporting period. This resulted in the following differences between rehabilitation provision recorded in the consolidated financial statements under IFRS and amounts reported under U.S. GAAP:
D — Actuarial gains and losses
At the date of transition to IFRS, we recognized actuarial gain/loss accumulated in prior period in retained earnings. Under IFRS, all prior service costs (positive or negative) are recognized in profit or loss when the employee benefit plan is amended and are not allowed to be spread over any future service period, which may create volatility in profit or loss whereas prior service cost is recognized in other comprehensive income/(loss) under U.S. GAAP at the date the plan amendment is adopted and then amortized into income over the participants’ remaining years of service, service to full eligibility date, or life expectancy, depending on the facts and circumstances. Finally, U.S. GAAP requires a pension contribution tax to be recognized as a component of net benefit cost in the period in which the contribution is made. Under IFRS, taxes related to benefit plans are included in the calculation of the benefit obligation. All aforementioned differences resulted in the following adjustments:
E — Impairment of non-current assets and goodwill
Under U.S. GAAP, goodwill is tested for impairment by using a two-step approach. Under the first step, the fair value of a “reporting unit” is compared to its carrying value. A reporting unit is the level, at which goodwill impairment is measured and it is defined as an operating segment or one level below it if certain conditions are met. If the fair value of the reporting unit is less than its carrying value, goodwill is impaired. Under step two, the amount of goodwill impairment is measured by the amount that the reporting unit’s goodwill carrying value exceeds the “implied” fair value of goodwill. The implied fair value of goodwill can only be determined by deducting the fair value of all tangible and intangible net assets (including unrecognized intangible assets) of the reporting unit from the fair value of the reporting unit (as determined in the first step). In this step, the fair value of the reporting unit is allocated to all of the reporting unit’s assets and liabilities (a hypothetical purchase price allocation). If goodwill and another asset (or asset group) of a reporting unit are tested for impairment at the same time, the other asset (or asset group) shall be tested for impairment before goodwill. If the asset group was impaired, the impairment loss would be recognized prior to goodwill being tested for impairment.
Under IFRS, impairment exists when the carrying value of an asset or CGU exceeds its recoverable amount, which is the higher of its fair value less costs of disposal and its value in use. The fair value less costs of disposal calculation is based on available data from binding sales transactions, conducted at arm’s length for similar assets or observable market prices less incremental costs for disposing of the asset. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessment of the time value of money and the risks specific to the assets.
We recognized differences related to impairment of non-current assets other than goodwill — property, plant and equipment and mineral licenses.
Under U.S. GAAP requirements, in the first step of impairment testing, the carrying value of non-current assets is compared to the undiscounted cash flows of reporting unit, and only if the carrying amount exceeds the undiscounted cash flows, the second step is performed where the carrying amount is compared to the discounted cash flows. Under IFRS requirements impairment is determined by comparison of the carrying amount to the recoverable amount, which is determined through the use of discounted cash flows. This difference in requirements resulted in the difference in impairment testing of non-current assets of two CGUs — Bluestone companies and Ekos-plus as of January 1, 2014. According to the first step of impairment testing under U.S. GAAP no excess of the carrying value over the undiscounted cash flows was identified, therefore the second step of testing was not performed, and no impairment of non-current assets was recognized. As a result of the impairment test in accordance with IAS 36 Impairment of Assets, excess of the carrying value over the recoverable amount was identified for Bluestone companies in the amount of RUB 40,491 million including impairment of property, plant and equipment of RUB 4,185 million and mineral licenses of RUB 54,862 million, and the respective effect on deferred taxes of RUB 18,556 million; and for Ekos-plus in the amount of RUB 51 million related to property, plant and equipment as of January 1, 2014.
As of December 31, 2014, Bluestone companies were recognized as disposal group classified as held for sale in the consolidated financial statements under IFRS as well as under U.S. GAAP. In the both sets of consolidated financial statements net assets of Bluestone companies were written down to fair value less cost to sell and as of December 31, 2014 there is no difference in the carrying value of Bluestone companies’non-current assets between IFRS and U.S. GAAP. A difference arose in the amount of impairment loss recognized by us in respect of Bluestone companies in the year ended December 31, 2014, as, under IFRS, impairment was partially recognized at the date of transition, whereas in the U.S. GAAP financial statements, the total amount of impairment loss was recognized by us in the year ended as of December 31, 2014. The difference in Profit (loss) after tax from discontinued operations, net for the year ended December 31, 2014 amounted to RUB 69,424 million. This difference also affected Other comprehensive income (loss) as impairment was recognized in different periods under IFRS and under U.S. GAAP — effect on currency translation adjustment comprised RUB 28,933 million in the year ended December 31, 2014.
Other difference between IFRS and U.S. GAAP requirements relates to the reversal of previously recognized impairment loss. If there is a change in estimates used to determine the recoverable amount, previously recognized impairment loss of property, plant and equipment can be reversed under IFRS whereas no such reversal is allowed according to U.S. GAAP requirements. This difference has affected the value ofnon-current assets of Donetsk Electrometallurgical Plant. According to U.S. GAAP, we recognized impairment loss in the consolidated financial statements as of June 30, 2013. The recoverable value was determined on binding offer from a third party. As of December 31, 2013, the recoverable value of Donetsk Electrometallurgical Plant has increased. According to U.S. GAAP previously identified impairment loss was not reversed. As of January 1, 2014, according to IFRS requirements we partially reversed impairment loss previously recognized in the amount of RUB 477 million. Due to the difference in the carrying value of Donetsk Electrometallurgical Plant’snon-current assets as of January 1, 2014, the difference in impairment loss recognized during the period ended December 31, 2014 arose in the consolidated financial statement under IFRS as compared to those previously prepared in accordance with U.S. GAAP in the amount of RUB 258 million.
F — Negative goodwill
In accordance with U.S. GAAP (ASC 805 Business combination), we recognized negative goodwill which arose on our business combinations carried out before January 1, 2009 as deferred credit for an excess of net assets acquired over cost and allocated it to the acquired non-current assets, except for the deferred taxes. In order to comply with IFRS, we derecognized the carrying amount of that deferred credit at the transition date.
G — Discontinued operations
In accordance with U.S. GAAP, we recognized and presented Bluestone companies as disposal group held for sale as of January 1, 2014 in the comparative information to our consolidated financial statements for the year ended December 31, 2014 when criteria for recognition of Bluestone companies as disposal group held for sale were met. Under IFRS, we also recognized Bluestone companies as asset held for sale as of December 31, 2014. In accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations, reclassification of comparative information in the statement of financial position for prior periods to reflect the classification in the statement of financial position for the latest period presented is not required, therefore we did not amend the presentation of our assets and liabilities in the comparative statement of financial position as of January 1, 2014. The effect of changes related to discontinued operations presentation made to comply with IFRS requirements, is presented in a separate column in the table below.“Item 18. Financial Statements.”
We recognized several subsidiaries as discontinued operations in our previously issued U.S. GAAP consolidated financial statements as of December 31, 2013: Toplofikatsia Rousse, Invicta Merchant Bar, Lomprom Rostov, Tikhvin Ferroalloy Plant, Voskhod-Oriel, Voskhod-Chrome and Voskhod-Trading. These subsidiaries do not meet IFRS 5 Non-current Assets Held for Sale and Discontinued Operations requirements to be recognized as discontinued operations as they do not represent a separate major line of business or geographical area of operations. We disposed of all these subsidiaries before December 31, 2013, and residual income and expenses related to these operations were presented as discontinued operations in the U.S. GAAP consolidated financial statements for the year ended December 31, 2014. In these financial statements prepared under IFRS we present these income and expenses as part of continuing operations. This resulted in the following adjustments to the U.S. GAAP amounts: increase in Revenue of RUB 126 million, increase in Cost of goods sold of RUB 140 million, increase in Allowance for doubtful accounts of RUB 567 million, and increase in Administrative and other operating expenses of RUB 204 million, and respective decrease in Loss from discontinued operations of RUB 785 million in the consolidated statements of profit (loss) and comprehensive income (loss) under IFRS as compared to the consolidated statement of operations under U.S. GAAP for the period ended December 31, 2014.
H — Inventory provision
We recalculated net realizable value provision in order to comply with IAS 2 Inventories requirements. This resulted in the increase in the Inventories balance in the amount of RUB 166 million as of January 1, 2014 and RUB 193 million as of December 31, 2014, and decrease in Cost of goods sold of RUB 31 million for the year ended December 31, 2014.
I — Borrowing costs
We recalculated borrowing costs capitalized in accordance with IFRS requirements. The effect of recalculations resulted in the increase in Property, plant and equipment in the amount of RUB 1,194 million as of December 31, 2014 in the consolidated statement of the financial position under IFRS as compared to U.S. GAAP and decrease in Finance costs of RUB 337 million and Foreign exchange gain/loss, net of RUB 857 million in the consolidated statements of profit (loss) and comprehensive income (loss) under IFRS compared to the consolidated statement of operations under U.S. GAAP.
J — Classification of liabilities
As of January 1, 2014, we were not in compliance with certain covenants under various credit facilities entered into with several lenders, including certain financial ratios, such as an EBITDA to Net Interest Expense and a Net Debt to EBITDA ratios. In April-May 2014, the lenders provided their consent to waive all breaches. According to U.S. GAAP requirements, when breach of covenants exists at the end of reporting period and lender agrees after the reporting period and before authorization of the financial statements for the issue not to demand the repayment, long-term credit facilities can be classified as non-current. In accordance with IFRS, such credit facilities shall be presented as current at the reporting date, unless waivers were received from lenders before the reporting date. As we received consent from the lenders after the reporting date, all corresponding liabilities are presented by us as current as of January 1, 2014. These liabilities included loans and borrowings for which covenants were breached, and also finance leases and other payables under contracts with cross-default clauses linked to those loans. The effect of this difference was as follows as of January 1, 2014:
K — Deferred taxes
Deferred tax assets and liabilities are treated as non-current under IFRS. Netting is performed for deferred tax assets and liabilities relating to income taxes levied by the same taxation authority on the same taxable entity where we have a legally enforceable right to set off current tax assets against current tax liabilities. Under U.S. GAAP, the deferred tax balances were calculated by applying the currently enacted statutory tax rate in each jurisdiction applicable to the period in which the temporary differences between the carrying amounts and tax base (both in respective local currencies) of assets and liabilities are expected to reverse. Deferred tax assets in the amount of RUB 5,132 million as of December 31, 2014 (January 1, 2014: RUB 1,144 million) and deferred tax liabilities in the amount of RUB 444 million as of December 31, 2014 (January 1, 2014: RUB 1,236 million) were recognized as current under U.S. GAAP. Under IFRS, deferred taxes have been recalculated based on the IFRS net book values of assets and liabilities and are presented as non-current. Deferred tax assets and deferred tax liabilities were offset in the amounts of RUB 7,799 million as of December 31, 2014 (RUB 793 million as of January 1, 2014).
The main differences in deferred tax amounts calculated under IFRS and deferred tax amounts calculated under U.S. GAAP were due to the following:
The aggregate decrease in deferred tax benefit of RUB 361 million for the year ended December 31, 2014 is the result of all adjustments described in the notes A-L and N.
L — Retained earnings and Non-controlling interest
Adjustments and remeasurements made by us as of January 1, 2014 in order to comply with IFRS requirements resulted in the increase in Accumulated deficit by RUB 52,781 million. This also had effect on net assets of subsidiaries and respective non-controlling interests.
M — The consolidated statement of cash flows
M1— Under IFRS, Finance income is reflected as a separate item within Adjustments to reconcile net loss from continuing operations to net cash provided by operating activities.
M2— Under IFRS, Finance costs are reflected as a separate item within Adjustments to reconcile net loss from continuing operations to net cash provided by operating activities.
M3— Under IFRS, Interest received is reflected as a separate item within Changes in working capital.
M4— Under IFRS, Interest paid is reflected as a separate item within Changes in working capital.
M5— Under IFRS, Income taxes paid are reflected as a separate item within Changes in working capital.
M6— Under IFRS, Interest paid, capitalized is presented as a separate item. Under U.S. GAAP, it was reflected within Purchases of property, plant and equipment.
M7— Under IFRS, overdrafts are accounted for as cash equivalents. Under U.S. GAAP, cash flows from overdrafts were included in cash flows from financing activity on a net basis.
N — Former related parties
Under U.S. GAAP (ASC 810 Consolidation), we determined certain Russian and foreign metallurgical plants and trading companies, which were formerly part of the Estar Group or controlled by the Estar Group shareholders (the “former Estar metallurgical plants”) as Variable Interest Entities (VIEs). We are not the primary beneficiary of the former Estar metallurgical plants, and the former Estar metallurgical plants were defined as related parties in previously issued U.S. GAAP consolidated financial statements as of December 31, 2014 and January 1, 2014. While under IFRS 12 Disclosure of Interests in Other Entities, an interest in an unconsolidated structured entity as defined by held by a reporting entity does not make the structured entity a related party to the reporting entity unless it would otherwise meet the definition of a related party (e.g. because the structured entity is an associate of the reporting entity). Accordingly, in the accompanying consolidated financial statements, the former Estar metallurgical plants are recognized as third parties. The main effects of this difference were as follows:
Other adjustments made by us to the U.S. GAAP amounts in order to meet IFRS requirements, which are not described above were insignificant.
Reconciliation of equity as of January 1, 2014 (date of transition to IFRS):
Notes | U.S. GAAP (In thousands of U.S. dollars) | U.S. GAAP (In millions of Russian rubles)(1) | U.S. GAAP component classified as discontinued | Changes in the presentation | Adjustments and reclassifications / remeasurements | IFRS | ||||||||||||||||||||
Assets | ||||||||||||||||||||||||||
Current Assets | ||||||||||||||||||||||||||
Cash and cash equivalents | 272,936 | 8,927 | 52 | — | — | 8,979 | ||||||||||||||||||||
Trade and other receivables | N, CP(1) | 587,999 | 19,242 | 177 | 1,920 | 1,138 | 22,477 | |||||||||||||||||||
Due from related parties, net of allowance | N, CP(12) | 56,792 | 1,859 | — | (71 | ) | (1,592 | ) | 196 | |||||||||||||||||
U.S. GAAP — Deferred income taxes | K | 25,092 | 821 | 323 | — | (1,144 | ) | — | ||||||||||||||||||
Inventories | F, H | 1,407,868 | 46,044 | 177 | — | 408 | 46,629 | |||||||||||||||||||
Income tax receivables | CP(2) | — | — | — | 2,936 | — | 2,936 | |||||||||||||||||||
Other current financial assets | CP(3) | — | — | — | 360 | — | 360 | |||||||||||||||||||
Other current assets | A, N, CP(1)-(3), CP(12) | 439,624 | 14,327 | 94 | (5,839 | ) | (1,357 | ) | 7,225 | |||||||||||||||||
U.S. GAAP — Current assets of discontinued operations | G | 25,159 | 823 | (823 | ) | — | — | — | ||||||||||||||||||
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Total current assets | 2,815,470 | 92,043 | — | (694 | ) | (2,547 | ) | 88,802 | ||||||||||||||||||
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Non-current assets | ||||||||||||||||||||||||||
Property, plant and equipment | C, E, F | 6,726,116 | 220,107 | 4,772 | — | 1,374 | 226,253 | |||||||||||||||||||
Mineral licenses | E, F | 1,293,470 | 42,334 | 64,724 | — | (55,331 | ) | 51,727 | ||||||||||||||||||
Non-current financial assets | CP(14) | 14,787 | 484 | — | 59 | — | 543 | |||||||||||||||||||
Investment in associates | 7,604 | 249 | — | — | 2 | 251 | ||||||||||||||||||||
Deferred tax assets | K | 5,066 | 166 | — | — | 351 | 517 | |||||||||||||||||||
Goodwill | 687,763 | 22,510 | — | — | 10 | 22,520 | ||||||||||||||||||||
Other non-current assets | A, CP(14) | 127,861 | 4,184 | 1,080 | (59 | ) | (2,724 | ) | 2,481 | |||||||||||||||||
U.S. GAAP — Non-current assets of discontinued operations | G | 2,156,373 | 70,576 | (70,576 | ) | — | — | — | ||||||||||||||||||
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Total non-current assets | 11,019,040 | 360,610 | — | — | (56,318 | ) | 304,292 | |||||||||||||||||||
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Total assets | 13,834,510 | 452,653 | — | (694 | ) | (58,865 | ) | 393,094 | ||||||||||||||||||
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Notes Equity and liabilities Current liabilities Interest-bearing loans and borrowings Trade and other payables J, N, CP(7), CP(8), CP(9), CP(15) Advances received Due to related parties Provisions C, CP(6), CP(10), CP(15) Pension obligations Finance lease liabilities Income tax payable Tax payable other than income tax CP(6), CP(11), CP(12) U.S. GAAP – Dividends payable U.S. GAAP – Deferred income taxes U.S. GAAP – Accrued expenses and other current liabilities CP(4), CP(7), CP(9), CP(10) U.S. GAAP – Current liabilities of discontinued operations Other current liabilities Total current liabilities U.S. GAAP
(In thousands
of U.S.
dollars) U.S. GAAP
(In millions of
Russian
rubles)(1) U.S. GAAP
component
classified
as discontinued Changes in the
presentation Adjustments and
reclassifications /
remeasurements IFRS A, J, CP(4) 1,478,154 48,297 221 2,051 216,509 267,078 929,375 30,393 956 8,757 11,867 51,973 CP(12) 140,919 4,566 — (302 ) 25 4,289 N 106,943 3,500 — — (2,476 ) 1,024 2,001 65 213 1,213 40 1,531 D 18,578 607 59 — 211 877 J 122,754 4,018 2 — 6,789 10,809 CP(11) 78,332 2,560 — 594 19 3,173 264,861 8,672 440 (1,672 ) — 7,440 CP(8) 3,293 108 — (108 ) — — K 37,775 1,236 — — (1,236 ) — 343,457 11,241 — (11,227 ) (14 ) — G 57,781 1,891 (1,891 ) — — — — — — — 29 29 3,584,223 117,154 — (694 ) 231,764 348,224
Notes Non-current liabilities Interest-bearing loans and borrowings Provisions Pension obligations Finance lease liabilities Deferred tax liabilities Other non-current liabilities U.S. GAAP – Long-term liabilities of discontinued operations Due to related parties Total non-current liabilities Total liabilities Equity Common shares Preferred shares Additional paid-in capital Accumulated other comprehensive income (loss) Accumulated deficit Equity attributable to equity shareholders of Mechel PAO Non-controlling interests Total equity Total equity and liabilities U.S. GAAP
(In thousands
of U.S.
dollars) U.S. GAAP
(In millions of
Russian
rubles)(1) U.S. GAAP
component
classified
as discontinued Changes in the
presentation Adjustments and
reclassifications /
remeasurements IFRS A, J 7,513,277 245,904 227 — (220,880 ) 25,251 C 50,567 1,655 215 — 2,433 4,303 D 104,525 3,412 1,552 — (61 ) 4,903 J 296,875 9,717 — — (6,744 ) 2,973 K 506,241 16,569 18,871 — (17,965 ) 17,475 J 293,370 9,601 1,181 — (7,330 ) 3,452 G 673,591 22,046 (22,046 ) — — — 21 1 — — (1 ) — 9,438,467 308,905 — — (250,547 ) 58,358 13,022,690 426,059 — (694 ) (18,783 ) 406,582 133,507 4,163 — — — 4,163 25,314 833 — — — 833 834,118 25,591 — — — 25,591 B, D (47,601 ) (12,844 ) — — 12,833 (11 ) B, D, L (427,863 ) (783 ) — — (52,781 ) (53,564 ) 517,475 16,960 — — (39,948 ) (22,988 ) L 294,345 9,634 — — (134 ) 9,500 811,820 26,594 — — (40,082 ) (13,488 ) 13,834,510 452,653 — (694 ) (58,865 ) 393,094
Reconciliation of equity as of December 31, 2014:
| Notes | U.S. GAAP (In thousands of U.S. dollars) | U.S. GAAP (In millions of Russian rubles)(1) | Changes in the presentation | Adjustments and reclassifications / remeasurements | IFRS | |||||||||||||||||
Assets | ||||||||||||||||||||||
Current Assets | ||||||||||||||||||||||
Cash and cash equivalents | 70,800 | 3,983 | — | — | 3,983 | |||||||||||||||||
Trade and other receivables | N, CP(1) | 330,371 | 18,586 | 932 | 291 | 19,809 | ||||||||||||||||
Due from related parties, net of allowance | N | 9,303 | 523 | — | (385 | ) | 138 | |||||||||||||||
U.S. GAAP — Deferred income taxes | K | 91,223 | 5,132 | — | (5,132 | ) | — | |||||||||||||||
Inventories | F, H | 640,671 | 36,043 | — | 294 | 36,337 | ||||||||||||||||
Income tax receivables | CP(2) | — | — | 578 | — | 578 | ||||||||||||||||
Other current financial assets | CP(3) | — | — | 186 | — | 186 | ||||||||||||||||
Other current assets | A, CP(1)-(3), CP(12) | 238,314 | 13,407 | (1,918 | ) | (2,739 | ) | 8,750 | ||||||||||||||
U.S. GAAP — Current assets of discontinued operations | C, G | 151,602 | 8,529 | — | (8,529 | ) | — | |||||||||||||||
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|
|
|
|
|
|
|
|
| |||||||||||||
Total current assets | 1,532,284 | 86,203 | (222 | ) | (16,200 | ) | 69,781 | |||||||||||||||
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|
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|
|
|
|
| |||||||||||||
Assets of disposal group classified as held for sale | C, G | — | — | — | 8,696 | 8,696 | ||||||||||||||||
Non-current assets | ||||||||||||||||||||||
Property, plant and equipment | C, F, I | 3,944,427 | 221,266 | — | 3,033 | 224,299 | ||||||||||||||||
Mineral licenses | F | 719,951 | 40,503 | — | (381 | ) | 40,122 | |||||||||||||||
Non-current financial assets | CP(14) | 4,060 | 216 | 273 | — | 489 | ||||||||||||||||
Investments in associates | CP(14) | 6,142 | 346 | (72 | ) | — | 274 | |||||||||||||||
Deferred tax assets | K | 72,966 | 4,105 | — | (2,667 | ) | 1,438 | |||||||||||||||
Goodwill | 403,207 | 22,684 | — | 13 | 22,697 | |||||||||||||||||
Other non-current assets | A, CP(14) | 30,453 | 1,713 | (201 | ) | (50 | ) | 1,462 | ||||||||||||||
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|
|
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|
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| |||||||||||||
Total non-current assets | 5,181,206 | 290,833 | — | (52 | ) | 290,781 | ||||||||||||||||
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|
|
|
|
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|
|
|
| |||||||||||||
Total assets | 6,713,490 | 377,036 | (222 | ) | (7,556 | ) | 369,258 | |||||||||||||||
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| |||||||||||||
Equity and liabilities Current liabilities Interest-bearing loans and borrowings Trade and other payables CP(7), CP(8), CP(9), CP(15) Advances received Due to related parties Provisions CP(6), Pension obligations Finance lease liabilities Income tax payable Tax payable other than income tax CP(11), CP(12) U.S. GAAP — Dividends payable U.S. GAAP — Deferred income taxes U.S. GAAP — Accrued expenses and other current liabilities CP(7), CP(9), CP(10) U.S. GAAP — Current liabilities of discontinued operations Other current liabilities Total current liabilities Liabilities of disposal group classified as held for sale Notes U.S. GAAP
(In thousands
of U.S. dollars) U.S. GAAP
(In millions of
Russian
rubles)(1) Changes in the
presentation Adjustments and
reclassifications /
remeasurements IFRS A,
CP(4) 6,678,549 375,725 14,615 (3,821 ) 386,518 N, 537,004 30,211 30,476 806 61,493 CP(12) 81,599 4,591 (292 ) (15 ) 4,284 N 15,494 872 — (828 ) 44 C,
CP(10) 3,478 196 1,928 6 2,130 D 18,656 1,050 — 22 1,072 270,980 15,245 — (32 ) 15,213 CP(11) 31,444 1,769 1,272 (8 ) 3,033 CP(6), 215,251 12,110 (2,489 ) 26 9,647 CP(8) 1,843 104 (104 ) — — K 7,893 444 — (444 ) — CP(4), 811,345 45,645 (45,628 ) (17 ) — C, G 150,033 8,441 — (8,441 ) — — — — 36 36 8,823,569 496,403 (222 ) (12,709 ) 483,472 C, G — — — 8,607 8,607
Non-current liabilities Interest-bearing loans and borrowings Provisions Pension obligations Finance lease liabilities Deferred tax liabilities Other non-current liabilities Due to related parties Income tax payable Total non-current liabilities Total liabilities Equity Common shares Preferred shares Additional paid-in capital Accumulated other comprehensive income (loss) Accumulated deficit Equity attributable to equity shareholders of Mechel PAO Non-controlling interests Total equity Total equity and liabilities Notes U.S. GAAP
(In thousands
of U.S. dollars) U.S. GAAP
(In millions of
Russian
rubles)(1) Changes in the
presentation Adjustments and
reclassifications /
remeasurements IFRS A 166,532 9,369 — (23 ) 9,346 C 43,712 2,459 — 539 2,998 D 60,222 3,388 — 57 3,445 2,813 158 — (12 ) 146 K 179,987 10,126 — (7,073 ) 3,053 CP(11) 81,288 4,557 (3,447 ) 45 1,155 G 38 2 — (2 ) — CP(11) — — 3,447 — 3,447 534,592 30,059 — (6,467 ) 23,592 9,358,161 526,462 (222 ) (10,569 ) 515,671 133,507 4,163 — — 4,163 25,314 833 — — 833 834,136 25,591 — 1 25,592 B, D, E 972,381 17,162 — (16,144 ) 1,018 B, D,
E, L (4,763,413 ) (205,805 ) — 19,533 (186,272 ) (2,798,075 ) (158,056 ) — 3,390 (154,666 ) L 153,404 8,630 — (377 ) 8,253 (2,644,671 ) (149,426 ) — 3,013 (146,413 ) 6,713,490 377,036 (222 ) (7,556 ) 369,258
Reconciliation of consolidated statements of profit (loss) and comprehensive income (loss) for the year ended December 31, 2014:
| Notes | U.S. GAAP (In thousands of U.S. dollars) | U.S. GAAP (In millions of Russian rubles)(1) | Changes in the presentation | Adjustments and reclassifications / remeasurements | IFRS | |||||||||||||||||
Continuing operations | ||||||||||||||||||||||
Revenue | G | 6,405,767 | 243,893 | — | 99 | 243,992 | ||||||||||||||||
Cost of goods sold | G, F, H | (4,031,657 | ) | (152,546 | ) | — | (511 | ) | (153,057 | ) | ||||||||||||
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|
|
|
|
|
|
|
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| |||||||||||||
Gross profit | 2,374,110 | 91,347 | — | (412 | ) | 90,935 | ||||||||||||||||
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| |||||||||||||
Selling and distribution expenses | (1,460,641 | ) | (55,599 | ) | — | (62 | ) | (55,661 | ) | |||||||||||||
Loss on write-off of property, plant and equipment | (17,395 | ) | (661 | ) | — | — | (661 | ) | ||||||||||||||
Impairment of goodwill and other non-current assets | E, F | (120,237 | ) | (6,764 | ) | — | (1,232 | ) | (7,996 | ) | ||||||||||||
Allowance for doubtful accounts | G, N | (37,968 | ) | (1,459 | ) | — | (2,212 | ) | (3,671 | ) | ||||||||||||
Taxes other than income taxes | (172,447 | ) | (6,442 | ) | — | (27 | ) | (6,469 | ) | |||||||||||||
Allowance for amounts due from related parties | N | (41,425 | ) | (1,823 | ) | — | 1,697 | (126 | ) | |||||||||||||
Administrative and other operating expenses | C, F, D, CP(13) | (392,606 | ) | (14,946 | ) | (851 | ) | (518 | ) | (16,315 | ) | |||||||||||
Other operating income | CP(13) | — | — | 851 | — | 851 | ||||||||||||||||
U.S. GAAP — Accretion expenses | C | (4,963 | ) | (191 | ) | 191 | — | — | ||||||||||||||
Total selling, distribution and operating expenses, net | (2,247,682 | ) | (87,885 | ) | 191 | (2,354 | ) | (90,048 | ) | |||||||||||||
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| |||||||||||||
Operating profit (loss) | 126,428 | 3,462 | 191 | (2,766 | ) | 887 | ||||||||||||||||
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Finance income | 2,398 | 88 | — | 19 | 107 | |||||||||||||||||
Finance costs | C, J, I | (793,228 | ) | (30,532 | ) | (191 | ) | 2,613 | (28,110 | ) | ||||||||||||
Foreign exchange gain/loss, net | A, I | (2,396,123 | ) | (105,129 | ) | — | 1,953 | (103,176 | ) | |||||||||||||
Share of profit of associates | 276 | 10 | — | (3 | ) | 7 | ||||||||||||||||
Other income | CP(16) | — | — | 684 | — | 684 | ||||||||||||||||
Other expenses | CP(16) | (9,613 | ) | (796 | ) | (684 | ) | (6 | ) | (1,486 | ) | |||||||||||
Total other income and (expense), net | (3,196,290 | ) | (136,359 | ) | (191 | ) | 4,576 | (131,974 | ) | |||||||||||||
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Loss before tax from continuing operations | (3,069,862 | ) | (132,897 | ) | — | 1,810 | (131,087 | ) | ||||||||||||||
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Income tax benefit | K | 183,908 | 9,187 | — | (365 | ) | 8,822 | |||||||||||||||
Loss for the year from continuing operations | (2,885,954 | ) | (123,710 | ) | — | 1,445 | (122,265 | ) | ||||||||||||||
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Discontinued operations Loss after tax for the year from discontinued operations, net Loss for the year Attributable to: Equity holders of the parent Non-controlling interests U.S. GAAP — Less: Dividends on preferred shares U.S. GAAP — Net (loss) income attributable to common shares of Mechel PAO Other comprehensive income (loss) Other comprehensive income to be reclassified to profit or loss in subsequent periods Exchange differences on translation of foreign operations Exchange differences on translation of disposal of subsidiaries Net gain on available for sale financial assets Other comprehensive income (loss) not to be reclassified to profit or loss in subsequent periods Remeasurement losses on defined benefit plans Other comprehensive income for the year, net of tax Total comprehensive loss for the year, net of tax Attributable to: Equity holders of the parent Non-controlling interests Notes U.S. GAAP
(In thousands
of U.S. dollars) U.S. GAAP
(In millions of
Russian rubles)(1) Changes in the
presentation Adjustments and
reclassifications /
remeasurements IFRS G, E (1,473,780 ) (82,231 ) — 70,529 (11,702 ) (4,359,734 ) (205,941 ) — 71,974 (133,967 ) (4,335,426 ) (205,007 ) — 72,303 (132,704 ) L (24,308 ) (934 ) — (329 ) (1,263 ) (124 ) (7 ) — — (7 ) (4,335,550 ) (205,014 ) — 72,303 (132,711 ) 925,222 30,306 — (29,136 ) 1,170 E 925,222 30,306 — (29,136 ) 1,170 923,929 30,304 — (29,136 ) 1,168 — — — — — 1,293 2 — — 2 (21,889 ) (302 ) — 175 (127 ) D (21,889 ) (302 ) — 175 (127 ) 903,333 30,004 — (28,961 ) 1,043 (3,456,401 ) (175,937 ) — 43,013 (132,924 ) (3,432,093 ) (175,003 ) — 43,328 (131,675 ) (24,308 ) (934 ) — (315 ) (1,249 )
Reconciliation of consolidated statement of cash flows for the year ended December 31, 2014:
| Notes | U.S. GAAP (In thousands of U.S. dollars)(1) | U.S. GAAP (In millions of Russian rubles) | Adjustments and reclassifications / remeasurements | IFRS | ||||||||||||||
Cash Flows from Operating Activities | ||||||||||||||||||
Net loss(2) | (4,359,734 | ) | (205,941 | ) | 71,974 | (133,967 | ) | |||||||||||
Profit (loss) from discontinuing operations, net of income tax | 1,473,780 | 82,231 | (70,529 | ) | 11,702 | |||||||||||||
Net loss from continuing operations | (2,885,954 | ) | (123,710 | ) | 1,445 | (122,265 | ) | |||||||||||
Adjustments to reconcile net loss from continuing operations to net cash provided by operating activities: | ||||||||||||||||||
Finance income | M1 | — | — | (107 | ) | (107 | ) | |||||||||||
Finance costs | M2 | — | — | 28,110 | 28,110 | |||||||||||||
Other adjustments | 2,739,002 | 118,978 | (1,445 | ) | 117,533 | |||||||||||||
Changes in working capital items: | ||||||||||||||||||
Interest received | M3 | — | — | 22 | 22 | |||||||||||||
Interest paid | M4 | — | — | (14,963 | ) | (14,963 | ) | |||||||||||
Income taxes paid | M5 | — | — | (2,509 | ) | (2,509 | ) | |||||||||||
Other operating cash flows | 891,579 | 32,804 | (10,553 | ) | 22,251 | |||||||||||||
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Net cash provided by operating activities | 744,627 | 28,072 | — | 28,072 | ||||||||||||||
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Cash Flows from Investing Activities | ||||||||||||||||||
Purchases of property, plant and equipment | M6 | (443,668 | ) | (16,506 | ) | 5,141 | (11,365 | ) | ||||||||||
Interest paid, capitalized | M6 | — | — | (5,141 | ) | (5,141 | ) | |||||||||||
Other investing cash flows | (28,628 | ) | (1,233 | ) | — | (1,233 | ) | |||||||||||
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Net cash used in investing activities | (472,296 | ) | (17,739 | ) | — | (17,739 | ) | |||||||||||
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Cash Flows from Financing Activities | ||||||||||||||||||
Proceeds from borrowings | 1,815,966 | 64,469 | — | 64,469 | ||||||||||||||
Repayment of borrowings | M7 | (2,185,343 | ) | (78,030 | ) | 269 | (77,761 | ) | ||||||||||
Other financing cash flows | (69,112 | ) | (2,728 | ) | — | (2,728 | ) | |||||||||||
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Net cash used in financing activities | (438,489 | ) | (16,289 | ) | 269 | (16,020 | ) | |||||||||||
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Effect of exchange rate changes on cash and cash equivalents | (35,965 | ) | 1,051 | (150 | ) | 901 | ||||||||||||
Net decrease in cash and cash equivalents | (202,123 | ) | (4,905 | ) | 119 | (4,786 | ) | |||||||||||
Cash and cash equivalents at beginning of period | M7 | 274,539 | 8,979 | (2,849 | ) | 6,130 | ||||||||||||
Cash and cash equivalents at end of period | M7 | 72,416 | 4,074 | (2,730 | ) | 1,344 | ||||||||||||
Trend Information
Demand
Mining. The demand for coking coal is dependent on the steel industry, which is directly tied to global economic cycles. In 2014, China’s coking coal imports fell by 13 million tonnes due to growing usage2016, growth of
domestic material and a slowdown in demand, according to Platts. As a result, global metallurgical coal imports stagnated with a slight decrease of 0.2% in 2014, according to CRU. In 2015,China was partially offset by lower imports in Europe and South America, in total global metallurgical coal imports fellincreased by 5.9% as China continued its policy0.9% compared to decreasethe previous year, according to CRU. In 2017, total global metallurgical coal imports increased by 3.6% compared to support domestic producers. As a result of such policy,2016, which was driven by China and India, according to CRU. In 2018, despite lower metallurgical coal imports ofin China and Europe, increased demand for seaborne metallurgical coal in China fellIndia led to higher global metallurgical coal imports by 20 million tonnes in 2015,0.8% compared to 2017, according to CRU.
The steam coal market is driven bynon-steel related factors, such as growth in electricity consumption, balance between supply and demand and seasonality. In 2015,2016, total global seaborne steam coal imports droppedchanged insignificantly and increased by 9.2%0.8%, according to CRU. In 2017, total global seaborne steam coal imports rose by 3.6% due to increased imports in China, South Korea and India, according to CRU. In 2018, total global seaborne steam coal imports increased by 2.9% compared to 2014 driven by drastic fall2017 due to consumption-driven growth in China import volumes,and India, according to CRU.CRU estimates.
AccordingIn 2016, global iron ore trade increased by 6.0% due to strong Chinese demand for imported iron ore which hit anall-time high in 2016, according to the Department of Industry, Innovation and Science of Australian Government in 2014,and CRU. In 2017, global iron ore trade increased by 11%1.2% due to world pig iron production growth and higher proportionimports of imported iron ore in Chinese consumption. Global iron ore trade is estimated to have increasedChina in 2017, which was supported by 1.8% in 2015, the lowest rate of growth since 2001,robust steel production, according to the Department of Industry, Innovation and Science of Australian Government. The main reasonIn 2018, global iron ore trade is estimated to have increased by 2.3% due to higher imports fromex-China countries, according to the Department of such growth slowdown was decreased steel production in China.Industry, Innovation and Science of Australian Government.
Steel. Russia is our largest market for steel products. In 2014,2016, Russian rolled steel consumption reached a level of 45.5amounted to 40.8 million tonnes, according to Metal Expert. In 2015, Russian rolled steel consumption declined2017, it increased by 8.7%6.9% and amounted to 41.543.6 million tonnes, according to Metal Expert. In 2018, rolled steel consumption in Russia increased by 0.9% and amounted to 44.0 million tonnes, according to Metal Expert.
In 2014,2016, exports of steel products increased by 5.2%4.0% and reached 24.9amounted to 28.5 million tonnes, according to Metal Expert. The increase was due to the growth in manufacturing of steel products and decrease in domestic supplies. In 2017, exports of steel products decreased by 2.3% and amounted to 27.8 million tonnes as a result of the ruble devaluation,a decline in manufacturing of steel products, according to Metal Expert. In 2015,2018, the volume of steel products exports from Russia grew by 8.4%2.4% and amounted to 27.028.5 million tonnes, due to the growth in the exchange rate, according to Metal Expert. The increase related primarily to semi-finished products and was due to favorable conditions on the international market in the first half of the year.
In 2014,2016, imports of steel declined by 20.5%6.3% and amounted to 5.53.8 million tonnes, according to Metal Expert. In 2015,2017, imports of steel decreasedincreased significantly by 27.3%49.6% and amounted to 4.05.6 million tonnes mostly as a result of the growth in supplies of flat products from Kazakhstan, according to Metal Expert. In 2018, imports of steel slightly increased by 0.5% and amounted to 5.6 million tonnes, according to Metal Expert. The decline was due to the ruble devaluation and growth in supplies of domestic producers.
Power. In 2015,2018, the electricity output of our generating facilities increaseddecreased by 12%5% as compared to 2014.2017. Heat energy generated for sale decreasedincreased by 7%3%.
The reduction Power demand in marketRussia depends on its consumption by the industrial sector. In Russia, the steel and mining industries are major consumers of power and the level of production of steel and mining companies impact demand for electricity energy has resulted in the need to adjust undertakings and completion schedules with respect to power industry companies’ investment programs. Currently the Russian government is analyzing the progress made on these programs, particularly in light of the current economic downturn, in an effort to clarify the timeline for installation of the necessary production capacities. It is expected that these decisions will result in a new long-term agreement with the Russian government regarding the regulatory scheme of the regulated capacity market which will determine the profitability of this market.power.
Sales
Mining. In 2016,2019, we expect sales volumes of our mining segment to remain at the level of 2015 with an increase in the share of exportsas compared to 2018 due to the increasingincrease of production volumes at all our coal assets, and the main increase is expected in the production volumes of production at the Elga coal deposit.Southern Kuzbass Coal Company and Yakutugol. We believe that our policy of concluding long-term contracts for coal sales will strengthen our relationships with our customers and will give us long-term presence in both the domestic and export markets.
Steel. Our steel segment sales volumes are expected to increase in 20162019 due to the increasedincrease in both steel production atand the utilization rate of rolling mills, including the universal rolling mill at our subsidiary Chelyabinsk Metallurgical Plant, resulting in an increasethe growth of long products, flat products, structural shapes, rebar and rails sales. In addition, we believe that our strategy aimed at increasing the efficiency of the existing distribution network in conjunction with direct sales from our plants to the largest customers will allow us to strengthen our leading position in the market, to provide us with greater stability in steel sales and to improve our cash flow in the current economic slowdown.
Power. In 2016,2019, we expect sales volumes of our power segment to remain at 2015 levels.increase as compared to 2018. We do not expect that consumption by small andmid-sized businesses and households, which are also customers of power and
heat-supply companies, will change significantly. We plan to expand our distributionsales channels to build a new customer base among small andmid-sized businesses, as well as public utilities. We also plan to optimize our production capacity through further integration of our intra-group assets. We hope that further integration of our power assets, as well as diversification of our customer portfolio will allow us to avoid a fall in power segment sales caused by a decrease in demand from large industrial companies that are shifting their business from power supply companies.
Inventory
Overall, our inventory decreasedincreased by RUB 1,1485,433 million, or 3.1%14.3%, to RUB 35,18943,423 million as of December 31, 20152018 from RUB 36,33737,990 million as of December 31, 2014,2017, due to the decreaseincrease in finished goods production costs, which was due to the decreaseincrease in raw materials costs as well as the decrease in production volumes in the steel segment as a result of the decline in steel products demand.costs.
Costs
Mining. Within our mining segment, we expect our iron ore cash costs per tonne to increase in 20162019 as a result of increasing prices of power, explosives, automotive tires and tubes for open pit equipment and land use
fees, while coal cash costs per tonne should remain relatively stable in 20162019 as a result of increasing operational efficiency and decreasing semi-fixed costs.
Steel. Excluding the effects of imposition of international sanctions against Russia and exchange rate fluctuations, our steel cash costs per tonne should remain relatively stable in 20162019 as a result of achieving cost savings, as well as efficiency and output gains arising as a result of our targeted capital investment program. Specifically, as we continue to introduce operational and technical changes at our plants allowing us to better integrate their products, we expect to be better able to control our costs.
Power. We expect that in 20162019 the cost of the production of electricity and heat energy will increase due to an increase in the prices of key raw materials, particularly natural gas, as well as some ancillary materials. We intend to maintain strict control over costs, which should enable us to cut expenditures by reducing fixed production costs, optimizing administrative expenses and increasing productivity to satisfy increased market demand in some regions.
Seasonality
Seasonal effects have a relatively limited impact on our results. Nevertheless, a slowing of demand and, thus, a reduction in sales volumes (and a related increase in inventories) is typically evident in the first and fourth quarters of the financial year as a result of the general reduction in economic activity associated with the New Year holiday period in Russia and elsewhere. We maintain increased stockpiles of scrap during the winter months in order to avoid potential supply disruptions due to inclement weather. We are dependent on the Russian construction market, which also experiences slowdowns in the winter months. Our mining segment revenues generally have the same seasonality as the steel segment since coking coal and iron ore are primarily used in the manufacture of steel and are closely linked to steel consumption. By contrast, our power segment sales volumes are generally higher in the first and the fourth quarters of the year, due to increased electricity and steam consumption in the winter period.
Consumption of combustive, lubricative and energy supplies during the winter months is generally higher than during the rest of the year. In addition, railroad carriers demand that iron ore concentrate be fully dried and coal concentrate be partially dried for transportation during the winter months, resulting in higher costs during that time.
Item 6.Directors, Senior Management and Employees
Directors and Executive Officers
Board of Directors
All of our current directors were elected at an extraordinary general shareholders’ meeting which took place on March 4, 2016,June 29, 2018, and their terms expire on the date of our next annual general shareholders’ meeting, which will take place not later than June 30, 2016.2019. The business and mailing address for all our directors and executive officers is Krasnoarmeyskaya Street 1, Moscow 125167, Russian Federation.
Name | Year of Birth | Position | ||
Igor V. Zyuzin | 1960 | Chairman | ||
Alexander N. Shokhin(1) | 1951 | Deputy Chairman | ||
Oleg V. Korzhov(4) | 1970 | Director, Chief Executive Officer, Chairman of Management Board | ||
Victor A. Trigubko | 1956 | Director, Senior Vice President — Government Relations, Member of Management Board | ||
Tigran G. Khachaturov(4) | 1979 | Director | ||
| ||||
Alexander N. Kotsky(1)(2)(4) | 1957 | Director | ||
Alexander D. Orishchin(1)(2)(3)(4) | 1932 | |||
| Director | |||
Yuriy N. Malyshev(1)(3)(4) | 1939 | Director | ||
| Director |
| (1) | Independent Director under the applicable NYSE regulations and Russian regulations. |
| (2) | Member of the Audit Committee of the Board of Directors. |
| (3) | Member of the Committee on Appointments and Remuneration. |
| (4) | Member of the Committee on Investments and Strategic Planning. |
Igor V. Zyuzinhas been Chairman of our Board of Directors since July 2010. He was our Chief Executive Officer from December 2006 to June 2010 and Chairman of our Management Board from September 2007 to June 2010. He served as Chairman of our Board of Directors from March 2003, when Mechel was founded, to December 2006 and has been a member of our Board of Directors since that time. Mr. Zyuzin has been a member of the Board of Directors of Mechel Mining since April 2008 and Chairman of the Board of Directors of Mechel Mining since July 2018. He held the position of Chief Executive Officer of Mechel Mining sincefrom July 2011.2011 to July 2018. Mr. Zyuzin has also served as Chairman of the Board of Directors of Southern Kuzbass Coal Company sincefrom May 1999 to June 2017 and has beenChairman of the Board of Directors of Yakutugol from June 2013 to June 2017. He was a member of the Board of Directors of Chelyabinsk Metallurgical Plant sincefrom June 2001 to April 2017 and a member of the Board of Directors of Yakutugol sincefrom October 2007. He has served as Chairman of the Board of Directors of Yakutugol since2007 to June 2013.2017. From July 2011 to April 2014, he was Chairman of the Management Board of Mechel Mining. From April 2008 to June 2011, Mr. Zyuzin served as Chairman of the Board of Directors of Mechel Mining. Mr. Zyuzin has over 2930 years of experience in the coal mining industry. Mr. Zyuzin has a degree in technology and complex mechanization of underground mining from the Tula Polytechnic Institute. Mr. Zyuzin also has a degree in mining engineering economics and a Ph.D. in technical sciences in the coal mining field. Mr. Zyuzin may be deemed to be the beneficial owner of approximately 36.34%26.67% of our common shares. See “Item 7. Major Shareholders and Related Party Transactions.”
Alexander N. Shokhin has been Deputy Chairman of our Board of Directors since June 2016. He has been President of the Russian Union of Industrialists and Entrepreneurs since 2005. From 2005 to 2009, he was a member of the Public Chamber of the Russian Federation. From 2002 to 2005, he served as Chairman of the Supervisory Board of Renaissance Capital Investment Group. Since 1995, he has been President of the National Research University — Higher School of Economics (HSE), Head of the Department of the Theory and Practice of Business — Government Interaction. Mr. Shokhin has been a member of the Council of the Chamber of Commerce and Industry of the Russian Federation since 2016, a member of Supervisory Board of Agency for Strategic Initiatives since 2011 and a member of Supervisory Board of Agency of Technological Development since 2016. He has been a member of the Board of Directors of Eurasia Drilling Company Limited since 2007, a member of the Board of Directors of TMK PAO since 2008 and a member of the Board of Directors of RSMB Corporation JSC since 2015. From 1994 to 2002, he was a Deputy of the State Duma, as well as he held the posts of First Deputy Chairman of the State Duma, leader of the Duma faction “Our Home is Russia” and chairman of the State Duma’s Credit Institutions and Financial Markets Committee. In 1991-1994 and in 1998, he was Deputy Chairman of the Government of the Russian Federation. In 1991-1994, he also held the positions of Minister of Labor, Minister of Economics, Chairman of the Russian Agency for International Cooperation and Development. Mr. Shokhin graduated from the Lomonosov Moscow State University. He is a D.Sc. in economics, professor.
Oleg V. Korzhov has been a member of our Board of Directors since June 2014. Mr. Korzhov has been our Chief Executive Officer and Chairman of our Management Board since January 2014. He was our Senior Vice President for Economics and Management from February 2012 to December 2013. He has been a member of our Management Board since March 2009. Mr. Korzhov was our Senior Vice President for Business Planning and Analysis from November 2011 to February 2012, and our Vice President for Business Planning and Analysis from April 2009 to October 2011. Mr. Korzhov has been a member of the Board of Directors of Mechel Mining since June 2011 and2011. He served as Chairman of the Board of Directors of Mechel Mining sincefrom June 2014.2014 to July 2018. He was a member of the Board of Directors of Port Posiet from May 2008 to June 2014, Beloretsk Metallurgical Plant and Mecheltrans from 2010 to 2014, Southern Kuzbass Power Plant from 2009 to 2014, Kuzbass Power Sales Company from 2010 to 2014, Chelyabinsk Metallurgical Plant from 2009 to 2011 and from
June 2014 to
June 2015, as well as Vyartsilya Metal Products Plant from 2008 to 2010. From July 2008 to April 2009, he was Deputy Chief Executive Officer for Economics and Finance of Mechel-Steel Management. From September 2005 to January 2006, he served as Economic Planning Director of Mechel and from February 2006 to July 2008 he held the same position at Mechel-Steel Management. From 2003 to 2005, Mr. Korzhov was Director for Finance and Economics of EvrazHolding OOO. From 1998 to 2003, he was Deputy Director for Economic Analysis and Pricing and then Director for Economics of Nizhniy Tagil Iron and Steel Works OAO. Mr. Korzhov has a degree in economics and management in metallurgy from the Urals Polytechnic Institute and a degree in general management from the Academy of National Economy under the Government of the Russian Federation. Mr. Korzhov also has a Ph.D. in economics.
Victor A. Trigubkohas been a member of our Board of Directors since June 2016. He has been our Senior Vice President — Government Relations since August 2006 and a member of our Management Board since February 2016. He was a member of our Board of Directors from June 2012 to March 2016. He served as our Vice President — Government Relations from 2005 to August 2006. From 2003 to 2005, he was our Vice President for Representation in Central and Eastern Europe, Chairman of the Board of Directors of Mechel Campia Turzii S.A. and a member of the Board of Directors of Mechel Targoviste S.A. From 2002 to 2003, Mr. Trigubko held the position of Director of Mechel International Holdings AG’s representative office in Romania. From 1997 to 2002, he was Head of Izhstal’s representative office in Moscow. From 1992 to 1997, he held various executive positions in the metallurgical company Unibros Steel Co. LTD, including Deputy General Director. Mr. Trigubko also worked in the Foreign Relations Department of the USSR State Committee for Labor and Social Issues and in the USSR Trade Representation Office in Romania. Mr. Trigubko has a degree in economics from the Kalinin State University.
Tigran G. Khachaturov has been a member of our Board of Directors since March 2016. HeSince September 2017, he has been a member of the Management Board of Gazprombank JSC. Since September 2016, he has served as Head for restructured assets management at Gazprombank JSC. From February 2015 to October 2016, he was an Adviser to our Chief Executive Officer for Finance since February 2015.Finance. From July to December 2014, he was an Adviser to Director of Atomenergoprom JSC. From June 2013 to July 2014, he served as First Executive Vice President, as well as Head of Moscow representative office of Uranium One Holding N.V. From August 2007 to May 2013, Mr. Khachaturov was First Deputy General Director and Acting General Director at Atomredmetzoloto OAO. From April 2002 to August 2007, he held various positions at Techsnabexport OJSC, including First Deputy General Director since July 2004. Mr. Khachaturov has a degree in finance and credit from the Plekhanov Russian Academy of Economics.
Alexey G. Ivanushkinhas been a member of our Board of Directors since June 2013 and a member of our Management Board since August 2014. He served as our Chief Operating Officer — First Deputy Chief Executive Officer from August 2014 to March 2016. He was Chief Executive Officer of Oriel Resources Ltd. from April 2009 to March 2016. He has been a member of the Board of Directors of Oriel Resources Ltd. since October 2008 and a member of the Board of Directors of Southern Urals Nickel Plant since May 2009. He served as Chairman of the Board of Directors of Southern Urals Nickel Plant from May 2010 to March 2016. He was a member of our Board of Directors from March 2003 to July 2009, and served as our Chief Operating Officer from January 2004 to February 2009. Mr. Ivanushkin held the position of our Chief Executive Officer from March 2003 to January 2004. Mr. Ivanushkin served as Chairman of the Board of Directors of Chelyabinsk Metallurgical Plant from June 2002 to June 2009. From June to October 2004, he was Chief Executive Officer of Southern Kuzbass Coal Company. From December 1999 to April 2002, Mr. Ivanushkin served as Chief Executive Officer of Chelyabinsk Metallurgical Plant. From 1993 to November 1999, he was Director of the Department of Ferrous Metals and Ferroalloys in the Moscow office of Glencore International. Mr. Ivanushkin has a degree in economics and international relations from the Moscow State University of International Relations (MGIMO).
Alexander N. Kotsky has been a member of our Board of Directors since March 2016. He has also beenFrom June 2015 to June 2016, he was a member of the Board of Directors of Port Vanino since June 2015.Vanino. From 2008 to 2014,2015, he was a member of the Board of Directors of Southern Kuzbass Coal Company. Mr. Kotsky has a degree in railway engineering from the Novosibirsk Institute of Railway Engineers.
Alexander D. Orishchin has been a member of our Board of Directors since March 2016. He was a member of the Board of Directors of Mechel Mining from June 2010 to June 2014. Mr. Orishchin has a degree in mining from the Tomsk Polytechnic Institute. He also holds a Ph.D. in technical sciences from the Moscow Mining Institute.
Vladimir V. Gusevhas been a member of our Board of Directors since July 2009. In 2008, Mr. Gusev held the position of Vice President for Finance of the State Corporation “Olympstroy.” From 2005 to 2008, he was Deputy Head of the Federal Tax Service of the Russian Federation. From 1999 to 2005, he was First Deputy Minister of Taxes and Levies of the Russian Federation. Mr. Gusev has a law degree from the Leningrad State University. He also has a Ph.D. in economics and is an associate professor. He was awarded several national awards, including in 2000, by the Decree of the President of the Russian Federation, the title of Honored Economist of the Russian Federation. Mr. Gusev has authored more than 30 scientific papers and publications.
Yuriy N. Malyshev has been a member of our Board of Directors since June 2013. Mr. Malyshev is currently DirectorPresident of the State Geological Museum of V.I. Vernadsky. He has been President of the Academy of Mining Sciences of Russia since 1993. Mr. Malyshev also servesHe has been a member of the Board of Directors of Acron PJSC since May 2015 and a member of the Board of Directors of Rosgeologia JSC since June 2017. From 2010 to 2016, he served as Chairman of the Board of Directors of OShK Soyuzspetsstroy ZAO. He has been a member of the Board of Directors of JSC Acron since May 2015. From 1999 to 2013, he was President of the Non-profitNonprofit Partnership Russian Mining Operators.Operators, and now he is a member of the Supreme Mining Council. Mr. Malyshev has almostover 50 years of experience in various executive positions in the coal mining industry. He is a member of the Russian Academy of Sciences and has a D.Sc. in technical sciences. He has the honorary title of
Honored Worker of Science and Technology of the Russian Federation. He is the recipient of several prizes and awards, including the order “For Merit to the Motherland” of the third grade, the Order of Honour and all three grades of the “Miner’s Glory” order. Mr. Malyshev has a degree in mining from the Kemerovo Mining Institute.
Vladimir Yu. KorovkinGeorgy G. Petrov has been a member of our Board of Directors since June 2014. From June 2011 to June 2014,2017. Since May 2016, he has served as Chairmanan Adviser on international issues to the President of the BoardChamber of DirectorsCommerce and Industry of Mechel Mining. Since 1995,the Russian Federation. From April 2002 to May 2016, he was Vice President of the Chamber of Commerce and Industry of the Russian Federation. From 1998 to 2002, Mr. Korovkin has held various positions at Federal Stock Corporation OAO, including President from 1999Petrov served as Director of the Department of Economic Cooperation in the Ministry of Foreign Affairs of the Russian Federation,Ambassador-at-large. From 1971 to 2004 and Chairman since 2004. From 1982 to 1995,1998, he held various positions atin the InstituteMinistry of World EconomyForeign Trade of the USSR and InternationalMinistry of Foreign Economic Relations and Trade of the Russian Academy of Sciences.Federation. Mr. KorovkinPetrov has a degree in economic geography of foreign countriesinternational currency and a Ph.D. in economicscredit relations from the Lomonosov Moscow State University.Institute of International Relations.
Executive Officers
Name | Year of Birth | Position | ||
Oleg V. Korzhov | 1970 | Chief Executive Officer, Director, Chairman of Management Board | ||
Victor A. Trigubko | 1956 | Senior Vice President — Government Relations, | ||
| ||||
Valery A. Sheverdin | 1963 | Vice President for Corporate Security, Member of Management Board | ||
Nelli R. Galeeva | 1973 | Chief Financial Officer, Member of Management Board | ||
Minas A. Darbinyan | 1983 | Deputy Chief Executive Officer for Financial Control, Member of Management Board | ||
Irina N. Ipeeva | 1963 | Director of Legal Department, Member of Management Board | ||
Natalya O. Trubkina | 1964 | Human Resources Director, Member of Management Board | ||
| ||||
Pavel V. Shtark | 1969 | Chief Executive Officer of Mechel Mining Management | ||
Andrey A. Ponomarev | 1977 | Chief Executive Officer of Mechel-Steel Management | ||
Petr A. Pashnin | 1977 | Chief Executive Officer of Mechel Energo | ||
Alexey V. Lebedev | 1974 | Chief Executive Officer of Mecheltrans Management |
For brief biographies of Messrs. Korzhov and Khachaturov,Trigubko, see “— Board of Directors.”
Victor A. Trigubkohas been our Senior Vice President — Government Relations since August 2006 and a member of our Management Board since February 2016. He was a member of our Board of Directors from June 2012 to March 2016. He served as our Vice President — Government Relations from 2005 to August 2006. From 2003 to 2005, he was our Vice President for Representation in Central and Eastern Europe, Chairman of the Board of Directors of Mechel Campia Turzii S.A. and a member of the Board of Directors of Mechel Targoviste
S.A. From 2002 to 2003, Mr. Trigubko held the position of Director of Mechel International Holdings AG’s representative office in Romania. From 1997 to 2002, he was Head of Izhstal’s representative office in Moscow. From 1992 to 1997, he held various executive positions in the metallurgical company Unibros Steel Co. LTD, including Deputy General Director. Mr. Trigubko also worked in the Foreign Relations Department of the USSR State Committee for Labor and Social Issues and in the USSR Trade Representation Office in Romania. Mr. Trigubko has a degree in economics from the Kalinin State University.
Andrey A. Slivchenko has been our Vice President — Finance since May 2014 and a member of our Management Board since August 2014. From April 2014 to May 2014, Mr. Slivchenko was our Director for Finance. He has been a member of the Board of Directors of Southern Kuzbass Coal Company since June 2014. From January 2012 to September 2012, he served as Chief Executive Officer and from November 2011 to January 2012 as Chief Operating Officer of Pharmacy Chain 36.6 OAO. From July 2007 to April 2011, he was Vice President for Corporate Finance at United Aircraft Corporation JSC. From August 2003 to July 2007, Mr. Slivchenko held the position of Director for Corporate Finance at Pharmacy Chain 36.6 OAO. From January 2001 to May 2003, he was Director for Corporate Finance at Ilim Pulp Enterprise ZAO. From August 1997 to February 1999, he held various positions at Yukos Oil Company, including Head of the Financial Markets Department of Yukos-Moskva OOO. Mr. Slivchenko received a bachelor’s degree in economics and a master’s degree in management from the International University in Moscow.
Valery A. Sheverdin has been our Vice President for Corporate Security since March 2014 and a member of our Management Board since August 2014. From June 2009 to March 2014, Mr. Sheverdin held the positions of our Director of the Department of Safety of Property Complex and Director of the Corporate Security Department. From April 2011 to March 2014, he was Chief Executive Officer of Mechel-GarantMechel Garant OOO. From July 2007 to April 2011, he worked in PSC Mechel-Centre OOO, including as General Director from December 2007. From April 20042003 to June 2007, Mr. Sheverdin held various positions inLukom-A Agency ZAO. From February 2001 to March 2003, he was Chairman of the Belgorod regional office of the Russian Fund of Social Progress. From September 1995 to February 2001, he held various executive positions in security agencies. From November 1981 to August 1995, he served in the Armed Forces of the Russian Federation. Mr. Sheverdin graduated from the Moscow Border Institute of the Federal Security Service of the Russian Federation with a degree in law and the Kolomna Higher Artillery Command College of the October Revolution.
Nelli R. Galeevahas been our Chief Financial Officer since January 2018 and a member of our Management Board since July 2016. She has been a member of the Board of Directors of Mechel Mining since March 2018.
From March 2014 to January 2018, she was Director of our Accounting and Tax Department. She served as Chief Accountant of Mechel Mining Management from April 2009 to March 2014 and Chief Accountant of Mechel Mining from May 2008 to April 2009. From August 2005 to May 2008, she was Chief Accountant of Southern Kuzbass Coal Company. From March 2000 to August 2005, Mrs. Galeeva worked at Southern Kuzbass Coal Company, first as chief of consolidated and international reporting department and then as deputy chief accountant, chief of consolidated reporting department. From June 1995 to February 2000, she was an accountant of finance department and then a deputy chief production accountant at Krasnogorsky Open Pit OAO. Mrs. Galeeva has a degree in accounting and audit from the Kuzbass State Technical University and a degree in finance and credit from the Kemerovo State University.
Minas A. Darbinyan has been our Deputy Chief Executive Officer for Financial Control since June 2015 and a member of our Management Board since July 2015. Since May 2017, he serves as an adviser to General Director of GPB Asset Development OOO. He has been a member of the Board of Directors of Chelyabinsk Metallurgical Plant since April 2017 and a member of the Board of Directors of Port Vanino since June 2018. He was a member of the Board of Directors of Port Posiet sincefrom March 2016.2016 to June 2017. From November 2013 to January 2015, he served as Director for Strategic Planning at Uranium One Holding N.V., part of state-owned corporation Rosatom. From April to November 2013, he headed Investment Planning and Development Department at Atomredmetzoloto OAO, also part of Rosatom. From May 2011 to April 2013, Mr. Darbinyan was senior consultant at KPMG ZAO. From 2008 to 2011, he held various positions atMIEL-DPM OOO, including Chief Financial Officer since 2010. From 2006 to 2008, he was an assistant to the Vice President-head of Moscow regional office in Moscow Industrial bank. Mr. Darbinyan has a degree in management from the Academy of National Economy under the Government of the Russian Federation and a degree in economics from the State Academic University for Humanities.
Irina N. Ipeevahas been Director of our Legal Department since April 2009 and a member of our Management Board since September 2007. She has been a member of the Board of Directors of Southern Kuzbass Coal CompanyMechel Mining since 2007June 2014 and a member of the Board of Directors of Mechel MiningElgaugol since February 2018. She was a member of the Board of Directors of Southern Kuzbass Coal Company from May 2005 to June 2014.2017. From September 2007 to April 2009, she was our General Counsel, Deputy Director of the Legal Department — Director of the Department of Corporate Governance and Property. From 2003 to 2007, Mrs. Ipeeva held the position of General Counsel and Director of the Department of Corporate Governance and Property. From February to July 2006, she was Director of the Department of Corporate Governance and Property of Mechel-Steel Management. From March to June 2003, Mrs. Ipeeva held the position of Deputy General Director for Property Matters of Uglemet-Trading OOO. From December 2001 to March 2003, she was Head of the Department for Regulation of Corporate Relations and Property of Southern Kuzbass Coal Company
and, from January to November 2001, she was Head of the Share Capital Department. From August 1988 to January 2001, Mrs. Ipeeva worked at the Kuzbassugleobogashcheniye Industrial Amalgamation and the Tomusinskaya Washing Plant, where she held positions ranging from a legal adviser to head of the legal department. Mrs. Ipeeva has a degree in law from the Kuibyshev State University.
Natalya O. Trubkinahas been our Human Resources Director since September 2015 and a member of our Management Board since February 2016. From August 2009 to August 2015, she held the position of Human Resources Director of Mechel-Steel Management. She has beenwas a member of the Board of Directors of Chelyabinsk Metallurgical Plant sincefrom June 2015. She was2015 to April 2017 and a member of the Board of Directors of Urals Stampings Plant from June 2014 to June 2015. In 2009, she served as Human Resources Director in Souzmetallresource Management Company ZAO. From 2004 to 2009, Mrs. Trubkina worked in United Company RUSAL, including as Head of the Human Resources Department of secondary alloys business since 2006. From 2003 to 2004, she was HR manager in Texas Nafta Industries Inc. From 1994 to 2002, she was HR manager in Belpromstroybank OAO. Mrs. Trubkina has a degree in heat and gas supply and ventilation from the Novopolotsk Polytechnic Institute, as well as a diploma of further education in personnel management psychology from the Lomonosov Moscow State University.
Pavel V. Shtarkhas been Chief Executive Officer of Mechel Mining Management since July 2013 and2013. He was a member of our Management Board sincefrom August 2014.2014 to May 2017. He has been a member of the Board of Directors of Moscow Coke and Gas Plant since June 2013, a member of the Board of Directors of Elgaugol since August 2013, and a member of the Board of Directors of Mechel Mining, Southern Kuzbass Coal Company, Korshunov Mining Plant and Yakutugol since June 2014.2014 and a member of the Board of Directors of Southern Kuzbass Coal Company since June 2017. He was a member of the Board of Directors of Southern Kuzbass Coal Company from June 2014 to March 2016. He was a member of the Management Board of Mechel Mining from July 2013 to April 2014. From October 2012 to July 2013, he held the position of Deputy General Director for Coke and Chemical Products Production — Managing Director of Moscow Coke and Gas Plant. From April 2008 to October 2012, Mr. Shtark served as Deputy Director, Director and Managing Director of Mechel Coke. From October 1996 to March 2008, he was Head of the Workshop, Chief Engineer of Coke and Chemical Products Production at Nizhniy Tagil Iron and Steel Works OAO. Mr. Shtark has a degree in equipment and technology of welding production from the Urals State Technical University and a degree in chemical technology of natural energy carriers and carbon materials from the same university.
Andrey A. Ponomarev has been Chief Executive Officer of Mechel-Steel Management since December 2015 and2015. He was a member of our Management Board sincefrom February 2016.2016 to May 2017. From August 2012 to November 2015, he served as First Deputy Chief Executive Officer of Mechel-Steel Management. He has been a member of the Board of Directors of Chelyabinsk Metallurgical Plant since 2013. He was a member of the Board of Directors of Vyartsilya Metal Products Plant and Beloretsk Metallurgical Plant from 2013 to 2014, Urals Stampings Plant from 2013 to 2015 and Izhstal from 2014 to 2015. From August 2009 to AugustMay 2013, he headed Mechel Service Global. From May 2005 to August 2009, Mr. Ponomarev was Managing Director of Mechel Service. From 2002 to 2005, he held various positions at Uglemet Trading OOO and Mechel Trading House OOO, including Head of Regional Sales Department. From 2000 to 2002, he served as chief of the analysis bureau in Chelyabinsk Metallurgical Plant’s marketing and sales service. From 1999 to 2000, he was an engineer in the special steels sales department of Chelyabinsk Metallurgical Plant’s marketing and sales service. Mr. Ponomarev has a degree in pressure metal treatment and a degree in finance from the Southern Urals State University.
Petr A. Pashnin has been Chief Executive Officer of Mechel Energo since November 2013. He has been a member of the Board of Directors of Kuzbass Power Sales Company since May 2014 and a member of the Board of Directors of Southern Kuzbass Power Plant since June 2015.2014. He was a member of the Board of Directors of Tomusinsk Energo Management from June 2014 to June 2015.2015 and a member of the Board of Directors of Kuzbass Power Sales Company from June 2014 to June 2017. From July to November 2013, he held the position of Technical Director of Mechel Energo. From March 2012 to June 2013, he was Chief Operating Officer of Toplofikatsia Rousse. From September 2011 to FebruaryMay 2012, he served as Head of Energy Efficiency and Energy Audit Department of Mechel Energo. From February 2008 to September 2011, he held various positions at the Chelyabinsk branch of Mechel Energo. From July 1999 to January 2008, he worked at
Chelyabinsk Metallurgical Plant, where he held positions ranging from steam turbine operator to heat and power station chief engineer. Mr. Pashnin has a degree in industrial heat power engineering from the Southern Urals State University.
Alexey V. Lebedev has been Chief Executive Officer of Mecheltrans Management since December 2013 and2013. He was a member of our Management Board sincefrom August 2014.2014 to May 2017. He has been a member of the Board of Directors of Mecheltrans since April 2014 and a member of the Board of Directors of Port Kambarka and Port Vanino since June 2014. He was a member of the Board of Directors of Port Posiet from June 2014 to March 2016 and a member of the Board of Directors of Mecheltrans from April 2014 to August 2016. He served as Chief Executive Officer of Mecheltrans Auto from February 2011December 2010 to December 2013 and Director of Motor Transportation Department of Mecheltrans from June 2010 to January 2011. From 2005 to 2010, Mr. Lebedev was Director of Uraltechstroy NN OOO. From 2004 to 2005, he held the position of Deputy General Director of Region Express TK OOO. From 1998 to 2003, he held various positions at UralPromSnab OOO. From 1993 to 1998, he was Head of Railway Transportation Department of Transfero EAFC OOO. Mr. Lebedev has a degree in industrial management from the Izhevsk State Technical University.
Compensation
Our directors and executive officers were paid an aggregate of approximately $7.8RUB 560.6 million for services in all capacities provided to us during 2015.2018. Our directors and executive officers are also provided with voluntary medical insurance and the use of wireless services. See note 9 to the consolidated financial statements.
Board of Directors
Members of our Board of Directors are elected by a majority of the voting stock present at our annual general shareholders’ meeting using a cumulative voting system. Directors are elected to serve until the next annual general shareholders’ meeting and may bere-elected an unlimited number of times. Our Board of Directors currently consists of nine members, five of whom are independent pursuant to the director independence criteria set forth both in the applicable Russian regulations and NYSE regulations, as well as in the Charter and the Bylaw on the Board of Directors of Mechel PAO. The Board of Directors is responsible for our overall management, except matters reserved for our shareholders. See “Item 10. Additional Information — General Meetings of Shareholders” for more information regarding the competence of our general shareholders’ meetings. SomeMembers of the members of our Board of Directors as well as the members of the boards of directorsdo not have service contracts with us or with any of our subsidiaries serve pursuant to contracts. These contracts do notthat provide for anythem benefits upon termination of their directorship.service.
Committees of the Board of Directors
Audit Committee
The Audit Committee consists of Vladimir Korovkin, Vladimir GusevGeorgy Petrov, Alexander Orishchin and Alexander Kotsky, each of whom is an Independent Director. Our Audit Committee operates pursuant to a bylaw, which is available atwww.mechel.com. The purpose of this Committee is to assist the Board of Directors with its oversight responsibilities regarding:
the quality and integrity of our financial statements;
our compliance with legal and regulatory requirements;
the independent auditor’s qualifications and independence; and
the performance of our internal audit function and independent auditor.
Committee on Investments and Strategic Planning
The members of the Committee on Investments and Strategic Planning are Yuriy Malyshev, Alexander Orishchin, Alexey Ivanushkin, Alexander Kotsky, Tigran Khachaturov and Oleg Korzhov. The Committee on
Investments and Strategic Planning defines our strategic goals and defines our priorities. The Committee makes recommendations to the Board of Directors on our dividend policy and on the adjustments to our strategy as required in order to enhance our efficiency. Our Committee on Investments and Strategic Planning operates pursuant to a bylaw, which is available atwww.mechel.com.www.mechel.com.
The followingsub-committees were set up function under the Committee on Investments and Strategic Planning:
Sub-committee on metallurgical production strategy, with members Alexey IvanushkinAlexander Orishchin and Oleg Korzhov; and
Sub-committee on mining production strategy, with members Yuriy Malyshev Alexander Kotsky and Alexander Orishchin; and
Kotsky.
Committee on Appointments and Remuneration
The members of the Committee on Appointments and Remuneration are Vladimir Gusev, Vladimir Korovkin, Alexander Orishchin, Georgy Petrov and Yuriy Malyshev, each of whom is an Independent Director. The Committee on Appointments and
Remuneration has been established to maintain continuity and high professional standards, as well as to work out a competitive remuneration system, within our group. The Committee prepares recommendations to the Board of Directors on candidates for appointment to the Management Board or as our Chief Executive Officer or other executive officers or senior officers of our subsidiaries. It also prepares appraisals of their performance and makes recommendations regarding their remuneration. The Committee also defines the requirements applicable to nominees to the Board of Directors and informs the shareholders of such nominees. The Committee operates pursuant to a bylaw, which is available atwww.mechel.com.
Management Board
In September 2007, we created a Management Board to provide for greater oversight of our operations. For more information, see “Item 10. Additional Information — Management Board.” Currently, our Management Board consists of seven members. The members of the Management Board are set out above under “— Directors and Executive Officers.”
Management Companies
We have four management companies within our group which provide management services to the companies within the mining, steel and power segments and to our companies within our transport division.
Mechel Mining Management
Mechel Mining Management was established in July 2008 as a wholly-owned subsidiary of Mechel Mining with the purpose to provide management services to the production subsidiaries within our mining segment. Mechel Mining Management presently performs the functions of the sole executive body of the following companies: Southern Kuzbass Coal Company, Korshunov Mining Plant, Yakutugol, Moscow Coke and Gas Plant, Mechel Coke, Mechel Engineering, Elgaugol, Elga-road and Vzryvprom.
Mechel-Steel Management
Mechel-Steel Management was established in October 2005 as a wholly-owned subsidiary of Mechel with the initial purpose to provide management services to our subsidiaries by performing the functions of their respective management bodies. The company’s former name was Mechel Management OOO which was changed in September 2009 in line with the reorganization of our group’s management structure. Mechel-Steel
Management presently provides management services to our subsidiaries within the steel segment by performing the functions of the sole executive body of Chelyabinsk Metallurgical Plant, Urals Stampings Plant, Izhstal and Bratsk Ferroalloy Plant.
Mechel Energo
Mechel Energo was established in May 2001 under the name of Regional Energy Company ENERGOSBYT OOO. In February 2004, we acquired the company with a view to make the strategic and operational management of our power assets more efficient. The name of the company was changed to its current name in April 2004. Mechel Energo performs the functions of the sole executive body of Southern Kuzbass Power Plant in our power segment.
Mecheltrans Management
Mecheltrans Management was established in March 2010 as a wholly-owned subsidiary of Mechel and since July 2010 began to provideMechel. Mecheltrans Management presently provides management services to the companies within our transport division by performing the functions of the sole executive body of Mecheltrans, Mecheltrans Vostok,MecheltransVostok, Port Posiet, Port Kambarka and Port Temryuk.
Review Commission
The Review Commission verifies the accuracy of our financial reporting under Russian law and generally supervises our financial activity. The members of our Review Commission are nominated and elected by our shareholders to serve until the next annual general shareholders’ meeting. Our Chief Executive Officer, a member of our Board of Directors and a member of our Management Board may not simultaneously be a member of the Review Commission. Our Review Commission currently has three members: Alexander N. Kapralov, Andrey V. Stepanov and Natalya S. Zykova. The powers and duties of our Review Commission are governed by a bylaw approved by our general shareholders’ meeting.
Internal Control and Audit Department
The Internal Control and Audit Department’s main function is to systematically, consistently and independently from our management assess and improve the efficiency of our group’s risk management, internal control, corporate governance and information systems. The activities of the Internal Control and Audit Department are governed by the Bylaw on the Internal Control and Audit Department. Natalya S. Zykova serves as the Director of the Internal Control and Audit Department. The Department is functionally subordinated to the Audit Committee of the Board of Directors, and administrated by our Chief Executive Officer.
Corporate Governance Principles
Our corporate governance principles are based on the Russian Corporate Governance Code recommended by the CBR and supplemented by the obligations of the Board of Directors prescribed by Russian law, our charter and internal rules of procedure. The principles are intended to ensure that we are managed and monitored in a responsible and value-driven manner. They include the protection of shareholders’ rights, comprehensive disclosure and transparency requirements and rules governing conflicts of interest. We are committed to continuing to adapt our corporate governance principles to developments in best-practices. Our corporate governance principles are reflected in our corporate documents, such as:
the Charter;
the Bylaw on the Board of Directors;
the Bylaw on the General Meeting of Shareholders;
the Bylaw on the General Director;
the Code of Business Conduct and Ethics;
the Bylaw on the Prohibition and Prevention of Insider Trading;
the Bylaw on the Disclosure of Information that may Significantly Impact the Market Value of our Shares;
the Bylaw on Information Policy;
the Bylaw on Appointments and Remuneration Committee of the Board of Directors;
the Bylaw on Investments and Strategic Planning Committee of the Board of Directors;
the Bylaw on the Audit Committee of the Board of Directors;
the Code of Corporate Governance; and
the Bylaw on Dividend Policy.
These documents or summary thereof are available atwww.mechel.comandwww.mechel.ru.
We also comply with the corporate governance requirements applicable to Russian public companies listed on Russian stock exchanges. Such requirements include: (1) the obligation to have at least three independent directors, who shall represent at leastone-fifth of the members of the board of directors; (2) the establishment of an audit committee chaired by an independent director and a committee on appointments and remuneration consisting of independent directors, or, if not practicable, of independent directors and members of the board of directors who are not a sole executive body and/or members of the collegial executive body; (3) the establishment of a corporate body responsible for the internal audit (control) and adoption of an internal audit (control) policy; (4) the existence of the corporate secretary or special structural unit(s) performing the functions of the corporate secretary; and (5) the adoption of a dividend policy; (5) the obligation to notify shareholders about the annual general shareholders’ meeting not less than 30 days before the date of the meeting; and (6) the obligation to disclose information about the date when the list of persons entitled to participate in a general shareholders’ meeting is prepared, at least seven days prior to such date.policy.
We are also required to comply with applicable corporate governance requirements of the NYSE. The NYSE permits listed companies that are foreign private issuers, such as Mechel, to follow their home jurisdiction governance practice where it differs from the NYSE requirements.requirements in certain circumstances. In addition, we have voluntarily complied with certain other requirements applicable to U.S. companies under the NYSE Listing Standard 303A. AFor a summary description of the NYSE Listing Standard 303A showing our compliance therewith and/or the alternative corporate governance practices followed by us is available atwww.mechel.com. See alsosee “Item 16G. Corporate Governance.”
Employees
As of December 31, 20152018, 2017 and 2014,2016, we employed 65,88859,382, 59,971 and 67,88061,455 people as follows:
| 2015 | 2014 | |||||||||||||||
Segment | Total Employees | % Unionized | Total Employees | % Unionized | ||||||||||||
Mining | 24,322 | 66 | % | 24,969 | 68 | % | ||||||||||
Steel | 36,430 | 61 | % | 37,769 | 60 | % | ||||||||||
Power | 4,447 | 34 | % | 4,436 | 36 | % | ||||||||||
Other | 689 | 8 | % | 706 | 16 | % | ||||||||||
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Total | 65,888 | 61 | % | 67,880 | 61 | % | ||||||||||
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Segment Mining Steel Power Other Total 2018 2017 2016 Primary
Location Total
Employees %
Unionized Total
Employees %
Unionized Total
Employees %
Unionized Russia,
Switzerland,
Singapore
21,175 65 % 21,930 65 % 22,472 65 % Russia,
Europe, CIS
33,167 53 % 32,974 55 % 33,985 58 % Russia 4,096 35 % 4,203 36 % 4,288 38 % Various 944 6 % 864 7 % 710 7 % 59,382 55 % 59,971 57 % 61,455 59 %
Set out below is information about membership of our employees in trade unions:
Employees of Chelyabinsk Metallurgical Plant, Beloretsk Metallurgical Plant, Southern Urals Nickel Plant, Korshunov Mining Plant, Moscow Coke and Gas Plant, Mechel Coke, Izhstal, Bratsk Ferroalloy Plant, Mechel Materials and Pugachevsky Open Pit are members of the Ore Mining and Smelting Trade Union of Russia.
Employees of Urals Stampings Plant are members of the Trade Union of Machinists of the Russian Federation, employees of Chelyabinsk branch of Urals Stampings Plant are members of the Ore Mining and Smelting Trade Union of Russia.
Employees of Southern Kuzbass Coal Company and its subsidiaries Tomusinsky Open Pit Vzryvprom and ShakhtspetsstroyVzryvprom are members of the Russian Independent Trade Union of Coal Industry Workers and of the Independent Trade Union of Miners of Russia.
Employees of Yakutugol, Neryungry Car Fleet and Mechel-Remservice are members of the Russian Independent Trade Union of Coal Industry Workers.
Employees of Mechel Energo are members of the Ore Mining and Smelting Trade Union of Russia.
Employees of Port Posiet are members of the Russian Stevedores’ Trade Union.
Employees of Mecheltrans’ separate business unit in the city of Myski are members of the Russian Independent Trade Union of Coal Industry Workers.
Employees of Southern Kuzbass Power Plant are members of theAll-Russian Power Industry Trade Union and of the Russian Independent Trade Union of Coal Industry Workers.
Employees of Kuzbass Power Sales Company are members of theAll-Russian Power Industry Trade Union.
Employees of Mechel Nemunas are members of the Trade Union Nemunas.
We consider our relationships with our employees to be good.
Item 7.Major Shareholders and Related Party Transactions
The following table sets forth information regarding our major shareholders, which means shareholders that are the beneficial owners of 5% or more of our common shares, as of March 31, 2016,21, 2019, based on the information available to us:
Name of Beneficial Owner | Number of Common Shares | % of Common Shares | Number of Common Shares | % of Common Shares | ||||||||||||
Igor V. Zyuzin(1) | 151,273,468 | 36.34 | % | 111,030,756 | 26.67 | % | ||||||||||
Irina V. Zyuzina(2) | 77,826,997 | 18.70 | % | 77,826,997 | 18.70 | % | ||||||||||
Ksenia I. Zyuzina(2) | 77,826,997 | 18.70 | % | 99,356,991 | 23.87 | % | ||||||||||
Kirill I. Zyuzin(2) | 77,826,997 | 18.70 | % | 77,826,997 | 18.70 | % | ||||||||||
Other(3)(4) | 187,170,280 | 44.96 | % | 205,882,998 | 49.46 | % | ||||||||||
| (1) | Mr. Zyuzin is the Chairman of our Board of Directors. See “Item 6. Directors, Senior Management and Employees — Directors and Executive Officers.” Mr. Zyuzin may be deemed to be the beneficial owner of approximately |
| (2) | In the course of 2016, MetHol OOO (“MetHol”), which is owned by Mrs. Irina V. Zyuzina, Ms. Ksenia I. Zyuzina and Mr. Kirill I. Zyuzin (the “Zyuzin Family Members”), acquired 77,826,997 of our common shares from Calridge. As a result, MetHol is now the owner of 18.70% of our common shares. As a result, each of |
| (3) | According to Deutsche Bank Trust Company Americas, as of |
| (4) | We believe our directors and executive officers as a group, other than Mr. Zyuzin and Zyuzin Family Members, beneficially own less than 1% of our shares. |
None of our common shareholders have voting rights which differ from any other holders of our common shares. Based on our share register, we believe we are not directly or indirectly owned or controlled by another corporation or government, and that there are no arrangements the operation of which may result in a change of control.
Related Party Transactions
See note 149 to theour consolidated financial statements.statements in “Item 18. Financial Statements.”
See “Item 18. Financial Statements.”
Litigation
Other than the legal proceedings described below, we are not involved in any legal proceedings that we believe to be material.
Tax
On January 16, 2012, Mechel Trading House received an assessment from the tax authorities for profitincome tax, interest and incurred penalties in a total amount of 5.9 billion rubles for the 2008-2009 period. We contested this assessment through the administrative procedure with the higher-level tax authorities which reduced the assessment to 5.5 billion rubles. On June 5, 2012, Mechel Trading House filed a claim with the Moscow Arbitrazh Court to contest the amount of 5.5 billion rubles. On January 9, 2014, the Moscow Arbitrazh Court sustained the Mechel Trading House claims in part of 1.6 billion rubles, including penalties and fines, and the remaining claims were denied. Mechel Trading House did not appeal the decision. On June 19, 2014, the Moscow Arbitrazh Court sustained the application of Mechel Trading House, requesting leave to repay the remaining 3.9 billion ruble assessment on an installment basis by May 2016. On March 15, 2016, Mechel Trading House reapplied with the court for installment payment. On March 31, 2016, the Moscow Arbitrazh Court extended the installment payment until May 2017.
In June 2012, Chelyabinsk Metallurgical Plant received an assessment from On December 14, 2016, Mechel Trading House and the tax authorities for profit tax, interest and incurred penalties inauthority entered into a total amount of 315.2 million rubles forsettlement agreement under which the year 2008. We contested this assessment with the higher-level tax authorities. The higher-level tax authorities reduced the assessment to 104.6 million rubles. On January 18, 2013, Chelyabinsk Metallurgical Plant filed a claim with the Moscow Arbitrazh Court to contest the amount of 104.6 million rubles. On December 29, 2014, the Moscow Arbitrazh Court sustained the Chelyabinsk Metallurgical Plant claims in part of 28.3 million rubles and the remaining claims were denied. Chelyabinsk Metallurgical Plant filed an appeal with the Ninth Arbitrazh Court of Appeal. On February 19, 2015, the Ninth Arbitrazh Court of Appeal reversed the lower court’s decision in part of reducing the profit tax assessment in the amount of 69.0 thousand rubles, the restpayment of the court’s decision was upheld. Chelyabinsk Metallurgical Plant filed a cassation appeal withdebt is extended until April 25, 2018. Mechel Trading House repaid the Arbitrazh Court of Moscow District. On July 3, 2015, the court dismissed the cassation appeal.debt in full.
We believe that we have paid or accrued all taxes that are applicable. Where uncertainty exists, we have accrued tax liabilities based on management’s best estimate of the probable outflow of resources embodying economic benefits, which will be required to settle these liabilities. We accrued RUB 480583 million, RUB 578 million and RUB 620760 million of tax claims other than income tax that management believes are probable as of December 31, 20152018, 2017 and 2014,2016, respectively. In addition, income tax claims that management believes are probable were accrued. See note 2120 to the consolidated financial statements.
Antimonopoly
In September 2013,May 2017, the Office of the FAS for Primorsky Krai found the Administration of the Kemerovo region, Russian Railways and 16 largest freight railway operators, including Mecheltrans,Port Posiet to have violated the Competition Law by entering into an agreement that led or could have ledpreventing access to ships’ agency service market in the divisionport and issued a directive to remedy violation of antimonopoly legislation. The courts, including the appeal and cassation instances, confirmed the legality of a decision and the directive issued by the Office of the commodity market on a territorial principle, in volume of sale of goods and composition of customers of goods, as well as to limiting access to the commodity marketFAS for entities or their elimination from it. MecheltransPrimorsky Krai. In May 2018, Port Posiet was fined by the Office of the FAS for Primorsky Krai in the amount of 19.354 million rubles. We filed an appeal with the Moscow Arbitrazh Court. In June 2015, the Moscow Arbitrazh Court invalidated the regulation of the FAS and cancelled the fine. In September and December 2015, the higher courts upheldCurrently, we are challenging the decision of the Moscow Arbitrazh Court. In April 2016, the Supreme Court of the Russian Federation denied to transfer the FAS’s cassation appeal for consideration at the court hearing of the Chamber for Commercial Disputes of the Supreme Court of the Russian Federation.impose a fine.
Environmental and safety
Pursuant to a claim of the Novokuznetsk Environmental Prosecutor’s Office against Southern Kuzbass Power Plant concerning the dischargeemission of pollutants into the atmosphere above the maximum allowable level, the court ruled in September 2008 that we must limit the dischargeemission of pollutants into the atmosphere to comply with the maximum allowable level. We have complied with the ruling effective as of November 2009. The court also mandated us to reconstruct thede-dusting system. Since then, we have applied several times for stay of execution, the last time being in June 2014,April 2017, and the court allowed us to stay execution of this mandate until June 1, 2016.2019. We are continuing with the reconstruction and replacement of the dust and gas scrubber equipment. During 2013-2015,2013-2018, we completed the reconstruction of threesix of the boilers and have commenced the reconstruction of another boiler.
On June 11, 2013, the Department of Rosprirodnadzor for the Republic of Bashkortostan filed a lawsuit against Beloretsk Metallurgical Plant with the Arbitrazh Court of the Republic of Bashkortostan seeking the recovery of damages caused to water resources as a result ofnon-compliance with water legislation in the amount of 408.2 million rubles. During the court hearings claims under the lawsuit were reduced to 398.6 million rubles. On October 3, 2013, the Arbitrazh Court of the Republic of Bashkortostan rendered a decision to collect from Beloretsk Metallurgical Plant the amount of damages in the amount of 398.6 million rubles. We contested this decision with the Eighteenth Arbitrazh Court of Appeal. On January 28, 2014, the court upheld the decision of the lower court. On February 7, 2014, Beloretsk Metallurgical Plant filed a cassation appeal with the Federal
Arbitrazh Court of UralUrals District. At the court hearing held on April 14, 2014 Beloretsk Metallurgical Plant withdrew its cassation appeal. On May 27, 2014, the Arbitrazh Court of the Republic of Bashkortostan approved a settlement agreement between Rosprirodnadzor for the Republic of Bashkortostan and Beloretsk Metallurgical Plant. In accordance with the settlement agreement, Beloretsk Metallurgical Plant iswas obliged to develop project documentation for the technical upgrading and/or reconstruction (construction) of waste treatment facilities system in order to bring the quality of discharged waste water into compliance with applicable regulatory requirements. The reconstruction of waste treatment facilities system mustwas to be completed by December 31, 2016. In November 2016, Beloretsk Metallurgical Plant applied for a stay of execution and the court ruled to complete the reconstruction by December 31, 2023.
In February 2016,October 2018, the Bratsk Environmental Prosecutor’s OfficeProsecutor filed a claimlawsuit against Bratsk Ferroalloy Plant with the Bratsk City Court of Irkutsk region against Bratsk Ferroalloy Plant seeking to ban (suspend) operation of one ore-thermal furnace untildeclare the complete replacementreclamation of the filter elementssludge reservoir illegal and ban it. On February 27, 2019, the Bratsk City Court of its gas-cleaning unit and to obligeIrkutsk region ordered Bratsk Ferroalloy Plant to carry outraise the replacementhazard class of the filter elementssludge reservoir by JuneDecember 1, 2016. The court sustained2019 in accordance with the specified claims of the Bratsk
Environmental Prosecutor’s Office regarding the replacement of the filter elements by June 1, 2016 and dismissed the rest of claims. We have begun to replace the filter elements.Prosecutor.
Commercial litigation
During the period from February 2014 to April 2015, Novatek — Chelyabinsk OOO filed 18 claims against Chelyabinsk Metallurgical Plant with the Arbitrazh Court of Chelyabinsk region seeking recovery of debt for gas supplied from December 2013 to March 2015 in an aggregate amount of approximately 8.0 billion rubles and penalty for delay in payment in an aggregate amount of approximately 145.0 million rubles. During the court hearings the amounts of claims were reduced to approximately 7.1 billion rubles of principal and approximately 160.0 million rubles of penalties. From April 2014 to October 2015, the Arbitrazh Court of Chelyabinsk region sustained the plaintiff’s claims under 18 cases. We appealed 16 cases. From July 2014 to October 2015, the Eighteenth Arbitrazh Court of Appeal dismissed our claims with respect to all these cases. Chelyabinsk Metallurgical Plant repaid debt in the amount of 7.1 billion rubles as principal and 45.5 million rubles as penalty.
On August 11, 2014, RPFB Project Finance OOO filed a claim against Mechel with the Moscow Arbitrazh Court seeking recovery of debt for provided consulting services in the amount of 731.8 million rubles, interest in the amount of 20.2 million rubles and litigation costs. On February 25, 2015, the Moscow Arbitrazh Court rendered a decision to sustain the claim in full. We appealed the decision, but the higher courts dismissed our claims. In August 2015, RPFB Project Finance OOO filed a bankruptcy petition with the Moscow Arbitrazh Court. In September 2015, the debt was repaid in full and the court terminated the proceedings.
In DecemberNovember 2014, Minmetals appealed toinitiated proceedings at the Arbitration Institute of the Stockholm Chamber of Commerce against Chelyabinsk Metallurgical Plant to recover alleged amounts due under the equipment supplyconstruction contract, amounting in total to approximately $128.4 million.whereas Chelyabinsk Metallurgical Plant has submitted a counterclaim in this matter amounting to $68.4 million,filed its own counter-claims, which includesinclude a penalty for delay and the recovery of damages for failing to perform works and rectifying works of poor quality. TheIn 2015-2017, both parties submitted a number of procedural statements to the arbitral tribunal has been appointed. The parties have provided evidence as per arbitration proceeding.Currently,and presented arguments during arbitral hearing for the adjustment of claims, so that the final claims of Minmetals amounted to approximately $143.0 million (plus applicable interest) and those by Chelyabinsk Metallurgical Plant has challenged an arbitrator appointed by Minmetals.to approximately $57.5 million and €4.1 million (plus applicable interest). During the arbitral proceedings, three arbitrators resigned from their duty and in November 2016 new arbitral tribunal was formed. The final arbitral award was issued on November 9, 2017, awarding Minmetals has to appeal(in accordance with a set off against the statementsatisfied claims of defense of the defendant and present a statement of defense to the cross-actionChelyabinsk Metallurgical Plant) approximately $16.7 million (plus applicable interest). Chelyabinsk Metallurgical Plant did not agree with the attachment of the evidence until May 31, 2016.
In February 2015, Mecheltransaward and filed a claim against SM Capital OOOpetition with the Moscow Arbitrazh Court seeking recovery of debt under REPO agreements (bonds) in the amount of 1.38 billion rubles. In March 2015, SM Capital OOO filed a counterclaim against Mecheltrans and Mechel (as the guarantor) with the Moscow Arbitrazh Court seeking recovery of debt under the same REPO agreements (bonds) in the amount of 1.44 billion rubles. On June 30, 2015, the Moscow Arbitrazh Court sustained the Mecheltrans’s claim in full and dismissed the counterclaim of SM Capital OOO. SM Capital OOO filed an appeal. The Ninth ArbitrazhSvea Court of Appeal upheld(state court in Sweden) asking to set aside this award in full. In February 2018, the decisionSvea Court of Appeal accepted the Moscow Arbitrazh Court.
From May 2015 to April 2016, Novatek — Chelyabinsk OOO filed 20 claims against Chelyabinsk Metallurgical Plantpetition for consideration. The court hearing has not yet been scheduled. In August 2018, Minmetals applied with the Arbitrazh Court of Chelyabinsk region seeking recoveryfor recognition and enforcement on the territory of debt for gas supplied from April 2015 to March 2016 in an aggregate amountthe Russian Federation of approximately 6.3 billion rubles and penalty for delay in payment in an aggregate amountthe award of approximately 229.4 million rubles. During the period from July 2015 to April 2016,Arbitration Institute of the Stockholm Chamber of Commerce. The Arbitrazh Court of Chelyabinsk region sustainedsuspended the plaintiff’s claims under 18 cases. We appealed 16 cases. The Eighteenth Arbitrazhconsideration of the Minmetals petition until the termination of the proceedings in the Svea Court of Appeal dismissed our claims with respect to 12 cases and the remaining four cases will be considered in May 2016. The court hearings with respect to two cases are scheduled for late April-May 2016. Chelyabinsk Metallurgical Plant repaid debt in the amount of 4.0 billion rubles as principal.Appeal.
In December 2015, ERG SALES AG filed a claim against Chelyabinsk Metallurgical Plant with the London Court of International Arbitration (“LCIA”) seeking recovery of debt under iron ore feed supply contract in the amount of $10.7 million and penalty for delay in payment in the amount of $513.4 thousand. The court hearing has not been scheduled yet.
Debt litigation
VTB Group Companies
In June 2016, the LCIA approved a settlement agreement according to which Chelyabinsk Metallurgical Plant was obliged to repay $12.3 million in monthly installments until June 25, 2017. As of December 31, 2017, Chelyabinsk Metallurgical Plant repaid $11.9 million. On September 25, 2014, VTB BankMarch 22, 2018, ERG SALES AG filed a lawsuitclaim with the Arbitrazh Court of Chelyabinsk region seeking to oblige Chelyabinsk Metallurgical Plant to repay the amount of approximately $941.9 thousand. In June 2018, the Arbitrazh Court of Chelyabinsk region sustained the claims of ERG SALES AG. In August 2018, the debt was repaid in full.
From September 2017 to February 2019, IDGC of Urals JSC filed 14 claims against Mechel Energo with the Moscow Arbitrazh Court of Chelyabinsk region seeking recovery of debt under a credit facility agreementfor electricity transmission services for the period from July 2017 to November 2018 in an aggregate amount of approximately 3.0 billion rubles, including interest on the loan in the amount of 2.9 billion919.8 million rubles and penalty for delay in the amount of 104.5payment totaling approximately 58.7 million rubles. On October 30, 2014, we filed a counterclaim against VTB Bank seekingCurrently, the revision of credit facility clauses. On Decemberproceedings under 12 2014,cases are suspended until the Moscow Arbitrazh Court sustainedfirst case is considered by the VTB Bank claims and dismissed our claims. On June 9, 2015, the Ninth Arbitrazh Court of Appeal upheld the decisioncourt. The court hearing of the Moscow Arbitrazh Court. We filed a cassation appeal which was returned upon our request due tofirst case is scheduled for March 26, 2019, and the restructuring of the debt.
In October 2014, VTB Factoring OOO filed a lawsuit with the Moscow Arbitrazh Court against Chelyabinsk Metallurgical Plant and Mechel Service seeking jointly and severally recovery of debt on payments of 867.7 million rubles, and recovery from Chelyabinsk Metallurgical Plant of debt on payments of financing fees of 86.6 million rubles. On February 3, 2015, the Moscow Arbitrazh Court sustained the lawsuit in full. Chelyabinsk Metallurgical Plant and Mechel Service appealed with the Ninth Arbitrazh Court of Appeal. On April 27, 2015, the Ninth Arbitrazh Court of Appeal dismissed the appeals. In August 2015, the proceedings were terminated in connection with the approval of the settlement agreement by the court.
In December 2014, Yakutugol and Southern Kuzbass Coal Company each filed separate lawsuits against VTB Bank with the Moscow Arbitrazh Court seeking amendment of the loan agreements in connection with the substantial change of circumstances, namely a sharp decline in coal prices. We withdrew these lawsuits due to the restructuring of the debt.
On December 30, 2014, Mechel Carbon Singapore received Statutory Demands from VTB Bankcourt hearing for the payment of: (i) 10.0 billion rubles (principal amount) and 322.2 million rubles (interest) based on the guarantee of Mechel Carbon Singapore in favor of VTB Bank under the credit facility agreement between VTB Bank and Southern Kuzbass Coal Company, and (ii) 5.8 billion rubles (principal amount) and 187.3 million rubles (interest) based on the guarantee of Mechel Carbon Singapore in favor of VTB Bank under the credit facility agreement between VTB Bank and Yakutugol. On January 20, 2015, Mechel Carbon Singapore declined to pay under the Statutory Demands of VTB Bank with respect to several litigations concerning credit facility agreements between the borrowers (Southern Kuzbass Coal Company and Yakutugol) and VTB Bank in Russia. On January 27, 2015, VTB Bank submitted an application to the High Court of Singaporeremaining case is scheduled for the winding up proceedings against Mechel Carbon Singapore. On February 13, 2015, the High Court stated that VTB Bank has to submit the final letter of claim by February 27, 2015 and Mechel Carbon Singapore has to submit the final letter of defense by March 13, 2015. VTB Bank submitted its final letter of claim on March 16, 2015 and Mechel Carbon Singapore submitted its final letter of defense on March 26, 2015. VTB Bank requested for hearings on April 6, 2015, April 9, 2015, April 30, 2015, July 1, 2015, September 28, 2015 and October 19, 2015, however due to the fact that restructuring agreements between Mechel and VTB Bank were signed and became effective on October 13, 2015, the High Court of Singapore ordered that VTB Bank be granted a right to withdraw its claims against Mechel on October 19, 2015.4, 2019.
On January 7, 2015, Mechel Carbon received two notices of Betreibungsamt of Baar where it was informed about the proceedings against Mechel Carbon based on the claims of VTB Bank: (i) CHF 194.0 million and CHF 6.2 million resulting from a guarantee issued by Mechel Carbon in favor of VTB Bank as to the payment obligations of Southern Kuzbass Coal Company under the credit facility agreement, and (ii) CHF 112.8 million and CHF 3.6 million resulting from a guarantee issued by Mechel Carbon in favor of VTB Bank as to the payment obligations of Yakutugol under the credit facility agreement. On January 8, 2015, Mechel Carbon rejected the proceedings by submission of two Rechtsvorschlag (i.e., a motion exercising the right to refuse the procedure for compulsory execution). The proceedings were stopped. On February 16, 2015, Mechel Carbon received two claims of VTB Bank dated February 10, 2015 and court orders of canton Zug dated February 13,
2015 with respect to the following amounts: (i) CHF 184.7 million and CHF 6.2 million resulting from a guarantee issued by Mechel Carbon in favor of VTB Bank as to the payment obligations of Southern Kuzbass Coal Company under the credit facility agreement, and (ii) CHF 107.4 million and CHF 3.6 million resulting from a guarantee issued by Mechel Carbon in favor of VTB Bank as to the payment obligations of Yakutugol under the credit facility agreement. In court of canton Zug, VTB Bank is challenging Mechel Carbon’s refusal to participate in the enforcement proceedings. The Cantonal Court of Zug asked Mechel Carbon to submit a statement of defense within seven days. Mechel Carbon has applied for the extension. The Cantonal Court of Zug has granted the extension until April 17, 2015. Statement of defense of Mechel Carbon has been filed. The hearings were suspended until July 5, 2016 based on the parties mutual request.
On January 7, 2015,14, 2019, Mechel Trading received thea notice dated January 8, 2019 from cantonal court of BetreibungsamtZug about an acceptance of Baar where it was informed about the proceedings against Mechel Trading based on thecourt recovery claim of VTB Bank in the amount of CHF 51.6 million and CHF 1.3 million resulting from the guarantee issued by Mechel Trading in favor of VTB Bank under the payment obligations of Mechel. OnMoorgate Industries UK Limited dated January 8, 2015, Mechel Trading rejected the proceedings by submission of Rechtsvorschlag. The proceedings were stopped. On January 14, 2015, Mechel Trading received the notice of Betreibungsamt of Baar about the proceedings against Mechel Trading based on the claim of VTB Bank in the amount of CHF 694.9 million and CHF 50.1 million (interest) and CHF 2.3 million (penalty for the payment default) resulting from the guarantee issued by Mechel Trading in favor of VTB Bank under the payment obligations of Mechel. On January 19, 2015, Mechel Trading rejected the proceedings by submission of Rechtsvorschlag. The proceedings were stopped. On February 16, 2015, Mechel Trading received one claim of VTB Bank dated February 10, 2015 and court order of canton Zug dated February 13, 2015, with respect to the amount of CHF 747.3 million. In court of canton Zug, VTB Bank is challenging Mechel Trading’s refusal to participate in the enforcement proceedings. The Cantonal Court of Zug asked Mechel Trading to submit a statement of defense within seven days. Mechel Trading has applied for the extension. The Cantonal Court of Zug has granted the extension until April 17, 2015. Statement of defense of Mechel Trading has been filed. The hearings were suspended until July 5, 2016 based on the parties mutual request.
On February 2, 2015, VTB Bank filed a lawsuit against Mechel with the Moscow Arbitrazh Court seeking recovery of principal and interest under the credit facility agreement in the amount of 50.2 billion rubles, of which principal amounts to 44.5 billion rubles, interest amounts to 3.2 billion rubles and penalties amount to 2.5 billion rubles. In turn, Mechel filed a lawsuit with the Moscow Arbitrazh Court seeking invalidation of the certain clauses of the credit facility agreement and the notice which was sent on its basis. These two cases were combined into one. On April 9, 2015, the Moscow Arbitrazh Court sustained the VTB Bank claims and dismissed our claims. VTB Bank withdrew the lawsuit in connection with the restructuring of the debt. On January 21, 2016, the Ninth Arbitrazh Court of Appeal reversed the decision of the Moscow Arbitrazh Court and terminated the proceedings.
On February 12, 2015, Mechel Carbon Singapore submitted to the LCIA the letters of claim against VTB Bank which were accepted; the respondent was granted 28 days for the submission of its letter of defense. On February 24, 2015, VTB Bank exercised its right under the Southern Kuzbass Coal Company and Yakutugol guarantees to require the disputes submitted to the LCIA to be heard by English Courts. On March 25, 2015, Mechel Carbon Singapore filed a claim with the High Court of Justice of Great Britain, requesting injunctive relief restraining VTB Bank from continuing the Singapore proceedings. VTB Bank requested for hearings on April 6, 2015, April 9, 2015, April 30, 2015, July 1, 2015, September 28, 2015 and October 19, 2015, however due to the fact that restructuring agreements between Mechel and VTB Bank were signed and became effective on October 13, 2015, Mechel Carbon Singapore withdrew from the letter of claim on October 19, 2015.
On February 16, 2015, Yakutugol filed two lawsuits against VTB Bank with the Moscow Arbitrazh Court seeking invalidation of certain clauses of the loan agreement3, 2019 regarding the notificationdebt of early repayment of the loan amount and the terms of payment of fees. We lost the case regarding the notification and withdrew the lawsuit on the terms of payment in connection with the restructuring of the debt.
On February 17 and 18, 2015, Southern Kuzbass Coal Company filed two lawsuits against VTB Bank with the Moscow Arbitrazh Court seeking invalidation of certain clauses of the loan agreement regarding the notification of early repayment of the loan amount and the terms of payment of fees. On April 17, 2015, the Moscow Arbitrazh Court dismissed our claims. Southern Kuzbass Coal Company filed appeals with the Ninth Arbitrazh Court of Appeal, but later withdrew them due to the debt restructuring.Debt litigation
On March 2, 2015, we received notice from the LCIA that VTB Bank has filed a request for arbitration against Mechel, claiming $101.9 million (plus interest, expenses and any other amounts awarded by the arbitral tribunal) pursuant to a guarantee under which Mechel has allegedly guaranteed the performance of obligations of Skyblock Limited under a 2012 ISDA Master Agreement currency derivative transaction between Skyblock Limited and VTB Bank (Austria) AG (the “2012 ISDA Master Agreement”). On March 4, 2015, VTB Bank delivered its demand for immediate payment of the $101.9 million amount, threatening to petition for the winding-up of Skyblock Limited in case Skyblock Limited fails to pay this outstanding amount. On March 27, 2015, Mechel sent to the LCIA its response to the request for arbitration, rejecting VTB Bank’s claim, including, inter alia, the validity of early termination of the 2012 ISDA Master Agreement. On March 31, 2015, notice was served on Mechel Service Global concerning the seizure of shares of the company in favor of VTB Bank. Such shares were seized according to the judgment of the court in the Hague dated March 30, 2015 as an interim measure in support of the LCIA arbitration claim by VTB Bank against Mechel. On April 10, 2015, VTB Bank submitted a request for arbitration against Skyblock Limited under the 2012 ISDA Master Agreement. Due to the restructuring negotiations initially the parties have agreed on the moratorium for any arbitration proceedings until July 1, 2015, since then this moratorium has been extended until July 1, 2016. In October 2015, the payment obligations of Skyblock Limited under the 2012 ISDA Master Agreement have been repaid.Banks
On March 16, 2015, we received notice from the LCIA that VTB Bank and VTB Capital Plc havehad filed 14 requests for arbitration against our group companies. The 14 requests claim amounts allegedly due including during the arbitration, plus expensescosts and anysuch other, amounts awarded byunspecified, relief that the arbitral tribunal may deem appropriate, pursuant to two syndicated credit agreements (one involving Yakutugol and the other involving Southern Kuzbass Coal Company) and 12 deeds of guarantee with respect to those syndicated credit agreements. Under these deeds of guarantee, the guarantors (Mechel, Mechel Mining, Mechel Carbon, Mechel Carbon Singapore, Korshunov Mining Plant, Yakutugol and Southern Kuzbass Coal Company) each guaranteed the obligations of the borrowers (Yakutugol and Southern Kuzbass Coal Company) under each of the syndicated credit agreements. As of the date of the filing of the requests for arbitration, the claim against Yakutugol as the borrower and the claims against each of the Yakutugol guarantors isamount to $16.2 million, and the claim against Southern Kuzbass Coal Company as the borrower and the claims against each of the Southern Kuzbass Coal Company guarantors isamount to $16.3 million. OnMarch 17-18, 2015, we received notice from the LCIA concerning the initiation of the 14 arbitration cases described above. On April 13, 2015, the relevant Mechel group companies filed preliminary response letters in respect of the 14 arbitration cases described above. On April 24, 2015, in support of the 14 aforementioned LCIA arbitration proceedings, VTB Bank and VTB Capital Plc filed an arbitration claim with the High Court of Justice Queen’s Bench Division Commercial Court in England seeking injunctive relief to secure their arbitration claims. The first hearing regarding injunctions took place on April 29, 2015, following2015. Following the hearing and considering parties positionthe parties’ positions, the court postponed the hearing until May 18, 2015, however, later due to the restructuring negotiations the parties agreed on thea moratorium for injunction hearing until July 1, 2015, afterwards the moratorium for hearing and arbitration proceedings has been extended until the execution in September 1, November 1, December 1, 2015,2018 of a settlement agreement with VTB Bank and VTB Capital Plc according to which the claims were discontinued.
In February 1, 2016, April 1, 2016, July 1, 2016.
On April 13, 2015,2017, a number of lenders filed 14 requests for arbitration with the LCIA. The 14 requests claim amounts allegedly due plus costs and such other, unspecified, relief that the arbitral tribunal may deem appropriate, pursuant to two syndicated credit agreements (one involving Yakutugol and the other involving Southern Kuzbass Coal Company) and 12 deeds of guarantee with respect to those syndicated credit agreements. Under these deeds of guarantee, the guarantors (Mechel, Mechel Mining, Mechel Carbon, Mechel Carbon Singapore, Korshunov Mining Plant, Yakutugol and Southern Kuzbass Coal Company) each guaranteed the obligations of the borrowers (Yakutugol and Southern Kuzbass Coal Company) under each of the syndicated credit agreements. As of the date of the filing of the requests for arbitration, the claim against Yakutugol as the borrower and the claims against each of the Yakutugol guarantors was claimed to amount to $230.1 million plus costs, and the claim against Southern Kuzbass Coal Company as the borrower and Yakutugol filed two lawsuitsthe claims against VTB Bank with the Moscow Arbitrazh Court seeking invalidation of credit facility agreements, particularly the grant to VTB Bankeach of the right to demand unilaterally from Southern Kuzbass Coal Company and Yakutugolguarantors was claimed to sell U.S. dollars atamount to $231.0 million plus costs. In September 2017, the exchange rate of 29.45 rubles per one U.S. dollar (while the exchange rate of this currency was about 35 rubles per one U.S. dollar), and invalidation of transactions sold at such exchange rate. Later we withdrew these lawsuits dueamounts were updated to the restructuring of the debt.
Sberbank Group Companies
In September-October 2014, Sberbank Leasing AO filed 14 lawsuits against Mechel and our subsidiaries with the arbitrazh courts of first instance in five regions of the Russian Federation seeking recovery of lease payments and penalties under equipment finance leases totaling approximately 952.3$241.1 million rubles and $3.0 million. From November 2014 to May 2015, the arbitrazh courts of first instance ruled in favor of Sberbank Leasing AO for all cases. Our appeals were considered and rejected by the courts of appeal during the period from May to November 2015.
In October 2014, Sberbank filed a lawsuit against Bratsk Ferroalloy Plant and Mechel with the Arbitrazh Court of Irkutsk region seeking recovery of overdue interestplus costs under the loanYakutugol syndicated credit agreement in the amount of approximately 21.9and $241.5 million rubles. As the debt was repaid, Sberbank specified its claim and on January 21, 2015 the Arbitrazh Court of Irkutsk region rendered a decision to recover penalties on overdue interest in the amount of approximately 212.9 thousand rubles. Bratsk Ferroalloy Plant filed an appeal which was dismissed by the Fourth Arbitrazh Court of Appeal in May 2015.
On October 16, 2014, Sberbank filed a lawsuit against Mechel Trading with the International Court of Commercial Arbitration at the Chamber of Commerce and Industry of the Russian Federation seeking recovery of interestplus costs under the loan agreement in the amount of approximately $1.2 million. Since the guarantor repaid the amount of interest, the court ruled to recover interest for another period (not repaid by the guarantor) in the amount of $13.1 thousand. In June 2015, Sberbank filed an application with the Moscow Arbitrazh Court seeking enforcement of the ruling of the International Court of Commercial Arbitration at the Chamber of Commerce and Industry of the Russian Federation. On February 16, 2016, the Moscow Arbitrazh Court sustained the application of Sberbank and issued an order of enforcement.
In October 2014, Sberbank filed eight lawsuits against Mechel and our subsidiaries with the Moscow Arbitrazh Court seeking recovery of debt (interest and penalties under credit facility agreements) in an aggregate amount of approximately 1.6 billion rubles and $1.6 million. After the commencement of court proceedings, interest in the amount of 1.5 billion rubles and $1.6 million was repaid voluntarily except for penalties which could be changed in the course of hearings. On December 19, 2014, the Moscow Arbitrazh Court partially sustained the claims of Sberbank and recovered penalties in the amount of 259.1 thousand rubles under the first case. Sberbank filed an appeal, but later withdrew it. On February 9, 2015, the Moscow Arbitrazh Court separated the second case into three separate disputes. Under one new case, the court recovered penalties in the amount of 10.6 million rubles and under the other two cases Sberbank abandoned its claims. We filed an appeal which was dismissed by the Ninth Arbitrazh Court of Appeal. On February 13, 2015, the Moscow Arbitrazh Court dismissed Sberbank’s claims under the third case. On February 18, 2015, the Moscow Arbitrazh Court sustained the claims of Sberbank to increase the amount of overdue interest by $2.9 million in connection with the conversion of the credit facility into U.S. dollars on the base of the novation agreement. According to this agreement the debt in Russian rubles was converted into U.S. dollars at the exchange rate of 31.0 rubles per one U.S. dollar, while on the date of conversion the exchange rate was 50.0 rubles per one U.S. dollar. Southern Kuzbass Coal Company received a new obligation to pay Sberbanksyndicated credit agreement. In late 2017 and early 2018, several lenders left the difference between these quotations and the increase in penalty by 2.4 million rubles and $42.9 thousand under the fourth case. Southern Kuzbass Coal Company filed a counterclaim seeking invalidation of this novation agreement. On April 2, 2015, the Moscow Arbitrazh Court dismissed the counterclaim. We filed an appeal which was dismissed by the Ninth Arbitrazh Court of Appeal. Later we filed a cassation appeal, but withdrew it in connection with the restructuring of the debt. On February 19, 2015, the Moscow Arbitrazh Court partially sustained the claims of Sberbank and recovered penalties in the amount of 20.6 million rubles under the fifth case. We appealed the decision in the court of appeal and the court of cassation, the courts dismissed our claims. On March 3, 2015, the Moscow Arbitrazh Court partially sustained the claims of Sberbank and recovered penalty in the amount of 22.8 thousand rubles under the sixth case. Sberbank filed an appeal regarding the stamp duty distribution which was sustained by the court in May 2015. With respect to the remaining two cases, Sberbank withdrew the lawsuits due to the repayment of the debt.
In February-March 2015, Sberbank filed two lawsuits against Mechel and our subsidiaries with the Moscow Arbitrazh Court seeking recovery of debt (interest under credit facility agreements) in an aggregate amount of approximately 7.4 million rubles and $6.7 million. These litigations refer, inter alia, to the novation agreement on the base of which the debt in Russian rubles was converted into U.S. dollars. Under one of the litigations, on April 21, 2015, we filed a counterclaim seeking invalidation of two novation agreements. The second litigation was joined with the Southern Kuzbass Coal Company’s lawsuit filed on February 26, 2015 against Sberbank with the Moscow Arbitrazh Court seeking invalidation of the novation agreement on the base of which the ruble debt was converted into U.S. dollars at the exchange rate of 31.0 rubles per one U.S. dollar (while on the date of conversion the exchange rate was 50.0 rubles per one U.S. dollar)arbitration. Yakutugol and Southern Kuzbass Coal Company receivedcontested the jurisdiction of the tribunal but the tribunal dismissed the contest. Yakutugol and Southern Kuzbass Coal Company appealed this decision. They also submitted counterclaims. From July to October 2018, we executed a new obligation to pay Sberbanknumber of settlement agreements with the difference between these quotations. We lost these cases inlenders, whereby the Moscow Arbitrazh Courtclaimants and the Ninth Arbitrazh Court of Appeal. Later we lost in the court of cassation with respectrespondents had agreed to the first casediscontinue their claims and withdrew the second one in connection with the restructuring of the debt.counterclaims.
In 2015, Sberbank Leasing AO filed 32 lawsuits against Mechel and our subsidiaries with the arbitrazh courts of first instance in five regions of the Russian Federation seeking recovery of lease payments, penalties and transfer of leasing assets under equipment finance leases totaling approximately 1.3 billion rubles and $4.5 million. The arbitrazh courts of first instance sustained in full and in part the plaintiff’s claims on recovery of debt under 31 cases, taking into account our counterclaims, as well as sustained in full the plaintiff’s claims on recovery of property under 29 of these cases. We appealed all these cases. Sberbank Leasing AO appealed those cases under which the claims were sustained in part. In March-May 2016, the arbitrazh courts of first instance and of appeal approved settlement agreements regarding 30 cases. One of the settlement agreements in the amount of approximately $4.5 million was not approved by the court and we filed a cassation appeal. The court hearing with respect to the remaining one case is scheduled for June 1, 2016.
OtherLeasing
From June to September 2015 and in March 2016, Caterpillar Financial OOO filed eight lawsuits with the Moscow Arbitrazh Court against Yakutugol, Mechel Engineering, Korshunov Mining Plant, Mechel Materials, Metallurgshakhtspetsstroy, Tomusinsky Open Pit and Southern Kuzbass Coal Company, as well as Mechel (as the guarantor under four lease agreements) seeking termination of lease agreements, withdrawal of leasing assets and recovery of debt in an aggregate amount of approximately $5.0 million and €313.9 thousand. As ofDuring the date hereof,period from October 2015 to July 2016, the Moscow Arbitrazh Court sustained the claims regarding the recovery of debt in the amount of approximately $4.0$4.5 million and €380.2 thousand and dismissed the claims regarding the withdrawal of leasing assets under fivesix cases; sustained the claims regarding the withdrawal of leasing assets and dismissed the rest of claims under one case; sustained in full the plaintiff’s claims under one case. One lawsuit has been left without motion until April 29, 2016.During the period from October 2015 to November 2016, we appealed all these cases with the higher courts. The higher courts upheld the decisions of the Moscow Arbitrazh Court under seven cases and recovered penalty in the amount of approximately $88.6 thousand under one case. In addition, in July 2016, Caterpillar Financial OOO appealedfiled a lawsuit with the Moscow Arbitrazh Court against Southern Kuzbass Coal Company seeking withdrawal of a leasing asset under one lease agreement and recovery of debt in an aggregate amount of approximately $235.8 thousand under two other lease agreements. During the court hearings, the court divided the lawsuit into three cases. In January 2017, the Moscow Arbitrazh Court sustained the plaintiff’s claims regarding the withdrawal of the leasing asset and recovery of debt in the amount of approximately $56.6 thousand. In April-December 2017, the Ninth Arbitrazh Court of Appeal all the cases. During the period from January to April 2016, the court upheld the decisions of the lower courtapproved settlement agreements with new payment schedules under five cases. We also intend to appealIn 2016-2018, we repaid the Moscow Arbitrazh Court’s decisions regarding the withdrawal of leasing assetsdebt in full under four cases. At present, we have signed settlement agreements under two cases.cases and expect to sign settlement agreements under three cases, all to be further approved by the court.
Securities litigationOther
On December 16, 2013, SAVEN ENTERPRISES LTD. (“SAVEN”)January 9, 2017, Atrix B.V. filed a claim inlawsuit with the Arbitrazh Court of KemerovoRostov region against Tomusinsky Open PitMechel, Mechel Mining Management, Mechel-Steel Management, NK INVEST OOO and Southern Kuzbass Coal Companyformer general director of Rostov Electrometallurgical Plant OOO seeking invalidationjointly and severally recovery of coal supply contracts signed between Tomusinsky Open Pit and Southern Kuzbass Coal Company, applicationdamages related to the management of the consequences of their invalidityRostov Electrometallurgical Plant OOO in the formamount of repayment of 21.1approximately 10.1 billion rubles and interest recovery in favor of Tomusinsky Open Pit. During the trial,rubles. In February 2017, the amount of claims under the lawsuit was reducedincreased to 16.410.9 billion rubles and several expert examinations regardingrubles. In April 2017, the determination of the market price of coal sold under these contracts were conducted. The experts confirmed that the coal was sold based on market prices. On January 30, 2015,proceedings have been suspended due to judicial expertise. In July 2017, the Arbitrazh Court of KemerovoRostov region ruled to dismisssustained the claims for recovery of SAVEN. SAVEN filed an appealdamages in the total amount of approximately 12.7 billion rubles. We appealed this decision with the Seventhhigher court. The higher court upheld the decision of the Arbitrazh Court of Appeal. The court dismissed the appeal. SAVENRostov region. In October 2017, we filed a cassation appeal with the Arbitrazh Court of West SiberianNorth Caucasus District. On September 14, 2015,In November 2017, the Arbitrazh Court of West SiberianNorth Caucasus District
reversed the lower courts decisions and remanded the case for a new proceeding with the court of first instance. On April 28, 2016,March 13, 2018, the Arbitrazh Court of Rostov region dismissed the claim of Atrix B.V. The courts of higher instances upheld the decision of the Arbitrazh Court of Rostov region. Atrix B.V. filed a cassation appeal with the Supreme Court of the Russian Federation, which denied in consideration.
Rostov Electrometallurgical Plant OOO and Lomprom Rostov OOO within the bankruptcy cases of Zlatoust Metallurgical Plant OAO and Guryevsk Metallurgical Plant OAO (hereinafter referred to as the “debtors”) reviewed in the Arbitrazh Court of Chelyabinsk region and the Arbitrazh Court of Kemerovo region, ruledrespectively, requested to conducthold Mechel secondarily liable for obligations of the debtors. The claimants state that Mechel was the controlling entity in relation to the debtors and pursuant to the Bankruptcy Law should be liable in the amount equal to the aggregate amount of creditor claims that remained unsettled due to insufficiency of the debtors’ property. The amount of claims is not currently defined. On August 31, 2018, the Arbitrazh Court of Kemerovo region dismissed claims to impose secondary liability on Mechel under the first case; this decision is being appealed now. The proceedings under the second case are suspended.
On December 1, 2017, the Arbitrazh Court of Irkutsk region held proceedings in connection with a judicial expertise until August 2016claim filed by Paslentia Investments Ltd. (“Paslentia”) against Mechel and suspendedMechel Mining in favor of Korshunov
Mining Plant, where Paslentia is a minority shareholder. Paslentia seeks to challenge loans provided by Korshunov Mining Plant in the proceedings.total amount of 4.2 billion rubles. The Arbitrazh Court of Irkutsk region and a higher court dismissed the claim in full.
In May 2014, SAVEN2017, Paslentia filed with the District Court of Nicosia a lawsuit against Tomusinsky Open Pit and other Russian group companies, Mr. Zyuzin and Russian and Cypriot companies belonging to him and his family members, claiming damages amounting to $781.4 million for losses allegedly caused to Tomusinsky Open Pit and SAVEN as a minority shareholder in Tomusinsky Open Pit. In the context of the above lawsuit, SAVEN applied for the seizure of assets of the defendant Cypriot companies and Mr. Zyuzin and on May 20, 2014 the Cyprus Court granted ex parte such freezing injunctions. The Cypriot defendant companies and Mr. Zyuzin are challenging the validity of the ex parte injunctions and the application for interim injunctions is pending for hearing. On April 30, 2015, the Court dismissed the application of Tomusinsky Open Pit regarding challenging the jurisdiction of Cyprus Courts, all other applications of other group defendants have been rescheduled. In May 2015, Tomusinsky Open Pit filed an appeal, the hearing is still pending. Due to the appeal filing the Cyprus Court several times adjourned the hearings, next will take place on May 20, 2016.
In August 2014, Arsagera Asset Management OAO filed a claim with the Moscow Arbitrazh Court against Mechel seeking invalidation of the decision of our annual general shareholders’ meeting relating to the confirmation of dividend payments in the amount of 0.05 rubles per one preferred share. The Moscow Arbitrazh Court dismissed the claim. The plaintiff appealed to the Ninth Arbitrazh Court of Appeal which upheld the decision of the Moscow Arbitrazh Court. In April 2015, the plaintiff filed a cassation appealtwo claims with the Arbitrazh Court of Moscow District. DuringIrkutsk region seeking invalidation of suretyship agreements entered into between Korshunov Mining Plant and each of Gazprombank and VTB Bank. Under the period from June to September 2015,suretyship agreements with Gazprombank, the Arbitrazh Court of Irkutsk region and a higher courts upheldcourt dismissed the decisionclaim in full. Under the suretyship agreements with VTB Bank, the court hearing is scheduled for May 21, 2019.
On October 26, 2017, Omia Holdings Limited (“Omia”), a minority shareholder of the Moscow Arbitrazh Court.
In December 2014, Rudservis OOOGuryevsk Metallurgical Plant OAO, filed two claims against Southern Kuzbass Coal Companya claim with the Arbitrazh Court of Kemerovo region seeking compensation for losses incurred dueinvalidation of a facility agreement and a loan agreement entered into by Guryevsk Metallurgical Plant OAO, recognition of Mechel as the borrower under the facility agreement and imposition of an obligation to delayed payment for delivered products under coal supply contracts concluded between Tomusinsky Open Pit and Southern Kuzbass Coal Company in a total principal amount of approximately 11.2 billion rubles. Rudservis OOO is a minority shareholder of Tomusinsky Open Pit. In May and June 2015,repay the facility on Mechel. The Arbitrazh Court of Kemerovo region dismissed the claims of Rudservis OOO. Later theclaim. The higher courts upheld the decision of the Arbitrazh Court of Kemerovo region.
In January and April 2015, Rudservis OOO2019, Omia filed two claims against Southern Kuzbass Coal Company, Mechel Mining and Mechel withfor review on the basis of newly discovered facts. On February 15, 2019, the Arbitrazh Court of Kemerovo region seeking recoveryrejected the review.
On March 2, 2018, Boreas Asset Management and Arsagera Asset Management, minority shareholders of damages (loss of profit) received by Tomusinsky Open Pit asUrals Stampings Plant, filed a result of coal supplies to Southern Kuzbass Coal Company in a total amount of 11.8 billion rubles. In July 2015, these two cases were combined into one. In October 2015,claim with the Arbitrazh Court of KemerovoChelyabinsk region stayed proceedings. On January 26, 2016, Rudservis OOO abandoned its claims.seeking invalidation of loan agreements entered into between Urals Stampings Plant and Mechel. The Arbitrazh Court of Chelyabinsk region and a higher court dismissed the claim in full.
Securities litigation
In April 2015, Vadim Varshavsky filed a lawsuit with the Moscow Arbitrazh Court seeking to oblige Mechel and Mechel Steel OOO to perform share purchase agreements by transferring 2,000 shares of our Cypriot company Daveze Limited and to recognize the plaintiff’s title to these shares. In August 2015, the Moscow Arbitrazh Court ruled to terminate the proceedings. Vadim Varshavsky appealed to the higher courts. In December 2015, the Arbitrazh Court of Moscow District reversed the lower courts decisions and remanded the case for a new proceeding. TheIn June 2016, the Moscow Arbitrazh Court dismissed the claim. During the period from October 2016 to August 2017, the higher courts upheld the decision of the Moscow Arbitrazh Court. In November 2017, Vadim Varshavsky filed for review on the basis of newly discovered facts. On March 21, 2018, the Moscow Arbitrazh Court rejected the review. In September 2018, a higher court session is adjourned until May 23, 2016.upheld the decision of the Moscow Arbitrazh Court.
Dividend Distribution Policy
We determine the amount of dividends payable on our common shares based on cash needs of our business, which will be influenced by the market situation, results of our operations, the level and availability of debt and debt servicing requirements and the requirements of our capital investment program.
We determine the amount of dividends payable on our preferred shares based on the provisions of our charter. See “Item 10. Additional Information — Description of Capital Stock — Dividends.”
In addition, some of our credit facility agreements impose certain restrictions on the payment of dividends on our shares. Mechel may not pay dividends on its common shares without the prior written consent of the lenders. The amount of permitted dividends paid on our preferred shares is limited to 7.5 million rubles.rubles or another minimum amount required by our charter.
The decision to pay dividends and the amount thereof must be recommended by our Board of Directors taking into account the charter’s provisions and approved by our shareholders. The amount of dividends, if any,
approved by the shareholders may not be higher than the amount proposed by the Board of Directors. In particular, dividends may be declared and paid only out of net profits calculated under the Russian accounting standards and as long as the following conditions have been met:
our charter capital has been paid in full;
the value of our net assets, calculated under the Russian accounting standards, is not less (and would not become less as a result of the proposed dividend payment) than the sum of our charter capital, our reserve fund and the difference between the liquidation value and the par value of our issued and outstanding preferred shares;
we have repurchased all shares from shareholders having the right to demand repurchase; and
we are not, and would not become, insolvent as the result of the proposed dividend payment.
For a further description, please refer to “Item 10. Additional Information — Description of Capital Stock — Dividends.” See also “Item 3. Key Information — Risk Factors — Risks Relating to Our Shares and ADSs and the Trading Market — Our ability to pay dividends depends primarily upon receipt of sufficient funds from our subsidiaries.”
On June 30, 2015,29, 2018, our general shareholders’ meeting decided not to pay dividends for 20142017 on common shares and declared a dividend of 2,311.7 million rubles on preferred shares (of which 809.1 million rubles was paid to Skyblock Limited), which was paid in August 2018. On June 30, 2017, our general shareholders’ meeting decided not to pay dividends for 2016 on common shares and declared a dividend of 1,426.4 million rubles on preferred shares (of which 570.6 million rubles was paid to Skyblock Limited), which was paid in July and August 2017. On June 30, 2016, our general shareholders’ meeting decided not to pay dividends for 2015 on common shares and declared a dividend of 6.9 million rubles on preferred shares (of which 2.8 million rubles was paid to Skyblock Limited), which was paid in July and August 2015. On June 30, 2014, our general shareholders’ meeting decided not to pay dividends for 2013 on common shares and declared a dividend of 6.9 million rubles on preferred shares (of which 2.8 million rubles was paid to Skyblock Limited), which was paid in July and August 2014. On June 28, 2013, our general shareholders’ meeting decided not to pay dividends for 2012 on common shares and declared a dividend of 6.9 million rubles on preferred shares (of which 2.8 million rubles was paid to Skyblock Limited), which was paid in August 2013.2016. In each case we could not pay insignificant amounts of dividends to those shareholders who did not provide us with their bank account details.details and/or due to the restriction of shareholders’ rights to receive dividends in certain cases provided for by Russian law.
We anticipate that any dividends we may pay in the future on shares represented by ADSs will be declared and paid to the depositary in rubles (subject to Russian withholding tax) and will be converted into U.S. dollars by the depositary and distributed to holders of ADSs, net of the depositary’s fees and expenses. Accordingly, the value of dividends received by holders of ADSs will be less than the amounts declared and subject to fluctuations in the exchange rate between the ruble and the U.S. dollar. For information on risks associated with Russian withholding tax on dividends to holders of ADSs, see “Item 10. Additional Information — Taxation — Russian Income and Withholding Tax Considerations.”
Significant Changes
Ongoing debt restructuring
In the first quarter of 2016, we converted all U.S. dollar-denominated debt with Gazprombank into Russian rubles. After the conversion restructuring under the respective credit facilities became effective. As of the date hereof, restructuring of the remaining credit facilities with GazprombankOther than as described in this document, no significant change in our business has not come into effect. In March 2016, we mortgaged the Ulak-Elga rail line to Gazprombank.
In February 2016, we signed amendments with Sberbank to restructure debt in the amount of approximately 29.3 billion rubles and $100.0 million, providing for, among others, extension of the repayment grace period until April 2017 and final maturity until April 2020. Further extension depends on obtainment of similar terms of restructuring with VTB Bank, as well as fulfillment of certain conditions subsequent. In March 2016, we signed additional amendments regulating time limits for fulfillment of conditions subsequent, including partial assignment of Sberbank’s debt to Gazprombank in the total amount of 31.5 billion rubles.
In April 2016, following the assignment of Southern Kuzbass Coal Company’s debt of $423.1 million and 3.1 billion rubles from Sberbank to Gazprombank, we signed settlement agreements with the latter to convert the U.S. dollar-denominated debt into Russian rubles and to extend the maturity of the loans until June 30, 2016. The remaining debt was restructured with extension of grace period and principal repayment, new interest rates and levels of financial covenants.
For a more detailed description of the current terms of our credit facilities, see “Item 5. Operating and Financial Review and Prospects — Description of Certain Indebtedness” and “Item 10. Additional Information — Material Contracts.”
Option for acquisition of a stake in the Elga coal complex
On April 1, 2016, we signed option agreements with Gazprombank providing the bank with an option to acquire a 49% stake in the Elga coal complex for a total consideration of 34.3 billion rubles. According to these agreements, we are obliged to sell to Gazprombank (after its acceptance of the option) a 49% stake in Elgaugol OOO, the owner of the subsoil license for the Elga coal deposit, a 49% stake in Elga-doroga OOO, the owner of the Ulak-Elga rail line which had been contributed to the registered capital of this newly established company in March 2016, and a 49% stake in Mecheltrans Vostok OOO, the rail line’s transport operator (collectively, the “target companies”), by June 30, 2016. Proceeds from the sale of these stakes will be used for repayment of our debt to Gazprombank, Sberbank and Sberbank Leasing AO. The agreements also provide for joint coordination of management over the Elga coal complex. Gazprombank will have a put option to sell its stakes (in full or in part) in the Elga coal complex within three years following a five-year period or in case of a breach of conditions stipulated by such agreement. Put options are signed by Yakutugol and Mecheltrans (sellers of the stakes in the target companies) and will be guaranteed by Mechel Mining and Southern Kuzbass Coal Company. If we fail to perform under these put options Gazprombank will have the right to buy out (call option) the remaining stakes owned by us in the target companies. A 1.99% stake in each of the target companies will be pledged in favor of Gazprombank as a security for the call option. As of the date hereof, Gazprombank has not exercised its right to conclude sale and purchase agreements under option agreements and the stakes of the target companies have not been transferred to the bank.occurred since December 31, 2018.
Our common ADSs have been listed on the NYSE under the symbol “MTL” since October 2004. OurIn June 2004, our common shares were listed on Open Joint Stock Company “Russian Trading System” Stock Exchange (“RTS”) under the symbol “MTLR” in June 2004, and in. In October 2008, our common shares were promoted to the quotation list “A-2.” In December 2011, RTS ceased to exist as a result of its reorganization through accession tolisted on Closed Joint Stock Company Moscow Interbank Currency Exchange (“CJSC MICEX”), now. RTS and MICEX ceased to exist as a result of their reorganization through accession to Public Joint-Stock Company “Moscow ExchangeMICEX-RTS” (“Moscow Exchange”), and our common shares were excluded from the quotation list “A-2” on RTS. In December 2008, our common shares were admitted to trading on MICEX and included in the quotation list “V”, and were promoted to the quotation list “A-1” in March 2009. Starting from December 2011, our common shares were traded in the quotation list “A-1” on MICEX. Since June 2014, our. Our common shares have been tradingtraded on the MICEXMoscow Exchange Level 1 quotation list. The change is associated withlist under the Moscow Exchange’s new listing rules which came into effect on June 9, 2014. Level 1 includes securities that were on the “A-1” and “A-2” quotation lists before this date. Since the liquidity of our shares on MICEX was typically much higher than on RTS, in the table below starting from January 2009 we use MICEX data (conversion from rubles into U.S. dollars is made using the CBR exchange rate).symbol “MTLR.”
The following table sets forth the high and low closing prices per common ADS and common share for: (1) the most recent seven months; (2) the most recent nine quarters; and (3) all years following our initial public offering in 2004. Effective January 12, 2016, we changed the ratio of our common shares to common ADSs from 1:1 to 2:1. See “Item 3. Key Information — Risk Factors — Risks Relating to Our Shares and the Trading Market — The price of our shares and ADSs could be volatile and could drop unexpectedly, making it difficult for investors to resell our shares or ADSs at or above the price paid.” The common ADS prices below have been recalculated to reflect the new common ADS-to-common share ratio.
| Common ADSs | Common Shares | |||||||||||||||
| High | Low | High | Low | |||||||||||||
| (In U.S. dollars) | ||||||||||||||||
April 2016 | 2.15 | 1.81 | 1.03 | 0.91 | ||||||||||||
March 2016 | 2.05 | 1.72 | 0.94 | 0.91 | ||||||||||||
February 2016 | 1.86 | 1.48 | 0.88 | 0.81 | ||||||||||||
January 2016 | 2.00 | 1.29 | 0.89 | 0.69 | ||||||||||||
December 2015 | 1.88 | 1.52 | 1.02 | 0.91 | ||||||||||||
November 2015 | 1.94 | 1.67 | 1.03 | 0.91 | ||||||||||||
October 2015 | 2.02 | 1.71 | 1.01 | 0.94 | ||||||||||||
First Quarter 2016 | 2.05 | 1.29 | 0.94 | 0.69 | ||||||||||||
Fourth Quarter 2015 | 2.02 | 1.52 | 1.03 | 0.91 | ||||||||||||
Third Quarter 2015 | 2.48 | 1.34 | 1.07 | 0.75 | ||||||||||||
Second Quarter 2015 | 2.94 | 2.34 | 1.35 | 1.20 | ||||||||||||
First Quarter 2015 | 3.65 | 1.26 | 1.51 | 0.44 | ||||||||||||
Fourth Quarter 2014 | 2.38 | 0.87 | 0.51 | 0.28 | ||||||||||||
Third Quarter 2014 | 4.28 | 1.34 | 1.50 | 0.39 | ||||||||||||
Second Quarter 2014 | 4.80 | 3.58 | �� | 1.61 | 1.03 | |||||||||||
First Quarter 2014 | 5.12 | 3.32 | 1.99 | 0.86 | ||||||||||||
2015 | 3.65 | 1.26 | 1.51 | 0.44 | ||||||||||||
2014 | 5.12 | 0.87 | 1.99 | 0.28 | ||||||||||||
2013 | 14.80 | 3.94 | 7.22 | 1.72 | ||||||||||||
2012 | 24.74 | 10.54 | 11.89 | 5.35 | ||||||||||||
2011 | 69.18 | 15.80 | 32.74 | 8.05 | ||||||||||||
2010 | 61.60 | 34.90 | 30.11 | 17.64 | ||||||||||||
2009 | 43.64 | 5.14 | 17.81 | 2.29 | ||||||||||||
2008 | 115.24 | 7.32 | 45.00 | 4.10 | ||||||||||||
2007 | 69.26 | 15.82 | 25.71 | 8.30 | ||||||||||||
2006 | 20.64 | 12.68 | 10.20 | 6.25 | ||||||||||||
2005 | 24.34 | 14.04 | 11.20 | 7.75 | ||||||||||||
2004 | 14.96 | 10.52 | 17.00 | 0.36 | ||||||||||||
Our preferred ADSs have been listed on the NYSE under the symbol “MTL PR” since May 2010. In April 2011, our preferred shares were admitted to trading without listing on RTS and MICEX. OurIn July 2011, our preferred shares were included in the quotation list “A-1”listed on MICEX. RTS and MICEX in July 2011. In December 2011, RTS ceased to exist as a result of their accession to CJSC MICEX, now Moscow Exchange, and our preferred shares were excluded from the list of securities admitted to trading without listing on RTS. Starting from December 2011, our preferred shares were traded in the quotation list “A-1” on MICEX. Since June 2014, ourExchange. Our preferred shares have been tradingtraded on the MICEXMoscow Exchange Level 1 quotation list. The change is associated withlist under the Moscow Exchange’s new listing rules which came into effect on June 9, 2014. Level 1 includes securities that were on the “A-1” and “A-2” quotation lists before this date. Each preferred ADS represents one-half of a preferred share.symbol “MTLRP.”
The following table sets forth the high and low closing prices per preferred ADS and preferred share for: (1) the most recent seven months; (2) the most recent nine quarters; and (3) all years following the public offering in 2010.
Preferred ADSs | Preferred Shares | |||||||||||||||
| High | Low | High | Low | |||||||||||||
| (In U.S. dollars) | ||||||||||||||||
April 2016 | 0.29 | 0.23 | 0.66 | 0.58 | ||||||||||||
March 2016 | 0.26 | 0.23 | 0.59 | 0.58 | ||||||||||||
February 2016 | 0.26 | 0.20 | 0.57 | 0.54 | ||||||||||||
January 2016 | 0.29 | 0.20 | 0.51 | 0.46 | ||||||||||||
December 2015 | 0.35 | 0.26 | 0.64 | 0.57 | ||||||||||||
November 2015 | 0.30 | 0.27 | 0.67 | 0.61 | ||||||||||||
October 2015 | 0.30 | 0.25 | 0.67 | 0.64 | ||||||||||||
First Quarter 2016 | 0.29 | 0.20 | 0.59 | 0.46 | ||||||||||||
Fourth Quarter 2015 | 0.35 | 0.25 | 0.67 | 0.64 | ||||||||||||
Third Quarter 2015 | 0.38 | 0.20 | 0.89 | 0.54 | ||||||||||||
Second Quarter 2015 | 0.42 | 0.35 | 0.94 | 0.86 | ||||||||||||
First Quarter 2015 | 0.46 | 0.09 | 1.03 | 0.30 | ||||||||||||
Fourth Quarter 2014 | 0.14 | 0.08 | 0.33 | 0.17 | ||||||||||||
Third Quarter 2014 | 0.36 | 0.09 | 0.74 | 0.23 | ||||||||||||
Second Quarter 2014 | 0.38 | 0.31 | 0.84 | 0.66 | ||||||||||||
First Quarter 2014 | 0.47 | 0.30 | 1.09 | 0.55 | ||||||||||||
2015 | 0.46 | 0.09 | 1.03 | 0.30 | ||||||||||||
2014 | 0.47 | 0.08 | 1.09 | 0.17 | ||||||||||||
2013 | 2.23 | 0.39 | 4.11 | 1.01 | ||||||||||||
2012 | 4.91 | 1.92 | 11.82 | 3.86 | ||||||||||||
2011 | 11.27 | 3.24 | 8.99 | 6.15 | ||||||||||||
2010 | 9.66 | 6.60 | n/a | n/a | ||||||||||||
Item 10. Additional Information
Charter and Certain Requirements of Russian Legislation
We describe below our registered common and preferred shares, the material provisions of our charter in effect on the date of this document and certain requirements of Russian legislation. In addition to this description, we urge you to review our charter, which is included as an exhibit to this document, to review its complete terms. The description of our charter is qualified in its entirety by reference to the charter.
Our Purpose
Article 4.1 of our charter provides that our primary purpose is to earn profit, as well as to provide the highest-quality products and services for our customers.
Description of Capital Stock
General
Pursuant to our charter, as amended, we have the right to issue registered common shares, preferred shares and other securities provided for by the legislation of the Russian Federation with respect to securities. Our capital stock currently consists of 555,027,660 shares, including 416,270,745 common shares, each with a nominal value of 10 rubles, and 138,756,915 preferred shares, each with a nominal value of 10 rubles, all of which are fully paid, issued and outstanding under Russian law. Under Russian legislation, charter capital refers
to the aggregate nominal value of the issued and outstanding shares. We are authorized to issue an additional 81,698,341 common shares with a nominal value of 10 rubles each. None of our capital stock is under option or agreed conditionally or unconditionally to be put under option. Any of our shares that are owned by our subsidiaries are not considered treasury shares under Russian law (i.e., they are considered outstanding shares), and we are able to vote such shares and dispose of such shares without any further corporate actions by our shareholders or Board of Directors, provided that such disposals are not major or interested party transactions. Currently, our wholly-owned subsidiary Skyblock Limited holds 55,502,766 preferred shares. The shares are considered issued and outstanding shares under Russian law and have all the rights attaching to other preferred shares. The preferred shares owned by Skyblock Limited are not considered outstanding for purposes of our IFRS financial statements.
Currently, we have more than 1,00010,000 holders of voting shares, which determines the applicability of certain provisions of the Joint-Stock Companies Law, as described below.
A resolution of our Board of Directors dated May 14, 2008 approved an increase in our charter capital through the issuance of 55,000,000 preferred shares with a nominal value of 10 rubles. On September 19, 2008, our Board of Directors amended its resolution to increase the number of preferred shares being issued to 138,756,915 preferred shares which is the maximum number of preferred shares authorized by our charter. The decision to issue 138,756,915 preferred shares was registered with the FFMS on October 23, 2008. On April 2, 2009, we placed all 138,756,915 of the preferred shares authorized for issuance at the placement price of 10 rubles per share. All the preferred shares were taken up by our wholly-owned subsidiary Skyblock Limited, which was the sole offeree. A report on the placement of the preferred shares was registered with the FFMS on April 14, 2009. We transferred 83,254,149 preferred shares to the sellers of 100% of the shares and interest of Bluestone Industries, Inc., Dynamic Energy, Inc. and JCJ Coal Group, LLC and certain other companies as part of the consideration in our acquisition of the Bluestone. Our preferred shares are not convertible into common shares, bonds or other securities of Mechel.
Rights attaching to common shares
Holders of our common shares have the right to vote at general shareholders’ meetings. As required by the Joint-Stock Companies Law and our charter, all of our common shares have the same nominal value and grant to their holders identical rights. Each fully paid common share, except for treasury shares, gives its holder the right to:
freely transfer the shares without the consent of other shareholders or the company;
receive dividends in accordance with our charter and current legislation;
participate in general shareholders’ meetings and vote on all matters of shareholders’ competence;
transfer voting rights to its representative on the basis of a power of attorney;
elect and be elected to the governing and controlling bodies of the company;
if holding, alone or with other holders, 2% or more of the voting stock, within 45 days after the end of our fiscal year, make proposals to the agenda of the annual general shareholders’ meeting and nominate candidates to the board of directors review commission and counting commission;
if holding, alone or with other holders, 10% or more of the voting stock, demand that the board of directors call an extraordinary general shareholders’ meeting or an unscheduled audit by our review commission or an independent auditor;meeting;
demand, under the following circumstances, the repurchase by us of all or some of the shares owned by it, as long as such holder voted against or did not participate in the voting on the decision approving the following:
our reorganization;
amendment of our charter or approval of a new version of our charter that restricts the holder’s rights; and
amendment of the company’s charter which eliminates indication that the company is public, simultaneously with the decision on applying to the CBR on release from obligation to disclose information under the laws of the Russian Federation on securities and the decision on applying for delisting of shares and equity securities convertible into shares;
upon liquidation, receive a proportionate amount of our property after our obligations to our creditors are fulfilled;
in cases and in the procedure provided by Russian law and our charter, receive information on the company’s activities, including access to certain company documents,accounting and other documentation, receive copies thereof for a reasonable fee not exceeding the cost of making such copies, and, if holding alone or with other holders, 25% or more of the voting stock, have free access to accounting documents and minutes of meetings of the collegial executive body (Management Board); and
if holding, alone or with other shareholders at least 1% of the voting shares, demand consent for the interested party transaction; and
exercise other rights of a shareholder provided by our charter, Russian legislation and decisions of general shareholders’ meetings approved in accordance with its competence.
Rights attaching to preferred shares
Pursuant to our charter, as amended, all of our preferred shares have the same nominal value and grant to their holders identical rights. Each fully paid preferred share gives its holder the right to:
freely transfer preferred shares without the consent of other shareholders;
receive dividends in accordance with our charter and current legislation;
upon liquidation, receive a portion of our liquidation value, which is equal to a portion of our assetsproperty calculated pro rata to the portion represented by one preferred share in our charter capital;
in cases and in the procedure provided by Russian law and our charter, receive information on the company’s activities, including access to certain company documentsaccounting and other documentation, and receive copies thereof for a reasonable fee;fee not exceeding the cost of making such copies;
transfer all or part of the rights attached to the preferred shares to its representative on the basis of a power of attorney; and
participate in shareholders’ meetings and vote on the following matters:
our reorganization, liquidation and in case of amendment of the company’s charter which eliminates indication that the company is public, simultaneously with the decision on applying to the CBR on release from obligation to disclose information under the laws of the Russian Federation on securities and the decision on applying for delisting of shares and equity securities convertible into shares;
any amendment of our charter or approval of a new version of our charter that restricts the preferred shareholders’ rights, including determination or increase or decrease of a dividend amount and/or determination or increase or decrease of the liquidation value paid on preferred shares of previous priority, as well as provision to preferred shareholders of otheranother type of preferred shares of advantages in the priority of payment of dividends and/or the liquidation value of shares;
participate in shareholders’ meetings and vote on all matters on which common shareholders are entitled to vote if for any reason the annual shareholders’ meeting did not adopt a resolution to pay the full amount of dividends to which preferred shareholders are entitled under our charter. The holders of preferred shares enjoy this right effective from the first shareholders’ meeting to be held after the relevant annual shareholders’ meeting and until the date when dividends on preferred shares are paid in full;
filing of an application with a stock exchange for listing or delisting of our preferred shares; and
in other cases provided for in the applicable laws of the Russian Federation.
Pre-emptive rights
The Joint-Stock Companies Law and our charter provide existing shareholders with apre-emptive right to purchase additional shares or securities convertible into shares issued by way of open subscription in an amount proportionate to their existing holding of shares of the same category (type) as the newly issued shares. In addition, the Joint-Stock Companies Law providesand our charter provide shareholders with apre-emptive right to purchase shares or securities convertible into shares during a closed subscription if the shareholders voted against or did not participate in the voting on the decision approving such subscription. Thepre-emptive right does not apply to placement of shares or other securities convertible into shares through a closed subscription among existing shareholders only, provided that such shareholders may each acquire a whole number of shares or other securities convertible into shares being placed in an amount proportionate to their existing holdings.holding of shares of the corresponding category (type). We must publish a noticenotify shareholders of the proposed placement of shares or provide shareholders with such notice in writing at least 45 days prioropportunity to the offering, during which time shareholders may exercise theirpre-emptive rights. In case rights and the price of shares orperiod thereof in accordance with the procedure for determining the price of shares is to be approvedand time limits provided by the board of directors not later than the beginning of placement period, the term for exercising the pre-emptive rights may be shortened to 20 days, or even to eight business days if the notice of the proposed placement of shares is subject to disclosure under Russian law.
Dividends
The Joint-Stock Companies Law and our charter set forth the procedure for determining the dividends that we distribute to our shareholders. Shareholders may decide on whether or not to pay the dividends upon results of a reporting quarter, half a year, nine months and/or year. Dividends are recommended to a general shareholders’ meeting by the board of directors, and approved by the general shareholders’ meeting by a majority vote. A decision on quarterly dividends may be taken at a general shareholders’ meeting within three months of the end of the respective quarter; a decision on annual dividends must be taken at the annual general shareholders’ meeting. A decisionThe company shall not be entitled to resolve (declare) on payment of dividends foron common and preferred shares, canthe amount of dividends on which has not been determined, unless it is resolved to fully pay dividends on all types of preferred shares, the amount of dividends on which is determined by the company’s charter. The company shall not be taken only after the decisionentitled to resolve (declare) on payment of dividends foron common and preferred shares of any other type, unless it is taken.resolved to fully pay dividends on preferred shares with an advantage in the order of receiving dividends. The company shall not be entitled to resolve (declare) on payment of dividends on common shares, unless it is resolved to pay the same amount of dividends on preferred shares, the amount of dividends on which is not determined by the company’s charter. The dividend approved at the general shareholders’ meeting may not be more than the amount recommended by the board of directors. The date on which in accordance with the decision on payment (declaration) of dividends are determined the persons entitled to receive them, cannot be earlier than 10 days from the date of the decision to pay (declare) dividends and later than 20 days from the date of such decision. Dividends are not paid on treasury shares. Dividend payment period to a nominalnominee holder and a trustee who is a professional participant of the securities market, which are registered in the register of shareholders, shall not exceed 10 business days, and to other persons registered in the register of shareholders shall not exceed 25 business days from the date on which the persons entitled to receive dividends are defined. A shareholder who is entitled to the declared dividends but has not received them due to the fact that the company or the registrar has no exact and necessary address information or bank details, or in connection with the other creditor’s delay, has a right to make a claim to the company for the unpaid dividends within three years from the date of the decision on their payment. Upon the expiration of this three year period, declared and unclaimed dividends are restored in retained earnings of the company and the obligation on their payment terminates.
Starting from January 1, 2014, a new “cascade” dividend payment mechanism is introduced with respect to shares recorded on custodians’ account as opposite to the shareholders’ register. The cascade payment mechanism provides that Russian issuers will pay dividends to custodians and depositary banks,the NSD for further transfer to nominee holders (custodians), who in turn will be obliged to further transfer dividends to shareholders.their clients (shareholders, foreign nominee holders and depositary banks for further transfer to depositary receipt owners). Under the new regime no disclosure will be required by ultimate beneficial owners in order to receive dividends. See also “Item 3. Key Information — Risk Factors — Risks Relating to Our Shares and ADSs and the Trading Market — Upon introduction of a new system of recording the depositary’s rights to the shares underlying depositary receipts, the depositary is required to disclose information on ADS and GDS owners in order to exercise voting rights and receive dividends with respect to the shares underlying ADSs and GDSs.”
The Joint-Stock Companies Law allows dividends to be declared only out of net profits calculated under the Russian accounting standards and as long as the following conditions have been met:
the charter capital of the company has been paid in full;
the company has repurchased all shares from shareholders who demanded repurchase; and
the company is not, and would not become, insolvent as the result of the proposed dividend payment.
Pursuant to our charter, as amended, we may calculate the dividends for preferred shares on the basis of our consolidated financial statements prepared under accepted international accounting standards which we apply for the relevant accounting period, including IFRS and U.S. GAAP. The annual fixed dividend for one preferred share amounts to 20% of our net profit under our annual consolidated financial statements prepared in accordance with the applicable international accounting standards and audited by an independent auditor, divided by 138,756,915, and is declared and paid subject to sufficiency of the company’s net profit for those purposes.
For the purpose of calculating the amount of dividends for preferred shares, we convert our net profit under our annual consolidated financial statements prepared in accordance with the applicable international accounting standards into rubles using the official exchange rate of the CBR as of the date the board of directors decides to recommend the amount of dividends for the preferred shares.
If the dividend to be paid for one common share exceeds the dividend to be paid for one preferred share for the same year, we must increase the dividend to be paid for one preferred share up to the amount of dividend to be paid for one common share. For this purpose, if the nominal value of our common shares has changed (e.g., through a share split), the dividend to be paid for one common share is calculated as if its nominal value has not changed. If dividends for common shares are to be paid in kind, the monetary valuevaluation of suchthe property directed for dividend payment must be determined by the Board of Directors involving an independent appraiser.
Distributions to shareholders on liquidation
Under Russian legislation, liquidation of a company results in its termination without the transfer of rights and obligations to other persons as legal successors. The Joint-Stock Companies Law and our charter allow us to be liquidated:
voluntarily, by a three-quarters majority of the voting stock present at a general shareholders’ meeting; or
involuntarily, by a court order.
Following a decision to liquidate the company, the right to manage our affairs would pass to a liquidation commission which, in the case of voluntary liquidation, is appointed by a general shareholders’ meeting and, in an involuntary liquidation, is appointed by the court. Creditors may file claims within a period to be determined by the liquidation commission, but which may not be less than two months from the date of publication of notice of liquidation by the liquidation commission.
The Civil Code gives creditors the following order of priority during liquidation:
individuals owed compensation for injuries or deaths;
payments related to disbursement of accrued vacation pay and wages of persons currently or formerly employed under an employment agreement and remuneration to owners of intellectual property rights;
federal and local governmental entities claiming taxes and similar payments to the budgets andnon-budgetary funds; and
other creditors in accordance with Russian legislation.
Claims of creditors in connection with obligations secured by a pledge of the company’s property (“secured claims”) are satisfied out of the proceeds of the sale of the pledged property prior to claims of any other creditors except for the creditors of the first and second priorities described above, provided that claims of such creditors arose before the pledge agreements in respect of the company’s property were made. To the extent that the proceeds of sale of the pledged property are not sufficient to satisfy secured claims, the latter are satisfied simultaneously with claims of the fourth priority creditors as described above.
The Joint-Stock Companies Law and our charter provide for the following order of priority for distribution of remaining assets after settlement with creditors:
payments to repurchase shares from shareholders having the right to demand repurchase;
payments of declaredaccrued but unpaid dividends on preferred shares and the liquidation value of the preferred shares determined by the company’s charter, as amended;charter; and
payments to holders of common and preferred shares.
Liability of shareholders
The Civil Code and the Joint-Stock Companies Law generally provide that shareholders in a Russian joint-stock company are not liable for the obligations of a joint-stock company and bear only the risk of losslosses within the value of their investment.shares. This may not be the case, however, when one entity is capable of determining decisions made by another entity. The entity capable of determining such decisions is called an “effective parent.” The entity whose decisions are capable of being so determined is called an “effective subsidiary.” The effective parent bears joint and several responsibility for transactions concluded by the effective subsidiary in course of carrying out these decisions if:
this decision-making capability is provided for in the charter of the effective subsidiary or in a contract between such entities; and
the effective parent gives binding instructions or consent for a transaction to the effective subsidiary based on the above-mentioned decision-making capability.
Thus, a shareholder of an effective parent is not itself liable for the debts of the effective parent’s effective subsidiary, unless that shareholder is itself an effective parent of the effective subsidiary. Accordingly, a shareholder will not be personally liable for our debts or those of our effective subsidiaries unless such shareholder controls our business and the conditions set forth above are met. See “Risk Factors — Legal risks and uncertainties — Shareholder liability under Russian legislation could cause us to become liable for the obligations of our subsidiaries.”
In addition, an effective parent is secondarily liable for an effective subsidiary’s debts if an effective subsidiary becomes insolvent or bankrupt resulting from the fault of an effective parent only when the effective parent has used the right to give binding instructions, knowing that the consequence of carrying out this action would be insolvency or bankruptcy of this effective subsidiary. This is the case regardless of how the effective parent’s capability to determine decisions of the effective subsidiary arises, for example, whether through ownership of voting securities or by contract. If the effective subsidiary is a joint-stock company, the effective parent has secondary liability only if the effective parent has caused the effective subsidiary to take any action or fail to take any action, knowing that such action or failure to take action would result in insolvency or bankruptcy of the effective subsidiary. If the effective subsidiary is a limited liability company, the effective parent may be held secondarily liable if the effective subsidiary’s insolvency is caused by the willful misconduct or negligence of such effective parent and if the effective subsidiary’s assets are insufficient to cover its obligations. To be relieved from the liability, the effective parent would need to prove before the court that it acted in good faith and in the interests of the effective subsidiary.
Shareholders of an effective subsidiary that is a joint-stock company may also claim compensation for the effective subsidiary’s losses from the effective parent if: (1) the effective parent caused the effective subsidiary to take any action or fail to take any action that resulted in a loss and (2) the effective parent knew that such action or failure to take such action would result in an effective subsidiary’s loss. Members of an effective subsidiary that is a limited liability company may claim compensation for the effective subsidiary’s losses from the effective parent if the effective parent through its willful misconduct or negligence caused the effective subsidiary to take any action that resulted in a loss.
Russian law also provides for other cases in which shareholders may be held liable to us.
Charter capital increase
We may increase our charter capital by:
issuing additional shares, or
increasing the nominal value of already issued shares.
A decision on any issuance of shares or securities convertible into shares by closed subscription, or an issuance by open subscription of common shares or securities convertible into common shares constituting more than 25% of the number of issued common shares, requires a three-quarters majority of the voting stock present at a general shareholders’ meeting. A decision to increase the charter capital by increasing the nominal value of issued shares requires a majority of the voting stock present at a general shareholders’ meeting. In addition, the issuance of shares above the number of authorized andnon-issued shares provided in our charter necessitates a charter amendment, which requires a three-quarters majority of the voting stock present at a general shareholders’ meeting.
The Joint-Stock Companies Law requires that the value of newly issued shares be determined by the board of directors based on their market value but not less than their nominal value, except in limited circumstances where: (1) existing shareholders exercise apre-emptive right to purchase shares at the price which is not more than 10% lower than the price paid by third parties, or (2) fees of up to 10% are paid to intermediaries. The price may not be set at less than the nominal value of the shares. The board of directors shall value anyin-kind contributions for new shares, based on the appraisal report of an independent appraiser.
Russian securities regulations set out detailed procedures for the issuance and registration of shares of a joint-stock company. These procedures require:
taking a decision on share placement and approving theplacement;
approval of a resolution on share issuance;
registration of a share issuance with the CBR;
placement of the shares, shares;
registration and filing with the CBR of a report or a notice (as applicable) on results of share issuanceissuance; and its public disclosure; and
public disclosure of information relating to the share issuance.
Charter capital decrease
The Joint-Stock Companies Law does not allow a company to reduce its charter capital below the minimum charter capital required by law, which is 100,000 rubles for a public joint-stock company. The Joint-Stock Companies Law and our charter require that any decision to reduce our charter capital, whether through a repurchase and cancellation of shares or a reduction in the nominal value of the shares, be made at a general shareholders’ meeting.
The Joint-Stock Companies Law allows a company to reduce its share capital only if, at the time of such reduction:
its share capital is paid up in full;
the value of its net assets is not less (and would not become less, as a result of the payment or the modification of the securities to the shareholders) than the sum of its share capital, the reserve fund and the difference between the liquidation value and the par value of its issued and outstanding preferred shares;
the company has repurchased all shares from shareholders that have the right to demand repurchase of their shares under legislation protecting the rights of minority shareholders, as described below;
the company has fully paid all declared dividends; and
the company complies with other requirements of Russian legislation.
In addition, within three business days after taking the decision to reduce our charter capital, we must notify this decision to the authority which carries out state registration of legal entities and publish this decision twice with a monthly interval. Within 30 days of the latest of such publications, our creditors, whose claim rights had occurredarose prior to the publication, would then have the right to acceleratedemand early performance of the relevant obligation by our indebtednesscompany, and if early performance is not possible to demand reimbursement of applicable damages.terminate the obligation and reimburse related losses.
Sharebuy-back
Under the Joint-Stock Companies Law and our charter, our general meeting of shareholders and our board of directors isare entitled to decide on the acquisition of our shares representing up to 10% of our charter capital. The repurchased shares must be resold at a value not less than a market value within one year of their repurchase or, failing that, the shareholders must decide to cancel such shares and decrease the charter capital. Repurchased shares do not bear voting rights.
The Joint-Stock Companies Law allows us to repurchase our shares only if:
our charter capital is paid in full;
we are not and would not become, insolvent as a result of the repurchase;
the value of our net assets is not less (and would not become less, as a result of the proposed repurchase) than the sum of our charter capital, the reserve fund and the difference between the liquidation value and par value of our issued and outstanding preferred shares; and
we have repurchased all shares from shareholders having the right to demand repurchase of their shares in accordance with Russian law, as described immediately below.
The Joint-Stock Companies Law and our charter provide that our shareholders may demand repurchase of all or some of their shares if the shareholder demanding repurchase voted against or did not participate in the voting on the decision approving any of the following actions:
reorganization;
consent or subsequent approval of a major transaction, as defined under Russian law;which involves property in excess of 50% of the balance sheet value of the company’s assets determined according to its accounting statements on the last reporting date (including those which are simultaneously interested party transactions);
amendment of our charter or approval of a new version of our charter in a manner which restricts shareholders’ rights; or
amendment of the public company’s charter which eliminates indication that the company is public, simultaneously with the decision on applying to the CBR on release from obligation to disclose information under the laws of the Russian Federation on securities and the decision on applying for delisting of shares and equity securities convertible into shares.
A shareholder demanding repurchase must send to us a written request within 45 days following the date when the relevant decision of the general shareholders’ meeting is taken. We must purchase the shares of the demanding shareholder within 30 days following the expiration of the above45-day period. period or within five business days notify the registrar that the repurchase of the shares is not carried out due to the fact that decisions made by the general shareholders’ meeting on the above issues have not entered into force. We may spend up to
10% of our net assets calculated under the Russian accounting standards on the date of the adoption of the decision which gives rise for a share redemption demanded by the shareholders. If the value of shares in respect of which shareholders have exercised their right to demand repurchase exceeds 10% of our net assets, we will repurchase shares from each such shareholder on apro-rata basis.
A shareholders’ decision on filing of an application for delisting of our shares enters into effect if the consideration to be paid for the repurchase of shares does not exceed 10% of our net assets.
Registration and transfer of shares
Russian legislation requires that a joint-stock company maintain a register of its shareholders which, for a public joint-stock company, shall be maintained by a registrar. Ownership of our shares is evidenced solely by entries made in such register. Any of our shareholders registered in a register may obtain an extract from our register certifying the number of shares that such shareholder holds. Since July 2014, our shareholder register has been maintained by Computershare Registrar JSC which was renamed to Independent Registrar Company JSC in October 2015.
The purchase, sale or other transfer Ownership of our shares is accomplished through the registration of such transferevidenced by entries made in the shareholdershareholders’ register or on the registration of such transfer with a depositary if shares are held and recorded by a depositary. The registrar or depositary may not require any documents in addition to those required by Russian legislation in order to transfer shares in the register or with a depositary. Refusal to register the shares in the name of the transferee or, upon request of the beneficial holder, in the namebooks of a nominee holder, is not allowed except in certain instances provided for by Russian legislation, and may be challenged in court.licensed depositary.
The Federal LawNo. 414-FZ “On the Central Depositary” dated December 7, 2011 (the “Central Depositary Law”), which came into force on January 1, 2012, set out a legal framework for establishment and operation of the central depositary. On November 6, 2012, the FFMS granted the NSD the status of central depositary which opened its nominalnominee holder accounts in, among others, all securities registers of the issuers which are obliged to disclose information in accordance with Russian securities law. As we are required to make public disclosures, the above requirement is applicable to us, which means that the central depositary became the only person having a nominalnominee holder account in our share register. Also, the Central Depositary Law prohibits persons maintaining securities registers from opening and depositing securities (save for limited exceptions) to other nominalnominee holder accounts from the date of the opening of a nominalnominee holder account with the central depositary.
Any of our shareholders may obtain an extract from the register of our shareholders maintained by the registrar or from their respective depositary, as the case may be, certifying the number of shares that such shareholder holds. We are entitled to obtain an extract from our shareholders’ register which sets out all of our shareholders registered directly therein in cases provided under Russian law. In addition, we are entitled to request through the registrar a list of clients of nominee holders which are entitled to participate in the general shareholders’ meeting. However, we are unable to monitor transfers of our shares that are held on the books of depositaries registered with the central depositary because underlying shareholders have no obligation to reveal and such depositaries have no obligation to notify us about such transfers. As a result, we can currently only identify our actual shareholders in a limited number of cases provided for by Russian law, including when requesting our registrar to compile a list of shareholders of record for the general shareholders’ meeting and when shareholders and ADSs or GDSs holders provide voting instructions together with disclosure of information, including ownership information, in accordance with Russian securities regulations.
The purchase, sale or other transfer of shares is accomplished through the registration of such transfer in the shareholder register, or the registration of such transfer with a depositary if shares are held and recorded by a depositary. The registrar or depositary may not require any documents in addition to those required by Russian legislation in order to transfer shares in the register or with a depositary. Refusal to register the shares in the name of the transferee or, upon request of the beneficial holder, in the name of a nominee holder, is not allowed except in certain instances provided for by Russian legislation, and may be challenged in court.
Reserve fund
Russian legislation requires that each joint-stock company establish a reserve fund to be used only to cover the company’s losses, redeem the company’s bonds and repurchase the company’s shares in cases when other funds are not available. Our charter provides for a reserve fund of 5% of our charter capital, funded through
mandatory annual transfers of at least 5% of our statutory net profits until the reserve fund has reached the 5% requirement.
Disclosure of Information
Under Russian legislation, disclosure of information on the securities market means making it available to all interested parties, regardless of the purpose of obtaining this information. We are required to make the following periodic public disclosures and filings in the newswire of authorized information agency Interfax (www.e-disclosure.ru), on our websites atwww.mechel.ruandwww.mechel.com, as well as on the webpage provided by authorized information agency Interfax (www.e-disclosure.ru/portal/company.aspx?id=1942):
disclosure of quarterly reports containing information about us, our shareholders, registrar and depositary, the structure of our management bodies, the members of the board of directors and management board, and review commission, our branches and representative offices, our subsidiaries and affiliates, our shares, bank accounts and auditors, important developments during the reporting quarter, quarterly accounting statements prepared in accordance with the Russian accounting standards, and other information about our financial and business activity;
disclosure of any information concerning material facts and other official disclosures, including, among other things, our reorganization; certain changes in the amount of our assets; decisions on share issuances; certain changes in ownership and shareholding; information about controlled organizations which are material to us or organizations controlling us, reorganization, liquidation or bankruptcy of such organizations; conclusion of agreement with our controlled or controlling organization, where we are required to buy securities issued by such controlled or controlling organization; as well as shareholder and management bodies resolutions;
notifying MICEXMoscow Exchange about the disclosure of aforementioned information;
disclosure of the documents that we have received in connection with any of the following:
a voluntary offer (including any competing offer) to acquire us;
a mandatory offer (including any competing offer) to acquire us;
a notice of the right of shareholders to sell their shares to the person that has acquired more than 95% of our common shares; and
a request that minority shareholders sell their shares to the person that has acquired more than 95% of our common shares;
disclosure of information on various stages of securities placement, issuance and registration through publication of certain data as required by the securities legislation;
disclosure of our charter and internal corporate governance documents;
disclosure of our annual report and annual financial statements prepared in accordance with the Russian accounting standards and our annual and interim U.S. GAAP/IFRS financial statements;
disclosure on a quarterly basis of a list of our affiliated companies and individuals;
disclosure of a list of information which is considered an insider information and approved by the company (“insider information”);
disclosure of insider information; and
disclosure of other information as required by applicable Russian securities legislation.
Starting from January 1, 2020, new disclosure rules (which were enacted by the Federal LawNo. 514-FZ “On amendments to the Federal Law “On Securities Market” and other legislative acts” on December 27, 2018) will enter into force. Pursuant to these new rules, among other things, issuers will be obligated to determine
independently which information is material and must be disclosed. At that, the CBR may adopt additional regulations related to disclosure of information based on a company’s field of business and size as well as on the category (type) of securities issued and type of listing of such securities.
In addition, new rules on inside information will enter into force, starting from January 1, 2020. Issuers will be obligated to maintain their own lists of inside information (compared to the current regulation where the CBR establishes an exhaustive list of what constitutes inside information which issuers must rely on).
General Meetings of Shareholders
Procedure
A general shareholders’ meeting may exercise only the powers that are set forth in the Joint-Stock Companies Law and in our charter. Among the issues which our shareholders have the exclusive power to decide are:
approval of charter amendments or of a new version of the charter;
election and early removal of the members of the board of directors;
determination of the number, nominal value and type of authorized shares and rights granted by such shares;
changes in the company’s charter capital;
appointment and early removal of the members of our review commission andthe counting commission;
approval of our independent auditor;
consent or subsequent approval of certain interested party transactions (the value of which is 2% or more of the balance sheet value of the company’s assets) and major transactions (the value of which is more than 50% of the balance sheet value of the company’s assets);transactions;
distribution of profits and losses, including approval of dividends payment;
decisions on our participation in commercial or industrial groups or other associations of commercial entities;
redemption by the company of issued shares in cases provided for by the Joint-Stock Companies Law;
approval of certain internal documents regulating the activity of our governing bodies;
decision on filing of an application for delisting of our shares or securities convertible into shares; and
other issues, as provided by the Joint-Stock Companies Law and our charter.
Voting at a general shareholders’ meeting is generally carried out on the principle of one vote per voting share, with the exception of the election of the board of directors, which is done through cumulative voting. Decisions are generally passed by a majority of the voting stock present at a general shareholders’ meeting. However, Russian law requires a three-quarters majority of the voting stock present at a general shareholders’ meeting to approve the following:
approval of charter amendments or of a new version of the charter;
reorganizations or liquidations;
determination of the number, nominal value and category (type) of authorized shares and the rights granted by such shares;
repurchase by the company of its issued shares;
any issuance of shares or securities convertible into common shares by closed subscription;
issuance by open subscription of common shares or securities convertible into common shares, in each case, constituting 25% or more of the number of issued and outstanding common shares;
consent or subsequent approval of a major transaction the subject matter of which is property with the value exceeding 50% of the balance sheet value of the company’s assets; and
decision on filing of an application for delisting of our shares or securities convertible into shares.
A resolution of the shareholders’ meeting to apply for listing or delisting of our preferred shares requires a three-quarters majority vote of the voting common stock present at the meeting and a three-quarters majority vote of the total preferred stock. The Joint-Stock Companies Law provides that a charter may require a larger number of the votes for passing such resolution.
The quorum requirement for our general shareholders’ meeting is met if shareholders (or their representatives) accounting for more than 50% of the issued voting shares are present. If the quorum requirement is not met, another general shareholders’ meeting with the same agenda may (and, in the case of an annual meeting, must) be scheduled and the quorum requirement is satisfied if shareholders (or their representatives) accounting for at least 30% of the issued voting shares are present at that meeting.
The annual general shareholders’ meeting must be convened by the board of directors and be held between March 1 and June 30 of each year, and the agenda must include the following items:
election of the members of the board of directors and review commission;directors;
approval of distribution of profits, including approval of annual dividends and losses, if any; and
appointment of an independent auditor.
A shareholder or group of shareholders owning in the aggregate at least 2% of the outstanding voting shares may introduce proposals for the agenda of the annual general shareholders’ meeting and may nominate candidates to the board of directors and the general director, the review commission and counting commission.director. Any agenda proposals or nominations must be provided to the company not later than 45 days after the preceding calendar year ends.
Extraordinary general shareholders’ meetings may be called either by the board of directors on its own initiative, or at the request of the review commission, the independent auditor of the statutory accounts or a shareholder or group of shareholders owning in the aggregate at least 10% of the issued voting shares as of the date of the request.
A general shareholders’ meeting may be held in a form of a meeting or by an absentee ballot. The form of a meeting contemplates the adoption of resolutions by the general shareholders’ meeting through the attendance of the shareholders or their authorized representatives for the purpose of discussing and voting on issues of the agenda, provided that if a ballot is mailed to shareholders for participation at a meeting convened in such form, the shareholders may complete and mail the ballot back to the company without personally attending the meeting. A general shareholders’ meeting by absentee ballot contemplates the determination of shareholders’ opinions on issues on the agenda by means of a written poll.
The following issues cannot be decided by a general shareholders’ meeting by absentee ballot:
approval of a company’s independent auditor for statutory accounts.
If the number of shareholders exceeds 1,000 persons, theThe voting ballots, which must be used when conducting a general shareholders’ meeting in form of a meeting in a joint-stock company, must be sent to persons registered in the register of shareholders and entitled to participate in the general shareholders’ meeting at least 20 days in advance of the general shareholders’ meeting.
Notice and participation
AllPersons registered in the register of shareholders and entitled to participate in a general shareholders’ meeting must be notified of the meeting, whether the meeting is to be held in direct form or by absentee ballot, not less than 30 days prior to the date of the meeting, and such notification shall specify the agenda for the meeting. However, if it is an extraordinary general shareholders’ meeting to elect the board of directors or it is a general shareholders’ meeting to elect the board of directors of a reorganized company, persons registered in the register of shareholders and entitled to participate in the general shareholders’ meeting must be notified at least 50 days prior to the date of the meeting (according to our charter and amendments to the Russian law effective from July 1, 2016).meeting. Under our charter, we may either provide notice by mail or deliver notice with the acknowledgement of receipt to each of our shareholders or publish a notice of the general shareholders’ meeting shall be published on our website www.mechel.ru. It also may be sent by post or delivered against signature, as well as published in the Russian official newspaperRossiyskaya Gazeta, an official newspaper founded by the Russian government, or on our website stated in the charter.. Moreover, other means of mass media (television, radio) can be used. Only those items that were set out in the agenda may be voted upon at a general shareholders’ meeting. We may also publish a notice of the meeting on our website stated in the charter. In addition, nominalnominee holders included in the shareholder register will be notified of the shareholders’ meeting by way of an electronic communication and will be required to convey such information to the depositors within a prescribed period.
UnderIn accordance with Russian law and our charter, and in accordance with amendments to the Russian law (effective from July 1, 2016), we may notify persons registered in the register of shareholders and entitled to participate in the general shareholders’ meeting of a meeting by sending an electronic message to the email address of a shareholder, as well as by sending the text message containing the procedure for reviewing the notice of the general meeting of shareholders at the contact phone number or email address of a shareholder.
UnderIn accordance with Russian law and our charter, and in accordance with amendments to the Russian law (effective from July 1, 2016), thea list of shareholderspersons entitled to participate in athe general shareholders’ meeting is compiled by the registrar of the company pursuant to the regulations of Russian securities law. It is compiled on the basis of the data from the register, as well as taking into account information provided to the registrar by the nominee holder to whom the relevant client account was opened in our shareholder registerthe register. The owners of the company’s shares are not included in the list if the nominee holder has not submitted to the registrar information about them. The list of persons entitled to participate in the general shareholders’ meeting is compiled on the date established by the board of directors, which date may neither be earlier than 10 days from the date of adoption of the resolution to hold a general shareholders’ meeting nor more than 2025 days before the date of the meeting (or, in the case of an extraordinary general shareholders’ meeting to elect the board of directors, not more than 55 days before the date of the meeting).
The right to participate in a general shareholders’ meeting may be exercised by a shareholdershareholders as follows:
by personally participating in the discussion of agenda items and voting thereon;
by sending an authorized representative to participate in the discussion of agenda items and to vote thereon;
by absentee ballot; or
by delegating the right to fill out the absentee ballot to an authorized representative.representative; or
by sending information about their willingness to the nominee holder for further transfer to the registrar in accordance with the requirements of Russian securities law.
The Federal LawNo. 415-FZ also sets forth new obligations for a depositary to disclose information on ‘depositarydepositary receipt owners’owners in order to exercise voting rights with respect to the shares represented by depositary receipts. The regulation setting forth the requirements for the provision of information was approvedare regulated by the OrderDirective of the FFMSCBR dated February 5, 2013.June 15, 2015. Information about the depositary receipt owners is provided to the issuer in the form of a list of persons who exercise the rights under the depositary receipts. The list is provided to the issuer by the foreign depositary which opens the depo account of depositary programs. The list is provided for the preparation and holding of a shareholders’ meeting. See also “Item 3. Key Information — Risk Factors — Risks Relating to Our Shares and ADSs and the Trading Market — Upon introduction of a new system of recording the depositary’s rights
to the shares underlying depositary receipts, the depositary is required to disclose information on ADS and GDS owners in order to exercise voting rights and receive dividends with respect to the shares underlying ADSs and GDSs.”
Furthermore, on July 1, 2016, provisions of the Federal Law No. 210 stipulating the new procedure for corporate actions became effective which,inter alia, provides for a possibility of participation at general meetings of security holders by means of electronic voting for those shareholders who hold their shares either directly on a share register or through a depositary. This new procedure may lead to delays in voting process and inconsistencies and may entail additional risks due to its novelty to the Russian market.
Board of Directors
The Joint-Stock Companies Law and our charter provide that our entire board of directors is up for election at each annual general shareholders’ meeting and that our board of directors is elected through cumulative voting. Under cumulative voting, each shareholder has a number of votes equal to the number of voting shares held by such shareholder multiplied by the number of persons to be elected to our board of directors, and the shareholder may give all such votes to one candidate or spread them between two or more candidates. Before the expiration of their term, the members of the board of directors may be removed as a group at any time without cause by a majority of the voting stock present at a general shareholders’ meeting.
The Joint-Stock Companies Law requires at least a five-member board of directors for all joint-stock companies, at least a seven-member board of directors for a joint-stock company with more than 1,000 holders of voting shares, and at least a nine-member board of directors for a joint-stock company with more than 10,000 holders of voting shares. Only natural persons (as opposed to legal entities) are entitled to sit on the board. Members of the board of directors are not required to be shareholders of the company. Members of the management board are not permitted to constitute more than 25% of the members of the board of directors. The actual number of directors is determined by the company’s charter or decision of the general shareholders’ meeting. Our charter provides that our board of directors shall consist of nine members, and the majority of our directors shall be independent.
The Joint-Stock Companies Law prohibits the board of directors from acting on issues that fall within the exclusive competence of the general shareholders’ meeting. Our board of directors has the power to direct the general management of the company, and to decide the following issues:
determination of our business priorities and their significant change, including approval of our annual and quarterly budgets;
convening of annual and extraordinary general shareholders’ meetings, except in certain circumstances specified in the Joint-Stock Companies Law;
approval of the agenda of the general shareholders’ meeting and determination of the record date for shareholders entitled to participate in a general shareholders’ meeting;
placement of our bonds and other securities, except for the shares;securities;
determination of the price of our property and of our securities to be placed or repurchased, as provided for by the Joint-Stock Companies Law;
repurchase of our shares, bonds and other securities in certain cases provided for by the Joint-Stock Companies Law;
appointment of the general director and members of the management board, and early termination of their powers and the establishment of their compensation;
recommendation to the general shareholders’ meeting on the amount of a dividend and the payment procedure thereof;
recommendation on the amount of remuneration and compensation to be paid to the members of our review commission and on the fees payable for the services of an independent auditor;
the use of our reserve fund and other funds;
the creation and liquidation of branches and representative offices;
approval of internal documents, except for those documents whose approval falls within the competence of the company’s shareholders or general director or the management board;
consent or subsequent approval of major and interested party transactions in the cases provided for by the Joint-Stock Companies Law;
approval of the procedures of internal control over financial and business operations of the company;
control over establishment of the risk management system;
increasing our charter capital by issuing additional shares within the limits of the authorized charter capital, except in certain circumstance specified in our charter;
approval of decisions on securities issuances and of the prospectus relating to such securities issuances, as well as of reports on the results of such securities issuances;
approval of our share registrar;
decision on filing of an application for delistinglisting of our shares or securities convertible into shares;
decision on alienation by the company of treasury and quasi-treasury shares, as well as determination of the procedure for alienation of such shares;
approval of financing transactions, as defined in our charter;
conclusion of transactions exceeding 5% of the balance sheet value of the company’s assets according to accounting statements on the last reporting date;
other issues, as provided for by the Joint-Stock Companies Law and our charter.
Our charter generally requires a majorityunanimous vote of the directors present for an action to pass, with the exception of actions for which Russian legislationour charter requires a unanimousmajority vote of the directors or a majority vote of the disinterested and independent directors, as described herein. A board meeting is considered duly assembled and legally competent to act when at least fivethe elected directors including at least one independent director, are present exceptin a number necessary for cases whenthe adoption of resolutions on items of the agenda in accordance with our charter decisions atthe charter. Quorum for a board meeting are being taken unanimously.shall be at least half of the elected members of the board and certain issues require presence all of the elected members of the board, unless otherwise provided by the law or the company’s charter.
Management Board
In June 2011, an annual general shareholders’ meeting approved a new version of the “Bylaw on the Collegial Executive Body (Management Board).” Pursuant to the Bylaw, the management board engages in discussions regarding important corporate issues within its powers and makes recommendations to our board of directors. The management board operates on the basis of our charter and applicable internal regulations. The management board’s size is defined by the board of directors, (and, with respect to a public joint-stock company, must not contain fewer than five members), and it is comprisedmay comprise of senior management of Mechel and our subsidiaries, with each member of the management board elected by the board of directors.directors for an indefinite period. A meeting of the management board is quorate if at least half of its members participate in the meeting.
The management board decides on the following issues, among others:
developing and submitting to the board of directors long-term plans for the implementation of the company’s priorities and proposals regarding its development strategy;
reporting to the board of directors on the realization of investment projects in the amount of more than $30 million;
developing and submitting to the board of directors investment projects in the amount of more than $50 million;
submitting to the board of directors proposals on bonds placement and acquisitions;
submitting to the board of directors proposals on participation (obtaining or increasing participation) or giving up (reducing) our participation in other entities;
approving annual and long-term investment programs;
approving transactions related to disposalsalienation by the company of capitalnon-current assets with a value of between 10% to 25% of the balance sheet assetsvalue of the company;company’s assets, except for transactions provided by our charter and interested party transactions;
making certain decisions regarding the exercise of our rights as a shareholder or a participant of other entities;
making recommendations on certain matters relating to the management of our affiliates included in the list approved by our management board;
developing and establishing methods of compensation and monetary motivation for our employees; and
other issues related to ourday-to-day business referred to the management board by its chairman, the board of directors or by a shareholder holding not less than 10%20% of our voting shares.
Together with the general director, the management board is responsible for ourday-to-day management and administration. The management board’s activities are coordinated by the general director (chairman of the management board) and are regulated by applicable Russian law and our charter.
General Director
The general director (also referred to in this document as chief executive officer) is our sole executive body and manages our current operations within its powers and organizes the implementation of resolutions of our general shareholders’ meeting and the board of directors. The general director acts on our behalf without a power of attorney and has the following rights and responsibilities:
performing the routine management of our operations;
managing our property to provide for our current operations within the limits established by our charter and prevailing Russian legislation within its powers;
representing our interests both in Russia and abroad;
approving staff, executing labor contracts with our employees and rewarding and disciplining employees;
entering into transactions on our behalf within its powers;
issuing powers of attorney on our behalf;
opening and closing our bank accounts;
organizing our accounting and reporting process;
issuing orders and instructions binding on all our employees;
organizing the implementation of resolutions of our general shareholders’ meeting and our board of directors; and
performing other functions necessary to achieve our aims and to provide for our normal operations, in compliance with prevailing legislation and our charter, except for the functions laid upon our other management bodies by the Joint-Stock Companies Law and our charter.
The general director is appointed by the board of directors for a period of one year. The term of office runs from the time of his appointment until such time as a general director is appointed by the board of directors one year later. The general director may bere-appointed an unlimited number of times.
The general director may on his own initiative renounce his powers at any time by written notice to the board of directors. The authority of the general director may be terminated before the expiration of his term of office by a resolution of the board of directors on the following grounds:
failure to comply with the requirements of our charter, resolutions of the general shareholders’ meeting or the board of directors or our internal documents;
in the cases stipulated by the employment agreement with the general director; and
in other events provided by current legislation.
Upon resolution of the general shareholders’ meeting, the authority of the sole executive body may be vested in a commercial organization (a “managing organization”) or an individual entrepreneur (a “manager”) on a contractual basis. Under the Civil Code, if the authority of a company’s sole executive body has been vested in a managing organization or a manager, the company exercises its legal rights and assumes its legal obligations through such managing organization or manager. A resolution to transfer the authority of a company’s sole executive body to a managing organization or a manager shall be passed by the general meeting of shareholders only upon recommendation of the board of directors of the company.
Our general director is required under Russian law to disclose information on his holdings of our securities and on sales and/or purchases of our securities.
Rolesecurities, as well as if he is a member of the Review Commission
The review commission exercises control over our financial and business operations.
On the basisBoard of Directors to inform of the resultscircumstances by virtue of its examinationwhich he can be recognized interested in transactions.
Interested Party Transactions
In accordance with amendments to the Joint-Stock Companies Law, which entered into force on January 1, 2017, transactions defined as “interested party transactions” do not require a mandatory prior consent of our financial and business operations,disinterested directors or shareholders of a company. However, the review commission prepares opinions, which contain the following:
Upon a request from the review commission, the general director andcompany to notify members of the board of directors, the management board and the liquidation commission must undertake to make available documents pertaining to our financial and business operations. The review commission is entitled to request that an extraordinary general shareholders’ meeting be convened in accordance with the procedure provided by our charter.
The review commission is elected by our general shareholders’ meeting for a period of one year and consists of three persons. Shares owned by members of our board of directors or persons holding positions in our management bodies cannot participate in the voting, when members of the review commission are elected. The term of office of the review commission runs from the moment it is elected by the shareholders to the moment it is elected or re-elected by the next annual general shareholders’ meeting. The authority of individual members or the whole review commission may be terminated before the expiration of the term of office thereof by a resolution of the general shareholders’ meeting on the groundscollegial executive body and in compliance with the procedure stipulated by our internal documents. If the number ofcase all members of the review commission falls to less than half of the required membership thereof, the board of directors must convene an extraordinary general shareholders’ meeting to elect a new review commission. The remaining members of the review commission continue to perform their functions until a new review commission is elected.
A shareholder or any person proposed by a shareholder may become a member of the review commission. A member of the review commission cannot simultaneously be a member of the board of directors are interested (or in case such notification is prescribed by the charter) all shareholders about such transactions prior to their accomplishment. After receiving such a member ofnotice, the liquidation commission, the general director or a member of the management board. The review commission elects its chairman and secretary from within its members.
The general shareholders’ meeting determines remuneration and compensation of expenses to the members of the review commission.
Interested Party Transactions
Under the Joint-Stock Companies Law, certain transactions defined as “interested party transactions” require approval by disinterested directors or shareholders of the company. “Interested party transactions” include transactions involving a member of the board of directors, a memberabove-mentioned persons may demand convocation of a collegial executive body of the company, a person or entity that performs the functions of a sole executive body, any person that owns, together with its affiliates, at least 20% of a company’s issued voting stock or any person who is able to direct the actions of the company, if that person, and/or that person’s spouse, parents, children, adoptive parents or children, blood or non-blood brothers and sisters or affiliates, is/are:
The following persons may be deemed interested parties: a member of the board of directors; the sole executive body; a member of a collegial executive body; a person directly or indirectly controlling over 50% of the voting shares in another legal entity (on the basis of an instruction, a shareholders’ agreement or other agreements); a person having the right to appoint the sole executive body or more than half of the management board members; and a person having the right to give binding instructions on the company.
A person directly or indirectly holding over 50% of the voting shares in another legal entity shall be deemed controlling. A person in which such holding is exercised shall be deemed controlled.
A transaction shall be deemed an interested party transaction if the persons referred to above and/or their spouses, parents, children, adoptive parents and adopted children, full and half brothers and sisters and/or controlled entities:
act as parties to, beneficiaries in, representatives or agents in the transaction;
control another legal entity that is a party, beneficiary, representative or agent in the transaction; or
act as members of any management body of athe company thatwhich is a party, to, or beneficiary, of, a transaction with the company, whether directly or as a representative or intermediary,agent in the transaction, or a membermembers of any managementgoverning body of a managementthe managing organization of such a company.
The Joint-Stock Companies Law requires that an interested partyIn public joint-stock companies approval for the transaction by a company with more than 1,000 shareholdersshall be approvedgranted by a majority vote of the independentdisinterested directors of the company who arewithin one year prior to the decision: (1) have not interested in the transaction. An “independent director” is a person who is not, and within the year preceding the decision was not, aacted as general director, a member of any executive bodydirectors (or persons performing functions of the company or its management company, a manager, or an affiliate of the company and whose sole nexus to the company is in the capacity of a
member of the board of directors. In addition, such person’s spouse, parents, children, adoptive parents or children, blood and non-blood brothers and sisters may not be a general director, a memberexecutive body), members of any executive body of the company or its management company or a manager. For companies with 1,000 or fewer shareholders, an interested party transaction must be approved by a majority votemanagers; (2) did not have spouses, parents, children, adoptive parents and adopted children, full and half brothers and sisters acting as members of any executive body of the directors who arecompany or its management company or managers; and (3) did not interested incontrol the transaction ifcompany or its management and were not entitled to give instructions binding on the number of these directors is sufficient to constitute a quorum.company.
Approval by a majority of shareholders who are not interested in the transaction is required if:
Approvalgranted by a majority vote of disinterested shareholders who are not interestedparticipating in the transaction maymeeting.
At the same time, the Joint-Stock Companies Law provides cases in which the relevant requirements do not be required for an interested party transaction if such transaction is substantially similar toapply. These include transactions concluded by the company and the interested party inentered into within the ordinary course of business before such party became an interested party with respect to the transaction.
The approval of interested party transactions is not required in the following instances:
Joint-Stock Companies Law.
For information on certain risks relating to interested party transactions see “Item 3. Key Information — Risk Factors — Risks Relating to Our Business and Industry — In the event that the minority shareholders of our subsidiaries were to successfully challenge past interested party transactions or do not approve interested party transactions in the future, we could be limited in our operational flexibility.”
Major Transactions
The Joint-Stock Companies Law defines a “major transaction” as a transaction or a number of related transactions involvingentered into beyond the ordinary course of business and, at the same time, associated with the direct or indirect acquisition, or disposal or a possibility of disposal (whether directly or indirectly), of property havingwith a value of 25% or more of the balance sheet value of the company’s assets of a company as determined underin accordance with the Russian accounting standards as of the latestlast reporting date preceding the transaction, with the exception of
transactions completedas well as in the ordinary course of business or transactions involving the placement of common shares or securities convertible into common shares by means of subscription (disposal) or transactions to be executedother cases provided by the company pursuantJoint-Stock Companies Law.
Under the Joint-Stock Companies Law a decision to the federal laws and/issue consent to, or other regulationsto grant a subsequent approval of, the Russian Federation and pricedmajor transactions shall be adopted in accordance with the regulations of the Russian government or other federal bodies authorized by the Russian government. Majorfollowing procedure:
major transactions involving property ranging from 25% to 50% of the balance sheet value of the company’s assets of a company require unanimous approval by all members of the board of directors or, failing to receive such approval,if unanimity is not reached, a majority of the voting stock present at a general shareholders’ meeting. Majorheld by shareholders participating in the meeting; and
major transactions involving property in excess of 50% of the balance sheet value of the company’s assets of a company require a three-quarters majority of the voting stock held by shareholders presentparticipating in the meeting.
At the same time, the Joint-Stock Companies Law sets out the cases to which requirements to the procedure of executing of major transactions do not apply:
transactions related to the placement of shares or other securities convertible into shares;
transactions entered into in the course of property rights transfer in a reorganization;
transactions mandatory for companies pursuant to the federal laws (settlements under such transactions are effected at fixed prices and tariffs set by the general shareholders’ meeting.relevant governmental authorities); and
other cases provided by the Joint-Stock Companies Law.
For information on our largest shareholders’ potential ability to approve major transactions see “Item 3. Key Information — Risk Factors — Risks Relating to Our Business and Industry — The concentration of our shares with our largest shareholders will limit your ability to influence corporate matters and transactions with largest shareholders may present conflicts of interest, potentially resulting in the conclusion of transactions on less favorable terms than could be obtained in arm’s length transactions.”
Change in Control
Anti-takeover protection
Russian legislation requires the following:
A person intending to acquire more than 30% of the total number of a public company’s common shares and voting preferred shares (including, for such purposes, shares already owned by such person and its affiliates), will be entitled to make a public offer to other holders of suchthe corresponding categories (types) of shares orof the public company (the “voluntary offer”). The voluntary offer may also contain an offer to purchase securities convertible into such shares pursuant to the requirementsfrom other holders of such securities convertible into such shares of the Joint-Stock Companies Law (the “voluntary offer”).public company.
A person that has acquired more than 30% of the total number of a public company’s common shares and voting preferred shares (including, for such purposes, shares already owned by such person and its affiliates) will be required to make, within 35 days of such shares being recorded in the name of such person or the moment when the person learnt, or should have learnt that it individually or together with its affiliates owned the relevant number of the shares, a public offer for other shares of the same class and for securities convertible into such shares (the “mandatory offer”), at a price which is not less than (i) the price determined based on a weighted average market price of the shares and securities convertible into such shares during trading sessions on a stock exchange for the six months preceding the date when a mandatory offer was sent to the CBR; or (ii) the market price, which must be determined by an independent appraiser if the shares and securities convertible into such shares are not traded on a stock exchange or their trading history is less than six month. The public offer price may not be less than the highest price at which the offeror or its affiliates purchased or undertook to purchase the relevant shares or securities over the six monthsix-month period before the offer was sent to the public company. From the moment of acquisition of more than 30% of the total number of the shares until the moment of sending of an offer to the public company, the person making the offer and its affiliates will be able to vote only 30% of the common shares and voting preferred shares of the public company (regardless of the size of their actual holdings). These rules are also applied (or reapplied) to acquisitions resulting in a person and its affiliates owning more than 50% and 75% of a public company’s outstanding common shares and voting preferred shares.
A person that, as a result of such a voluntary or mandatory offer, becomes (individually or together with its affiliates) the owner of more than 95% of the total number of the public company’s common shares and voting preferred shares, must buy out the remaining shares of the public company as well as other securities convertible into such shares upon request of the holders of such shares or other securities, and may require such holders to sell such shares and other securities convertible into such shares. The price for the shares and other securities convertible into such shares should be determined in the manner described above for a mandatory offer, but it may not be less than (i) the price of the preceding acquisition of the public company’s shares or other securities convertible into such shares under the voluntary or mandatory offer as a result of which the offeror and its affiliates acquired over
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An offer of the kind described in the preceding three paragraphs must be accompanied by a bank guarantee of payment. Prior notice of the offer must be filed with the CBR which may order amendments to the terms of the offer (including price) in order to bring them into compliance with the requirements of the current legislation.
| • | Once a voluntary or mandatory offer has been made, competing offers for the same securities can be made by third parties and, in certain circumstances, acceptance of the initial offer may be withdrawn by the security holders who choose to accept such competing offer. From the date of receipt of a voluntary or mandatory offer by the public company until 20 days after its expiration the public company’s general shareholders’ meeting will have the sole power to make decisions on charter capital increase by way of issuance of additional shares within the number and category (type) of authorized shares, issuance of securities convertible into shares, including options of a public company, consent or subsequent approval of certain transactions or a number of related transactions, involving the acquisition or disposal, or a possibility of disposal (whether directly or indirectly), of property having a value of 10% or more of the balance sheet value of the assets of a public company as determined under the Russian accounting standards as of the last reporting date preceding the transaction, with the exception of,inter alia, transactions completed in the ordinary course of business, and on certain other significant matters. |
The above rules may be supplemented through rulemaking by the CBR, which may result in a broader, narrower or more specific interpretation of these rules by the governmental and judicial authorities, as well as by market participants.
Approval of the Russian Federal Antimonopoly Service
Pursuant to the Competition Law, acquisitions of voting shares of a joint-stock company, involving companies with a combined value of assets or annual revenues, exceeding a certain threshold under the Russian accounting standards, which would result in a shareholder (or a group of shareholders defined under Russian law) holding more than 25%, 50% or 75% of the voting capital stock of such company, or in a transfer between such companies of assets or rights to assets, the value of which exceeds a certain amount, or obtaining rights to determine the conditions of business activity of an entity or to exercise the authorities of its executive body must be approved in advance by the FAS. Such transactions executed between members of a group of companies may require only a subsequent notification to the FAS if prior notification about the members of the group of companies has been filed with the FAS and the information contained in this notification is still accurate as of the date of the relevant transaction and had not been changed within 30 days from the date of group’s disclosure and prior to the date of the transaction’s settlement. See “Item 4. Information on the Company — Regulatory Matters — Russian Antimonopoly Regulation.”
Foreign ownership
Under the Strategic Industries Law any acquisition, whether direct or indirect, by a foreign investor or its group of entities (except for the acquisition by a foreign investor controlled by the Russian Federation, the
constituent entity of the Russian Federation and/or Russian nationals provided such Russian nationals are Russian tax residents and do not have other nationality) of a certain stake, or certain rights, in a Strategic
Company or a Subsoil Strategic Subsoil Company, as well as acquisition, ownership or use by them of property of such companies which relates to core production facilities and the cost of which is 25% or more of the balance sheet value, must be previously approved by the Governmental Commission. Under the Strategic Industries Law, acquisition of 5% or more of the charter capital of a Strategic Company and implementation ofpre-agreed transactions and other actions by a foreign investor or its group of entities require notification of the Russian authorities. The FAS is the federal executive authority for execution of control over making foreign investments in the Russian Federation. See “Item 3. Key Information — Risk Factors — Legal risks and uncertainties — Expansion of limitations on foreign investment in strategic sectors could affect our ability to attract and/or retain foreign investments” and “Item 4. Information on the Company — Regulatory Matters — The Strategic Industries Law.”
The Federal LawNo. 160-FZ “On Foreign Investments in the Russian Federation,” dated July 9, 1999, as amended (“Foreign Investments Law”), provides that any acquisition (whether direct or indirect) by a foreign state or international organization or entities controlled by them of (1) more than 25% of voting shares ofin a Russian company;company or (2) any other powers to block decisions of the management bodies ofin a Russian company, requires a prior approval of the Governmental Commission in accordance with the procedures set forth in the Strategic Industries Law.
In July 2017, the Foreign Investments Law and the Strategic Industries Law were amended to restrict foreign investments. After July 18, 2017, any transaction involving acquisition of rights by a foreign investor in respect of any Russian taxpayers (organizations and individual entrepreneurs), as well as foreign persons, registered as individual entrepreneursenterprise may become subject to approval by the Commission on Control of Foreign Investments in Russia who acquire shares in a Russian joint-stock company, need to notifyat the decision of the Russian tax authorities within one month following such acquisition. Starting from January 1, 2015,Prime Minister. Furthermore, the neednotion of a foreign investor also includes Russian citizens possessing foreign nationality and legal entities which, though incorporated in Russia, are controlled by foreign investors. The amendments to notify the Russian tax authorities occurs only if direct participation interest exceeds 10%.Strategic Industries Law which entered into force on June 12, 2018, prohibit obtaining control over a Strategic Company or acquiring fixed assets of a Strategic Company representing 25% or more of its balance sheet value to foreign investors which do not submit to the FAS information on their beneficiaries, beneficial owners and controlling parties, or organizations controlled by them.
Disclosure of Ownership
Under Russian law, a holder of common shares of a joint-stock company, which has a CBR registered prospectus, must notify the company and the CBR of an acquisition of 5% or more of the company’s common shares or of an acquisition of the right to cast votes attached to 5% or more of the common shares by virtue of an agreement or otherwise, and of any subsequent change in the number of the common shares above or below a 5%, 10%, 15%, 20%, 25%, 30%, 50%, 75% or 95% threshold. Such notifications must be given not later than 10 days after the common shares have been transferred to such shareholder’s securities account or after the acquisition of the right to cast votes attached to such common shares, whether by virtue of an agreement or otherwise.
Russian taxpayers (organizations and individual entrepreneurs), as well as foreign persons, registered as individual entrepreneurs in Russia, who acquire more than 10% of shares in a Russian joint-stock company, need to notify the Russian tax authorities within one month following such acquisition.
Negative Net Assets
If the net assets of a Russian joint-stock company calculated on the basis of the Russian accounting standards as of the end of its second or any subsequent reporting year are lower than its share capital, thejoint-stock company’s board of directors must disclose it in the annual report. Furthermore, if the net assets of a Russian joint-stock company calculated on the basis of the Russian accounting standards as of the end of the reporting year that follows its second or any subsequent reporting year, at the end of which the net assets of such company were lower than its share capital, remain lower than its share capital, the company must decrease its
share capital to the amount of its net assets or liquidate. In addition, if a Russian joint-stock company’s net assets calculated on the basis of the Russian accounting standards as of the end of its second or any subsequent reporting year are lower than the minimum amount of the share capital required by law, the company must liquidate.
Moreover, if a Russian joint-stock company fails to comply with any of the requirements stated above within six months from the end of the relevant reporting year, governmental or local authorities will be able to seek involuntary liquidation of such company in court. In addition, if a Russian joint-stock company fails to comply with any of the requirements stated above within six months from the end of the relevant reporting year or decreases its share capital, the company’s creditors will have the right to accelerate their claims or demand early performance of the company’s obligations owed to them and demand compensation of damages.
In addition, if a Russian joint-stock company’s net assets calculated on the basis of the Russian accounting standards are lower than its share capital by more than 25% as of the end of three, six, nine or twelve months of the reporting year that follows its second or any subsequent reporting year, at the end of which the net assets of such company were lower than its share capital, a joint-stock company is obliged to make a public disclosure of this fact. In this case, the company’s creditors whose claims arose before the publication will have the right to accelerate their claims or demand early performance of the company’s obligations owed to them and demand compensation of damages.
However, if a Russian joint-stock company is able to demonstrate that the creditors’ rights were not violated as a result of a decrease of its share capital or a decrease of the amount of its net assets, as the case may be, and that the security provided for due performance of the company’s obligations is sufficient, a court may dismiss the creditors’ claims that are brought in the following cases: (1) in the event of a decrease of the share capital of the company, including when the share capital of the company must be decreased to the amount of its net assets in compliance with the requirements of Russian law; and (2) in the event the company’s net assets calculated on the basis of the Russian accounting standards are lower than its share capital by more than 25% at the end of three, six, nine or twelve months of the reporting year that followed its second or any subsequent reporting year, at the end of which the net assets of such company became lower than its share capital. Moreover, the existence of negative assets, generally, may not accurately reflect the actual ability to pay debts as they come due. Some Russian courts, in deciding whether or not to order the liquidation of a company for having negative net assets, have looked beyond the fact that the company failed to comply fully with all applicable legal requirements and have taken into account other factors, such as the financial standing of the company and its ability to meet its tax obligations, as well as the economic and social consequences of its liquidation. Nonetheless, creditors have the right to accelerate claims, including damages claims, and governmental or local authorities may seek the liquidation of a company with negative net assets. Courts have, on rare occasions, ordered the involuntary liquidation of a company for having net assets less than the minimum share capital required by law, even if the company had continued to fulfill its obligations and had net assets in excess of the minimum share capital required by law at the time of liquidation. See “Item 3. Key information — Risk Factors — Legal risks and uncertainties — One or more of our subsidiaries could be forced into liquidation on the basis of formalnon-compliance with certain requirements of Russian law, which could materially adversely affect our business, financial condition, results of operations and prospects.”
Material Contracts
The following is a description of contracts that we and/or our subsidiaries are a party to and that are or may be material to our business. The descriptions of the contracts are qualified in their entirety by reference to the relevant contracts. For more information, see “Item 5. Operating and Financial Review and Prospects — Liquidity and Capital Resources — Restrictive Covenants,”Covenants” and “Item 13. Defaults, Dividend Arrearages and Delinquencies” and “Item 8. Financial Information — Litigation — Debt litigation.Delinquencies.”
Credit Facility for Mechel from VTB Bank
General
On December 27, 2010, Mechel obtained a credit line for the total amount of 10.0 billion rubles (approximately $329.3 million) from VTB Bank to finance our general activity. In November 2011, the amount of the credit line was increased up to 13.0 billion rubles (approximately $442.2 million).rubles.
On April 10, 2013, Mechel executed an amendment to the loan agreement increasing the amount of the facility to 40.0 billion rubles (approximately $1.3 billion as of that date). The term of the facility was extended to five years and the covenants were amended. The proceeds were used to refinance existing indebtedness with VTB Bank as well as to refinance other obligations of the companies within our group (including redemption of ruble bonds).
In May 2014, Mechel entered into an amendment to the credit facility agreement to refinance debt in the amount of 40.0 billion rubles (approximately $711.0 million as of December 31, 2014), providing for an extension of the repayment grace period until April 2015 and the final maturity until April 2018. VTB Bank also provided an additional loan for redemption of ruble bonds in the amount of up to 3.8 billion rubles (approximately $67.3 million as of December 31, 2014). As of December 31, 2014, the facility was fully drawn.
In September 2015, Mechel signed restructuring with VTB Bank for the amount of principal and accrued compounded interest totaling 44.8 billion rubles (approximately $614.3 million as of December 31, 2015), providing for an extension of the repayment grace period until April 2017 and the final maturity until April 2020. The restructuring came into effect on October 13, 2015.
In December 2016, Mechel signed an amendment to its credit facility agreement with VTB Bank which provides for an extension of the repayment grace period until April 2020 and the final maturity until April 2022.
In December 2016, Chelyabinsk Metallurgical Plant entered into a credit facility agreement with VTB Bank with a credit limit of 30.0 billion rubles (approximately $494.6 million as of December 31, 2016) to refinance Mechel’s debt under the credit facility with VTB Bank. The loans are provided to the borrower until February 28, 2020 in the amount of 5.0 billion rubles twice a year in 2017 and 2018 and once a year in 2019 and 2020. The borrower’s obligations are guaranteed by Mechel and the same guarantors as under the Mechel’s credit facility, except for Bratsk Ferroalloy Plant, Mecheltrans and Mechel Service. The credit facility is secured by the same pledges as the Mechel’s credit facility, except for 37.5%+1 share of Mechel Mining. In all other material aspects the terms of the credit facility are identical to the Mechel’s credit facility. As of December 31, 2015, Mechel2018, we had the overdue penalty in the amount of 94.7 milliondrawn 10.0 billion rubles (approximately $1.3 million). We have requested the lender to write off the overdue penalty.under this credit facility.
Interest rate and interest period
Interest under the credit facility is payable monthly at the CBR key rate plus 2.35%1.5% per year until January 6, 2018; and at the CBR key rate plus 2.99% per year from January 7, 2018.year. The lender may increase the interest rate by 1% per year if the borrower fails to meet certain obligations under the credit facility.
During the grace period, we apply payable interest rate for interest repayment. The remaining unpaid interest is being capitalized and paid on the final maturity date. Payable interest rate: 8.75% if our Net Borrowings/EBITDA ratio is equal to 6.01 or above; 9.50% if our Net Borrowings/EBITDA ratio is equal to or above 5.01 and less than 6.00; and 10.50% if our Net Borrowings/EBITDA ratio is equal to or above 4.01 and less than 5.00. If our Net Borrowings/EBITDA ratio is 4.00 or less, the accrued interest shall be paid in full.
Repayment and prepayments
The facility has a grace period until April 6, 20172020 and is to be repaid in equal monthly installments. The final maturity date is April 6, 2020.2022. Mechel may prepay the loan in full or in part subject to simultaneous compliance with certain requirements.
Guarantee
The borrowerborrower’s obligations under the credit facility are guaranteed by Mechel Mining, Mechel Carbon, Mechel Carbon Singapore, Mechel Trading, Yakutugol, Southern Kuzbass Coal Company, Korshunov Mining Plant, Urals Stampings Plant, Chelyabinsk Metallurgical Plant, Bratsk Ferroalloy Plant, Mecheltrans and Mechel Service.
Security
The credit facility is secured by a pledge of 37.5%+1 share of Mechel Mining, 21.66%-2 shares46.66%-1 share of Chelyabinsk Metallurgical Plant, 25%+1 share of Southern Kuzbass Coal Company,25%-3 shares of Yakutugol, 25%+1 share of Korshunov Mining Plant and 25%+1 share of Urals Stampings Plant.
Covenants and other matters
For the relevant period ending on December 31, 2015,2018, we were not in compliance with certain financial and non-financial covenants.
Under the credit facility agreement, Mechel group’s ratio of net borrowingsNet Borrowings to EBITDA shall not exceed 9.00:1 until December 31, 2016, 8.00:1 until December 31, 2017, 7.00:1 until December 31, 2018, 6.00:1 until December 31, 2019, 5.00:1 until December 31, 2020 and thereafter. Mechel group’s ratio of EBITDA to net interest expenseNet Interest Expense shall not be less than 1.25:1 until December 31, 2016, 1.50:1 until December 31, 2017, 1.75:1 until December 31, 2018, 2.00:1 until December 31, 2019, 2.25:1 until December 31, 2020 and thereafter. Financial covenants are tested semi-annually.
The credit facility agreement contains certain customary representations and warranties, affirmative covenants, notice provisions and events of default, including change of control and cross-defaults relating to other debt, as well as limitations on payment of dividends, acquisitions and disposals andnon-core transactions.
The credit facility agreement is governed by Russian law.
Credit Facilities for Southern Kuzbass Coal Company from Sberbank
General
On October 9, 2012, Sberbank opened four credit lines to our subsidiary Southern Kuzbass Coal Company in the total amount of 24.0 billion rubles (approximately $772.3 million) for the purpose of working capital financing. As of December 31, 2012, we had drawn 15.1 billion rubles (approximately $497.2 million) under the credit lines. In February 2013, we drew down an additional 1.0 billion rubles. Due to the amendment in March 2013, we drew down a further 7.9 billion rubles (such drawdowns also contained a built-in cross-currency derivative instrument). As of December 31, 2013, the facilities were fully drawn. In December 2014, due to substantial depreciation of the ruble, the exchange rate threshold of 50.00 rubles per one U.S. dollar (as stipulated in the agreements) was exceeded and Sberbank converted the 20.9 billion rubles loans into U.S. dollars. As of December 31, 2015, the outstanding balance was $678.0 million for the U.S. dollar-denominated part of the credit lines and 3.1 billion rubles for the ruble-denominated part of the credit lines.
In December 2015, Southern Kuzbass Coal Company signed settlement agreements with Sberbank making all the debt due and payable to be further assigned to Gazprombank in the amount of 31.5 billion rubles. In April 2016, Southern Kuzbass Coal Company signed new settlement agreements with Sberbank which assigned part of the principal amount to Gazprombank. The principal in the total amount of $423.1 million (28.4 billion rubles as of April 12, 2016) and 3.1 billion rubles was assigned with $254.9 million remaining onwith Southern Kuzbass Coal Company. The overdue interest on ruble-denominated and U.S. dollar-denominated debt was added to the principal outstanding in the amount of 189.4 million rubles and $40.2 million, respectively. Part of the overdue interest and penalties remained onwith Southern Kuzbass Coal Company was capitalized with extended maturity similar to the principal outstanding. The rest of the overdue interest and penalties shall be paid.were paid in June 2016.
As of December 31, 2015, the overdue principal amounted to $678.0 million (approximately 49.4 billion rubles) and 3.1 billion rubles and the overdue interest amounted to $43.1 million (approximately 3.1 billion rubles) and 192.4 million rubles.
Interest rate and interest period
Under the U.S. dollar-denominated part of the credit lines, the interest is payable monthly at 3-month3M LIBOR plus a margin of 7%. Starting from April 13, 2016, per year. During the grace period, we apply payable part of interest equals to the rate of3-month LIBOR plus a margin of 5%, with thefor interest repayment. The remaining unpaid interest is being capitalized and paid aton the final maturity date. The level of margin beingPayable interest rate: 3M LIBOR+5% if our Total Borrowings/EBITDA ratio is above 6.01; 3M LIBOR+5.5% if our Total Borrowings/EBITDA ratio is above 5.01 and equal to or less than 6.01; and 3M LIBOR+6% if our Total Borrowings/EBITDA ratio is above 4.01 and equal to or less than 5.01. If our Total Borrowings/EBITDA ratio is 4.01 or less, the accrued interest shall be paid depends on Mechel group’s ratio of total borrowings to EBITDA.in full.
Under the ruble-denominated part of the credit lines, the interest is payable monthly at the CBR key rate plus 1.5% per year. The lender may change the interest rate onto the CBR key rate plus 3.5% per year if our Total Borrowings/EBITDA ratio is 4.00 or less. During the borrower fails to obtain similar terms with Gazprombank and VTB Bank.grace period, we apply payable interest rate for interest repayment. The payable part of interest equals to 8.75%, with the remaining unpaid interest is being capitalized and paid aton the final maturity date. The levelPayable interest rate: (key rate +1.5%)×0.6 if our Total Borrowings/EBITDA ratio is above 6.01; (key rate +1.5%)×0.7 if our Total Borrowings/EBITDA ratio is above 5.01 and equal to or less than 6.01; and (key rate +1.5%)×0.8 if our Total Borrowings/EBITDA ratio is above 4.01 and equal to or less than 5.01. If our Total Borrowings/EBITDA ratio is 4.01 or less, the accrued interest shall be paid in full. In all of the above cases, payable interest being paid depends on Mechel group’s ratio of total borrowings to EBITDA.rate shall not be less than 8.75% per year.
Repayment and prepayments
Should we obtain similar terms with Gazprombank and VTB Bank, theThe final maturity date shall be extended untilis April 10, 2022. The debt is payable in equal monthly installments starting from April 10, 2017 or January 10, 2020 (if the extension from Gazprombank and VTB Bank is obtained).2020. The borrower may prepay the loans in full or in part with prior notice to the lender.
Guarantee
The borrower’s obligations under the credit facility agreements are guaranteed by Mechel, Mecheltrans, Mechel Service, Bratsk Ferroalloy Plant, Izhstal, Yakutugol, Korshunov Mining Plant, Chelyabinsk Metallurgical Plant Mechel Trading and Mechel Mining.
Security
Starting from March 2016, the credit facilities share one security package with other Sberbank credit facilities: a pledge of 25%+1 share of Mechel Mining, a pledge of 25%+1 share of Beloretsk Metallurgical Plant, pledges of movable assets and mortgage over immovable assets of other Sberbank borrowers within Mechel group.
Covenants and other matters
For the relevant period ending on December 31, 2015,2018, we were not in compliance with certain financial andnon-financial covenants.
Under the credit facility agreements, Mechel group’s ratio of total borrowingsTotal Borrowings to EBITDA shall not exceed 7.5:1 as of June 30, 2016 and December 31, 2016, 5.5:1 as of June 30, 2017 and December 31, 2017, 4.5:1 as of June 30, 2018 and December 31, 2018, 3.5:1 as of June 30, 2019 and December 31, 2019, 3.0:1 as of June 30, 2020 and thereafter. Mechel group’s ratio of EBITDA to consolidated financial expenseConsolidated Financial Expense shall not fall below 1.25:1 as of June 30, 2016 and December 31, 2016, 1.5:1 as of June 30, 2017 and December 31, 2017, 1.75:1 as of June 30, 2018 and December 31, 2018, 2.0:1 as of June 30, 2019 and December 31, 2019, 2.5:1 as of June 30, 2020 and thereafter.
The credit facility agreements contain certain customary representations and warranties, affirmative covenants, notice provisions and events of default, including change of control and cross-defaults to other debt.
The credit facility agreements are governed by Russian law.
Pre-Export Facility Agreements
General
On December 3, 2013, our subsidiaries Yakutugol and Southern Kuzbass Coal Company entered into an amendment agreement to the existing $1.0 billion pre-export facility agreements (as amended and restated on December 4, 2012) with a syndicate of banks coordinated by ING Bank N.V., Société Générale and VTB Capital Plc. The amendments provide that the loan, which was entering the repayment phase in December 2013, will be repayable in equal monthly installments until December 2016 following a grace period of 12 months ending in December 2014. The terms of the facility agreements are identical in all material aspects, except for the security provided under each facility.
As of December 31, 2015, we had overdue principal in the amount of $522.1 million (approximately 38.0 billion rubles) and overdue interest in the amount of $52.9 million (approximately 3.9 billion rubles) under these facility agreements. We have requested the banks to restructure the repayment schedule of the facilities.
Interest rate and interest period
Interest under the facilities is payable at LIBOR plus a margin, or at fixed rate that may be agreed with the lenders. Based on results for the period ending December 31, 2012, the margin levels were reset during 2013 at 5.5% per year and are subject to downward or upward adjustments based on the ratio of Mechel Mining’s ratio of net borrowings to EBITDA. The overdue principal bears interest rate of LIBOR plus 7.5% per year.
Repayment and prepayments
The facility is repayable in equal monthly installments after a 12-month grace period ending in December 2014. The borrowers are entitled to prepay the loan subject to 10 business days’ prior notice to the syndicate of banks and certain other conditions specified in the credit facility agreements. Starting from December 2014, the borrowers have failed to pay the installments.
Guarantee
Yakutugol’s obligations under the credit facility agreement are guaranteed in full by Mechel, Mechel Mining, Mechel Carbon, Mechel Carbon Singapore as well as by Southern Kuzbass Coal Company and Korshunov Mining Plant (for Southern Kuzbass Coal Company and Korshunov Mining Plant in the amount of up to 2% of the value of their total assets as determined under Russian accounting standards). Southern Kuzbass Coal Company’s obligations under the credit facility agreement are guaranteed in full by Mechel, Mechel Mining, Mechel Carbon, Mechel Carbon Singapore and Yakutugol, as well as by Korshunov Mining Plant (for the latter in the amount of up to 2% of the value of its total assets as determined under Russian accounting standards). The guarantee provided by Mechel can be released subject to certain conditions.
Security
Yakutugol’s obligations under the credit facility agreement are secured by a pledge of all equipment and machinery of the borrower having a balance sheet value of $10.0 million or higher and a pledge of 15%+1 share of Yakutugol and of 10% of shares of Southern Kuzbass Coal Company. Southern Kuzbass Coal Company’s obligations under the credit facility agreement are secured by a pledge of all equipment and machinery of the borrower having a balance sheet value of $10.0 million or higher and a pledge of 15%+1 share of Southern Kuzbass Coal Company and of 10% of shares of Yakutugol.
The number of shares of each of Yakutugol and Southern Kuzbass Coal Company under pledge will be decreased from 25%+1 share to 15% if certain conditions are met. Such conditions include, among others, the ratio of Mechel Mining’s net borrowings to EBITDA being less than or equal to 2.5:1, the outstanding debt under the facility not exceeding 50% of the original principal amount and there being no event of default continuing under the facility.
The obligations of each of the borrowers are also secured by the assignment of rights under their export and offtake contracts and a charge over their collection accounts.
Covenants and other matters
For the relevant period ending on December 31, 2015, we were not in compliance with certain financial and non-financial covenants.
Under the credit facility agreements, Mechel Mining’s ratio of net borrowings to EBITDA shall not exceed 5.0:1 as of June 30, 2016. Mechel Mining’s ratio of EBITDA to net interest expense shall not be less than 4.0:1 as of June 30, 2016. Mechel Mining’s net borrowings shall not exceed $4.0 billion, under the condition that Mechel Mining’s ratio of net borrowings to EBITDA shall exceed 3.0:1. Mechel Mining’s shareholder equity shall not fall below $4.0 billion.
Mechel Mining may pay dividends on its common shares if its ratio of net borrowings to EBITDA is less than or equal to 3.0:1 and the aggregate amount of all dividends does not exceed 75% of Mechel Mining’s net profit for the respective financial year.
Acquisitions by Mechel Mining in any given year are permitted, subject to testing of Mechel Mining’s ratio of net borrowings to EBITDA as follows: (i) $500 million payable in any financial year if Mechel Mining’s ratio
of net borrowings to EBITDA is equal to or less than 2.5:1; (ii) $375 million payable in any financial year if Mechel Mining’s ratio of net borrowings to EBITDA is between 2.5:1 and 3.0:1; (iii) $50 million payable in any financial year if Mechel Mining’s ratio of net borrowings to EBITDA is between 3.0:1 and 3.5:1; (iv) $5 million payable in any financial year if Mechel Mining’s ratio of net borrowings to EBITDA exceeds 3.5:1; and (v) any other higher amount if it is approved by the majority lenders and provided that Mechel Mining will continue to be in compliance with its financial covenants and no default is continuing or would arise as a consequence of such acquisition.
The credit facility agreements contain certain customary representations and warranties, affirmative covenants, including negative pledges and limitation on lending to third parties, as well as notice provisions and events of default, including change of control and cross-defaults relating to other debt with certain limitations.
The credit facility agreements are governed by English law.
Project Finance — Credit Facility for Elgaugol from Vnesheconombank
General
On March 12, 2014, our subsidiary Elgaugol signed two credit facilities in an aggregate amount of $2.5 billion with Vnesheconombank for the development of the Elga coal complex: (i) a facility in the amount of $2.085 billion for the total budgeted financing necessary until commissioning (the “main credit line”) and (ii) a facility in the amount of $418.7 million to be used for the repayment of the $150.0 million bridge loan and payment of the fees and commissions associated with the main credit line and interest during the grace period (the “second credit line”). The facilities have a tenor of 13.5 years, including a repayment grace period of 3.5 years.
As of December 31, 2015, a total of $20.9 million was drawn under the second credit line. Disbursement of the loan was suspended by Vnesheconombank due to our failure to fulfill conditions precedent; we intend to fulfill all conditions so as to continue disbursements. As of December 31, 2015, the overdue interest under the credit facility amounted to approximately $415.9 thousand (approximately 30.3 million rubles). In March 2016, the overdue interest was fully repaid.
Interest rate and interest period
Main credit line: fixed rate of 7.5% per year for the first 60 months after the date of the loan agreement; and 6-month LIBOR plus 6% per year after the first 60 months.
Second credit line: fixed rate of 8% per year for the first 60 months after the date of the loan agreement; and 6-month LIBOR plus 6% per year after the first 60 months.
The interest is paid quarterly.
Repayment and prepayments
Identical for both facilities, the first principal repayment is 42 months after the date of signing of the loan agreement and takes place on a yearly basis according to a defined schedule.
Security
The facilities are secured with a pledge of 49% of shares in Elgaugol, a pledge of Elgaugol proprietary land and land lease rights, a pledge of immovable property of Elgaugol including construction in progress and a pledge over all movable property of Elgaugol with a book value over one million rubles per unit.
Covenants and other matters
There are no guarantees and financial covenants issued in support of these facilities, except for the requirement to maintain a positive value of the borrower’s net assets starting from the calendar quarter following the date of the commissioning of the facilities and ending on the date of the complete repayment of the credit.
The credit facility agreements are governed by Russian law.
Facility Agreement for Chelyabinsk Metallurgical Plant from BNP Paribas, Gazprombank and UniCredit — Universal Rolling Mill Facility Agreement
General
On September 15, 2010, we signed a credit facility agreement to finance the universal rolling mill installation project at our subsidiary Chelyabinsk Metallurgical Plant. The credit facility consists of three tranches underwritten by BNP Paribas S.A., Gazprombank and UniCredit. Gazprombank’s tranche is $219.4 million, BNP Paribas’s tranche is €102.8 million and UniCredit’s tranche is €89.2 million. The credit facility benefits from insurance coverage of the Italian, German and Chinese export credit agencies: SACE, Euler Hermes and Sinosure, respectively.
The purpose of the facility is to finance payments under two contracts: the equipment and technology supply contract executed with Danieli and the general construction contract executed with Minmetals.
As of December 31, 2015,2018, the principal amount outstanding under the facility was $154.9 million and €154.7 million (in aggregate approximately 23.623.1 billion rubles), with overdue principal in the amount of $42.2$126.7 million and €33.1€99.4 million (in aggregate approximately 5.716.7 billion rubles) and overdue interest in the amount of $13.5 million and €3.1 million (in aggregate approximately 1.2 billion rubles). We have requestedhold negotiations with the lenders to restructureon the repayment schedulerestructuring of the facility.
Interest rate and interest period
Interest on the facility tranche underwritten by Gazprombank (Facility A) is payable at 6M LIBOR plus a margin of 6.75% per year during the period until the construction completion date and at 6M LIBOR plus a margin of 6.25% per year after that date. Interest on the facility tranche underwritten by UniCredit (Facility B) is payable at 6M EURIBOR plus a margin of 1.50% per year. Interest on the facility tranche underwritten by BNP Paribas (Facility C) is payable at 6M EURIBOR plus a margin of 1.60% per year. The margin is increased by 2% per year if the payments are overdue.
Accrued interest is payable twice a year on payment dates January 21 and July 21.
Repayment and prepayments
The borrower must repay the tranches in 13 equal semi-annual installments in respect of Facility A; 16 equal semi-annual installments in respect of Facility B; and 16 equal semi-annual installments in respect of Facility C.
Repayment starts on the first repayment date, which means in respect of each of the tranches, the first payment date (January 21 or July 21) falling after the earlier of (a) the end of the availability period and (b) the construction completion date. The availability period under all three tranches is 30 months from the signing date. Facility A must be repaid in full after six years following the first repayment date, Facilities B and C must be repaid in full after seven and a half years following the first repayment date.
The borrower may make a pro rata prepayment of the loan with the prior written consent of the lenders. A prepayment of part of the loan must be of a minimum amount of $10.0 million in respect of Facility A, and €10.0 million in respect of Facility B and Facility C.
Starting from July 2014, the borrower failed to pay the installments.
Guarantee
The borrower’s obligations under the credit facility agreement are guaranteed by Mechel.
Security
The borrower’s obligations under the credit facility agreement are secured by a pledge of 20% of the common shares of Chelyabinsk Metallurgical Plant. The borrower has also granted security over certain of its assets, including real estate and equipment to secure its obligations.
Covenants and other matters
For the relevant period ending on December 31, 2015,2018, we were not in compliance with certain financial andnon-financial covenants.
Under the credit facility agreement, Mechel’s ratio of net borrowingsNet Borrowings to EBITDA shall not exceed 6.3:1 as of June 30, 2016 and December 31, 2016, 6.0:1 as of June 30, 2017, 5.8:1 as of December 31, 20172018 and thereafter, provided that if during any period the ratio of net borrowingsNet Borrowings to EBITDA is 3.0:1 or less, then the ratio of 3.0:1 continues to apply thereafter. Mechel’s ratio of EBITDA to net interest expenseNet Interest Expense shall not fall below 2.0:1 as of June 30, 2016December 31, 2018 and thereafter. Mechel’s shareholder equity shall be equal to or exceed $3.0 billion.
Mechel may pay dividends: (i) on our common and preferred shares, provided that the ratio of Mechel’s net borrowingsNet Borrowings to EBITDA does not exceed 3.0:1, and if such dividends are funded from available excess cash flow, provided that no default occurs or would occur as a result of that payment; and (ii) if dividends on our preferred shares do not exceed 20% of Mechel’s net profit. If Mechel records a loss as shown in the financial statements, the amount of permitted dividends paid on our preferred shares shall be limited to 7.5 million rubles for any such financial year.
Acquisitions by members of our group are permitted if (1) such acquisitions in aggregate do not exceed (i) $5.0 million when the ratio of our net borrowingsNet Borrowings to EBITDA exceeds 3.5:1, (ii) $50.0 million when the ratio of our net borrowingsNet Borrowings to EBITDA is within the range of 3.0:1 – 3.5:1, (iii) $250.0 million when the ratio of our net borrowingsNet Borrowings to EBITDA is within the range of 2.5:1 – 3.0:1, (iv) $375.0 million when the ratio of our net borrowingsNet Borrowings to EBITDA is within the range of 2.0:1 – 2.5:1, or (v) $500.0 million when the ratio of our net borrowingsNet Borrowings to EBITDA is 2.0:1 or less; or (2) the total amount of such acquisition is fully financed by available excess cash flow.
The borrower may not, without prior consent from the lender,lenders, enter into any amalgamation, demerger, merger or reorganization except an intra-group reorganization on a solvent basis.
The credit facility agreement contains certain customary representations and warranties, affirmative covenants, notice provisions and events of default, including change of control and cross-defaults to other debt.
The credit facility agreement is governed by English law.
Credit Facility Agreements for Yakutugol and Southern Kuzbass Coal Company from Gazprombank
General
In April 2012, our subsidiaries Yakutugol and Southern Kuzbass Coal Company entered into two separatenon-revolving credit facility agreements with Gazprombank for a total amount of $500.0 million: $300.0 million
was made available to Yakutugol and $200.0 million was made available to Southern Kuzbass Coal Company, both for a period of up to five years with a three-year grace period obtained for the purpose of funding operational activities and refinancing of short-term debt. As of December 31, 2014, the facilities were fully drawn.
In August and December 2015, Yakutugol and Southern Kuzbass Coal Company signed amendments to their credit facility agreements with Gazprombank to restructure debt in a total amount of $500.0 million, providing for an extension of the grace period until April 2020 and the final maturity until April 2022.million. In
In
January 2016, the restructuring of these credit facilities became effective. As a result of the conversion into rubles, the debt of Yakutugol amounted to approximately 22.8 billion rubles and of Southern Kuzbass Coal Company amounted to approximately 15.3 billion rubles.
As of December 31, 2015, YakutugolIn June 2016, we signed amendments to the credit facility agreements under which accrued and Southern Kuzbass Coal Company had overdue principalunpaid interests in the amount of $100.0 million and $66.7 million (in aggregate approximately 12.1 billion rubles) and overdue interest in the amount of $32.2 million and $21.4 million (in aggregate approximately 3.9 billion rubles), respectively. All overduerubles were capitalized. We repaid this amount and interest shall be repaid untilaccrued on it during the end ofperiod from April 15, 2017 to March 2017.30, 2018.
Interest rate and interest period
Starting from the effective date, the interest under the credit facilities is payable monthly at the CBR key rate plus 1.5% per year until April 2022. The lender may change the interest rate on the CBR key rate plus 3.5% per year if the borrowers fail to meet certain additional conditions, including obtaining similar terms with Sberbank and VTB Bank. year.
During the grace period, we apply thepayable interest rate of 8.75% for interest repayment. The remaining unpaid interests are being capitalized and paid in accordance with the principal repayment schedule. Payable interest rate: 8.75% if our Total Borrowings/EBITDA ratio is equal to 6.01 or above; 9.50% if our Total Borrowings/EBITDA ratio is equal to or above 5.01 and less than 6.00; and 10.50% if our Total Borrowings/EBITDA ratio is equal to or above 4.01 and less than 5.00. If our Total Borrowings/EBITDA ratio is 4.00 or less, the accrued interest shall be paid in full. In all of the above cases, payable interest rate shall not exceed the CBR key rate plus 1.5% per year.
Repayment and prepayments
The final maturity date is April 20, 2022. Repayment is to be made in equal monthly installments starting from April 4,February 17, 2020. The lender may change the final maturity date on April 20, 2020 if the borrowers fail to meet certain additional conditions, including obtaining similar terms with Sberbank and VTB Bank. In this case repayment is to be made in equal monthly installments starting from April 4, 2017.
The borrowers may prepay the loans in full or in part with a 30 day prior notice to the lender.
Guarantee
The borrowers’ obligations are guaranteed by Mechel Mining, Mechel Carbon, Korshunov Mining Plant, Urals Stampings Plant, Chelyabinsk Metallurgical Plant, Mechel and cross guarantee between Southern Kuzbass Coal Company and Yakutugol.
Security
Yakutugol’s obligations under the credit facility agreement are secured by a pledge of 25%+1 share in each of Southern Kuzbass Coal Company, Korshunov Mining Plant, Port Posiet, Chelyabinsk Metallurgical Plant, Beloretsk Metallurgical Plant and Urals Stampings Plant, 45%+1 share of Southern Kuzbass Coal Company, 50%+1 share inof Yakutugol, 25%+1 share of Mechel Mining and 25% inof registered capital of Port Temryuk, as well as 33.3% of common shares of Izhstal.
Southern Kuzbass Coal Company’s obligations under the credit facility agreement are secured by a pledge of 25%+1 share in each of Southern Kuzbass Coal Company, Korshunov Mining Plant, Port Posiet and Beloretsk Metallurgical Plant, 45%+1 share of Southern Kuzbass Coal Company, 50%+1 share in each of Yakutugol and Urals Stampings Plant, 25%+1 share of Mechel Mining and 25% of registered capital in each of Port Temryuk and Bratsk Ferroalloy Plant, as well as 33.3% of common shares of Izhstal.
In March 2016, we mortgaged the Ulak-Elga rail line under the credit facility agreements.
Covenants and other matters
For the relevant period ending on December 31, 2015,2018, we were not in compliance with certain financial andnon-financial covenants.
Under the credit facility agreements, Mechel group’s ratio of total borrowingsTotal Borrowings to EBITDA shall not exceed 7.5:1 in 2016, 5.5:1 in 2017, 4.5:1 in 2018, 3.5:1 in 2019 and 3.0:1 in 2020. Mechel group’s ratio of EBITDA to consolidated financial expenseConsolidated Financial Expense shall not be less than 1.25:1 in 2016, 1.50:1 in 2017, 1.75:1 in 2018, 2.0:1 in 2019 and 2.5:1 in 2020. During the period from 2017 to 2020, we also have to comply with the ratios of operational cashCash flow from operating activities to EBITDA and EBITDA to revenuesRevenues at the levels of 80% and 20%, respectively.
The credit facility agreements contain certain customary representations and warranties, affirmative covenants, notice provisions and events of default, including change of control and cross-defaults to other debt.
The credit facility agreements are governed by Russian law.
Credit Facility Agreements for Yakutugol and Southern Kuzbass Coal Company from Gazprombank
General
In April 2013, our subsidiaries Yakutugol and Southern Kuzbass Coal Company entered into separatenon-revolving credit facility agreements with Gazprombank for a total amount of $889.0 million: $400.0 million was made available to Southern Kuzbass Coal Company and $489.0 million was made available to Yakutugol, both for a period of up to five years with a three-year grace period obtained for the purpose of funding operational activities and refinancing of short-term debt provided by Gazprombank. As of December 31, 2014, the amount outstanding under the Southern Kuzbass Coal Company facility was $400.0 million and the amount outstanding under the Yakutugol facility was $385.8 million.
In August and December 2015, Yakutugol and Southern Kuzbass Coal Company signed amendments to their credit facility agreements with Gazprombank to restructure debt in a total amount of $785.8 million, providing for an extension of the grace period until April 2020 and the final maturity until April 2022.
million. In January 2016, the restructuring of these credit facilities became effective. As a result of the conversion into rubles, the debt of Yakutugol amounted to approximately 30.5 billion rubles and of Southern Kuzbass Coal Company amounted to approximately 30.4 billion rubles.
As of December 31, 2015, YakutugolIn June 2016, we signed amendments to the credit facility agreements under which accrued and Southern Kuzbass Coal Company had overdue interestunpaid interests in the amount of $41.3 million6.4 billion rubles were capitalized. We repaid this amount and $42.9 million (in aggregate approximately 6.1 billion rubles), respectively. All overdue interest shall be repaid untilaccrued on it during the end ofperiod from April 15, 2017 to March 2017.30, 2018.
Interest rate and interest period
Starting from the effective date, the interest under the credit facilities is payable monthly at the CBR key rate plus 1.5% per year until April 2022. The lender may change the interest rate on the CBR key rate plus 3.5% per year if the borrowers fail to meet certain additional conditions, including obtaining similar terms with Sberbank and VTB Bank. year.
During the grace period, we apply thepayable interest rate of 8.75% for interest repayment. The remaining unpaid interests are being capitalized and paid in accordance with the principal repayment schedule. Payable interest rate: 8.75% if our Total Borrowings/EBITDA ratio is equal to 6.01 or above; 9.50% if our Total Borrowings/EBITDA ratio is equal to or above 5.01 and less than 6.00; and 10.50% if our Total Borrowings/EBITDA ratio is equal to or above 4.01 and less than 5.00. If our Total Borrowings/EBITDA ratio is 4.00 or less, the accrued interest shall be paid in full. In all of the above cases, payable interest rate shall not exceed the CBR key rate plus 1.5% per year.
Repayment and prepayments
The final maturity date is April 20, 2022. Repayment is to be made in equal monthly installments starting from April 4,February 17, 2020. The lender may change the final maturity date on April 20, 2020 if the borrowers fail to meet certain additional conditions, including obtaining similar terms with Sberbank and VTB Bank. In this case repayment is to be made in equal monthly installments starting from April 4, 2017.
The borrowers may prepay the loans in full or in part with a 10 day prior notice to the lender.
Guarantee
The borrowers’ obligations are guaranteed by Mechel Mining, Mechel Carbon, Korshunov Mining Plant, Urals Stampings Plant, Chelyabinsk Metallurgical Plant, Mechel and cross guarantee between Southern Kuzbass Coal Company and Yakutugol.
Security
Yakutugol’s obligations under the credit facility agreement are secured by a pledge of 25%+1 share in each of Southern Kuzbass Coal Company, Korshunov Mining Plant, Port Posiet, Chelyabinsk Metallurgical Plant, Beloretsk Metallurgical Plant and Urals Stampings Plant, 45%+1 share of Southern Kuzbass Coal Company, 50%+1 share inof Yakutugol, 25%+1 share of Mechel Mining and 25% inof registered capital of Port Temryuk, as well as 33.3% of common shares of Izhstal.
Southern Kuzbass Coal Company’s obligations under the credit facility agreement are secured by a pledge of 25%+1 share in each of Southern Kuzbass Coal Company, Korshunov Mining Plant, Port Posiet and Beloretsk Metallurgical Plant, 45%+1 share of Southern Kuzbass Coal Company, 50%+1 share in each of Yakutugol and Urals Stampings Plant, 25%+1 share of Mechel Mining and 25% of registered capital in each of Port Temryuk and Bratsk Ferroalloy Plant, as well as 33.3% of common shares of Izhstal.
In March 2016, we mortgaged the Ulak-Elga rail line under the credit facility agreements.
Covenants and other matters
For the relevant period ending on December 31, 2015,2018, we were not in compliance with certain financial andnon-financial covenants.
Under the credit facility agreements, Mechel group’s ratio of total borrowingsTotal Borrowings to EBITDA shall not exceed 7.5:1 in 2016, 5.5:1 in 2017, 4.5:1 in 2018, 3.5:1 in 2019 and 3.0:1 in 2020. Mechel group’s ratio of EBITDA to consolidated financial expenseConsolidated Financial Expense shall not be less than 1.25:1 in 2016, 1.50:1 in 2017, 1.75:1 in 2018, 2.0:1 in 2019 and 2.5:1 in 2020. During the period from 2017 to 2020, we also have to comply with the ratios of operational cashCash flow from operating activities to EBITDA and EBITDA to revenuesRevenues at the levels of 80% and 20%, respectively.
The credit facility agreements contain certain customary representations and warranties, affirmative covenants, notice provisions and events of default, including change of control and cross-defaults to other debt.
The credit facility agreements are governed by Russian law.
Syndicated Loan for Chelyabinsk Metallurgical Plant from VTB Bank
General
On July 12, 2018, Chelyabinsk Metallurgical Plant entered into a syndicated credit facility agreement with VTB Bank and VTB Bank (Europe) SE for a total amount of up to €950.0 million (two tranches of $1,004 million and $38 million in euro equivalent) to refinance the existingpre-export credit facilities of Yakutugol and Southern Kuzbass Coal Company and for the purposes of funding operating activities. We drew down a total of €896.7 million under this credit facility.
Interest rate and interest period
Interest under the credit facility is payable monthly at 1M EURIBOR plus a margin of 5.5% per year. The lender may increase the interest rate by 1% per year if the borrower fails to meet certain obligations under the credit facility.
Repayment and prepayments
The credit facility is repayable in equal monthly installments starting on April 6, 2020. The final maturity date is April 6, 2022. The borrower may prepay the loan in full or in part subject to simultaneous compliance with certain requirements.
Guarantee
The borrower’s obligations are guaranteed by Mechel, Mechel Mining, Mechel Carbon, Yakutugol, Southern Kuzbass Coal Company, Korshunov Mining Plant, Urals Stampings Plant, Bratsk Ferroalloy Plant, Mecheltrans, Mechel-BusinessService and Mechel Service.
Security
The borrower’s obligations are secured by a pledge of25%-3 shares of Yakutugol, 25%+1 share of Southern Kuzbass Coal Company and 25%+1 share of Korshunov Mining Plant. We are obliged to provide additional security to VTB Bank.
Covenants and other matters
For the relevant period ending on December 31, 2018, we were not in compliance with certain financial andnon-financial covenants.
Under the credit facility agreement, Mechel group’s ratio of Net Borrowings to EBITDA shall not exceed 6.00:1 until December 31, 2019, 5.00:1 until December 31, 2020 and thereafter. Mechel group’s ratio of EBITDA to Net Interest Expense shall not be less than 1.75:1 until December 31, 2018, 2.00:1 until December 31, 2019, 2.25:1 until December 31, 2020 and thereafter. Financial covenants are tested on a quarterly basis.
The credit facility contains certain customary representations and warranties, affirmative covenants, notice provisions and events of default, including change of control and cross-defaults relating to other debt, as well as limitations on payment of dividends, acquisitions and disposals andnon-core transactions.
The credit facility agreement is governed by Russian law.
Exchange Controls
The Federal Law “On Currency Regulation and Currency Control,” effective from June 18, 2004, as amended, sets forth certain restrictions on settlements between residents of Russia with respect to transactions involving foreign securities (including ADSs), including requirements for settlement in Russian rubles.
Repatriation of Export Proceeds
Russian companies must repatriate 100% of their receivables from the export of goods and services and/or the provision of loans (with a limited number of exceptions concerning, in particular, certain types of secured financing) within the time frame provided under the respective agreement.
Restrictions on Remittance toNon-residents
The Foreign Investments Law guarantees foreign investors the right to repatriate their earnings from Russian investments. However, the evolving Russian exchange control regime may affect investors’ ability to do
so. Ruble so in the future. Currently, ruble dividends on shares may be paid to the depositary or its nominee and converted
into U.S. dollars by the depositary for distribution to owners of ADSs without restriction. In addition, ADSs may be sold bynon-residents of Russia for U.S. dollars outside Russia without regard to Russian currency control laws so long as the buyer is not a Russian resident for currency control purposes.
Taxation
The following discussion is not intended as tax advice to any particular investor. No opinion of counsel will be issued with respect to the following discussion and, therefore, such discussion is not based on an opinion of counsel. It is also not a complete analysis or listing of all potential U.S. federal or Russian income and withholding tax consequences of ownership of shares or ADSs. We urge such holders to consult their tax advisers regarding the specific U.S. federal, state and local and Russian tax consequences of the ownership and disposition of the shares or ADSs, including their eligibility for the benefits of a double tax treaty between the Russian Federation and their country of residence, in light of their particular facts and circumstances, as well as the applicability and effect of state, regional and local tax laws and foreign tax law.
Russian Income and Withholding Tax Considerations
The following is a summary of certain Russian tax considerations relevant to payments to Russian resident andnon-resident holders of the shares and ADSs and to the purchase, ownership and disposition of the shares and ADSs by Russian resident andnon-resident holders. This summary is based on the laws of Russia in effect as of the date of this document. The discussion with respect to Russian legislation is based on our understanding of current Russian law and tax rules, which are subject to frequent change and varying interpretations.
This summary does not seek to address the applicability of, and procedures in relation to, taxes levied by the regions, municipalities or othernon-federal level authorities of the Russian Federation. Nor does the summary seek to address the availability of double tax treaty relief, and it should be noted that there might be practical difficulties involved in claiming relief under an applicable double tax treaty. You should consult your own professional advisors regarding the tax consequences of investing in the shares and ADSs. No representations with respect to the Russian tax consequences to any particular holder are made hereby.
The Russian tax rules applicable to ADSs are characterized by uncertainties and by an absence of special provisions with respect to transactions involving ADSs. Both the substantive provisions of Russian tax law and the interpretation and application of those provisions by the Russian authorities may be subject to more rapid and unpredictable change than in a jurisdiction with more developed capital markets and a more developed taxation system. In particular, the interpretation and application of such provisions will in practice rest substantially with local tax inspectors.
For the purposes of this summary, a “Russian resident holder” means: (1) an individual holder of the shares and ADSs, actually present in the Russian Federation for 183 days or more in 12 consecutive months; or (2) an organization recognized as a tax resident of the Russian Federation, namely (i) an organization or an individual entrepreneur, organized under Russian law, (ii) a foreign organization recognized as a tax resident of the Russian Federation in accordance with the international tax treaty of the Russian Federation, and (iii) a foreign organization which place of management is the Russian Federation, unless otherwise provided by the international tax treaty of the Russian Federation; or (3) an organization, organized under a foreign law, that holds and disposes of the shares and ADSs through its permanent establishment in Russia. Individual presence in Russia is not considered interrupted if an individual departs for short periods (less than six months) for the purpose of medical treatment or education, as well as for the performance of labor or other duties related to the execution of work or services at offshore raw hydrocarbon deposits.
For the purposes of this summary, a “non-resident“non-resident holder” is a holder of the shares or ADSs which is not qualified to be a Russian resident holder as defined in the previous paragraph.
Taxation of acquisition of the shares and ADSs
No Russian tax implications should arise for holders of the shares and ADSs upon purchase of the shares and ADSs. However, starting from 2015, Russian resident holders are required to notify tax authorities about their participation in Russian organizations (in case of direct participation interests in excess of 10%) not later than one month from the date of commencement of such participation. In addition, under certain conditions a taxable material gain may arise for individuals if the shares and ADSs are purchased at a price below the deemed market value. Also, in certain circumstances, a Russian resident holder that is an organization acquiring the shares or ADSs is generally obliged to act as a tax agent to withhold profitincome tax on proceeds from the sale of the shares or ADSs to be transferred to anon-resident holder disposing such shares or ADSs. We urge such holders to consult their tax advisers regarding specific tax consequences of acquisition of the shares or ADSs.
Taxation of dividends
A Russian company that pays dividends is generally obliged to act as a tax agent to withhold tax on the dividends and remit the amount of tax due to the Russian Federation state budget. In some cases, tax agent’s functions are performed by other legal entities. However, the applicable withholding tax rate will depend on the status of the dividend’s recipient and on the availability with the Russian company paying dividends on the date of such payment of documents confirming the status of the tax resident of the respective state (country) in relation to the recipient of income.
Russian resident holders
Shares
Dividends paid to a Russian resident holder of the shares that is a Russian organization or an individual will be generally subject to Russian withholding tax at the rate of 13%. Dividends received by Russian organizations are subject to withholding tax at the rate of 0% provided that the recipient organization constantly owns for a period of 365 calendar days or more at least 50% of participation shares in the share capital of the paying organization or share depositary receipts qualifying for dividends equal to at least 50% of the total amount of dividends paid by the organization. However, it is difficult to predict how the Russian tax authorities may interpret the conditions listed above. Therefore, there can be no assurance that the 0% withholding tax rate will apply.
The effective rate of this tax may be lower than 13% (other than tonon-resident companies andnon-resident individuals) owing to the fact that generally this tax should be calculated by multiplying the basic tax rate (13%) by the difference between (i) the dividends to be distributed by us to our shareholders, and (ii) dividends collected by us in the current and preceding tax periods from other Russian persons (except for dividends which under the current Russian tax law are taxable at the rate of 0% and provided that the amount of dividends previously was not included when determining the tax base which is determined in respect of income received by a Russian organization in the form of dividends).
Since 2014, when paying dividends in respect of shares that are recorded on depo account of foreign nominee holder and depo account of foreign authorized holder, the tax should be calculated and withheld by the depositary (tax agent), which opened these accounts. Effective from January 1, 2014, the reduced tax rate of 0% does not apply on dividend payments for such shares. Under Russian law, the general rate of 13% is applied, subject to the submission of certain information to the tax agent. If such information has not been submitted to the tax agent in the prescribed manner and in a certain period of time, the tax rate of 15% is applied.
A holder that is a foreign organization holding shares through a permanent establishment in Russia is entitled to pay this tax to the Russian budget on its own behalf (i.e., without a Russian entity that distributes the dividends to such holder acting as a tax agent for withholding tax) if such holder provides the Russian entity that acts as the Russian tax agent with specific documentary evidence confirming dividend income is attributable to a
permanent establishment of the holder in Russia. Such evidence includes a notarized copy of the form confirming registration of the holder with the Russian tax authorities. A notification must also be issued by the local tax authorities at the holder’s place of tax registration confirming dividend income is attributable to the permanent establishment of the holder in Russia.
According to clarifications issued by the Russian tax authorities, it may be possible to claim that the reduced withholding tax rate should apply to dividendsDividends paid to a Russian permanent establishment of a foreign organization are taxable at a rate which is set based onnon-discrimination provisions of a double tax treaty between Russia and the country of tax residencyresidence of the respective foreign organization. However, asAs the Russian Tax Code does not specifically provide for the application by the Russian establishment of the reduced taxa foreign organization of a rate of 0% in such situations andrespect of received dividends, it is not possible to guarantee the application of treaty-basednon-discrimination cases is still rare in Russian tax practice, no assurance can be given that any claims for application of the reduced tax rate would not be challenged by the Russian tax authorities, hence 15% withholding tax rate would be applied by us.this rate.
ADSs
There are uncertainties in relation to withholding tax on dividends payable to Russian resident holders of ADSs primarily because the taxation of dividends payable under ADSs is not specifically addressed under Russian tax law.
Effective from January 1, 2014, so as to apply the tax rate of 13% when paying dividends under ADSs to residents the tax agent must be submitted with certain information in the prescribed manner and in a certain period of time. If such information has not been submitted to the tax agent, the tax rate of 30% is applied. Thus, starting from 2014, the tax agent may be obliged to withhold tax at the rate of 30% (due to the absence of the required information) and Russian holders of ADSs may be unable to use the rate of 13% provided by Russian tax law for residents.
Upon receiving dividends, Russian holders which are organizations may be required to pay additional Russian profitincome tax at the rate of 13% (the rate applied to dividends received fromnon-residents) or 20% (if the income received will not be recognized as dividends) while Russian holders who are individuals may be required to pay Russian personal income tax at the rate of 13%. There is also no established procedure providing for the refund of tax withheld from dividends payable through the depositary to Russian resident holders of ADSs. Accordingly, Russian residents are urged to consult their own tax advisors regarding the tax treatment of the purchase, ownership and disposition of the ADSs.
A holder of the ADSs that is a foreign organization conducting its business through a permanent establishment in Russia is entitled to pay this tax to the Russian budget on its own behalf (i.e., without a Russian entity that distributes the dividends to such holder acting as a tax agent for withholding tax) if such holder provides the Russian entity that acts as the Russian tax agent with specific documentary evidence confirming dividend income is attributable to a permanent establishment of the holder in Russia. Such evidence includes a notarized copy of the form confirming registration of the holder with the Russian tax authorities. A notification must also be issued by the local tax authorities at the holder’s place of tax registration confirming dividend income is attributable to the permanent establishment of the holder in Russia.
Non-resident holders
As of September 2018, Russia participates in the international automatic exchange of financial information with the competent authorities of foreign states (territories). As part of this exchange, the organizations of the Russian financial market, including professional securities market participants engaged in brokerage and/or securities management and/or depositary activities, are obliged to send information about clients, their beneficiaries and controlling parties who are foreign tax residents to the Russian tax service. Special attention is given to individuals whose account balance exceeds $1 million or the equivalent of such amount in another currency and legal entities with a capital over $250 thousand or the equivalent of such amount in another currency.
Shares
Dividends paid tonon-resident holders of shares will generally be subject to Russian withholding tax, which the tax agent will withhold. Under Russian law dividends paid to anon-resident holder which is an organization or individual will be subject to Russian withholding tax at rates of 15% or 30% in certain cases. Withholding tax on dividends may be generally reduced under the terms of a double tax treaty between the Russian Federation and the country of tax treaty residence of anon-resident holder of the shares.
Since 2014, when paying dividends in respect of shares issued by Russian organizations that are recorded on depo account of foreign nominee holder, depo account of foreign authorized holder and/or depo account of depositary programs, the tax should be calculated and withheld by the depositary (tax agent), which opened these accounts. Effective from January 1, 2014, the reduced tax rate established in accordance with certain provisions of the double tax treaty does not apply on dividend payments under such shares. The general rate established by such treaty and not accounting for benefits or the rate of 15% provided by Russian law are applied, subject to the submission of certain information to the tax agent. If such information has not been submitted to the tax agent in the prescribed manner and in a certain period of time, a tax rate of 30% is applied.
Thus, starting from 2014, the tax agent is obliged to withhold tax at the general rate established by the tax treaty or at the rate of 15% (in the absence of the tax treaty) or at the rate of 30% (in the absence of the required information) andnon-resident holders of shares may be unable to benefit from the tax treaty. Althoughnon-resident holders of shares may apply for a refund of a portion of the tax withheld under an applicable tax treaty, the procedure to do so may be time-consuming and no assurance can be given that the Russian tax authorities will grant a refund.
ADSs
Comments provided in the previous section (see “— Taxation of dividends —Non-resident holders — Shares”) are also applicable to ADSs. Effective from January 1, 2014, the reduced tax rate established in accordance with certain provisions of the double tax treaty does not apply on dividend payments under ADSs. The general rate established by such treaty and not accounting for benefits or the rate of 15% provided by Russian law are applied, subject to the submission of certain information to the tax agent. If such information has not been submitted to the tax agent in the prescribed manner and in a certain period of time, a tax rate of 30% is applied.
Thus, starting from 2014, the tax agent is obliged to withhold tax at the general rate established by the tax treaty or at the rate of 15% (in the absence of the tax treaty) or at the rate of 30% (in the absence of the required information) andnon-resident holders of ADSs may be unable to benefit from the tax treaty. Althoughnon-resident holders of ADSs may apply for a refund of a portion of the tax withheld under an applicable tax treaty, the procedure to do so may be time-consuming and no assurance can be given that the Russian tax authorities will grant a refund. See “— Tax treaty procedures” below.
The dividends taxation rate may be reduced to 10% under the United States-Russia income tax treaty forU.S. non-resident holders. Under current regulations, authorization from the Russian tax authorities is not required to allow the tax agent to withhold tax at a reduced rate under applicable double tax treaties provided that all other requirements are met. See “— Tax treaty procedures.”
If the tax agent is not submitted with the prescribed by the tax legislation information, it will be obliged to withhold tax at the rate of 30%. In this case, U.S. holders qualifying for a reduced rate under theUnited States-Russia income tax treaty may claim a refund from the Russian tax authorities/tax agents, depending on the status of a holder, within three years. There is significant uncertainty regarding the availability and timing of such refunds.
Taxation of capital gains
The following sections summarize the taxation of capital gains in respect of the disposition of the shares and ADSs.
Russian resident holders
As the Russian legislation related to taxation of capital gains derived by Russian resident holders (including organizations and individuals) in connection with ADSs is not entirely clear, we urge Russian residents to consult their own tax advisors regarding the tax treatment of the purchase, ownership and disposition of ADSs.
However, since 2015, Russian tax legislation does not recognize as a sale or other disposition of securities: (i) the cancellation of ADSs upon receipt of representing securities; (ii) the transfer of securities at placement of ADSs certifying the rights for represented securities.
Organizations
Capital gains arising from the sale of the shares and ADSs by a Russian resident holder that is an organization will be taxable at the regular Russian corporate profitincome tax rate of 20%.
Since November 27, 2018, sale of the shares and ADSs is taxable at a rate of 0% provided that there is a documentary evidence that on the date of sale of such shares they were continuously owned by Russian resident holders on the basis of the right of ownership or other proprietary right for more than five years, and provided that such shares constitute the charter capital of Russian organizations in which no more than 50% of assets directly or indirectly consist of immovable property located in Russia. Until November 27, 2018, the above conditions applied only to the sale of the shares and ADSs which were acquired after January 1, 2011.
However, it should be noted that the determination of whether more than 50% of our assets consist of immovable property located in Russia is inherently factual and is made on an ongoing basis, and the relevant Russian legislation in this respect is not entirely clear. Hence, there can be no assurance that immovable property owned by us and located in Russia will not constitute more than 50% of the company’s assets as at the date of the sale of shares and ADSs by residents.
Russian tax legislation contains a requirement that a profit arising from activities connected with securities quoted on a stock exchange must be calculated and accounted for separately from a profit from activities connected with securities that are not quoted on a stock exchange and from other profits. Since 2015, income (expenses) from operations with securities quoted on a stock exchange is recorded in the general tax base in accordance with generally established procedures. Therefore, Russian resident holders may be able to apply losses arising in respect of the listed shares and ADSs in the current base for profitincome tax.
Individuals
Capital gains arising from the sale, exchange or other disposition of the shares and ADSs by individuals who are Russian resident holders must be declared on the holder’s tax return and are subject to personal income tax at a rate of 13%.
Since November 27, 2018, sale of the shares and ADSs by Russian individuals resident holders is not subject to personal income tax provided that there is a documentary evidence that on the date of sale of such shares they were continuously owned by Russian resident holders on the basis of the right of ownership or other proprietary right for more than five years, and provided that such shares constitute the charter capital of Russian organizations in which no more than 50% of assets directly or indirectly consist of immovable property located in Russia. Until November 27, 2018, the above conditions applied only to the sale of the shares and ADSs which were acquired after January 1, 2011.
However, it should be noted that the determination of whether more than 50% of our assets consist of immovable property located in Russia is inherently factual and is made on an ongoing basis, and the relevant Russian legislation in this respect is not entirely clear. Hence, there can be no assurance that immovable property owned by us and located in Russia will not constitute more than 50% of the company’s assets as at the date of the sale of shares and ADSs by residents.
The income in respect of sale of the shares or ADSs by an individual is calculated as sale proceeds less documented expenses related to the purchase of these securities (including cost of securities and expenses associated with purchase, safe-keeping and sale of these securities).
Under Russian law, the acquisition value can be deducted by the source of the payment, if the sale was made by a holder through a professional trustee, dealer or broker that is a Russian organization or a foreign company with a permanent establishment in Russia. This professional trustee, dealer or broker should also act as a tax agent and withhold the applicable tax. Such a tax agent will be required to report to the Russian tax authorities the amount of income realized by the individual and tax withheld upon the sale of the shares and ADSs not later than April 1 of the year following the reporting year.
Furthermore, according to certain conditions, individuals may have taxable material gain at the rate of 13% if the shares and ADSs are acquired at a price below conventional market value.
A Russian resident holder who is an individual is not subject to income tax from the sale of shares in Russian organizations if the shares comprise the charter capital of Russian organizations, no more than 50% of assets of which directly or indirectly consists of immovable property located in the territory of the Russian Federation, provided that on the date of sale (redemption) of such shares they were continuously owned on the basis of the right of ownership or other proprietary right for more than five years.
Non-resident holders
Since 2015, Russian tax legislation does not recognize as a sale or other disposition of securities: (i) the cancellation of ADSs upon receipt of representing securities; (ii) the transfer of securities at placement of ADSs certifying the rights for represented securities.
As of September 2018, Russia participates in the international automatic exchange of financial information with the competent authorities of foreign states (territories). As part of this exchange, the organizations of the Russian financial market, including professional securities market participants engaged in brokerage and/or securities management and/or depositary activities, are obliged to send information about clients, their beneficiaries and controlling parties who are foreign tax residents to the Russian tax service. Special attention is given to individuals whose account balance exceeds $1 million or the equivalent of such amount in another currency and legal entities with a capital over $250 thousand or the equivalent of such amount in another currency.
Organizations
Capital gains arising from the sale, exchange or other disposition of the shares and ADSs by organizations that arenon-resident holders should not be subject to tax in Russia if more than 50% of our assets directly or indirectly consist of immovable property located in Russia constitutes 50% or less of our assets.Russia. If more than 50% of our assets were to consist of immovable property
located in Russia, organizations that arenon-resident holders of the shares and ADSs should be subject (except as described below) to a 20% withholding tax on the gross proceeds from sale, exchange or other disposition of the shares and ADSs or 20% withholding tax on the difference between the sales, exchange or other disposition price and the acquisition costs of the shares and ADSs.
However, it should be noted that the determination of whether more than 50% of our assets consist of immovable property located in Russia is inherently factual and is made on an ongoing basis, and the relevant Russian legislation and regulations in this respect areis not entirely clear. Hence, there can be no assurance that immovable property owned by us and located in Russia will not constitute more than 50% of the company’s assets as at the date of the sale of shares and ADSs bynon-residents. Certain international double tax treaties may provide for protection from the Russian taxation in such instances.
Where the shares and ADSs are sold by organizations beingnon-resident holders to persons being organizations recognized as tax residents of the Russian Federation, even if the resulting capital gain is considered taxable in Russia, there is currently no mechanism under which the purchaser will be able to withhold the tax and remit it to the Russian budget.
Individuals
The taxation of the income ofnon-resident individuals depends on whether the income is received from Russian ornon-Russian sources. Russian tax law considers the place of sale as an indicator of source. Accordingly, the sale of the shares and ADSs outside of Russia by individuals who arenon-resident holders should not be considered Russian source income and, therefore, should not be taxable in Russia. However the Russian tax law gives no clear indication as to how the place of sale of the shares and ADSs should be defined in this respect. Therefore, the Russian tax authorities may have a certain amount of flexibility in concluding whether a transaction is within Russia or outside of Russia.
The sale, exchange or other disposal of the shares and ADSs bynon-resident holders in Russia will be considered Russian source income and will be subject to tax at the rate of 30% on the difference between the sales price and the acquisition value of such shares and ADSs as well as other documented expenses, such as depositary expenses and broker fees, among others. Under Russian law, the acquisition value can only be deducted by the source of the payment, if the sale was made by anon-resident holder through a professional trust manager, dealer or broker that is a Russian organization or a foreign company with a permanent establishment in Russia. Such professional trust manager, dealer or broker should also act as a tax agent and withhold the applicable tax. Such a tax agent will be required to report to the Russian tax authorities the amount of income realized by thenon-resident individual and tax withheld upon the sale of the shares and ADSs not later than on April 1 of the year following the reporting year.
Otherwise, if the sale is made to other organizations and individuals, generally no withholding needs to be made and thenon-resident holder will have an obligation to file a tax return, report his realized profit and apply for a deduction of acquisition expenses (which includes filing of support documentation).
Although Russian tax law imposes this responsibility only on professional trust manager, brokers or dealers, in practice, the tax authorities may require organizations recognized as tax residents of the Russian Federation that are not professional trust manager, dealers or brokers to act as tax agents and withhold the applicable tax when purchasing securities fromnon-resident individuals.
In some circumstances, anon-resident holder may be exempt from Russian personal income tax on the sale, exchange or other disposition of the shares and ADSs under the terms of a double tax treaty between the Russian Federation and the country of residence of thenon-resident holder. Under the United States-Russia income tax treaty, capital gains from the sale of the shares and/or ADSs by U.S. holders should be relieved from taxation in Russia, unless 50% or more of our assets (as the term “fixed assets” is used in the Russian version of the United States-Russia income tax treaty) were to consist of immovable property located in Russia. If this 50% threshold
is not met, individuals who are U.S. holders may seek to obtain the benefit of the United States-Russia income tax treaty in relation to capital gains resulting from the sale, exchange or other disposition of the shares and/or ADSs.
In order to apply the provisions of relevant double tax treaties, the individual holders should receive clearance from the Russian tax authorities as described below. See “— Tax treaty procedures” below.
Tax treaty procedures
The Russian Tax Code does not contain a requirement that anon-resident holder that is an organization must obtain tax treaty clearance from the Russian tax authorities prior to receiving any income in order to qualify for
benefits under an applicable tax treaty. However, anon-resident organization seeking to obtain relief from Russian withholding tax under a tax treaty must provide to a tax agent, before the income payment date, a confirmation of its tax treaty residence that complies with the applicable requirements in advance of receiving the relevant income. Starting from 2016, in order to apply the provisions of the international treaties of the Russian Federation, foreign organizations will also have to provide to the Russian organization which pays the income a confirmation that the foreign organization has an actual right to receive income.income (is a beneficiary owner of the income).
Starting from 2016, the rules of elimination of double taxation in respect of individuals act in a new version. Anon-resident individual who derives income from a source in the Russian Federation in order to implement the provisions of international tax treaties will have to provide the tax agent on the income payment date a confirmation that an individual-recipient of income is a tax resident in the respective foreign country. In order to confirm the status of a tax resident an individual may use the passport of a foreign citizen or any other identification document, established by the federal law or recognized by the international treaty as such. If these documents do not make it possible to confirm the existence of an individual’s tax resident status of a foreign country with which the international treaty is concluded, the tax agent should also be provided with the official confirmation of this status. Such confirmation should be issued by the competent authority of the respective foreign country authorized to issue such confirmations on the basis of the international tax treaty of the Russian Federation. If such confirmation is in a foreign language, an individual provides a notarized translation into Russian. It should be noted that the tax agent in the application of preferential provisions of the international treaty must submit to the tax authority at the place of its registration the information on foreign individuals, income paid to them from which tax had not been withheld on the basis of the international treaty, as well as the refund of the tax.
In order to apply the provisions of the international treaties of the Russian Federation, foreign organizations will have to provide to the tax agent which pays the income a confirmation that the foreign organization has a residence in the country with which the Russian Federation has the international tax treaty. Such confirmation should be certified by the competent authority of the respective foreign country. If such confirmation is in a foreign language, the tax agent should be provided with a translation into Russian. In addition, starting from 2016, foreign organizations will have to provide the tax agent which pays the income with a confirmation that the foreign organization has an actual right to receive income (is a beneficiary owner of the income).
In 2018, Russian legislation was amended in terms of confirming the actual right to receive income. The amendments apply to income payments made from January 1, 2018 and provide for a “pass-through approach” to identification of a party that has actual right to income. In accordance with this approach, if a foreign organization (foreign structure without forming a legal entity) that receives income recognizes a lack of actual right to receive such income, the provisions of the international treaties of the Russian Federation and/or the Russian Tax Code can be applied to another party if this party has actual right to such income, and, in case of income payment in the form of dividends, if this party directly and/or indirectly participates in the Russian organization that paid income in the form of dividends, with the submission of supporting documents to the tax agent which pays such income. Moreover, each subsequent party which directly participates in the party that recognized the lack of actual right to income in the form of dividends (in the respective sequence of participation) is entitled to recognize the actual right to such income.
The submission by the foreign organization of the above confirmations to the tax agent which pays the income before the income payment date constitutes grounds for an exemption of such income from withholding or withholding at reduced rates.
In the absence of such information, the tax agent is not entitled to apply rates established in accordance with the terms of the double tax treaty between the Russian Federation and the country of residence of thenon-resident holder, and will have to apply the rate of 15% or 30% in certain cases.
At the same time, Russian legislation does not contain a specific list of documents that can be used as a confirmation of both the actual right to receive income and the actual residence of the foreign organization, thereby admitting their ambiguous interpretation which may lead to an additional tax burden for the foreign organization.
If anon-resident holder that is an organization does not obtain double tax treaty relief at the time that income is received and tax is withheld by a Russian tax agent, thenon-resident holder may apply for a refund within three years from the end of the tax period (a calendar year) in which the tax was withheld. To process a claim for a refund, the Russian tax authorities require (i) a confirmation of the tax treaty residence of thenon-resident at the time the income was paid, (ii) an application for the refund of the tax withheld in a format provided by the Russian tax authorities, and (iii) copies of the relevant contracts under which the foreign entity received income as well as payment documents confirming the payment of the tax withheld to the Russian budget (Form 1012DT for dividends and interest and Form 1011DT for other income are designed by the Russian tax authorities to combine requirements (i) and (ii) specified above and recommended for application). The Russian tax authorities will require a Russian translation of the above documents if they are prepared in a foreign language. The refund of the tax withheld should be granted within one month of the filing of the above set of documents with the Russian tax authorities. However, procedures for processing such claims have not been clearly established, and there is significant uncertainty regarding the availability and timing of such refunds.
Since 2014, in respect of dividend payments on shares (including represented by ADSs) that are recorded on depo account of foreign nominee holder, depo account of foreign authorized holder and depo account of depositary programs, a general rate established by the double tax treaty and not accounting for benefits is applied. Refund of the overpaid tax is made to the taxpayer upon the submission to the tax authorities of the documents mentioned above, as well as the following documents: (i) document confirming the ownership of shares by the taxpayer on the date determined by the decision of the Russian company on payment of income,
(ii) document confirming the amount of income actually received on shares, (iii) documents containing information about the depositary, which transferred the income on shares in favor of a foreign organization (management company), which lawfully carried out the record of rights to shares held by the taxpayer, and (iv) document confirming that the legal entity, which carried out the record of rights of share ownership on the date determined by the decision of the Russian company on payment of income, complied with additional conditions provided by Russian tax legislation or international double tax treaty for the application of the reduced tax rate when paying dividends on shares. Due to the fact that these regulations entered into force only on January 1, 2014, the practice of such refunds have not been established yet, and that is why it is not possible to exclude risks associated with a possiblenon-refund of the tax withheld.
A resident of the United States who is fully eligible for benefits under the United States-Russia income tax treaty is referred to in this “Russian Income and Withholding Tax Considerations” section as a “U.S. holder.” Subject to certain provisions of the United States-Russia income tax treaty relating to limitations on benefits, a person generally will be a resident of the United States for treaty purposes and entitled to treaty benefits if such person is:
liable, under the laws of the United States, for U.S. federal income tax (other than taxes in respect only of income from sources in the United States or capital situated therein) by reason of the holder’s domicile, residence, citizenship, place of incorporation, or any other similar criterion (and, for income derived by a partnership, trust or estate, residence is determined in accordance with the residence of the person liable to tax with respect to such income); and
not also a resident of the Russian Federation for purposes of the United States-Russia income tax treaty.
The benefits under the United States-Russia income tax treaty discussed in this document generally are not available to United States persons who hold shares or ADSs in connection with the conduct of a business in the Russian Federation through a permanent establishment as defined in the United States-Russia income tax treaty.
Subject to certain exceptions, a United States person’s permanent establishment under the United States-Russia income tax treaty is a fixed place of business through which such person carries on business activities in the Russian Federation (generally including, but not limited to, a place of management, a branch, an office and a factory). Under certain circumstances, a United States person may be deemed to have a permanent establishment in the Russian Federation as a result of activities carried on in the Russian Federation through agents of the United States person. This summary does not address the treatment of those holders.
United States-Russia income tax treaty procedures
Under current rules, to claim the benefit of a reduced rate of withholding under the United States-Russia income tax treaty, anon-resident generally must provide official certification from the U.S. tax authorities of eligibility for the treaty benefits in the manner required by Russian law.
A U.S. holder may obtain the appropriate certification by mailing completed forms, together with the holder’s name, taxpayer identification number, the tax period for which certification is required, and other applicable information, to the U.S. Internal Revenue Service (the “IRS”). The procedures for obtaining certification are described in greater detail in the instructions to IRS Form 8802. As obtaining the required certification from the IRS may take at least six to eight weeks, U.S. holders should apply for such certification as soon as possible.
If tax is withheld by a Russian resident on dividends or other amounts at a rate different from that provided in the tax treaty, a U.S. holder may apply for a tax refund by filing a package of documents with the Russian local tax inspectorate to which the withholding tax was remitted within three years from the withholding date for U.S. holders which are legal entities, and within one year from the withholding date for individual U.S. holders. The package should include confirmations of residence of the foreign holder (IRS Form 6166), a copy of the
agreement or other documents substantiating the payment of income, documents confirming the beneficial ownership of the dividends recipient and the transfer of tax to the budget. Under the provisions of the Russian Tax Code the refund of the tax should be effected within one month after the submission of the documents. However, procedures for processing such claims have not been clearly established, and there is significant uncertainty regarding the availability and timing of such refunds.
Neither the depositary nor we will have any obligation to assist a U.S. holder of shares or ADSs with the completion and filing of any tax forms.
Stamp duty
No Russian stamp duty will be payable by the holders upon any of the transactions with the shares or ADSs discussed in this section (e.g., on a purchase or sale of the shares or ADSs), except for transactions involving the receipt of the shares or ADSs by way of inheritance.
Certain U.S. Federal Income Tax Considerations
The following is a summary of material U.S. federal income tax consequences of the purchase, ownership and disposition of shares or ADSs by a “U.S. Holder.” Solely for purposes of this “— Certain U.S. Federal Income Tax Considerations” section, a U.S. Holder is a beneficial owner of shares or ADSs that is, for U.S. federal income tax purposes: (1) an individual who is a citizen or resident of the United States, (2) a corporation created or organized in or under the laws of the United States, any state thereof or the District of Columbia, (3) an estate the income of which is subject to U.S. federal income tax regardless of its source or (4) a trust, if a United States court can exercise primary supervision over the administration of the trust and one or more United States persons can control all substantial trust decisions, or if the trust has a valid election in effect under applicable U.S. Treasury Regulations to be treated as a United States person.
If an entity treated as a partnership for U.S. federal income tax purposes is a beneficial owner of shares or ADSs, the U.S. federal income tax treatment of a partner in the partnership will generally depend on the status of the partner and the activities of the partnership. A partner of a partnership holding shares or ADSs should consult its tax adviser regarding the associated tax consequences.
This summary does not discuss all aspects of U.S. federal income taxation that may be relevant to investors in light of their particular circumstances, such as investors subject to special tax rules (including, without limitation: (i) financial institutions; (ii) insurance companies; (iii) dealers in stocks, securities, or currencies or notional principal contracts; (iv) regulated investment companies; (v) real estate investment trusts;(vi) tax-exempt organizations; (vii) partnerships, pass-through entities, or persons that hold shares or ADSs through pass-through entities; (viii) holders that are not U.S. Holders; (ix) holders that own (directly, indirectly or constructively) 10% or more of our voting stock;stock (by vote or value); (x) investors that hold shares or ADSs as part of a straddle, hedge, conversion, constructive sale or other integrated transaction for U.S. federal income tax purposes; (xi) investors that have a functional currency other than the U.S. dollardollar; (xii) persons subject to special tax accounting rules as a result of any item of gross income with respect to the shares or ADSs being taken into account in an applicable financial statement; and (xii)(xiii) U.S. expatriates and former long-term residents of the United States), all of whom may be subject to tax rules that differ significantly from those summarized below. This summary does not address tax consequences applicable to holders of equity interests in a holder of the shares or ADSs, including, but not limited to, U.S. federal estate, gift or alternative minimum tax considerations, ornon-U.S., state or local tax considerations. This summary only addresses investors that will acquire shares or ADSs in an original offering, and it assumes that investors will hold their shares or ADSs as capital assets for U.S. federal income tax purposes (generally, property held for investment).
This summary is based upon current U.S. federal income tax law, including the U.S. Internal Revenue Code of 1986 (the “Code”), its legislative history, existing, temporary and proposed regulations thereunder, published rulings and court decisions, all of which are subject to differing interpretation or change (possibly with retroactive effect), and the United States-Russia income tax treaty, which is subject to change, possibly with retroactive effect. We have not sought, and will not seek, any ruling from the IRS or any opinion of counsel with
respect to the tax consequences discussed below, and we cannot provide assurance that the IRS will not take a position contrary to the tax consequences discussed below or that any position taken by the IRS would not be sustained.
Investors should consult their tax advisers as to the consequences under U.S. federal, estate, gift, state, local and applicablenon-U.S. tax laws of the purchase, ownership and disposition of shares or ADSs.
Ownership of ADSs in general
U.S. Holders of ADSs should generally be treated for U.S. federal income tax purposes as owners of the underlying shares represented by those ADSs, assuming the relevant deposit agreement and any related agreement include customary representations and obligations (particularly relating to anypre-release of ADSs) and such representations and obligations are properly complied with. In such case, except as noted, the U.S. federal income tax consequences discussed below should apply equally to U.S. Holders of ADSs and shares, and no gain or loss will be recognized upon an exchange of an ADS for the share represented by that ADS. A U.S. Holder’s tax basis in such shares will be the same as the U.S. Holder’s tax basis in such ADSs, and the holding period in such shares will include the holding period in such ADSs.
Taxation of dividends on shares or ADSs
Subject to the passive foreign investment company rules described below, for U.S. federal income tax purposes, the gross amount of a distribution, including any Russian withholding taxes, with respect to shares or ADSs will be treated as a taxable dividend to the extent of our current and accumulated earnings and profits, computed in accordance with U.S. federal income tax principles. Certain dividends received bynon-corporate
U.S. Holders may be taxed at the lower applicable capital gains rate. This lower capital gains rate is only applicable to dividends paid by “qualified foreign corporations” (which term excludes PFICs, as defined below) and only with respect to shares or ADSs held for a minimum holding period (generally, 61 days during the121-day period beginning 60 days before theex-dividend date). A company will be a qualified foreign corporation if: (a) it is eligible for the benefits of an applicable United States income tax treaty; or (b) the stock with respect to which such dividend is paid is readily tradable on an established securities market in the United States.Non-corporate U.S. Holders are strongly urged to consult their tax advisers as to the applicability of the lower capital gains rate to dividends received with respect to shares or ADSs. Distributions in excess of our current and accumulated earnings and profits will be applied against and will reduce a U.S. Holder’s tax basis in shares or ADSs and, to the extent in excess of such tax basis, will be treated as gain from a sale or exchange of such shares or ADSs and will be treated as described under “Taxation on sale or other disposition of shares or ADSs” below. We do not intend to calculate our earnings and profits for U.S. federal income tax purposes and, unless we make such calculations, U.S. Holders should expect that any distributions with respect to shares or ADSs generally will be reported to them as a dividend, even if that distribution would otherwise be treated as a return of capital or as a capital gain pursuant to the rules described above. Such dividends will not be eligible for the dividends received deduction allowed to corporations.
If a dividend distribution is paid in rubles, the amount includible in income will be the U.S. dollar value of the dividend, calculated using the exchange rate in effect on the date the dividend is received by the U.S. Holder (or the date of the depositary’s receipt in the case of the ADSs), regardless of whether the payment is actually converted into U.S. dollars on that date. Generally, any gain or loss resulting from currency exchange rate fluctuations during the period from the date the dividend is includible in the income of the U.S. Holder to the date the rubles are converted into U.S. dollars will be treated as U.S. source ordinary income or loss. U.S. Holders may be required to recognize foreign currency gain or loss on the receipt of a refund of Russian withholding tax pursuant to the United States-Russia income tax treaty to the extent the U.S. dollar value of the refund differs from the U.S. dollar equivalent of that amount on the date of receipt of the underlying dividend.
Russian withholding tax under the United States-Russia income tax treaty should be treated as a foreign income tax that, subject to generally applicable limitations and conditions, is eligible for a U.S. foreign tax credit
against the U.S. federal income tax liability of the U.S. Holder. If Russian tax is withheld at a rate in excess of the applicable rate under the United States-Russia income tax treaty for which a U.S. Holder qualifies, a U.S. foreign tax credit for the excess amount may not be allowed to be claimed.
For U.S. foreign tax credit purposes, a dividend distribution will be treated as foreign source income and will generally be classified as “passive category income” but could, in the case of certain U.S. Holders, constitute “general category income.” Additionally, a U.S. Holder who does not elect to claim a foreign tax credit may instead be eligible to claim a deduction for U.S. federal income tax purposes in respect of Russian withholding tax, but only for a year in which such holder elects to do so for all creditable foreign income taxes. The rules relating to the determination of the U.S. foreign tax credit, or deduction in lieu of the U.S. foreign tax credit, are complex and U.S. Holders should consult their tax advisers with respect to those rules.
Taxation on sale or other disposition of shares or ADSs
Subject to the passive foreign investment company rules described below, the sale or other disposition of shares or ADSs will generally result in the recognition of gain or loss in an amount equal to the difference between the amount realized on the sale or other disposition and the adjusted basis in such shares or ADSs. Such gain or loss generally will be treated as long-term capital gain or loss if the shares or ADSs have been held for more than one year as of the time of the sale or other disposition. Capital gains ofnon-corporate U.S. Holders derived from capital assets held for more than one year are eligible for reduced rates of taxation. The deductibility of capital losses is subject to significant limitations.
Gain or loss realized on the sale or other disposition of shares or ADSs will generally be treated as U.S. source income and as a result any Russian taxes imposed upon such sale or other disposition may not be
creditable against a U.S. Holder’s U.S. federal income tax liability. U.S. Holders are strongly urged to consult their tax advisers as to the availability of tax credits for any Russian taxes withheld on the sale or other disposition of shares or ADSs.
If a U.S. Holder receives any foreign currency on the sale or other disposition of shares or ADSs, such U.S. Holder generally will realize an amount equal to the U.S. dollar value of such foreign currency on the settlement date of such sale or other disposition if (1) such U.S. Holder is a cash basis or electing accrual basis taxpayer and the shares or ADSs are treated as being “traded on an established securities market” or (2) such settlement date is also the date of such sale or other disposition. If the foreign currency so received is converted to U.S. dollars on the settlement date, such U.S. Holder should not recognize foreign currency gain or loss on such conversion. If the foreign currency so received is not converted into U.S. dollars on the settlement date, such U.S. Holder will have a basis in such foreign currency equal to its U.S. dollar value on the settlement date. Any gain or loss on a subsequent conversion or other disposition of such foreign currency generally will be treated as ordinary income or loss to such U.S. Holder and generally will be income or loss from sources within the United States for U.S. foreign tax credit purposes. Each U.S. Holder should consult its tax adviser regarding the U.S. federal income tax consequences of receiving foreign currency from the sale or other disposition of shares or ADSs.
Passive foreign investment company status
Anon-U.S. company is a passive foreign investment company (“PFIC”) in any taxable year in which, after taking into account the income and assets of certain subsidiaries, either (1) at least 75% of its gross income is passive income or (2) at least 50% of the average value of its assets (based on an average of the quarterly values of the assets) is attributable to assets that produce or are held to produce passive income. We believe that for U.S. federal income tax purposes, we were not a PFIC for the taxable year ending in 2015.2018. However, the PFIC determination is made annually and may involve facts that are not within our control. In addition, there are special requirements that apply to income from the sale and ownership of commodities that need to be satisfied in order for amounts attributable to commodities to be treated asnon-passive. If we were classified as a PFIC at any
time that you hold our ADSs and shares, you may be subject to materially adverse U.S. federal income tax consequences compared to an investment in a company that is not considered a PFIC, including being subject to greater amounts of U.S. tax on distributions and gains on the sale or disposition of the ADSs and shares as well as being subject to additional U.S. tax filing requirements. Additionally, dividends paid by the company tonon-corporate U.S. holders would not be eligible for the special reduced rate of tax described above under “Taxation of dividends on shares or ADSs.” You should consult your tax advisers as to the consequences of an investment in a PFIC.
Information reporting and backup withholding
U.S. Holders may be subject to information and backup withholding on the payment of dividends on, and the proceeds received from the disposition of, shares or ADSs, unless: (1) the U.S. Holder is an exempt recipient, or (2) in the case of backup withholding, the U.S. Holder provides a correct taxpayer identification number and certifies that it is not subject to backup withholding. Backup withholding is not an additional tax. Amounts withheld as backup withholding may be credited against a U.S. Holder’s federal income tax liability, and a U.S. Holder may obtain a refund of any excess amounts withheld under the backup withholding rules by timely filing the appropriate claim for refund with the IRS and furnishing all required information. U.S. Holders should consult their tax advisors regarding their qualification for exemption from backup withholding and the procedure for obtaining such an exemption, if applicable.
FATCA
Provisions under Sections 1471 through 1474 of the Code and applicable U.S. Treasury Regulations commonly referred to as “FATCA” generally impose 30% withholding on certain “withholdable payments” and,
in the future, may impose such withholding on “foreign passthru payments” made by a “foreign financial institution” (each as defined in the Code) that has entered into an agreement with the IRS to perform certain diligence and reporting obligations with respect to the foreign financial institution’s U.S.-owned accounts. Prospective investors should consult their tax advisors regarding the potential impact of FATCA and anynon-U.S. legislation implementing FATCA on the investment in ADSs.
Documents on Display
The documents that are exhibits to or incorporated by reference in this document can be read at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. Information on the operation of the Public Reference Room can be obtained by calling the SEC at +1800-SEC-0330. These filings are also available at the website maintained by the SEC atwww.sec.gov.
Some of our reports and other information can also be inspected at the offices of the NYSE at 20 Broad Street, New York, New York 10005.
Glossary
Blast furnace: A towering cylinder lined with heat-resistant (refractory) bricks, used by integrated steel mills to smelt pig iron from ore. Its name comes from the “blast” of hot air and gases forced up through the iron ore, coke and limestonefluxing additions that load the furnace.
Carbon steel: A type of steel generally having no specified minimum quantity of any alloying element and containing only an incidental amount of any element other than carbon, silicon, manganese, copper, sulfur and phosphorus.
CIF: Cost, Insurance and Freight, a commercial term pursuant to which the seller must pay the costs, insurance and freight necessary to bring the goods to the named port of destination but the risk of loss or damage to the goods, as well as any additional costs due to events occurring after the time of delivery, are transferred from the seller to the buyer.
Coils:Steel sheet that has been wound. A slab, once rolled in ahot-strip mill, can be more than one mile long; coils are the most efficient way to store and transport sheet steel.
Continuous casting: A method of pouring steel directly from a ladle through a tundish into a special machine shaped to form billets and slabs. Continuous casting avoids the need for blooming mills for rolling billets into slabs. Continuous cast metal solidifies in a few minutes, versus several hours for an ingot. As a result of this, the chemical composition and mechanical properties of billets are more uniform.
FCA: Free Carrier, a commercial term pursuant to which the seller must deliver the goods, cleared for export, to the carrier nominated by the buyer at the named place. Costs for transportation and risk of loss transfer to the buyer after delivery to the carrier.
Flat-rolled steel/Flat products: Category of steel that includes sheet and strip, among others.
FOB: Free on Board, a commercial term pursuant to which the buyer bears all costs and risks of loss of or damage to the goods from the point the goods pass the ship’s rail at the named point of shipment.
Galvanized steel: Steel coated with a layer of zinc to provide corrosion resistance in underbody auto parts, garbage cans, storage tanks, fencing wire, etc. Sheet steel normally must be cold-rolled prior to galvanizing. Galvanized steel is subdivided intohot-dipped galvanized and electrogalvanized steel.
Hot-rolled:Section that is sold in its “as-produced”“as-produced” state off the hot mill with no additional treatment, aside from being pickled and oiled (if specified).
Magnetic separator: A device used in a process when magnetically susceptible mineral is separated from gangue minerals by applying a strong magnetic field.
Pipes:Tubes used to transport fluids or gases. Pipe and tube are often used interchangeably, with a given label applied primarily as a matter of historical use.
Probable reservesreserves:: In accordance with the JORC Code, those reserves which are the economically mineable part of the indicated mineral resources. Indicated reserves include all minerals conforming to the thickness and depth limits defined in the resource base, and for which known data points are not more than 2,000 meters apart. In accordance with the USGS, reserves for which quantity and grade and/or quality are computed from information similar to that used for proven reserves, but the sites for inspection, sampling and measurement are farther apart or are otherwise less adequately spaced. The degree of assurance, although lower than that for proven reserves, is high enough to assume continuity between points of observation.
Proved/Proven reservesProved reserves:: In accordance with the JORC Code, those reserves which are the economically mineable part of the measured mineral resources. Measured mineral resources means the tonnages ofin-situ minerals contained in seams or sections of seams for which sufficient information is available to enable detailed or conceptual mine planning. In accordance with the USGS, reserves for which (1) quantity is computed from dimensions revealed in outcrops, trenches, workings or drill holes; grade and/or quality are computed from the results of detailed sampling, and (2) the sites for inspection, sampling and measurement are spaced so closely and the geologic character is so well defined that size, shape, depth and mineral content of reserves arewell-established.
Raw steel: Steel in primary form of hot molten metal.
Rebar or Reinforcement bars: Round rolled products of plain ordie-rolled sections of various types and classes used to strengthen concrete in highway and building construction.
ReserveReserve: : In accordance with the JORC Code, virgin and/or accessed parts of a mineral resource base, which could be economically extracted or produced at the time of determination, considering environmental, legal and technological constraints. In accordance with the USGS, that part of a mineral deposit which could be economically and legally extracted or produced at the time of the reserve determination.
Rolled steel (products): Steel with certain forms and geometric dimensions manufactured by drafting metal between rotary rolls of rolling mills.
Run-of-mine, or ROM, coal: Coal that has not undergone the processes of classification and washing.
Saleable coal: Coal that has undergone the processes of classification and washing.
Scrap (Ferrous): Ferrous (iron-containing) material that generally is remelted and recast into new steel in EAFs. Integrated steel mills also use scrap metal for up to 25% of their basic oxygen furnace charge. Scrap metal includes waste steel generated from within metal-processing plants and steel mills through edge trimming and rejects.
Sections:Blooms or billets that arehot-rolled in a rolling mill to manufacture rounds, squares, bands, among other structural shapes, “L”, “U”,“L,” “U,” “T” or “I” shapes. Sections can also be produced by welding together pieces of flat products. Sections can be used for a wide variety of purposes in the construction, engineering and transport industries.
Semi-finished steel: Steel shapes (for example, blooms, billets or slabs) that later are rolled into finished products such as beams, bars or sheet.
Sheet steel: Thin, flat-rolled steel created in ahot-strip mill by rolling a cast slab flat while maintaining the side dimensions. The malleable steel lengthens to several thousand feet as it is squeezed by the rolling mill. The most common differences among steel bars, strip, plate and sheet are merely their physical dimensions of width and gauge (thickness).
Sintering:A process that combines iron-bearing particles into small chunks. Initially, these materials are too fine to withstand the air currents of the smelting process in the blast furnace and could be thrown away. The iron is now conserved in sinter as the chunks of sinter are heavier and therefore can be charged into the blast furnace.
Slab:The most common type of semi-finished steel. Traditional slabs measure13-35 centimeters thick,75-300 centimeters wide and are usually about6-12 meters long, while the output of the recently developed “thin slab” casters is approximately five centimeters thick. After casting, slabs are sent to thehot-strip mill to be rolled into coiled sheet and plate products.
Special steel: Alloyed steel produced by the addition of various metals (e.g., manganese) in small quantities during the steel-makingsteelmaking process to improve mechanical properties such as strength and resistance to stress. Special steels are intermediary products between standard steel grades and stainless steel alloys (with a high content of nickel and chrome). Special steel products are typically used as long products (e.g., special bar quality, bearing steel, tool steel and high-speed steel).
Tailings:Material rejected from a mine after the valuable minerals have been recovered.
Welded mesh: Cold-rolled or drawn wire cuts of certain length welded together at specified distances in longitudinal and traverse directions into sheets of rectangular shapes.
Wire rod: Round, semi-finished steel that is rolled from a billet and coiled for further processing. Wire rod is commonly drawn into wire or used to tie bundles. Wire rod rolling mills (rolling facilities) can run as fast as 6,000 meters per minute.
Item 11.Quantitative and Qualitative Disclosures about Market Risk
In the normal course of business, our financial position is routinely subject to a variety of risks. We are exposed to market risks associated with foreign currency exchange rates, interest rates and commodity prices. We are also subject to the risks associated with the business environment in which we operate, including the collectibilitycollectability of accounts receivable.
We do not enter into hedging transactions to manage the risks specified above.
We do not hold or issue derivative financial instruments for trading purposes.
See notes 3 and 11.2 to the consolidated financial statements for more information on foreign currency translations, derivative financial instruments, market risks and risk management.
Currency Risk
The functional currencies for our main Russian European, Ukrainian and KazakhEuropean subsidiaries are the Russian ruble euro, the Ukrainian hryvnia and the Kazakh tenge,euro, respectively. The U.S. dollar is the functional currency of our other main international operations. Our reporting currency is the Russian ruble.
In the past we entered into forward transactions to buy U.S. dollars for euros to hedge our exposure to movements in foreign currency exchange rates arising in relation to euro-denominated accounts receivable of our trading subsidiaries. These derivatives were not designated as hedging contracts for accounting purposes. As of December 31, 2015,2018, we did not have any forward transactions.
We are exposed to movements in the U.S. dollar and euro exchange rates relative to the Russian ruble, our reporting currency. The following table sets forth our monetary assets and liabilities by currency as of December 31, 2015.2018.
| U.S. Dollar | Euro | |||||||
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Non-current assets | — | — | ||||||
Long-term financial assets | — | — | ||||||
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Current assets | 2,549 | 3,096 | ||||||
Receivables | 1,399 | 1,939 | ||||||
Shor-term financial assets | — | — | ||||||
Cash and cash equivalents | 1,150 | 1,157 | ||||||
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Long-term liabilities | — | (97 | ) | |||||
Long-term loans and borrowings | — | (64 | ) | |||||
Long-term payables | — | — | ||||||
Long-term finance lease liability | — | (33 | ) | |||||
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Short-term liabilities | (301,442 | ) | (30,705 | ) | ||||
Short-term loans and borrowings | (279,905 | ) | (28,544 | ) | ||||
Short-term payables | (19,405 | ) | (1,936 | ) | ||||
Short-term finance lease liability | (2,132 | ) | (225 | ) | ||||
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| U.S. Dollar | Euro | |||||||
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Current assets | 157 | 812 | ||||||
Trade and other receivables | 27 | 510 | ||||||
Cash and cash equivalents | 130 | 302 | ||||||
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Non-current liabilities | — | (219 | ) | |||||
Long-term finance lease liabilities | — | (219 | ) | |||||
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Current liabilities | (54,954 | ) | (101,294 | ) | ||||
Short-term loans and borrowings | (51,732 | ) | (98,285 | ) | ||||
Trade and other payables | (3,222 | ) | (2,953 | ) | ||||
Short-term finance lease liabilities | — | (56 | ) | |||||
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Interest Rate Risk
Interest rate risk is the risk that changes in floating interest rates will adversely impact our financial results. As of December 31, 2015, 20142018, 2017 and January 1, 2014,2016, the shares of the borrowings with floating rates in the total amount of the borrowings were 53%95% (including MosPrime — 0.2%0%, the CBR key rate — 14%62%, LIBOR, EURIBOR and others — 39%33%), 39%95% (including MosPrime — 12%0.03%, the CBR key rate — 66%, LIBOR, EURIBOR and others — 27%29%) and 43%91% (including MosPrime — 18%0.1%, the CBR key rate — 62%, LIBOR, EURIBOR and others — 25%29%), respectively.
We have not entered into transactions designed to hedge against interest rate risks, which may exist in connection with our current or future indebtedness. We monitor the market and assess our options for hedging interest rate risks and may enter into such arrangements in the future.
We manage interest rate risk through analysis of current interest rates. If there are significant changes in market interest rates management may consider refinancing of a particular financial instrument on more favorable terms.
The table below demonstrates our sensitivity to change of floating rates which management believes is an appropriate measure of the current market conditions.
| Increase/decrease in MosPrime and the CBR key rate (%) | Effect on profit before tax (In millions of Russian rubles) | Increase/decrease in LIBOR (%) | Effect on profit before tax (In millions of Russian rubles) | Increase/decrease in EURIBOR (%) | Effect on profit before tax (In millions of Russian rubles) | |||||||||||||||||||
2014 | ||||||||||||||||||||||||
| +9.32 | % | 4,395 | +0.02 | % | 12 | +0.07 | % | 13 | ||||||||||||||||
| –9.32 | % | (4,395 | ) | –0.02 | % | (12 | ) | –0.07 | % | (13 | ) | |||||||||||||
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2015 | ||||||||||||||||||||||||
| +6 | % | 3,312 | +0.5 | % | 662 | +0.25 | % | 62 | ||||||||||||||||
| –5 | % | (2,760 | ) | –0.12 | % | (159 | ) | –0.25 | % | (62 | ) | |||||||||||||
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| Increase/decrease in MosPrime and the CBR key rate (%) | Effect on profit before tax (In millions of Russian rubles) | Increase/ decrease in LIBOR (%) | Effect on profit before tax (In millions of Russian rubles) | Increase/decrease in EURIBOR (%) | Effect on profit before tax (In millions of Russian rubles) | |||||||||||||||||||
2016 | ||||||||||||||||||||||||
| +2.00 | % | (4,943 | ) | +0.60 | % | (736 | ) | +0.12 | % | (28 | ) | |||||||||||||
| –4.00 | % | 9,887 | –0.08 | % | 98 | –0.08 | % | 19 | ||||||||||||||||
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2017 | ||||||||||||||||||||||||
| +1.00 | % | (2,744 | ) | +0.48 | % | (500 | ) | +0.04 | % | (8 | ) | |||||||||||||
| –2.00 | % | 5,488 | –0.24 | % | 250 | –0.08 | % | 16 | ||||||||||||||||
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2018 | ||||||||||||||||||||||||
| +0.75 | % | (1,922 | ) | +0.50 | % | (226 | ) | +0.20 | % | (190 | ) | |||||||||||||
| –1.00 | % | 2,563 | –0.15 | % | 68 | –0.01 | % | 9 | ||||||||||||||||
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Commodity Price Risk
In the normal course of our business, we are primarily exposed to market risk of price fluctuations related to the purchase, production and sale of steel products, and to a lesser extent, to the purchase, production and sale of coal, coke and other products.
We do not use commodity derivatives or long-term fixed-price sales contracts to manage our commodity price risks.
Equity Price Risk
We also have minor investments in shares of Russian companies that are not publicly traded and, accordingly, their market values are not available. We consider that it is not practicable for us to estimate the fair values of these investments because we have not yet obtained or developed the valuation models necessary to make the estimates, and the cost of obtaining an independent valuation is believed by management to be excessive considering the significance of the investments. Accordingly, these investments are omitted from the risk information disclosure presented herein.
We do not use derivative instruments or any other arrangements to manage our equity price risks.
Item 12.Description of Securities Other than Equity Securities
Depositary Fees and Charges
Our common American Depositary Shares, or common ADSs, each representing two common shares, are traded on the NYSE under the symbol “MTL.” The common ADSs are evidenced by common American Depositary Receipts, or common ADRs, issued by Deutsche Bank Trust Company Americas as depositary (“DBTCA”), as depositary under the Deposit Agreement, dated as of July 27, 2004, among Mechel PAO, Deutsche Bank Trust Company Americas,DBTCA, and holders and beneficial owners of common ADSs, as amended on May 21, 2007, May 19, 2008 and December 21, 2015. Common ADS holders are required to pay the following service fees to DBTCA:
Service | Fees (In U.S. dollars) | |||
Issuance of common ADSs | Up to $0.05 per common ADS | |||
Cancellation of common ADSs | Up to $0.05 per common ADS | |||
Distribution of cash dividends or other cash distributions | Up to $0.02 per common ADS | |||
Distribution of common ADSs pursuant to (1) stock dividends, free stock distributions or (2) exercises of rights to purchase additional common ADSs or distribution of proceeds thereof | Up to $0.05 per common ADS | |||
Distribution of securities other than common ADSs or rights to purchase additional common ADSs or the distribution of proceeds thereof | Up to $0.05 per common ADS | |||
Common ADR transfer, combination orsplit-up fee | $1.50 per transfer | |||
Share register inspection annual fee | $0.01 per common ADS | |||
Operation and maintenance annual fee | $0.02 per common ADS* |
| * | This fee, when combined with the fees for cash distributions, shall not exceed $0.02 per common ADS per year. |
Our preferred American Depositary Shares, or preferred ADSs, each representingone-half of a preferred share, are traded on the NYSE under the symbol “MTL PR.” The preferred ADSs are evidenced by preferred American Depositary Receipts, or preferred ADRs, issued by DBTCA under the Deposit Agreement, dated as of May 12, 2010, among Mechel PAO, Deutsche Bank Trust Company Americas,DBTCA, and holders and beneficial owners of preferred ADSs. Preferred ADS holders are required to pay the following service fees to DBTCA:
Service | Fees (In U.S. dollars) | |||
Issuance of preferred ADSs | Up to $0.05 per preferred ADS | |||
Cancellation of preferred ADSs | Up to $0.05 per preferred ADS | |||
Distribution of cash dividends or other cash distributions | Up to $0.02 per preferred ADS | |||
Distribution of preferred ADSs pursuant to (1) stock dividends, free stock distributions or (2) exercises of rights to purchase additional preferred ADSs or distribution of proceeds thereof | Up to $0.05 per preferred ADS | |||
Distribution of securities other than preferred ADSs or rights to purchase additional preferred ADSs or the distribution of proceeds thereof | Up to $0.05 per preferred ADS | |||
Preferred ADR transfer, combination orsplit-up fee | $1.50 per transfer | |||
Share register inspection annual fee | $0.01 per preferred ADS | |||
Operation and maintenance annual fee | $0.02 per preferred ADS* |
| * | This fee, when combined with the fees for cash distributions, shall not exceed $0.02 per preferred ADS per year. |
In addition, holders of ADSs may also be charged for the following expenses: (1) taxes and governmental charges; (2) cable, telex and facsimile transmission and delivery charges; (3) transfer or registration fees of the Russian share registrar; (4) fees or charges of DBTCA for conversion of foreign currency into U.S. dollars; and (5) expenses of DBTCA in connection with the issuance of definitive certificates.
Holders of ADSs are responsible for any taxes or other governmental charges payable on their ADSs or on the deposited securities underlying the ADSs. DBTCA may refuse to transfer the ADSs or to allow holders to withdraw the deposited securities underlying their ADSs until such payment is made, or it may deduct the amount of taxes owed from any payments to ADS holders. It may also sell deposited securities, by public or private sale, to pay any taxes owed. ADS holders will remain liable if the proceeds of the sale are not enough to pay the taxes. If DBTCA sells deposited securities, it will, if appropriate, reduce the number of ADSs to reflect the sale and pay to ADS holders any proceeds, or send to ADS holders any property, remaining after it has paid the taxes.
Depositary Payments for 20142018, 2017 and 20152016
In consideration for its appointment as depositary, DBTCA agreed to reimburse us for costs of the maintenance of our ADS programs and ofADS-programs related investor relations activities. For the yearyears ended December 31, 2014,2018, 2017 and 2016, DBTCA reimbursed us $2.489 millionapproximately $402,816, $434,774 and $825,993, respectively, in regard to our commonADS-program. We have not yet drawn down reimbursement For the years ended December 31, 2018, 2017 and 2016, DBTCA reimbursed us approximately $378,975, $121,001 and $234,124, respectively, in regard to our common ADS-program for the year ended December 31, 2015.preferredADS-program.
In addition, for the years ended December 31, 20142018, 2017 and 2015,2016, DBTCA made the following payments on our behalf in relation to our ADS programs:
| Payment (In U.S. dollars) For the Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||
Category | 2014 | 2015 | 2018 | 2017 | 2016 | |||||||||||||||
| (In U.S. dollars) | ||||||||||||||||||||
NYSE listing fees | 83,140 | 91,888 | 85,037 | 93,146 | 150,189 | |||||||||||||||
Proxy solicitation expenses | — | — | — | — | 178,010 | |||||||||||||||
ADS holder identification expenses | 15,300 | — | — | 18,000 | 9,000 | |||||||||||||||
Full targeting project | — | — | ||||||||||||||||||
Perception study | — | — | ||||||||||||||||||
BD corporate | 11,000 | 11,000 | ||||||||||||||||||
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Total | 109,440 | 102,888 | 85,037 | 111,146 | 337,199 | |||||||||||||||
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In addition, DBTCA waived the cost of various ADR program-related support services that it provided to us in 20142018, 2017 and 2015.2016. DBTCA had valued these services at $412,500 per annum for common ADSs when DBTCA wasre-appointed in 2014 and at $160,000 per annum for preferred ADSs when DBTCA was appointed in 2015. The volume of the costs that DBTCA agrees to waive may vary depending on the depositary receipt program size within particular year. Under certain circumstances, including early termination of the appointment of DBTCA, we would be required to repay to DBTCA some or all of the payments made to us or on our behalf (including fees waived by it) since its appointment.
PART II
Item 13.Defaults, Dividend Arrearages and Delinquencies
As of May 13, 2016,March 21, 2019, we did not pay in full amounts due in respect of principal and interest under certain of our loan agreements and several of our leaseexport credit facility agreements and were in breach of certain financial andnon-financial covenants under ourseveral credit facilities. See “Item 5. Operating and Financial Review and Prospects — Liquidity and Capital Resources — Restrictive Covenants” andCovenants,” “Item 3. Key Information — Risk Factors — Risks Relating to Our Financial Condition and Financial Reporting — Our creditors have accelerated and in the future may accelerate amounts due under our loan agreements due to our failure to comply with theour payment and other obligations, in our credit facilities caused some of our creditors to accelerate amounts due under their loan agreements and such failure, or like failure in the future, may cause the acceleration of our other outstanding debt, which could lead to cross-default under other borrowings and have a material adverse effect on our business, financial condition, results of operations and prospects,” “Item 3. Key Information — Risk Factors — Risks Relating to Our Financial Condition and Financial Reporting — If we areWe may be unable to restructure all of our indebtedness or we may fail to comply with the new terms of the restructured indebtedness, our lenders may claim for accelerated repayment, which could lead to cross-default under other borrowings and have a material adverse effect on our business, financial condition, results of operations and prospects,” “Item 3. Key Information — Risk Factors — Risks Relating to Our Financial Condition and Financial Reporting — We have a substantial amount of outstanding indebtedness with restrictive financial covenants and most shares and assets in our subsidiaries are pledged” andpledged,” “Item 3. Key Information — Risk Factors — Risks Relating to Our Financial Condition and Financial Reporting — We have not fulfilled ourIf we fail to fulfill payment obligations under several of the group’s lease agreements, and a number of the respectiveour lessors have requiredmay require the return of the leased assets, which maycould materially adversely affect our business, financial condition, results of operations and prospects.prospects” and “Item 8. Financial Information — Litigation — Debt litigation.”
The table below summarizes the payment defaults, cross-defaults and other covenant breaches under our main facility agreements:
| Non-payment of principal or interest (yes/no) | Cross-default (yes/no) | Breach of financial covenants(1) (yes/no) | Breach of non- financial covenants (yes/no) | |||||||||||||
VTB Bank | yes | yes | yes | |||||||||||||
Sberbank | yes | yes | yes | |||||||||||||
Gazprombank | ||||||||||||||||
| yes | yes | yes | |||||||||||||
Universal Rolling Mill Facility Agreement | yes | yes | yes | yes | ||||||||||||
| ||||||||||||||||
Other | yes | yes | yes | yes | ||||||||||||
| (1) | The breaches provided in this table are as of December 31, |
| (2) | Includes export credit |
The failure to pay the scheduled principal and interest amounts, in excess of the permissible thresholds and within prescribed grace periods, as well as the breach of financial and other covenants in our loan agreements, which were not
remedied by us or waived by our creditors, permit the creditors under those loan agreements to accelerate the payment of principal and interest under those loan agreements, as well as trigger cross-default provisions under a number of other facilities, permitting the respective lenders under such other facilities to accelerate the payment of principal and interest under their loans.
The failure to pay amounts due, thenon-compliance with financial andnon-financial covenants and the triggering of the cross-default provisions resulted in the reclassification of our group’s long-term debt intoshort-term liabilities in the amount of RUB 175,743361,328 million as of December 31, 2015.
2018. In addition, severalcross-default provisions resulted in the reclassification of our group companies have failed to fulfill payment obligations as well as other terms and conditions under the lease agreements. As a result, the long-term finance lease liability of RUB 7,7491,320 million was reclassified tointo short-term finance lease liabilities as of December 31, 2015.2018.
Payment Defaults
The sections below summarize details of payment defaults under our main credit facilities, including principal amounts outstanding as of May 13, 2016, as well as briefly describe outstanding amounts under certain lease agreements with respect to which we have failed to meet payment obligations. Figures included in these sections are subject to change, including as a result of reconciliation with creditors, changes in exchange rates, additional charges invoiced, default interest and/or other penalty accruals, ongoing restructuring negotiations or any present or future proceedings (including litigations and arbitrations described in “Item 8. Financial Information — Litigation — Debt litigation”) related to our indebtedness or to our restructuring plans. Consequently, the figures stated herein do not constitute an acknowledgement of any obligation on our part to pay such amounts.
As of May 13, 2016,March 21, 2019, the total amount in default for failure to pay principal or interest under our export credit facilities and several of our leasefacility agreements was approximately 110.729.4 billion rubles. Conversion from U.S. dollars and euros into rubles is made using the CBR exchange rate on May 13, 2016.March 21, 2019. The amounts provided below do not include various fines, surcharges and penalty fees, unless otherwise noted.
VTB Bank
In October 2014, VTB Bank served a notice to Mechel and its subsidiaries that act as borrowers demanding the early payment of principal and interest under the loan agreements provided by VTB Bank. On September 9, 2015, we signed restructuring agreements with VTB Bank providing for extension of the repayment grace period and final maturity which became effective on October 13, 2015.
Facility Agreement for Mechel from VTB Bank — the principal amount outstanding was 44.8 billion rubles. The amount of overdue interest was 419.7 million rubles.
Facility Agreements for Southern Kuzbass Coal Company from VTB Bank — the principal amount outstanding was 11.7 billion rubles. The amount of overdue interest was 84.9 million rubles.
Facility Agreement for Yakutugol from VTB Bank — the principal amount outstanding was 5.8 billion rubles. The amount of overdue interest was 42.4 million rubles.
Facility Agreement for Chelyabinsk Metallurgical Plant from VTB Bank — the principal amount outstanding was 8.0 billion rubles. The amount of overdue interest was 58.3 million rubles.
Sberbank
Restructuring of the Facility Agreements for Chelyabinsk Metallurgical Plant, Mechel Trading, Izhstal, Bratsk Ferroalloy Plant, Yakutugol, Southern Kuzbass Coal Company and Korshunov Mining Plant from
Sberbank became effective in the first quarter of 2016. Restructuring of the Facility Agreements for Southern Kuzbass Coal Company from Sberbank became effective in April 2016 following the court’s approval of settlement agreements and partial assignment of principal to Gazprombank. Under the new terms, the borrowers have to pay overdue amounts of principal and of interest and penalties which are not capitalized.
Facility Agreements for Southern Kuzbass Coal Company from Sberbank – the principal amount outstanding was $295.1 million (approximately 19.2 billion rubles) and 260.2 million rubles. The amount of overdue interest was $93.3 thousand (approximately 6.1 million rubles) and 5.3 million rubles.
Facility Agreements for Chelyabinsk Metallurgical Plant from Sberbank — the principal amount outstanding was 27.8 billion rubles, including overdue principal in the amount of 5.7 billion rubles. In addition, the amount of overdue interest was 1.1 billion rubles.
Facility Agreements for Mechel Trading from Sberbank — the principal amount outstanding was $100.0 million (approximately 6.5 billion rubles). The amount of overdue interest was $1.5 million (approximately 97.7 million rubles).
Facility Agreements for Izhstal, Bratsk Ferroalloy Plant, Yakutugol and Korshunov Mining Plant from Sberbank — the principal amount outstanding was 1.4 billion rubles, including overdue principal in the amount of 95.3 million rubles. In addition, the amount of overdue interest was 57.8 million rubles.
Gazprombank
Restructuring of the Facility Agreements for Southern Kuzbass Coal Company and Yakutugol from Gazprombank became effective in the first quarter of 2016. In accordance with the new terms, Southern Kuzbass Coal Company and Yakutugol are obliged to pay monthly 400.0 million rubles of overdue interest accrued up to the effective date (in addition to the current interest). As of May 13, 2016, the overdue amount under such payments was 1,119.0 million rubles.
Facility Agreement for Chelyabinsk Metallurgical Plant from Gazprombank — the principal amount outstanding was 6.0 billion rubles. The amount of overdue interest was 527.2 million rubles.
Facility Agreements for Mechel Energo, Urals Stampings Plant, Chelyabinsk Metallurgical Plant and Southern Kuzbass Coal Company from Gazprombank — the principal amount outstanding was 5.0 billion rubles, including overdue principal in the amount of 5.0 billion rubles. In addition, the amount of overdue interest was 845.7 million rubles.
Facility Agreements for Mechel Service, Urals Stampings Plant, Chelyabinsk Metallurgical Plant, Mechel Coke and Southern Kuzbass Coal Company from Gazprombank — the principal amount outstanding was 11.0 billion rubles, including overdue principal in the amount of 11.0 billion rubles. In addition, the amount of overdue interest was 1.02 billion rubles.
Facility Agreements for Beloretsk Metallurgical Plant, Mechel Coke, Port Posiet and Urals Stampings Plant from Gazprombank — the principal amount outstanding was 4.8 billion rubles, including overdue principal in the amount of 4.8 billion rubles. In addition, the amount of overdue interest was 526.8 million rubles.
Pre-Export Facilities from a Syndicate of Banks
Pre-Export Facility Agreements for Yakutugol and Southern Kuzbass Coal Company from a syndicate of banks coordinated by ING Bank N.V., Société Générale and VTB Capital Plc — the principal amount outstanding was $1.0 billion (approximately 65.2 billion rubles), including overdue principal in the amount of $722.9 million (approximately 47.0 billion rubles). In addition, the amount of overdue interest was $81.2 million (approximately 5.3 billion rubles).
Universal Rolling Mill Facility Agreement
Facility Agreement for Chelyabinsk Metallurgical Plant from BNP Paribas, Gazprombank and UniCredit — the—the principal amount outstanding was $154.9 million and €154.7 million (in aggregate approximately 21.521.2 billion rubles), including overdue principal in the amount of $56.3$140.8 million and €44.1€110.5 million (in aggregate approximately 6.917.1 billion rubles). In addition, the amount of overdue interest was $8.2$16.8 million and €2.2��3.4 million (in aggregate approximately 697.0 million rubles).
Vnesheconombank
Facility Agreements for Elgaugol from Vnesheconombank — the principal amount outstanding was $167.3 million (approximately 10.9 billion rubles), including overdue principal in the amount of $146.4 million (approximately 9.51.3 billion rubles).
Sberbank Leasing AO
In February 2015, Sberbank Leasing AO sent termination notices to the lessees (Korshunov Mining Plant, Mechel Materials, Yakutugol, Southern Kuzbass Coal Company and Metallurgshakhtspetsstroy) under the respective lease agreements for the total amount of 4.2 billion rubles (including various fines, surcharges and penalty fees). The payments were not made, and in April 2015, Sberbank Leasing AO requested through the courts accelerated repayment of amounts due under the lease agreements as well as the return of the leased assets. During the period from December 2015 to May 2016, we signed settlement agreements with Sberbank Leasing AO which waived our previous defaults and restructured our future payment schedules. The settlement agreements will become effective upon approval at the court hearings which are ongoing.
Caterpillar Financial OOO
During the period from May to August 2015, Caterpillar Financial OOO sent termination notices to the lessees (Yakutugol, Mechel Engineering, Korshunov Mining Plant, Mechel Materials, Metallurgshakhtspetsstroy, Tomusinsky Open Pit and Southern Kuzbass Coal Company) under the respective lease agreements. We have not settled the claims and Caterpillar Financial OOO filed several lawsuits with the court seeking termination of lease agreements, withdrawal of leasing assets and recovery of debt in an aggregate amount of approximately $5.0 million and €313.9 thousand.
Item 14.Material Modifications to the Rights of Security Holders and Use of Proceeds
None.
Item 15. Controls and Procedures
| (a) | Disclosure Controls and Procedures |
As required by paragraph (b) ofRules 13a-15f13a-15 and 15d-15f15d-15 under the Securities Exchange Act of 1934, management has evaluated, with the participation of our chief executive officer and chief financial officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Disclosure controls and procedures refer to controls and other procedures designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the Securities and Exchange Commission. Disclosure controls and procedures include, without limitation, controls and other procedures designed to ensure that information required to be disclosed by us in our reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported to management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding our required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management was required to apply its judgment in evaluating and implementing possible controls and procedures.
As described below, two material weaknesses were identified in our internal control over financial reporting. Exchange Act Rule 12b-2 (17 CFR 240.12b-2) and Rule 1-02 of Regulation S-X (17 CFR 210.1-02) define a material weakness as a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement ofBased on the registrant’s annual or interim financial statements will not be prevented or detected on a timely basis. As a resultevaluation of the material weaknesses, our chief executive officer and chief financial officer have concluded that, as of December 31, 2015, the end of the period covered by this report, our disclosure controls and procedures in place as of December 31, 2018, our controls and procedures were not effective at a reasonable assurance level.recognized effective.
| (b) | Management’s Annual Report on Internal Control over Financial Reporting |
Management is responsible for establishing and maintaining adequate internal control over financial reporting.
Internal control over financial reporting refers to a process designed by, or under the supervision of, our chief executive officer and chief financial officer and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principlesIFRS, and includes those policies and procedures that:
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and members of our Board of Directors; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on our financial statements.
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process, and it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
Our management evaluated the effectiveness of our internal control over financial reporting as of December 31, 20152018 using the framework set forth in the report of the Treadway Commission’s Committee of Sponsoring Organizations (COSO)(“COSO”), “Internal Control — Integrated Framework” (2013).
As a result of management’s evaluation of Based on the assessment, our management believes our company maintained effective internal control over financial reporting management identified two material weaknesses in our internal control. These material weaknesses are described below:
As a result of these material weaknesses, management has concluded that our internal control over financial reporting was ineffective as of December 31, 2015.
Additional information regarding these material weaknesses follows:
Due to the increased workload in connection with the first-time adoption of IFRS, we did not operate effective internal controls over the review of the IFRS consolidated financial statements and the IFRS transformation process. As a result, several material misstatements in the consolidated financial statements resulting from errors in the underlying data and manual calculations were identified and then corrected. This material weakness relates to the operating effectiveness of internal controls over the IFRS in financial statement close process and affects certain significant accounts related to non-routine and estimation processes and presentation and disclosure in the consolidated financial statements.
We failed to operate effective controls over the computation for deferred income taxes. As a result, material misstatements related to deferred income taxes were identified and adjustments were made to our financial statements to correct these errors. Specifically, misstatements were identified in the manual processing of data used in the computation of deferred income taxes. This material weakness affects deferred tax assets and liabilities and the related financial statement disclosures.2018.
Ernst & Young LLC, an independent registered public accounting firm, has audited our consolidated financial statements and has also issued an attestation report on the effectiveness of our internal controls over financial reporting as of December 31, 2015,2018, a copy of which contains an adverse opinion on the effectiveness of internal controls over financial reporting.appears below.
| (c) | Report of Independent Registered Public Accounting Firm |
TheTo the Shareholders and the Board of Directors of Mechel PAO
Opinion on Internal Control over Financial Reporting
We have audited Mechel PAO a public joint-stock company, and subsidiaries’ (hereinafter referred to as the “Group”) internal control over financial reporting as of December 31, 2015,2018, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), (the COSO criteria). In our opinion, the Group maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated statements of financial position of the Group as of December 31, 2018 and 2017, and the related consolidated statements of profit (loss) and other comprehensive income, changes in equity, and cash flows for each of the three years in the period ended December 31, 2018, and the related notes, and our report dated March 21, 2019 expressed an unqualified opinion thereon that included an explanatory paragraph regarding the Group’s ability to continue as a going concern.
Basis for Opinion
The Group’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Group in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definitions and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weaknesses have been identified and included in management’s assessment (Item 15 (b) Management’s Annual Report on Internal Control over Financial Reporting):
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the 2015 consolidated financial statements of the Group. These material weaknesses were considered in determining the nature, timing and extent of audit tests applied in our audit of the 2015 consolidated financial statements, and this report does not affect our report dated May 13, 2016, which expressed an unqualified opinion on those financial statements.
In our opinion, because of the effect of the material weaknesses described above on the achievement of the objectives of the control criteria, the Group has not maintained effective internal control over financial reporting as of December 31, 2015, based on the COSO criteria.
/s/ Ernst & Young LLC
Moscow, Russia
May 13, 2016March 21, 2019
| (d) | Changes in Internal Control over Financial Reporting |
Remediation Activities Being Undertaken
In order to remedy this material weakness, we intend to expand the use of reviews by internal financial reporting experts and to converge local GAAP and IFRS accounting policies (specifically, accruals, unified chart of accounts) and dedicate increased time for review controls as well as increase the automationidentified in the IFRS financial statements close process.
In order to remedy this material weakness, we plan to hold training for accounting and tax professionals, specifically related to accounting for deferred income taxes and detecting misstatements in the completionevaluation required by paragraph (d) ofRule 13a-15 orRule 15d-15 of the reporting formsExchange Act that occurred during the period covered by this annual report that have materially affected, or are reasonably likely to materially affect, our subsidiaries, continue improvements related to roles, responsibilities and accountabilitiesinternal control over controls and processes impacting tax accounting andfinancial reporting.
Item 16A.Audit Committee Financial Expert
Our Board of Directors has determined that Vladimir Korovkin, chairmanGeorgy Petrov, Chairman of our Audit Committee, is an “audit committee financial expert.” Mr. KorovkinPetrov is independent in accordance with SECRule 10A-3. For a description of Mr. Korovkin’sPetrov’s experience, see “Item 6. Directors, Senior Management and Employees — Directors and Executive Officers.”
We have adopted a code of business conduct and ethics that applies to our directors, officers and employees. It is available atwww.mechel.comandwww.mechel.ru. Hard copies of our code of business conduct and ethics are available free of charge to any person upon request. In order to request a hard copy, please send an inquiry toir@mechel.comindicating postal address to which the hard copies should be sent and a contact person. No amendments were made to our code of business conduct and ethics in 2015.2018.
Item 16C.Principal Accountant Fees and Services
Ernst & Young LLC has served as our independent registered public accountants for each of the fiscal years in the three year period ended December 31, 2015,2018, for which audited financial statements appear in this Annual
Report onForm 20-F. The following table presents the aggregate fees for professional services and other services rendered by Ernst & Young LLC in 20152018 and 2014,2017, respectively.
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||
| 2015 | 2014 | 2018 | 2017 | |||||||||||||
| (In millions of Russian rubles, net of VAT) | (In millions of Russian rubles, net of VAT) | |||||||||||||||
Audit Fees | 120.0 | 152.5 | 125.0 | 120.0 | ||||||||||||
Audit-related Fees | 3.3 | 7.7 | 0.7 | 0.4 | ||||||||||||
Tax Fees | 2.6 | 1.5 | 0.2 | 0.8 | ||||||||||||
Other Fees | — | — | 0.1 | — | ||||||||||||
|
|
|
| |||||||||||||
Total | 125.9 | 161.7 | 126.0 | 121.2 | ||||||||||||
|
|
|
| |||||||||||||
Audit Fees
The amount of audit fees includes fees necessary to perform an audit or interim review in accordance with the standards of the Public Company Accounting Oversight Board (United States) and services that generally only the independent auditor can reasonably provide, such as comfort letters, statutory audits, attestation services and consents and assistance with, and review of, documents filed with the SEC.
Audit-related Fees
This category usually includes assurance and related services that are typically performed by the independent auditor. More specifically, these services could include, among others, employee benefit plan audits,IT-related audits, consultation concerning financial accounting and reporting standards.
Tax Fees
Tax services include, among others, tax consultation related to proposed and consummated transactions, restructuring, personal taxation and general tax consultation.
Other Fees
Other fees include subscription, consultancy and training fees.
Audit CommitteePre-Approval Policies and Procedures
The Sarbanes-Oxley Act of 2002 required that we implement apre-approval process for all engagements with our independent public accountants. In compliance with Sarbanes-Oxley requirements pertaining to auditor independence, our Audit Committeepre-approves the engagement terms and fees of Ernst & Young LLC for all audit andnon-audit services, including tax services. All audit, audit-related and tax services rendered by Ernst & Young LLC in 20152018 were approved by the Audit Committee before Ernst & Young LLC was engaged for such services. No services of any kind were approved pursuant to a waiver permitted pursuant to 17 CFR210.2-01(c)(7)(i)(C).
Item 16D.Exemptions from the Listing Standards for Audit Committees
None.
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
We did not repurchase any of our shares, GDSs or ADSs in 2015.2018.
Item 16F.Change in Registrant’sRegistrant’s Certifying Accountant
Not applicable.
The NYSE permits us to follow certain home country corporate governance practices, which differ from those required for U.S. companies under the NYSE Listed Company Manual. The following table sets forth the most important differences between the NYSE corporate governance requirements for U.S. companies under the NYSE Listed Company Manual Section 303A and our current practices.
NYSE Corporate Governance Rules for U.S. Companies | Our Corporate Governance Practices | |
| A majority of directors must be independent, as determined by the board. (Section 303A.01 and 02). | We comply with this requirement, although it is not required for foreign private issuers like Mechel. | |
| Non-management directors must meet at regularly scheduled executive sessions without management. (Section 303A.03). | Our Bylaw on the Board of Directors, which is posted in the “Corporate Governance” section of our corporate website, provides that before each meeting of the board of directors, independent directors shall hold a consultation in the absence of management. | |
| Listed companies must have a nominating/corporate governance and a compensation committee, each composed entirely of independent directors and having a written charter specifying the committee’s purpose and responsibilities, as well as annual performance evaluation of the committee. (Section 303A.04 and 05). | We have a Committee on Appointments and Remuneration, which has | |
| Listed companies must have an audit committee that satisfies the requirements ofRule 10A-3 under the Exchange Act. (Section 303A.06). | We comply with this requirement. | |
|
| |
| Audit committee must have a minimum of three members and have a written charter specifying the committee’s purpose, an annual performance evaluation and its duties and responsibilities. (Section 303A.07(a) and(b)). | Our Audit Committee has three members. The Bylaw on the Audit Committee of the Board of Directors is posted in the “Corporate Governance” section of our corporate website. | |
| Listed companies must have an internal audit function. (Section 303A.07(c)). | We have an Internal | |
| Shareholders must be given the opportunity to vote on all equity compensation plans and material revisions thereto. (Section 303A.08). | As a Russian company, we are subject to the mandatory requirements of the Russian Joint-Stock Companies Law. The items on which shareholders can vote cannot be altered. | |
| Listed companies must adopt and disclose corporate governance guidelines. (Section 303A.09). | Our corporate governance guidelines are reflected in our various corporate documents, such as the Bylaw on the Board of Directors and the Code of Corporate Governance, all of which are posted in the “Corporate Governance” section of our website. | |
| Listed companies must adopt and disclose a code of business conduct and ethics for directors, officers and employees, and promptly disclose any waivers of the code for directors or executive officers. (Section 303A.10). | Our Code of Business Conduct and Ethics is posted in the “Corporate Governance” section of our website. | |
PART III
See instead “Item 18. Financial Statements.”
The following financial statements, together with the report of Ernst & Young LLC, are filed as part of this annual report onForm 20-F.
We hereby agree to furnish to the Securities and Exchange Commission, upon its request, copies of any instruments defining the rights of holders of long-term debt issued by Mechel or any of its consolidated subsidiaries.
The registrant hereby certifies that it meets all of the requirements for filing onForm 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
| MECHEL PAO | ||||
By: | /s/ OLEG V. KORZHOV | |||
| Name: Oleg V. Korzhov | ||||
| Title:Chief Executive Officer | ||||
Date: May 13, 2016March 21, 2019
Consolidated Financial Statements
CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 20152018
| F-3 | ||||
| F-4 | ||||
| F-7 | ||||
| ||||
Report of Independent Registered Public Accounting Firm
Shareholders andTo the Board of Directors and Shareholders of
Mechel PAO
Opinion on the Financial Statements
We have audited the accompanying consolidated statements of financial position of Mechel PAO, a public joint stock company, and subsidiaries (hereinafter referred to as the “Group”) as of December 31, 20152018 and 2014, and as of January 1, 2014,2017, and the related consolidated statements of profit (loss) and other comprehensive income, (loss), changes in equity, and cash flows for each of the twothree years in the period ended December 31, 2015. These2018, and the related notes (collectively referred to as the “consolidated financial statements are the responsibility of the Group’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States)statements“). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Group as ofat December 31, 20152018 and 2014,2017, and as of January 1, 2014, and the consolidated results of its operations and its cash flows for each of the twothree years in the period ended December 31, 2015,2018, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Group’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated March 21, 2019 expressed an unqualified opinion thereon.
The Group’s Ability to Continue as a Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Group will continue as a going concern. As discussed in Note 4 to the consolidated financial statements, the Group has significant debt that it does not have the ability to repay without its refinancing or restructuring, and has not complied with certain covenants of its major loan agreements with banks. These conditions raisebanks and has stated that substantial doubt exists about the Group’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 4.4 to the consolidated financial statements. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Group’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We also have audited,are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB“) and are required to be independent with respect to the Group in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States),PCAOB. Those standards require that we plan and perform the Group’s internal control overaudit to obtain reasonable assurance about whether the financial reporting asstatements are free of December 31, 2015, based on criteria established in Internal Control-Integrated Framework issued bymaterial misstatement, whether due to error or fraud. Our audits included performing procedures to assess the Committeerisks of Sponsoring Organizationsmaterial misstatement of the Treadway Commission (2013 framework)financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our report dated May 13, 2016 expressed an adverse opinion thereon.audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLC
We have served as the Group’s auditor since 2003.
Moscow, Russia
May 13, 2016March 21, 2019
MECHEL PAO
Consolidated statementCONSOLIDATED STATEMENT OF PROFIT (LOSS) AND
OTHER COMPREHENSIVE INCOME
for the year ended December 31, 2018
(All amounts are in millions of Russian rubles, unless stated otherwise)
| Notes | Year ended December 31, 2018 | Year ended December 31, 2017 | Year ended December 31, 2016 | |||||||||||||
Continuing operations | ||||||||||||||||
Revenue from contracts with customers | 26 | 312,574 | 299,113 | 276,009 | ||||||||||||
Cost of sales | (177,756 | ) | (160,356 | ) | (146,322 | ) | ||||||||||
|
|
|
|
|
| |||||||||||
Gross profit | 26 | 134,818 | 138,757 | 129,687 | ||||||||||||
|
|
|
|
|
| |||||||||||
Selling and distribution expenses | (54,988 | ) | (55,686 | ) | (56,233 | ) | ||||||||||
Loss onwrite-off ofnon-current assets | (859 | ) | (321 | ) | (1,953 | ) | ||||||||||
Impairment of goodwill and othernon-current assets | 18 | (7,222 | ) | (6,081 | ) | (5,202 | ) | |||||||||
Allowance for expected credit losses on financial assets | 13, 15 | (940 | ) | (332 | ) | (758 | ) | |||||||||
Taxes other than income taxes | (4,834 | ) | (4,967 | ) | (5,913 | ) | ||||||||||
Administrative and other operating expenses | 25.1 | (17,906 | ) | (15,590 | ) | (18,791 | ) | |||||||||
Other operating income | 25.3 | 1,711 | 1,387 | 1,853 | ||||||||||||
|
|
|
|
|
| |||||||||||
Total selling, distribution and operating income and (expenses), net | (85,038 | ) | (81,590 | ) | (86,997 | ) | ||||||||||
|
|
|
|
|
| |||||||||||
Operating profit | 49,780 | 57,167 | 42,690 | |||||||||||||
|
|
|
|
|
| |||||||||||
Finance income | 25.4 | 34,056 | 633 | 1,176 | ||||||||||||
Finance costs including fines and penalties on overdue loans and borrowings and finance leases payments | 25.5 | (42,052 | ) | (47,610 | ) | (54,240 | ) | |||||||||
Foreign exchange gain (loss), net | (25,775 | ) | 4,237 | 25,947 | ||||||||||||
Share of profit (loss) of associates, net | 8 | 10 | 18 | (17 | ) | |||||||||||
Other income | 25.6 | 512 | 1,495 | 598 | ||||||||||||
Other expenses | 25.6 | (314 | ) | (220 | ) | (2,003 | ) | |||||||||
|
|
|
|
|
| |||||||||||
Total other income and (expense), net | (33,563 | ) | (41,447 | ) | (28,539 | ) | ||||||||||
|
|
|
|
|
| |||||||||||
Profit before tax from continuing operations | 16,217 | 15,720 | 14,151 | |||||||||||||
Income tax expense | 20 | (2,681 | ) | (3,150 | ) | (4,893 | ) | |||||||||
|
|
|
|
|
| |||||||||||
Profit for the period from continuing operations | 13,536 | 12,570 | 9,258 | |||||||||||||
Discontinued operations | ||||||||||||||||
(Loss) profit after tax for the period from discontinued operations, net | — | — | (426 | ) | ||||||||||||
|
|
|
|
|
| |||||||||||
Profit for the period | 13,536 | 12,570 | 8,832 | |||||||||||||
|
|
|
|
|
| |||||||||||
Attributable to: | ||||||||||||||||
Equity shareholders of Mechel PAO | 12,628 | 11,557 | 7,126 | |||||||||||||
Non-controlling interests | 908 | 1,013 | 1,706 | |||||||||||||
See accompanying notes to the consolidated financial position statements.
MECHEL PAO
CONSOLIDATED STATEMENT OF PROFIT (LOSS) AND
OTHER COMPREHENSIVE INCOME (continued)
for the year ended December 31, 2018
(All amounts are in millions of Russian rubles, unless stated otherwise)
| Notes | Year ended December 31, 2018 | Year ended December 31, 2017 | Year ended December 31, 2016 | |||||||||||||
Other comprehensive income | ||||||||||||||||
Other comprehensive (loss) income that may be reclassified to profit or loss in subsequent periods, net of income tax: | (9 | ) | 313 | 430 | ||||||||||||
Exchange differences on translation of foreign operations | (9 | ) | 313 | 430 | ||||||||||||
Other comprehensive income (loss) not to be reclassified to profit or loss in subsequent periods, net of income tax: | 487 | 145 | (23 | ) | ||||||||||||
Re-measurement of defined benefit plans | 22 | 487 | 145 | (23 | ) | |||||||||||
|
|
|
|
|
| |||||||||||
Other comprehensive income for the period, net of tax | 478 | 458 | 407 | |||||||||||||
|
|
|
|
|
| |||||||||||
Total comprehensive income (loss) for the period, | 14,014 | 13,028 | 9,239 | |||||||||||||
|
|
|
|
|
| |||||||||||
Attributable to: | ||||||||||||||||
Equity shareholders of Mechel PAO | 13,096 | 12,012 | 7,529 | |||||||||||||
Non-controlling interests | 918 | 1,016 | 1,710 | |||||||||||||
Earnings (loss) per share | ||||||||||||||||
Weighted average number of common shares | 24 | 416,270,745 | 416,270,745 | 416,270,745 | ||||||||||||
Basic and diluted, profit for the period attributable to common equity shareholders of Mechel PAO | 24 | 30.34 | 27.76 | 17.12 | ||||||||||||
Earnings per share from continuing operations (Russian rubles per share), basic and diluted | 24 | 30.34 | 27.76 | 17.99 | ||||||||||||
Loss per share from discontinued operations (Russian rubles per share) | 24 | — | — | (0.87 | ) | |||||||||||
See accompanying notes to the consolidated financial statements.
MECHEL PAO
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
as of December 31, 20152018
(All amounts are in millions of Russian rubles)
| December 31, 2015 | December 31, 2014 | January 1, 2014 | ||||||||||||||||||||||
| Notes | Notes | December 31, 2018 | December 31, 2017 | |||||||||||||||||||||
Assets | ||||||||||||||||||||||||
Current assets | ||||||||||||||||||||||||
Cash and cash equivalents | 12 | 3,079 | 3,983 | 8,979 | ||||||||||||||||||||
Trade and other receivables | 13 | 15,981 | 19,809 | 22,477 | ||||||||||||||||||||
Due from related parties, net of allowance | 14 | 96 | 138 | 196 | ||||||||||||||||||||
Inventories | 15 | 35,189 | 36,337 | 46,629 | ||||||||||||||||||||
Income tax receivables | 603 | 578 | 2,936 | |||||||||||||||||||||
Other current financial assets | 45 | 186 | 360 | |||||||||||||||||||||
Other current assets | 16 | 8,127 | 8,750 | 7,225 | ||||||||||||||||||||
|
|
| ||||||||||||||||||||||
Total current assets | 63,120 | 69,781 | 88,802 | |||||||||||||||||||||
|
|
| ||||||||||||||||||||||
Assets of disposal group classified as held for sale | 17 | — | 8,696 | — | ||||||||||||||||||||
Non-current assets | ||||||||||||||||||||||||
Property, plant and equipment | 18, 19 | 215,844 | 224,299 | 226,253 | 16, 18 | 189,879 | 197,875 | |||||||||||||||||
Mineral licenses | 20 | 38,517 | 40,122 | 51,727 | 17 | 32,068 | 33,240 | |||||||||||||||||
Non-current financial assets | 194 | 489 | 543 | |||||||||||||||||||||
Goodwill and other intangible assets | 17, 18 | 16,883 | 19,211 | |||||||||||||||||||||
Investments in associates | 8 | 284 | 274 | 251 | 8 | 293 | 283 | |||||||||||||||||
Deferred tax assets | 21 | 1,492 | 1,438 | 517 | 20 | 5,488 | 96 | |||||||||||||||||
Goodwill | 20 | 21,378 | 22,697 | 22,520 | ||||||||||||||||||||
Other non-current assets | 16 | 1,243 | 1,462 | 2,481 | 14 | 630 | 758 | |||||||||||||||||
Non-current financial assets | 244 | 202 | ||||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||
Total non-current assets | 278,952 | 290,781 | 304,292 | 245,485 | 251,665 | |||||||||||||||||||
|
| |||||||||||||||||||||||
Current assets | ||||||||||||||||||||||||
Inventories | 12 | 43,423 | 37,990 | |||||||||||||||||||||
Income tax receivables | 121 | 107 | ||||||||||||||||||||||
Trade and other receivables | 13 | 17,612 | 18,762 | |||||||||||||||||||||
Other current assets | 14 | 8,673 | 7,589 | |||||||||||||||||||||
Other current financial assets | 11.3 | 508 | 562 | |||||||||||||||||||||
Cash and cash equivalents | 15 | 1,803 | 2,452 | |||||||||||||||||||||
|
| |||||||||||||||||||||||
Total current assets | 72,140 | 67,462 | ||||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||
Total assets | 342,072 | 369,258 | 393,094 | 317,625 | 319,127 | |||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||
Equity and liabilities | ||||||||||||||||||||||||
Current liabilities | ||||||||||||||||||||||||
Interest-bearing loans and borrowings, including Interest payable, fines and penalties on overdue amounts of RUB 47,475 million, RUB 14,615 million and RUB 2,052 million as of December 31, 2015, 2014 and January 1, 2014 | 11.1 | 491,674 | 386,518 | 267,078 | ||||||||||||||||||||
Trade and other payables | 22 | 54,524 | 61,493 | 51,973 | ||||||||||||||||||||
Advances received | 3,492 | 4,286 | 4,290 | |||||||||||||||||||||
Due to related parties | 14 | 78 | 44 | 1,024 | ||||||||||||||||||||
Provisions | 23 | 2,532 | 2,130 | 1,531 | ||||||||||||||||||||
Pension obligations | 24 | 1,120 | 1,072 | 877 | ||||||||||||||||||||
Finance lease liabilities | 29 | 13,507 | 15,213 | 10,809 | ||||||||||||||||||||
Income tax payable | 5,549 | 3,033 | 3,173 | |||||||||||||||||||||
Tax payable other than income tax | 25 | 8,034 | 9,647 | 7,440 | ||||||||||||||||||||
Other current liabilities | 26 | 36 | 29 | |||||||||||||||||||||
|
|
| ||||||||||||||||||||||
Total current liabilities | 580,536 | 483,472 | 348,224 | |||||||||||||||||||||
|
|
| ||||||||||||||||||||||
Liabilities of disposal group classified as held for sale | 17 | — | 8,607 | — | ||||||||||||||||||||
Non-current liabilities | ||||||||||||||||||||||||
Interest-bearing loans and borrowings | 11.1 | 4,308 | 9,346 | 25,251 | ||||||||||||||||||||
Provisions | 23 | 3,439 | 2,998 | 4,303 | ||||||||||||||||||||
Pension obligations | 24 | 3,746 | 3,445 | 4,903 | ||||||||||||||||||||
Finance lease liabilities | 29 | 481 | 146 | 2,973 | ||||||||||||||||||||
Deferred tax liabilities | 21 | 11,090 | 3,053 | 17,475 | ||||||||||||||||||||
Other non-current liabilities | 189 | 1,157 | 3,453 | |||||||||||||||||||||
Income tax payable | 137 | 3,447 | — | |||||||||||||||||||||
|
|
| ||||||||||||||||||||||
Total non-current liabilities | 23,390 | 23,592 | 58,358 | |||||||||||||||||||||
|
|
| ||||||||||||||||||||||
Total liabilities | 603,926 | 515,671 | 406,582 | |||||||||||||||||||||
|
|
| ||||||||||||||||||||||
Equity | ||||||||||||||||||||||||
Common shares | 26 | 4,163 | 4,163 | 4,163 | 24 | 4,163 | 4,163 | |||||||||||||||||
Preferred shares | 26 | 833 | 833 | 833 | 24 | 833 | 833 | |||||||||||||||||
Additional paid-in capital | 26 | 28,322 | 25,592 | 25,591 | 24 | 24,378 | 24,378 | |||||||||||||||||
Accumulated other comprehensive income (loss) | 445 | 1,018 | (11 | ) | ||||||||||||||||||||
Accumulated other comprehensive income | 1,771 | 1,303 | ||||||||||||||||||||||
Accumulated deficit | (301,565 | ) | (186,272 | ) | (53,564 | ) | (274,186 | ) | (283,743 | ) | ||||||||||||||
|
|
|
|
| ||||||||||||||||||||
Equity attributable to equity shareholders of Mechel PAO | (267,802 | ) | (154,666 | ) | (22,988 | ) | (243,041 | ) | (253,066 | ) | ||||||||||||||
|
|
| ||||||||||||||||||||||
Non-controlling interests | 6,7 | 5,948 | 8,253 | 9,500 | 6, 7 | 9,846 | 8,933 | |||||||||||||||||
|
|
|
|
| ||||||||||||||||||||
Total equity | (261,854 | ) | (146,413 | ) | (13,488 | ) | (233,195 | ) | (244,133 | ) | ||||||||||||||
|
|
|
|
| ||||||||||||||||||||
Non-current liabilities | ||||||||||||||||||||||||
Loans and borrowings | 11.1 | 6,538 | 17,360 | |||||||||||||||||||||
Finance lease liabilities | 11.6 | 2,413 | 1,878 | |||||||||||||||||||||
Othernon-current financial liabilities | 11.4 | 44,510 | 40,916 | |||||||||||||||||||||
Othernon-current liabilities | 120 | 138 | ||||||||||||||||||||||
Pension obligations | 22 | 3,819 | 3,512 | |||||||||||||||||||||
Provisions | 23 | 3,719 | 3,814 | |||||||||||||||||||||
Deferred tax liabilities | 20 | 13,506 | 11,494 | |||||||||||||||||||||
|
| |||||||||||||||||||||||
Totalnon-current liabilities | 74,625 | 79,112 | ||||||||||||||||||||||
|
| |||||||||||||||||||||||
Current liabilities | ||||||||||||||||||||||||
Loans and borrowings, including interest payable, fines and penalties on overdue amounts of RUB 9,877 million and RUB 41,992 million as of December 31, 2018 and 2017, respectively | 11.1 | 412,294 | 422,533 | |||||||||||||||||||||
Trade and other payables | 19 | 34,800 | 33,469 | |||||||||||||||||||||
Finance lease liabilities | 11.6 | 5,880 | 7,476 | |||||||||||||||||||||
Income tax payable | 6,425 | 4,578 | ||||||||||||||||||||||
Taxes and similar charges payable other than income tax | 21 | 6,106 | 6,696 | |||||||||||||||||||||
Advances received | 5,028 | 4,385 | ||||||||||||||||||||||
Other current financial liabilities | 11.5 | — | 734 | |||||||||||||||||||||
Other current liabilities | 68 | 69 | ||||||||||||||||||||||
Pension obligations | 22 | 772 | 849 | |||||||||||||||||||||
Provisions | 23 | 4,822 | 3,359 | |||||||||||||||||||||
|
| |||||||||||||||||||||||
Total current liabilities | 476,195 | 484,148 | ||||||||||||||||||||||
|
| |||||||||||||||||||||||
Total liabilities | 550,820 | 563,260 | ||||||||||||||||||||||
|
| |||||||||||||||||||||||
Total equity and liabilities | 342,072 | 369,258 | 393,094 | 317,625 | 319,127 | |||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||
See accompanying notes to the consolidated financial statements.
MECHEL PAO
Consolidated statement of profit (loss) and other comprehensive income (loss) CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
for the year ended December 31, 20152018
(All amounts are in millions of Russian rubles, unless shares numbers)
| Year ended December 31, 2015 | Year ended December 31, 2014 | |||||||||
| Notes | ||||||||||
Continuing operations | ||||||||||
Revenue | 28 | 253,141 | 243,992 | |||||||
Cost of goods sold | (151,334 | ) | (153,057 | ) | ||||||
|
|
|
| |||||||
Gross profit | 28 | 101,807 | 90,935 | |||||||
Selling and distribution expenses | (51,117 | ) | (55,661 | ) | ||||||
Loss on write-off of property, plant and equipment | (691 | ) | (661 | ) | ||||||
Impairment of goodwill and other non-current assets | 19 | (1,460 | ) | (7,996 | ) | |||||
Allowance for doubtful accounts | 13 | (1,464 | ) | (3,671 | ) | |||||
Taxes other than income taxes | (5,853 | ) | (6,469 | ) | ||||||
Allowance for amounts due from related parties | 14 | (43 | ) | (126 | ) | |||||
Administrative and other operating expenses | 27.1 | (17,300 | ) | (16,315 | ) | |||||
Other operating income | 27.3 | 189 | 851 | |||||||
|
|
|
| |||||||
Total selling, distribution and operating expenses, net | (77,739 | ) | (90,048 | ) | ||||||
|
|
|
| |||||||
Operating profit | 24,068 | 887 | ||||||||
|
|
|
| |||||||
Finance income | 27.4 | 183 | 107 | |||||||
Finance costs | 27.5 | (60,452 | ) | (28,110 | ) | |||||
Foreign exchange gain (loss), net | (71,106 | ) | (103,176 | ) | ||||||
Share of profit of associates | 8 | — | 7 | |||||||
Other income | 27.6 | 526 | 684 | |||||||
Other expenses | 27.6 | (347 | ) | (1,486 | ) | |||||
|
|
|
| |||||||
Total other income and (expense), net | (131,196 | ) | (131,974 | ) | ||||||
|
|
|
| |||||||
Loss before tax from continuing operations | (107,128 | ) | (131,087 | ) | ||||||
|
|
|
| |||||||
Income tax (expense) benefit | 21 | (8,322 | ) | 8,822 | ||||||
|
|
|
| |||||||
Loss for the year from continuing operations | (115,450 | ) | (122,265 | ) | ||||||
|
|
|
| |||||||
Discontinued operations | ||||||||||
Profit (loss) after tax for the year from discontinued operations, net | 17 | 822 | (11,702 | ) | ||||||
|
|
|
| |||||||
Loss for the year | (114,628 | ) | (133,967 | ) | ||||||
|
|
|
| |||||||
Attributable to: | ||||||||||
Equity holders of the parent | (115,163 | ) | (132,704 | ) | ||||||
Non-controlling interests | 535 | (1,263 | ) | |||||||
| Attributable to equity shareholders of the parent | ||||||||||||||||||||||||||||||||||||||||||
| Common shares | Preferred shares | Additional paid-in capital | Accumulated other comprehensive income (loss) | Accumulated deficit | Equity attributable to shareholders of Mechel PAO | Non- controlling interests | Total equity | |||||||||||||||||||||||||||||||||||
Notes | Shares Quantity | Amount | Shares Quantity | Amount | ||||||||||||||||||||||||||||||||||||||
As of January 1, 2016 | 416,270,745 | 4,163 | 83,254,149 | 833 | 28,322 | 445 | (301,565 | ) | (267,802 | ) | 5,948 | (261,854 | ) | |||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||
Profit for the period | — | — | — | — | — | — | 7,126 | 7,126 | 1,706 | 8,832 | ||||||||||||||||||||||||||||||||
Other comprehensive income (loss) | ||||||||||||||||||||||||||||||||||||||||||
Re-measurement losses on defined benefit plans | 22 | — | — | — | — | — | (23 | ) | — | (23 | ) | — | (23 | ) | ||||||||||||||||||||||||||||
Exchange differences on translation of foreign operations | — | — | — | — | — | 426 | — | 426 | 4 | 430 | ||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||
Total comprehensive income for the period | — | — | — | — | — | 403 | 7,126 | 7,529 | 1,710 | 9,239 | ||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||
Reversal of unclaimed declared dividends tonon-controlling interest upon expiration of limitation period | — | — | — | — | — | — | — | — | 35 | 35 | ||||||||||||||||||||||||||||||||
Dividends declared to equity shareholders of Mechel PAO | 24 | — | — | — | — | — | — | (5 | ) | (5 | ) | — | (5 | ) | ||||||||||||||||||||||||||||
Dividends declared tonon-controlling interests | 24 | — | — | — | — | — | — | — | — | (3 | ) | (3 | ) | |||||||||||||||||||||||||||||
Acquisition of non-controlling interests | 6, 24 | — | — | — | — | 4 | — | — | 4 | (4 | ) | — | ||||||||||||||||||||||||||||||
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||
As of December 31, 2016 | 416,270,745 | 4,163 | 83,254,149 | 833 | 28,326 | 848 | (294,444 | ) | (260,274 | ) | 7,686 | (252,588 | ) | |||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||
See accompanying notes to the consolidated financial statements.
MECHEL PAO
Consolidated statement of profit (loss) and other comprehensive income (loss) CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (continued)
for the year ended December 31, 2015
(All amounts are in millions of Russian rubles)
| Year ended December 31, 2015 | Year ended December 31, 2014 | |||||||||||
| Notes | ||||||||||||
Other comprehensive income | ||||||||||||
Other comprehensive income to be reclassified to profit or loss in subsequent periods, net of income tax: | 295 | 1,170 | ||||||||||
Exchange differences on translation of foreign operations | 287 | 1,168 | ||||||||||
Net gain on available for sale financial assets | 8 | 2 | ||||||||||
|
|
|
| |||||||||
Other comprehensive loss not to be reclassified to profit or loss in subsequent periods, net of income tax: | (194 | ) | (127 | ) | ||||||||
Re-measurement losses on defined benefit plans | 24 | (194 | ) | (127 | ) | |||||||
Other comprehensive income for the year, net of tax | 101 | 1,043 | ||||||||||
|
|
|
| |||||||||
Total comprehensive loss for the year, net of tax | (114,527 | ) | (132,924 | ) | ||||||||
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|
|
| |||||||||
Attributable to: | ||||||||||||
Equity holders of the parent | (115,064 | ) | (131,675 | ) | ||||||||
Non-controlling interests | 537 | (1,249 | ) | |||||||||
Earnings (Loss) per share | ||||||||||||
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|
| |||||||||
Weighted average number of common shares | 26 | 416,270,745 | 416,270,745 | |||||||||
Basic and diluted, loss for the year attributable to ordinary equity holders of the parent | 26 | (276.65 | ) | (318.79 | ) | |||||||
Loss per share from continuing operations (Russian rubles per share) — basic and diluted | 26 | (278.44 | ) | (289.96 | ) | |||||||
Earnings (loss) per share from discontinued operations (Russian rubles per share) | 26 | 1.79 | (28.83 | ) | ||||||||
See accompanying notes to the consolidated financial statement
MECHEL PAO
Consolidated statement of changes in equity for the year ended December 31, 20152018
(All amounts are in millions of Russian rubles, unless shares numbers)
| Attributable to equity holders of the parent | ||||||||||||||||||||||||||||||||||||||||||
| Common shares | Preferred shares | Additional paid-in capital | Accumulated deficit | Accumulated other comprehensive (loss) income | Equity attributable to shareholders of Mechel PAO | Non- controlling interest | Total equity | |||||||||||||||||||||||||||||||||||
| Notes | Shares Quantity | Amount | Shares Quantity | Amount | ||||||||||||||||||||||||||||||||||||||
As of January 1, 2014 | 416,270,745 | 4,163 | 83,254,149 | 833 | 25,591 | (53,564 | ) | (11 | ) | (22,988 | ) | 9,500 | (13,488 | ) | ||||||||||||||||||||||||||||
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Loss for the period | — | — | — | — | — | (132,704 | ) | — | (132,704 | ) | (1,263 | ) | (133,967 | ) | ||||||||||||||||||||||||||||
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Other comprehensive income (loss) | ||||||||||||||||||||||||||||||||||||||||||
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Net gain on available for sale financial assets | — | — | — | — | — | — | 2 | 2 | — | 2 | ||||||||||||||||||||||||||||||||
Re-measurement losses on defined benefit plans | 24 | — | — | — | — | — | — | (141 | ) | (141 | ) | 14 | (127 | ) | ||||||||||||||||||||||||||||
Exchange differences on translation of foreign operations | — | — | — | — | — | — | 1,168 | 1,168 | — | 1,168 | ||||||||||||||||||||||||||||||||
Total comprehensive (loss) income | — | — | — | — | — | (132,704 | ) | 1,029 | (131,675 | ) | (1,249 | ) | (132,924 | ) | ||||||||||||||||||||||||||||
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| |||||||||||||||||||||||
Dividends declared to shareholders of Mechel PAO | 26 | — | — | — | — | — | (4 | ) | — | (4 | ) | — | (4 | ) | ||||||||||||||||||||||||||||
Dividends declared to non-controlling interest | 26 | — | — | — | — | — | — | — | — | (2 | ) | (2 | ) | |||||||||||||||||||||||||||||
Disposal of non-controlling interest | 6 | — | — | — | — | 1 | — | — | 1 | 4 | 5 | |||||||||||||||||||||||||||||||
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As of December 31, 2014 | 416,270,745 | 4,163 | 83,254,149 | 833 | 25,592 | (186,272 | ) | 1,018 | (154,666 | ) | 8,253 | (146,413 | ) | |||||||||||||||||||||||||||||
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| |||||||||||||||||||||||
| Attributable to equity shareholders of the parent | ||||||||||||||||||||||||||||||||||||||||||
| Common shares | Preferred shares | Additional paid-in capital | Accumulated other comprehensive income (loss) | Accumulated deficit | Equity attributable to shareholders of Mechel PAO | Non- controlling interests | Total equity | |||||||||||||||||||||||||||||||||||
Notes | Shares Quantity | Amount | Shares Quantity | Amount | ||||||||||||||||||||||||||||||||||||||
As of January 1, 2017 | 416,270,745 | 4,163 | 83,254,149 | 833 | 28,326 | 848 | (294,444 | ) | (260,274 | ) | 7,686 | (252,588 | ) | |||||||||||||||||||||||||||||
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| |||||||||||||||||||||||
Profit for the period | — | — | — | — | — | — | 11,557 | 11,557 | 1,013 | 12,570 | ||||||||||||||||||||||||||||||||
Other comprehensive income (loss) | ||||||||||||||||||||||||||||||||||||||||||
Re-measurement losses on defined benefit plans | 22 | — | — | — | — | — | 145 | — | 145 | — | 145 | |||||||||||||||||||||||||||||||
Exchange differences on translation of foreign operations | — | — | — | — | — | 310 | — | 310 | 3 | 313 | ||||||||||||||||||||||||||||||||
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| |||||||||||||||||||||||
Total comprehensive income for the period | — | — | — | — | — | 455 | 11,557 | 12,012 | 1,016 | 13,028 | ||||||||||||||||||||||||||||||||
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| |||||||||||||||||||||||
Dividends declared to equity shareholders of Mechel PAO | 24 | — | — | — | — | — | — | (856 | ) | (856 | ) | — | (856 | ) | ||||||||||||||||||||||||||||
Dividends declared tonon-controlling interests | 24 | — | — | — | — | — | — | — | — | (359 | ) | (359 | ) | |||||||||||||||||||||||||||||
Change innon-controlling interests | 6, 24 | — | — | — | — | (3,948 | ) | — | — | (3,948 | ) | 590 | (3,358 | ) | ||||||||||||||||||||||||||||
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As of December 31, 2017 | 416,270,745 | 4,163 | 83,254,149 | 833 | 24,378 | 1,303 | (283,743 | ) | (253,066 | ) | 8,933 | (244,133 | ) | |||||||||||||||||||||||||||||
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F-8
See accompanying notes to the consolidated financial statements.
MECHEL PAO
Consolidated statement of changes in equity CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (continued)
for the year ended December 31, 2015 (continued)2018
(All amounts are in millions of Russian rubles, unless shares numbers)
| Attributable to equity holders of the parent | ||||||||||||||||||||||||||||||||||||||||||
| Common shares | Preferred shares | Additional paid-in capital | Accumulated deficit | Accumulated other comprehensive income (loss) | Equity attributable to shareholders of Mechel PAO | Non- controlling interest | Total equity | |||||||||||||||||||||||||||||||||||
| Notes | Shares Quantity | Amount | Shares Quantity | Amount | ||||||||||||||||||||||||||||||||||||||
As of January 1, 2015 | 416,270,745 | 4,163 | 83,254,149 | 833 | 25,592 | (186,272 | ) | 1,018 | (154,666 | ) | 8,253 | (146,413 | ) | |||||||||||||||||||||||||||||
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| |||||||||||||||||||||||
(Loss) profit for the period | — | — | — | — | — | (115,163 | ) | — | (115,163 | ) | 535 | (114,628 | ) | |||||||||||||||||||||||||||||
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| |||||||||||||||||||||||
Other comprehensive income (loss) | ||||||||||||||||||||||||||||||||||||||||||
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Net gain on available for sale financial assets | — | — | — | — | — | — | 8 | 8 | — | 8 | ||||||||||||||||||||||||||||||||
Re-measurement losses on defined benefit plans | 24 | — | — | — | — | — | — | (196 | ) | (196 | ) | 2 | (194 | ) | ||||||||||||||||||||||||||||
Exchange differences on translation of foreign operations | — | — | — | — | — | — | 287 | 287 | — | 287 | ||||||||||||||||||||||||||||||||
Total comprehensive (loss) income for the year | — | — | — | — | — | (115,163 | ) | 99 | (115,064 | ) | 537 | (114,527 | ) | |||||||||||||||||||||||||||||
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| |||||||||||||||||||||||
Transfer of cumulative translation adjustment due to disposal of discontinued operations | 17 | — | — | — | — | — | — | (798 | ) | (798 | ) | — | (798 | ) | ||||||||||||||||||||||||||||
Transfer of actuarial gains (losses) due to disposal of discontinued operations | 17 | — | — | — | — | — | (126 | ) | 126 | — | — | — | ||||||||||||||||||||||||||||||
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| |||||||||||||||||||||||
Dividends declared to shareholders of Mechel PAO | 26 | — | — | — | — | — | (4 | ) | — | (4 | ) | — | (4 | ) | ||||||||||||||||||||||||||||
Dividends declared to non-controlling interest | 26 | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||
Acquisition of non-controlling interest | 6,26 | — | — | — | — | 2,730 | — | — | 2,730 | (2,842 | ) | (112 | ) | |||||||||||||||||||||||||||||
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| |||||||||||||||||||||||
As of December 31, 2015 | 416,270,745 | 4,163 | 83,254,149 | 833 | 28,322 | (301,565 | ) | 445 | (267,802 | ) | 5,948 | (261,854 | ) | |||||||||||||||||||||||||||||
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| |||||||||||||||||||||||
| Attributable to equity shareholders of the parent | ||||||||||||||||||||||||||||||||||||||||||
| Common shares | Preferred shares | Additional paid-in capital | Accumulated other comprehensive income (loss) | Accumulated deficit | Equity attributable to shareholders of Mechel PAO | Non- controlling interests | Total equity | |||||||||||||||||||||||||||||||||||
Notes | Shares Quantity | Amount | Shares Quantity | Amount | ||||||||||||||||||||||||||||||||||||||
As of January 1, 2018 | 416,270,745 | 4,163 | 83,254,149 | 833 | 24,378 | 1,303 | (283,743 | ) | (253,066 | ) | 8,933 | (244,133 | ) | |||||||||||||||||||||||||||||
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| |||||||||||||||||||||||
Adjustment on initial application of IFRS 9 | 3 | — | — | — | — | — | — | (1,684 | ) | (1,684 | ) | (5 | ) | (1,689 | ) | |||||||||||||||||||||||||||
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As of January 1, 2018 adjusted for the effect of IFRS 9 | 416,270,745 | 4,163 | 83,254,149 | 833 | 24,378 | 1,303 | (285,427 | ) | (254,750 | ) | 8,928 | (245,822 | ) | |||||||||||||||||||||||||||||
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| |||||||||||||||||||||||
Profit for the period | — | — | — | — | — | 12,628 | 12,628 | 908 | 13,536 | |||||||||||||||||||||||||||||||||
Other comprehensive income (loss) | ||||||||||||||||||||||||||||||||||||||||||
Re-measurement losses on defined benefit plans | 22 | — | — | — | — | — | 487 | — | 487 | — | 487 | |||||||||||||||||||||||||||||||
Exchange differences on translation of foreign operations | — | — | — | — | — | (19 | ) | — | (19 | ) | 10 | (9 | ) | |||||||||||||||||||||||||||||
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Total comprehensive income for the period | — | — | — | — | — | 468 | 12,628 | 13,096 | 918 | 14,014 | ||||||||||||||||||||||||||||||||
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Dividends declared to equity shareholders of Mechel PAO | 24 | — | — | — | — | — | — | (1,387 | ) | (1,387 | ) | — | (1,387 | ) | ||||||||||||||||||||||||||||
As of December 31, 2018 | 416,270,745 | 4,163 | 83,254,149 | 833 | 24,378 | 1,771 | (274,186 | ) | (243,041 | ) | 9,846 | (233,195 | ) | |||||||||||||||||||||||||||||
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F-9
See accompanying notes to the consolidated financial statements.
MECHEL PAO
Consolidated Statement of cash flows CONSOLIDATED STATEMENT OF CASH FLOWS
for the year ended December 31, 20152018
(All amounts are in millions of Russian rubles, unless stated otherwise)rubles)
Consolidated Statement of Cash Flows
| Year ended December 31, | ||||||||||
| Notes | 2015 | 2014 | ||||||||
Cash Flows from Operating Activities | ||||||||||
Net loss | (114,628 | ) | (133,967 | ) | ||||||
(Profit) loss from discontinuing operations, net of income tax | (822 | ) | 11,702 | |||||||
Net loss from continuing operations | (115,450 | ) | (122,265 | ) | ||||||
Adjustments to reconcile net loss from continuing operations to net cash provided by operating activities: | ||||||||||
Depreciation | 12,397 | 12,639 | ||||||||
Depletion and amortization | 1,688 | 1,790 | ||||||||
Foreign exchange loss | 71,106 | 103,176 | ||||||||
Deferred income taxes | 21 | 7,946 | (15,525 | ) | ||||||
Allowance for doubtful accounts | 13 | 1,464 | 3,671 | |||||||
Allowance for amounts due from related parties | 14 | 43 | 126 | |||||||
Write-off of accounts receivable | 27.1 | 247 | 185 | |||||||
Write-off of taxes receivable | — | 1,605 | ||||||||
Write-offs of inventories to net realisable value | 15 | 1,003 | 394 | |||||||
Revision in estimated cash flows of rehabilitation provision | 27.3 | (47 | ) | (236 | ) | |||||
Loss on write-off of property, plant and equipment | 27.1 | 691 | 661 | |||||||
Impairment of goodwill and non-current assets | 19 | 1,460 | 7,996 | |||||||
Loss on sale of property, plant and equipment | 102 | 85 | ||||||||
Gain on sale of investments | 27.6 | — | (483 | ) | ||||||
Gain on accounts payable with expired legal term | 27.6 | (222 | ) | (37 | ) | |||||
Pension benefit plan curtailment gain | 27.3 | (142 | ) | (58 | ) | |||||
Pension service cost and actuarial loss, other expenses | 24 | 192 | 52 | |||||||
Finance income | 27.4 | (183 | ) | (107 | ) | |||||
Finance costs | 27.5 | 60,452 | 28,110 | |||||||
Other | 480 | 1,492 | ||||||||
Changes in working capital items: | ||||||||||
Trade and other receivables | 4,719 | 2,089 | ||||||||
Inventories | 1,873 | 14,565 | ||||||||
Trade and other payables | (7,972 | ) | (1,640 | ) | ||||||
Advances received | (664 | ) | 62 | |||||||
Taxes payable and other current liabilities | (1,465 | ) | 8,771 | |||||||
Settlements with related parties | (275 | ) | (29 | ) | ||||||
Other current assets | 997 | (822 | ) | |||||||
Interest received | 25 | 22 | ||||||||
Interest paid | (28,910 | ) | (14,963 | ) | ||||||
Income taxes paid | (1,437 | ) | (2,509 | ) | ||||||
Net operating cash flows of discontinued operations | (136 | ) | (745 | ) | ||||||
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| |||||||
Net cash provided by operating activities | 9,982 | 28,072 | ||||||||
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| |||||||
| Year ended December 31, | ||||||||||||||
| Notes | 2018 | 2017 | 2016 | |||||||||||
Cash flows from operating activities | ||||||||||||||
Profit for the period | 13,536 | 12,570 | 8,832 | |||||||||||
Less loss after tax for the period from discontinued operations, net | — | — | 426 | |||||||||||
Profit for the period from continuing operations | 13,536 | 12,570 | 9,258 | |||||||||||
Adjustments to reconcile profit from continuing operations to net cash provided by operating activities: | ||||||||||||||
Depreciation of property, plant and equipment | 12,454 | 12,555 | 11,813 | |||||||||||
Amortisation of mineral licenses and other intangible assets | 1,405 | 1,672 | 1,901 | |||||||||||
Foreign exchange (gain) loss, net | 25,775 | (4,237 | ) | (25,947 | ) | |||||||||
Deferred income tax (benefit) expense | 20 | (2,596 | ) | (3,401 | ) | 5,104 | ||||||||
Allowance for expected credit losses on financial assets | 13, 15 | 940 | 332 | 758 | ||||||||||
Write-off of trade and other receivables | 25.1 | 2 | 109 | 113 | ||||||||||
Write-off of inventories to net realisable value | 12 | 1,162 | 470 | 364 | ||||||||||
Revision in estimated cash flows of rehabilitation provision | 25.3 | (38 | ) | — | (375 | ) | ||||||||
Loss onwrite-off ofnon-current assets | 859 | 321 | 1,953 | |||||||||||
Impairment of goodwill and othernon-current assets | 18 | 7,222 | 6,081 | 5,202 | ||||||||||
Net result from disposal ofnon-current assets | 25.1, 25.3 | (128 | ) | 21 | 57 | |||||||||
Gain on sale of investments | 25.6 | — | (2 | ) | (186 | ) | ||||||||
Gain on restructuring and forgiveness of trade and other payables andwrite-off of trade and other payables with expired legal term | 25.6 | (425 | ) | (963 | ) | (115 | ) | |||||||
Effect of pension obligations | 22 | 548 | (33 | ) | (171 | ) | ||||||||
Finance income | 25.4 | (34,056 | ) | (633 | ) | (1,176 | ) | |||||||
Finance costs including fines and penalties on overdue loans and borrowings and finance leases payments | 25.5 | 42,052 | 47,610 | 54,240 | ||||||||||
VEB commissionswrite-off | 25.6 | — | — | 1,411 | ||||||||||
Gain on royalty and other proceeds associated with disposal of Bluestone | 25.6 | (3 | ) | (474 | ) | (121 | ) | |||||||
Provisions for legal claims, taxes and other provisions | 4,940 | 4,222 | 1,246 | |||||||||||
Provision fornon-recoverable advances to pension funds | 25.6 | — | — | 408 | ||||||||||
Other | 68 | 281 | 51 | |||||||||||
Changes in working capital items: | ||||||||||||||
Trade and other receivables | 1,354 | (318 | ) | (5,542 | ) | |||||||||
Inventories | (7,858 | ) | (4,508 | ) | (1,070 | ) | ||||||||
Trade and other payables | 4,150 | (3,435 | ) | (4,259 | ) | |||||||||
Advances received | 485 | 625 | 588 | |||||||||||
Taxes payable and other liabilities | 683 | (158 | ) | 1,122 | ||||||||||
Other current assets | (851 | ) | (895 | ) | (883 | ) | ||||||||
Income tax paid | (3,562 | ) | (4,530 | ) | (2,101 | ) | ||||||||
Net operating cash flows from discontinued operations | — | — | (436 | ) | ||||||||||
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Net cash provided by operating activities | 68,118 | 63,282 | 53,207 | |||||||||||
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continued on next page
MECHEL PAO
Consolidated Statement of cash flows CONSOLIDATED STATEMENT OF CASH FLOWS (continued)
for the year ended December 31, 2015 (continued)2018
(All amounts are in millions of Russian rubles)
| Year ended December 31, | ||||||||||||||
| Notes | 2018 | 2017 | 2016 | |||||||||||
Cash flows from investing activities | ||||||||||||||
Loans issued and other investments | — | (525 | ) | (133 | ) | |||||||||
Interest received | 188 | 165 | 128 | |||||||||||
Royalty and other proceeds associated with disposal of Bluestone | 3 | 474 | 103 | |||||||||||
Proceeds from disposal of subsidiaries, net of cash disposed | — | 94 | 145 | |||||||||||
Purchases of available for sale securities | — | — | (4 | ) | ||||||||||
Proceeds from loans issued and other investments | 9 | 144 | 31 | |||||||||||
Proceeds from disposals of property, plant and equipment | 215 | 328 | 285 | |||||||||||
Purchases of property, plant and equipment | (5,472 | ) | (6,460 | ) | (4,742 | ) | ||||||||
Purchases of intangible assets | 17 | (150 | ) | (771 | ) | — | ||||||||
Interest paid, capitalized | (440 | ) | (587 | ) | (782 | ) | ||||||||
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| |||||||||
Net cash used in investing activities | (5,647 | ) | (7,138 | ) | (4,969 | ) | ||||||||
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| |||||||||
Cash flows from financing activities | ||||||||||||||
Proceeds from loans and borrowings, including proceeds from factoring arrangement of RUB 918 million, RUB 272 million and nil for the periods ended December 31, 2018, 2017 and 2016, respectively | 76,504 | 23,200 | 4,002 | |||||||||||
Repayment of loans and borrowings, including payments from factoring arrangement of RUB 435 million, RUB 1,123 million and RUB 2,625 million for the periods ended December 31, 2018, 2017 and 2016, respectively | (97,269 | ) | (35,033 | ) | (42,322 | ) | ||||||||
Repayment of other current financial liabilities | 11.5 | (442 | ) | — | — | |||||||||
Dividends paid to shareholders of Mechel PAO | (1,386 | ) | (856 | ) | (5 | ) | ||||||||
Dividends paid tonon-controlling interest | (8 | ) | (122 | ) | (2 | ) | ||||||||
Interest paid, including fines and penalties | (33,308 | ) | (31,948 | ) | (33,872 | ) | ||||||||
Acquisition ofnon-controlling interests in subsidiaries | — | (3,358 | ) | — | ||||||||||
Proceeds from sales of 49% stakes in Elga coal complex, withput-option granted | 6 | — | — | 34,300 | ||||||||||
Repayment of obligations under finance lease | (2,780 | ) | (3,513 | ) | (3,238 | ) | ||||||||
Deferred payments for acquisition of assets | (629 | ) | (455 | ) | — | |||||||||
Deferred consideration paid for the acquisition of subsidiaries in prior periods | (3,968 | ) | (3,652 | ) | (4,732 | ) | ||||||||
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Net cash used in financing activities | (63,286 | ) | (55,737 | ) | (45,869 | ) | ||||||||
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Foreign exchange loss (gain) on cash and cash equivalents, net | 63 | (637 | ) | (1,807 | ) | |||||||||
Allowance for expected credit losses on cash and cash equivalents | 15 | (91 | ) | — | — | |||||||||
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Net (decrease) increase in cash and cash equivalents | (843 | ) | (230 | ) | 562 | |||||||||
Cash and cash equivalents at beginning of period | 15 | 2,452 | 1,689 | 3,079 | ||||||||||
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Cash and cash equivalents, net of overdrafts at beginning of period | 15 | 1,223 | 1,453 | 891 | ||||||||||
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Cash and cash equivalents at end of period | 15 | 1,803 | 2,452 | 1,689 | ||||||||||
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Cash and cash equivalents, net of overdrafts at end of period | 15 | 380 | 1,223 | 1,453 | ||||||||||
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MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2018
(All amounts are in millions of Russian rubles, unless stated otherwise)
| Year ended December 31, | ||||||||||
| Notes | 2015 | 2014 | ||||||||
continued from previous page | ||||||||||
Cash Flows from Investing Activities | ||||||||||
Monthly installments for acquisition of DEMP | (4,819 | ) | (3,223 | ) | ||||||
Proceeds from disposal of securities | 143 | 538 | ||||||||
Loans issued and other investments | (6 | ) | (36 | ) | ||||||
Proceeds from disposal of Bluestone | 101 | — | ||||||||
Proceeds from disposal of subsidiaries | 76 | 632 | ||||||||
Purchases avaliable for sale securities | — | (113 | ) | |||||||
Proceeds from loans issued | 15 | 151 | ||||||||
Proceeds from disposals of property, plant and equipment | 405 | 830 | ||||||||
Purchases of property, plant and equipment | (5,076 | ) | (11,365 | ) | ||||||
Purchases of mineral licenses and other related payments | (71 | ) | — | |||||||
Interest paid, capitalized | (830 | ) | (5,141 | ) | ||||||
Net investing cash flows of discontinued operations | — | (12 | ) | |||||||
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| |||||||
Net cash used in investing activities | (10,062 | ) | (17,739 | ) | ||||||
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Cash Flows from Financing Activities | ||||||||||
Proceeds from borrowings | 13,875 | 64,469 | ||||||||
Repayment of borrowings | (11,896 | ) | (77,761 | ) | ||||||
Dividends paid | (4 | ) | (4 | ) | ||||||
Dividends paid to noncontrolling interest | (1 | ) | (6 | ) | ||||||
Acquisition of noncontrolling interest in subsidiaries | (1 | ) | (1,425 | ) | ||||||
Repayment of obligations under finance lease | (2,677 | ) | (1,863 | ) | ||||||
Sale leaseback proceeds | — | 675 | ||||||||
Net financing cash flows of discontinued operations | — | (105 | ) | |||||||
|
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| |||||||
Net cash used in financing activities | (704 | ) | (16,020 | ) | ||||||
|
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| |||||||
Effect of exchange rate changes on cash and cash equivalents | 331 | 901 | ||||||||
|
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| |||||||
Net decrease in cash and cash equivalents | (453 | ) | (4,786 | ) | ||||||
Cash and cash equivalents at beginning of period | 1,344 | 6,130 | ||||||||
|
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Cash and cash equivalents at end of period | 891 | 1,344 | ||||||||
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MECHEL PAO
Notes to the consolidated financial statements for the year ended December 31, 2015
(All amounts are in millions of Russian rubles, unless stated otherwise)
Notes to the consolidated financial statements
| 1. | Corporate information |
| (a) | Information |
Mechel PAO (“Mechel”, formerly — Mechel OAO and Mechel Steel Group OAO) was incorporated on March 19, 2003, under the laws of the Russian Federation in connection with a reorganization to serve as a holding company for various steel and mining companies owned by two individual shareholders (the “Controlling Shareholders”). The Controlling Shareholders, directly or through their associates, either acquired existing companies or established new companies, at varying dates from 1995 through March 19, 2003, which were contributed to Mechel after its formation. The formation of Mechel and contribution of the subsidiaries’ shares into Mechel’s capital represents a reorganization of entities under common control, and accordingly, has been accounted for in a manner similar to a pooling for the periods presented. During 2006, one of the Controlling Shareholders sold all his Mechel’s stock to the other Controlling Shareholder, Igor V. Zyuzin. Igor V. Zyuzin with his family members is the ultimate controlling party. In accordance with the changes in the Civil Code of the Russian Federation Mechel has the registered changes in its Charter on March 17, 2016 and changed its corporate name from Mechel OAO to Mechel PAO. The registered office is located at Krasnoarmeyskaya St. 1, Moscow, 125167, Russian Federation. Mechel and its subsidiaries are collectively referred to herein as the “Group”. Set forth below is a summary of the Group’s primary subsidiaries:
Name of subsidiary | Registered in | Core business | Date control acquired / date of incorporation (*) | Interest in voting stock held by the Group at | ||||||||
Southern Kuzbass Coal | Russia | Coal mining | % | |||||||||
Chelyabinsk Metallurgical Plant (CMP) | Russia | Steel products | 94.2 | % | ||||||||
Vyartsilya Metal Products Plant (VMPP) | Russia | Steel products | May | 93.3 | % | |||||||
Beloretsk Metallurgical Plant (BMP) | Russia | Steel products | June | % | ||||||||
| Russia | Steel products | April | 93.8 | % | |||||||
Korshunov Mining Plant (KMP) | Russia | Iron ore mining | 90.0 | % | ||||||||
Mechel Nemunas (MN) | Lithuania | Steel products | 100.0 | % | ||||||||
Mechel Energo | Russia | Power generation | 100.0 | % | ||||||||
Port Posiet | Russia | Transshipment | % | |||||||||
Izhstal | Russia | Steel products | May | 90.0 | % | |||||||
Port Kambarka | Russia | Transshipment | April | 90.4 | % | |||||||
Mechel Service | Russia | Trading | May | |||||||||
| 100.0 | % | ||||||||||
Mechel Coke | Russia | Coke production | June | 100.0 | % | |||||||
Moscow Coke and Gas Plant (Moskoks) | Russia | Coke production | 99.5 | % | ||||||||
Southern Kuzbass Power Plant (SKPP) | Russia | Power generation | April 2007 | 98.3 | % | |||||||
Kuzbass Power Sales Company (KPSC) | Russia | Electricity distribution | June 2007 | 72.1 | % | |||||||
Bratsk Ferroalloy Plant (BFP) | Russia | Ferrosilicon production | August 2007 | 100.0 | % | |||||||
Yakutugol | Russia | Coal mining | October 2007 | 100.0 | % | |||||||
Port Temryuk | Russia | Transshipment | March 2008 | 100.0 | % | |||||||
Mechel Carbon AG | Switzerland | Trading | April 2008 | 100.0 | % | |||||||
MECHEL PAO
Notes to the consolidated financial statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 20152018
(All amounts are in millions of Russian rubles, unless stated otherwise)
Name of subsidiary | Registered in | Core business | Date control acquired / date of incorporation (*) | Interest in voting stock held by the Group at | ||||||||
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| ||||||||||||
HBL Holding GmbH (HBL) | Germany | Trading | 100.0 | % | ||||||||
| Austria | Trading | 100.0 | % | ||||||||
Elgaugol | Russia | Coal mining | %** | |||||||||
Elga-road | Russia | Railroad transportation | January 2016 | 51.0 | %** | |||||||
| * | Date, when a control interest was acquired or a new company established. |
| ** | In 2016, the Group sold 49% stakes in Elgaugol and Elga-road to Gazprombank. Simultaneously with this transaction, the Group granted to Gazprombank a put option to sell 49% stakes in these companies to the Group. The transaction in fact represents a financial liability, and these entities are consolidated based on 100% ownership (Notes 6 and 11.4). |
| (b) | Business |
The Group operates in three business segments: steel (comprising steel and steel products), mining (comprising coal, iron ore and coke) and power (comprising electricity (generation and transportation) and heat power)power generation), and conducts operations in Russia, Ukraine, Kazakhstanthe CIS countries, Europe and Europe.Asia Pacific. The Group sells its products within Russia and foreign markets. Through acquisitions, the Group has added various businesses to explore new opportunities and build an integrated Group of steel, mining, ferroalloy and power group.companies. The Group operates in a highly competitive and cyclical industry; any local or global downturn in the industries may have an adverse effect on the Group’s results of operations and financial condition. While the Group will utilize funds from operations, it expects to continue to rely on operating cash flow and long term debt marketsto finance major investment projects, focus on restructuring of the loan portfolio and other financing sources for its capital needs. As discussed in Notes 4 and 5, management believes that the Group will secure adequate financing.
| (c) | Authorisation for issuance |
These consolidated financial statements as of December 31, 2018 and for the year then ended were authorised for issuance on March 21, 2019.
| 2. | Basis of preparation of the consolidated financial statements |
| (a) | Basis of preparation |
The consolidated financial statements of the Group have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB).
The consolidated financial statements have been prepared on a historical cost basis, except for specific financial assets and liabilities that have been measured at fair value and certain exemptions applied by the Group under IFRS 1 First-time Adoption of International Financial Reporting Standards (Note 9).value.
Russian associates and subsidiaries of the Group maintain their books and records in Russian rubles and prepare accounting reports in accordance with the accounting principles and practices mandated by Russian
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2018
(All amounts are in millions of Russian rubles, unless stated otherwise)
Accounting Standards (RAS). Foreign subsidiaries and associates maintain their books and records in different foreign functional currencies and prepare accounting reports in accordance with generally accepted accounting
MECHEL PAO
Notes to the consolidated financial statements for the year ended December 31, 2015
(All amounts are in millions of Russian rubles, unless stated otherwise)
principles (GAAP) in various jurisdictions. The financial statements and accounting reports for the Group and its subsidiaries and associates for the purposes of preparation of the consolidated financial statements in accordance with IFRS have been translated and adjusted on the basis of the respective standalone RAS or other GAAP financial statements.
The accompanying consolidated financial statements differ from the financial statements issued for the RAS and other GAAP purposes in that they reflect certain adjustments, not recorded in the statutory books, which are appropriate to present the financial position, results of operations and cash flows in accordance with IFRS. The principal adjustments relate to: (1) purchase accounting; (2) recognition of interest expense and certain operating expenses; (3) valuation and depreciation of property, plant and equipment and mineral licenses; (4) defined benefit plans;plans and other long-term benefits; (5) foreign currency translation; (6) deferred income taxes; (7) accounting for tax penalties, uncertainties and contingencies,contingencies; (8) revenue recognition; (9) valuation allowances for unrecoverable assets,assets; (10) accounting for financial instruments; (11) finance leases and (10)(12) recording investments at fair value.
For all periods up to and including the year ended December 31, 2014,The consolidated financial statements of the Group prepared itscomply with the Russian Federal Law No. 208On Consolidated Financial Statements (Law“208-FZ”), which was adopted on July 27, 2010. The Law208-FZ provides the legal basis for certain entities to prepare the financial statements in accordance with generally accepted accounting principlesIFRS as issued by the IASB and subsequently endorsed for use in U.S. GAAP. The accompanying consolidated financial statements for the year endedRussian Federation. As of December 31, 2015 are2018, all currently effective standards and interpretations issued by the first the Group has preparedIASB have been endorsed for use in accordance with IFRS. Refer to Note 9 for information on how the Group adopted IFRS.
Russia. The consolidated financial statements are presented in millions of Russian rubles, except when otherwise indicated.
| (b) | Basis of consolidation |
The consolidated financial statements comprise the financial statements of the Group and its subsidiaries as offor the year ended December 31, 2015.2018. Control is achieved when the Group is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Specifically, the Group controls an investee if, and only if, the Group has:
Power over the investee (i.e., existing rights that give it the current ability to direct the relevant activities of the investee);
Exposure, or rights, to variable returns from its involvement with the investeeinvestee;
The ability to use its power over the investee to affect its returns.
Consolidation of a subsidiary begins when the Group obtains control over the subsidiary and ceases when the Group loses control of the subsidiary. Assets, liabilities, income and expenses of a subsidiary acquired or disposed of during the year are included in the consolidated financial statements from the date the Group gains control until the date the Group ceases to control the subsidiary.
Profit or loss and each component of other comprehensive income (loss) (OCI) are attributed to the equity holders of the parent of the Group and to thenon-controlling interests, even if this results in thenon-controlling interests having a deficit balance. When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies intoin line with the Group’s accounting policies. All intra-group assets and liabilities, equity, income, expenses and cash flows relating to transactions between members of the Group are eliminated in full on consolidation.
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2018
(All amounts are in millions of Russian rubles, unless stated otherwise)
A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity transaction.
MECHEL PAO
Notes to the consolidated financial statements for the year ended December 31, 2015
(All amounts are in millions of Russian rubles, unless stated otherwise)
If the Group loses control over a subsidiary, it derecognises the related assets (including goodwill), liabilities,non-controlling interest and other components of equity, while any resultant gain or loss is recognised in the consolidated statement of profit (loss) and other comprehensive income (loss).income. Any investment retained is recognised at fair value.
| 3. | Summary of significant accounting policies |
| (a) | Business combinations and goodwill |
Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred, which is measured at acquisition date fair value, and the amount of anynon-controlling interests in the acquiree. For each business combination, the Group elects whether to measure thenon-controlling interests in the acquiree at fair value or at the proportionate share of the acquiree’s identifiable net assets. Acquisition-related costs are expensed as incurred and included in administrative expenses.
When the Group acquires a business, it assesses the financial assets and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions as of the acquisition date.
Any contingent consideration to be transferred by the acquirer will be recognised at fair value at the acquisition date. Contingent consideration classified as an asset or liability that is a financial instrument and within the scope of IAS 39 IFRS 9Financial Instruments: Recognition and Measurement,Instruments(“IFRS 9”), is measured at fair value with the changes in fair value recognised in the consolidated statement of profit (loss) and other comprehensive income (loss).income.
Goodwill is initially measured at cost (being the excess of the aggregate of the consideration transferred and the amount recognised fornon-controlling interests) and any previous interest held over the net identifiable assets acquired and liabilities assumed. If the fair value of the net assets acquired is in excess of the aggregate consideration transferred, the Groupre-assesses whether it has correctly identified all of the assets acquired and all of the liabilities assumed and reviews the procedures used to measure the amounts to be recognised at the acquisition date. If the reassessment still results in an excess of the fair value of net assets acquired over the aggregate consideration transferred, then the gain is recognised in the consolidated statement of profit (loss) and other comprehensive income (loss).income.
After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group’s cash-generating units that are expected to benefit from the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units.
Where goodwill has been allocated to a cash-generating unit (CGU) and part of the operation within that unit is disposed of, the goodwill associated with the disposed operation is included in the carrying amount of the operation when determining the gain or loss on disposal. Goodwill disposed in these circumstances is measured based on the relative values of the disposed operation and the portion of the cash-generating unit retained.
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2018
(All amounts are in millions of Russian rubles, unless stated otherwise)
| (b) | Investments in associates |
An associate is an entity over which the Group has significant influence. Significant influence is the power to participate in the financial and operating policy decisions of the investee, but is not control or joint control over those policies.
MECHEL PAO
Notes to the consolidated financial statements for the year ended December 31, 2015
(All amounts are in millions of Russian rubles, unless stated otherwise)
The considerations made in determining significant influence are similar to those necessary to determine control over subsidiaries.
The Group’s investments in its associate are accounted for using the equity method.
Under the equity method, the investment in an associate is initially recognised at cost. The carrying amount of the investment is adjusted to recognise changes in the Group’s share of net assets of the associate since the acquisition date. Goodwill relating to the associate is included in the carrying amount of the investment and is not tested for impairment separately.
The consolidated statement of profit (loss) and other comprehensive income (loss) reflects the Group’s share of the results of operations of the associate. Any change in OCI of those investees is presented as part of the Group’s OCI.OCI movements. In addition, when there has been a change recognised directly in the equity of the associate, the Group recognises its share of any changes, when applicable, in the statement of changes in equity. Unrealised gains and losses resulting from transactions between the Group and the associate are eliminated to the extent of the interest in the associate.
The aggregate of the Group’s share of profit or loss of an associate is shown on the face of the consolidated statement of profit (loss) and other comprehensive income (loss) outside operating profit and represents profit or loss after tax andnon-controlling interests in the subsidiaries of the associate.
The financial statements of the associate are prepared for the same reporting period as the Group. When necessary, adjustments are made to bring the accounting policies in line with those of the Group.
After application of the equity method, the Group determines whether it is necessary to recognise an impairment loss on its investment in its associate. At each reporting date, the Group determines whether there is objective evidence that the investment in the associate is impaired. If there is such evidence, the Group calculates the amount of impairment as the difference between the recoverable amount of the investment in associate and its carrying value, and then recognises the loss as ‘Share of profit (loss) of an associate’associates’ in the consolidated statement of profit (loss) and other comprehensive income (loss).income.
Upon loss of significant influence over the associate, the Group measures and recognises any retained investment at its fair value. Any difference between the carrying amount of the associate upon loss of significant influence and the fair value of the retained investment and proceeds from disposal is recognised in in the consolidated statement of profit (loss) and other comprehensive income (loss).income.
| (c) | Current versusnon-current classification |
The Group presents assets and liabilities in the consolidated statement of financial position based oncurrent/non-current classification. An asset is current when it is:
Expected to be realised or intended to be sold or consumed in the normal operating cyclecycle;
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2018
(All amounts are in millions of Russian rubles, unless stated otherwise)
Held primarily for the purpose of tradingtrading;
Expected to be realised within twelve months after the reporting periodperiod; or
Or
Cash or cash equivalent unless restricted from being exchanged or used to settle a liability for at least twelve months after the reporting period.
MECHEL PAO
Notes to the consolidated financial statements for the year ended December 31, 2015
(All amounts are in millions of Russian rubles, unless stated otherwise)
All other assets are classified asnon-current.
A liability is current when:
It is expected to be settled in the normal operating cyclecycle;
It is held primarily for the purpose of tradingtrading;
It is due to be settled within twelve months after the reporting periodperiod; or
Or
There is no unconditional right to defer the settlement of the liability for at least twelve months after the reporting period.
The Group classifies all other liabilities asnon-current.
Deferred tax assets and liabilities are classified asnon-current assets and liabilities.
| (d) | Fair value measurement |
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either:
In the principal market for the asset or liabilityliability; or
Or
In the absence of a principal market, in the most advantageous market for the asset or liability.
The principal or the most advantageous market must be accessible by the Group.
The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest.
The Group uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs.
All assets and liabilities for which fair value is measured or disclosed in the consolidated financial statements are categorised within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole:
Level 1 — Quotedquoted (unadjusted) market prices in active markets for identical assets or liabilitiesliabilities;
Level 2 — Valuationvaluation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observableobservable;
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2018
(All amounts are in millions of Russian rubles, unless stated otherwise)
Level 3 — Valuationvaluation techniques for which the lowest level input that is significant to the fair value measurement is unobservable.
For assets and liabilities that are recognised in the consolidated financial statements at fair value on a recurring basis, the Group determines whether transfers have occurred between levels in the hierarchy byre-assessing categorisation (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period.
MECHEL PAO
Notes to the consolidated financial statements for the year ended December 31, 2015
(All amounts are in millions of Russian rubles, unless stated otherwise)
| (e) | Revenue |
Revenue from contracts with customers is recognised to the extentat an amount that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured, regardless of when the payment is received. Revenue is measured at the fair value ofreflects the consideration receivedto which an entity expects to be entitled in exchange for transferring goods or receivable, taking into account contractually defined terms of payment and excluding discounts, rebates, and sales taxes or duty.services to a customer.
Revenues areRevenue from contracts with customers is inflows from sales of goods that constitute ongoing major operations of the Group and areis reported as such in the consolidated statement of profit (loss) and other comprehensive income (loss).income. Inflows from incidental and peripheral operations, net of related costs, are considered gains and are included net of related costs, in other operating income and other income in the consolidated statement of profit (loss) and other comprehensive income (loss).income.
The following criteria are also applicable to other specific revenue transactions:transactions from contracts with customers:
Sales of goods and rendering services
Revenue from the sale of goods and rendering servicesis recognised when (or as) the Group satisfies a performance obligation by transferring promised goods and services to a customer. An asset is transferred when (or as) the customer obtains control of the asset. The Group is engaged into contracts for sales of goods which include transportation and freight services. In these contracts the Group accounts for two separate performance obligations: the obligation to provide goods to the customer and the obligation to arrange the delivery (transportation, freight) of goods to the customer. Revenue is recognised at a point of time when the significant risks and rewards of ownership ofcontrol over the goods have passedpasses to the buyer.customer (at the loading port, place or after delivery to the first carrier). Revenue related to freight and transportation component is recognised over time as the service is rendered. Revenue from the sale of goods isand rendering servicesis measured at the fair value ofan amount that reflects the consideration receivedto which the Group expects to be entitled in exchange for those goods or receivable,services, net of returns and allowances, trade discounts, associated sales taxes (VAT) and export duties.
Principal vs agent arrangements
The GroupCertain contracts are provisionally priced so that price is involved in re-selling goods and services produced or rendered by other entities. Revenues are reportednot settled until the final price based on the gross amount billedmarket price for the relevant period is determined. Revenue from these transactions is initially recognised based on related coal market indices. An adjustment to the customer when the Group has earned revenue as a principal from the sale of goods or services, or the net amount retained (thatfinal price on provisionally priced contracts is the amount billed to the customer reduced by the amount billed by the supplier) when the Group has earned a commission or fee as an agent.
Shipping and handling costs
The Group classifies all amounts billed to customersrecorded in a sale transaction and related to shipping and handling as part of sales revenue and all related shipping and handling costs as selling and distribution expenses when the Group is acting as a principal in accordance with the requirements of IAS 18 Revenue.revenue.
Sales of power
In the Power segment (Note 28)26), revenue is recognised based on unit of power measure (kilowatts) delivered to customers, since at that point revenue recognition criteria are met. The billings are usually done on a monthly basis, several days after each month end.
Interest income
For all financial instruments measured at amortised cost interest income is recorded using the effective interest rate (EIR). The EIR is the rate that exactly discounts the estimated future cash receipts over the expected life of the financial instrument or a shorter period, where appropriate, to the net carrying amount of the financial asset. Interest income is included in finance income in the statement of profit (loss) and other comprehensive income (loss).
MECHEL PAO
Notes to the consolidated financial statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 20152018
(All amounts are in millions of Russian rubles, unless stated otherwise)
Variable consideration
If the consideration in a contract includes a variable amount, the Group estimates the amount of consideration to which it will be entitled in exchange for transferring the goods to the customer.
Some contracts with customers provide a right of return, trade discounts or volume rebates. IFRS 15Revenue from Contracts with customers (“IFRS 15”) requires the estimated variable consideration to be constrained to prevent over-recognition of revenue. The application of the constraint does not result in more revenue being deferred than under previous IFRS.
Significant financing component
The Group decided to use the practical expedient provided in IFRS 15, which allows not to adjust the promised amount of consideration for the effects of a significant financing component in the contracts where the Group expects, at contract inception, that the period between the Group’s transfer of a promised good or service to a customer and when the customer pays for that good or service will be one year or less.
Warranty obligations
The Group provides warranties to its customers under the Russian Federation Law requirements. These warranties represent assurance type warranties and do not require to provide any additional service to the Group’s customers. This type of warranties is accounted for under IAS 37 Provisions, Contingent Liabilities and Contingent Assets(“IAS 37”), consistent with its current practice.
Trade receivables
A receivable represents the Group’s right to an amount of consideration that is unconditional (i.e., only the passage of time is required before payment of the consideration is due). Refer to accounting policies of financial assets in Note 3 (n).
The disclosure of significant accounting judgements relating to revenue from contracts with customers is provided in Note 3 (u).
| (f) | Taxes |
Current income tax
Current income tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted at the reporting date in the countries where the Group operates and generates taxable income.
Uncertain tax positions
The Group’s policy is to comply fully with the applicable tax regulations in the jurisdictions in which its operations are subject to income taxes. The Group’s estimates of current income tax expense and liabilities are calculated assuming that all tax computations filed by the Group’s subsidiaries will be subject to a review or
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2018
(All amounts are in millions of Russian rubles, unless stated otherwise)
audit by the relevant tax authorities. The Group and the relevant tax authorities may have different interpretations of how regulations should be applied to actual transactions. Such uncertain tax positions are accounted for in accordance with IAS 12Income Taxes(“IAS 12”)and IAS 37 Provisions, Contingent Liabilities and Contingent Assets.37. The Group applies single most likely outcome method of uncertain tax positions estimation.
Deferred tax
Deferred tax is provided using the liability method on temporary differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes at the reporting date.
Deferred tax liabilities are recognised for all taxable temporary differences, except:
When the deferred tax liability arises from the initial recognition of goodwill or an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or lossloss.
In respect of taxable temporary differences associated with investments in subsidiaries, associates and interests in joint arrangements, when the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.
Deferred tax assets are recognised for all deductible temporary differences, the carry forward of unused tax credits and any unused tax losses. Deferred tax assets are recognised to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry forward of unused tax credits and unused tax losses can be utilised, except:
When the deferred tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or lossloss.
In respect of deductible temporary differences associated with investments in subsidiaries, associates and interests in joint arrangements, deferred tax assets are recognised only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilized.
The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilised. Unrecognised deferred tax assets arere-assessed at each reporting date and are recognised to the extent that it has become probable that future taxable profits will allow the deferred tax asset to be recovered.
MECHEL PAO
Notes to the consolidated financial statements for the year ended December 31, 2015
(All amounts are in millions of Russian rubles, unless stated otherwise)
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the year when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the reporting date.
Deferred tax relating to items recognised outside profit or loss is recognised in correlation to the underlying transaction either in OCI or directly in equity.
Deferred tax assets and deferred tax liabilities are offset if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority.
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2018
(All amounts are in millions of Russian rubles, unless stated otherwise)
Tax benefits acquired as part of a business combination, but not satisfying the criteria for separate recognition at that date, are recognised subsequently if new information about facts and circumstances change. The adjustment is either treated as a reduction in goodwill (as long as it does not exceed goodwill) if it was incurred during the measurement period or recognised in profit or loss.
| (g) | Foreign currencies |
The Group’s consolidated financial statements are presented in Russian rubles whichto comply with the Law208-FZ. Russian ruble is also the parent company’s functional currency.
For each entity, the Group determines the functional currency and items included in the financial statements of each entity are measured using that functional currency. The functional currencies of the main Russian European, Ukrainian and KazakhEuropean subsidiaries of the Group are the Russian ruble Euro, the Ukrainian hryvnia and the Kazakh tenge,euro, respectively. The U.S. dollar is the functional currency of the other main international operations of the Group. The Group uses the direct method of consolidation and on disposal of a foreign operation,operation; the gain or loss that is reclassified to profit or loss reflects the amount that arises from using this method.
| (i) | Transactions and balances |
Transactions in foreign currencies are initially recorded by the Group’s entities at their respective functional currency spotexchange rates at the date the transaction first qualifies for recognition. Monetary assets and liabilities denominated in foreign currencies are translated atto the functional currency spotat the exchange rates as of exchange at the reporting date. Differences arising on settlement or translation of monetary items are recognised in profit or loss.
Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates at the dates of the initial transactions.Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value is determined.
The following table presents the exchange rates for the functional and operating currencies at various subsidiaries, other than the presentation currency:
| Rates at | Average exchange rates* for the years ended | |||||||||||||||||||||||||||||||||||||||||||
| December, 31 | January, 1 | December, 31 | Exchange rates* at | Average exchange rates* for the year ended | ||||||||||||||||||||||||||||||||||||||||
Currency | 2015 | 2014 | 2014 | 2015 | 2014 | December 31, 2018 | December 31, 2017 | December 31, 2016 | December 31, 2018 | December 31, 2017 | December 31, 2016 | |||||||||||||||||||||||||||||||||
U.S. dollar | 72.88 | 56.26 | 32.73 | 60.96 | 38.42 | 69.47 | 57.60 | 60.66 | 62.71 | 58.35 | 67.03 | |||||||||||||||||||||||||||||||||
Euro | 79.70 | 68.34 | 44.97 | 67.78 | 50.82 | 79.46 | 68.87 | 63.81 | 73.95 | 65.90 | 74.23 | |||||||||||||||||||||||||||||||||
Ukrainian hryvnia | 3.05 | 3.56 | 3.97 | 2.83 | 3.25 | |||||||||||||||||||||||||||||||||||||||
Kazakh tenge | 0.22 | 0.31 | 0.21 | 0.28 | 0.21 | |||||||||||||||||||||||||||||||||||||||
| (*) | Exchange rates shown in Russian rubles for one |
MECHEL PAO
Notes to the consolidated financial statements for the year ended December 31, 2015
(All amounts are in millions of Russian rubles, unless stated otherwise)
The majority of the balances and operations not already denominated in the presentation currency were denominated in the U.S. dollar and Euro.euro. The Russian ruble is not a convertible currency outside the territory of Russia. Official exchange rates are determined daily by the Central Bank of Russiathe Russian Federation (“CBR”) and are generally considered to be a reasonable approximation of market rates.
| (ii) | Group companies |
On consolidation, the assets and liabilities of foreign operations are translated into rubles at the rate of exchange prevailing at the reporting date and their statements of profit (loss) and other comprehensive income (loss)
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2018
(All amounts are in millions of Russian rubles, unless stated otherwise)
are translated at the weighted average exchange rate for the period. The exchange differences arising on translation for consolidation are recognised in OCI. On disposal of a foreign operation, the component of OCI relating to that particular foreign operation is recognised in profit or loss.
Any goodwill arising on the acquisition of a foreign operation and any fair value adjustments to the carrying amounts of assets and liabilities arising on the acquisition are treated as assets and liabilities of the foreign operation and translated at the spotexchange rate as of exchange at the reporting date.
| (h) | Non-current assets held for sale and discontinued operations |
The Group classifiesnon-current assets (or disposal group) as held for sale if their carrying amounts will be recovered principally through a sale transaction rather than through continuing use. Suchnon-current assets (or disposal group) classified as held for sale are measured at the lower of their carrying amount and fair value less costs to sell.
The criteria for held for sale classification is regarded as met only when the sale is highly probable and the asset (or disposal group) is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets (or disposal groups). For the sale to be highly probable, the appropriate level of management must be committed to a plan to sell the asset (or disposal group), and an active program to locate a buyer and complete the plan must have been initiated.
Property, plant and equipment and intangible assets are not depreciated or amortised once classified as held for sale.
Assets and liabilities classified as held for sale are presented separately as current items in the consolidated statement of financial position.
A disposal group qualifies as discontinued operation if it is a component of an entity that either has been disposed of, or is classified as held for sale, and:
Represents a separate major line of business or geographical area of operationsoperations;
Is part of a singleco-ordinated plan to dispose of a separate major line of business or geographical area of operationsoperations; or
Or
Is a subsidiary acquired exclusively with a view to resale.
Discontinued operations are excluded from the results of continuing operations and are presented as a single amount as profit or loss after tax from discontinued operations in the consolidated statement of profit (loss) and other comprehensive income (loss).
| (i) | Mineral licenses |
The Group’s mining segment production activities are located within Russia. The Group’s mineral reserves and deposits are situated on the land belonging to government and regional authorities. Mining minerals requires a subsoil license from the state authorities with respect to identified mineral deposits. The Group obtains licenses from such authorities and pays certain taxes to explore and produce from these deposits. These licenses expire up to 2037, with the most significant licenses expiring between 2020 and 2033, and management believes that they may be extended at the initiative of the Group without substantial cost as it happened in the past. Management intends to extend such licenses for deposits expected to remain productive subsequent to their license expiry dates.
MECHEL PAO
Notes to the consolidated financial statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 20152018
(All amounts are in millions of Russian rubles, unless stated otherwise)
Additional disclosures are provided in Note 17. All other notes to the financial statements include amounts for continuing operations, unless otherwise mentioned.
Mineral licenses acquired separately are measured on initial recognition at cost. The cost of mineral licenses acquired in a business combination is their fair value at the date of acquisition. Mineral licenses are amortizedamortised under a unit of production basis over provenproved and probable reserves of the relevant area.
In order to calculate provenproved and probable reserves, estimates and assumptions are used about a range of geological, technical and economic factors, including but not limited to quantities, grades, production techniques, recovery rates, production costs, transport costs, commodity demand, commodity prices and exchange rates. There are numerous uncertainties inherent in estimating provenproved and probable reserves, and assumptions that are valid at the time of estimation may change significantly when new information becomes available.
The Group established a policy according to which internal mining engineers review provenproved and probable reserves annually. This policy does not change the Group’s approach to the measurement of provenproved and probable reserves as of their acquisition dates as part of business combinations that involve independent mining engineers. The Group’s provenproved and probable reserve estimates as of the reporting date were made by internal mining engineers and the majority of the assumptions underlying these estimates had been previously reviewed and verified by independent mining engineers.
The carrying values of the mineral licenses were reduced proportionate to the depletion of the respective mineral reserves at each deposit related to mining and production of reserves adjusted for the reservesre-measurement and purchase accounting effects. Reduction in carrying values of the mineral licenses is included in the depletion charge for the period within the Cost of sales in the consolidated statement of profit (loss) and other comprehensive income. No residual value is assumed in the mineral license valuation.
Property, plant and equipment |
Property, plant and equipment and construction in progress are stated at cost, net of accumulated depreciation and accumulated impairment losses, if any. The initial cost of an asset comprises its purchase price or construction cost, any costs directly attributable to bringing the asset into operation, the initial estimate of the rehabilitation provision, and, for qualifying assets (where relevant), borrowing costs and other costs incurred in connection with the borrowings. The purchase price or construction cost is the aggregate amount paid and the fair value of any other consideration given to acquire the asset.
When significant parts of property, plant and equipment are required to be replaced at intervals, the Group depreciates them separately based on their specific useful lives. Likewise, when a major inspection is performed, its cost is recognised in the carrying amount of the property, plant and equipment as a replacement if the recognition criteria are satisfied. Where a separately depreciated asset, or part of an asset, is replaced, the expenditure is capitalised. Where part of the asset was not separately considered as a component and therefore not depreciated separately, the replacement value adjusted for prices inflation is used to estimate the carrying amount of the replaced asset(s) which is immediately written off. All other repair and maintenance costs are recognised in the consolidated statement of profit (loss) and other comprehensive income (loss) as incurred.
The capitalised value of a finance lease is also included in property, plant and equipment. The present value of the expected cost for the rehabilitation of an asset after its use is included in the cost of the respective asset if the recognition criteria for a provision are met.
Inventories planned to be used for construction and spare parts with useful lives over one year are recorded within property, plant and equipment.
MECHEL PAO
Notes to the consolidated financial statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 20152018
(All amounts are in millions of Russian rubles, unless stated otherwise)
Mining assets and processing plant and equipment
Mining assets and processing plant and equipment are those assets, including construction in progress, which are intended to be used only for the needs of a certain mine or field, and upon full extraction exhausting of the reserves of such mine or the field, these assets cannot be further used for any other purpose without a capital reconstruction.
Items of production mines are stated at cost, less accumulated depletiondepreciation and accumulated impairment losses, if any.
Costs of developing new underground mines are capitalized. Underground development costs, which are costs incurred to make the mineral physically accessible, include costs to prepare property for shafts, driving main entries for ventilation, haulage, personnel, construction of airshafts, roof protection and other facilities. Additionally, interest expense subject to allocation to the cost of developing mining properties and to constructing new facilities is capitalized until assets are ready for their intended use.
Exploration and evaluation activity involves the search for mineral resources, the determination of technical feasibility and the assessment of commercial viability of identified provenproved and probable reserves. Once the legal right to explore has been acquired, exploration and evaluation expenditure is charged to profit or loss as incurred, unless the Group concludes that a future economic benefit is more likely than not to be realized.
As part of its surface mining operations, the Group incurs stripping costs both during the development phase and production phase of its operations. Stripping costs incurred in the development phase of a mine, before the production phase commences, are capitalized as part of cost of constructing the mine. TheIn general case, the capitalization of development stripping costs ceases when the mine is commissioned and ready for use as intended by management. Stripping cotscosts undertaken during the production phase of mine are charged to profit and loss as cost of goods soldsales as incurred.
In some cases, the further development of a mine may require stripping operations, equivalent by scale to those that were incurred in the development phase of a mine. In such cases, production stripping costs are capitalized similarly to the capitalization of costs during the development phase of a mine.
Stripping costs incurred in the production phase are capitalized, if all of the following criteria according toIFRIC 20 Stripping Costs in the Production Phase of a Surface Mine are satisfied:
| (a) | it is probable that the future economic benefit associated with the stripping activity will flow to the entity; |
| (b) | the entity can identify the component of the ore body for which access has been improved; |
| (c) | the costs relating to the stripping activity associated with that component can be measured reliably. |
When mining assets and processing plant and equipment are placed in production, the applicable capitalized costs, including mine development costs, are depleted using theunit-of-production method at the ratio of tonnes of mineral mined or processed to the estimated provenproved and probable mineral reserves that are expected to be mined during the estimated lives of the mines. Capitalized production stripping costs are also depleted using theunit-of-production method on a basis consistent with the mine production and reserves to which they relate.The unit-of-production method is used for the underground mine development structure costs as their useful lives coincide with the estimated lives of mines, provided that all repairs and maintenance are timely carried out.
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2018
(All amounts are in millions of Russian rubles, unless stated otherwise)
A decision to abandon, reduce or expand activity on a specific mine is based upon many factors, including general and specific assessments of mineral reserves, anticipated future mineral prices, anticipated costs of developing and operating a producing mine, the expiration date of mineral licenses, and the likelihood that the Group will continue exploration on the mine. Based on the results at the conclusion of each phase of an exploration program, properties that are not economically feasible for production arere-evaluated to determine if future exploration is warranted and that carrying values are appropriate. The ultimate recovery of these costs depends on the discovery and development of economic ore reserves or the sale of the companies owning such mineral rights.
Other property, plant and equipment
Capitalized production costs for internally developed assets include material, direct labor costs, and allocated material and manufacturing direct overhead costs. When construction activities are performed over an extended period, borrowing costs incurred in connection with the borrowing of funds are capitalized.Construction-in-progress and equipment held for installation are not depreciated until the constructed or installed asset is substantially ready for its intended use.
MECHEL PAO
Notes to the consolidated financial statements for the year ended December 31, 2015
(All amounts are in millions of Russian rubles, unless stated otherwise)
Property, plant and equipment (apartare depreciated using the straight-line method, apart from railway of the Elga coal deposit) aredeposit which is depreciated using the straight-line method.units of production method as discussed in (u) Significant accounting judgements, estimates and assumptions). Upon sale or retirement, the acquisition or production cost and related accumulated depreciation are removed from the consolidated statement of financial position and any gain or loss is included in the consolidated statement of profit (loss) and other comprehensive income (loss).income.
The following useful lives are used as a basis for calculating depreciation:
Category of asset | Useful economic lives estimates, years | |||
Buildings and constructions | 5-85 | |||
Operating machinery and equipment | 2-30 | |||
Transportation vehicles | 2-25 | |||
Other equipment | 2-15 | |||
| (k) | Leases |
The determination of whether an arrangement is (or contains) a lease is based on the substance of the arrangement at the inception of the lease. The arrangement is, or contains, a lease if fulfilment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset or assets, even if that right is not explicitly specified in an arrangement.
A lease is classified at the inception date as a finance lease or an operating lease. A lease that transfers substantially all the risks and rewards incidental to ownership to the Group is classified as a finance lease.
Finance leases are capitalised at the commencement of the lease at the inception date fair value of the leased property or, if lower, at the present value of the minimum lease payments. Lease payments are apportioned between finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are recognised in finance costs in the consolidated statement of profit (loss) and other comprehensive income (loss).income.
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2018
(All amounts are in millions of Russian rubles, unless stated otherwise)
A leased asset is depreciated over the useful life of the asset. However, if there is no reasonable certainty that the Group will obtain ownership by the end of the lease term, the asset is depreciated over the shorter of the estimated useful life of the asset and the lease term.
An operating lease is a lease other than a finance lease. Operating lease payments are recognised as an operating expense in the consolidated statement of profit (loss) and other comprehensive income (loss)on a straight-line basis over the lease term.
| (l) | Borrowing costs |
Borrowing costs directly attributable to the acquisition, construction or production of an asset that necessarily takes a substantial period of time to get ready for its intended use or sale (a qualifying asset) are capitalised as part of the cost of the respective asset. Borrowing costs consist of interest including exchange differences arising from foreign currency borrowings and other costs that an entity incurs in connection with the borrowing of funds.
MECHEL PAO
Notes to the consolidated financial statements for the year ended December 31, 2015
(All amounts are in millions of Russian rubles, unless stated otherwise)
Where funds are borrowed specifically to finance a project, the amount capitalised represents the actual borrowing costs incurred. Where the funds used to finance a project form part of general borrowings, the amount capitalised is calculated using a weighted average of rates applicable to relevant general borrowings of the Group during the period.
According to IAS 23Borrowing Costs(“IAS 23”), borrowing costs may include exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs. Foreign exchange differences on borrowings directly attributable to the acquisition, construction or production of a qualifying asset are considered by the Group to be eligible for capitalization in the amount of difference between actual amount of interest costs and potential amount of interest costs calculated using a weighted average of rates applicable to ruble-nominated borrowings of the Group during the period. All other borrowing costs are recognised in the consolidated statement of profit (loss) and other comprehensive income (loss)in the period in which they are incurred.
| (m) | Intangible assets |
Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is their fair value at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and accumulated impairment losses.
Intangible assets with determinable useful lives are amortizedamortised using the straight-line method over their estimated period of benefit, ranging from two to sixteentwenty five years.
| (n) | Financial instruments — initial recognition and subsequent measurement |
A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.
| (i) | Financial assets |
Initial recognition and measurement
Financial assets are classified, at initial recognition, as financial assetssubsequently measured at amortised cost, fair value through other comprehensive income (OCI), and fair value through profit or loss, loans and receivables, held-to-maturity investments, available-for-sale (AFS)loss.
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2018
(All amounts are in millions of Russian rubles, unless stated otherwise)
The classification of financial assets at initial recognition depends on the financial asset’s contractual cash flow characteristics and the Group’s business model for managing them. With the exception of trade receivables that do not contain a significant financing component or as derivatives. Allfor which the Group has applied the practical expedient, the Group initially measures a financial assets are recognised initiallyasset at its fair value plus, in the case of a financial assetsasset not recorded at fair value through profit or loss, transaction costscosts. Trade receivables that do not contain a significant financing component or for which the Group has applied the practical expedient are measured at the transaction price determined under IFRS 15 (Note 3 (e)).
In order for a financial asset to be classified and measured at amortised cost or fair value through OCI, it needs to give rise to cash flows that are attributable‘solely payments of principal and interest (SPPI)’ on the principal amount outstanding. This assessment is referred to as the acquisition ofSPPI test and is performed at an instrument level.
The Group’s business model for managing financial assets refers to how it manages its financial assets in order to generate cash flows. The business model determines whether cash flows will result from collecting contractual cash flows, selling the financial asset.assets, or both.
Purchases or sales of financial assets that require delivery of assets within a time frame established by regulation or convention in the market place (regular way trades) are recognised on the trade date, i.e., the date that the Group commits to purchase or sell the asset.
Subsequent measurement
For purposes of subsequent measurement, financial assets are classified in fourthree categories:
Financial assets at amortised cost;
Financial assets at fair value through OCI;
Financial assets at fair value through profit or lossloss.
Financial assets at amortised cost
This category of financial assets is the most relevant to the Group. The Group measures financial assets at amortised cost if both of the following conditions are met:
The financial asset is held within a business model with the objective to hold financial assets in order to collect contractual cash flows; and
The contractual terms of the financial asset give rise on specified dates to cash flows that are SPPI on the principal amount outstanding.
Financial assets at amortised cost are subsequently measured using the effective interest rate (EIR) method and receivables
This category generally applies to trade and other receivables excluding trade receivables on provisionally priced contracts.
MECHEL PAO
Notes to the consolidated financial statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 20152018
(All amounts are in millions of Russian rubles, unless stated otherwise)
Financial assets at fair value through OCI
The Group measures financial assets at fair value through OCI if both of the following conditions are met:
The financial asset is held within a business model with the objective of both holding to collect contractual cash flows and selling; and
The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.
For financial assets at fair value through OCI, interest income, foreign exchange revaluation and impairment losses or reversals are recognised in the consolidated statement of profit (loss) and other comprehensive income and computed in the same manner as for financial assets measured at amortised cost. The remaining fair value changes are recognised in OCI. Upon derecognition of financial assets represented by debt instruments at fair value through OCI the cumulative fair value change recognised in OCI is recycled to profit or loss in opposite to equity instruments at fair value through OCI with the cumulative fair value change remained in OCI.
The Group has no instruments measured at fair value through OCI.
Financial assets at fair value through profit or loss
Financial assets at fair value through profit or loss include financial assets held for trading, and financial assets designated upon initial recognition at fair value through profit or loss.loss, or financial assets mandatorily required to be measured at fair value. Financial assets are classified as held for trading if they are acquired for the purpose of selling or repurchasing in the near term. Derivatives, including separated embedded derivatives, are also classified as held for trading unless they are designated as effective hedging instruments. Financial assets with cash flows that are not solely payments of principal and interest are classified and measured at fair value through profit or loss, irrespective of the business model. Notwithstanding the criteria for debt instruments to be classified at amortised cost or at fair value through OCI, as described above, debt instruments may be designated at fair value through profit or loss on initial recognition if doing so eliminates, or significantly reduces, an accounting mismatch.
Trade receivables on provisionally priced contracts are measured at fair value through profit or loss. Trade receivables on provisionally priced contracts are remeasured at each reporting date based on the market price for the relevant period.
Financial assets at fair value through profit or loss are carried in the consolidated statement of financial position at fair value with net changes in fair value presented as finance costs (negative net changesrecognised in fair value) or finance income (positive net changes in fair value) in the consolidated statement of profit (loss) and other comprehensive income (loss).
Loans and receivables
This category is the most relevant to the Group. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. After initial measurement, such financial assets are subsequently measured at amortised cost using the effective interest rate (EIR) method, less impairment. Amortised cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR amortisation is included in finance income in the statement of profit (loss) and other comprehensive income (loss). The losses arising from impairment are recognised in the statement of profit (loss) and other comprehensive income (loss) in finance costs for loans and in other operating expenses for receivables.
This category generally applies to trade and other receivables. For more information on receivables, refer to Note 13.
AFS financial assets
AFS financial assets include equity investments and debt securities. Equity investments classified as AFS are those that are neither classified as held for trading nor designated at fair value through profit or loss. Debt securities in this category are those that are intended to be held for an indefinite period of time and that may be sold in response to needs for liquidity or in response to changes in the market conditions.
After initial measurement, AFS financial assets are subsequently measured at fair value with unrealised gains or losses recognised in OCI and credited in the AFS reserve until the investment is derecognised, at which time, the cumulative gain or loss is recognised in other operating income, or the investment is determined to be impaired, when the cumulative loss is reclassified from the AFS reserve to the statement of profit (loss) and other comprehensive income (loss) in finance costs. Interest earned whilst holding AFS financial assets is reported as interest income using the EIR method.income.
Derecognition
A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is primarily derecognised (i.e., removed from the Group’s consolidated statement of financial position) when:
The rights to receive cash flows from the asset have expiredexpired; or
Or
The Group has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a ‘pass-through’ arrangement; and either (a) the Group has transferred substantially all the risks and rewards of the asset, or (b) the Group has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.“pass-through”
MECHEL PAO
Notes to the consolidated financial statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 20152018
(All amounts are in millions of Russian rubles, unless stated otherwise)
arrangement; and either (a) the Group has transferred substantially all the risks and rewards of the asset, or (b) the Group has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. |
ImpairmentAllowance for expected credit losses of financial assets
Further disclosures relating to impairment of financial assets are also provided in the following notes:
| ||
| ||
TheFinancial assets — Note 11.
Trade and other receivables — Note 13.
Allowance for expected credit losses is recognised in two stages. For credit exposures for which there has not been a significant increase in credit risk since initial recognition, expected credit losses are provided for credit losses that result from default events that are possible within the next12-months (a12-month expected credit losses). For those credit exposures for which there has been a significant increase in credit risk since initial recognition, a loss allowance is required for credit losses expected over the remaining life of the exposure, irrespective of the timing of the default (a lifetime expected credit losses).
For purposes of measuring probability of default, the Group assesses,defines default as a situation when the exposure meets one or more of the following criteria:
the customer is more than 90 days past due on its contractual payments;
international rating agencies have classified the customer in the default rating class;
the customer meets theunlikeliness-to-pay criteria listed below:
the customer is insolvent;
the customer is in breach of financial covenants; and
it is becoming likely that the customer will enter bankruptcy.
For trade receivables and contract assets, the Group applies a simplified approach in calculating expected credit losses. Therefore, the Group does not track changes in credit risk, but instead recognises a loss allowance based on lifetime expected credit losses at each reporting date.
To estimate the allowance for expected credit losses for trade and other receivables the Group applied2-dimension model. For individual significant balances with specific characteristics the individual allowance rates were applied based on the historical experience of relationships with those counterparties, individual analysis of their current financial position and forward-looking factors specific to the debtors and the economic environment. For all other balances which are similar by the nature the standard simplified approach was applied with the use of a provision matrix based on the Group’s historical credit loss experience adjusted for forward-looking information. The provision rates are based on days past due for groupings of various homogeneous counterparties. At each reporting date, whether therethe historical observed default rates are updated and changes in the forward-looking estimates are analysed.
The maximum exposure to credit risk at the reporting date is objective evidence that a financial asset or a groupthe carrying value of each class of financial assets disclosed in Note 11.2. The Group does not hold collateral as security.
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2018
(All amounts are in millions of Russian rubles, unless stated otherwise)
Allowance for expected credit losses on cash and cash equivalents is impaired. An impairment exists if one or more events that has occurred sincecalculated based on the initial recognition12-month expected loss basis and reflects the short maturities of the asset (an incurred ‘loss event’), has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. Evidence of impairment may include indications that the debtors or a group of debtors is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganisation and observable data indicating that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults.
Financial assets carried at amortised cost
For financial assets carried at amortised cost, the Group first assesses whether impairment exists individually for financial assets that are individually significant, or collectively for financial assets that are not individually significant. If the Group determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is, or continues to be, recognised are not included in a collective assessment of impairment.exposures.
| (ii) | Financial liabilities |
Initial recognition and measurement
Financial liabilities are classified, at initial recognition, as financial liabilities at fair value through profit or loss, loans and borrowings, payables, or as derivatives.
All financial liabilities are recognised initially at fair value and, in the case of loans and borrowings and payables, net of directly attributable transaction costs.
The Group’s financial liabilities include trade and other payables, loans and borrowings including bank overdrafts, financial guarantee contracts and derivative financial instruments.
Subsequent measurement
The measurement of financial liabilities depends on their classification, as described below:
Financial liabilities at fair value through profit or loss
Financial liabilities at fair value through profit or loss include financial liabilities held for trading and financial liabilities designated upon initial recognition as at fair value through profit or loss.
MECHEL PAO
Notes to the consolidated financial statements for the year ended December 31, 2015
(All amounts are in millions of Russian rubles, unless stated otherwise)
Financial liabilities are classified as held for trading if they are incurred for the purpose of repurchasing in the near term. Gains or losses on liabilities held for trading are recognised in the consolidated statement of profit (loss) and other comprehensive income (loss).income.
Financial liabilities designated upon initial recognition at fair value through profit or loss are designated at the initial date of recognition, and only if the criteria in IAS 39 Financial Instruments Recognition and MeasurementIFRS 9 are satisfied.
Loans and borrowings
This is the category most relevant to the Group. After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortised cost using the EIR method. Gains and losses are recognised in profit or loss when the liabilities are derecognised as well as through the EIR amortisation process. Amortised cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR amortisation is included as finance costs in the consolidated statement of profit (loss) and other comprehensive income. This category generally applies to loans and borrowings (Note 11).
Put options written onnon-controlling interests
The Group initially measures a financial liability at the present value of the redemption amount in the parent’s consolidated financial statements for written puts onnon-controlling interests, therefore, when the Group grantsnon-controlling interests a put option to sell part or all of their interests in a subsidiary during a
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2018
(All amounts are in millions of Russian rubles, unless stated otherwise)
certain period, on the date of grant, thenon-controlling interests are classified as a financial liability. The Group remeasures the financial liability at the end of each reporting period based on the estimated present value of the consideration to be transferred upon the exercise of the put option. The respective finance cost is recognised in the consolidated statement of profit (loss) and other comprehensive income (loss). This category generally applies to interest-bearing loans and borrowings (Note 11).within finance costs.
Financial guarantee contractsCall options written on preferred shares
Financial guarantee contracts issued byIn the consolidated financial statements the Group are those contracts thatinitially measures a financial liability for call options granted in respect of preferred shares at fair value. Determining the fair value of the call options at the recognition date is subject to judgment. The Group calculated the fair value of call options using mix of the Black-Scholes option pricing model and model of Asian options. The models require a payment to be made to reimburseinput of assumptions, including expected volatility, expected term, risk-free interest rate and dividend yield and other subjective assumptions. The Group remeasures the holder for a loss it incurs because the specified debtor fails to make a payment when due in accordance with the terms of a debt instrument. Financial guarantee contracts are recognised initially as afinancial liability at the end of each reporting period at fair value, adjusted for transactionvalue. The respective finance cost or income is recognised in the consolidated statement of profit (loss) and other comprehensive income within finance costs that are directly attributable to the issuance of the guarantee. Subsequently, the liability is measured at the higher of the best estimate of the expenditure required to settle the present obligation at the reporting date and the amount recognised less cumulative amortisation.or finance income.
Derecognition
A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as the derecognition of the original liability and the recognition of a new liability. The difference in the respective carrying amounts is recognised in the consolidated statement of profit (loss) and other comprehensive income.
| (iii) | Interest income |
For all financial instruments measured at amortised cost interest income is recorded using the EIR. The EIR is the rate that exactly discounts the estimated future cash receipts over the expected life of the financial instrument or a shorter period, where appropriate, to the net carrying amount of the financial asset. Interest income is included in finance income in the consolidated statement of profit (loss). and other comprehensive income.
| (o) | Derivative financial instruments |
The Group uses derivative financial instruments, such as cross currency swap and cross currency option. Such derivative financial instruments are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently remeazuredremeasured at fair value. Derivatives are carried as financial assets when the fair value is positive and as financial liabilities when the fair value is negative.
For the yearsyear ended December 31, 2015, 20142018, 2017 and as of January 1, 2014,2016, the Group did not have any derivatives designated as hedging instruments.
| (p) | Inventories |
Inventories are measured at the lower of cost or net realisable value. Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and selling expenses.
MECHEL PAO
Notes to the consolidated financial statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 20152018
(All amounts are in millions of Russian rubles, unless stated otherwise)
The cost of inventories is determined under the weighted average cost method, and includes all costs in bringing the inventory to its present location and condition. The elements of costs include direct material, labor and allocable material and manufacturing overhead.
Costs of production in process and finished goods include the purchase costs of raw materials and conversion costs such as direct labor and allocation of fixed and variable production overheads. Raw materials are valued at a purchase cost inclusive of freight and other shipping costs.
Coal and iron ore inventory costs include direct labor, supplies, depreciation of equipment depletion ofand mining assets, and amortizationamortisation of licenses to use mineral reserves, mine operating overheads and other related costs. Operating overheads are charged to expenses in the periods when the production is temporarily paused or abnormally low.
| (q) | Impairment ofnon-current assets |
Further disclosures relating to impairment ofnon-current assets are also provided in the following notes:
| ||
| ||
Intangible assets — Note 17.
Impairment of goodwill and othernon-current assets — Note 18.
The Group assesses, at each reporting date, whether there is an indication that an asset may be impaired. If any indication exists, or when annual impairment testing for an asset is required, the Group estimates the asset’s recoverable amount. An asset’s recoverable amount is the higher of an asset’s or CGU’s fair value less costs of disposal and its value in use. The recoverable amount is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. When the carrying amount of an asset or CGU exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. The Group’s CGUs represent single entities with one component of business in each case. As of December 31, 2015, the Group had the following number of CGUs by segments for impairment testing purposes: Steel — 9, Mining — 7 and Power — 2.
In assessing value in use, the Group uses assumptions that include estimates regarding the discount rates, growth rates and expected changes in selling prices, sales volumes and operating costs, as well as capital expenditures and working capital requirements during the forecasted period. The estimated future cash flows expected to be generated by the asset, when the quoted market prices are not available, are discounted to their present value using apre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. The growth rates are based on the Group’s growth forecasts, which are largely in line with industry trends. Changes in selling prices and direct costs are based on historical experience and expectations of future changes in the market. In determining fair value less costs of disposal, recent market transactions are taken into account.
The Group bases its impairment calculation on detailed budgets and forecast calculations, which are prepared separately for each of the Group’s CGUs to which the individual assets are allocated. These budgets and forecast calculations generally cover a period of five years. A long-term growth rate is calculated and applied to project future cash flows after the fifth year.
MECHEL PAO
Notes to the consolidated financial statements for the year ended December 31, 2015
(All amounts are in millions of Russian rubles, unless stated otherwise)
For CGUs involved in mining activity future cash flows include estimates of recoverable minerals that will be obtained from provenproved and probable reserves, mineral prices (considering current and historical prices, price trends and other related factors), production levels, capital and reclamation costs, all based on the life of mine models prepared by the GroupsGroup’s engineers.
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2018
(All amounts are in millions of Russian rubles, unless stated otherwise)
Impairment losses of continuing operations are recognised in the consolidated statement of profit (loss) and other comprehensive income (loss) in expense categories consistent with the function of the impaired asset.income.
For impaired assets excluding goodwill, an assessment is made at each reporting date to determine whether there is an indication that previously recognised impairment losses no longer exist or have decreased. If such indication exists, the Group estimates the asset’s or CGU’s recoverable amount. A previously recognised impairment loss is reversed only if there has been a change in the assumptions used to determine the asset’s recoverable amount since the last impairment loss was recognised. The reversal is limited so that the carrying amount of the asset does not exceed its recoverable amount, nor exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognised for the asset in prior years. Such reversal is recognised in the consolidated statement of profit (loss) and other comprehensive income (loss) unless the asset is carried at a revalued amount, in which case, the reversal is treated as a revaluation increase.
Goodwill is tested for impairment annually as of December 31 and when circumstances indicate that the carrying value may be impaired.
Impairment is determined for goodwill by assessing the recoverable amount of each CGU to which the goodwill relates. When the recoverable amount of the CGU is less than its carrying amount, an impairment loss is recognised. Impairment losses relating to goodwill cannot be reversed in future periods.
| (r) | Cash and cash equivalents |
Cash and cash equivalents in the consolidated statement of financial position comprise cash at banks and on hand and short-term deposits with aan original maturity of three months or less, which are subject to an insignificant risk of changes in value.
For the purpose of the consolidated statement of cash flows, cash and cash equivalents consist of cash and short-term deposits, as defined above, net of outstanding bank overdrafts as they are considered an integral part of the Group’s cash management.
| (s) | Provisions |
General
Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, including legal or tax proceedings’ obligations, and a reliable estimate can be made of the amount of the obligation. The expense relating to a provision is presented in the consolidated statement of profit (loss) and other comprehensive income, (loss).net of any reimbursment.
If the effect of the time value of money is material, provisions are discounted using a currentpre-tax rate that reflects, when appropriate, the risks specific to the liability. When discounting is used, the increase in the provision due to the passage of time is recognised as a finance cost.
MECHEL PAO
Notes to the consolidated financial statements for the year ended December 31, 2015
(All amounts are in millions of Russian rubles, unless stated otherwise)
Rehabilitation provision
Mine rehabilitation costs will be incurred by the Group either while operating, or at the end of the operating life of the Group’s facilities and mine properties. The Group assesses its mine rehabilitation provision at each reporting date. The Group recognises a rehabilitation provision where it has a legal and constructive obligation as a result of past events, and it is probable that an outflow of resources will be required to settle the obligation, and
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2018
(All amounts are in millions of Russian rubles, unless stated otherwise)
a reliable estimate of the amount of obligation can be made. The nature of these restoration activities includes: dismantling and removing structures; rehabilitating mines and tailings dams; dismantling operating facilities; closing plant and waste sites; and restoring, reclaiming and revegetating affected areas.
The obligation generally arises when the asset is installed or the ground/environment is disturbed at the mining operation’s location. When the liability is initially recognised, the present value of the estimated costs is capitalised by increasing the carrying amount of the related mining assets to the extent that it was incurred as a result of the development/construction of the mine.
Changes in the estimated timing of rehabilitation or changes to the estimated future costs are dealt with prospectively by recognising an adjustment to the rehabilitation provision and a corresponding adjustment to the asset to which it relates, if the initial estimate was originally recognised as part of an asset measured in accordance with IAS 16Property, Plant and Equipment.Equipment(“IAS 16”).
Any reduction in the rehabilitation provision and, therefore, any deduction from the asset to which it relates, may not exceed the carrying amount of that asset. If it does, any excess over the carrying value is taken immediately to the consolidated statement of profit (loss) and other comprehensive income (loss).income.
Over time, the discounted liability is increased for the change in present value based on the discount rates that reflect current market assessments and the risks specific to the liability. The periodic unwinding of the discount is recognised in the consolidated statement of profit (loss) and other comprehensive income (loss) as part of finance costs.
For closed sites, changes to estimated rehabilitation costs are recognised immediately in the consolidated statement of profit (loss) and other comprehensive income (loss).income.
Environmental expenditures and liabilities
Environmental expenditures that relate to current or future revenues are expensed or capitalised as appropriate. Expenditures that relate to an existing condition caused by past operations and do not contribute to current or future earnings are expensed. Liabilities for environmental costs are recognised when aclean-up is probable and the associated costs can be reliably estimated. Generally, the timing of recognition of these provisions coincides with the commitment to a formal plan of action or, if earlier, on divestment or on closure of inactive sites. The amount recognised is the best estimate of the expenditure required. Where the liability will not be settled for a number of years, the amount recognised is the present value of the estimated future expenditure.
| (t) | Pensions and other post-employment benefits |
Defined benefit pension and other post-retirement plans
The Group has a number of defined benefit pension plans and other long-term benefits that cover the majority of production employees.
Benefits under these plans are primarily based upon years of service and average earnings. The Group accounts
MECHEL PAO
Notes to the consolidated financial statements for the year ended December 31, 2015
(All amounts are in millions of Russian rubles, unless stated otherwise)
for the cost of defined benefit plans and other long-term benefits using the projected unit credit method. Under this method, the cost of providing pensions is charged to the consolidated statement of profit (loss) and other comprehensive income, (loss), so as to attribute the total pension cost over the service lives of employees in accordance with the benefit formula of the plan.
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2018
(All amounts are in millions of Russian rubles, unless stated otherwise)
The Group’s obligation in respect of defined retirement benefit plans and other long-term benefits is calculated separately for each defined benefit plan and other long-term benefit plan by discounting the amounts of future benefits that employees have already earned through their service in the current and prior periods. The discount rate applied represents the yield at the year endyearend on highly rated long-term bonds.
Where there is a change in actuarial assumptions, the resulting actuarial gains and losses are recognised directly in the statement ofother comprehensive income.
For unfunded plans, the Group recognizesrecognises a pension liability, which is equal to the projected benefit obligation. For funded plans, the Group offsets the fair value of the plan assets with the projected benefit obligations and recognizesrecognises the net amount of pension liability. The market value of plan assets is measured at each reporting date.
State pension fund
The Group’s Russian subsidiariescompanies are legally obligated to make defined contributions to the Russian Pension Fund at the rate of 10% from employee’s annual income over RUB 1 million and at the rate of 22% from employee’s annual income not exceeding RUB 1 million, managed bywithin the framework of the social security scheme of the Russian Federation Social Security (a defined contribution plan financed on apay-as-you-go basis). The Group’s contributions to the Russian Pension Fund relating to defined contribution plans are charged to income in the year, to which they relate.relate and are recognized within social security costs (Note 25.2).
| (u) | Significant accounting judgments, estimates and assumptions |
The preparation of the consolidated financial statements requires management to make judgments, estimates and assumptions that affect the reported carrying amounts of assets and liabilities, and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements, and the amounts of revenues and expenses recognised during the reporting period. Estimates and assumptions are continually evaluated and are based on the Group’s experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Actual results could differ from those estimates. Uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of assets or liabilities affected in future periods.
Judgments
In the process of applying the Group’s accounting policies, management has made the following judgments, which have the most significant effect on the amount recognised in the consolidated financial statements.
Abandoned Activity
As of January 1, 2014, Southern Urals Nickel Plant (“SUNP”) was recognised as abandoned activity according to a decision to close SUNP without sale. In July 2013, the Group received an approval from the governmental authorities to abandon the industrial complex. The closure of SUNP is aligned with the revised strategy aimed at restructuring the Group’s assets and development of its core businesses. As of December 31,
MECHEL PAO
Notes to the consolidated financial statements for the year ended December 31, 2015
(All amounts are in millions of Russian rubles, unless stated otherwise)
2015, the works related to closure of the plant are ongoing (Note 17); therefore the Group excluded the results of SUNP from the continuing operations and reported them as discontinued operations for the year ended December 31, 2015 and prior periods.
Capitalization of Interest Relatedinterest related to the Elga Coal Depositcoal deposit and Railway Constructionrailway construction
In 2013 and 2014, Elgaugol OOO (“Elgaugol”) and the Russian State Corporation “Bank for Development and Foreign Economic Affairs” (“VEB”) signed credit agreements for financing of the Elga coal project approved by the VEB’s Supervisory Board in September 2013. The use of proceeds under these facilities is limited to the development of the Elga coal project. Borrowing costs under these VEB facilities that are directly attributable to the construction of the Elga coal project are capitalized. Borrowing costs consist of interest including exchange differences arising from revaluation of foreign currency borrowings and other costs that the Group incurs in connection with the debt servicing.
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2018
(All amounts are in millions of Russian rubles, unless stated otherwise)
Railway Depreciation Methoddepreciation method
In 2015, the Group commencescommenced to depreciate the railway of the Elga coal deposit using units of production method. In applying the units of production method, depreciation is normally calculated based on produced and delivered tonnes in the period as a percentage of total expected tonnes to be produced and delivered in current and future periods over the Elga coal deposit life cycle. The Group’s analysis has shown that the consumption of the economic benefits of the asset is linked to production and delivery of coal. The Group assesses the total or ultimate railway capacity in tonnes at least at each financial year end and, if expectations differ from previous estimates, the changes will be accounted for as a change in an accounting estimate in accordance with IAS 8Accounting Policies, Changes in Accounting Estimates and Errors.Errors(“IAS 8”).
DEMP property complex
On June 25, 2016, by the decree of the Council of Ministers of the self-proclaimed People’s Republic of Donetsk, the State Enterprise “Yuzovsky metallurgical plant” was established on the basis of the property complex of the Group’s subsidiary Donetsk Electrometallurgical Plant (“DEMP”). The Group’s ability to manage and control the assets of the DEMP property complex is restricted by this decree. The Group concluded that the assets included in the DEMP’s property complex do not meet the recognition criteria and derecognised these assets in the consolidated financial statements. The DEMP’s assets were fully impaired based on the results of impairment tests as of January 1, 2014 and December 31, 2014 due to conservation of production since 2013. The loss of control over the assets of nil carrying value has no impact on the financial result for the year ended December 31, 2016, 2017 and 2018.
Principal vs Agent Arrangementsagent arrangements
The Group makes significant judgment on gross or net revenue recognition. The Group evaluates the relevant facts and circumstances and takes into consideration the following factors in determining whether to recognize revenue onRevenue is recognised when a gross basis:
Otherwise, revenues are reported net when the Group performs as an agent orwhen it is not primarily responsible for fulfilling the promise to provide transportation services. As a broker without assuming the risks and rewards of ownership of goods. The evaluations of these factors, which at times can be contradictory, are subject to significant judgment and subjectivity. In the situationresult, for operations when the Group acts as a supplierprincipal the amounts of transportation costs and freight services, which are included in the transaction price and incurred by the Group in fulfilling its performance obligations shall be recorded as revenue and recognised over time as the obligation is fulfilled. For agent services related to transportation of goods sold, when cost of transportation is included into the goods price, the revenue and selling expenses are recognised on a net basis.
Taxation
The Group is subject to taxation to the largest extent in Russia, and secondarily in other jurisdictions. The Russian tax, currency and customs legislation is subject to varying interpretations, and changes, which can occur frequently. Management’s interpretation of such legislation as applied to the transactions and activity of the Group may be challenged by the relevant regional and federal authorities. Russian tax authorities take assertive position in its interpretation of the legislation and assessments and as a buyer withresult, it is possible that transactions and activities that have not been challenged in the same counterparty, the Group analyzes the respective purchase and sales agreements to identify whether these transactions were concluded in contemplation with each other and, therefore, shouldpast may be combined for accounting purposes deferring the revenue recognition to the point when the earnings process has culminated.challenged. As such, significant additional taxes,
MECHEL PAO
Notes to the consolidated financial statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 20152018
(All amounts are in millions of Russian rubles, unless stated otherwise)
penalties and interest may be assessed. Fiscal periods remain open to review by the authorities in respect of the taxes for three calendar years preceding the year of review. Under certain circumstances reviews may cover longer periods. The fact that a year has been reviewed does not close that year, or any tax declaration applicable to that year, from further review during thethree-year period.
In the event that a taxpayer submits a revised tax declaration in which the stated amount of tax is less than the amount previously declared, tax audit of a taxpayer may be performed, but only with the respect to the changes in the tax declaration.
In other tax jurisdictions where the Group conducts operations or holds shares, taxes are generally charged on their worldwide income. In the most jurisdictions agreements to avoid double taxation were signed with other jurisdictions; however, the risk of additional taxation exists, especially in respect of certain domiciles where some of the Group entities are located.
The Russian transfer pricing legislation, which came into force on January 1, 2012, allows the Russian tax authority to apply transfer pricing adjustments and impose additional profits tax liabilities in respect of all “controlled” transactions if the transaction price differs from the market level of prices. The list of “controlled” transactions includes transactions performed with related parties and certain types of cross-border transactions. For domestic transactions the transfer pricing rules apply only if the amount of all transaction with related party exceeds RUB 1,000 million since 2014.
In order to support the level of prices applied for the “controlled” transactions the Group should provide evidence that prices of “controlled” transactions are based on market prices and to prepare the reports for submission to the Russian tax authorities. Otherwise, the Russian tax authorities have the right to challenge the prices determined by the Group for such transactions and to charge additional taxes, penalties and fines. In cases where the domestic transaction resulted in an accrual of additional tax liabilities for one party, another party could correspondingly adjust its profit tax liabilities according to the special notification issued by the authorized body in due course. Special transfer pricing rules apply to transactions with securities and derivatives.
Due to the uncertainty and absence of current practice of application of the current Russian transfer pricing legislation the Russian tax authorities may challenge the level of prices applied by the Group under the “controlled” transactions and accrue additional tax liabilities unless the Group is able to demonstrate the use of market prices with respect to the “controlled” transactions, and that there has been proper reporting to the Russian tax authorities, supported by appropriate available transfer pricing documentation.
The Group believes that it uses the market prices in “controlled” transactions and does not expect any claims of tax authorities related to the prices used in such transactions. However, due to the uncertainty and limited practice of the Russian legislation in the area of transfer pricing relevant tax claims may be raised and the respective effect is currently impossible to estimate.
In addition, in November 2014, the legislation of the Russian Federation has been significantly revised in order to prevent the misuse oflow-tax jurisdictions for tax avoidance in the Russian Federation. Changes in the legislation set out the rules for the taxation of income of a foreign organization recognised as a controlled foreign corporation. The foreign organization is recognised as a controlled foreign corporation, if it is not a tax resident of the Russian Federation and the share of the controlling Russian entities or individuals in the organization is more than 25% (in some cases, more than 10%). Starting from the calculation of the profits of controlled foreign
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2018
(All amounts are in millions of Russian rubles, unless stated otherwise)
corporation for 2017 and beyond, the amount ofnon-taxable income of 10 million rubles is established. The Russian tax law also provides for certain conditions under which the income of controlled corporations qualifies as tax exempt. Starting 2016, the taxable income of the controlling party is increased by the profits of the controlled foreign corporation earned in the financial year ended prior to the reporting year.
Provision for legal claims
The Group is subject to various other lawsuits, claims and proceedings related to matters incidental to the Group’s business, licenses, tax positions. Accruals for probable cash outflows have been made based on an assessment of a combination of litigation and settlement strategies. It is possible that results of operations in any future period could be materially affected by changes in assumptions or by the actual effectiveness of such strategies.
Environmental contingencies
In the course of the Group’s operations, the Group may be subject to environmental claims and legal proceedings. The quantification of environmental exposures requires an assessment of many factors, including changing laws and regulations, improvements in environmental technologies, the quality of information available related to specific sites, the assessment stage of each site investigation, preliminary findings and the length of time involved in remediation or settlement. Management does not believe that any pending environmental claims or proceedings will have a material adverse effect on the Group’s financial position and results of operations.
Estimates and assumptions
The key assumptions concerning the future and other key sources of estimation uncertainty at the reporting date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are described below or in the related accounting policy note. The Group based its assumptions and estimates on parameters available when the consolidated financial statements were prepared. Existing circumstances and assumptions about future developments, however, may change due to market change or circumstances arising beyond the control of the Group.
In particular, the Group has identified a number of areas where significant estimates and assumptions are required. Further information on each of these areas and how they impact the various accounting policies are described with the associated accounting policy note within the related qualitative and quantitative note as described below.
Deferred Tax Assetstax assets and Uncertain Tax Positionsuncertain tax positions
Deferred tax assets are recognised for unused tax losses to the extent that it is probable that taxable profit will be available against which the losses can be utilised. Significant management judgment is required to determine the amount of deferred tax assets that can be recognised, based upon the likely timing and the level of future taxable profits and the existence of taxable temporary differences (Note 21)20). Various factors are considered to assess the probability of the future utilization of deferred tax assets for individual subsidiaries and for the consolidated group of taxpayers, including past operating results, operational plans for not longer than five years as this term is considered reliable and accurate for forecast, same assumptions for operational plans as used for determination of the expected future cash flows from the cash generating units, financial plans based on
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2018
(All amounts are in millions of Russian rubles, unless stated otherwise)
historical data and expectation built on the debt portfolio, terms of the expiration of tax losses carried forward depending on respective tax legislation, and tax planning strategies.strategies based on changes in tax regulation for tax losses offsetting for 2018-2020. If actual results differ from these estimates or if these estimates must be adjusted in future periods, the Group’s financial position, results of operations and cash flows may be negatively affected. In the event that the assessment of future utilization of deferred tax assets must be reduced,changed, this reduction will beeffect is recognised in the consolidated statement of profit (loss) and other comprehensive income (loss).income.
The carrying amount of deferred tax assets is reviewed at each reporting date and is adjusted to reflect the likelihood that the estimated taxable profit and taxable temporary differences will be sufficient to recover the asset in whole or in part.
Impairment of Property, Plantproperty, plant and Equipmentequipment and Other Non-current Assetsothernon-current assets
The Group assesses at each reporting date whether there is any indication that an asset may be impaired. If any such indication exists, the Group makes an estimate of the asset’s recoverable amount. An impairmentImpairment exists when the carrying value of an asset or CGU exceeds its recoverable amount, which is the higher of its fair value less costs of disposal and its value in use. The fair value less costs of disposal calculation is based on available data from binding sales transactions, conducted at arm’s length for similar assets or observable market prices less incremental costs for disposing of the asset. In assessing value in use, the estimated future cash flows are discounted to their present value using apre-tax discount rate that reflects current market assessment of the time value of money and the risks specific to the assets.
Impairment is based on a large number of factors, such as changes in current competitive conditions, expectations of growth in the industry, increasedchanges in cost of capital, changes in the future availability of financing, technological obsolescence, and other changes in circumstances that indicate that impairment exists. The determination of the recoverable amount of acash-generating unit involves the use of estimates by management. Methods used to determine the value in use include discounted cash flow-based methods, which require the Group to make an estimate of the expected future cash flows from thecash-generating unit and also to choose a suitable discount rate in order to calculate the present value of those cash flows. These estimates, including the methodologies used, may have a material impact on the value in use and, ultimately, the amount of any impairment (Note 19)18).
MECHEL PAO
Notes to the consolidated financial statements for the year ended December 31, 2015
(All amounts are in millions of Russian rubles, unless stated otherwise)
Impairment of Goodwillgoodwill
The Group determines whether goodwill is impaired at least on an annual basis and when circumstances indicate that the carrying value may be impaired. This requires an estimation of the value in use of the cash generating units to which the goodwill is allocated. Estimating the value in use requires the Group to make an
estimate of the expected future cash flows from the cash-generating unit and also to choose a suitable discount rate in order to calculate the present value of those cash flows. More details of the assumptions used in estimating the value in use of the cash-generating units to which goodwill is allocated are provided in Note 19.18.
Useful Liveslives of Itemsitems of Property, Plantproperty, plant and Equipmentequipment
The Group assesses the remaining useful lives of items of property, plant and equipment at least at each financial year end and, if expectations differ from previous estimates, the changes are accounted for as a change in an accounting estimate in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors.8. These estimates may have a material impact on the amount of the carrying values of property, plant and equipment and on depreciation expense for the period.
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2018
(All amounts are in millions of Russian rubles, unless stated otherwise)
Mineral Reservesreserves
Mineral reserves and the associated mine plans are a material factor in the Group’s computation of a depletion charge. Estimation of reserves involves some degree of uncertainty. The uncertainty depends mainly on the amount of reliable geological and engineering data available at the time of the estimate and the interpretation of this data, which also requires use of subjective judgment and development of assumptions. Mine plans are periodically updated which can have a material impact on the depletion charge for the period. More details are provided in Note 3 (i)3(i).
Fair Valuevalue of Financial Instrumentsfinancial instruments
Where the fair value of financial assets and financial liabilities recorded in the consolidated statement of financial position cannot be derived from active markets, their fair value is determined using valuation techniques, including discounted cash flow models and other specific models. The inputs to these models are taken from observable markets where possible, but when this isthese are not feasible,available, a degree of judgment is required in establishing fair values. The judgments include considerations of inputs such as dividend yield, terms of redemption, liquidity risk, credit risk and volatility. Changes in assumptions about these factors could affect the reported fair value of financial instruments (Note 10).
Provisions
The Group is subject tooutcomes of various legal proceedings, disputes and claims including regulatory discussions related to the Group’s business, licenses, tax positions and the outcomesGroup are subject to significant uncertainty. Management evaluates, among other factors, the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. Unanticipated events or changes in these factors may require the Group to increase or decrease the amount recorded or to be recorded for a matter that has not been previously recorded because it was not considered probable (Note 23).
Pensions and Other Post-Employment Benefitsother post-employment benefits
The cost of defined benefit pension plans and other post-employment benefits and the present value of the pension obligation are determined using actuarial valuations. An actuarial valuation involves making various
MECHEL PAO
Notes to the consolidated financial statements for the year ended December 31, 2015
(All amounts are in millions of Russian rubles, unless stated otherwise)
assumptions which may differ from actual developments in the future. These include the determination of the discount rate, future salary increases, mortality rates and future pension increases. Due to the complexity of the valuation, the underlying assumptions and its long-term nature, a defined benefit obligation isand other long-term benefit plans are highly sensitive to changes in these assumptions. All assumptions are reviewed at each reporting date. More details are provided in Note 24.22.
Rehabilitation Provisionsprovisions
The Group reviews rehabilitation provisions at each reporting date and adjusts them to reflect the current best estimate in accordance with IFRIC 1 Changes in Existing Decommissioning, Restoration and Similar Liabilities.estimate. Rehabilitation provisions are recognised in the period in which they arise and are stated at the best estimate of the present value of estimated future costs. These estimates require extensive judgment about the nature, cost and timing of the work to be completed, and may change with future changes to costs, environmental laws and regulations and remediation practices. Changes in the estimated timing of rehabilitation or changes to the estimated future costs are dealt with prospectively by recognizing an adjustment to the rehabilitation provision and a corresponding adjustment to the asset to which it relates, if the initial estimate was originally recognised as part of an asset measured in accordance with IAS 16 Property, Plant and Equipment (Note 18)16(Note 16).
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2018
(All amounts are in millions of Russian rubles, unless stated otherwise)
Impairment of Financial Assetsfinancial assets
The Group makes allowances for doubtful receivables to account for estimatedexpected credit losses resulting from the expected inability of customers to make required payments. When evaluating the adequacy of an allowance for doubtful accounts,expected credit losses management bases its estimates on the current overall economic conditions, the ageing of accounts receivable balances, historicalwrite-off experience, customerdebtor creditworthiness and changes in payment terms. ChangesThe amount of ECLs is sensitive to changes in circumstances and of forecast economic conditions. The Group’s historical credit loss experience and forecast of economic conditions may also not be representative of customer’s actual default in the economy, industry or specific customer conditions may require adjustments to the allowance for doubtful accounts recorded in the consolidated financial statements.future (Note 13).
Determining Net Realizable Valuenet realisable value of Inventoriesinventories
The Group makes write-downs for obsolete and slow-moving raw materials and spare parts. In addition, finished goods of the Group are carried at net realizablerealisable value (Note 15)12). Estimates of net realizablerealisable value of finished goods are based on the most reliable evidence available at the time the estimates are made. These estimates take into consideration fluctuations of price or cost directly relating to events occurring subsequent to the end of the reporting period to the extent that such events confirm conditions existing at the end of the period.
For other judgments, estimates and assumptions and details refer to:
Mineral licenses (Note 3(i));
Property, plant and equipment (Note 3(j));
Deferred tax assets (Note 3(f));
Non-current assets held for sale and discontinued operations (Note 3(h));
Inventories (Note 3(p));
Impairment ofnon-current assets (Note 3(q));
Pensions and other post-employment benefits (Note 3(t));
Provisions (Note 3(s));
Fair value measurement (Note 3(d)).
| (v) | Reclassifications and rounding |
MECHEL PAO
NotesCertain reclassifications have been made to the prior periods’ consolidated financial statements to conform to the current year presentation. Such reclassifications affect the presentation of certain items in the consolidated statement of financial position, consolidated statement of profit (loss) and other comprehensive income, consolidated statement of cash flows and notes to the consolidated financial statements and have no impact on net income or equity.
All amounts disclosed in these consolidated financial statements and notes have been rounded to the nearest millions of Russian rubles units unless otherwise stated.
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 20152018
(All amounts are in millions of Russian rubles, unless stated otherwise)
New and amended standards and interpretations adopted by the Group |
AtThe Group applied for the end of the reporting period, the following Standardsfirst time certain standards and Interpretationsamendments, which are relevant to the Group’s operations were in issue but not yet effective.
The effect from the application of IFRS 9 Financial Instruments — Classification and Measurement, IFRS 15 Revenue from Contracts with Customers and IFRS 16 Leases and has not yet been assessed.
Management anticipates that the adoption of all other Standards and Interpretations in future periods will have no material impact on the results and financial position presented in these financial statements, other than changes to the disclosures required in the financial statements, except for IFRS 9 Financial Instruments issued in November 2009 and amended in October 2010, December 2011, November 2013 and July 2014. The Group does not intend to adopt this standard before its effective date.
IAS 39 Financial Instruments: Recognition and Measurement — Amendments to permit an entity to elect to continue to apply the hedge accounting requirements in IAS 39 for a fair value hedge of the interest rate exposure of a portion of a portfolio of financial assets and liabilities when IFRS 9 is applied, and to extend the fair value option to certain contracts that meet the ‘own use’ scope exception (when IFRS 9 will be applied — see below).
IFRS 7 Financial Instruments: Disclosures — Additional hedging disclosures (and consequential amendments) resulting from the introduction of the hedge accounting chapter in IFRS 9 (when IFRS 9 will be applied — see below).
IFRS 9 Financial Instruments — Classification and Measurement. Finalised version, incorporating requirements for classification and measurement, impairment, general hedge accounting and derecognition (effective for annual periods beginning on or after January 1, 2018).2018. The Group has not early adopted any other standard, interpretation or amendment that has been issued but is not yet effective. The nature and the effect of these changes are described below.
The Group applies for the first time IFRS 15 and IFRS 9 that require restatement of previous financial statements.
IFRS 15 Revenue from Contracts with Customers
IFRS 15 supersedes IAS 11Construction Contracts(“IAS 11”), IAS 18Revenue (“IAS 18”) and related Interpretations and it applies to all revenue arising from contracts with customers, unless those contracts are in the scope of other standards. The new standard establishes a five-step model to account for revenue arising from contracts with customers. Under IFRS 15, revenue is recognised at an amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer. The Group has initially adopted IFRS 15 from January 1, 2018 using the full retrospective method.
The standard requires entities to exercise judgement, taking into consideration all of the relevant facts and circumstances when applying each step of the model to contracts with their customers. The standard also specifies the accounting for the incremental costs of obtaining a contract and the costs directly related to fulfilling a contract.
Based on the results of the Group’s final assessment, the effect of adoption of IFRS 15 on revenue recognition is not significant to the Group’s consolidated financial statements.
IFRS 9 Financial Instruments
IFRS 9 introduces new requirements for the classification and measurement of financial assets and financial liabilities and for derecognition:
In particular for financial liabilities that are designated at fair value through profit or loss, the amount of change in the fair value of the financial liability that is attributable to changes in the credit risk of that liability is recognised in other comprehensive income, unless the recognition of the effects of changes in the liability’s credit risk in other comprehensive income would create or enlarge an accounting mismatch in profit or loss. Changes in fair value attributable to a financial liability’s credit risk are not subsequently reclassified to profit or loss. Previously, underreplaces IAS 39Financial Instruments: Recognition and Measurement the entire amount of the change in the fair value of the financial liability designated as at fair value through profit or loss was recognised in profit or loss.
IFRS 10 Consolidated Financial Statements and (“IAS 28 Investments in Associates and Joint Ventures — Amendments regarding the sale or contribution of assets between an investor and its associate or
MECHEL PAO
Notes to the consolidated financial statements for the year ended December 31, 2015
(All amounts are in millions of Russian rubles, unless stated otherwise)
joint venture. This amendment has no impact to the Group as the Group does not plan to make any sales or contribution of assets to its associates or joint ventures during the period (effective39”) for annual periods beginning on or after January 1, 2016).2018.
IFRS 10 Consolidated Financial Statements, IFRS 12 Disclosure of InterestsChanges in Other Entities and IAS 28 Investments in Associates and Joint Ventures — Amendments regarding the application of the consolidation exception by investment entities. This amendment has no impact to the Group as it is not an investment entity (effective for annual periods beginning on or after January 1, 2016).
IFRS 11 Joint Arrangements — Amendments regarding the accounting for acquisitions of an interest in a joint operation. Accounting for Acquisitions of Interests in Joint Operations (Amendments to IFRS 11) amends IFRS 11 such that the acquirer of an interest in a joint operation in which the activity constitutes a business, as defined in IFRS 3, is required to apply all of the principles on business combinations accounting in IFRS 3 and other IFRSs with the exception of those principles that conflict with the guidance in IFRS 11 (effective for annual periods beginning on or after January 1, 2016). This amendment has no impact to the Group as the Group does not plan to acquire an interest in joint operations.
IAS 1 Presentation of Financial Statements — Amendmentspolicies resulting from the disclosure initiative. The amendments aim at clarifying IAS 1 to address perceived impediments to preparers exercising their judgment in presenting their financial reports. Management has not yet considered any changes or amendments to be made to the financial reports (effective for annual periods beginning on or after January 1, 2016).
IAS 16 Property, Plant and Equipment and IAS 38 Intangibles — Amendments to IAS 16 and IAS 38 to prohibit entities from using a revenue based depreciation method for items of property, plant and equipment. This amendment has no impact to the Group as the Group does not use revenue-based methods to depreciate/amortise its non-current assets (effective for annual periods beginning on or after January 1, 2016).
IAS 7 Statement of Cash Flows — Amendments resulting from the disclosure initiative The amendments aim at clarifying IAS 7 to improve information provided to users of financial statements about an entity’s financing activities. Management has not yet considered any changes or amendments to be made to the financial reports (effective for annual periods beginning on or after January 1, 2017).
IFRS 15 Revenue from Contracts with Customers. IFRS 15 specifies how and when an IFRS reporter will recognise revenue as well as requiring such entities to provide users of financial statements with more informative, relevant disclosures. The standard provides a single, principles based five-step model to be applied to all contracts with customers (effective for annual periods beginning on or after January 1, 2018). The Group is currently in the process of assessing the impact of adoption of IFRS 15 on the Group’s consolidated financial statements.
IFRS 16 Leases, IFRS 16 specifies how an IFRS reporter will recognise, measure, present and disclose leases. The standard provides a single lessee accounting model, requiring lessees to recognise assets and liabilities for all leases unless the lease term is 12 months or less or the underlying asset has a low value. Lessors continue to classify leases9 have been applied as operating or finance, with IFRS 16’s approach to lessor accounting substantially unchanged from its predecessor, IAS 17 (effective for annual reporting periods beginning on or afterof January 1, 2019)2018, with no restatement of comparative information. Consequently, the difference between the carrying amount of financial instruments under IAS 39 and the carrying amount under IFRS 9, related to debt restructurings accounted for as debt modifications, was recognised in the opening retained earnings (accumulated deficit). The Group is currently in the process of assessing the impact of IFRS 9 adoption as of January 1, 2018 is as follows:
Increase in loans and borrowings amounted to RUB 2,551 million;
Decrease in deferred tax liabilities amounted to RUB 862 million;
The corresponding decrease in accumulated deficit andnon-controlling interests amounted to RUB 1,684 million and RUB 5 million, respectively.
Effect from the changes in accounting policy upon adoption of other aspects of IFRS 16 on the Group’s consolidated financial statements.9 was not significant.
MECHEL PAO
Notes to the consolidated financial statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 20152018
(All amounts are in millions of Russian rubles, unless stated otherwise)
Annual Improvements to IFRSs 2012-2014 CycleIFRIC 22 Foreign Currency Transactions and Advance Consideration
The “September 2014 Annual ImprovementsInterpretation clarifies that, in determining the spot exchange rate to IFRSs”use on initial recognition of the related asset, expense or income (or part of it) on the derecognition of anon-monetary asset ornon-monetary liability relating to advance consideration, the date of the transaction is the date on which an entity initially recognises thenon-monetary asset ornon-monetary liability arising from the advance consideration. If there are multiple payments or receipts in advance, then the entity must determine the date of the transactions for each payment or receipt of advance consideration. This Interpretation does not have any impact on the Group’s consolidated financial statements.
Amendments to IAS 28 Investments in Associates and Joint Ventures (“IAS 28”) — Clarification that measuring investees at fair value through profit or loss is aninvestment-by-investment choice
The amendments clarify that an entity that is a collectionventure capital organisation, or other qualifying entity, may elect, at initial recognition on aninvestment-by-investment basis, to measure its investments in associates and joint ventures at fair value through profit or loss. If an entity that is not itself an investment entity, has an interest in an associate or joint venture that is an investment entity, then it may, when applying the equity method, elect to retain the fair value measurement applied by that investment entity associate or joint venture to the investment entity associate’s or joint venture’s interests in subsidiaries. This election is made separately for each investment entity associate or joint venture, at the later of the date on which: (a) the investment entity associate or joint venture is initially recognised; (b) the associate or joint venture becomes an investment entity; and (c) the investment entity associate or joint venture first becomes a parent. These amendments do not have any impact on the Group’s consolidated financial statements.
Standards issued but not effective
The standards and interpretations that are issued, but not yet effective, up to the date of issuance of the Group’s financial statements are discussed below. The Group intends to adopt these standards and amendments, if applicable, when they become effective.
IFRS 16 Leases
IFRS 16Leases (“IFRS 16”) was issued in January 2016 and it replaces IAS 17Leases(“IAS 17”), IFRIC 4Determining whether an Arrangement contains a Lease(“IFRIC 4”),SIC-15Operating Leases-Incentives andSIC-27Evaluating the Substance of Transactions Involving the Legal Form of a Lease. IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases and requires lessees to account for all leases under a singleon-balance sheet model similar to the accounting for finance leases under IAS 17. The standard includes two recognition exemptions for lessees — leases of‘low-value’ assets (e.g., personal computers) and short-term leases (i.e., leases with a lease term of 12 months or less). At the commencement date of a lease, a lessee will recognise a liability to make lease payments (i.e., the lease liability) and an asset representing the right to use the underlying asset during the lease term (i.e., theright-of-use asset). Lessees will be required to separately recognise the interest expense on the lease liability and the depreciation expense on theright-of-use asset.
Lessees will be also required to remeasure the lease liability upon the occurrence of certain events (e.g., a change in the lease term, a change in future lease payments resulting from a change in an index or rate used to determine those payments). The lessee will generally recognise the amount of the remeasurement of the lease liability as an adjustment to theright-of-use asset.
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2018
(All amounts are in millions of Russian rubles, unless stated otherwise)
Lessor’s accounting under IFRS 16, which becomes effective for annual periods beginning on or after January 1, 2019, is substantially unchanged from today’s accounting under IAS 17. Lessors will continue to classify all leases using the same classification principle as in IAS 17 and distinguish between two types of leases: operating and finance leases.
The Group plans to adopt IFRS 16 from January 1, 2019 retrospectively with a cumulative effect recognised at the date of initial application. Theright-of use assets would be measured at the amount equal to the lease liability adjusted for the amount of any prepaid or accrued lease payments relating to that lease recognised in the balance sheet as of December 31, 2018. The Group will apply the standard to contracts that were previously identified as leases applying IAS 17 and IFRIC 4. The Group will use the exemptions proposed by the standard on lease contracts for which the lease terms ends within 12 months as of the date of initial application. Also, the Group uses the following practical expedient: direct costs are excluded from the measurement of theright-of-use asset at the date of initial application. The Group’s weighted average incremental borrowing rate applied to lease liabilities is 9.17% as of January 1, 2019.
In previous years and in 2018, the majority of the Group’s outstanding short-term and long-term lease agreements were cancellable. IAS 17 requires disclosing operating lease commitments fornon-cancellable leases only, while under IFRS 16 the Group is also required to include in lease liabilities the payments relating to the term periods covered by an option to terminate the lease if the lessee is reasonably certain not excercise that option.
Impact on the consolidated statement of financial position (increase/(decrease)) as of January 1, 2019:
| Millions of Russian rubles | ||||
Assets | ||||
Property, plant and equipment(right-of-use assets) | 2,636 | |||
Deferred tax asset | 28 | |||
Total assets | 2,664 | |||
Liabilities | ||||
Non-current lease liabilities | 3,099 | |||
Current lease liabilities | 111 | |||
Total liabilities | 3,210 | |||
Net impact on equity | (546 | ) | ||
On adoption of IFRS 16, the Group will recognise lease liabilities in relation to leases which had previously been classified as operating lease under the principles of IAS 17. These liabilities will be measured at the present value of the remaining lease payments, discounted using the lessee’s incremental borrowing rate as of January 1, 2019.
IFRIC 23 Uncertainty over Income Tax Treatment
The Interpretation addresses the accounting for income taxes when tax treatments involve uncertainty that affects the application of IAS 12 and does not apply to taxes or levies outside the scope of IAS 12, nor does it specifically include requirements relating to interest and penalties associated with uncertain tax treatments.
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2018
(All amounts are in millions of Russian rubles, unless stated otherwise)
The Interpretation specifically addresses the following:
Whether an entity considers uncertain tax treatments separately;
The assumptions an entity makes about the examination of tax treatments by taxation authorities;
How an entity determines taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates;
How an entity considers changes in facts and circumstances.
An entity must determine whether to consider each uncertain tax treatment separately or together with one or more other uncertain tax treatments. The approach that better predicts the resolution of the uncertainty should be followed. The interpretation is effective for annual reporting periods beginning on or after January 1, 2019, but certain transition reliefs are available. The Group will apply interpretation from its effective date. Since the Group operates in a complex multinational tax environment, applying the Interpretation may affect its consolidated financial statements and the required disclosures. In addition, the Group may need to establish processes and procedures to obtain information that is necessary to apply the Interpretation on a timely basis.
Amendments to IFRS 10 and IAS 28: Sale or Contribution of Assets between an Investor and its Associate or Joint Venture
The amendments address the conflict between IFRS 10 and IAS 28 in dealing with the loss of control of a subsidiary that is sold or contributed to an associate or joint venture. The amendments clarify that the gain or loss resulting from the sale or contribution of assets that constitute a business, as defined in IFRS 3, between an investor and its associate or joint venture, is recognised in full. Any gain or loss resulting from the sale or contribution of assets that do not constitute a business, however, is recognised only to the extent of unrelated investors’ interests in the associate or joint venture. The IASB has deferred the effective date of these amendments indefinitely, but an entity that early adopts the amendments must apply them prospectively. The Group will apply these amendments when they are effective.
Amendments to IAS 19: Plan Amendment, Curtailment or Settlement
The amendments to IFRSsIAS 19Plan Amendment, Curtailment or Settlement(“IAS 19”)address the accounting when a plan amendment, curtailment or settlement occurs during a reporting period. The amendments specify that when a plan amendment, curtailment or settlement occurs during the annual reporting period, an entity is required to:
Determine current service cost for the remainder of the period after the plan amendment, curtailment or settlement, using the actuarial assumptions used to remeasure the net defined benefit liability (asset) reflecting the benefits offered under the plan and the plan assets after that event
Determine net interest for the remainder of the period after the plan amendment, curtailment or settlement using: the net defined benefit liability (asset) reflecting the benefits offered under the plan and the plan assets after that event; and the discount rate used to remeasure that net defined benefit liability (asset).
The amendments also clarify that an entity first determines any past service cost, or a gain or loss on settlement, without considering the effect of the asset ceiling. This amount is recognised in responseprofit or loss. An entity then determines the effect of the asset ceiling after the plan amendment, curtailment or settlement. Any change in that effect, excluding amounts included in the net interest, is recognised in other comprehensive income.
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2018
(All amounts are in millions of Russian rubles, unless stated otherwise)
The amendments apply to four standards.plan amendments, curtailments, or settlements occurring on or after the beginning of the first annual reporting period that begins on or after January 1, 2019, with early application permitted. These improvementsamendments will apply only to any future plan amendments, curtailments, or settlements of the Group.
Amendments to IAS 28: Long-term interests in associates and joint ventures
The amendments clarify that an entity applies IFRS 9 to long-term interests in an associate or joint venture to which the equity method is not applied but that, in substance, form part of the net investment in the associate or joint venture (long-term interests). This clarification is relevant because it implies that the expected credit loss model in IFRS 9 applies to such long-term interests.
The amendments also clarified that, in applying IFRS 9, an entity does not take account of any losses of the associate or joint venture, or any impairment losses on the net investment, recognised as adjustments to the net investment in the associate or joint venture that arise from applying IAS 28.
The amendments should be applied retrospectively and are effective from January 1, 2016 and are2019, with early application permitted. The Group does not expected to have a material impactexpect any effect on the Group. It includes the following amendments:its consolidated financial statements.
The IASB issued amendments to Condensed Interimthe definition of a business in IFRS 3 Business Combinations to help entities determine whether an acquired set of activities and assets is a business or not. They clarify the minimum requirements for a business, remove the assessment of whether market participants are capable of replacing any missing elements, add guidance to help entities assess whether an acquired process is substantive, narrow the definitions of a business and of outputs, and introduce an optional fair value concentration test.
An entity applies those amendments to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after January 1, 2020, with early application permitted. These amendments will apply on future business combinations of the Group.
Amendments to IAS 1 and IAS8: Definition of Material
In October 2018, the IASB issued amendments to IAS 1Presentation of Financial Statements and IAS 8Accounting Policies, Changes in Accounting Estimates and Errors to align the definition of ‘material’ across the standards and to clarify certain aspects of the definition. The amendments clarify that materiality will depend on the nature or magnitude of information, or both.
The amendment should be applied perspectively and is effective for annual reporting periods beginning on or after January 1, 2020. The Group does not expect significant effect on its consolidated financial statements.
Annual Improvements 2015-2017 Cycle (issued in December 2017)
These improvements include:
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2018
(All amounts are in millions of Russian rubles, unless stated otherwise)
IFRS 3 Business Combinations
The amendments clarify that, when an entity obtains control of Information Elsewherea business that is a joint operation, it applies the requirements for a business combination achieved in stages, including remeasuring previously held interests in the Interim Financial Report.assets and liabilities of the joint operation at fair value. In doing so, the acquirer remeasures its entire previously held interest in the joint operation.
An entity applies those amendments to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after January 1, 2019, with early application permitted. These amendments will apply on future business combinations of the Group.
IFRS 11 Joint Arrangements
A party that participates in, but does not have joint control of, a joint operation might obtain joint control of the joint operation in which the activity of the joint operation constitutes a business as defined in IFRS 3. The amendments clarify that the previously held interests in that joint operation are not remeasured.
An entity applies those amendments to transactions in which it obtains joint control on or after the beginning of the first annual reporting period beginning on or after January 1, 2019, with early application permitted. These amendments are currently not applicable to the Group but may apply to future transactions.
IAS 12 Income Taxes
The amendments clarify that the income tax consequences of dividends are linked more directly to past transactions or events that generated distributable profits than to distributions to owners. Therefore, an entity recognises the income tax consequences of dividends in profit or loss, other comprehensive income or equity according to where the entity originally recognised those past transactions or events.
An entity applies those amendments for annual reporting periods beginning on or after January 1, 2019, with early application is permitted. When an entity first applies those amendments, it applies them to the income tax consequences of dividends recognised on or after the beginning of the earliest comparative period. Since the Group’s current practice is in line with these amendments, the Group does not expect any effect on its consolidated financial statements.
IAS 23 Borrowing Costs
The amendments clarify that an entity treats as part of general borrowings any borrowing originally made to develop a qualifying asset when substantially all of the activities necessary to prepare that asset for its intended use or sale are complete.
An entity applies those amendments to borrowing costs incurred on or after the beginning of the annual reporting period in which the entity first applies those amendments. An entity applies those amendments for annual reporting periods beginning on or after January 1, 2019, with early application permitted. Since the Group’s current practice is in line with these amendments, the Group does not expect any effect on its consolidated financial statements.
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2018
(All amounts are in millions of Russian rubles, unless stated otherwise)
| 4. | Going concern |
The current economic environment and economic conditions in the major segments of the Group’s operations createretain uncertainty about the level of demand for the Group’s products, the pricing of major products mined or manufactured by the Group, operating and financial results, the availability of financing.free cash flow for repayment or ability to refinance and restructure current liabilities.
As of December 31, 2015,2018, the Group’s total liabilities exceeded total assets by RUB 261,854233,195 million.
As of December 31, 2015,2018, restructuring was not finalized with respect to the Group’s credit facilities withECA-covered loans creditors and therefore the Group was not in compliance with the payment schedules under certain credit facilities and a number of financial andnon-financial covenants contained in the Group’s loan agreements relatingtotaling to RUB 468,872406,077 million of the Group’s debt. As of December 31, 2015,2018, the Group hadGroup’s debt payable on demand was RUB 491,674406,077 million, of loans repayable during 2016 including RUB 175,743361,328 million of long-term debt classified as short-term debt as of that date because ofdebt restructuring was not finalized with respect to the covenant violations,Group’s credit portfolio and due to contractual cross-default provisions, and RUB 20,2062,128 million of fines and penalties accrued on overdue loans and overdue interest. As of the date of approval of the consolidated financial statements, these breaches constitute an event of default and, as a result, the lenders may request accelerated repayment of a substantial portion of the Group’s debt. The Group does not have the resources to enable it to comply with such accelerated repayment requests immediately. However, the Group’s management believes that the major part of the Group’s debt has been extended as of the date of approval of the consolidated financial statements and the Group will pursue to reach similar terms with other lenders.
By the date of approval of the consolidated financial statements, the Group signed amendment agreements with its three major lenders, which waived all previous defaults. Such amendments were conditional upon undertakings, which the Group had partially managed to fulfill before the date hereof (see Note 30).
The management has concluded that the existing uncertainty about the Group’s refinancingavailability of free cash flow for repayment or ability to refinance and restructuring of its outstanding debtrestructure current liabilities described above represents a material uncertainty that castsmay cast significant doubt upon the Group’s ability to continue as a going concern. Based on management’s plans and actions undertaken as noted herein, management believes that the Group will achieve restructuring with all of its lenders and secure adequate financing to continue in operational existence for the foreseeable future. The management’s strategy includes enhancement of crude steel production, increase in sales of the major steel products as well as diversifying products range into specialty products, rails and beams targeting higher marginal market niches. Together with the further development of the Group’s mining assets providing additional volumes of high-grade coking coal and pulverized coal injection (PCI) both to the Russian consumers and to
MECHEL PAO
Notes to the consolidated financial statements for the year ended December 31, 2015
(All amounts are in millions of Russian rubles, unless stated otherwise)
exports markets the Group expects it to result in an increase in profitability. The Group’s detailed monthly operational plans include further optimization of the costs structure andon-going control over the production costs and commercialselling expenses.
The consolidated financial statements have been prepared assuming that the Group will continue as a going concern. Accordingly, the consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts, the amounts and classification of liabilities or any other adjustments that might result infrom the Group being unable to continue as a going concern.
| 5. | Capital management |
The equity capital of the Group was formed by injecting shares of its operating subsidiaries into Mechel PAO. This together with robust and growingobtaining profits allowed the Group to raise debt to finance major developmentinvestment projects as well as to finance metallurgical market expansion to Europe.acquire new companies. Although it has always been the Group’s priority to create and grow the shareholders’ value, during the past fewseveral years, the Group has become more focused on managing its debt, which has been the major source for expansion and growth.
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2018
(All amounts are in millions of Russian rubles, unless stated otherwise)
Metals and mining industry is known for its capital intensive investment cycle requiring secure long-term financing. Together withIn 2012-2015, high price volatility on the coal seaborne market and volatile constructive materialsmetal market both significantly influenced byresulted in the developmentdecrease in the Group’s operating profit and impairments ofnon-current assets. Devaluation of the Chinese economynational currency (Russian ruble) affected the amount of foreign exchange losses and its recent demand slow-down,increase in cost of financing on local and inability of the Russianforeign debt markets to provide long-term financing at reasonable cost, this has becomemarkets. These facts became the major reason for the losses incurred by the Group whichin the past and resulted in a negative equity and augmented debt burden.equity.
Given current economic circumstances and the amount of debt, the Group’s primary objective is to settlefocus on resolving the debt issues through a long-term restructuring of the loan portfolio briningand bringing down both cost of financing and actual interest payments.
payments as well as use of all available free cash flow for repayment of debt. The Group’s long-term policy is to maintain a strong capital base to maintain investor, creditor and market confidence and to ensure sustainable future development of the business. The Group’s management constantly monitors profitability and leverage ratios. The Group’s capital management has always been based on a number of covenants, of which ‘Net Debt to EBITDA’ and ‘EBITDA to Net Interest Expense’ are the main indicators the management uses for control. The level of dividends is monitored by the Board of Directors of the Group.
The Group was required to comply with the following ratios under the most significant loan agreements with the Russian state-owned banks as of December 31, 2015:2018:
Restrictive | Requirement | Actual as of December 31, | ||||
Mechel’s EBITDA to Net Interest Expense | Shall not be less than | |||||
Mechel’s EBITDA to Consolidated Financial Expense | Shall not be less than | |||||
Mechel’s Net Debt to EBITDA | Not exceed | |||||
Mechel’s Total Debt to EBITDA | Not exceed | 6.25:1.0 | ||||
Mechel’s Cash flow from operating activities to EBITDA | Shall not be less than 0.8:1.0 | 0.90:1.0 | ||||
Mechel’s EBITDA to Revenue | Shall not be less than 0.2:1.0 | 0.24:1.0 |
The Group was required to comply with the following ratios under the most significant loan agreements with the Russian state-owned banks as of December 31, 2014:20171:
Restrictive | Requirement | Actual as of December 31, | ||||
Mechel’s EBITDA to Net Interest Expense | Shall not be less than | 1.78:1.0 | ||||
Mechel’s EBITDA to Consolidated Financial Expense | Shall not be less than 1.50:1.0 | 1.86:1.0 | ||||
Mechel’s Net Debt to EBITDA | Not exceed | 6.35:1.0 | ||||
Mechel’s Total Debt to EBITDA | Not exceed 5.5:1.0 | 6.07:1.0 | ||||
Mechel’s Cash flow from operating activities to EBITDA | Shall not be less than 0.8:1.0 | 0.78:1.0 | ||||
Mechel’s EBITDA to Revenue | Shall not be less than 0.2:1.0 | 0.27:1.0 |
In 2012-2015, following a sudden fall of the commodity markets the Group violated most of such covenants and defaulted on major credit facilities of interest and debt payments. Limited free cash flow available for debt service forced the Group to start negotiations with creditors about review of schedule of the debt maturity profile. Current restructuring arrangements with major creditors are aimed at rescheduling repayment of principal, gradual amortisation and decrease in interest payments by partial capitalization.
| 1 | Detailed information in respect of restrictive covenant calculations is presented in Note 11.1. |
MECHEL PAO
Notes to the consolidated financial statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 20152018
(All amounts are in millions of Russian rubles, unless stated otherwise)
In 2014, following a sudden fall of the markets the Group violated most of such covenants and defaulted on major credit facilities. That brought the Group to a situation where it vitally needs to significantly improve the debt maturity profile. Current restructuring arrangements with major creditors are aimed at adjourning repayment of principal and decreasing interest payments by capitalizing significant amount of related interest expense.
Nominal costCost of debt is also important infor the Group’s capital management. Throughout the restructuring process, the Group turned away fromchanged the floating interest rates dependent on the Russian money market (Mosprime rate) in favorto the key rate of the Central Bank of the Russian Central Bank Key Rate,Federation, which is less volatile and better represents the cost of funds byfor the local banks fromset by the Central Bank of Russian Federation in the Russian economy.Federation. The management believes that it will allow the Group to avoid sudden splashes in the cost of debt due to temporary demand/supply fluctuations. OnIn 2016, under the restructuring agreements, the outstanding balance of U.S. dollar-denominated long-term loans was partially converted from U.S. dollar into Russian ruble, which will allow to reduce the effect of foreign currency indebtednessfluctuations. In 2018, the Group’s finance cost is also based on the floating LIBOR/EURIBOR, which remains comparatively low.Group refinanced existingpre-export credit facility by receiving a new euro-denominated loan from VTB. The loan matures in April 2022 (Note 11.1 (a)).
While theThe main goal for the Group is to reviseachieve long-term restructuring of the loan portfolio with a grace period for repayment of debts and gradual decrease in debt balance, which will permit to restore working capital, improve efficiency of operations and provide ability to sustain full service of debt in accordance with newly agreed repayment schedules as well as use of all available free cash flow for the improved debt service, the Group is also considering selling certain assets to bring the debt burden down in the short to mid-term run. There is no specific plan or listrepayment of such assets and it may further be elaborated asdebt.
In June 2016, a result of restructuring and negotiations with the lenders.
On April 1, 2016, the Group signed several agreements to provide Gazprombank with an option to purchase 49% sharestake in the Elga coal complex (OOO Elgaugol, Elga-road OOO and Mecheltrans Vostok OOO) was sold to Gazprombank by exercising an option held by Gazprombank for a total consideration of RUB 34,300 million. ProceedsAll proceeds received from the sale will beof the shares were used for repayment of the Group’s debt assignedre-assigned from Sberbank to Gazprombank, (or their respective assignees), and to Sberbank and Sberbank Leasing (Seerepay overdue payment to Sberbank. Simultaneously with the sale of a 49% stake, a put option in respect of this stake was granted to Gazprombank (see Note 30)6).
The objectives, policies and processes for managing capital during the yearsyear ended December 31, 2015, 20142018 and as of January 1, 2014 are2017 were not changed.
| 6. | Business combinations and |
There were no new business combinations in the yearsyear ended December 31, 20142018, 2017 and 2015.2016.
On December 22, 2011, the Group acquired 100% of the shares of Daveze Ltd, which held 100% of ownership interest in Donetsk Electrometallurgical Plant (“DEMP”),DEMP, a steel plant located in Donetsk, Ukraine (Note 3(u)), for a consideration of $537,000 thousand (RUB 17,058 million at exchange rate as of December 22, 2011) to be paid in monthly installments during the period from December 2011 until December 2018. The Group continues to paypaid monthly installments and has paid RUB 4,819 million during 2015, as disclosed the respective payments in the consolidated statement of cash flows.flows within cash outflows from financing activities. The Group fully repaid the consideration in February 2019.
MECHEL PAO
Notes to the consolidated financial statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 20152018
(All amounts are in millions of Russian rubles, unless stated otherwise)
The following table summarizes changes innon-controlling interests for the yearsyear ended December 31, 20142018, 2017 and 2015:2016:
Balance | ||||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
| 5,948 | |||
|
| |||
Change innon-controlling interests in existing subsidiaries of the Group | (4 | ) | ||
Reversal of unclaimed declared dividends tonon-controlling interests upon expiration of limitation period | 35 | |||
Dividends declared tonon-controlling interests | (3 | ) | ||
Profit for the period | 1,706 | |||
Other comprehensive income | 4 | |||
Balance as of December 31, 2016 | 7,686 | |||
Change innon-controlling interests in existing subsidiaries of the Group (Note 24) | 590 | |||
Dividends declared tonon-controlling interests | (359 | ) | ||
Profit for the period | 1,013 | |||
Other comprehensive income | 3 | |||
Balance as of December 31, 2017 | 8,933 | |||
Adjustment on initial application of IFRS 9 | (5 | ) | ||
Balance as of January 1, 2018 adjusted for the effect of IFRS 9 | 8,928 | |||
Profit for the period | 908 | |||
Other comprehensive income | 10 | |||
Balance as of December 31, 2018 | 9,846 | |||
In June 2016, 49% share in the Elga coal complex was sold to Gazprombank by exercising an option held by Gazprombank for a total consideration of RUB 34,300 million. The Group sold to Gazprombank upon its request a 49% stake in Elgaugol OOO, the owner of the subsoil license for the Elga coal deposit, a 49% stake in Elga-road, the owner of the Railway Ulak-Elga, which had been contributed to the registered capital of this newly established company in March 2016, a 49% stake in Mecheltrans Vostok OOO, the rail line’s transportation operator (collectively, the “target companies”).
Simultaneously with the sale of a 49% stake in the target companies a put option with fixed price and annual interest at the key rate of the Central Bank of the Russian Federation plus 2% was granted to Gazprombank to sell the stake (in full or in part) in the target companies to the Group within three years following a five-year grace period or in case of a breach of conditions stipulated by such agreement. This allowed the Group to retain control over 100% of shares and therefore this transaction in fact represents a financial liability. Put options are signed by Yakutugol and Mecheltrans (sellers of the stakes in target companies) and are guaranteed by Mechel Mining and SKCC. If the Group fails to perform under these put options Gazprombank has the right to buy out (call option) the remaining stakes owned by the Group in the target companies and a 100% stake in Mechel Port Vanino. A 1.99% stake in each of the target companies is pledged in favor of Gazprombank as a security for the call option. For accounting for this financial liability see Note 11.4.
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2018
(All amounts are in millions of Russian rubles, unless stated otherwise)
| 7. | Material partly-owned subsidiaries |
Financial information of subsidiaries that have materialnon-controlling interests is provided below.
Proportion of equity interest held bynon-controlling interests:
Name | Country of incorporation and operation | Voting rights | ||||||||||||||||||||||
| At December 31, 2015 | At December 31, 2014 | At January 1, 2014 | At December 31, 2018 | At December 31, 2017 | ||||||||||||||||||||
SKCC and subsidiaries* | Russia | 3,41 | % | 3,41 | % | 3,40 | % | 0.9 | % | 0.9 | % | |||||||||||||
Kuzbass Power Sales Company (KPSC) | Russia | 27,86 | % | 27,86 | % | 27,86 | % | 27.9 | % | 27.9 | % | |||||||||||||
Chelyabinsk Metallurgical Plant (CMP) | Russia | 5,86 | % | 5,86 | % | 5,86 | % | 5.8 | % | 5.8 | % | |||||||||||||
Southern Urals Nickel Plant (SUNP) | Russia | 15,90 | % | 15,94 | % | 15,94 | % | 15.9 | % | 15.9 | % | |||||||||||||
Beloretsk Metallurgical Plant (BMP) | Russia | 8,55 | % | 8,55 | % | 8,55 | % | 8.6 | % | 8.6 | % | |||||||||||||
Korshunov Mining Plant (KMP) | Russia | 9,96 | % | 9,96 | % | 9,96 | % | 10.0 | % | 10.0 | % | |||||||||||||
Ural Stampings Plant (USP) | Russia | 6,24 | % | 6,24 | % | 6,24 | % | |||||||||||||||||
Urals Stampings Plant (USP) | 6.2 | % | 6.2 | % | ||||||||||||||||||||
Izhstal | Russia | 10,00 | % | 10,00 | % | 10,00 | % | 10.0 | % | 10.0 | % | |||||||||||||
| * | Hereinafter SKCC and subsidiaries are represented by Southern Kuzbass Coal Company (SKCC), Tomusinsky Open Pit Mine (TOPM), Tomusinsky |
MECHEL PAO
Notes to the consolidated financial statements for the year ended December 31, 2015
(All amounts are in millions of Russian rubles, unless stated otherwise)
Carrying values of material non-controlling interest: | At December 31, 2015 | At December 31, 2014 | At January 1, 2014 | |||||||||
SKCC and subsidiaries | (576 | ) | 2,841 | 4,089 | ||||||||
Kuzbass Power Sales Company (KPSC) | 1,021 | 866 | 749 | |||||||||
Chelyabinsk Metallurgical Plant (CMP) | 514 | 381 | 520 | |||||||||
Southern Urals Nickel Plant (SUNP) | 1,028 | 950 | 649 | |||||||||
Beloretsk Metallurgical Plant (BMP) | 761 | 605 | 492 | |||||||||
Korshunov Mining Plant (KMP) | 2,670 | 2,555 | 2,289 | |||||||||
Ural Stampings Plant (USP) | 939 | 876 | 715 | |||||||||
Izhstal | (495 | ) | (907 | ) | (87 | ) | ||||||
|
|
|
|
|
| |||||||
(Loss) profit allocated to material non-controlling interest: | 2015 | 2014 | ||||||||||
SKCC and subsidiaries | (565 | ) | (1,263 | ) | ||||||||
Kuzbass Power Sales Company (KPSC) | 155 | 116 | ||||||||||
Chelyabinsk Metallurgical Plant (CMP) | 135 | (137 | ) | |||||||||
Beloretsk Metallurgical Plant (BMP) | 157 | 112 | ||||||||||
Korshunov Mining Plant (KMP) | 114 | 262 | ||||||||||
Ural Stampings Plant (USP) | 63 | 161 | ||||||||||
Izhstal | 413 | (822 | ) | |||||||||
|
|
|
| |||||||||
The summarised financial information offor these subsidiaries is provided below. This information is based on amounts before inter-company eliminations. SUNP was recognised as abandoned operations activity according to a decision to close SUNP without sale (see Note 17).for the nine months of 2016. Therefore, SUNP isSUNP’s results for the nine months period ended September 30, 2016 are not disclosed in summarizedsummarised statements of profit (loss) and other comprehensive income (loss)loss and summarized cash flow information below. The SUNP’s results for the years ended December 31, 2015fourth quarter of 2016 are disclosed in summarised statements of profit or loss and 2014summarized cash flow information below. Profit allocated to SUNP’s SUNPnon-controlling interest holders iswas RUB 80 million and RUB 30119 million for the yearsyear ended December 31, 2015 and 2014, respectively. SUNP’s non-controlling interest is disclosed in statements of financial position as of December 31, 2015, 2014 and January 1, 2014 (see below).2016.
Summarised statements of profit (loss) and other comprehensive income (loss) for 2015:2018:
| SKCC and subsidiaries | KPSC | CMP | BMP | KMP | USP | Izhstal | ||||||||||||||||||||||
Revenue | 31,169 | 20,723 | 96,126 | 23,605 | 7,784 | 12,591 | 9,902 | |||||||||||||||||||||
Cost of goods sold | (19,842 | ) | (11,268 | ) | (78,995 | ) | (21,518 | ) | (6,400 | ) | (9,663 | ) | (8,589 | ) | ||||||||||||||
Total selling, distribution and operating expenses, net | (6,324 | ) | (8,924 | ) | (6,425 | ) | (2,028 | ) | (3,004 | ) | (3,212 | ) | 5,088 | |||||||||||||||
Total other income and (expense), net | (27,907 | ) | 167 | (9,074 | ) | 1,739 | 2,741 | 998 | (1,543 | ) | ||||||||||||||||||
|
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|
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|
| |||||||||||||||
(Loss) profit before tax | (22,904 | ) | 698 | 1,632 | 1,798 | 1,121 | 714 | 4,858 | ||||||||||||||||||||
Income tax | (3,432 | ) | (141 | ) | �� | 665 | 37 | 26 | 298 | (730 | ) | |||||||||||||||||
|
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|
|
|
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|
| |||||||||||||||
(Loss) profit for the year from continuing operations | (26,336 | ) | 557 | 2,297 | 1,835 | 1,147 | 1,012 | 4,128 | ||||||||||||||||||||
|
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|
|
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|
|
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|
| |||||||||||||||
Total comprehensive (loss) income | (26,336 | ) | 557 | 2,297 | 1,835 | 1,147 | 1,012 | 4,128 | ||||||||||||||||||||
|
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|
| |||||||||||||||
Attributable to non-controlling interests | (565 | ) | 155 | 135 | 157 | 114 | 63 | 413 | ||||||||||||||||||||
Dividends paid to non-controlling interests | 68 | — | — | — | — | — | — | |||||||||||||||||||||
| SKCC and subsidiaries | KPSC | CMP | SUNP | BMP | KMP | USP | Izhstal | |||||||||||||||||||||||||
Revenue from contracts with customers | 32,251 | 24,084 | 124,372 | 88 | 25,899 | 9,989 | 16,549 | 21,173 | ||||||||||||||||||||||||
Cost of sales | (18,123 | ) | (12,077 | ) | (101,829 | ) | (47 | ) | (24,095 | ) | (6,222 | ) | (13,131 | ) | (19,392 | ) | ||||||||||||||||
Total selling, distribution and operating expenses, net | (9,064 | ) | (11,894 | ) | (11,988 | ) | (170 | ) | (1,867 | ) | (4,250 | ) | (1,099 | ) | (2,498 | ) | ||||||||||||||||
Total other income and (expense), net | (4,514 | ) | 343 | (5,114 | ) | 722 | 1,034 | 2,103 | 2,090 | (1,097 | ) | |||||||||||||||||||||
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| |||||||||||||||||
Profit (loss) before tax | 550 | 456 | 5,441 | 593 | 971 | 1,620 | 4,409 | (1,814 | ) | |||||||||||||||||||||||
Income tax (expense) benefit | (1,707 | ) | (94 | ) | 1,443 | (115 | ) | (34 | ) | 46 | (109 | ) | 228 | |||||||||||||||||||
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| |||||||||||||||||
(Loss) profit for the year from continuing operations | (1,157 | ) | 362 | 6,884 | 478 | 937 | 1,666 | 4,300 | (1,586 | ) | ||||||||||||||||||||||
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| |||||||||||||||||
Total comprehensive (loss) income | (1,157 | ) | 362 | 6,884 | 478 | 937 | 1,666 | 4,300 | (1,586 | ) | ||||||||||||||||||||||
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| |||||||||||||||||
Attributable tonon-controlling interests | 12 | 101 | 345 | 76 | 83 | 166 | 269 | (154 | ) | |||||||||||||||||||||||
Dividends paid tonon-controlling interests | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
MECHEL PAO
Notes to the consolidated financial statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 20152018
(All amounts are in millions of Russian rubles, unless stated otherwise)
Summarised statements of profit (loss) and other comprehensive income (loss) for 2014:2017:
| SKCC and subsidiaries | KPSC | CMP | BMP | KMP | USP | Izhstal | ||||||||||||||||||||||
Revenue | 26,584 | 19,037 | 87,866 | 22,253 | 9,688 | 12,792 | 9,131 | |||||||||||||||||||||
Cost of sales | (18,835 | ) | (9,737 | ) | (72,198 | ) | (20,094 | ) | (6,301 | ) | (9,997 | ) | (8,964 | ) | ||||||||||||||
Total selling, distribution and operating expenses, net | (7,649 | ) | (8,920 | ) | (6,557 | ) | (2,022 | ) | (3,196 | ) | (1,376 | ) | (7,466 | ) | ||||||||||||||
Total other income and (expense), net | (37,802 | ) | 150 | (10,232 | ) | 1,126 | 2,502 | 1,099 | (1,739 | ) | ||||||||||||||||||
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| |||||||||||||||
(Loss) profit before tax | (37,702 | ) | 530 | (1,121 | ) | 1,263 | 2,693 | 2,518 | (9,038 | ) | ||||||||||||||||||
Income tax | 2,921 | (114 | ) | (1,213 | ) | 50 | (58 | ) | 64 | 819 | ||||||||||||||||||
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| |||||||||||||||
(Loss) profit for the year from continuing operations | (34,781 | ) | 416 | (2,334 | ) | 1,313 | 2,635 | 2,582 | (8,219 | ) | ||||||||||||||||||
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| |||||||||||||||
Total comprehensive (loss) income | (34,781 | ) | 416 | (2,334 | ) | 1,313 | 2,635 | 2,582 | (8,219 | ) | ||||||||||||||||||
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| |||||||||||||||
Attributable to non-controlling interests | (1,263 | ) | 116 | (137 | ) | 112 | 262 | 161 | (822 | ) | ||||||||||||||||||
Dividends paid to non-controlling interests | — | — | — | — | — | — | — | |||||||||||||||||||||
| SKCC and subsidiaries | KPSC | CMP | SUNP | BMP | KMP | USP | Izhstal | |||||||||||||||||||||||||
Revenue from contracts with customers | 31,993 | 22,418 | 118,557 | 102 | 24,206 | 11,492 | 12,725 | 18,696 | ||||||||||||||||||||||||
Cost of sales | (18,173 | ) | (10,754 | ) | (102,398 | ) | (24 | ) | (21,464 | ) | (6,136 | ) | (10,089 | ) | (16,199 | ) | ||||||||||||||||
Total selling, distribution and operating expenses, net | (7,844 | ) | (11,182 | ) | (11,894 | ) | (184 | ) | (1,634 | ) | (5,576 | ) | (909 | ) | (3,486 | ) | ||||||||||||||||
Total other income and (expense), net | 12,769 | 340 | (506 | ) | 531 | 379 | 2,913 | 1,382 | (906 | ) | ||||||||||||||||||||||
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| |||||||||||||||||
Profit (loss) before tax | 18,745 | 822 | 3,759 | 425 | 1,487 | 2,693 | 3,109 | (1,895 | ) | |||||||||||||||||||||||
Income tax (expense) benefit | (718 | ) | (170 | ) | 544 | (85 | ) | (91 | ) | 212 | (144 | ) | 194 | |||||||||||||||||||
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| |||||||||||||||||
Profit (loss) for the year from continuing operations | 18,027 | 652 | 4,303 | 340 | 1,396 | 2,905 | 2,965 | (1,701 | ) | |||||||||||||||||||||||
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| |||||||||||||||||
Total comprehensive income (loss) | 18,027 | 652 | 4,303 | 340 | 1,396 | 2,905 | 2,965 | (1,701 | ) | |||||||||||||||||||||||
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Attributable tonon-controlling interests | 103 | 182 | 256 | 54 | 114 | 281 | 183 | (170 | ) | |||||||||||||||||||||||
Dividends paid tonon-controlling interests | 198 | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Summarised statements of financial position as of December 31, 2015:profit (loss) and other comprehensive income for 2016:
| SKCC and subsidiaries | KPSC | CMP | SUNP | BMP | KMP | USP | Izhstal | |||||||||||||||||||||||||
Current assets | 81,248 | 5,095 | 46,932 | 4,646 | 11,479 | 18,357 | 14,611 | 2,961 | ||||||||||||||||||||||||
Non-current assets | 61,713 | 1,235 | 61,183 | 2,345 | 3,449 | 11,961 | 7,437 | 5,972 | ||||||||||||||||||||||||
Current liabilities | (168,615 | ) | (2,559 | ) | (96,666 | ) | (318 | ) | (5,891 | ) | (2,622 | ) | (6,935 | ) | (11,678 | ) | ||||||||||||||||
Non-current liabilities | (3,355 | ) | (107 | ) | (2,678 | ) | (211 | ) | (143 | ) | (873 | ) | (48 | ) | (2,209 | ) | ||||||||||||||||
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Total equity | (29,009 | ) | 3,664 | 8,771 | 6,462 | 8,894 | 26,823 | 15,065 | (4,954 | ) | ||||||||||||||||||||||
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Attributable to: | ||||||||||||||||||||||||||||||||
Equity holders of parent | (28,433 | ) | 2,643 | 8,257 | 5,434 | 8,133 | 24,153 | 14,126 | (4,459 | ) | ||||||||||||||||||||||
Non-controlling interest | (576 | ) | 1,021 | 514 | 1,028 | 761 | 2,670 | 939 | (495 | ) | ||||||||||||||||||||||
Revenue from contracts with customers Cost of sales Total selling, distribution and operating expenses, net Total other income and (expense), net Profit before tax Income tax (expense) benefit Profit for the year from continuing operations Total comprehensive income Attributable tonon-controlling interests Dividends paid tonon-controlling interestsSummarised statements of financial position as of December 31, 2014: SKCC and
subsidiaries KPSC CMP SUNP BMP KMP USP Izhstal 27,171 20,695 107,119 16 22,718 8,782 12,471 14,357 (18,115 ) (10,518 ) (84,441 ) (8 ) (20,311 ) (6,064 ) (9,908 ) (12,456 ) (6,284 ) (9,865 ) (11,261 ) 13 (1,746 ) (3,029 ) (1,035 ) (1,254 ) 3,995 274 1,209 530 (640 ) 2,742 756 (476 ) 6,767 586 12,626 551 21 2,431 2,284 171 (592 ) (128 ) 297 (27 ) 29 25 (170 ) 266 6,175 458 12,923 524 50 2,456 2,114 437 6,175 458 12,923 524 50 2,456 2,114 437 241 128 757 83 4 245 132 44 — — — — — — — —
| SKCC and subsidiaries | KPSC | CMP | SUNP | BMP | KMP | USP | Izhstal | |||||||||||||||||||||||||
Current assets | 78,972 | 2,605 | 23,836 | 1,573 | 11,572 | 14,293 | 10,091 | 2,702 | ||||||||||||||||||||||||
Non-current assets | 47,305 | 2,735 | 63,449 | 4,961 | 1,691 | 15,264 | 8,573 | 15 | ||||||||||||||||||||||||
Current liabilities | (126,201 | ) | (2,134 | ) | (77,488 | ) | (399 | ) | (6,044 | ) | (2,898 | ) | (4,388 | ) | (8,901 | ) | ||||||||||||||||
Non-current liabilities | (2,625 | ) | (98 | ) | (3,286 | ) | (174 | ) | (152 | ) | (994 | ) | (221 | ) | (2,887 | ) | ||||||||||||||||
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Total equity | (2,549 | ) | 3,108 | 6,511 | 5,961 | 7,067 | 25,665 | 14,055 | (9,071 | ) | ||||||||||||||||||||||
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Attributable to: | ||||||||||||||||||||||||||||||||
Equity holders of parent | (5,390 | ) | 2,242 | 6,130 | 5,011 | 6,462 | 23,110 | 13,179 | (8,164 | ) | ||||||||||||||||||||||
Non-controlling interest | 2,841 | 866 | 381 | 950 | 605 | 2,555 | 876 | (907 | ) | |||||||||||||||||||||||
MECHEL PAO
Notes to the consolidated financial statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 20152018
(All amounts are in millions of Russian rubles, unless stated otherwise)
Summarised statements of financial position as of January 1, 2014:December 31, 2018:
| SKCC and subsidiaries | KPSC | CMP | SUNP | BMP | KMP | USP | Izhstal | SKCC and subsidiaries | KPSC | CMP | SUNP | BMP | KMP | USP | Izhstal | |||||||||||||||||||||||||||||||||||||||||||||||||
Current assets | 58,177 | 2,120 | 18,072 | 4,935 | 7,089 | 18,766 | 11,418 | 2,929 | 49,771 | 3,735 | 38,571 | 1,507 | 9,594 | 13,863 | 10,217 | 5,171 | ||||||||||||||||||||||||||||||||||||||||||||||||
Non-current assets | 55,080 | 2,221 | 52,155 | 26 | 3,691 | 9,127 | 3,425 | 7,368 | 81,868 | 4,187 | 174,639 | 6,201 | 6,442 | 23,221 | 19,139 | 1,803 | ||||||||||||||||||||||||||||||||||||||||||||||||
Current liabilities | (75,143 | ) | (1,529 | ) | (58,886 | ) | (500 | ) | (4,772 | ) | (3,765 | ) | (3,086 | ) | (8,024 | ) | (101,714 | ) | (2,757 | ) | (176,114 | ) | (108 | ) | (4,751 | ) | (2,336 | ) | (4,870 | ) | (12,765 | ) | ||||||||||||||||||||||||||||||||
Non-current liabilities | (6,063 | ) | (123 | ) | (2,470 | ) | (390 | ) | (253 | ) | (1,130 | ) | (285 | ) | (3,139 | ) | (40,888 | ) | (31 | ) | (4,921 | ) | (204 | ) | (141 | ) | (917 | ) | (137 | ) | (1,987 | ) | ||||||||||||||||||||||||||||||||
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Total equity | 32,051 | 2,689 | 8,871 | 4,071 | 5,755 | 22,998 | 11,472 | (866 | ) | 10,963 | (5,134 | ) | (32,175 | ) | (7,396 | ) | (11,144 | ) | (33,831 | ) | (24,349 | ) | 7,778 | |||||||||||||||||||||||||||||||||||||||||
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Attributable to: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Equity holders of parent | 27,962 | 1,940 | 8,351 | 3,422 | 5,263 | 20,709 | 10,757 | (779 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Non-controlling interest | 4,089 | 749 | 520 | 649 | 492 | 2,289 | 715 | (87 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Equity shareholders of Mechel PAO | 11,157 | (3,706 | ) | (30,314 | ) | (6,223 | ) | (10,182 | ) | (30,462 | ) | (22,837 | ) | 7,010 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Non-controlling interests | (194 | ) | (1,428 | ) | (1,861 | ) | (1,173 | ) | (962 | ) | (3,369 | ) | (1,512 | ) | 768 | |||||||||||||||||||||||||||||||||||||||||||||||||
Summarised statements of financial position as of December 31, 2017:
| SKCC and subsidiaries | KPSC | CMP | SUNP | BMP | KMP | USP | Izhstal | |||||||||||||||||||||||||
Current assets | 43,303 | 3,492 | 44,440 | 7,245 | 10,104 | 11,111 | 11,005 | 4,958 | ||||||||||||||||||||||||
Non-current assets | 86,396 | 4,158 | 86,353 | — | 6,810 | 23,006 | 15,958 | 2,880 | ||||||||||||||||||||||||
Current liabilities | (136,469 | ) | (2,804 | ) | (99,119 | ) | (135 | ) | (6,502 | ) | (1,599 | ) | (6,700 | ) | (12,059 | ) | ||||||||||||||||
Non-current liabilities | (4,019 | ) | (76 | ) | (5,252 | ) | (192 | ) | (145 | ) | (390 | ) | (160 | ) | (1,981 | ) | ||||||||||||||||
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Total equity | 10,789 | (4,770 | ) | (26,422 | ) | (6,918 | ) | (10,267 | ) | (32,128 | ) | (20,103 | ) | 6,202 | ||||||||||||||||||
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Attributable to: | ||||||||||||||||||||||||||||||||
Equity shareholders of Mechel PAO | 10,990 | (3,443 | ) | (24,913 | ) | (5,820 | ) | (9,383 | ) | (28,929 | ) | (18,856 | ) | 5,587 | ||||||||||||||||||
Non-controlling interests | (201 | ) | (1,327 | ) | (1,509 | ) | (1,098 | ) | (884 | ) | (3,199 | ) | (1,247 | ) | 615 | |||||||||||||||||
Summarised cash flow information for the year ended December 31, 2015:2018:
| SKCC and subsidiaries | KPSC | CMP | BMP | KMP | USP | Izhstal | SKCC and subsidiaries | KPSC | CMP | SUNP | BMP | KMP | USP | Izhstal | ||||||||||||||||||||||||||||||||||||||||||||||
Operating | 10,649 | 545 | 1,102 | 1,768 | (637 | ) | 2,725 | (125 | ) | 13,152 | 193 | 13,015 | (264 | ) | (1,891 | ) | 1,325 | 3,950 | 1,647 | |||||||||||||||||||||||||||||||||||||||||
Investing | (11,834 | ) | (608 | ) | (13,738 | ) | 267 | 876 | (5,047 | ) | (34 | ) | 547 | (97 | ) | (76,283 | ) | 264 | 1,870 | (1,003 | ) | (1,163 | ) | (89 | ) | |||||||||||||||||||||||||||||||||||
Financing | 1,340 | 103 | 12,159 | (1,881 | ) | (284 | ) | 2,023 | 172 | (13,651 | ) | (99 | ) | 63,200 | — | (169 | ) | (322 | ) | (2,829 | ) | (1,604 | ) | |||||||||||||||||||||||||||||||||||||
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Increase (decrease) in cash and cash equivalents, net | 155 | 40 | (477 | ) | 154 | (45 | ) | (299 | ) | 13 | 48 | (3 | ) | (68 | ) | — | (190 | ) | — | (42 | ) | (46 | ) | |||||||||||||||||||||||||||||||||||||
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Summarised cash flow information for the year ended December 31, 2014:2017:
| SKCC and subsidiaries | KPSC | CMP | BMP | KMP | USP | Izhstal | SKCC and subsidiaries | KPSC | CMP | SUNP | BMP | KMP | USP | Izhstal | ||||||||||||||||||||||||||||||||||||||||||||||
Operating | 14,755 | 109 | 14,053 | 2,253 | 7,287 | 2,262 | (756 | ) | 3,434 | 112 | 8,036 | (211 | ) | (1,221 | ) | 500 | 560 | 751 | ||||||||||||||||||||||||||||||||||||||||||
Investing | (18,094 | ) | (580 | ) | (18,740 | ) | (1,947 | ) | (7,278 | ) | (2,921 | ) | (49 | ) | 8,008 | (38 | ) | (2,950 | ) | 210 | 1,477 | (329 | ) | 949 | 73 | |||||||||||||||||||||||||||||||||||
Financing | 380 | 447 | 5,175 | (392 | ) | (13 | ) | 997 | 773 | (11,445 | ) | (45 | ) | (4,826 | ) | — | (323 | ) | (172 | ) | (1,590 | ) | (755 | ) | ||||||||||||||||||||||||||||||||||||
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Increase (decrease) in cash and cash equivalents, net | (2,959 | ) | (24 | ) | 488 | (86 | ) | (4 | ) | 338 | (32 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
(Decrease) increase in cash and cash equivalents, net | (3 | ) | 29 | 260 | (1 | ) | (67 | ) | (1 | ) | (81 | ) | 69 | |||||||||||||||||||||||||||||||||||||||||||||||
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MECHEL PAO
Notes to the consolidated financial statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 20152018
(All amounts are in millions of Russian rubles, unless stated otherwise)
Summarised cash flow information for the year ended December 31, 2016:
| SKCC and subsidiaries | KPSC | CMP | SUNP | BMP | KMP | USP | Izhstal | |||||||||||||||||||||||||
Operating | 14,923 | 707 | 14,900 | 806 | (491 | ) | 86 | 2,119 | 987 | |||||||||||||||||||||||
Investing | 25,989 | (554 | ) | (8,035 | ) | (806 | ) | 398 | 310 | (1,226 | ) | (33 | ) | |||||||||||||||||||
Financing | (41,114 | ) | 200 | (6,418 | ) | — | 151 | (396 | ) | (839 | ) | (949 | ) | |||||||||||||||||||
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(Decrease) increase in cash and cash equivalents, net | (202 | ) | 353 | 447 | — | 58 | — | 54 | 5 | |||||||||||||||||||||||
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| 8. | Investments in associates |
Investments in associates are comprised of:
| Percent voting shares held at | Investment carrying value at | |||||||||||||||||||||||
Investee | December 31, 2015 | December 31, 2014 | January 1, 2014 | December 31, 2015 | December 31, 2014 | January 1, 2014 | ||||||||||||||||||
Mechel Somani Carbon (Mining segment) | 51 | % | 51 | % | 51 | % | 45 | 39 | 17 | |||||||||||||||
TPTU (Mining segment) | 40 | % | 40 | % | 40 | % | 157 | 155 | 148 | |||||||||||||||
TRMZ (Mining segment) | 25 | % | 25 | % | 25 | % | 82 | 80 | 79 | |||||||||||||||
BWS Bewehrungsstahl GmbH (Steel segment) | — | — | 36 | % | — | — | 7 | |||||||||||||||||
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Total Investments in associates | 284 | 274 | 251 | |||||||||||||||||||||
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Mechel Somani Carbon Private Limited shares are owned by Mechel Carbon AG. The core business is distribution of metallurgical coals on the Indian market. Despite the ownership of 51% of Mechel Somani Carbon shares the Group cannot exercise control over the company.
| Percent of shares held at | Investment carrying value at | |||||||||||||||
Investee | December 31, 2018 | December 31, 2017 | December 31, 2018 | December 31, 2017 | ||||||||||||
Mechel Somani Carbon (Mining segment) | — | 51 | % | — | — | |||||||||||
TPTU (Mining segment) | 40 | % | 40 | % | 189 | 184 | ||||||||||
TRMZ (Mining segment) | 25 | % | 25 | % | 104 | 99 | ||||||||||
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Total investments in associates | 293 | 283 | ||||||||||||||
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TPTU (Tomusinskiy Transportation Management Center) shares are owned by SKCC. The core business is provision of transportation services both to the Group’s subsidiaries and third parties.
services. TRMZ (Tomusinskiy Auto Repair Shop) shares are owned by SKCC. TRMZ provides repair services to the Group’s subsidiaries.
The core business of BWS Bewehrungsstahl GmBH is cutting and processing steel products. Cognor owned 36% of the shares of BWS Bewehrungsstahl GmBH until December 15, 2014. The shares of BWS Bewehrungsstahl GmBH were sold by the Group to third parties for the consideration of EUR 70 thousand (RUB 5 million at exchange rate as of December 15, 2014).services.
The following table shows movements in the investments in associates:
| Mechel Somani Carbon Private Limited (Mining segment) | TPTU (Mining segment) | TRMZ (Mining segment) | BWS Bewehrungsstahl GmbH (Austria) (Steel segment) | Total | Mechel Somani Carbon Private Limited (Mining segment) | TPTU (Mining segment) | TRMZ (Mining segment) | Total | ||||||||||||||||||||||||||||
January 1, 2014 | 17 | 148 | 79 | 7 | 251 | |||||||||||||||||||||||||||||||
Share of profit (loss) | 6 | 7 | 1 | (7 | ) | 7 | ||||||||||||||||||||||||||||||
Disposal of investments | — | — | — | (1 | ) | (1 | ) | |||||||||||||||||||||||||||||
December 31, 2015 | 44 | 157 | 83 | 284 | ||||||||||||||||||||||||||||||||
Share of (loss) profit | — | 18 | 7 | 25 | ||||||||||||||||||||||||||||||||
Provision for impairment of investments | (42 | ) | (42 | ) | ||||||||||||||||||||||||||||||||
Exchange differences | 16 | — | — | 1 | 17 | (2 | ) | — | — | (2 | ) | |||||||||||||||||||||||||
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December 31, 2014 | 39 | 155 | 80 | — | 274 | |||||||||||||||||||||||||||||||
Share of (loss) profit | (5 | ) | 2 | 3 | — | — | ||||||||||||||||||||||||||||||
Exchange differences | 10 | — | — | — | 10 | |||||||||||||||||||||||||||||||
December 31, 2016 | — | 175 | 90 | 265 | ||||||||||||||||||||||||||||||||
Share of profit | — | 9 | 9 | 18 | ||||||||||||||||||||||||||||||||
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December 31, 2015 | 44 | 157 | 83 | — | 284 | |||||||||||||||||||||||||||||||
December 31, 2017 | — | 184 | 99 | 283 | ||||||||||||||||||||||||||||||||
Share of profit | — | 5 | 5 | 10 | ||||||||||||||||||||||||||||||||
December 31, 2018 | — | 189 | 104 | 293 | ||||||||||||||||||||||||||||||||
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MECHEL PAO
Notes to the consolidated financial statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2015
(All amounts are in millions of Russian rubles, unless stated otherwise)
Summarized financial information on equity method investees as of December 31, 2015, 2014 and for the years then ended and as of January 1, 2014 is as follows:
Statement of financial position information | December 31, 2015 | December 31, 2014 | January 1, 2014 | |||||||||
Current assets | 929 | 801 | 804 | |||||||||
Non-current assets | 295 | 309 | 312 | |||||||||
Current liabilities | (371 | ) | (303 | ) | (354 | ) | ||||||
Non-current liabilities | (19 | ) | (21 | ) | (20 | ) | ||||||
Statement of profit (loss) information | 2015 | 2014 | ||||||
Revenues and other income | 1,158 | 1,408 | ||||||
Operating income | 70 | 44 | ||||||
Net income | 36 | 19 | ||||||
The accompanying financial statements for the year ended December 31, 2015 are the first the Group has prepared in accordance with IFRS. The date of transition to IFRS is January 1, 2014. For periods up to and including the year ended December 31, 2014, the Group prepared its consolidated financial statements in accordance with U.S. GAAP.
Accordingly, the Group has prepared financial statements that comply with IFRS applicable as of December 31, 2015, together with the comparative period data for the year ended December 31, 2014, as described in the summary of significant accounting policies (Note 3). In preparing the financial statements, the Group’s opening consolidated statement of financial position was prepared as of January 1, 2014, the Group’s date of transition to IFRS. This note explains the principal adjustments made by the Group in representing its U.S. GAAP financial statements, including the statement of financial position as of January 1, 2014 and the financial statements for the year ended December 31, 2014, in order to comply with IFRS.
The presentation currency of the Group’s consolidated financial statements is the Russian ruble. Before transition to IFRS, U.S. dollar was the presentation currency of the Group’s consolidated financial statements prepared under U.S. GAAP. The reason of adopting the Russian ruble as the presentation currency in the consolidated statements under IFRS is to allow a greater transparency of the financial and operating performance of the Group as it more closely reflects the profile of revenue and operating income of the Group that are generated in Russian rubles. The U.S. GAAP financial information included in the consolidated financial statements as of January 1, 2014 and for the year ended December 31, 2014 previously reported in the U.S. Dollars has been converted into Russian rubles using the procedures outlined below:
MECHEL PAO
Notes to the consolidated financial statements for the year ended December 31, 2015
(All amounts are in millions of Russian rubles, unless stated otherwise)
As a first-time adopter of IFRS, the Group applied IFRS 1 First-time Adoption of International Financial Reporting Standards. The Standard contains a number of voluntary and mandatory exemptions from the requirement to retrospectively apply IFRS, which the Group has applied as of January 1, 2014.
The Group has applied the mandatory exceptions and certain optional exemptions as set out below:
Business combinations — The Group has not applied IFRS 3 Business Combinations retrospectively to the business combinations that occurred before the date of transition to IFRS. As a result, assets recognized and liabilities assumed in the past business combinations under U.S. GAAP have remained unchanged at the date of transition, except for the changes described in the notes below.
Currency translation differences — The Group has used the IFRS 1 exemption relating to IAS 21 The Effects of Changes in Foreign Exchange Rates. As a result, the cumulative translation differences for all foreign operations of the Group were set to be zero at the date of transition. The gain or loss on a subsequent disposal of any foreign operations will include only exchange differences that arose after the date of transition.
Borrowing costs — The Group has applied the transitional provisions in IAS 23 Borrowing Costs, and capitalised borrowing costs on qualifying assets after the date of transition, and where the construction was commenced as of and after the date of transition to IFRS according to IAS 23 Borrowing Costs. Borrowing costs capitalised under U.S. GAAP prior to the date of transition have not been adjusted.
Rehabilitation provision— The Group has elected to use the IFRS 1 exemption relating to recognition of changes in the measurement of rehabilitation provision and therefore measures those in accordance with IFRIC 1 Changes in Existing Decommissioning, Restoration and Similar Liabilities as of January 1, 2014.
Pension obligations — The Group has elected to recognize all cumulative actuarial gains and losses as at the date of transition in retained earnings. The Group is not required to re-compute the unrecognized portion of actuarial gains and losses from the inception of the defined benefit plans. Instead, the Group applies IAS 19 Employee Benefits from the date of transition. Therefore, at the date of transition, the Group recognizes the pension obligations in accordance with IAS 19 Employee Benefits and no unrecognized actuarial gains and losses are presented at the transition date.
Estimates — The estimates as of January 1, 2014 and December 31, 2014 are consistent with those made as of the same dates in accordance with U.S. GAAP apart from the estimates described above.
Changes in the presentation (CP) — The Group changed the presentation of certain items in the consolidated statement of financial position and statement of profit (loss) and comprehensive income (loss) as compared to the presentation under the previously issued U.S. GAAP financial statements. The most significant changes in the presentation related to:
CP(1) Other accounts receivable (RUB 1,920 million as of January 1, 2014 and RUB 932 million as of December 31, 2014) are presented within Trade and other receivables in the consolidated statement of financial position. Under U.S. GAAP, the Group reflected Other accounts receivables within Other current assets.
CP(2) Income tax receivable (RUB 2,936 million as of January 1, 2014 and RUB 578 million as of December 31, 2014) is presented as a separate item in the consolidated statement of financial position. Under U.S. GAAP, it was reflected within Prepayments and other current assets.
MECHEL PAO
Notes to the consolidated financial statements for the year ended December 31, 2015
(All amounts are in millions of Russian rubles, unless stated otherwise)
CP(3) Other current financial assets (RUB 360 million as of January 1, 2014 and RUB 186 million as of December 31, 2014) are presented as a separate item in the consolidated statement of financial position. Under U.S. GAAP, Other current financial assets were reflected within Prepayments and other current assets.
CP(4) Interest payable (RUB 2,051 million as of January 1, 2014 and RUB 14,615 million as of December 31, 2014) is presented as part of Interest-bearing loans and borrowings in the consolidated statement of financial position. Under U.S. GAAP, Interest payable was reflected within Accrued expenses and Other current liabilities.
CP(5) Rehabilitation provision (non-current portion of RUB 1,655 million and current portion of RUB 66 million as of January 1, 2014, non-current portion of RUB 2,459 million and current portion of RUB 195 million as of December 31, 2014) is included in Provisions in the consolidated statement of financial position. Under U.S. GAAP, Rehabilitation provision was presented as a separate item.
CP(6) Provision for taxes other than income tax (RUB 521 million as of January 1, 2014 and RUB 769 million as of December 31, 2014) is included in Provisions in the consolidated statement of financial position. Under U.S. GAAP, Provision for taxes other than income tax, was reflected within Taxes and social charges payable.
CP(7) Accrual for unused vacation (RUB 1,618 million as of January 1, 2014 and RUB 1,651 million as of December 31, 2014) is presented within Trade and other payables in the consolidated statement of financial position. Under U.S. GAAP, it was presented within Accrued expenses and other current liabilities.
CP(8) Dividends payable (RUB 108 million as of January 1, 2014 and RUB 104 million as of December 31, 2014) are presented within Trade and other payables in the consolidated statement of financial position. Under U.S. GAAP, Dividends payable were reflected as a separate item.
CP(9) Other current liabilities (RUB 7,233 million as of January 1, 2014 and RUB 27,989 million as of December 31, 2014) are presented within Trade and other payables in the consolidated statement of financial position. Under U.S. GAAP, they were reflected as a separate item.
CP(10) Provision for taxes and other provisions (RUB 325 million as of January 1, 2014 and RUB 1,285 million as of December 31, 2014) are presented within Provisions in the consolidated statement of financial position. Under U.S. GAAP, they were reflected within Accrued expenses and other current liabilities.
CP(11) Income tax payable (RUB 594 million as of January 1, 2014 and RUB 1,272 million as of December 31, 2014) is included in a separate item in the consolidated statement of financial position. Under U.S. GAAP, Income tax payable was reflected within Taxes and social charges payable. Long-term income tax payable in the amount of RUB 3,447 million as of December 31, 2014 is included in a separate item in the consolidated statement of financial position. Under U.S. GAAP, it was reflected within Other non-current liabilities.
CP(12) The Group adopted net presentation of the input and output VAT on advances against advances issued and received for the purpose of harmonization with the RAS. Under U.S. GAAP, the Group presented advances and related VAT on advances in gross amounts. The effect of the changes was as follows:
As of the date of transition to IFRS, it resulted in the decrease in advances received from related parties of RUB 71 million, decrease in advances issued and VAT on advances received included in Other
MECHEL PAO
Notes to the consolidated financial statements for the year ended December 31, 20152018
(All amounts are in millions of Russian rubles, unless stated otherwise)
| 9. |
|
Note 1 provides information about the Group’s structure, including details of the subsidiaries and the holding company. The following table provides the total amount of transactions that have been entered into with the related parties in 2018, 2017 and 2016.
| 2018 | 2017 | 2016 | ||||||||||||||||||||||||||||||||||
| Purchases | Sales | Other loss (income) | Purchases | Sales | Other loss (income) | Purchases | Sales | Other loss (income) | ||||||||||||||||||||||||||||
Associates | 121 | 103 | (33 | ) | 230 | 134 | (6 | ) | 200 | 117 | (11 | ) | ||||||||||||||||||||||||
Controlling shareholders and entities under control of the Group’s Controlling shareholders | 280 | 52 | (9 | ) | 267 | 50 | (33 | ) | 278 | 45 | 41 | |||||||||||||||||||||||||
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Total | 401 | 155 | (42 | ) | 497 | 184 | (39 | ) | 478 | 162 | 30 | |||||||||||||||||||||||||
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As of December 31, 2014, it resulted2018 and 2017, the Group had the following balances in settlement with related parties:
| December 31, 2018 | December 31, 2017 | |||||||||||||||||||||||
| Financial assets from | Financial liabilities to | Total outstanding, net | Financial assets from | Financial liabilities to | Total outstanding, net | |||||||||||||||||||
Associates | 7 | (13 | ) | (6 | ) | 16 | (23 | ) | (7 | ) | ||||||||||||||
Controlling shareholders and entities under control of the Group’s Controlling shareholders | 50 | (500 | ) | (450 | ) | 47 | (35 | ) | 12 | |||||||||||||||
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Total | 57 | (513 | ) | (456 | ) | 63 | (58 | ) | 5 | |||||||||||||||
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| (a) | Transactions with associates |
The Group’s associates provide to the decrease in advances issuedGroup’s subsidiaries transportation and VAT on advances received included in Other current assetsauto repair services. During the year ended December 31, 2018, 2017 and 2016, the Group purchased from its associates transportation services in the amount of RUB 53671 million, decreaseRUB 98 million and RUB 114 million, respectively, and repair services in Advances receivedthe amount of RUB 29250 million, RUB 132 million and VAT on advances within Tax payable other than income taxRUB 86 million, respectively.
| (b) | Controlling shareholders and entities under control of the Group’s Controlling shareholders |
As of December 31, 2018 and 2017, the amounts of accounts receivable fully covered by the allowance for expected credit losses included amounts receivable of RUB 244 million.
CP(13) Other operating income24,391 million and RUB 24,391 million, respectively, described below. In December 2013, the Group, related party (an entity wholly owned by the Controlling Shareholder) and the former Estar metallurgical plants (hereinafter referred to as “metallurgical plants”) signed an assignment agreement. Under that agreement, the Group assigned to its related party the right to collect amounts due from the metallurgical plants, and the related party is presented as a separate item (RUB 851 million to repay this amount to the Group through November 2017. In November 2017, the Group extended the terms of repayment through 2022. The amount of receivables and allowance for expected credit losses have been reclassified toNon-current financial assets (Note 13).
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2014) in the consolidated statement of profit (loss) and other comprehensive income (loss). Under U.S. GAAP, it was reflected within Administrative and other operating expenses, net.
CP(14) The Group presented Other non-current financial assets in a separate line in the statement of financial position. Under U.S. GAAP financial statements, these assets were included in Other non-current assets in the amount of RUB 201 million and RUB 59 million as of December 31, 2014 and January 1, 2014, correspondingly. Investments in associates are presented within Other non-current financial assets. Under U.S. GAAP, they were reflected within Investments in associates (RUB 72 million as of December 31, 2014).
CP(15) The Group presents provisions for legal claims (RUB 367 million as of January 1, 2014 and RUB 36 million as of December 31, 2014) as part of Provisions. Under U.S. GAAP, they were reflected within Other payables.
CP(16) Other income and Other expenses are presented as separate lines (RUB 684 million and RUB 1,486 million, for the year ended December 31, 2014, respectively) in the consolidated statement of profit (loss) and other comprehensive income (loss). Under U.S. GAAP, it was reflected together.
Additionally, certain reclassifications have been made to the December 31, 2014 consolidated statement of financial position to conform to the current year presentation. Such reclassifications affect the presentation of certain items in the consolidated statement of financial position, and have no impact on net income or equity of the Group.
Adjustments, reclassifications and remeasurement made in order to comply with IFRS
Property, plant and equipment and mineral licenses — The Group’s property, plant and equipment and mineral licenses are recorded at historical cost of acquisition. To arrive at IFRS historical cost the Group used the historical cost of property, plant and equipment and mineral licenses in accordance with U.S. GAAP as the Group believes that it reasonably approximates historical values in accordance with IFRS, and adjusted it through retrospective application of the requirements of IAS 16 Property, Plant and Equipment, IAS 36 Impairment of Assets and IFRIC 1 Changes in Existing Decommissioning, Restoration and Similar Liabilities as described in Notes C, E, F below.
A — Debt issuance costs
In accordance with IFRS, fees paid on origination of loan facilities are recognized as transaction costs which are deducted from outstanding debt and are amortized using the effective interest rate method. Under U.S. GAAP, debt issuance costs were capitalized as a separate asset and included in Other current or non-current assets and then amortized using the effective interest rate method. The amounts reclassified from other current and non-current assets to re-measure debt liabilities in order to comply with IFRS requirements comprised RUB 2,766 million (current portion of RUB 2,743 million and non-current portion of RUB 23 million) and
MECHEL PAO
Notes to the consolidated financial statements for the year ended December 31, 20152018
(All amounts are in millions of Russian rubles, unless stated otherwise)
The outstanding cash balance in Coalmetbank, entity under control of the Group’s controlling shareholders, was RUB 4,409 million (current portion of RUB 1,730703 million and non-current portion of RUB 2,679 million)1,217 million as of December 31, 20142018 and January 1, 2014,December 31, 2017, respectively.
| (c) | Compensation to key management personnel |
The differencestotal compensation to key management personnel was included in effective interest rate method calculations under IFRSgeneral and U.S. GAAP resulted in a RUB 1,051 million decrease in the balance of Interest-bearing loans and borrowings and corresponding decrease in Foreign exchange gain (loss), netadministrative expenses in the consolidated statement of profit (loss) and other comprehensive income (loss).
B — Exchange differences
Under U.S. GAAP, the Group recognized exchange differences on foreign operations in a separate component of equity. Exchange differences for all foreign operations are deemed to be zero as at the date of transition in order to comply with IFRS requirements. A reclassification in equity from Accumulated other comprehensive income (loss) to Accumulated losses of RUB 13,568 million was made as of January 1, 2014.
C — Rehabilitation provision expenses
According to U.S. GAAP, rehabilitation provision (asset retirement obligations) was measured based on the estimated cost of rehabilitation, discounted to its net present value upon recognition. Adjustments to discount rate were not reflected in the provisions under U.S. GAAP unless there was an upward revision in the future cost estimates. The Group has taken the exemption and applied IFRIC 1 Changes in the Existing Decommissioning, Restoration and Similar Liabilities; correspondingly, the rehabilitation provision as of January 1, 2014 was revalued using current discount rate as of that date. In the subsequent periods, the rehabilitation provision was remeasured using the current discount rate asconsisted of the end of each reporting period. This resulted in the following differences between rehabilitation provision recorded in the consolidated financial statements under IFRS and amounts reported under U.S. GAAP:
D — Actuarial gains and losses
At the date of transition to IFRS, the Group recognized actuarial gain/loss accumulated in prior period in retained earnings. Under IFRS, all prior service costs (positive or negative) are recognized in profit or loss when the employee benefit plan is amended and are not allowed to be spread over any future service period, which may create volatility in profit or loss whereas prior service cost is recognized in other comprehensive income/(loss) under U.S. GAAP at the date the plan amendment is adopted and then amortized into income over the participants’ remaining years of service, service to full eligibility date, or life expectancy, depending on the facts
MECHEL PAO
Notes to the consolidated financial statements for the year ended December 31, 2015
(All amounts are in millions of Russian rubles, unless stated otherwise)
and circumstances. Finally, U.S. GAAP requires a pension contribution tax to be recognized as a component of net benefit cost in the period in which the contribution is made. Under IFRS, taxes related to benefit plans are included in the calculation of the benefit obligation. All above mentioned differences resulted in the following adjustments:
E — Impairment of non-current assets and goodwill
Under U.S. GAAP, goodwill is tested for impairment by using a two-step approach. Under the first step, the fair value of a “reporting unit” is compared to its carrying value. A reporting unit is the level, at which goodwill impairment is measured and it is defined as an operating segment or one level below it if certain conditions are met. If the fair value of the reporting unit is less than its carrying value, goodwill is impaired. Under step two, the amount of goodwill impairment is measured by the amount that the reporting unit’s goodwill carrying value exceeds the “implied” fair value of goodwill. The implied fair value of goodwill can only be determined by deducting the fair value of all tangible and intangible net assets (including unrecognized intangible assets) of the reporting unit from the fair value of the reporting unit (as determined in the first step). In this step, the fair value of the reporting unit is allocated to all of the reporting unit’s assets and liabilities (a hypothetical purchase price allocation). If goodwill and another asset (or asset group) of a reporting unit are tested for impairment at the same time, the other asset (or asset group) shall be tested for impairment before goodwill. If the asset group was impaired, the impairment loss would be recognized prior to goodwill being tested for impairment.
Under IFRS, impairment exists when the carrying value of an asset or CGU exceeds its recoverable amount, which is the higher of its fair value less costs of disposal and its value in use. The fair value less costs of disposal calculation is based on available data from binding sales transactions, conducted at arm’s length for similar assets or observable market prices less incremental costs for disposing of the asset. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessment of the time value of money and the risks specific to the assets.
The Group recognized differences related to impairment of non-current assets other than goodwill — property, plant and equipment and mineral licenses:
Under U.S. GAAP requirements, in the first step of impairment testing, the carrying value of non-current assets is compared to the undiscounted cash flows of reporting unit, and only if the carrying amount exceeds the undiscounted cash flows, the second step is performed where the carrying amount is compared to the discounted cash flows. Under IFRS requirements, impairment is determined by comparison of the carrying amount to the recoverable amount, which is determined through the use of discounted cash flows. This difference in requirements resulted in the difference in impairment testing of non-current assets of two CGUs — the BCG Companies and Ekos-Plus as of January 1, 2014. According to the first step of impairment testing under U.S. GAAP, no excess of the carrying value over the undiscounted cash flows was identified, therefore the second
MECHEL PAO
Notes to the consolidated financial statements for the year ended December 31, 2015
(All amounts are in millions of Russian rubles, unless stated otherwise)
step of testing was not performed, and no impairment of non-current assets was recognized. As a result of the impairment test in accordance with IAS 36 Impairment of Assets, excess of the carrying value over the recoverable amount was identified for the BCG Companies in the amount of RUB 40,491 million including impairment of property, plant and equipment of RUB 4,185 million and mineral licenses of RUB 54,862 million, and the respective effect on deferred taxes of RUB 18,556 million; and for Ekos-plus in the amount of RUB 51 million related to property, plant and equipment as of January 1, 2014.
As of December 31, 2014, the BCG Companies were recognized as disposal group classified as held for sale in the consolidated financial statements under IFRS as well as under U.S. GAAP. In the both sets of consolidated financial statements, net assets of the BCG Companies were written down to fair value less cost to sell and, as of December 31, 2014, there is no difference in the carrying value of the BCG Companies’ non-current assets between IFRS and U.S. GAAP. A difference arose in the amount of impairment loss recognized by the Group in respect of the BCG Companies in the year ended December 31, 2014, as, under IFRS, impairment was partially recognized at the date of transition, whereas, in the U.S. GAAP financial statements, the total amount of impairment loss was recognized by the Group in the year ended as of December 31, 2014. The difference in Profit (loss) after tax from discontinued operations, net for the year ended December 31, 2014 amounted to RUB 69,424 million. This difference also affected Other comprehensive income (loss) as impairment was recognized in different periods under IFRS and under U.S. GAAP — effect on currency translation adjustment comprised RUB 28,933543 million in the year ended December 31, 2014.
Other difference between IFRS2018, 2017 and U.S. GAAP requirements relates2016, respectively. There are no share-based payments to the reversal of previously recognized impairment loss. If there is a change in estimates used to determine the recoverable amount previously recognized impairment loss of property, plantkey management personnel. The Group’s directors and equipment can be reversed under IFRS whereas no such reversal is allowed according to U.S. GAAP requirements. This difference has affected the value of non-current assets of DEMP. According to U.S. GAAP, the Group recognized impairment loss in the consolidated financial statements as of June 30, 2013. The recoverable value was determined on binding offer from a third party. As of December 31, 2013, the recoverable value of DEMP has increased. According to U.S. GAAP, previously identified impairment loss was not reversed. As of January 1, 2014, according to IFRS requirements, the Group partially reversed impairment loss previously recognized in the amount of RUB 477 million. Due to the difference in the carrying value of DEMP’s non-current assets as of January 1, 2014, the difference in impairment loss recognized during the period ended December 31, 2014 arose in the consolidated financial statement under IFRS as compared to those previously prepared in accordanceexecutive officers are also provided with U.S. GAAP in the amount of RUB 258 million.
F — Negative goodwill
In accordance with U.S. GAAP (ASC 805 Business combination), the Group recognized negative goodwill which arose on the Group’s business combinations carried out before January 1, 2009 as deferred credit for an excess of net assets acquired over cost and allocated it to the acquired non-current assets except for the deferred taxes. In order to comply with IFRS, the Group derecognized the carrying amount of that deferred credit at the transition date:
MECHEL PAO
Notes to the consolidated financial statements for the year ended December 31, 2015
(All amounts are in millions of Russian rubles, unless stated otherwise)
G — Discontinued operations
In accordance with U.S. GAAP, the Group recognized and presented the BCG Companies as disposal group held for sale as of January 1, 2014 in the comparative information to the Group’s consolidated financial statements for the year ended December 31, 2014 when criteria for recognition of the BCG Companies as disposal group held for sale were met. Under IFRS, the Group also recognized the BCG Companies as asset held for sale as of December 31, 2014. In accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations, reclassification of comparative information in the statement of financial position for prior periods to reflect the classification in the statement of financial position for the latest period presented is not required, therefore the Group did not amend the presentation of its assets and liabilities in the comparative statement of financial position as of January 1, 2014. The effect of changes related to discontinued operations presentation made to comply with IFRS requirements, is presented in a separate column in the table below.
The Group recognized several subsidiaries as discontinued operations in its previously issued U.S. GAAP consolidated financial statements as of December 31, 2013: TPP Rousse, Invicta, Lomprom Rostov, TFP, Voskhod-Oriel, Voskhod-Chrome and Voskhod Trading. These subsidiaries do not meet IFRS 5 Non-current Assets Held for Sale and Discontinued Operations requirements to be recognized as discontinued operations as they do not represent a separate major line of business or geographical area of operations. The Group disposed of all these subsidiaries before December 31, 2013, and residual income and expenses related to these operations were presented as discontinued operations in the U.S. GAAP consolidated financial statements for the year ended December 31, 2014. In these financial statements prepared under IFRS, the Group presents these income and expenses as part of continuing operations. This resulted in the following adjustments to the U.S. GAAP amounts: increase in Revenue of RUB 126 million, increase in Cost of goods sold of RUB 140 million, increase in Allowance for doubtful accounts of RUB 567 million, and increase in Administrative and other operating expenses of RUB 204 million, and respective decrease in Loss from discontinued operations of RUB 785 million in the consolidated statements of profit (loss) and comprehensive income (loss) under IFRS as compared to the consolidated statement of operations under U.S. GAAP for the period ended December 31, 2014.
H — Inventory provision
The Group recalculated net realizable value provision in order to comply with IAS 2 Inventories requirements. This resulted in the increase in the Inventories balance in the amount of RUB 166 million as of January 1, 2014 and RUB 193 million as of December 31, 2014, and decrease in Cost of goods sold of RUB 31 million for the year ended December 31, 2014.
I — Borrowing costs
The Group recalculated borrowing costs capitalized in accordance with IFRS requirements. The effect of recalculations resulted in the increase in Property, plant and equipment in the amount of RUB 1,194 million as of December 31, 2014 in the consolidated statement of the financial position under IFRS as compared to U.S. GAAP and decrease in Finance costs of RUB 337 million and Foreign exchange gain/loss, net of RUB 857 million in the consolidated statements of profit (loss) and comprehensive income (loss) under IFRS compared to the consolidated statement of operations under U.S. GAAP.
MECHEL PAO
Notes to the consolidated financial statements for the year ended December 31, 2015
(All amounts are in millions of Russian rubles, unless stated otherwise)
J — Classification of liabilities
As of January 1, 2014, the Group was not in compliance with certain covenants under various credit facilities entered into with several lenders, including certain financial ratios such as ‘EBITDA to Net Interest Expense’ and ‘Net Debt to EBITDA’ ratios. In April-May 2014, the lenders provided their consent to waive all breaches. According to U.S. GAAP requirements, when breach of covenants exists at the end of reporting period and lender agrees after the reporting period and before authorization of the financial statements for the issue not to demand the repayment, long-term credit facilities can be classified as non-current. In accordance with IFRS, such credit facilities shall be presented as current at the reporting date, unless waivers were received from lenders before the reporting date. As the Group received consent from the lenders after the reporting date all corresponding liabilities are presented by the Group as current as of January 1, 2014. These liabilities included loans and borrowings for which covenants were breached, and also finance leases and other payables under contracts with cross-default clauses linked to those loans. The effect of this difference was as follows as of January 1, 2014:
K — Deferred taxes
Deferred tax assets and liabilities are treated as non-current under IFRS. Netting is performed for deferred tax assets and liabilities relating to income taxes levied by the same taxation authority on the same taxable entity where the Group has a legally enforceable right to set off current tax assets against current tax liabilities. Under U.S. GAAP, the deferred tax balances were calculated by applying the currently enacted statutory tax rate in each jurisdiction applicable to the period in which the temporary differences between the carrying amounts and tax base (both in respective local currencies) of assets and liabilities are expected to reverse. Deferred tax assets in the amount of RUB 5,132 million as of December 31, 2014 (January 1, 2014: RUB 1,144 million) and deferred tax liabilities in the amount of RUB 444 million as of December 31, 2014 (January 1, 2014: RUB 1,236 million) were recognized as current under U.S. GAAP. Under IFRS, deferred taxes have been recalculated based on the IFRS net book values of assets and liabilities and are presented as non-current. Deferred tax assets and deferred tax liabilities were offset in the amounts of RUB 7,799 million as of December 31, 2014 (RUB 793 million as of January 1, 2014).
The main differences in deferred tax amounts calculated under IFRS and deferred tax amounts calculated under U.S. GAAP were due to the following:
MECHEL PAO
Notes to the consolidated financial statements for the year ended December 31, 2015
(All amounts are in millions of Russian rubles, unless stated otherwise)
The aggregate decrease in deferred tax benefit of RUB 361 million for the year ended December 31, 2014 is the result of all adjustments described in the notes A-L and N.
L — Retained earnings and Non-controlling interest
Adjustments and re-measurements made by the Group as of January 1, 2014 in order to comply with IFRS requirements resulted in the increase in Accumulated deficit by RUB 52,781 million. This also had effect on net assets of subsidiaries and respective non-controlling interests.
M — The consolidated statement of cash flows
M1 — Under IFRS, Finance income is reflected as a separate item within Adjustments to reconcile net loss from continuing operations to net cash provided by operating activities.
M2 — Under IFRS, Finance costs are reflected as a separate item within Adjustments to reconcile net loss from continuing operations to net cash provided by operating activities.
M3 — Under IFRS, Interest received is reflected as a separate item within Changes in working capital.
M4 — Under IFRS, Interest paid is reflected as a separate item within Changes in working capital.
M5 — Under IFRS, Income taxes paid are reflected as a separate item within Changes in working capital.
M6 — Under IFRS, Interest paid, capitalized is presented as a separate item. Under U.S. GAAP, it was reflected within Purchases of property, plant and equipment.
M7 — Under IFRS, overdrafts are accounted for as cash equivalents. Under U.S. GAAP, cash flows from overdrafts were included in cash flows from financing activity on a net basis.
N — Former related parties
Under U.S. GAAP (ASC 810 Consolidation), the Group determined certain Russian and foreign metallurgical plants and trading companies, which were formerly part of the Estar Group or controlled by the Estar Group shareholders (“the former Estar metallurgical plants”) as Variable Interest Entities (“VIEs”). The Group is not the primary beneficiary of the former Estar metallurgical plantsvoluntary medical insurance and the former Estar metallurgical plants were defined as related parties in previously issued U.S. GAAP consolidated financial statements asuse of December 31, 2014 and January 1, 2014. While under IFRS 12 Disclosure of Interests in Other Entities, an
MECHEL PAO
Notes to the consolidated financial statements for the year ended December 31, 2015
(All amounts are in millions of Russian rubles, unless stated otherwise)
interest in an unconsolidated structured entity as defined by held by a reporting entity does not make the structured entity a related party to the reporting entity unless it would otherwise meet the definition of a related party (e.g. because the structured entity is an associate of the reporting entity). Accordingly, in the accompanying consolidated financial statements, the former Estar metallurgical plants are recognized as third parties. The main effects of this difference were as follows:
Other adjustments made by the Group to the U.S. GAAP amounts in order to meet IFRS requirements, which are not described above were insignificant.
Reconciliation of equity as of January 1, 2014 (date of transition to IFRS):
| U.S. GAAP | U.S. GAAP | U.S. GAAP component classified as discontinued | Changes in the presentation | Adjustments and reclassifications / remeasurements | IFRS | |||||||||||||||||||||
| Notes | Thousands of U.S. dollars | Millions of Russian rubles1 | Note G | |||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||
Current Assets | ||||||||||||||||||||||||||
Cash and cash equivalents | 272,936 | 8,927 | 52 | — | — | 8,979 | ||||||||||||||||||||
Trade and other receivables | N,CP(1) | 587,999 | 19,242 | 177 | 1,920 | 1,138 | 22,477 | |||||||||||||||||||
Due from related parties, net of allowance | N,CP(12) | 56,792 | 1,859 | — | (71 | ) | (1,592 | ) | 196 | |||||||||||||||||
U.S. GAAP — Deferred income taxes | K | 25,092 | 821 | 323 | — | (1,144 | ) | — | ||||||||||||||||||
Inventories | F,H | 1,407,868 | 46,044 | 177 | — | 408 | 46,629 | |||||||||||||||||||
Income tax receivables | CP(2) | — | — | — | 2,936 | — | 2,936 | |||||||||||||||||||
Other current financial assets | CP(3) | — | — | — | 360 | — | 360 | |||||||||||||||||||
Other current assets | A,N,CP(1)- (3),CP(12) | 439,624 | 14,327 | 94 | (5,839 | ) | (1,357 | ) | 7,225 | |||||||||||||||||
U.S. GAAP — Current assets of discontinued operations | G | 25,159 | 823 | (823 | ) | — | — | — | ||||||||||||||||||
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Total current assets | 2,815,470 | 92,043 | — | (694 | ) | (2,547 | ) | 88,802 | ||||||||||||||||||
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| |||||||||||||||
MECHEL PAO
Notes to the consolidated financial statements for the year ended December 31, 2015
(All amounts are in millions of Russian rubles, unless stated otherwise)
| U.S. GAAP | U.S. GAAP | U.S. GAAP component classified as discontinued | Changes in the presentation | Adjustments and reclassifications / remeasurements | IFRS | |||||||||||||||||||||
| Notes | Thousands of U.S. dollars | Millions of Russian rubles1 | Note G | |||||||||||||||||||||||
Non-current assets | ||||||||||||||||||||||||||
Property, plant and equipment | C,E,F | 6,726,116 | 220,107 | 4,772 | — | 1,374 | 226,253 | |||||||||||||||||||
Mineral licenses | E,F | 1,293,470 | 42,334 | 64,724 | (55,331 | ) | 51,727 | |||||||||||||||||||
Non-current financial assets | CP(14) | 14,787 | 484 | — | 59 | — | 543 | |||||||||||||||||||
Investments in associates | 7,604 | 249 | — | — | 2 | 251 | ||||||||||||||||||||
Deferred tax assets | K | 5,066 | 166 | — | — | 351 | 517 | |||||||||||||||||||
Goodwill | 687,763 | 22,510 | — | — | 10 | 22,520 | ||||||||||||||||||||
Other non-current assets | A, CP(14) | 127,861 | 4,184 | 1,080 | (59 | ) | (2,724 | ) | 2,481 | |||||||||||||||||
U.S. GAAP – Non-current assets of discontinued operations | G | 2,156,373 | 70,576 | (70,576 | ) | — | — | — | ||||||||||||||||||
Total non-current assets | 11,019,040 | 360,610 | — | — | (56,318 | ) | 304,292 | |||||||||||||||||||
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|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total assets | 13,834,510 | 452,653 | — | (694 | ) | (58,865 | ) | 393,094 | ||||||||||||||||||
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| |||||||||||||||
Equity and liabilities | ||||||||||||||||||||||||||
Current liabilities | ||||||||||||||||||||||||||
Interest-bearing loans and borrowings | CP(4),A,J | 1,478,154 | 48,297 | 221 | 2,051 | 216,509 | 267,078 | |||||||||||||||||||
Trade and other payables | J,N, CP(7), CP(8),CP(9) CP(15) | 929,375 | 30,393 | 956 | 8,757 | 11,867 | 51,973 | |||||||||||||||||||
Advances received | CP(12) | 140,919 | 4,566 | — | (302 | ) | 26 | 4,290 | ||||||||||||||||||
Due to related parties | N | 106,943 | 3,500 | — | — | (2,476 | ) | 1,024 | ||||||||||||||||||
Provisions | C,CP(6), CP(10), CP(15) | 2,001 | 65 | 213 | 1,213 | 40 | 1,531 | |||||||||||||||||||
Pension obligations | D | 18,578 | 607 | 59 | — | 211 | 877 | |||||||||||||||||||
Finance lease liabilities | J | 122,754 | 4,018 | 2 | — | 6,789 | 10,809 | |||||||||||||||||||
Income tax payable | CP(11) | 78,332 | 2,560 | — | 594 | 19 | 3,173 | |||||||||||||||||||
Tax payable other than income tax | CP(6), CP(11),CP(12) | 264,861 | 8,672 | 440 | (1,672 | ) | — | 7,440 | ||||||||||||||||||
U.S. GAAP —Dividends payable | CP(8) | 3,293 | 108 | — | (108 | ) | — | — | ||||||||||||||||||
U.S. GAAP — Deferred income taxes | K | 37,775 | 1,236 | — | — | (1,236 | ) | — | ||||||||||||||||||
U.S. GAAP — Accrued expenses and other current liabilities | CP(4), CP(7), CP(9), CP(10) | 343,457 | 11,241 | — | (11,227 | ) | (14 | ) | — | |||||||||||||||||
U.S. GAAP — Current liabilities of discontinued operations | G | 57,781 | 1,891 | (1,891 | ) | — | — | — | ||||||||||||||||||
MECHEL PAO
Notes to the consolidated financial statements for the year ended December 31, 2015
(All amounts are in millions of Russian rubles, unless stated otherwise)
| U.S. GAAP | U.S. GAAP | U.S. GAAP component classified as discontinued | Changes in the presentation | Adjustments and reclassifications / remeasurements | IFRS | |||||||||||||||||||||
| Notes | Thousands of U.S. dollars | Millions of Russian rubles1 | Note G | |||||||||||||||||||||||
Other current liabilities | — | — | — | — | 29 | 29 | ||||||||||||||||||||
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| |||||||||||||||
Total current liabilities | 3,584,223 | 117,154 | — | (694 | ) | 231,764 | 348,224 | |||||||||||||||||||
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Non-current liabilities | ||||||||||||||||||||||||||
Interest-bearing loans and borrowings | A,J | 7,513,277 | 245,904 | 227 | — | (220,880 | ) | 25,251 | ||||||||||||||||||
Provisions | C | 50,567 | 1,655 | 215 | — | 2,433 | 4,303 | |||||||||||||||||||
Pension obligations | D | 104,525 | 3,412 | 1,552 | — | (61 | ) | 4,903 | ||||||||||||||||||
Finance lease liabilities | J | 296,875 | 9,717 | — | — | (6,744 | ) | 2,973 | ||||||||||||||||||
Deferred tax liabilities | K | 506,241 | 16,569 | 18,871 | — | (17,965 | ) | 17,475 | ||||||||||||||||||
Other non-current liabilities | J | 293,370 | 9,601 | 1,181 | — | (7,329 | ) | 3,453 | ||||||||||||||||||
U.S. GAAP — Long-term liabilities of discontinued operations | G | 673,591 | 22,046 | (22,046 | ) | — | — | — | ||||||||||||||||||
Due to related parties | 21 | 1 | — | — | (1 | ) | — | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total non-current liabilities | 9,438,467 | 308,905 | — | — | (250,547 | ) | 58,358 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total liabilities | 13,022,690 | 426,059 | — | (694 | ) | (18,783 | ) | 406,582 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Equity | ||||||||||||||||||||||||||
Common shares | 133,507 | 4,163 | — | — | — | 4,163 | ||||||||||||||||||||
Preferred shares | 25,314 | 833 | — | — | — | 833 | ||||||||||||||||||||
Additional paid-in capital | 834,118 | 25,591 | — | — | — | 25,591 | ||||||||||||||||||||
Accumulated other comprehensive income (loss) | B,D | (47,601 | ) | (12,844 | ) | — | — | 12,833 | (11 | ) | ||||||||||||||||
Accumulated deficit | B,D,L | (427,863 | ) | (783 | ) | — | — | (52,781 | ) | (53,564 | ) | |||||||||||||||
Equity attributable to equity shareholders of Mechel PAO | 517,475 | 16,960 | — | — | (39,948 | ) | (22,988 | ) | ||||||||||||||||||
Non-controlling interests | L | 294,345 | 9,634 | — | — | (134 | ) | 9,500 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total equity | 811,820 | 26,594 | — | — | (40,082 | ) | (13,488 | ) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total equity and liabilities | 13,834,510 | 452,653 | — | (694 | ) | (58,865 | ) | 393,094 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
MECHEL PAO
Notes to the consolidated financial statements for the year ended December 31, 2015
(All amounts are in millions of Russian rubles, unless stated otherwise)
Reconciliation of equity as of December 31, 2014:
| U.S. GAAP | U.S. GAAP | Changes in the presentation | Adjustments and reclassifications / remeasurements | IFRS | ||||||||||||||||||
Notes | Thousands of U.S. dollars | Millions of Russian rubles2 | ||||||||||||||||||||
Assets | ||||||||||||||||||||||
Current Assets | ||||||||||||||||||||||
Cash and cash equivalents | 70,800 | 3,983 | — | — | 3,983 | |||||||||||||||||
Trade and other receivables | N,CP(1) | 330,371 | 18,586 | 932 | 291 | 19,809 | ||||||||||||||||
Due from related parties, net of allowance | N | 9,303 | 523 | — | (385 | ) | 138 | |||||||||||||||
U.S. GAAP — Deferred income taxes | K | 91,223 | 5,132 | — | (5,132 | ) | — | |||||||||||||||
Inventories | F,H | 640,671 | 36,043 | — | 294 | 36,337 | ||||||||||||||||
Income tax receivables | CP(2) | — | — | 578 | — | 578 | ||||||||||||||||
Other current financial assets | CP(3) | — | — | 186 | — | 186 | ||||||||||||||||
Other current assets | A, CP(1)-(3),CP(12) | 238,314 | 13,407 | (1,918 | ) | (2,739 | ) | 8,750 | ||||||||||||||
U.S. GAAP — Current assets of discontinued operations | C,G | 151,602 | 8,529 | — | (8,529 | ) | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total current assets | 1,532,284 | 86,203 | (222 | ) | (16,200 | ) | 69,781 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||
Assets of disposal group classified as held for sale | C,G | — | — | — | 8,696 | 8,696 | ||||||||||||||||
Non-current assets | ||||||||||||||||||||||
Property, plant and equipment | C, F,I | 3,944,427 | 221,266 | — | 3,033 | 224,299 | ||||||||||||||||
Mineral licenses | F | 719,951 | 40,503 | — | (381 | ) | 40,122 | |||||||||||||||
Non-current financial assets | CP(14) | 4,060 | 216 | 273 | — | 489 | ||||||||||||||||
Investments in associates | CP(14) | 6,142 | 346 | (72 | ) | — | 274 | |||||||||||||||
Deferred tax assets | K | 72,966 | 4,105 | — | (2,667 | ) | 1,438 | |||||||||||||||
Goodwill | 403,207 | 22,684 | — | 13 | 22,697 | |||||||||||||||||
Other non-current assets | A, CP(14) | 30,453 | 1,713 | (201 | ) | (50 | ) | 1,462 | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total non-current assets | 5,181,206 | 290,833 | — | (52 | ) | 290,781 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total assets | 6,713,490 | 377,036 | (222 | ) | (7,556 | ) | 369,258 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||
Equity and liabilities | ||||||||||||||||||||||
Current liabilities | ||||||||||||||||||||||
Interest-bearing loans and borrowings | CP(4),A | 6,678,549 | 375,725 | 14,615 | (3,822 | ) | 386,518 | |||||||||||||||
Trade and other payables | N, CP(7), CP(8), CP(9), CP(15) | 537,004 | 30,211 | 30,476 | 806 | 61,493 | ||||||||||||||||
Advances received | CP(12) | 81,599 | 4,591 | (292 | ) | (13 | ) | 4,286 | ||||||||||||||
Due to related parties | N | 15,494 | 872 | — | (828 | ) | 44 | |||||||||||||||
Provisions | C, CP(6), CP(10) | 3,478 | 196 | 1,928 | 6 | 2,130 | ||||||||||||||||
Pension obligations | D | 18,656 | 1,050 | — | 22 | 1,072 | ||||||||||||||||
Finance lease liabilities | 270,980 | 15,245 | — | (32 | ) | 15,213 | ||||||||||||||||
MECHEL PAO
Notes to the consolidated financial statements for the year ended December 31, 2015
(All amounts are in millions of Russian rubles, unless stated otherwise)
| U.S. GAAP | U.S. GAAP | Changes in the presentation | Adjustments and reclassifications / remeasurements | IFRS | ||||||||||||||||||
Notes | Thousands of U.S. dollars | Millions of Russian rubles2 | ||||||||||||||||||||
Income tax payable | CP(11) | 31,444 | 1,769 | 1,272 | (8 | ) | 3,033 | |||||||||||||||
Tax payable other than income tax | CP(6), CP(11),CP(12) | 215,251 | 12,110 | (2,489 | ) | 26 | 9,647 | |||||||||||||||
U.S. GAAP — Dividends payable | CP(8) | 1,843 | 104 | (104 | ) | — | — | |||||||||||||||
U.S. GAAP — Deferred income taxes | K | 7,893 | 444 | — | (444 | ) | — | |||||||||||||||
U.S. GAAP — Accrued expenses and other current liabilities | CP(4), CP(7), CP(9), CP(10) | 811,345 | 45,645 | (45,628 | ) | (17 | ) | — | ||||||||||||||
U.S. GAAP — Current liabilities of discontinued operations | C,G | 150,033 | 8,441 | — | (8,441 | ) | — | |||||||||||||||
Other current liabilities | — | — | — | 36 | 36 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total current liabilities | 8,823,569 | 496,403 | (222 | ) | (12,709 | ) | 483,472 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||
Liabilities of disposal group classified as held for sale | C,G | — | — | — | 8,607 | 8,607 | ||||||||||||||||
Non-current liabilities | ||||||||||||||||||||||
Interest-bearing loans and borrowings | A | 166,532 | 9,369 | — | (23 | ) | 9,346 | |||||||||||||||
Provisions | C | 43,712 | 2,459 | — | 539 | 2,998 | ||||||||||||||||
Pension obligations | D | 60,222 | 3,388 | — | 57 | 3,445 | ||||||||||||||||
Finance lease liabilities | 2,813 | 158 | — | (12 | ) | 146 | ||||||||||||||||
Deferred tax liabilities | K | 179,987 | 10,126 | — | (7,073 | ) | 3,053 | |||||||||||||||
Other non-current liabilities | CP(11) | 81,288 | 4,557 | (3,447 | ) | 47 | 1,157 | |||||||||||||||
Due to related parties | G | 38 | 2 | — | (2 | ) | — | |||||||||||||||
Income tax payable | CP(11) | — | — | 3,447 | — | 3,447 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total non-current liabilities | 534,592 | 30,059 | — | (6,467 | ) | 23,592 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total liabilities | 9,358,161 | 526,462 | (222 | ) | (10,569 | ) | 515,671 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||
Equity | ||||||||||||||||||||||
Common shares | 133,507 | 4,163 | — | — | 4,163 | |||||||||||||||||
Preferred shares | 25,314 | 833 | — | — | 833 | |||||||||||||||||
Additional paid-in capital | 834,136 | 25,591 | — | 1 | 25,592 | |||||||||||||||||
Accumulated other comprehensive income (loss) | B,D,E | 972,381 | 17,162 | — | (16,144 | ) | 1,018 | |||||||||||||||
Accumulated deficit | B,D,E,L | (4,763,413 | ) | (205,805 | ) | — | 19,533 | (186,272 | ) | |||||||||||||
Equity attributable to equity shareholders of Mechel PAO | (2,798,075 | ) | (158,056 | ) | — | 3,390 | (154,666 | ) | ||||||||||||||
Non-controlling interests | L | 153,404 | 8,630 | — | (377 | ) | 8,253 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total equity | (2,644,671 | ) | (149,426 | ) | — | 3,013 | (146,413 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total equity and liabilities | 6,713,490 | 377,036 | (222 | ) | (7,556 | ) | 369,258 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||
MECHEL PAO
Notes to the consolidated financial statements for the year ended December 31, 2015
(All amounts are in millions of Russian rubles, unless stated otherwise)
Reconciliation of consolidated statements of profit (loss) and other comprehensive income (loss) for the year ended December 31, 2014:
Notes | U.S. GAAP | U.S. GAAP | Changes in the presentation | Adjustments and reclassifications / remeasurements | IFRS | |||||||||||||||||
| Thousands of U.S. dollars | Millions of Russian rubles3 | |||||||||||||||||||||
Continuing operations | ||||||||||||||||||||||
Revenue | G | 6,405,767 | 243,893 | — | 99 | 243,992 | ||||||||||||||||
Cost of goods sold | G,F,H | (4,031,657 | ) | (152,546 | ) | — | (511 | ) | (153,057 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||
Gross profit | 2,374,110 | 91,347 | — | (412 | ) | 90,935 | ||||||||||||||||
Selling and distribution expenses | (1,460,641 | ) | (55,599 | ) | — | (62 | ) | (55,661 | ) | |||||||||||||
Loss on write-off of property, plant and equipment | (17,395 | ) | (661 | ) | — | — | (661 | ) | ||||||||||||||
Impairment of goodwill and other non-current assets | E,F | (120,237 | ) | (6,764 | ) | — | (1,232 | ) | (7,996 | ) | ||||||||||||
Allowance for doubtful accounts | G,N | (37,968 | ) | (1,459 | ) | — | (2,212 | ) | (3,671 | ) | ||||||||||||
Taxes other than income taxes | (172,447 | ) | (6,442 | ) | — | (27 | ) | (6,469 | ) | |||||||||||||
Allowance for amounts due from related parties | N | (41,425 | ) | (1,823 | ) | — | 1,697 | (126 | ) | |||||||||||||
Administrative and other operating expenses | C,F,D,CP(13) | (392,606 | ) | (14,946 | ) | (851 | ) | (518 | ) | (16,315 | ) | |||||||||||
Other operating income | CP(13) | — | — | 851 | — | 851 | ||||||||||||||||
U.S. GAAP — Accretion expenses | C | (4,963 | ) | (191 | ) | 191 | — | — | ||||||||||||||
Total selling, distribution and operating expenses, net | (2,247,682 | ) | (87,885 | ) | 191 | (2,354 | ) | (90,048 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||
Operating profit (loss) | 126,428 | 3,462 | 191 | (2,766 | ) | 887 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||
Finance income | 2,398 | 88 | — | 19 | 107 | |||||||||||||||||
Finance costs | C,I,J | (793,228 | ) | (30,532 | ) | (191 | ) | 2,613 | (28,110 | ) | ||||||||||||
Foreign exchange gain (loss), net | A,I | (2,396,123 | ) | (105,129 | ) | — | 1,953 | (103,176 | ) | |||||||||||||
Share of profit of associates | 276 | 10 | — | (3 | ) | 7 | ||||||||||||||||
Other income | CP(16) | — | — | 684 | — | 684 | ||||||||||||||||
Other expenses | CP(16) | (9,613 | ) | (796 | ) | (684 | ) | (6 | ) | (1,486 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total other income and (expense), net | (3,196,290 | ) | (136,359 | ) | (191 | ) | 4,576 | (131,974 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||
MECHEL PAO
Notes to the consolidated financial statements for the year ended December 31, 2015
(All amounts are in millions of Russian rubles, unless stated otherwise)
Notes | U.S. GAAP | U.S. GAAP | Changes in the presentation | Adjustments and reclassifications / remeasurements | IFRS | |||||||||||||||||
| Thousands of U.S. dollars | Millions of Russian rubles3 | |||||||||||||||||||||
Loss before tax from continuing operations | (3,069,862 | ) | (132,897 | ) | — | 1,810 | (131,087 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||
Income tax benefit | K | 183,908 | 9,187 | — | (365 | ) | 8,822 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||
Loss for the year from continuing operations | (2,885,954 | ) | (123,710 | ) | — | 1,445 | (122,265 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||
Discontinued operations | ||||||||||||||||||||||
Loss after tax for the year from discontinued operations, net | G,E | (1,473,780 | ) | (82,231 | ) | — | 70,529 | (11,702 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||
Loss for the year | (4,359,734 | ) | (205,941 | ) | — | 71,974 | (133,967 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||
Attributable to: | ||||||||||||||||||||||
Equity holders of the parent | (4,335,426 | ) | (205,007 | ) | — | 72,303 | (132,704 | ) | ||||||||||||||
Non-controlling interests | L | (24,308 | ) | (934 | ) | — | (329 | ) | (1,263 | ) | ||||||||||||
U.S. GAAP — Less: Dividends on preferred shares | (124 | ) | (7 | ) | — | — | (7 | ) | ||||||||||||||
U.S. GAAP — Net (loss) income attributable to common shares of Mechel PAO | (4,335,550 | ) | (205,014 | ) | — | 72,303 | (132,711 | ) | ||||||||||||||
MECHEL PAO
Notes to the consolidated financial statements for the year ended December 31, 2015
(All amounts are in millions of Russian rubles, unless stated otherwise)
| U.S. GAAP | U.S. GAAP | Changes in the presentation | Adjustments and Reclassifications / remeasurements | IFRS | ||||||||||||||||||
| Notes | Thousands of U.S. dollars | Millions of Russian rubles4 | ||||||||||||||||||||
Other comprehensive income | 925,222 | 30,306 | — | (29,136 | ) | 1,170 | ||||||||||||||||
Other comprehensive income to be reclassified to profit or loss in subsequent periods, net of income tax: | E | 925,222 | 30,306 | — | (29,136 | ) | 1,170 | |||||||||||||||
Exchange differences on translation of foreign operations | 923,929 | 30,304 | — | (29,136 | ) | 1,168 | ||||||||||||||||
Exchange differences on translation of disposal of subsidiaries | — | — | — | — | — | |||||||||||||||||
Net gain on available for sale financial assets | 1,293 | 2 | — | — | 2 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||
Other comprehensive income (loss) not to be reclassified to profit or loss in subsequent periods | (21,889 | ) | (302 | ) | — | 175 | (127 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||
Re-measurement losses on defined benefit plans | D | (21,889 | ) | (302 | ) | — | 175 | (127 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||
Other comprehensive income for the year, net of tax | 903,333 | 30,004 | — | (28,961 | ) | 1,043 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total comprehensive loss for the year, net of tax | (3,456,401 | ) | (175,937 | ) | — | 43,013 | (132,924 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||
Attributable to: | ||||||||||||||||||||||
Equity holders of the parent | (3,432,093 | ) | (175,003 | ) | — | 43,328 | (131,675 | ) | ||||||||||||||
Non-controlling interests | (24,308 | ) | (934 | ) | — | (315 | ) | (1,249 | ) | |||||||||||||
MECHEL PAO
Notes to the consolidated financial statements for the year ended December 31, 2015
(All amounts are in millions of Russian rubles, unless stated otherwise)
Reconciliation of Consolidated Statement of Cash Flows for the year ended December 31, 2014:
| U.S. GAAP | U.S. GAAP | Adjustments and reclassifications / remeasurements | IFRS | |||||||||||||||
| Notes | Thousands of U.S. dollars5 | Millions of Russian rubles | ||||||||||||||||
Cash Flows from Operating Activities | ||||||||||||||||||
Net loss6 | (4,359,734 | ) | (205,941 | ) | 71,974 | (133,967 | ) | |||||||||||
Profit (loss) from discontinuing operations, net of income tax | 1,473,780 | 82,231 | (70,529 | ) | 11,702 | |||||||||||||
Net loss from continuing operations | (2,885,954 | ) | (123,710 | ) | 1,445 | (122,265 | ) | |||||||||||
Adjustments to reconcile net loss from continuing operations to net cash provided by operating activities: | ||||||||||||||||||
Finance income | M1 | — | — | (107 | ) | (107 | ) | |||||||||||
Finance costs | M2 | — | — | 28,110 | 28,110 | |||||||||||||
Other adjustments | 2,739,002 | 118,978 | (1,445 | ) | 117,533 | |||||||||||||
Changes in working capital items: | ||||||||||||||||||
Interest received | M3 | — | — | 22 | 22 | |||||||||||||
Interest paid | M4 | — | — | (14,963 | ) | (14,963 | ) | |||||||||||
Income taxes paid | M5 | — | — | (2,509 | ) | (2,509 | ) | |||||||||||
Other operating cash flows | 891,579 | 32,804 | (10,553 | ) | 22,251 | |||||||||||||
Net cash provided by operating activities | 744,627 | 28,072 | — | 28,072 | ||||||||||||||
Cash Flows from Investing Activities | ||||||||||||||||||
Purchases of property, plant and equipment | M6 | (443,668 | ) | (16,506 | ) | 5,141 | (11,365 | ) | ||||||||||
Interest paid, capitalized | M6 | — | — | (5,141 | ) | (5,141 | ) | |||||||||||
Other investing cash flows | (28,628 | ) | (1,233 | ) | — | (1,233 | ) | |||||||||||
Net cash used in investing activities | (472,296 | ) | (17,739 | ) | — | (17,739 | ) | |||||||||||
Cash Flows from Financing Activities | ||||||||||||||||||
Proceeds from borrowings | 1,815,966 | 64,469 | — | 64,469 | ||||||||||||||
Repayment of borrowings | M7 | (2,185,343 | ) | (78,030 | ) | 269 | (77,761 | ) | ||||||||||
Other financing cash flows | (69,112 | ) | (2,728 | ) | — | (2,728 | ) | |||||||||||
Net cash used in financing activities | (438,489 | ) | (16,289 | ) | 269 | (16,020 | ) | |||||||||||
Effect of exchange rate changes on cash and cash equivalents | (35,965 | ) | 1,051 | (150 | ) | 901 | ||||||||||||
Net decrease in cash and cash equivalents | (202,123 | ) | (4,905 | ) | 119 | (4,786 | ) | |||||||||||
Cash and cash equivalents at beginning of period | M7 | 274,539 | 8,979 | (2,849 | ) | 6,130 | ||||||||||||
Cash and cash equivalents at end of period | M7 | 72,416 | 4,074 | (2,730 | ) | 1,344 | ||||||||||||
MECHEL PAO
Notes to the consolidated financial statements for the year ended December 31, 2015
(All amounts are in millions of Russian rubles, unless stated otherwise)wireless services.
| 10. | Fair value measurement |
Set out below is a comparison by class of the carrying amounts and fair value of the Group’s financial instrumentsliabilities that are carried in the consolidated financial statements:
| December 31, 2015 | December 31, 2014 | January 1, 2014 | ||||||||||||||||||||||||||
| Level | Carrying amount | Fair value | Carrying amount | Fair value | Carrying amount | Fair value | ||||||||||||||||||||||
Financial liabilities | ||||||||||||||||||||||||||||
Interest-bearing loans and borrowings | ||||||||||||||||||||||||||||
Floating rate loans | 3 | 255,931 | 220,225 | 154,518 | 132,525 | 127,136 | 112,378 | |||||||||||||||||||||
Bonds | 1 | 16,684 | 13,398 | 15,284 | 7,168 | 24,883 | 19,876 | |||||||||||||||||||||
Fixed rate loans | 3 | 223,367 | 190,108 | 226,062 | 194,058 | 140,310 | 99,702 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Total | 495,982 | 423,731 | 395,864 | 333,751 | 292,329 | 231,956 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
| December 31, 2018 | December 31, 2017 | |||||||||||||||||||
| Level | Carrying amount | Fair value | Carrying amount | Fair value | ||||||||||||||||
Financial liabilities measured at amortised cost | ||||||||||||||||||||
Loans and borrowings: | ||||||||||||||||||||
— Floating rate loans and borrowings | 3 | 384,608 | 356,444 | 402,024 | 355,794 | |||||||||||||||
— Bonds | 1 | 11,195 | 10,876 | 14,759 | 13,984 | |||||||||||||||
— Fixed rate loans and borrowings | 3 | 23,029 | 21,852 | 23,110 | 20,505 | |||||||||||||||
Othernon-current financial liabilities (Note 11.4) | 3 | 44,510 | 40,528 | 40,916 | 33,854 | |||||||||||||||
Financial liabilities measured at fair value | ||||||||||||||||||||
Other current financial liabilities (Note 11.5) | 2 | — | — | 734 | 734 | |||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||
Total | 463,342 | 429,700 | 481,543 | 424,871 | ||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||
The fair value of loans and borrowings was calculated based on the present value of future principal and interest cash flows, discounted at the Group’s interest rates adjusted for risk premium at the reporting dates (Level 3).
Management assessed that the fair values of cash and short-term deposits, trade receivables, trade payables, bank overdrafts and other current financial liabilities approximate their carrying amounts largely due to the short-term maturities of these instruments.
As of December 31, 2018 and 2017, trade receivables of RUB 1,938 million and RUB 1,348 million arising from provisionally priced contracts were measured at fair value through profit or loss upon recognition (level 2).
The fair value of the financial assets and liabilities is included at the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale.
The following methods and assumptions were used to estimate the fair values:
Long-term loans and borrowings, other non-current liabilities: the fair values of other non-current liabilities are based on the present value of the anticipated cash flows and approximate carrying value.
Derivatives: the fair value of derivative financial instruments, including embedded derivatives, is based on quoted market prices. Where no price information is available from a quoted market source, alternative market mechanisms or recent comparable transactions, fair value is estimated based on the Group’s views on relevant future prices, net of valuation allowances to accommodate liquidity, modelling and other risks implicit in such estimates. Option-based derivatives are valued using Black-Scholes models and Monte-Carlo simulations. The derivative financial instruments are recorded at their fair value at each reporting date.
MECHEL PAO
Notes to the consolidated financial statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2015
(All amounts are in millions of Russian rubles, unless stated otherwise)
The movement of financial instruments measured at the fair value using unobservable inputs (Level 2 and 3) is presented below:
| Contingent consideration — Drilling Program | Swap transactions | Option | ||||||||||
| Level 3 | Level 2 | Level 2 | ||||||||||
January 1, 2014 | 907 | 408 | 415 | |||||||||
|
|
|
|
|
| |||||||
Remeasurement recognised in OCI | 689 | — | — | |||||||||
Loss on contingent consideration remeasurement | 85 | — | — | |||||||||
Disposal/Termination | — | (408 | ) | (415 | ) | |||||||
|
|
|
|
|
| |||||||
December 31, 2014 | 1,681 | — | — | |||||||||
Disposal/Termination | (1,681 | ) | — | — | ||||||||
|
|
|
|
|
| |||||||
December 31, 2015 | — | — | — | |||||||||
The contingent consideration resulted from the acquisition of the BCG Companies and measured at fair value is represented by the Drilling Program contingent consideration, which was calculated using estimated tonnage of coal in-place determined by the independent appraiser. The present value of this liability was determined using an 8% discount rate, stated in the agreement for actual settlement of contingent obligation, which represents the estimate of the amount that would have been paid if the Group had settled the liability at the balance sheet date. The contingent consideration was released on the date of transfer of the BCG Companies’ shares on February 12, 2015. As of December 31, 2014, the contingent consideration of RUB 1,681 million is included in Current liabilities of discontinued operations (Note 17).
Swap with VTB
On July 12, 2011, the Group entered into a non-deliverable cross currency RUB 5,000 million swap agreement with VTB Bank (Austria), which involved the exchange of two principal amounts in two different currencies at the prevailing currency rate at contract inception. During the life of the swap, the counterparties exchange fixed rate interest payments in the swapped currencies. At maturity, the principal amounts are again swapped at a pre-determined rate of exchange. The business objective of this instrument was to decrease the effective interest rate for a RUB 5,000 million bond via a positive net cash inflow from interest payments under the swap instrument according to the Group’s expectations about U.S. dollar and Russian ruble exchange rate fluctuations. The underlying instrument for the swap transaction is a RUB 5,000 million bond bearing interest at 10% p.a. and maturing on August 25, 2020 (put option date – September 1, 2015) issued by Mechel OAO on September 7, 2010. Under the terms of the agreement, VTB Bank pays interest of 10% p.a. at RUB 5,000 million notional amount, the Group pays interest of 5.69% p.a. on $176,000 thousand notional amount (RUB 5,772 million at exchange rate 32.7292 as of January 1, 2014). Interest is paid on a semi-annual basis with the first payment on March 2, 2012. On the termination date, August 28, 2015, VTB Bank pays to the Group the notional amount of RUB 5,000 million, and the Group pays to VTB Bank the notional amount of $176,000 thousand (RUB 5,772 million at exchange rate 32.7292 as of January 1, 2014). For the year ended December 31, 2014, a loss of RUB 4,654 million related to the change in the fair value and termination of this swap instrument was included in the net foreign exchange gain (loss) in the statements of profit (loss) and other comprehensive income (loss). On December 29, 2014, the swap agreement with VTB Bank (Austria) was terminated, and the liability was transferred to VTB Bank (PAO) in the amount of $101,912 thousand. As of December 31, 2014, the amount of RUB 5,733 million ($101,912 thousand at exchange rate as of December 31, 2014) due to VTB Bank
MECHEL PAO
Notes to the consolidated financial statements for the year ended December 31, 2015
(All amounts are in millions of Russian rubles, unless stated otherwise)
was recorded within Trade and other payables in the consolidated statement of financial position. In September 2015, the Group signed agreements with VTB Bank contemplating, among other things, extension of the loan tenures, decrease in the interest rates, revision of the collateral requirements and dismissal of all court proceedings, all of which becomes effective upon fulfilment of all conditions precedent and conditions subsequent. All conditions were fulfilled and the restructuring became effective in October 2015. As part of restructuring the outstanding liability of $107,703 thousand that remained from the swap agreement termination and related interest was converted to Russian rubles at spot rate of 64.65 rubles per U.S. dollar and repaid from the proceeds under the loan agreement signed between CMP and VTB Bank (PAO).
The Group accounts for the above mentioned swap instrument at fair value as a derivative instrument not designated or qualifying as a hedging instrument under IAS 39 Financial instruments: Recognition and Measurement. As of January 1, 2014, the fair value of this swap instrument was recorded in Other long-term liabilities in the amount of RUB 408 million. The fair value of the Group’s swap contract was valued based upon quotes obtained from counterparties to the agreements and is designated as Level 2. Such quotes had been derived using discounted cash flows analysis that incorporates observable market parameters for all significant inputs such as interest yield curves and currency rates.
Cross-currency options with Sberbank
In October 2012 and March 2013, SKCC entered into cross currency options with Sberbank. The options are contracted in respect of four facilities totaling to RUB 20,900 million for the purpose of working capital financing, falling due on October 6, 2017. The cross currency option creates an embedded derivative, which should be measured at fair value, bifurcated at inception from the host agreement and recorded as a liability. The fair value of the option is estimated using modified Black-Scholes model for barrier options. The liability under the host contract is recorded at amortized value, and the interest is accrued using the effective interest rate. The ruble-denominated facilities bear floating interest at 10.5%-11.5% p.a. When the underlying achieves the barrier value which was fixed at a level of 50.00 Russian rubles per 1 U.S. dollar, the liability under the host contract converts into cross-currency at a pre-determined strike exchange rate (RUB 6,500 million – at the exchange rate of 31.04 Russian rubles per 1 U.S. dollar, RUB 5,000 million — at the exchange rate of 30.80 Russian rubles per 1 U.S. dollar, RUB 1,500 million — at the exchange rate of 31.00 Russian rubles per 1 U.S. dollar, RUB 7,900 million — at the exchange rate of 30.64 rubles per 1 U.S. dollar) and a modified interest rate (minus 50bps to the original interest rate). Simultaneously, the interest rate is modified into floating 10.0%-11.0% p.a. After the triggering event, all future payments are made in U.S. dollars. The business objective of this instrument was the decrease in interest rate on the ruble-denominated facilities based on the Group’s expectations about U.S. dollar and ruble exchange rate fluctuations.
As of January 1, 2014, the fair value of this option was recorded in Other long-term liabilities in the amount of RUB 415 million. The fair value of the Group’s option contract was measured based upon quotes obtained from counterparties to the agreements and is designated as Level 2. Such quotes have been derived using discounted cash flows analysis that incorporates observable market parameters for all significant inputs such as interest yield curves and currency rates.
On December 1, 2014, the exchange rate reached the point of 50.00 Russian rubles per 1 U.S. dollar and the facilities were converted into U.S. dollar equivalent of $677,981 thousand (RUB 33,439 million) due to the termination of cross currency options with Sberbank. For the year ended December 31, 2014, a RUB 14,303 million loss related to conversion was included in the net foreign exchange gain (loss) in the statements of profit (loss) and other comprehensive income (loss). The Group accounted for the above mentioned option at fair value as a derivative instrument not designated or qualifying as a hedging instrument under IAS 39 Financial Instruments: Recognition and Measurement.
MECHEL PAO
Notes to the consolidated financial statements for the year ended December 31, 20152018
(All amounts are in millions of Russian rubles, unless stated otherwise)
| 11. | Financial assets and financial liabilities |
| 11.1 | Financial liabilities: |
The Group has the following principal and interest amounts outstanding for interest-bearing loans and bonds:
| Interest rate | December 31, 2015 | Interest rate | December 31, 2014 | Interest rate | January 1, 2014 | |||||||||||||||||||||||||||||||||||
| % | % | % | ||||||||||||||||||||||||||||||||||||||
Short-term borrowings and current portion of long-term debt: | ||||||||||||||||||||||||||||||||||||||||
Short-term borrowings and current portion of | December 31, 2018 | December 31, 2017 | ||||||||||||||||||||||||||||||||||||||
| Interest rate, % | Amount of outstanding debt | Interest rate, % | Amount of outstanding debt | |||||||||||||||||||||||||||||||||||||
In Russian rubles | ||||||||||||||||||||||||||||||||||||||||
Banks and financial institutions | 9.4-16.0 | 8,239 | 8.0-27.0 | 10,557 | 9.0-15.3 | 6,606 | 9.3-9.6 | 3,634 | 9.3-12 | 2,410 | ||||||||||||||||||||||||||||||
Bonds issue | — | — | 13.5 | 2,705 | — | — | ||||||||||||||||||||||||||||||||||
Corporate lenders | 6.7 | 65 | 6.4 | 64 | 8.3-10.0 | 78 | 6.7 | 10 | 6.7 | 65 | ||||||||||||||||||||||||||||||
Weighted average interest rate | 12.9 | % | 15.0 | % | 9.4 | % | ||||||||||||||||||||||||||||||||||
Weighted average interest rate for the period | 9.4 | 11.9 | ||||||||||||||||||||||||||||||||||||||
In U.S. dollars | ||||||||||||||||||||||||||||||||||||||||
Banks and financial institutions | 8.0 | 310 | — | — | 2.3-8.0 | 5,269 | ||||||||||||||||||||||||||||||||||
Weighted average interest rate | 8.0 | % | 7.1 | % | ||||||||||||||||||||||||||||||||||||
In Euro | ||||||||||||||||||||||||||||||||||||||||
In euro | ||||||||||||||||||||||||||||||||||||||||
Banks and financial institutions | 8.3 | 3,591 | — | — | — | — | 1.3-2.8 | 580 | — | — | ||||||||||||||||||||||||||||||
Corporate lenders | 2.8 | 182 | 2.8 | 178 | 2.8 | 158 | 3.0 | 22 | — | 2 | ||||||||||||||||||||||||||||||
Weighted average interest rate | 8.3 | % | 2.8 | % | 2.8 | % | ||||||||||||||||||||||||||||||||||
In other currency | ||||||||||||||||||||||||||||||||||||||||
Banks and financial institutions | — | — | — | — | 9.0-9.5 | 411 | ||||||||||||||||||||||||||||||||||
Corporate lenders | — | — | 2.5 | 27 | — | — | ||||||||||||||||||||||||||||||||||
Current portion of long-term debt | 431,812 | 358,372 | 252,504 | |||||||||||||||||||||||||||||||||||||
Weighted average interest rate for the period | 1.5 | — | ||||||||||||||||||||||||||||||||||||||
Current portion oflong-term debt | — | 398,171 | — | 378,063 | ||||||||||||||||||||||||||||||||||||
Interest payable | 27,269 | 13,093 | 2,052 | — | 7,749 | — | 20,420 | |||||||||||||||||||||||||||||||||
Fines and penalties on overdue amounts | 20,206 | 1,522 | — | — | 2,128 | — | 21,573 | |||||||||||||||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||||||||
Total short-term borrowings and current portion of long-term Debt | 491,674 | 386,518 | 267,078 | |||||||||||||||||||||||||||||||||||||
Total short-term borrowings and current portion oflong-term debt | 412,294 | 422,533 | ||||||||||||||||||||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||||||||
Long-term debt | December 31, 2018 | December 31, 2017 | ||||||||||||||
| Interest rate, % | Amount of outstanding debt | Interest rate, % | Amount of outstanding debt | |||||||||||||
In Russian rubles | ||||||||||||||||
Banks and financial institutions | 5.0-10.0 | 242,499 | 5.0-15.0 | 253,421 | ||||||||||||
Bonds issue | 8.0-12.3 | 10,979 | 8.0-14.0 | 14,459 | ||||||||||||
Corporate lenders | 6.7 | 73 | 6.7 | 5 | ||||||||||||
Weighted average interest rate for the period | 9.3 | 9.5 | ||||||||||||||
In U.S. dollars | ||||||||||||||||
Banks and financial institutions | 3.9-9.9 | 54,719 | 2.2-8.9 | 102,040 | ||||||||||||
Corporate lenders | 3.0 | 138 | — | |||||||||||||
Weighted average interest rate for the period | 8.6 | 8.3 | ||||||||||||||
In euro | ||||||||||||||||
Banks and financial institutions | 0.8-7.0 | 96,301 | 0.8-7.0 | 25,498 | ||||||||||||
Weighted average interest rate for the period | 4.8 | 2.7 | ||||||||||||||
Current part of long-term loans and borrowings | (398,171 | ) | (378,063 | ) | ||||||||||||
|
|
|
| |||||||||||||
Total long-term debt | 6,538 | 17,360 | ||||||||||||||
|
|
|
| |||||||||||||
MECHEL PAO
Notes to the consolidated financial statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 20152018
(All amounts are in millions of Russian rubles, unless stated otherwise)
| Interest rate | December 31, 2015 | Interest rate | December 31, 2014 | Interest rate | January 1, 2014 | |||||||||||||||||||
| % | % | % | ||||||||||||||||||||||
Long-term debt: | ||||||||||||||||||||||||
In Russian rubles | ||||||||||||||||||||||||
Banks and financial institutions | 10.1-17.0 | 134,786 | 10.1-35.6 | 124,452 | 7.5.-14.6 | 124,985 | ||||||||||||||||||
Bonds issue | 2.0-15.0 | 16,551 | 8.4-13.0 | 17,376 | 8.3-13.0 | 42,639 | ||||||||||||||||||
Corporate lenders | 6.7 | 5 | 6.4 | 4 | 3.9 | 8 | ||||||||||||||||||
Weighted average interest rate | 12.9 | % | 21.1 | % | 10.9 | % | ||||||||||||||||||
In U.S. dollars | ||||||||||||||||||||||||
Banks and financial institutions | 1.8-8.0 | 260,212 | 1.6-10 | 202,721 | 1.7-10.9 | 91,272 | ||||||||||||||||||
Corporate lenders | — | — | — | — | 5.1-9.0 | 448 | ||||||||||||||||||
Weighted average interest rate | 8.0 | % | 8.7 | % | 6.6 | % | ||||||||||||||||||
In Euro | ||||||||||||||||||||||||
Banks and financial institutions | 0.8-5.7 | 24,566 | 0.8-5.7 | 23,163 | 1.1-6.8 | 18,387 | ||||||||||||||||||
Weighted average interest rate | 4.5 | % | 4.7 | % | 3.1 | % | ||||||||||||||||||
In other currency | ||||||||||||||||||||||||
Banks and financial institutions | — | — | — | 2 | 8.5 | 16 | ||||||||||||||||||
Current part of long-term loans and borrowings | (431,812 | ) | (358,372 | ) | (252,504 | ) | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Total long-term debt | 4,308 | 9,346 | 25,251 | |||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Aggregate scheduled maturities of the debt outstanding as of December 31, 2015, are2018 were as follows:
Payable by: | ||||
2016 (current portion) | 491,674 | |||
2017 | 889 | |||
2018 | 1,101 | |||
2019 | 1,536 | |||
2020 | 782 | |||
Thereafter | — | |||
|
| |||
Total | 495,982 | |||
|
|
Payable by | ||||
On demand | 406,077 | |||
2019 (current portion) | 6,217 | |||
2020 | 3,972 | |||
2021 | 2,430 | |||
2022 | 16 | |||
2023 | 88 | |||
Thereafter | 32 | |||
|
| |||
Total | 418,832 | |||
|
|
The unused portion under all credit facilities as of December 31, 2015, 20142018 and January 1, 20142017 was RUB 409 million, RUB 1,879573 million and RUB 9,191475 million, respectively.
MECHEL PAO
Notes to the consolidated financial statements for the year ended December 31, 2015
(All amounts are in millions of Russian rubles, unless stated otherwise)
The outstanding balances of principal amount of short-term and long-term debt by denominated currencies and major banks as of December 31, 2015, 20142018 and January 1, 20142017 were as follows:
| December 31, 2015 | December 31, 2014 | January 1, 2014 | ||||||||||||||||||
Short-term and long-term debt | December 31, 2018 | December 31, 2017 | ||||||||||||||||||
Russian ruble-denominated: | ||||||||||||||||||||
Russian ruble-denominated | ||||||||||||||||||||
Gazprombank | 142,635 | 148,238 | ||||||||||||||||||
VTB | 70,415 | 62,428 | 56,600 | 73,416 | 72,570 | |||||||||||||||
Gazprombank | 33,639 | 33,726 | 32,477 | |||||||||||||||||
Sberbank | 32,141 | 32,503 | 39,476 | 25,723 | 26,459 | |||||||||||||||
Bonds | 16,551 | 20,081 | 42,639 | 10,979 | 14,459 | |||||||||||||||
Eximbank of Russia | 3,305 | 3,049 | ||||||||||||||||||
Uralsib | 3,331 | 3,379 | — | — | 2,214 | |||||||||||||||
Eurasian Development Bank | 1,767 | 2,101 | 2,334 | — | 517 | |||||||||||||||
Raiffeisen Bank | 897 | — | — | — | 139 | |||||||||||||||
Other | 905 | 940 | 790 | 1,137 | 2,715 | |||||||||||||||
|
|
|
|
| ||||||||||||||||
Total | 159,646 | 155,158 | 174,316 | 257,195 | 270,360 | |||||||||||||||
|
|
|
|
| ||||||||||||||||
U.S. dollar-denominated: | ||||||||||||||||||||
Gazprombank | 101,156 | 78,017 | 42,810 | |||||||||||||||||
U.S. dollar-denominated | ||||||||||||||||||||
Sberbank | 23,147 | 14,626 | ||||||||||||||||||
BNP | 10,759 | 8,894 | ||||||||||||||||||
VEB | 8,794 | 10,090 | ||||||||||||||||||
VTB | 7,573 | 6,172 | ||||||||||||||||||
MCB | 4,037 | 4,096 | ||||||||||||||||||
Pre-export facility | 72,881 | 55,549 | 31,545 | 7 | 57,829 | |||||||||||||||
Sberbank | 56,609 | 43,567 | 3,232 | |||||||||||||||||
VEB | 12,192 | 9,411 | 1,059 | |||||||||||||||||
BNP | 10,955 | 8,290 | 5,181 | |||||||||||||||||
MCB | 6,311 | 5,907 | 3,432 | |||||||||||||||||
Alfa-bank | — | — | 4,909 | |||||||||||||||||
UniCredit Bank (former Bayerische Hypo-und-Vereinsbank) | — | — | 1,647 | |||||||||||||||||
Raiffeisen Bank | — | 1,665 | 1,412 | |||||||||||||||||
ING Bank | — | — | 630 | |||||||||||||||||
Uralsib | — | — | 324 | |||||||||||||||||
Other | 418 | 315 | 808 | 540 | 333 | |||||||||||||||
|
|
|
|
| ||||||||||||||||
Total | 260,522 | 202,721 | 96,989 | 54,857 | 102,040 | |||||||||||||||
|
|
|
|
| ||||||||||||||||
Euro-denominated: | ||||||||||||||||||||
BNP | 11,505 | 9,547 | 6,563 | |||||||||||||||||
VTB | 4,098 | 1,910 | 1,473 | |||||||||||||||||
BNL | 3,364 | 2,811 | 1,989 | |||||||||||||||||
UniCredit Bank (former Bayerische Hypo-und-Vereinsbank) | 3,345 | 2,838 | 2,018 | |||||||||||||||||
ING Bank | 2,461 | 2,100 | 1,463 | |||||||||||||||||
Raiffeisen Bank | 475 | 406 | 332 | |||||||||||||||||
Uralsib | — | — | 1,574 | |||||||||||||||||
Gazprombank | — | 1,062 | 1,216 | |||||||||||||||||
Other | 3,091 | 2,667 | 1,917 | |||||||||||||||||
|
|
| ||||||||||||||||||
Total | 28,339 | 23,341 | 18,545 | |||||||||||||||||
|
|
| ||||||||||||||||||
Denominated in other currencies: | ||||||||||||||||||||
Sberbank | — | — | 341 | |||||||||||||||||
Other | — | 29 | 86 | |||||||||||||||||
|
|
| ||||||||||||||||||
Total | — | 29 | 427 | |||||||||||||||||
|
|
| ||||||||||||||||||
Total short-term and long-term debt | 448,507 | 381,249 | 290,277 | |||||||||||||||||
|
|
| ||||||||||||||||||
MECHEL PAO
Notes to the consolidated financial statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 20152018
(All amounts are in millions of Russian rubles, unless stated otherwise)
Short-term and long-term debt | December 31, 2018 | December 31, 2017 | ||||||
Euro-denominated | ||||||||
VTB | 74,794 | 3,334 | ||||||
BNP | 15,752 | 13,504 | ||||||
ING Bank | 2,541 | 2,182 | ||||||
NatWest Markets | 1,549 | 1,342 | ||||||
Commerzbank | 1,317 | 875 | ||||||
Raiffeisen Bank | 14 | 411 | ||||||
UniCredit Bank (former BayerischeHypo-und-Vereinsbank) | — | 2,970 | ||||||
Other | 936 | 882 | ||||||
|
|
|
| |||||
Total | 96,903 | 25,500 | ||||||
|
|
|
| |||||
Total short-term and long-term debt | 408,955 | 397,900 | ||||||
|
|
|
| |||||
| (a) | Pre-export facility agreement |
AsIn 2018, the Group refinanced existingpre-export credit facility by receiving a new euro-denominated loan from VTB in the amount of December 31, 2015, pre-export facility agreement bears interestRUB 66,368 million (EUR 897 million at LIBOR plus 5.5% p.a. — 7.5% p.a.the date of transactions). The increased interest rate is applied to the overdue amounts.loan matures in April 2022. The outstanding balances of thepre-export credit facility as of December 31, 2015, 20142018 and January 1, 20142017 were RUB 72,8817 million ($999,970 thousand), RUB 55,549 million ($987,383 thousand) and RUB 31,545 million ($963,806 thousand), respectively.
As of December 31, 2015, the Group’s overdue principal amount and overdue interest on pre-export facility agreement amounted to RUB 38,049 million and RUB 3,857 million, respectively. The Group is currently negotiating the refinancing of this overdue amount with the syndicate of banks.
The fines and penalties on overdue amounts of RUB 28 million were recorded in Interest-bearing loans and borrowings in the consolidated statement of financial position100 thousand at exchange rate as of December 31, 2015. 2018) and RUB 57,829 million ($1,003,964 thousand at exchange rate as of December 31, 2017), respectively.
The finance income in the amount of RUB 16512,854 million was recorded as Finance costs in the consolidated statements of profit (loss) and other comprehensive income (loss) for the year ended December 31, 2015.2018 as a result of refinancing ofpre-export credit facility.
| (b) | VTB facilities |
In September 2015, the new restructuring agreements between the Group and VTB were signed. On October 13, 2015, the restructuring became effective. The restructuring provided for an extension of the repayment grace period until April 2017 and the final maturity until April 2020 for the credit facilities of Mechel PAO, SKCC and Yakutugol in the total amount of RUB 62,098 million. In addition, in October 2015, VTB provided CMP with a new ruble-denominated long-term loan in the amount of RUB 8,000 million. Interest rate under the restructured agreements is set at the level of the Key Rate of the Central Bank of Russia plus 2.35% through January 6, 2018 and 2.99% afterwards.
The outstanding balances of the ruble-denominated facilities as of December 31, 2015, 20142018 and January 1, 20142017 were RUB 70,415 million, RUB 62,42873,416 million and RUB 56,60072,570 million, respectively, bearing interest at 9.42-13.4%9.3% p.a.
During 2010-2015, VTB provided euro-denominated long-term and short-term loansIn December 2016, the Group signed amendments to the Group, bearing interest at 5.3%-8.3% p.a. The outstanding balances as of December 31, 2015, 2014restructuring agreements and, January 1, 2014, were RUB 4,098 million, RUB 1,910 million and RUB 1,473 million, respectively.
As of December 31, 2015,in April 2017, VTB confirmed the Group’s overdue principal amount on VTBrestructuring terms under the credit facilities amountedof Mechel PAO, CMP, SKCC and Yakutugol including an extension of the repayment grace period until 2020 and the final maturity until 2022 and annual interest rate at the level of the key rate of the Central Bank of the Russian Federation plus 1.5% for the ruble-denominated credit facilities. In accordance with the restructuring terms, the repayment of a RUB 30,000 million credit facility issued to RUB 45 million. The fines and penalties on overdue amountsMechel PAO is made in equal installments within 36 months starting February 22, 2017 from the proceeds received from VTB under the credit facility issued to CMP2.
In December 2016, the Group signed the prolongation agreement providing with the final maturity until April 2022 for the euro-denominated credit facility of RUB 10,6897 million were recordedMCAG in Interest-bearing loans and borrowings in the consolidated statement of financial position as of December 31, 2015. The amount of RUB 9,7042,812 million was recorded as Finance costs in the consolidated statements of profit (loss) and other comprehensive income (loss)
| 2 | Cash flows arising from settlement of VTB credit facilities were disclosed on a gross basis (as cash inflows and cash outflows within financing activities in the amount of RUB 5,000 million for the year ended December 31, 2018). All payments under the credit facility issued to Mechel PAO are made upon receipt of the respective proceeds from VTB under the credit facility issued to CMP. |
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2015.
During 2011-2014, Gazprombank provided ruble-denominated long-term and short-term loans to the Group bearing interest at 9.8%-14% p.a. The outstanding balances as of December 31, 2015, 2014 and January 1, 2014 were RUB 33,639 million, RUB 33,726 million and RUB 32,477 million, respectively.
MECHEL PAO
Notes to the consolidated financial statements for the year ended December 31, 20152018
(All amounts are in millions of Russian rubles, unless stated otherwise)
During 2009-2014, Gazprombank provided dollar-denominated long-term loans to(44,068 thousand euro at the Group bearing interest at 5.9%-7.5% p.a.exchange rate as of December 31, 2016). The outstanding balances as of December 31, 2015, 20142018 and January 1, 20142017 were RUB 101,1563,396 million ($1,387,930 thousand), RUB 78,017 million ($1,386,752 thousand) and RUB 42,8103,334 million, ($1,308,025 thousand), respectively.
As part of the restructuring requirement, in January 2017, the Group signed a call option agreement with VTB providing VTB with an option to acquire preferred shares of Mechel PAO (Note 11.5).
In April 2017, the U.S. dollar-denominated credit facilities of MTAG were transferred from Sberbank to VTB according to the assignment agreement between Sberbank and VTB. The outstanding balance of these credit facilities as of December 31, 2015,2018 and 2017 was RUB 7,573 million and RUB 6,172 million, respectively, bearing interest at 9.4% p.a.
In 2018, the Group’sGroup received a new euro-denominated loan from VTB bearing interest at 12M EURIBOR plus 5.5% p.a. in the amount of EUR 897 million (RUB 66,368 million at the date of transactions) in order to refinance the existingpre-export credit facilities in the amount of EUR 864 million (RUB 63,844 million at the date of transactions) and for other purposes in the amount of EUR 33 million (RUB 2,524 million at the date of transactions).
There were no overdue principal amount and overdue interest on GazprombankVTB credit facilities amounted to RUB 36,308 million and RUB 11,362 million, respectively. As of December 31, 2015, the Group was in process of restructuring of the overdue facilities. In the period from August through December 2015, the Group’s subsidiaries (SKCC, Yakutugol, CMP, Mechel Service, Mechel-Energo, BMP, Port Posiet, Mechel Coke and USP) signed amendments to their credit facility agreements with Gazprombank for a total amount of RUB 129,666 million (including loans denominated in U.S. dollars at exchange rate as of December 31, 2015), providing for an extension of the grace period until April 20202018 and the final maturity until April 2022. The extension of the grace is subject to certain conditions, if they are not met the grace period will be moved to April 2017 and the final maturity to April 2020. Interest rate under restructured agreements is set at the level of the Central Bank of Russia rate plus 1.5% (subject to increase to 3.5% if certain conditions are not met). The restructuring under SKCC and Yakutugol facilities with the total balance of RUB 101,156 million became effective in January and March 2016.
2017. The fines and penalties on overdue amounts of nil and RUB 6,02610,196 million were recorded in Interest-bearing loans and borrowings in the consolidated statement of financial position as of December 31, 2018 and 2017, respectively. In October 2018, the Group fulfilled the terms of restructuring agreement signed in 2015. TheConsequently, finance income in the amount of RUB 5,17912,101 million, including fines and penalties in the amount of RUB 9,878 million, was recorded as Finance costsrecognized in the consolidated statements of profit (loss) and other comprehensive income (loss) for the year ended December 31, 2015.2018.
Gazprombank facilities |
The outstanding balances of the ruble-denominated facilities as December 31, 2018 and 2017 were RUB 142,635 million and RUB 148,238 million, respectively, bearing interest at9.3-9.5% p.a.
In 2015, the Group signed restructuring agreements (became effective in 2016) and in April 2017, Gazprombank confirmed the restructuring terms of the credit facilities of SKCC, Yakutugol, CMP, Mechel Service, Mechel-Energo, BMP, Port Posiet, Mechel Coke and USP including an extension of the repayment grace period until 2020 and of the final maturity until 2022 and annual interest rate at the level of the key rate of the Central Bank of the Russian Federation plus 1.5% for the ruble-denominated credit facilities.
In March 2018, the Group fully repaid the overdue interest accrued prior to the credit facilities restructuring in 2016. Consequently, fines and penalties in the amount of RUB 7,323 million were recorded as finance income in the consolidated statements of profit (loss) and other comprehensive income for the year ended December 31, 2018.
As of December 31, 2015, the Group’s2018 and 2017, there were no overdue principal amount and overdue interest on SberbankGazprombank credit facilities amounted to RUB 65,778 million and RUB 5,770 million, respectively.
facilities. The fines and penalties on overdue amounts of nil and RUB 2,6817,323 million were recorded in Interest-bearing loans and borrowings in the consolidated statement of financial position as of December 31, 2015.2018 and 2017, respectively. The finance income in the amount of RUB 2,6997,323 million was recorded as Finance costs in the consolidated statementsstatement of profit (loss) and other comprehensive income (loss) for the year ended December 31,
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2015. Refer to Note 302018
(All amounts are in millions of Russian rubles, unless stated otherwise)
2018 and fines and penalties in the amount of RUB 56 million and RUB 2,031 million were recorded as finance costs in the consolidated statement of profit (loss) and other comprehensive income for details onthe year ended December 31, 2017 and 2016, respectively.
| (d) | Sberbank facilities |
The outstanding balances of the ruble-denominated facilities as of December 31, 2018 and 2017 were RUB 25,723 million and RUB 26,459 million, respectively, bearing interest at 9.3% p.a.
In 2016, the Group signed restructuring agreements and amicable settlements agreement approved by the courts with Sberbank and, in April 2017, Sberbank confirmed the restructuring terms under the relevant credit facilities including an extension of the repayment grace period until 2020 and the final maturity until 2022 and annual interest rate at the level of the key rate of the Central Bank of the Russian Federation plus 1.5% for the ruble-denominated credit facilities and 3M LIBOR plus 7% for the U.S. dollar-denominated credit facilities.
In April 2017, the U.S. dollar-denominated credit facilities of MTAG were transferred from Sberbank to VTB according to the assignment agreement between Sberbank and VTB. The outstanding balances of the U.S. dollar-denominated facilities subsequent toas of December 31, 2015.2018 and 2017 were RUB 23,147 million ($333,198 thousand at exchange rate as of December 31, 2018) and RUB 14,626 million ($253,927 thousand at exchange rate as of December 31, 2017), respectively, bearing interest at 9.4% p.a.
As of December 31, 2018 and 2017, there were no overdue principal amount and overdue interest on Sberbank credit facilities. The fines and penalties on overdue amounts of RUB 506 million and RUB 1,872 million were recorded in loans and borrowings in the consolidated statement of financial position as of December 31, 2018 and 2017, respectively. The fines and penalties in the amount of nil, RUB 4 million and RUB 2,244 million were recorded as finance costs in the consolidated statement of profit (loss) and other comprehensive income for the year ended December 31, 2018, 2017 and 2016, respectively.
| (e) | VEB facility |
In September 2017, the Group signed a new credit agreement, providing the Group with refinancing of existing credit facilities and the final maturity until April 2022. According to the agreement, VEB provided a credit facility in the amount of up to $190 million to refinance existing credit facilities.
The Elgaugol’s outstanding balances under VEB credit facility as of December 31, 2015, 20142018 and January 1, 20142017 were RUB 12,1928,794 million ($167,288 thousand),126,583 thousand at exchange rate as of December 31, 2018) and RUB 9,41110,090 million ($167,288 thousand) and RUB 1,059 million ($32,342 thousand)175,172 thousand at exchange rate as of December 31, 2017), respectively. respectively, bearing interest at 5.5% p.a.
As of December 31, 2015, the Group’s2018 and 2017, there were no overdue principal amount and overdue interest payable on VEB credit facilities amounted to RUB 10,673 million ($146,438 thousand) and RUB 246 million ($3,369 thousand), respectively.facilities. The use of proceeds under the facility is limited to the development of the Elga coal project.
TheThere were no fines and penalties on overdue amounts of RUB 18 million were recorded in Interest-bearing loans and borrowings in the consolidated statement of financial position as of December 31, 2015. The amount of RUB 9 million was recorded as Finance costs in the consolidated statements of profit (loss) and other comprehensive income (loss) 2018.
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2015.
MECHEL PAO
Notes to the consolidated financial statements for the year ended December 31, 20152018
(All amounts are in millions of Russian rubles, unless stated otherwise)
| (f) | Bonds |
On July 30, 2009, Mechel PAO issued 5,000,000 ruble-denominated bonds in an aggregate principal amount of RUB 5,000 million. The coupon interest rate for the current coupon periodas of December 31, 2018 amounted to 2.0%10.5% p.a. The maturity date is July 21, 2016.15, 2021. The balance outstanding as of December 31, 20152018 was RUB 1,761969 million, and isincluding RUB 352 million classified as currentshort-term debt and RUB 617 million classified as long-term debt.
On September 7, 2010, Mechel PAO issued two 5,000,000 ruble-denominated bonds in an aggregate principal amount of RUB 10,000 million. The interest rate for the current coupon period amounted to 15.0% p.a. The maturity date is August 25, 2020. The balance outstanding as of December 31, 2015 was RUB 4,684 million. In October 2015 bonds were restructured and according to the restructuring terms RUB 445 million were classified as short-term debt and RUB 4,239 million were classified as long-term debt. According to the new payment schedule the amount of RUB 445 million should be paid in 2016, RUB 868 million — in 2017, RUB 1085 million — in 2018, RUB 1,520 million — in 2019 and the final payment in the amount of RUB 766 million should be made in 2020.
On February 22, 2011, Mechel PAO madeplaced two issues of 5,000,000 ruble-denominated bonds each in an aggregate principal amount of RUB 10,000 million. The coupon interest rate for the current coupon periodas of December 31, 2018 amounted to 8.0%12.25% p.a. The maturity date is February 9, 2021. The bondholders have an option to demand repayment of the bonds at par value starting August 18, 2016.25, 2020. The balance outstanding as of December 31, 20152018 was RUB 8262,589 million, including RUB 1,642 million classified asshort-term debt and isRUB 947 million classified as currentlong-term debt.
On June 9,February 22, 2011, Mechel PAO madeplaced two issues of 5,000,000 ruble-denominated bonds each in an aggregate principal amount of RUB 10,000 million. The coupon interest rate for the current coupon periodas of December 31, 2018 amounted to 8.4%8.0% p.a. The bondholders havematurity date is February 9, 2021. The balance outstanding as of December 31, 2018 was RUB 820 million and was classified as long-term debt that should be paid in 2021.
On June 9, 2011, Mechel PAO placed two issues of 5,000,000 ruble-denominated bonds each in an optionaggregate principal amount of RUB 10,000 million. The coupon interest rate as of December 31, 2018 amounted to demand repayment of the bonds at par value starting June 6, 2016.10.6% p.a. The maturity date is May 27, 2021. The balance outstanding as of December 31, 2015 in the amount of2018 was RUB 5,9814,132 million, isincluding RUB 1,622 million classified asshort-term debt and RUB 2,510 million classified as currentlong-term debt.
On June 14, 2011, Mechel PAO issued 5,000,000 ruble-denominated bonds in an aggregate principal amount of RUB 5,000 million. The coupon interest rate for the current coupon periodas of December 31, 2018 amounted to 8.4%10.6% p.a. The bondholders have an option to demand repayment of the bonds at par value starting June 9, 2016. The maturity date is June 1, 2021. The balance outstanding as of December 31, 2015 in the amount of2018 was RUB 3,299 is2,469 million, including RUB 988 million classified asshort-term debt and RUB 1,481 million classified as currentlong-term debt.
| (g) | Other loans |
Other loans represent Russian ruble, U.S. dollar and euro-denominated long-term and short-term loans bearing interest at0.8%-17%-10.9% p.a. The outstanding balance under other loan agreements amounted to RUB 48,82541,887 million and RUB 44,123 million as of December 31, 2015.2018 and 2017, respectively.
As of December 31, 2015,2018, the Group’s overdue principal amount and overdue interest on other loans amounted to RUB 10,43625,209 million and RUB 7351,726 million, respectively, as of December 31, 2017 — RUB 17,409 million and RUB 1,527 million, respectively. The fines and penalties on overdue amounts of RUB 7641,622 million and RUB 2,182 million were recorded in Interest-bearing loans and borrowings in the consolidated statement of financial position as of December 31, 2015.2018 and 2017, respectively. The fines and penalties in the amount of RUB 769858 million, RUB 1,038 million and RUB 642 million was recorded as Financefinance costs in the consolidated statements of profit (loss) and other comprehensive income (loss) for the year ended December 31, 2015.
MECHEL PAO
Notes to the consolidated financial statements for the year ended December 31, 2015
(All amounts are in millions of Russian rubles, unless stated otherwise)
2018, 2017 and 2016, respectively.
In 2012-2015,2010-2017, the Group negotiatedsigned revolving credit agreements providing for unrestricted borrowingsworking capital financing up to RUB 26,5817,472 million with several banks. These revolving credit lines allow the Group to withdraw, repay andre-draw in the agreed amounts, timing and number of times until the arrangement expires. Borrowings bear interest at 8.3-14.5%5.3-7.0% p.a., and
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2018
(All amounts are continuously renewable at the Group’s option for 1-2 years provided there is compliance with the termsin millions of the agreement.Russian rubles, unless stated otherwise)
(h) Pledges
In order to secure bank financings, the Group pledged shares in certain key subsidiaries, including100%-1 share of Yakutugol, 75%95% +4 shares of SKCC, 66.66%91.66% of CMP, 50%+2 shares of common shares of BMP, 80%+3 shares of KMP, 62.5%87.5%+3 shares of Mechel Mining, 80%-575% + 2 shares of USP, 33.33%+1 share of common shares of Izhstal, 25%+1 share of Port Posiet, 49%50.99% of registered capital of Elgaugol, 25% of registered capital of Mecheltrans, and 100% of registered capital of Fincom-invest OOO, 25% of registered capital of BFP, 25% of registered capital of Port Temryuk, 1.99% of registered capital of Mecheltrans Vostok OOO, 1.99% of registered capital of Elga-road as of December 31, 2015. In addition, the pledge of 25% of BFP and 25% of Mechel Temryuk became effective in 2016.2018.
As of December 31, 2015, 20142018 and January 1, 2014,2017, the carrying value of property, plant and equipment pledged under the loan agreements amounted to RUB 33,510 million, RUB 29,899117,370 million and RUB 31,764121,926 million, respectively (Note 18)16). Carrying value of inventories pledged under the loan agreements amounted to RUB 4,037 million, RUB 3,5303,472 million and RUB 8902,450 million as of December 31, 2015, 20142018 and January 1, 2014,2017, respectively. Accounts receivable pledged as of December 31, 2015, 20142018 and January 1, 20142017 amounted to RUB 273 million, RUB 3831,044 million and RUB 393372 million, respectively. Third party bondsAdditionally, CMP pledged its rights to receive future payments (revenue) related to the contract with Russian Railways JSC in the amount of RUB 1146,947 million as of December 31, 2014, were pledged under the loan agreements.($100 million).3
| (i) | Covenants |
The Group’s loan agreements contain a number of covenants and restrictions, which include, but are not limited to, financial ratios, maximum amount of debt, minimum value of shareholders’ equity and certain crossdefaultcross-default provisions. The covenants also include, among other restrictions, limitations on: (1) indebtednessraising of certain companies in the Group;additional borrowings; (2) amount of dividends in common and preferred shares; and (3) amounts that can be spent for capital expenditures, new investments and acquisitions. Covenant breaches if not waived generally permit lenders to demand accelerated repayment of principal and interest.
The Group was required to comply with the following ratios under the most significant loan agreements with the Russian state-owned banks as of December 31, 2015:20184:
Restrictive | Requirement | Actual as of December 31, | ||||
| ||||||
Mechel’s EBITDA to Net Interest Expense | Shall not be less than | |||||
Mechel’s EBITDA to Consolidated Financial Expense | Shall not be less than | |||||
| ||||||
Mechel’s Net Debt to EBITDA | ||||||
Mechel’s Total Debt to EBITDA | 6.25:1.0 | |||||
Mechel’s Cash flow from operating activities to EBITDA | Shall not be less than 0.80:1.0 | 0.90:1.0 | ||||
Mechel’s EBITDA to Revenue | Shall not be less than 0.20:1.0 | 0.24:1.0 |
As of December 31, 2018, the Group was not in compliance with several covenants set by the loan agreements with the Russian state-owned banks (such as Net Debt to EBITDA, Total Debt to EBITDA ratios andnon-financial covenants). Also, the Group was not in compliance with covenants contained in the loan
| 3 | CMP’s accounts receivable from Russian Railways JSC as of December 31, 2018 amounted to RUB 834 million. |
| 4 | Net Debt and Total Debt are calculated according to the respective definitions set by the credit agreements. Generally, Total Debt includes outstanding loans, finance lease, bonds and other finance liability balances; Net Debt is equal to Total Debt less cash and cash equivalents. |
MECHEL PAO
Notes to the consolidated financial statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 20152018
(All amounts are in millions of Russian rubles, unless stated otherwise)
As of December 31, 2015, the Group was not in complianceagreements with all major Group’s restrictive financial covenants, except for theforeign banks (such as Net Borrowings to EBITDA ratio, EBITDA to Net Interest Expense ratio and targeted amount of Net borrowings (Total debt)Adjusted Shareholder’s Equity). There was a default on payments of principal and interest in the amount of RUB 161,28925,215 million and RUB 21,9691,728 million, respectively.respectively, which is represented primarily byECA-covered loans (represented by the credit facilities of BNP, ING, NatWest, Commerzbank and other international banks). As a result, the long-term debt of RUB 175,743361,328 million was reclassified to short-term liabilities as of December 31, 2015.2018.
11.2 Financial instruments risk management objectives and policies
The Group is exposed to foreign currency risk, credit risk and liquidity risk. Management reviews and agrees policies for managing each of these risks, which are summarised below.
Liquidity risk
Liquidity risk is the risk that arises when the maturity of assets and liabilities does not match. An unmatched position potentially enhances profitability, but can also increase the risk of losses. The CompanyGroup has procedures with the objectobjective of minimizing such losses such as maintaining sufficient cash and other highly liquid current assets to meet its liabilities as and when they fall due.
As of December 31, 2015,2018, the Group was in breach of a number of financial andnon-financial covenants contained in the Group’s loan agreements which led to cross-defaults under other loan and finance lease agreements, permitting the respective lenders under such other facilities to accelerate the payment of principal and interest under their loans.
The following tables show the remaining contractual maturities at the reporting date of the Group’snon-derivative financial liabilities, which are based on contractual undiscounted cash flows (including interest payment computed using contractual rates, or if floating, based on rates current at the reporting date) and the earliest the Group can be required to pay.
| Maturity | Maturity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| On demand | Within 1 year | More than 1 year but less than 2 years | More than 2 years but less than 3 years | More than 3 years but less than 4 years | More than 4 years | Total | On demand | Within 1 year | More than 1 year but less than 2 years | More than 2 years but less than 3 years | More than 3 years but less than 4 years | More than 4 years | Total | |||||||||||||||||||||||||||||||||||||||||||
At December 31, 2015 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
At December 31, 2018 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Loans and borrowings, including interest payable | 472,159 | 23,385 | 1,542 | 1,754 | 2,187 | 986 | 502,013 | 406,337 | 7,185 | 4,520 | 2,550 | 16 | 119 | 420,727 | ||||||||||||||||||||||||||||||||||||||||||
Finance lease liabilities | 10,534 | 6,469 | 360 | 169 | 20 | 1 | 17,553 | 1,664 | 5,186 | 908 | 886 | 745 | 350 | 9,739 | ||||||||||||||||||||||||||||||||||||||||||
Trade and other payables | 1,038 | 50,200 | 15 | — | — | — | 51,253 | 15,891 | 15,270 | 352 | 186 | 16 | — | 31,715 | ||||||||||||||||||||||||||||||||||||||||||
| Maturity | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| On demand | Within 1 year | More than 1 year but less than 2 years | More than 2 years but less than 3 years | More than 3 years but less than 4 years | More than 4 years | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||
At December 31, 2014 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Loans and borrowings, including interest payable | 378,120 | 40,522 | 10,701 | 666 | 666 | 781 | 431,456 | |||||||||||||||||||||||||||||||||||||||||||||||||
Finance lease liabilities | 14,544 | 5,774 | 107 | 37 | 14 | — | 20,476 | |||||||||||||||||||||||||||||||||||||||||||||||||
Trade and other payables | 1,050 | 56,941 | 1,009 | — | — | — | 59,000 | |||||||||||||||||||||||||||||||||||||||||||||||||
Contingent consideration | — | 1,681 | — | — | — | — | 1,681 | |||||||||||||||||||||||||||||||||||||||||||||||||
Other financial liabilities | — | — | — | 55,742 | — | — | 55,742 | |||||||||||||||||||||||||||||||||||||||||||||||||
MECHEL PAO
Notes to the consolidated financial statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 20152018
(All amounts are in millions of Russian rubles, unless stated otherwise)
| Maturity | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Maturity | On demand | Within 1 year | More than 1 year but less than 2 years | More than 2 years but less than 3 years | More than 3 years but less than 4 years | More than 4 years | Total | |||||||||||||||||||||||||||||||||||||||||||||||||
| On demand | Within 1 year | More than 1 year but less than 2 years | More than 2 years but less than 3 years | More than 3 years but less than 4 years | More than 4 years | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||
At January 1, 2014 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
At December 31, 2017 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Loans and borrowings, including interest payable | 251,431 | 38,683 | 38,507 | 16,429 | 685 | 1,433 | 347,168 | 416,316 | 9,959 | 6,678 | 7,293 | 5,215 | 1,651 | 447,112 | ||||||||||||||||||||||||||||||||||||||||||
Finance lease liabilities | 9,843 | 4,637 | 2,217 | 864 | 253 | 56 | 17,870 | 4,075 | 4,625 | 633 | 584 | 557 | 526 | 11,000 | ||||||||||||||||||||||||||||||||||||||||||
Trade and other payables | — | 49,407 | 1,319 | 543 | — | — | 51,269 | 394 | 29,540 | 542 | 166 | — | — | 30,642 | ||||||||||||||||||||||||||||||||||||||||||
Contingent consideration | — | 907 | — | — | — | — | 907 | |||||||||||||||||||||||||||||||||||||||||||||||||
Derivative financial instruments | — | 823 | — | — | — | — | 823 | |||||||||||||||||||||||||||||||||||||||||||||||||
Other financial liabilities | — | 869 | — | — | 55,905 | — | 56,774 | |||||||||||||||||||||||||||||||||||||||||||||||||
Credit risk
Credit risk arises when a failure by counterparties to discharge their obligations could reduce the amount of future cash inflows from financial assets on hand at the reporting date.
The Group is exposed to credit risk from its operating activities (primarily trade receivables) and from its financing activities, including deposits with banks and financial institutions, foreign exchange transactions and other financial instruments.
Customer credit risk is managed by each subsidiary subject to the Group’s established policy, procedures and control relating to customer credit risk management. Credit quality of a customer is assessed and individual credit limits are defined in accordance with this assessment. Outstanding customer receivables are regularly monitored.
The contractual credit period for sales of goods is varied fromabout 30 to 60 days on average. No interest is charged on trade receivables.
An impairment analysis is performed at each reporting date on an individual basis for major clients.customers. In addition, a large number of minor receivables are grouped into homogenous groups and assessed for impairment collectively. The calculation is based on actual incurred historical data.
The maximum exposure to credit risk arising from the Group’s financial assets is presented as follows:
| December 31, 2015 | December 31, 2014 | January 1, 2014 | ||||||||||
Restricted cash (excluding cash on hand) | 62 | 72 | — | |||||||||
Trade and other receivables | 16,033 | 20,076 | 22,753 | |||||||||
Other financial assets: | 303 | 448 | 543 | |||||||||
Promissory notes | 218 | 204 | 2 | |||||||||
Loans issued | 72 | 102 | 410 | |||||||||
Bonds | 13 | 142 | 21 | |||||||||
Deposits | — | — | 110 | |||||||||
|
|
|
|
|
| |||||||
Total | 16,398 | 20,596 | 23,296 | |||||||||
|
|
|
|
|
| |||||||
| December 31, 2018 | December 31, 2017 | |||||||
Restricted cash (excluding cash on hand) | 51 | 20 | ||||||
Trade and other receivables | 17,718 | 18,825 | ||||||
Other financial assets | 533 | 795 | ||||||
— Promissory notes | 212 | 210 | ||||||
— Loans issued | 305 | 571 | ||||||
— Bonds | 16 | 14 | ||||||
|
|
|
| |||||
Total | 18,302 | 19,640 | ||||||
|
|
|
| |||||
MECHEL PAO
Notes to the consolidated financial statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 20152018
(All amounts are in millions of Russian rubles, unless stated otherwise)
Foreign currency risk
Foreign currency risk is the risk that the value of future cash flows of a financial instrument will fluctuate because of changes in foreign exchanges rates. This risk arises when commercial transactions and recognised assets and liabilities are denominated in a currency different from the Group’s functional currency.currencies.
The Group undertakes transactions denominated in foreign currencies and consequently is exposed to foreign currency risk. Approximately 19%25% of the Group’s sales are denominated in U.S. dollars and 15%13% of the Group’s sales are denominated in Euro, 59%euro, 14% of the Group’s borrowings are denominated in U.S. dollars and 6%24% of the Group’s borrowings are denominated in Euro.euro. The Group does not have formal arrangements to mitigate foreign currency risk. However, management of the Group believes that the foreign currency risk is partly mitigated for the Group by the situation where approximately 34%38% of total sales of the Group are denominated in U.S. dollars and Euroeuros that reduces the negative impact of changes in exchange rates for the Group’s borrowings and purchases denominated in foreign currencies, mostly in U.S. dollars. The Group does not currently use derivative instruments to manage exchange rate exposures.
The Group’s exposure at the reporting date to foreign currency risk arising from recognised assets and liabilities denominated in a currency other than the functional currency of the entity to which they relate to is set out in the table below:
| December 31, 2015 | December 31, 2014 | January 1, 2014 | ||||||||||
Assets and liabilities denominated in U.S. dollars: | ||||||||||||
Non-current assets | — | 135 | 45 | |||||||||
Long-term financial assets | — | 135 | 45 | |||||||||
Current assets | 2,549 | 7,175 | 11,993 | |||||||||
Receivables | 1,399 | 5,235 | 4,831 | |||||||||
Shor-term financial assets | — | 138 | 13 | |||||||||
Cash and cash equivalents | 1,150 | 1,802 | 7,149 | |||||||||
Long-term liabilities | — | — | (6,008 | ) | ||||||||
Long-term loans and borrowings | — | — | (5,269 | ) | ||||||||
Long-term payables | — | — | (536 | ) | ||||||||
Long-term finance lease liability | — | — | (203 | ) | ||||||||
Short-term liabilities | (301,442 | ) | (236,214 | ) | (108,372 | ) | ||||||
Short-term loans and borrowings | (279,905 | ) | (207,419 | ) | (92,440 | ) | ||||||
Short-term payables | (19,405 | ) | (27,238 | ) | (15,717 | ) | ||||||
Short-term finance lease liability | (2,132 | ) | (1,557 | ) | (215 | ) | ||||||
Assets and liabilities denominated in U.S. dollars | December 31, 2018 | December 31, 2017 | ||||||
Current assets | 157 | 829 | ||||||
Trade and other receivables | 27 | 111 | ||||||
Cash and cash equivalents | 130 | 718 | ||||||
Current liabilities | (54,954 | ) | (118,677 | ) | ||||
Short-term loans and borrowings | (51,732 | ) | (112,277 | ) | ||||
Trade and other payables | (3,222 | ) | (5,614 | ) | ||||
Short-term finance lease liabilities | — | (786 | ) | |||||
Assets and liabilities denominated in euro | December 31, 2018 | December 31, 2017 | ||||||
Current assets | 812 | 746 | ||||||
Trade and other receivables | 510 | 711 | ||||||
Cash and cash equivalents | 302 | 35 | ||||||
Non-current liabilities | (219 | ) | (88 | ) | ||||
Long-term finance lease liabilities | (219 | ) | (88 | ) | ||||
Current liabilities | (101,294 | ) | (27,399 | ) | ||||
Short-term loans and borrowings | (98,285 | ) | (25,304 | ) | ||||
Trade and other payables | (2,953 | ) | (2,064 | ) | ||||
Short-term finance lease liabilities | (56 | ) | (31 | ) | ||||
MECHEL PAO
Notes to the consolidated financial statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 20152018
(All amounts are in millions of Russian rubles, unless stated otherwise)
| December 31, 2015 | December 31, 2014 | January 1, 2014 | ||||||||||
Assets and liabilities denominated in Euro: | ||||||||||||
Non-current assets | — | 11 | 21 | |||||||||
Long-term financial assets | — | 11 | 21 | |||||||||
Current assets | 3,096 | 2,263 | 2,323 | |||||||||
Receivables | 1,939 | 1,381 | 1,629 | |||||||||
Shor-term financial assets | — | 21 | 110 | |||||||||
Cash and cash equivalents | 1,157 | 860 | 584 | |||||||||
Long-term liabilities | (97 | ) | (207 | ) | (210 | ) | ||||||
Long-term loans and borrowings | (64 | ) | (178 | ) | (158 | ) | ||||||
Long-term finance lease liability | (33 | ) | (29 | ) | (52 | ) | ||||||
Short-term liabilities | (30,705 | ) | (25,632 | ) | (19,906 | ) | ||||||
Short-term loans and borrowings | (28,544 | ) | (23,423 | ) | (18,497 | ) | ||||||
Short-term payables | (1,936 | ) | (1,978 | ) | (1,357 | ) | ||||||
Short-term finance lease liability | (225 | ) | (231 | ) | (52 | ) | ||||||
| December 31, 2015 | December 31, 2014 | January 1, 2014 | ||||||||||
Currency exchange rates | ||||||||||||
U.S. dollar | 72.8827 | 56.2584 | 32.7292 | |||||||||
Euro | 79.6972 | 68.3427 | 44.9699 | |||||||||
Sensitivity analysis
The table below demonstrates the Group’s sensitivity to a devaluation of the Russian ruble against U.S. dollar and Euroeuro which management believes is an appropriate measure in the current market conditions and which would impact its operations:
| Change in U.S. dollar to Russian ruble exchange rate | Effect on profit before tax | Change in Euro to Russian ruble exchange rate | Effect on profit before tax | |||||||||||||
2014 | ||||||||||||||||
| +30 | % | 68,671 | +30 | % | 7,070 | |||||||||||
| -30 | % | (68,671 | ) | -30 | % | (7,070 | ) | |||||||||
2015 | ||||||||||||||||
| +40 | % | 119,557 | +40 | % | 11,082 | |||||||||||
| -15 | % | (44,834 | ) | -15 | % | (4,156 | ) | |||||||||
| Change in U.S. dollar to Russian ruble exchange rate | Effect ((decrease)/ increase) on profit before tax | Change in Euro to Russian ruble exchange rate | Effect ((decrease)/ increase) on profit before tax | |||||||||||||
2016 | ||||||||||||||||
| +20 | % | (24,811 | ) | +20 | % | (4,654 | ) | |||||||||
| -20 | % | 24,811 | -20 | % | 4,654 | |||||||||||
2017 | ||||||||||||||||
| +10 | % | (11,785 | ) | +10 | % | (2,674 | ) | |||||||||
| -10 | % | 11,785 | -10 | % | 2,674 | |||||||||||
2018 | ||||||||||||||||
| +14 | % | (7,672 | ) | +14 | % | (14,098 | ) | |||||||||
| -14 | % | 7,672 | -14 | % | 14,098 | |||||||||||
Interest rate risk
Interest rate risk is the risk that changes in floating interest rates will adversely impactimpacts the financial results of the Group. As of December 31, 2015, 20142018 and January 1, 2014,2017, the sharesshare of the borrowings with floating rates in the total amount of the borrowings were 53%95% (incl. Mosprime — 0.2%– 0%, key rate of the Central Bank of Russia — 14%the Russian Federation – 62%, Libor, EuriborLIBOR, EURIBOR and others — 39%– 33%) and 95% (incl. Mosprime – 0.03%, 39% (incl. Mospimekey rate of the Central Bank of the Russian Federation – 12%66%, Libor, EuriborLIBOR, EURIBOR and others — 27%) and 43% (incl. Mosprime — 18%, Libor, Euribor and others — 25%– 29%), respectively.
MECHEL PAO
Notes to the consolidated financial statements for the year ended December 31, 2015
(All amounts are in millions of Russian rubles, unless stated otherwise)
The table below demonstrates the Group’s sensitivity to the change of floating rates.
| Increase/decrease in MosPrime (%) | Effect on profit before tax | Increase/decrease in LIBOR (%) | Effect on profit before tax | Increase/decrease in Euribor (%) | Effect on profit before tax | |||||||||||||||||||
2014 | ||||||||||||||||||||||||
| +9.32 | % | 4,395 | +0.02 | % | 12 | +0.07 | % | 13 | ||||||||||||||||
| -9.32 | % | (4,395 | ) | -0.02 | % | (12 | ) | -0.07 | % | (13 | ) | |||||||||||||
2015 | ||||||||||||||||||||||||
| +6 | % | 3,312 | +0.5 | % | 662 | +0.25 | % | 62 | ||||||||||||||||
| -5 | % | (2,760 | ) | -0.12 | % | (159 | ) | -0.25 | % | (62 | ) | |||||||||||||
| Increase/decrease in Mosprime and the key rate of the Central Bank of Russian Federation (%) | Effect ((decrease)/ increase) on profit before tax | Increase/ decrease in LIBOR (%) | Effect ((decrease)/ increase) on profit before tax | Increase/ decrease in EURIBOR (%) | Effect ((decrease)/ increase) on profit before tax | |||||||||||||||||||
2016 | ||||||||||||||||||||||||
| +2.00 | % | (4,943 | ) | +0.60 | % | (736 | ) | +0.12 | % | (28 | ) | |||||||||||||
| -4.00 | % | 9,887 | -0.08 | % | 98 | -0.08 | % | 19 | ||||||||||||||||
2017 | ||||||||||||||||||||||||
| +1.00 | % | (2,744 | ) | +0.48 | % | (500 | ) | +0.04 | % | (8 | ) | |||||||||||||
| -2.00 | % | 5,488 | -0.24 | % | 250 | -0.08 | % | 16 | ||||||||||||||||
2018 | ||||||||||||||||||||||||
| +0.75 | % | (1,922 | ) | +0.50 | % | (226 | ) | +0.20 | % | (190 | ) | |||||||||||||
| -1.00 | % | 2,563 | -0.15 | % | 68 | -0.01 | % | 9 | ||||||||||||||||
| 11.3 | Other current financial assets |
In November 2011, the owners of the former Estar metallurgical plants (refer to Note 9(b)) and the Group entered into a loan agreement pursuant to which a loan of $944,530 thousand (RUB 28,433 million at exchange rate as of
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2018
(All amounts are in millions of Russian rubles, unless stated otherwise)
November 10, 2014)2011) was granted by the Group. The loan consists of several tranches which bear interest at the range of1-8.5% p.a. To secure the loan, shares in the major former Estar metallurgical plants (or shares in parent companies of such metallurgical plants) were pledged. The proceeds from this loan were used by the former Estar metallurgical plants to repay most of the accounts receivable owed to the Group. According to the loan agreement, in the event that the loan is not repaid at maturity (September 30, 2012), the Group was entitled to enforce the pledge over the pledged former Estar metallurgical plants assets and thereby take control of these assets subject to approval from the Russian Federal Antimonopoly Service.
In September 2012, the Group extended the term of the loan for additional nine months from October 1, 2012, the pledges and guarantees remained the same. From September through December 2012, the loan was partially repaid in the amount of $213,360 thousand (RUB 6,654 million at the average rate for the period from September till December 2012). To make this repayment, the owners of the former Estar metallurgical plants used the proceeds received by them from the Group for the sale of Cognor and proceeds under a security deposit, as discussed further below. During the year ended December 31, 2013, $5,000 thousand (RUB 154 million at exchange rate as of March 19, 2013) were repaid and the owners of the former Estar metallurgical plants returned the security deposit paid by the Group in the end of 2012 for the acquisition of some assets pledged under the loan agreement.
The Group evaluates the recoverability of the loan amount based on the fair value of the pledged assets which, as of December 31, 2015, 2014 and January 1, 2014, was RUB nil. This resulted in a $830,421 thousand (RUB 60,620 million at exchange rate as of December 31, 2015), $832,013 thousand (RUB 46,742 million at exchange rate as of December 31, 2014) and $888,015 thousand (RUB 29,064 million at exchange rate as of January 1, 2014) provision for doubtful accounts under this loan as of December 31, 2015, 2014 and January 1, 2014, respectively. The Group has not taken possession of assets provided as collateral because these entities are under the bankruptcy procedure and burdened with substantial amount of debt.
The Group evaluates the recoverability of the loan based on the fair value of the pledged assets. As of December 31, 2018, 2017 and 2016, this loan in the amount of RUB 10,240 million, RUB 9,800 million and RUB 50,320 million, respectively, was fully provided for as the fair value of the pledged assets was nil as at these dates. In 2017, this loan was partially written off in the amount of $664,556 thousand (RUB 39,297 million as at exchange rate at March 14, 2017) due to liquidation of certain debtors.
| 11.4 | Othernon-current financial liabilities |
The Group recognised othernon-current financial liabilities under the put option of Gazprombank (see Note 6) in the amount of RUB 44,056 million as of December 31, 2018 and RUB 40,260 million as of December 31, 2017 (estimated at the present value of the consideration to be transferred upon the exercise of the put option discounted at the key rate of the Central Bank of the Russian Federation plus 2%). The respective finance cost was recognised in the consolidated statement of profit (loss) and other comprehensive income in the amount of RUB 3,796 million, RUB 4,062 million and RUB 1,898 million for 2018, 2017 and 2016, respectively (Note 25.5).
| 11.5 | Other current financial liabilities |
As a part of the restructuring requirements of the credit facility with VTB, in January 2017, the Group signed a call option agreement with VTB providing VTB with an option to acquire a 5% stake (6,937,846 preferred shares) of the preferred shares of the Mechel PAO at a price of 47.3682 rubles per share or to pay cash to VTB in the amount calculated as a difference between the weighted average market value of preferred shares for the last six months from the date of the call from the VTB and the price of 47.3682 rubles per share or combination of these two options. Until the execution of the call option 6,937,846 preferred shares were pledged.
At the date of the call option agreement, the Group recognised the financial liability at fair value in the amount of RUB 815 million. The corresponding amount was capitalized as restructuring fees within loans and borrowings considering this call option agreement as part of the restructuring requirement.
In April 2017, VTB notified the Group of its decision to exercise the option. The Group has requested to extend the commencement day of the option period by one year till April 1, 2018. On August 9, 2017, the Group and VTB signed an amendment agreement postponing the option period start date till April 1, 2018, removing an option to acquire 5% of preferred shares and granting VTB the right to receive only a cash consideration in the amount equal to the higher of RUB 620 million less agreed payments or the amount calculated as a difference between the weighted average market value of preferred shares for the last six months from the date of the call from VTB and the price of 47.3682 rubles per share multiplied by the number of option shares.
On August 10, 2018, VTB notified the Group of its decision to exercise the option and receive cash of RUB 442 million. On August 22, 2018, RUB 442 million has been paid by the Group in full.
MECHEL PAO
Notes to the consolidated financial statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 20152018
(All amounts are in millions of Russian rubles, unless stated otherwise)
| 11.6 | Finance lease liabilities |
The Group has finance leases for various items of plant and machinery. The Group’s obligations under finance leases are not secured. Future minimum lease payments under finance leases together with the present value of the net minimum lease payments were as follows:
| Minimum payments | Present value of payments | |||||||||||||||
| December 31, 2018 | December 31, 2017 | December 31, 2018 | December 31, 2017 | |||||||||||||
Payable in 1 year | 6,849 | 8,700 | 5,880 | 7,476 | ||||||||||||
Payable in 2 years | 908 | 633 | 702 | 457 | ||||||||||||
Payable in 3 years | 886 | 584 | 751 | 458 | ||||||||||||
Payable in 4 years | 745 | 557 | 680 | 481 | ||||||||||||
Payable in 5 years and thereafter | 350 | 526 | 280 | 482 | ||||||||||||
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|
|
| |||||||||
Total minimum lease payment | 9,738 | 11,000 | 8,293 | 9,354 | ||||||||||||
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|
| |||||||||||||
Less amounts representing finance charges | (1,445 | ) | (1,646 | ) | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Present value of finance lease liabilities | 8,293 | 9,354 | 8,293 | 9,354 | ||||||||||||
|
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|
|
|
|
|
| |||||||||
Current portion of finance lease liabilities | 5,880 | 7,476 | ||||||||||||||
Non-current portion of finance lease liabilities | 2,413 | 1,878 | ||||||||||||||
Discount rate used for the calculation of the present value of minimum lease payments equals the implicit rate for the lessor and varies on different groups of equipment from 7.2% p.a. to 11.4% p.a. (U.S. dollar-denominated contracts), from 8.1% p.a. to 10.4% p.a. (euro-denominated contracts) and from 8.6% p.a. to 34.7% p.a. (Russian ruble-denominated contracts). Interest expense charged to the consolidated statements of profit (loss) and other comprehensive income in 2018, 2017 and 2016 amounted to RUB 1,104 million, RUB 1,230 million and RUB 1,500 million, respectively.
The Group’s finance lease contracts contain a number of covenants and restrictions, which include, but not limited to, compliance with payment schedule and certain cross-default provisions. As of December 31, 2018 and 2017, the Group was not in compliance with certain Group’s covenants under a number of loan agreements. There was also a breach of restrictive covenants on overdue principal amount of nil and 158 million as of December 31, 2018 and 2017, respectively. As a result, the long-term finance lease liability of RUB 1,320 million and RUB 3,898 million was reclassified to short-term finance lease liabilities due to covenant violations as of December 31, 2018 and 2017, respectively.
The total amount of commitments under the signed lease contracts as of December 31, 2018 and 2017 is equal to nil and RUB 75 million, respectively.
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2018
(All amounts are in millions of Russian rubles, unless stated otherwise)
| 12. | Inventories |
| December 31, 2015 | December 31, 2014 | January 1, 2014 | ||||||||||
Cash and cash equivalents from continuing operations: | ||||||||||||
Cash on hand | 8 | 67 | 63 | |||||||||
Cash at banks, including | ||||||||||||
in Russian rubles | 628 | 922 | 723 | |||||||||
in U.S. dollars | 1,150 | 1,802 | 7,149 | |||||||||
in Euro | 1,157 | 860 | 584 | |||||||||
in other currencies | 135 | 312 | 301 | |||||||||
Other cash and cash equivalents | 1 | 20 | 159 | |||||||||
|
|
|
|
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| |||||||
Total cash and cash equivalents from continuing operations | 3,079 | 3,983 | 8,979 | |||||||||
|
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|
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| |||||||
Cash and cash equivalents of discontinued operations (Note 17) | — | 91 | — | |||||||||
|
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|
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| |||||||
Total cash and cash equivalents | 3,079 | 4,074 | 8,979 | |||||||||
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| December 31, 2018 | December 31, 2017 | |||||||
Raw materials | 14,980 | 15,050 | ||||||
Work in progress | 8,681 | 6,990 | ||||||
Finished goods and goods for resale | 19,762 | 15,950 | ||||||
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| |||||
Total inventories at the lower of cost and net realisable value | 43,423 | 37,990 | ||||||
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For the purpose of the statement of cash flows, bank overdrafts are deducted from cash and cash equivalents in the amount ofDuring 2018, RUB 2,1881,162 million (2017: RUB 2,730470 million, and 2,849 million as of December 31, 2015, 2014 and January 1, 2014.
As of December 31, 2015, 2014 and January 1, 2014, short-term deposits in the amount of2016: RUB nil, RUB 1,483 million and RUB 6,506 million with original maturities of less than 90 days were included in bank accounts in U.S. dollars, Russian rubles and other currencies, respectively. The following table presents the Group’s deposits with maturity of less than 3 months:
| December 31, 2014 | January 1, 2014 | |||||||
in Russian rubles | 363 | 237 | ||||||
in U.S. dollars | 1,100 | 6,251 | ||||||
in other currencies | 20 | 18 | ||||||
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Total short-term deposits | 1,483 | 6,506 | ||||||
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As of December 31, 2015, 2014 and January 1, 2014, the amount of RUB 62 million, RUB 72 million and RUB nil, respectively, was restricted for use by regulatory requirements.
As of December 31, 2015, 2014 and January 1, 2014, the Group had available RUB 409 million, RUB 1,879 million and RUB 9,191 million, respectively, of undrawn committed borrowing facilities.
MECHEL PAO
Notes to the consolidated financial statements for the year ended December 31, 2015
(All amounts are in millions of Russian rubles, unless stated otherwise)
| December 31, 2015 | December 31, 2014 | January 1, 2014 | ||||||||||
Trade receivables | 26,834 | 31,221 | 29,776 | |||||||||
Domestic customers | 22,332 | 23,842 | 24,126 | |||||||||
Foreign customers | 4,502 | 7,379 | 5,650 | |||||||||
Other receivables | 5,495 | 3,093 | 4,677 | |||||||||
Total trade and other receivables | 32,329 | 34,314 | 34,453 | |||||||||
Less allowance for doubtful accounts | (16,348 | ) | (14,505 | ) | (11,976 | ) | ||||||
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Total accounts receivable, net | 15,981 | 19,809 | 22,477 | |||||||||
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As of December 31, the ageing analysis of trade receivables is as follows:
| December 31, 2015 | December 31, 2014 | January 1, 2014 | ||||||||||
Total receivables | 32,329 | 34,314 | 34,453 | |||||||||
Past due but not impaired: | ||||||||||||
< 30 days | 2,181 | 1,908 | 1,664 | |||||||||
30–60 days | 618 | 623 | 377 | |||||||||
61–90 days | 241 | 332 | 406 | |||||||||
91–180 days | 248 | 346 | 698 | |||||||||
181–365 days | 326 | 557 | 345 | |||||||||
> 1 year | 613 | 293 | 182 | |||||||||
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Total past due, but not impaired: | 4,227 | 4,059 | 3,672 | |||||||||
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Receivables that were past due but not impaired amounted to RUB 4,227 million as of December 31, 2015, RUB 4,059 million as of December 31, 2014, RUB 3,672 million as of January 1, 2014. Based on past experience, management believes that no allowance is necessary in respect of receivables that were past due but not impaired as there has not been a significant change in credit quality and the balances are still considered fully recoverable. The Group does not hold any collateral over these balances.
MECHEL PAO
Notes to the consolidated financial statements for the year ended December 31, 2015
(All amounts are in millions of Russian rubles, unless stated otherwise)
As of December 31, 2015, trade and other receivables with an initial carrying value of RUB 16,348 million (December 31, 2014: RUB 14,505 million, January 1, 2014: RUB 11,976 million) were impaired and fully provided for. See below for the movements in the allowance for doubtful accounts:
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Note 1 provides information about the Group’s structure, including details of the subsidiaries and the holding company. The following table provides the total amount of transactions that have been entered into with the related parties in 2014 and 2015.
| 2015 | 2014 | |||||||||||||||||||||||
| Purchases | Sales | Other loss (income) | Purchases | Sales | Other loss (income) | |||||||||||||||||||
Associates | 199 | 80 | 28 | 284 | 91 | (2 | ) | |||||||||||||||||
Controlling shareholders and entities under control of the Group’s Controlling shareholders | 261 | 37 | (23 | ) | 94 | 25 | 133 | |||||||||||||||||
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Total | 460 | 117 | 5 | 378 | 116 | 131 | ||||||||||||||||||
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As of December 31, the Group had the following balances in settlement with related parties:
| December 31, 2015 | December 31, 2014 | January 1, 2014 | ||||||||||||||||||||||||||||||||||
| Receivables from | Payables to | Total outstanding, net | Receivables from | Payables to | Total outstanding, net | Receivables from | Payables to | Total outstanding, net | ||||||||||||||||||||||||||||
Associates | 8 | (50 | ) | (42 | ) | 59 | (44 | ) | 15 | 50 | (61 | ) | (11 | ) | ||||||||||||||||||||||
Controlling shareholders and entities under control of the Group’s Controlling shareholders | 88 | (28 | ) | 60 | 79 | — | 79 | 146 | (963 | ) | (817 | ) | ||||||||||||||||||||||||
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Total | 96 | (78 | ) | 18 | 138 | (44 | ) | 94 | 196 | (1,024 | ) | (828 | ) | |||||||||||||||||||||||
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MECHEL PAO
Notes to the consolidated financial statements for the year ended December 31, 2015
(All amounts are in millions of Russian rubles, unless stated otherwise)
The Group’s associates provide to the Group’s subsidiaries transportation and auto repair services. During the years ended December 31, 2015 and 2014, the Group purchased from its associates transportation services in the amounts of RUB 105 million and RUB 166 million, respectively, and repair services in the amounts of RUB 94 million and RUB 86 million, respectively.
As of December 31, 2015, 2014 and January 1, 2014, the amounts of accounts receivable fully covered by the allowance included amounts receivable of RUB 24,035 million, RUB 24,254 million and RUB 15,386 million, respectively, described below. In December 2013, the Group, related party (an entity wholly owned by the Controlling Shareholder) and the former Estar metallurgical plants signed an assignment agreement. Under that agreement, the Group assigned to its related party the right to collect amounts due from the former Estar metallurgical plants, and the related party is to repay this amount to the Group through November 2017.
As of January 1, 2014, the Group had accounts payables to the Controlling Shareholder in the amount of RUB 964 million. In November 2013, the Group purchased 1.31% of Mechel Mining OAO from the Controlling Shareholder for consideration of RUB 1,895 million. The transaction was accounted for as an equity transaction. The Group has 99.999995% of voting shares of Mechel Mining OAO as of January 1, 2014.
The outstanding cash balance in Coalmetbank was RUB 1,580 million and RUB 2,183 million as of December 31, 2015 and December 31, 2014, respectively.
The total compensation to key management personnel was included in general and administrative expenses in the accompanying consolidated statements of profit (loss) and other comprehensive income (loss) and consisted of the short-term employee benefits in the amount of RUB 481 million and RUB 291 million in the year ended December 31, 2015 and 2014, respectively. There are no share-based payments to key management personnel. The Group’s directors and executive officers are also provided with voluntary medical insurance and the use of wireless services.
| December 31, 2015 | December 31, 2014 | January 1, 2014 | ||||||||||
Raw materials | 11,496 | 10,553 | 13,377 | |||||||||
Work in progress | 5,769 | 5,843 | 6,742 | |||||||||
Finished goods and goods for resale | 17,924 | 19,941 | 26,510 | |||||||||
|
|
|
|
|
| |||||||
Total inventories at the lower of cost and net realizable value | 35,189 | 36,337 | 46,629 | |||||||||
|
|
|
|
|
| |||||||
During 2015, RUB 1,003 million (2014: RUB 1,360364 million) was recognised as an expense within cost of goods soldsales for inventories carried at net realisable value. The amount of inventories recognised as an expense during the period was RUB 100,577115,126 million for 2015 (2014:2018 (2017: RUB 99,934102,613 million, 2016: RUB 95,019 million).
| 13. | Trade and other receivables |
| December 31, 2018 | December 31, 2017 | |||||||
Trade receivables, including from contracts with | 24,039 | 23,878 | ||||||
— domestic customers | 19,037 | 19,064 | ||||||
— foreign customers | 5,002 | 4,814 | ||||||
Less allowance for expected credit losses on trade receivables | (6,749 | ) | (5,630 | ) | ||||
|
|
|
| |||||
Total trade receivables, net | 17,290 | 18,248 | ||||||
Other receivables | 3,410 | 3,967 | ||||||
|
|
|
| |||||
Less allowance for expected credit losses on other receivables | (3,088 | ) | (3,453 | ) | ||||
|
|
|
| |||||
Total other receivables, net | 322 | 514 | ||||||
|
|
|
| |||||
Total accounts receivable, net | 17,612 | 18,762 | ||||||
|
|
|
| |||||
MECHEL PAO
Notes to the consolidated financial statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2018
(All amounts are in millions of Russian rubles, unless stated otherwise)
Set out below is the information about the credit risk exposure on the Group’s trade receivables by ageing as of December 31, 2018 and 2017:
| December 31, 2018 | December 31, 2017 | |||||||||||||||
| Trade receivables | Expected credit losses | Trade receivables | Expected credit losses | |||||||||||||
Current | 14,734 | (659 | ) | 14,930 | (333 | ) | ||||||||||
=<30 days | 2,178 | (106 | ) | 2,361 | (60 | ) | ||||||||||
31-60 days | 497 | (62 | ) | 521 | (55 | ) | ||||||||||
61-90 days | 199 | (57 | ) | 205 | (42 | ) | ||||||||||
91-180 days | 334 | (142 | ) | 407 | (102 | ) | ||||||||||
181-365 days | 579 | (377 | ) | 584 | (302 | ) | ||||||||||
>1 year | 5,518 | (5,346 | ) | 4,870 | (4,736 | ) | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Total trade receivables | 24,039 | (6,749 | ) | 23,878 | (5,630 | ) | ||||||||||
|
|
|
|
|
|
|
| |||||||||
The Group does not hold any collateral over these balances.
The movements in the allowance for expected credit losses on trade and other receivables were as follows:
| Total | ||||
At December 31, 2015 | (40,218 | ) | ||
Charge for the year | (613 | ) | ||
Utilised amounts | 6,637 | |||
Disposal of subsidiaries | 11 | |||
Exchange rate difference | 242 | |||
At December 31, 2016 | (33,941 | ) | ||
Charge for the year | (343 | ) | ||
Utilised amounts | 603 | |||
Reclassified tonon-current financial assets (Note 9) | 24,391 | |||
Exchange rate difference | 207 | |||
At December 31, 2017 | (9,083 | ) | ||
Charge for the year | (791 | ) | ||
Utilised amounts | 575 | |||
Exchange rate difference | (538 | ) | ||
At December 31, 2018 | (9,837 | ) | ||
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2018
(All amounts are in millions of Russian rubles, unless stated otherwise)
Other current andnon-current assets |
| December 31, 2015 | December 31, 2014 | January 1, 2014 | December 31, 2018 | December 31, 2017 | ||||||||||||||||
Other current assets: | ||||||||||||||||||||
Other current assets | ||||||||||||||||||||
Prepayments and advances | 4,778 | 4,049 | ||||||||||||||||||
Input VAT and other taxes recoverable | 2,976 | 4,569 | 4,371 | 3,758 | 3,413 | |||||||||||||||
Prepayments and advances for materials | 3,545 | 2,605 | 2,525 | |||||||||||||||||
Other current assets | 1,606 | 1,576 | 329 | 137 | 127 | |||||||||||||||
|
|
|
|
| ||||||||||||||||
Total prepayments and other current assets | 8,127 | 8,750 | 7,225 | 8,673 | 7,589 | |||||||||||||||
|
|
|
|
| ||||||||||||||||
| December 31, 2015 | December 31, 2014 | January 1, 2014 | ||||||||||
Other non-current assets: | ||||||||||||
Deferred assets from sale and lease back | 339 | 372 | 359 | |||||||||
Advance payment to non-state pension fund | 462 | 565 | 562 | |||||||||
Long-term prepayments | 1 | 1 | 6 | |||||||||
Prepaid bonds | — | — | 184 | |||||||||
Prepaid royalties | — | — | 904 | |||||||||
Other non-current assets | 441 | 524 | 466 | |||||||||
|
|
|
|
|
| |||||||
Total other non-current assets | 1,243 | 1,462 | 2,481 | |||||||||
|
|
|
|
|
| |||||||
| December 31, 2018 | December 31, 2017 | |||||||
Othernon-current assets | ||||||||
Deferred assets from sale and lease back | 241 | 273 | ||||||
Othernon-current assets | 389 | 485 | ||||||
|
|
|
| |||||
Total othernon-current assets | 630 | 758 | ||||||
|
|
|
| |||||
Generally in Russia, VAT related to sales is payable to the tax authorities on an accrual basis based upon invoices issued to the customer. VAT incurred on purchases may be reclaimed, subject to certain restrictions, against VAT related to sales.
As of December 31, 2015, 2014 and January 1, 2014, advanced payments of RUB 462 million, RUB 565 million and RUB 562 million were made by Yakutugol in terms of agreed pension benefit program to Mechel Fund non-state pension funds (Note 24).
Provision for advances issued of RUB 35589 million, reversal of provision of RUB 11 million and provision of RUB 595185 million waswere included in Allowance for doubtful accountsAdministrative and other operating expenses in the Statementconsolidated statement of profit (loss) and other comprehensive income (loss) for the years ended December 31, 2015 and 2014.
BCG Companies
In December 2014, the Group entered into an agreement with a third party to sell 100% of the shares of the BCG Companies. The binding agreement was signed on February 12, 2015. The total consideration for the sale of the BCG Companies under the shares sale agreement consists of: (1) an immediate cash payment of $5,000 thousand (RUB 330 million at exchange rate of 66.0585 RUB/USD as of February 12, 2015); (2) future royalty payments on coal mined and sold in the amount of 3.00 U.S. dollars (RUB 198.2 at exchange rate of 66.0585 RUB/USD as of February 12, 2015) per short ton, capped at $150,000 thousand (RUB 9,909 million at
MECHEL PAO
Notes to the consolidated financial statements for the year ended December 31, 20152018, 2017 and 2016.
| 15. | Cash and cash equivalents |
| December 31, 2018 | December 31, 2017 | |||||||
Cash on hand | 8 | 7 | ||||||
Cash at banks, including | ||||||||
— in Russian rubles | 360 | 617 | ||||||
— in U.S. dollars | 766 | 1,377 | ||||||
— in euro | 596 | 305 | ||||||
— in other currencies | 164 | 146 | ||||||
|
|
|
| |||||
Total cash and cash equivalents | 1,894 | 2,452 | ||||||
|
|
|
| |||||
Less allowance for expected credit losses | (91 | ) | — | |||||
|
|
|
| |||||
Total cash and cash equivalents, net | 1,803 | 2,452 | ||||||
|
|
|
| |||||
For the purpose of the consolidated statement of cash flows, bank overdrafts are deducted from cash and cash equivalents in the amount of RUB 1,423 million and RUB 1,229 million as of December 31, 2018 and 2017, respectively. As of December 31, 2018 and 2017, the Group had short-term deposits included in cash at banks of RUB 494 million and 1,062, respectively. As of December 31, 2018 and 2017, the Group had available RUB 573 million and RUB 475 million, respectively, of undrawn committed borrowing facilities.
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2018
(All amounts are in millions of Russian rubles, unless stated otherwise)
exchange rateReconciliation between the changes in liabilities arising from financing activities including both changes arising from cash flows andnon-cash changes:
| Loans and borrowings | Finance lease liabilities | Deferred payments for acquisition of assets | Put option of Gazprombank | Other current financial liabilities | Deferred consideration paid for the acquisition of subsidiaries in prior periods | |||||||||||||||||||
At December 31, 2015 | 495,982 | 13,988 | — | — | — | 14,799 | ||||||||||||||||||
Cash flows | (70,084 | ) | (5,217 | ) | — | 34,300 | — | (4,732 | ) | |||||||||||||||
Foreign exchange movement | (25,303 | ) | (351 | ) | — | — | — | (2,035 | ) | |||||||||||||||
Other changes, including interest | 45,214 | 2,176 | 1,052 | 1,898 | — | — | ||||||||||||||||||
At December 31, 2016 | 445,809 | 10,596 | 1,052 | 36,198 | — | 8,032 | ||||||||||||||||||
Cash flows | (42,480 | ) | (4,801 | ) | (455 | ) | — | — | (3,652 | ) | ||||||||||||||
Foreign exchange movement | (3,942 | ) | (67 | ) | — | — | — | (370 | ) | |||||||||||||||
Changes in fair value | — | — | — | — | (81 | ) | — | |||||||||||||||||
Other changes, including interest | 40,506 | 3,626 | 1,083 | 4,062 | 815 | — | ||||||||||||||||||
At December 31, 2017 | 439,893 | 9,354 | 1,680 | 40,260 | 734 | 4,010 | ||||||||||||||||||
Cash flows | (52,951 | ) | (3,892 | ) | (629 | ) | — | (442 | ) | (3,968 | ) | |||||||||||||
Foreign exchange movement | 24,167 | 83 | — | — | — | 339 | ||||||||||||||||||
Changes in fair value | — | — | — | — | (292 | ) | — | |||||||||||||||||
Other changes, including interest | 7,723 | 2,748 | 379 | 3,796 | — | — | ||||||||||||||||||
At December 31, 2018 | 418,832 | 8,293 | 1,430 | 44,056 | — | 381 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
The table above does not include dividends paid of 66.0585 RUB/USD asRUB 1,394 million, RUB 978 million and RUB 7 million, acquisition of February 12, 2015); (3) a portionnon-controlling interests in subsidiaries of a sale price in case of any future sale of the BCG Companies and/or its assets, amounting to 12.5% or 10% of the total consideration if the sale transaction closed within, respectively, five or ten years of the sale to the buyer. The fair value of future royalty payments and portion of selling price in case of future resale of the BCG Companies was assessed by the Group as RUB nil at the date of sale.
The contingent consideration arising upon the acquisition of the BCG Companies of $29,936 thousand (RUB 1,681 million, at exchange rate as of December 31, 2015RUB 3,358 million and RUB 1,977nil million at exchange rate of 66.0585 RUB/USD as of February 12, 2015), which dependsand fines and penalties on the results of additional geological researches of reserves (“Drilling Program”), was released on the date of transfer of shares of February 12, 2015. The Group incurred expenses of $3,415 thousand (RUB 226 million at exchange rate of 66.0585 RUB/USD as of February 12, 2015) related to consulting services from third party banks in connection with the sale. The disposal of the BCG Companies is aligned with the revised strategy aimed at restructuring the Group’s assets and development of its core businesses.
The results of operations of BCG Companies are included in the consolidated financial statements as discontinued operations for the period ended December 31, 2014.
Following the classification of the BCG Companies as held for sale, the fair value less costs to sell of net assets was determined in accordance with requirements of IFRS 5 Non-current Assets Held for Sale and Discontinued Operations. As a result, the impairment lossoverdue finance leases of RUB 11,65310 million, was recognised as a loss on discontinued operationsRUB 13 million and RUB 129 million for the year ended December 31, 2014 (including2018, 2017 and 2016, respectively. The amounts presented in other changes are primarily attributable to interest accrued of RUR 36,660 million, RUB 66941,528 million related to Property, plant and equipment and RUB 10,93445,664 million related to Mineral licenses and RUB 50 million related to other assets).
The results of the BCG Companies presented as discontinued operations in the statements of profit (loss) and comprehensive income (loss) were as follows:
| 2015 | 2014 | |||||||
Revenue | — | 389 | ||||||
Cost of goods sold | — | (629 | ) | |||||
|
|
|
| |||||
Gross profit | — | (240 | ) | |||||
|
|
|
| |||||
Selling and distribution expenses | — | (10 | ) | |||||
Administrative and other operation expenses | — | (864 | ) | |||||
Other operating income | — | (207 | ) | |||||
Finance costs | — | (146 | ) | |||||
Total other income (expense), net | (34 | ) | 64 | |||||
Impairment loss recognised on the remeasurement to fair value less costs to sell | — | (11,653 | ) | |||||
|
|
|
| |||||
Loss before tax from discontinued operations | (34 | ) | (13,056 | ) | ||||
|
|
|
| |||||
Tax benefit: | ||||||||
Related to current pre-tax profit (loss) | — | (85 | ) | |||||
Transfer of cumulative translation adjustment due to disposal of discontinued operations | 798 | — | ||||||
|
|
|
| |||||
Profit (loss) for the year from discontinued operations | 764 | (13,141 | ) | |||||
|
|
|
| |||||
MECHEL PAO
Notes to the consolidated financial statements for the year ended December 31, 20152018, 2017 and 2016, respectively (Note 25.5), and effect of restructuring of loans and finance leases of RUB 33,514 million, RUB 264 million and RUB 992 million for the year ended December 31, 2018, 2017 and 2016, respectively (Note 25.4).
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2018
(All amounts are in millions of Russian rubles, unless stated otherwise)
| 16. | Property, plant and equipment |
| Land | Buildings and constructions | Operating machinery and equipment | Transportation vehicles | Other equipment | Construction- in-progress | Mining plant and equipment | Railway Ulak-Elga | Total | ||||||||||||||||||||||||||||
Cost | ||||||||||||||||||||||||||||||||||||
At December 31, 2015 | 3,313 | 78,265 | 114,231 | 30,399 | 1,236 | 26,836 | 14,918 | 71,804 | 341,002 | |||||||||||||||||||||||||||
Additions | — | 504 | 1,428 | 549 | 25 | 5,027 | 542 | — | 8,075 | |||||||||||||||||||||||||||
Change in rehabilitation provision | — | 346 | — | — | — | — | (212 | ) | — | 134 | ||||||||||||||||||||||||||
Transfers | 1 | 2,435 | 2,610 | 180 | (209 | ) | (8,393 | ) | 389 | 2,987 | — | |||||||||||||||||||||||||
Disposals | (75 | ) | (3,050 | ) | (3,266 | ) | (1,717 | ) | (169 | ) | (2,330 | ) | (536 | ) | — | (11,143 | ) | |||||||||||||||||||
Exchange differences | (190 | ) | (841 | ) | (675 | ) | (120 | ) | (61 | ) | (6 | ) | (1 | ) | — | (1,894 | ) | |||||||||||||||||||
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| |||||||||||||||||||
At December 31, 2016 | 3,049 | 77,659 | 114,328 | 29,291 | 822 | 21,134 | 15,100 | 74,791 | 336,174 | |||||||||||||||||||||||||||
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| |||||||||||||||||||
Additions | 6 | 363 | 1,531 | 3,124 | 45 | 5,767 | 1,576 | — | 12,412 | |||||||||||||||||||||||||||
Change in rehabilitation provision | — | 141 | — | — | — | — | (58 | ) | — | 83 | ||||||||||||||||||||||||||
Transfers | — | 2,934 | 3,360 | 190 | 148 | (7,011 | ) | 362 | 17 | — | ||||||||||||||||||||||||||
Disposals | (12 | ) | (432 | ) | (1,713 | ) | (1,795 | ) | (28 | ) | (245 | ) | (3 | ) | — | (4,228 | ) | |||||||||||||||||||
Exchange differences | 52 | 148 | 132 | 21 | 9 | — | — | — | 362 | |||||||||||||||||||||||||||
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At December 31, 2017 | 3,095 | 80,813 | 117,638 | 30,831 | 996 | 19,645 | 16,977 | 74,808 | 344,803 | |||||||||||||||||||||||||||
Additions | 9 | 10 | 2,423 | 2,048 | 83 | 6,851 | 50 | — | 11,474 | |||||||||||||||||||||||||||
Change in rehabilitation provision | — | (187 | ) | — | — | — | — | (102 | ) | — | (289 | ) | ||||||||||||||||||||||||
Transfers | 1 | 487 | 2,750 | 251 | 97 | (4,099 | ) | 119 | 394 | — | ||||||||||||||||||||||||||
Disposals | (255 | ) | (649 | ) | (1,734 | ) | (1,410 | ) | (32 | ) | (509 | ) | (136 | ) | — | (4,725 | ) | |||||||||||||||||||
Exchange differences | 91 | 277 | 251 | 40 | 28 | — | — | — | 687 | |||||||||||||||||||||||||||
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| |||||||||||||||||||
At December 31, 2018 | 2,941 | 80,751 | 121,328 | 31,760 | 1,172 | 21,888 | 16,908 | 75,202 | 351,950 | |||||||||||||||||||||||||||
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MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2018
(All amounts are in millions of Russian rubles, unless stated otherwise)
| Land | Buildings and constructions | Operating machinery and equipment | Transportation vehicles | Other equipment | Construction- in-progress | Mining plant and equipment | Railway Ulak-Elga | �� | Total | |||||||||||||||||||||||||||
Depreciation and impairment At December 31, 2015 | (59 | ) | (35,577 | ) | (68,519 | ) | (15,416 | ) | (933 | ) | (932 | ) | (3,388 | ) | (334 | ) | (125,158 | ) | ||||||||||||||||||
Depreciation charge | — | (3,774 | ) | (7,760 | ) | (2,613 | ) | (50 | ) | — | (133 | ) | (247 | ) | (14,577 | ) | ||||||||||||||||||||
Disposals | — | 3,160 | 3,045 | 1,272 | 198 | 238 | 437 | — | 8,350 | |||||||||||||||||||||||||||
Reversal of impairment/ (impairment) | (224 | ) | (260 | ) | (215 | ) | (98 | ) | — | (887 | ) | (16 | ) | — | (1,700 | ) | ||||||||||||||||||||
Exchange differences | 32 | 546 | 550 | 86 | 52 | (1 | ) | (1 | ) | — | 1,264 | |||||||||||||||||||||||||
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At December 31, 2016 | (251 | ) | (35,905 | ) | (72,899 | ) | (16,769 | ) | (733 | ) | (1,582 | ) | (3,101 | ) | (581 | ) | (131,821 | ) | ||||||||||||||||||
Depreciation charge | — | (3,747 | ) | (7,315 | ) | (2,222 | ) | (72 | ) | — | (245 | ) | (235 | ) | (13,836 | ) | ||||||||||||||||||||
Disposals | — | 302 | 1,611 | 1,720 | 22 | 127 | 1 | 7 | 3,790 | |||||||||||||||||||||||||||
Reversal of impairment/ (impairment) | (37 | ) | (876 | ) | (2,174 | ) | (454 | ) | (5 | ) | (278 | ) | (1,067 | ) | — | (4,891 | ) | |||||||||||||||||||
Exchange differences | (4 | ) | (49 | ) | (95 | ) | (13 | ) | (9 | ) | — | — | — | (170 | ) | |||||||||||||||||||||
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| |||||||||||||||||||
At December 31, 2017 | (292 | ) | (40,275 | ) | (80,872 | ) | (17,738 | ) | (797 | ) | (1,733 | ) | (4,412 | ) | (809 | ) | (146,928 | ) | ||||||||||||||||||
Depreciation charge | — | (3,550 | ) | (7,273 | ) | (2,253 | ) | (99 | ) | — | (180 | ) | (279 | ) | (13,634 | ) | ||||||||||||||||||||
Disposals | 223 | 287 | 1,593 | 1,317 | 50 | 47 | 170 | — | 3,687 | |||||||||||||||||||||||||||
Impairment | (43 | ) | (319 | ) | (1,065 | ) | (709 | ) | (15 | ) | (536 | ) | (2,153 | ) | — | (4,840 | ) | |||||||||||||||||||
Exchange differences | (3 | ) | (110 | ) | (191 | ) | (28 | ) | (24 | ) | — | — | — | (356 | ) | |||||||||||||||||||||
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At December 31, 2018 | (115 | ) | (43,967 | ) | (87,808 | ) | (19,411 | ) | (885 | ) | (2,222 | ) | (6,575 | ) | (1,088 | ) | (162,071 | ) | ||||||||||||||||||
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Net book value | ||||||||||||||||||||||||||||||||||||
At December 31, 2015 | 3,254 | 42,688 | 45,712 | 14,983 | 303 | 25,904 | 11,530 | 71,470 | 215,844 | |||||||||||||||||||||||||||
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At December 31, 2016 | 2,798 | 41,754 | 41,429 | 12,522 | 89 | 19,552 | 11,999 | 74,210 | 204,353 | |||||||||||||||||||||||||||
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| |||||||||||||||||||
At December 31, 2017 | 2,803 | 40,538 | 36,766 | 13,093 | 199 | 17,912 | 12,565 | 73,999 | 197,875 | |||||||||||||||||||||||||||
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At December 31, 2018 | 2,826 | 36,784 | 33,520 | 12,349 | 287 | 19,666 | 10,333 | 74,114 | 189,879 | |||||||||||||||||||||||||||
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MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2018
(All amounts are in millions of Russian rubles, unless stated otherwise)
The major classes of assets and liabilities of the BCG Companies classified as held for sale were as follows:
| At February 12, 2015 | At December 31, 2014 | |||||||
Assets | ||||||||
Cash and cash equivalents | — | 91 | ||||||
Trade and other receivables | 139 | 118 | ||||||
Other current assets | 251 | 212 | ||||||
Other non-current assets | 2,263 | 1,919 | ||||||
Property, plant and equipment | 428 | 363 | ||||||
Mineral licenses | 7,065 | 5,993 | ||||||
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Assets of disposal group classified as held for sale | 10,146 | 8,696 | ||||||
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Liabilities | ||||||||
Trade and other payables | 2,297 | 2,026 | ||||||
Provisions | 845 | 716 | ||||||
Pension obligations | 3,650 | 3,097 | ||||||
Interest-bearing loans and borrowings | 727 | 617 | ||||||
Other non-current liabilities | 555 | 470 | ||||||
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| |||||
Liabilities of disposal group classified as held for sale | 8,074 | 6,926 | ||||||
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| |||||
Net assets directly associated with disposal group | 2,072 | 1,770 | ||||||
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The net cash flows incurred by the BCG Companies are as follows:
| For the period from January 1 till February 12, 2015 | For the year ended December 31, 2014 | |||||||
Operating | (91 | ) | (738 | ) | ||||
Investing | — | (17 | ) | |||||
Financing | — | (105 | ) | |||||
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Net cash outflow | (91 | ) | (860 | ) | ||||
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SUNP
On 25 May 2013, according to the decision on the closure of the plant the Group approved the plan of staff curtailment. The number of SUNP’s personnel was reduced to 274 workers as of January 1, 2014. As of December 31, 2014, the number of personnel increased to 315 workers due to cease of third parties security services and redirection of these functions to SUNP’s internal employees as part of the Group’s efforts to reduce SUNP’s costs.
The impairment of property, plant and equipment and nickel mineral license of RUB 2,600 million as of January 1, 2014 was recognised to reduce the carrying amount of the assets and liabilities of SUNP to their realizable value. The impairment of goodwill in the amount of RUB 184 million was recognised as of January 1, 2014.
MECHEL PAO
Notes to the consolidated financial statements for the year ended December 31, 2015
(All amounts are in millions of Russian rubles, unless stated otherwise)
The results of SUNP presented as discontinued operations in the consolidated statement of profit (loss) and other comprehensive income (loss) were as follows for the years ended:
| December 31, 2015 | December 31, 2014 | |||||||
Revenue | 69 | 66 | ||||||
Cost of goods sold | (51 | ) | (45 | ) | ||||
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Gross profit | 18 | 21 | ||||||
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Selling and distribution expenses | — | (1 | ) | |||||
Administrative and other operating expenses | (115 | ) | (133 | ) | ||||
Other operating income | 31 | 296 | ||||||
Finance costs | (30 | ) | (32 | ) | ||||
Other income | 154 | 1,288 | ||||||
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Profit for the year from discontinued operations | 58 | 1,439 | ||||||
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| Land | Buildings and constructions | Operating machinery and equipment | Transportation vehicles | Other equipment | Construction- in-progress | Mining plant and equipment | Railway Ulak-Elga | Total | ||||||||||||||||||||||||||||
Cost | ||||||||||||||||||||||||||||||||||||
At January 1, 2014 | 3,210 | 64,226 | 107,481 | 29,810 | 1,331 | 109,730 | 15,193 | — | 330,981 | |||||||||||||||||||||||||||
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Additions | — | 786 | 2,467 | 137 | 13 | 19,794 | 488 | — | 23,685 | |||||||||||||||||||||||||||
Assets of disposal group held for sale/Discontinued operations | (130 | ) | (99 | ) | (13,496 | ) | (254 | ) | (33 | ) | (93 | ) | (1,579 | ) | — | (15,684 | ) | |||||||||||||||||||
Change in rehabilitation provision | — | (225 | ) | — | — | — | — | (496 | ) | — | (721 | ) | ||||||||||||||||||||||||
Transfers | 3 | 8,249 | 15,523 | 1,814 | 49 | (25,627 | ) | (11 | ) | — | — | |||||||||||||||||||||||||
Disposals | (318 | ) | (1,205 | ) | (3,192 | ) | (705 | ) | (203 | ) | (1,308 | ) | (129 | ) | — | (7,060 | ) | |||||||||||||||||||
Exchange differences | 357 | 1,845 | 6,159 | 100 | 142 | 42 | 643 | — | 9,288 | |||||||||||||||||||||||||||
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At December 31, 2014 | 3,122 | 73,577 | 114,942 | 30,902 | 1,299 | 102,538 | 14,109 | — | 340,489 | |||||||||||||||||||||||||||
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Additions | — | 417 | 1,052 | 508 | 29 | 4,249 | 719 | — | 6,974 | |||||||||||||||||||||||||||
Change in rehabilitation provision | — | 49 | — | — | — | — | 232 | — | 281 | |||||||||||||||||||||||||||
Transfers | 59 | 4,886 | 1,607 | 171 | 24 | (78,565 | ) | 14 | 71,804 | — | ||||||||||||||||||||||||||
Disposals | (10 | ) | (474 | ) | (3,196 | ) | (1,170 | ) | (156 | ) | (1,378 | ) | (156 | ) | — | (6,540 | ) | |||||||||||||||||||
MECHEL PAO
Notes to the consolidated financial statements for the year ended December 31, 2015
(All amounts are in millions of Russian rubles, unless stated otherwise)
| Land | Buildings and constructions | Operating machinery and equipment | Transportation vehicles | Other equipment | Construction- in-progress | Mining plant and equipment | Railway Ulak-Elga | Total | ||||||||||||||||||||||||||||
Exchange differences | 142 | (190 | ) | (174 | ) | (12 | ) | 40 | (8 | ) | — | — | (202 | ) | ||||||||||||||||||||||
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At December 31, 2015 | 3,313 | 78,265 | 114,231 | 30,399 | 1,236 | 26,836 | 14,918 | 71,804 | 341,002 | |||||||||||||||||||||||||||
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Depreciation and impairment | ||||||||||||||||||||||||||||||||||||
At January 1, 2014 | (98 | ) | (24,141 | ) | (63,885 | ) | (11,749 | ) | (903 | ) | (47 | ) | (3,905 | ) | — | (104,728 | ) | |||||||||||||||||||
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Depreciation charge | — | (4,593 | ) | (7,693 | ) | (2,718 | ) | (170 | ) | — | (227 | ) | — | (15,401 | ) | |||||||||||||||||||||
Disposals | — | 395 | 2,650 | 565 | 186 | — | 126 | — | 3,922 | |||||||||||||||||||||||||||
Assets of disposal group held for sale | 109 | 88 | 12,756 | 245 | 28 | 81 | 1,345 | — | 14,652 | |||||||||||||||||||||||||||
Impairment | (124 | ) | (2,414 | ) | (5,345 | ) | (82 | ) | (15 | ) | (16 | ) | — | — | (7,996 | ) | ||||||||||||||||||||
Exchange differences | (17 | ) | (245 | ) | (5,605 | ) | (69 | ) | (105 | ) | (35 | ) | (563 | ) | — | (6,639 | ) | |||||||||||||||||||
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At December 31, 2014 | (130 | ) | (30,910 | ) | (67,122 | ) | (13,808 | ) | (979 | ) | (17 | ) | (3,224 | ) | — | (116,190 | ) | |||||||||||||||||||
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Depreciation charge | — | (5,008 | ) | (5,627 | ) | (2,745 | ) | (56 | ) | — | (218 | ) | (334 | ) | (13,988 | ) | ||||||||||||||||||||
Disposals | 9 | 396 | 2,619 | 1,092 | 146 | 16 | 54 | — | 4,332 | |||||||||||||||||||||||||||
Reversal of impairment/(Impairment) | 67 | (485 | ) | 1,331 | 6 | (4 | ) | (931 | ) | — | — | (16 | ) | |||||||||||||||||||||||
Exchange differences | (5 | ) | 430 | 280 | 39 | (40 | ) | — | — | — | 704 | |||||||||||||||||||||||||
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At December 31, 2015 | (59 | ) | (35,577 | ) | (68,519 | ) | (15,416 | ) | (933 | ) | (932 | ) | (3,388 | ) | (334 | ) | (125,158 | ) | ||||||||||||||||||
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Net book value | ||||||||||||||||||||||||||||||||||||
At January 1, 2014 | 3,112 | 40,085 | 43,596 | 18,061 | 428 | 109,683 | 11,288 | — | 226,253 | |||||||||||||||||||||||||||
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At December 31, 2014 | 2,992 | 42,667 | 47,820 | 17,094 | 320 | 102,521 | 10,885 | — | 224,299 | |||||||||||||||||||||||||||
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At December 31, 2015 | 3,254 | 42,688 | 45,712 | 14,983 | 303 | 25,904 | 11,530 | 71,470 | 215,844 | |||||||||||||||||||||||||||
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According to the results of the impairment analysis ofnon-current assets, impairment losses of RUB 164,840 million, RUB 4,891 million and RUB 7,9961,700 million were recognizedrecognised by the Group for the years ended December 31, 20152018, 2017 and 2014,2016, respectively (Note 19)18).
MECHEL PAO
Notes to the consolidated financial statements for the year ended December 31, 2015
(All amounts are in millions of Russian rubles, unless stated otherwise)
Assets under construction
As of December 31, 2015, 20142018 and January 1, 2014, 2017,construction-in-progress included advances issued for acquisition of property, plant and equipment in the amounts of RUB 544 million, RUB 1,700547 million and RUB 1,986342 million, respectively.
In 2015, the Group transferred the railway from the Elga coal deposit to Ulak station fromConstruction-in-progress in the amount of RUB 71,804 million, put it into exploitation and commenced its depreciation.
Property pledged to the bankbanks as security
Certain property, plant and equipment assets have been pledged to secure bank loans and borrowings granted to the Group:
| December 31, 2015 | December 31, 2014 | January 1, 2014 | ||||||||||
Net book value | 33,510 | 29,899 | 31,764 | |||||||||
| December 31, 2018 | December 31, 2017 | |||||||
Net book value | 117,370 | 121,926 | ||||||
Finance leases
The Group leases operating machinery and equipment and transporttransportation vehicles under a number of finance lease agreements. At the end of the term of the lease, the Group obtains ownership of the assets or has an option to purchase leased assets at a bargainingbargain price.
| December 31, 2015 | December 31, 2014 | January 1, 2014 | ||||||||||
Net book value — Operating machinery and equipment | 4,253 | 4,119 | 4,040 | |||||||||
Net book value — Transportation vehicles | 12,332 | 14,021 | 15,056 | |||||||||
| December 31, 2018 | December 31, 2017 | |||||||
Net book value — operating machinery and equipment | 644 | 1,516 | ||||||
Net book value — transportation vehicles | 9,469 | 9,690 | ||||||
Additions of operating machinery and equipment and transportation vehicles under finance lease during the year ended December 31, 2018 amounted to RUB 1,675 million (2017: RUB 2,295 million).
Capitalised borrowing costs
The amount of borrowing costs capitalised during the year ended December 31, 20152018 was RUB 1,954492 million (2014:(2017: RUB 9,254621 million, 2016: RUB 1,015 million). The rate used to determine the amount of borrowing costs eligible for capitalisation was 15.02% (2014: 12.04%)8.55% (2017: 9.70%, 2016: 10.28 %), which is the average rate of the eligible borrowings.
Contractual commitments
As of December 31, 2018 and 2017, the total Group’s contractual commitments to acquire property, plant and equipment excluding VAT amounted to RUB 11,801 million and RUB 16,435 million, respectively.
MECHEL PAO
Notes to the consolidated financial statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 20152018
(All amounts are in millions of Russian rubles, unless stated otherwise)
Intangible assets |
| Goodwill | Mineral licenses | Other intangible assets | ||||||||||
Cost | ||||||||||||
At December 31, 2015 | 32,995 | 55,783 | — | |||||||||
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| |||||||
Exchange differences | (93 | ) | — | — | ||||||||
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| |||||||
At December 31, 2016 | 32,902 | 55,783 | — | |||||||||
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| |||||||
Additions | — | — | 880 | |||||||||
Disposal | — | (165 | ) | — | ||||||||
Exchange differences | (24 | ) | — | — | ||||||||
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| |||||||
At December 31, 2017 | 32,878 | 55,618 | 880 | |||||||||
|
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| |||||||
Additions | — | — | — | |||||||||
Disposal | — | — | — | |||||||||
Exchange differences | 90 | — | — | |||||||||
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| |||||||
At December 31, 2018 | 32,968 | 55,618 | 880 | |||||||||
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| |||||||
Amortisation and impairment | ||||||||||||
At December 31, 2015 | (11,617 | ) | (17,266 | ) | — | |||||||
|
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| |||||||
Impairment | (2,930 | ) | (572 | ) | — | |||||||
Amortisation | — | (1,846 | ) | — | ||||||||
At December 31, 2016 | (14,547 | ) | (19,684 | ) | — | |||||||
|
|
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| |||||||
Impairment | — | (1,190 | ) | — | ||||||||
Amortisation | — | (1,504 | ) | — | ||||||||
At December 31, 2017 | (14,547 | ) | (22,378 | ) | — | |||||||
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| |||||||
Impairment | (2,382 | ) | — | — | ||||||||
Amortisation | — | (1,172 | ) | (36 | ) | |||||||
Disposal | — | — | — | |||||||||
Exchange differences | — | — | — | |||||||||
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| |||||||
At December 31, 2018 | (16,929 | ) | (23,550 | ) | (36 | ) | ||||||
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| |||||||
Net book value | ||||||||||||
At December 31, 2015 | 21,378 | 38,517 | — | |||||||||
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| |||||||
At December 31, 2016 | 18,355 | 36,099 | — | |||||||||
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| |||||||
At December 31, 2017 | 18,331 | 33,240 | 880 | |||||||||
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| |||||||
At December 31, 2018 | 16,039 | 32,068 | 844 | |||||||||
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| |||||||
In December 2017, the Group acquired the rights to connect to the power grid for providing the SKCC’s power receiving equipment with an additional power capacity. These rights are recorded as other intangible assets of mining segment with a useful life of 25 years.
As of December 31, 2018 and 2017, the Group performed an impairment analysis of goodwill (Note 18).
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2018
(All amounts are in millions of Russian rubles, unless stated otherwise)
As of December 31, 2018 and 2017, the total Group’s contractual commitments to acquire intangible assets excluding VAT amounted to RUB 110 million and RUB 134 million, respectively.
| 18. | Impairment of goodwill and othernon-current assets |
As of December 31, 2015, 20142018 and January 1, 2014,2017, the Group performed an impairment analysis of goodwill and othernon-current assets onat the level of cash generating units (CGU). The Group considers the relationship between market capitalization and its book value, among other factors, when reviewing for indicators of impairment. Goodwill acquired through business combinations has been allocated to CGUs for impairment testing as follows (before impairment write-downs):
| Goodwill | Goodwill | |||||||||||||||||||||||||
Cash generating units | Segment | December 31, 2015 | December 31, 2014 | January 1, 2014 | Segment | December 31, 2018 | December 31, 2017 | |||||||||||||||||||
Yakutugol | Mining | 13,399 | 13,399 | 13,399 | Mining | 13,399 | 13,399 | |||||||||||||||||||
Southern Kuzbass Power Plant | Power | 3,827 | 3,827 | 3,827 | Power | 2,382 | 2,382 | |||||||||||||||||||
Bratsk Ferroalloy Plant | Steel | 2,930 | 2,930 | 2,930 | ||||||||||||||||||||||
Kuzbass Power Sales Company | Power | 1,026 | 1,026 | 1,947 | Power | 1,026 | 1,026 | |||||||||||||||||||
Port Posiet | Mining | 756 | 756 | 756 | Mining | 756 | 756 | |||||||||||||||||||
Chelyabinsk Metallurgical Plant | Steel | 672 | 547 | 370 | Steel | 646 | 556 | |||||||||||||||||||
Southern Kuzbass Coal Company | Mining | 143 | 143 | 143 | Mining | 143 | 143 | |||||||||||||||||||
Mechel Temryuk | Mining | 69 | 69 | 69 | ||||||||||||||||||||||
Ekos-plus | Mining | — | — | 133 | ||||||||||||||||||||||
WNL Staal | Steel | — | — | 74 | ||||||||||||||||||||||
Ramateks | Steel | — | — | 74 | ||||||||||||||||||||||
Mechel Transport | Steel | — | — | 52 | ||||||||||||||||||||||
Port Temryuk | Mining | 69 | 69 | |||||||||||||||||||||||
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| ||||||||||||||||||||||
Total | 22,822 | 22,697 | 23,774 | 18,421 | 18,331 | |||||||||||||||||||||
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|
| ||||||||||||||||||||||
As of December 31, 2015, 20142018 and January 1, 2014,2017, the recoverable amount of CGUs except for WNL, Ramateks and Mechel Transport was determined based on value in use. The material assumptions that drive the value in use are represented by projected prices, sales volumes, operating costs, terminal growth rates and discount rates. Some of these assumptions materially deviate from the Group’s historical results primarily due to the market downturns and economic slowdowns in the recent years in Russia. All these material assumptions are based on the Group’s projections and are subject to risk and uncertainty. Recoverable amount of WNL, Ramateks and Mechel Transport was determined based on fair value less cost to sell.
The forecasted period fornon-mining subsidiaries of the Group was assumed to be five years to reach stabilized cash flows, and the value beyond the forecasted period was based on the terminal growth rate of 2.5% as of December 31, 2014 and January 1, 2014.flows. As of December 31, 2015,2018, the value beyond the forecasted period was based on the terminal growth rates of2%-3.7%-4%. For mining subsidiaries of the Group the forecasted period was based on the remaining life of the mines.
MECHEL PAO
Notes to the consolidated financial statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 20152018
(All amounts are in millions of Russian rubles, unless stated otherwise)
Discount rates used in the impairment test for goodwill andnon-current assets were estimated in nominal terms on the weighted average cost of capital basis. Inflation and discount rates, range of discount rates, estimated for each year for the forecasted period, arewere as follows:
| Forecast period, years | ||||||||||||||||||||
At January 1, 2014 | 2014 | 2015 | 2016 | 2017 | 2018 | |||||||||||||||
Inflation rate in Russia | 5% | 5% | 4% | 4% | 4% | |||||||||||||||
Inflation rate in USA | 2% | 2% | 2% | 2% | 2% | |||||||||||||||
Inflation rate in Europeans countries | 3% | 4% | 4% | 3% | 3% | |||||||||||||||
Discount rate, % | 10,5%-14,5% | 11,5%-15,9% | 11,9%-16,6% | 11,2%-16,5% | 11,2%-15,5% | |||||||||||||||
For the year ends December 31, 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | |||||||||||||||
Inflation rate in Russia | 12% | 6% | 5% | 5% | 5% | |||||||||||||||
Inflation rate in Europeans countries | 3% | 3% | 3% | 4% | 3% | |||||||||||||||
Discount rate, % | 14,6%-18,0% | 14,2%-17,5% | 13,9%-17,1% | 13,2%-17,6% | 7,9%-14,0% | |||||||||||||||
For the year ends December 31, 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | |||||||||||||||
Inflation rate in Russia | 7,5% | 5,6% | 5,2% | 4,6% | 4,3% | |||||||||||||||
Inflation rate in Europeans countries | 2,6% | 2,6% | 2,4% | 2,3% | 2,3% | |||||||||||||||
Discount rate, % | 8,5%-18,9% | 8,5%-18,9% | 8,5%-18,9% | 8,5%-18,9% | 8,5%-18,9% | |||||||||||||||
| Forecast period, years | ||||||||||
For the year ended December 31, 2017 | 2018 | 2019 | 2020 | 2021 | 2022 | |||||
Inflation rate in Russia | 4.0% | 4.0% | 4.0% | 4.0% | 4.0% | |||||
Inflation rate in European countries | 2.9% | 2.9% | 2.9% | 2.8% | 2.8% | |||||
Pre-tax discount rate, % | 9.19%-17.72% | 9.19%-17.72% | 9.19%-17.72% | 9.19%-17.72% | 9.19%-17.72% | |||||
For the year ended December 31, 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | |||||
Inflation rate in Russia | 5.0% | 4.3% | 3.8% | 4.0% | 4.0% | |||||
Inflation rate in European countries | 3.3% | 3.3% | 3.1% | 3.1% | 3.0% | |||||
Pre-tax discount rate, % | 11.10%-23.60% | 11.10%-23.60% | 11.10%-23.60% | 11.10%-23.60% | 11.10%-23.60% | |||||
ForAs of December 31, 2018, the Group performed the impairment testing for the following number of CGUs which cash flows relate to mineral assets, future cash flows include estimates of recoverable minerals that will be obtained from provenby segments: Steel – 3, Mining – 6 and probable reserves, mineral prices (considering current and historical prices, price trends and other related factors), production levels, capital and reclamation costs, all based on the life of mine models prepared by the Group’s engineers. The Group believes that the values assigned to key assumptions and estimates represent the most realistic assessment of future trends.Power – 2.
Impairment of goodwill
According to the results of the impairment analysis of goodwill, an impairment loss as of January 1, 2014December 31, 2018 was recognisedrecognized in the following CGUs:CGU:
Cash generating units | Impairment loss on goodwill at 2018 | |||
Southern Kuzbass Power | ||||
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| ||||
|
| |||
Total | ||||
|
| |||
The remaining carrying valueGoodwill at SKPP was written down to nil as of December 31, 2018 due to the breakdown of generating equipment and increased raw materials cost, that led to the increased idle and maintenance costs and reduced generating capacity forecasts.
According to the results of the impairment analysis of goodwill, for KPSC where the Group recorded goodwillno impairment loss as of January 1, 2014December 31, 2017 was RUB 1,026 million. The remaining carrying value of goodwill for Ekos-plus, WNL Staal, Ramateks and Mechel Transport was RUB nil.recognised.
MECHEL PAO
Notes to the consolidated financial statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 20152018
(All amounts are in millions of Russian rubles, unless stated otherwise)
According to the resultsImpairment of the impairment analysis, no impairment of goodwill was identified as of December 31, 2014.non-current assets
According to the results of the impairment analysis, of goodwill, an impairment lossofnon-current assets was identified for the following CGUs as of December 31, 2015 was recognised in the following CGUs:2018:
Cash generating units | Impairment loss onnon-current assetsidentified as a result of impairment tests at December 31, 2018 | |||
Korshunov Mining Plant (KMP) | 1,151 | |||
Izhstal | 781 | |||
Southern Kuzbass Power Plant (SKPP) | ||||
|
| |||
Total | ||||
Impairment of goodwill at Southern Kuzbass Power Plant (SKPP) was identified due to change in structure of raw materials and usage of steam coal instead of lean grade coal with low oxidation rate from SKCC. The remaining carrying value of the goodwill of SKPP was RUB 2,383 million as of December 31, 2015.
Impairment of non-current assets
According to the results of the impairment analysis of Non-current assets, an impairment loss accumulated as of January 1, 2014 was recognised in the following reporting units:
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| ||||
| ||||
The remaining carrying value of non-current assets after recognition of impairment loss as of January 1, 2014 was RUB 10,596 million for the BCG Companies, RUB 1,637 million for DEMP and RUB 85 million for Ekos-plus. Impairment loss of the BCG Companies relates to property, plant and equipment in the amount of RUB 4,177 million and mineral assets in the amount of RUB 54,862 million and is conditioned by the decreased global coal prices and relatively high production costs which led to lower production volumes. As of December 31, 2014, the BCG Companies were recognised as discontinued operations (Note 17).
Impairment loss on non-current assets of DEMP in the amount of RUB 5,162 million was calculated by comparison of the carrying value of DEMP and its fair value less cost to sell determined based on the binding offer from a third party to acquire 100% of the shares of DEMP for the consideration of $80,000 thousand (RUB 2,618 million at exchange rate as of January 1, 2014). The amount of $20,000 thousand (RUB 656 million at exchange rate as of January 1, 2014) was planned to be paid as of the date of disposal. The remaining balance of $60,000 thousand (RUB 1,962 million at exchange rate as of January 1, 2014) was to be paid within two years after the disposal date under the interest-free loan agreement. Further negotiations on the sale of DEMP were suspended and deal was cancelled. Impairment loss of DEMP mainly related to property, plant and equipment in the amount of RUB 5,129 million.
Impairment loss of Ekos-plus relates to property, plant and equipment in the full amount of RUB 64 million. The remaining carrying value of property, plant and equipment of Ekos-plus as of January 1, 2014 was RUB 85 million.
MECHEL PAO
Notes to the consolidated financial statements for the year ended December 31, 2015
(All amounts are in millions of Russian rubles, unless stated otherwise)
According to the results of the impairment analysis, impairment of non-current assets was identified for the following CGUs as of December 31, 2014:
| ||||
| ||||
| ||||
| ||||
| ||||
The carrying value of non-current assets after impairment loss of Izhstal was written to RUB nil as of December 31, 2014. Impairment loss of Izhstal mainly relates to property, plant and equipment in the amount of RUB 6,666 million. The carrying value of non-current assets after impairment loss of DEMP was written down to nil as of December 31, 2014. Impairment loss was recognised in the amount of RUB 1,283 million (including RUB 1,279 million on property, plant and equipment) as of December 31, 2014 due to the existing uncertainty in the economic and political situation in Ukraine. Fair value less cost to sell of MS Romania was determined on the base of valuation reports of property. The remaining carrying value of property, plant and equipment of MS Romania after impairment loss was RUB 239 million as of December 31, 2014.
Based on comparison of carrying value and recoverable value of Ekos-plus as of December 31, 2014, excess of recoverable value over its carrying value was identified; therefore a reversal of previously recorded impairment loss was recognised in the amount of RUB 19 million. The carrying value of property, plant and equipment of Ekos-plus after reversal of impairment loss was RUB 94 million as of December 31, 2014.
According to the results of the impairment analysis, impairment of non-current assets was identified for the following CGUs as of December 31, 2015:
| ||||
| ||||
| ||||
|
| |||
The carrying value of property, plant and equipment related to grinding mixing complex at Mechel MaterialsKMP was written down to RUB nil as of December 31, 20152017. However, during 2018, newnon-current assets were acquired for the purpose to maintain production volumes in accordance with the license agreement obligations. As of December 31, 2018, estimated future cash flows remain negative due to unfavorable market conditions including declinehigh transportation cost per tonne and significant costs of large-scale stripping works in order to fulfil required level of extraction. Therefore, an additional impairment of property, plant and equipment at KMP of RUB 1,151 million was recognised as of December 31, 2018.
Impairment of property, plant and equipment at Izhstal of RUB 781 million was caused by the shift of production volumetechnology to casting own steel instead of construction industry, cut-offacquiring billets, increased projected cost of subsidypurchased scrap metal and continued growth in related industrieslong-term production costs. The remaining carrying value of the property, plant and forecastsequipment of slow market recovery inIzhstal was RUB 1,799 million.
Impairment ofnon-current assets at SKPP of RUB 337 million represents the future.remaining loss allocated after the reduction of carrying value of goodwill at SKPP as described above. The remaining carrying value of the property, plant and equipment of SKPP was RUB 1,889 million.
According to the results of the impairment analysis, reversalimpairment of previously recognised impairment loss of non-current assets was identified for the following CGUs as of December 31, 2015:2017:
Cash generating units | onnon-current assetsidentified as a result of impairment 2017 | |||
Korshunov Mining Plant (KMP) | 2,271 | |||
Izhstal | ||||
Bratsk Ferroalloy Plant (BFP) | 151 | |||
|
| |||
Total | ||||
|
| |||
Carrying value of property, plant and equipment and the mineral licenses at KMP of RUB 1,631 million and RUB 640 million, respectively, was written down to nil as of December 31, 2017 due to the decline in long-term
MECHEL PAO
Notes to the consolidated financial statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 20152018
(All amounts are in millions of Russian rubles, unless stated otherwise)
Based on the comparisonforecast for iron ore prices, increase in transportation cost per tonne and growth of stripping costs required for removal of landslide deformations. Impairment ofnon-current assets at Izhstal of RUB 2,130 million was caused by significant increase in production costs for raw materials, specifically by increase in purchase price for electrodes expected to be maintained for a long-term period. The remaining carrying value and recoverable value of Izhstal, as of December 31, 2015, excess of recoverable value over its carrying value was identified; therefore reversal of previously recorded impairment loss as of December 31, 2014 was recognised in the amount of RUB 5,966 million due to optimization of product lines in favor of high value added long products and hardware and devaluation of ruble to U.S. dollar, which positively affected Izhstal’s margin. The carrying value of property, plant and equipment of Izhstal after reversalwas 2,871 RUB million. Impairment of impairment lossproperty, plant and equipment at BFP of RUB 151 million was recognised due to the extension of planned period of furnace shutdown for compulsory repair works. The remaining carrying value of the property, plant and equipment and mineral licenses of BFP was RUB 5,966 million1,258 million.
Carrying value of individual items of thenon-current assets for the respective entities including the underground mining workings at SKCC was impaired due to changes in the Group’s management plans to invest funds into the ongoing construction projects and, as a result, the inability of these assets to generate future economic benefits in the current market conditions:
Subsidiaries | Impairment loss onnon-current assets identified for individual items of assets at December 31, 2018 | |||
Southern Kuzbass Coal Company (SKCC) | 2,533 | |||
Other | 38 | |||
Total | 2,571 | |||
The carrying value of individual items of thenon-current assets for the respective entity was impaired due to the refusal by the regulatory authorities to extend the term of mineral license for exploration and extraction as of December 31, 2015.2017:
Subsidiaries | Impairment loss onnon-current assetsidentified for individual items of assets at December 31, 2017 | |||
Southern Kuzbass Coal Company (SKCC) | 1,529 | |||
Total | 1,529 | |||
Sensitivity analysis
Reasonably possible change in key assumptions used in calculations of value in use could impact recoverable amount which was most sensitive to the growth of discount rate, cash flows growth rates after the forecasted period and change in operationaloperating profit due to changes in sales and extraction volumes, sales prices and costs.
Based on the sensitivity analysis carried out as of December 31, 2014,2018, a 5% decrease in future planned revenues would trigger impairment of goodwill, property, plant and equipment and mineral licenses of
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2018
(All amounts are in millions of Russian rubles, unless stated otherwise)
RUB 10,016 million at SKCC, impairment of goodwill of KPSC in the amount of RUB 1,0264,715 million and property, plant and equipment in the amount of RUB 629 million and theat Yakutugol, additional impairment of property, plant and equipment of HBLRUB 1,889 million at SKPP, impairment of property, plant and equipment and mineral licenses at BFP of RUB 1,216 million.
For the cash-generating units, which were not impaired in the reporting period and for which the reasonably possible changes could lead to impairment, the recoverable amounts would become equal to their carrying amounts if the assumptions used to measure the recoverable amounts changed by the following percentages: increase in discount rate by 1.85% at Elga coal deposit or decrease in sales prices by 4.9%, 2.8% and 2.4% at Elga coal deposit, SKCC and Yakutugol, respectively. The recoverable amounts of Elga coal deposit, SKCC and Yakutugol based on initial key assumptions exceed the carrying amounts by RUB 62,103 million, RUB 12,895 million and RUB 4,415 million, respectively. The recoverable amount approximates the carrying amount of RUB 448 million. Effects of reasonablyBFP and a reasonable possible change in sales prices could lead to impairment.
Reasonably possible changes in other key assumptions used in assessing recoverable amount of CGUs as of December 31, 20142018 do not lead to excess of carrying value over recoverable value.amount.
Based on the sensitivity analysis carried out as of December 31, 2015,2017, a 1% decrease in cash flows growth rate after the forecasted future and a 1% increase in discount rate would trigger additional impairment of goodwill at SKPP in the amount of RUB 188 million and RUB 286 million, respectively. A 5% decrease in future planned revenues would trigger additional impairment of goodwill at SKPP of RUB 1,721 million, impairment of goodwill of RUB 1,0262,279 million at SKPP, additional impairment of property, plant and equipment and mineral licenses at BFP of RUB 1,258 million, impairment of property, plant and equipment of RUB 6302,651 million at KPSCIzhstal.
| 19. | Trade and other payables |
| December 31, 2018 | December 31, 2017 | |||||||
Trade payables | 24,288 | 18,999 | ||||||
Other payables | 10,512 | 14,470 | ||||||
|
|
|
| |||||
Total trade and other payables | 34,800 | 33,469 | ||||||
|
|
|
| |||||
Other payables include accruals for breach of contracts, payables for property, plant and equipment acquired, salaries payable, dividends payable and other.
| December 31, 2018 | December 31, 2017 | |||||||
Other payables | ||||||||
Accounts payable for property, plant and equipment | 2,600 | 2,774 | ||||||
Wages and salaries payable | 1,581 | 1,504 | ||||||
Accruals for breach of contract terms | 456 | 176 | ||||||
Dividends payable, common shares | 146 | 152 | ||||||
Dividends payable, preferred shares | 86 | 86 | ||||||
Other | 5,643 | 9,778 | ||||||
|
|
|
| |||||
Total | 10,512 | 14,470 | ||||||
|
|
|
| |||||
The balance of other payables includes payables for the acquisition of DEMP of RUB 383381 million at BFP and would allow to reverse RUB 5,7324,010 million as of previously recoded impairment of Izhstal which is less than the full reversal recorded by the Group by RUB 235 million.December 31, 2018 and 2017, respectively (Note 6).
The calculated value in use of Izhstal is sensitive to currency exchange rates volatility. If US dollar appreciates to Russian ruble by 4.7%, the value in use of Izhstal would equal the carrying value after reversal of impairment loss — RUB 5,966 million. The strengthening of exchange rate of Russian ruble to U.S. dollar by 18.9% would not allow the Group to reverse any of previously recoded impairment, as the value in use would fall to nil.
MECHEL PAO
Notes to the consolidated financial statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 20152018
(All amounts are in millions of Russian rubles, unless stated otherwise)
| 20. |
| Goodwill | Mineral licenses | |||||||
Cost | ||||||||
At January 1, 2014 | 32,781 | 126,680 | ||||||
|
|
|
| |||||
Assets of disposal group held for sale /Discontinued operations | — | (122,002 | ) | |||||
Exchange differences | 682 | 51,034 | ||||||
|
|
|
| |||||
At December 31, 2014 | 33,463 | 55,712 | ||||||
|
|
|
| |||||
Additions | — | 71 | ||||||
Disposal | (88 | ) | — | |||||
Exchange differences | (174 | ) | — | |||||
|
|
|
| |||||
At December 31, 2015 | 33,201 | 55,783 | ||||||
|
|
|
| |||||
Amortisation and impairment | ||||||||
At January 1, 2014 | (10,261 | ) | (74,953 | ) | ||||
|
|
|
| |||||
Depletion | — | (1,759 | ) | |||||
Assets of disposal group held for sale /Discontinued operations | — | 105,075 | ||||||
Exchange differences | (505 | ) | (43,953 | ) | ||||
|
|
|
| |||||
At December 31, 2014 | (10,766 | ) | (15,590 | ) | ||||
|
|
|
| |||||
Impairment | (1,444 | ) | — | |||||
Amortization | — | (1,676 | ) | |||||
Disposal | 88 | — | ||||||
Exchange differences | 299 | — | ||||||
|
|
|
| |||||
At December 31, 2015 | (11,823 | ) | (17,266 | ) | ||||
|
|
|
| |||||
Net book value | ||||||||
At January 1, 2014 | 22,520 | 51,727 | ||||||
|
|
|
| |||||
At December 31, 2014 | 22,697 | 40,122 | ||||||
|
|
|
| |||||
At December 31, 2015 | 21,378 | 38,517 | ||||||
|
|
|
| |||||
Most of the existing mineral licenses (97%) relate to coal mines and were recorded upon acquisition of mining subsidiaries.
The carrying values of the mineral licenses were reduced proportionate to the depletion of the respective mineral reserves at each deposit related to mining and production of reserves adjusted for the reserves re-measurement and purchase accounting effects. Reduction in carrying values of the mineral licenses is included in the depletion charge for the period within the Cost of goods sold in the consolidated statement of profit (loss) and other comprehensive income (loss). No residual value is assumed in the mineral license valuation.
To determine the value of the mineral licenses as of December 31, 2015, the Group used quantities of underlying mineral assets, production data and other factors, including economic viability and any new exploration data.
MECHEL PAO
Notes to the consolidated financial statements for the year ended December 31, 2015
(All amounts are in millions of Russian rubles, unless stated otherwise)
The Group’s mining segment production activities are located within Russia. The Group’s mineral reserves and deposits are situated on the land belonging to government and regional authorities. Mining minerals require a subsoil license from the state authorities with respect to identified mineral deposits. The Group obtains licenses from such authorities and pays certain taxes to explore and produce from these deposits. These licenses expire up to 2037, with the most significant licenses expiring between 2019 and 2024, and management believes that they may be extended at the initiative of the Group without substantial cost. Management intends to extend such licenses for deposits expected to remain productive subsequent to their license expiry dates.
As of December 31, 2015, 2014 and January 1, 2014, the Group performed an impairment analysis of goodwill (Note 19).
| Income tax |
The major components of income tax (expense) benefitexpense for the years ended December 31, 20152018, 2017 and 20142016 are:
Recognised in profit or loss | 2015 | 2014 | 2018 | 2017 | 2016 | |||||||||||||||
Current income tax | ||||||||||||||||||||
Current income tax charge | (331 | ) | (502 | ) | (2,315 | ) | (3,397 | ) | (555 | ) | ||||||||||
Adjustments in respect of current income tax of previous year | (45 | ) | (6,201 | ) | ||||||||||||||||
Adjustments in respect of income tax, including income tax penalties and changes in uncertain income tax position | (2,962 | ) | (3,154 | ) | 766 | |||||||||||||||
Deferred tax: | ||||||||||||||||||||
Deferred tax | ||||||||||||||||||||
Relating to origination and reversal of temporary differences | (7,946 | ) | 15,525 | 2,596 | 3,401 | (5,104 | ) | |||||||||||||
|
|
|
|
| ||||||||||||||||
Income tax (expense) benefit reported in the consolidated statement of profit (loss) and other comprehensive income (loss) | (8,322 | ) | 8,822 | |||||||||||||||||
Income tax expense reported in the consolidated statement of profit (loss) and other comprehensive income | (2,681 | ) | (3,150 | ) | (4,893 | ) | ||||||||||||||
|
|
|
|
| ||||||||||||||||
In January 2013, the Group created the consolidated group of taxpayers in accordance with part one of the Tax code of the Russian Federation, under the Federal law of the Russian Federation of November 16, 2011 No.321-FZ. The existence of the consolidated group of taxpayers is subject to compliance with several conditions stated in the Tax code of the Russian Federation. The Group believes that these conditions are satisfiedwere met as of December 31, 2015. As of January 1, 2013,2018 and 2017. In 2016-2018, the consolidated group of taxpayers consisted of 1620 subsidiaries of the Group, together with Mechel PAO, which is the responsible taxpayer under the agreement. AsUnder the Federal law of January 1, 2014, the numberRussian Federation of subsidiaries included inAugust 3, 2018 No.302-FZ, the Russian legislation introduced a limitation for registration by the tax authorities of agreements on the establishment of consolidated group of taxpayers, changes to contracts related to the accession of new members of such groups, withdrawal of participants, the extension of the agreement on the established consolidated group of taxpayers and termination of the consolidated group of taxpayers increased to 20 participants and did not change as of December 31, 2015.by January 1, 2023.
For subsidiaries which are not included in the consolidated group of taxpayers, income taxes are calculated on an individual subsidiary basis. Deferred income tax assets and liabilities are recognised in the accompanying consolidated financial statements in the amount determined by the Group in accordance with IAS 12 Income Taxes.12.
Taxes represent the Group’s provision for profit tax. During 2013-2015,2016-2018, income tax was calculated at 20% of taxable profit in Russia, at 10.8%10.5%-11% in Switzerland, at 16% in Romania, at 15% in Lithuania, at 20% in Kazakhstan.Kazakhstan and at 18% in Ukraine. The Group’s subsidiaries incorporated in Liechtenstein and British Virgin Islands are exempt from profit tax. In the U.S., the tax rates were as follows: 39.55% in 2013-2015. Amendments in the tax legislation of
Starting 2018, Elgaugol used a privilege and applied a 0% income tax rate due to fulfillment of conditions of the Regional investment project (RIP) resulting in an income tax benefit for 2018.
MECHEL PAO
Notes to the consolidated financial statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 20152018
(All amounts are in millions of Russian rubles, unless stated otherwise)
the United Kingdom resulted in the decrease in tax rate from 23% since April 1, 2013 to 21% since April 1, 2014. The tax legislation of Ukraine was amended to decrease the statutory income tax rate to 19% from January 1, 2013 and 18% from January 1, 2014 and thereafter.
The reconciliation between the income tax (benefit) expense computed by applying the Russian enacted statutory tax rates to the income from continuing operations before tax andnon-controlling interest, to the income tax (expense) benefitexpense reported in the consolidated financial statements is as follows:
| 2015 | 2014 | |||||||
Loss before tax from continuing operations | (107,128 | ) | (131,087 | ) | ||||
Income tax benefit at statutory income tax rate of 20% | 21,426 | 26,217 | ||||||
Adjustments: | ||||||||
Adjustments in respect of income tax related to previous years | (1,021 | ) | (6,201 | ) | ||||
Unrecognized current year tax losses and write-off of previously recognized asset on tax losses | (19,822 | ) | 286 | |||||
Non-deductible expenses for tax purposes | (4,175 | ) | (7,367 | ) | ||||
Non-deductible interest expense | (2,588 | ) | (3,815 | ) | ||||
Effect of penalties on breach of credit agreements (unrecognized deferred tax asset) | (3,025 | ) | — | |||||
Social expenditures | (134 | ) | (116 | ) | ||||
Tax penalties and interest | (36 | ) | (794 | ) | ||||
Effect of different tax rates in foreign jurisdictions | 26 | (37 | ) | |||||
Effect of the disposal of subsidiaries | 17 | (204 | ) | |||||
Change in uncertain tax positions | 1,029 | 862 | ||||||
Other | (19 | ) | (9 | ) | ||||
|
|
|
| |||||
At the effective income tax rate of -7.8% (6.7% in 2014) | (8,322 | ) | 8,822 | |||||
|
|
|
| |||||
Income tax (expense) benefit reported in the consolidated statement of profit (loss) and other comprehensive income (loss) | (8,322 | ) | 8,822 | |||||
| 2018 | 2017 | 2016 | ||||||||||
Profit before tax from continuing operations | 16,217 | 15,720 | 14,151 | |||||||||
|
|
|
|
|
| |||||||
Income tax expense at statutory income tax rate of 20% | (3,243 | ) | (3,144 | ) | (2,830 | ) | ||||||
Adjustments: | ||||||||||||
Adjustments in respect of income tax, including income tax penalties and changes in uncertain income tax position | (2,962 | ) | (3,154 | ) | 766 | |||||||
Unrecognised current year tax losses andwrite-off of previously recognised asset on tax losses | 4,008 | 4,783 | 513 | |||||||||
Non-deductible expenses for tax purposes | (3,625 | ) | (1,755 | ) | (1,317 | ) | ||||||
Non-deductible interest expense | (363 | ) | (254 | ) | (1,055 | ) | ||||||
Effect of restructuring and expense related to fines and penalties on breach of covenants in credit agreements | 3,460 | 112 | (1,152 | ) | ||||||||
Effect of different tax rates | (12 | ) | 262 | 182 | ||||||||
Change in tax rate | 56 | — | — | |||||||||
At the effective income tax rate of 16.5% (20.0% in 2017, 34.6% in 2016) income tax expense reported in the consolidated statement of profit (loss) and other comprehensive income | (2,681 | ) | (3,150 | ) | (4,893 | ) | ||||||
|
|
|
|
|
| |||||||
The deferred tax balances were calculated by applying the currently enacted statutory income tax rate in each jurisdiction applicable to the period in which the temporary differences between the carrying amounts and tax base (both in respective local currencies) of assets and liabilities are expected to reverse.
On January 9, 2014, the Group failed to sustain its position in the court with respect to the income tax claims in the amount of RUB 3,977 million, including penalties and fines. The schedule of payments was agreed with the tax authorities for the period till May 2017. During 2016, the Group doesdid not intend to appealmeet this schedule of payments and a new payment schedule agreed with the decision. The Group recognized this income tax as income tax expenseauthorities was signed in December 2016. As of December 31, 2017, the outstanding amount payable was RUB 540 million (not overdue). As of RUB 3,666 million included in the line Adjustments in respect of current income tax of previous years and penalty in theDecember 31, 2018, there was no outstanding amount of RUB 311 million included in line Tax penalties and interest in the income tax reconciliation in 2014.payable.
MECHEL PAO
Notes to the consolidated financial statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 20152018
(All amounts are in millions of Russian rubles, unless stated otherwise)
The amounts reported in the accompanying consolidated financial statements consisted of the following:
| January 1, 2014 | Tax income/(expense) during the period recognised in profit or loss | Disposals of subsidiaries | Foreign currency translation effect | December 31, 2014 | January 1, 2016 | Tax (expense) benefit during the period recognised in profit or loss | Foreign currency translation effect | December 31, 2016 | ||||||||||||||||||||||||||||
Deferred tax assets | ||||||||||||||||||||||||||||||||||||
Property, plant and equipment | 786 | 23 | — | 11 | 820 | 1,055 | (378 | ) | — | 677 | ||||||||||||||||||||||||||
Rehabilitation provision | 214 | 9 | — | — | 223 | 510 | 184 | — | 694 | |||||||||||||||||||||||||||
Inventory | 140 | (33 | ) | — | 18 | 125 | 73 | 134 | (14 | ) | 193 | |||||||||||||||||||||||||
Accounts receivable | 63 | 125 | — | 2 | 190 | |||||||||||||||||||||||||||||||
Bad debt allowance | 461 | 250 | — | 47 | 758 | |||||||||||||||||||||||||||||||
Loans & borrowings | 9 | 3,417 | — | 2 | 3,428 | |||||||||||||||||||||||||||||||
Trade and other receivables | 1,112 | (253 | ) | (28 | ) | 831 | ||||||||||||||||||||||||||||||
Loans and borrowings | 224 | (106 | ) | — | 118 | |||||||||||||||||||||||||||||||
Finance lease liabilities | 2,077 | (445 | ) | — | 7 | 1,639 | 1,508 | (389 | ) | 2 | 1,121 | |||||||||||||||||||||||||
Accounts payable and other liabilities | 487 | 547 | — | 7 | 1,041 | |||||||||||||||||||||||||||||||
Trade and other payables and other liabilities | 763 | (70 | ) | 7 | 700 | |||||||||||||||||||||||||||||||
Net operating loss carry-forwards | 4,584 | 12,094 | — | 183 | 16,861 | 10,611 | (5,807 | ) | (89 | ) | 4,715 | |||||||||||||||||||||||||
Other assets | 332 | (9 | ) | — | 5 | 328 | ||||||||||||||||||||||||||||||
Other | 324 | (264 | ) | (1 | ) | 59 | ||||||||||||||||||||||||||||||
Deferred tax liabilities | ||||||||||||||||||||||||||||||||||||
Property, plant and equipment | (14,628 | ) | (1,493 | ) | — | (359 | ) | (16,480 | ) | (16,199 | ) | 497 | 37 | (15,665 | ) | |||||||||||||||||||||
Mineral licenses | (8,341 | ) | 321 | — | — | (8,020 | ) | (7,701 | ) | 485 | — | (7,216 | ) | |||||||||||||||||||||||
Rehabilitation provision | (17 | ) | (10 | ) | — | — | (27 | ) | ||||||||||||||||||||||||||||
Inventory | (1,433 | ) | 471 | — | (8 | ) | (970 | ) | (604 | ) | (83 | ) | 3 | (684 | ) | |||||||||||||||||||||
Accounts receivable | (89 | ) | (15 | ) | — | (35 | ) | (109 | ) | |||||||||||||||||||||||||||
Bad debt allowance | (229 | ) | 54 | — | (2 | ) | (177 | ) | ||||||||||||||||||||||||||||
Loans & borrowings | (1,129 | ) | 527 | — | (2 | ) | (604 | ) | ||||||||||||||||||||||||||||
Accounts payable and other liabilities | (48 | ) | (34 | ) | — | 4 | (78 | ) | ||||||||||||||||||||||||||||
Other assets | (197 | ) | (304 | ) | — | (62 | ) | (563 | ) | |||||||||||||||||||||||||||
Trade and other receivables | (224 | ) | 100 | — | (124 | ) | ||||||||||||||||||||||||||||||
Loans and borrowings | (454 | ) | 350 | 1 | (103 | ) | ||||||||||||||||||||||||||||||
Trade and other payables and other liabilities | (596 | ) | 496 | 4 | (96 | ) | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||
Deferred tax assets (liabilities), net | (16,958 | ) | 15,525 | — | (182 | ) | (1,615 | ) | (9,598 | ) | (5,104 | ) | (78 | ) | (14,780 | ) | ||||||||||||||||||||
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||
| January 1, 2017 | Tax benefit (expense) during the period recognised in profit or loss | Foreign currency translation effect | December 31, 2017 | |||||||||||||
Deferred tax assets | ||||||||||||||||
Property, plant and equipment | 677 | 81 | 1 | 759 | ||||||||||||
Rehabilitation provision | 694 | 108 | — | 802 | ||||||||||||
Inventory | 193 | (9 | ) | (5 | ) | 179 | ||||||||||
Trade and other receivables | 831 | (92 | ) | (4 | ) | 735 | ||||||||||
Loans and borrowings | 118 | 195 | — | 313 | ||||||||||||
Finance lease liabilities | 1,121 | (138 | ) | — | 983 | |||||||||||
Trade and other payables and other liabilities | 700 | (31 | ) | (13 | ) | 656 | ||||||||||
Net operating loss carry-forwards | 4,715 | 3,248 | 9 | 7,972 | ||||||||||||
Other | 59 | 26 | 1 | 86 | ||||||||||||
Deferred tax liabilities | ||||||||||||||||
Property, plant and equipment | (15,665 | ) | (193 | ) | (11 | ) | (15,869 | ) | ||||||||
Mineral licenses | (7,216 | ) | 564 | — | (6,652 | ) | ||||||||||
Inventory | (684 | ) | (117 | ) | — | (801 | ) | |||||||||
Trade and other receivables | (124 | ) | (207 | ) | 1 | (330 | ) | |||||||||
Loans and borrowings | (103 | ) | (9 | ) | — | (112 | ) | |||||||||
Trade and other payables and other liabilities | (96 | ) | (25 | ) | 2 | (119 | ) | |||||||||
|
|
|
|
|
|
|
| |||||||||
Deferred tax assets (liabilities), net | (14,780 | ) | 3,401 | (19 | ) | (11,398 | ) | |||||||||
|
|
|
|
|
|
|
| |||||||||
MECHEL PAO
Notes to the consolidated financial statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 20152018
(All amounts are in millions of Russian rubles, unless stated otherwise)
| January 1, 2015 | Tax income/(expense) during the period recognised in profit or loss | Disposals of subsidiaries | Foreign currency translation effect | December 31, 2015 | January 1, 2018 | Adjustment on initial application of IFRS 9 | As of January 1, 2018 adjusted for the effect of IFRS 9 | Tax (expense) benefit during the period recognised in profit or loss | Foreign currency translation effect | December 31, 2018 | ||||||||||||||||||||||||||||||||||
Deferred tax assets | ||||||||||||||||||||||||||||||||||||||||||||
Property, plant and equipment | 820 | 265 | (30 | ) | — | 1,055 | 759 | — | 759 | (373 | ) | — | 386 | |||||||||||||||||||||||||||||||
Rehabilitation provision | 223 | 288 | — | (1 | ) | 510 | 802 | — | 802 | (29 | ) | — | 773 | |||||||||||||||||||||||||||||||
Inventory | 125 | (48 | ) | — | (4 | ) | 73 | 179 | — | 179 | 1,537 | — | 1,716 | |||||||||||||||||||||||||||||||
Accounts receivable | 190 | 79 | — | (11 | ) | 258 | ||||||||||||||||||||||||||||||||||||||
Bad debt allowance | 758 | 50 | (2 | ) | 48 | 854 | ||||||||||||||||||||||||||||||||||||||
Loans & borrowings | 3,428 | (3,205 | ) | — | 1 | 224 | ||||||||||||||||||||||||||||||||||||||
Trade and other receivables | 735 | — | 735 | 52 | 3 | 790 | ||||||||||||||||||||||||||||||||||||||
Loans and borrowings | 313 | 822 | 1,135 | (815 | ) | — | 320 | |||||||||||||||||||||||||||||||||||||
Finance lease liabilities | 1,639 | (133 | ) | — | 2 | 1,508 | 983 | — | 983 | (141 | ) | 1 | 843 | |||||||||||||||||||||||||||||||
Accounts payable and other liabilities | 1,041 | (279 | ) | — | 1 | 763 | ||||||||||||||||||||||||||||||||||||||
Trade and other payables and other liabilities | 656 | — | 656 | 213 | — | 869 | ||||||||||||||||||||||||||||||||||||||
Net operating loss carry-forwards | 16,861 | (6,258 | ) | 3 | 5 | 10,611 | 7,972 | — | 7,972 | 5,646 | 5 | 13,623 | ||||||||||||||||||||||||||||||||
Other | 328 | (4 | ) | — | — | 324 | 86 | — | 86 | (15 | ) | 3 | 74 | |||||||||||||||||||||||||||||||
Deferred tax liabilities | ||||||||||||||||||||||||||||||||||||||||||||
Property, plant and equipment | (16,480 | ) | 308 | — | (27 | ) | (16,199 | ) | (15,869 | ) | — | (15,869 | ) | 429 | (28 | ) | (15,468 | ) | ||||||||||||||||||||||||||
Mineral licenses | (8,020 | ) | 319 | — | — | (7,701 | ) | (6,652 | ) | — | (6,652 | ) | 276 | — | (6,376 | ) | ||||||||||||||||||||||||||||
Rehabilitation provision | (27 | ) | 19 | — | — | (8 | ) | |||||||||||||||||||||||||||||||||||||
Inventory | (970 | ) | 372 | — | (6 | ) | (604 | ) | (801 | ) | — | (801 | ) | (28 | ) | (5 | ) | (834 | ) | |||||||||||||||||||||||||
Accounts receivable | (109 | ) | 62 | — | — | (47 | ) | |||||||||||||||||||||||||||||||||||||
Bad debt allowance | (177 | ) | — | — | — | (177 | ) | |||||||||||||||||||||||||||||||||||||
Loans & borrowings | (604 | ) | 151 | — | (1 | ) | (454 | ) | ||||||||||||||||||||||||||||||||||||
Accounts payable and other liabilities | (78 | ) | (35 | ) | — | — | (113 | ) | ||||||||||||||||||||||||||||||||||||
Other | (563 | ) | 103 | — | (15 | ) | (475 | ) | ||||||||||||||||||||||||||||||||||||
Trade and other receivables | (330 | ) | — | (330 | ) | (160 | ) | (9 | ) | (499 | ) | |||||||||||||||||||||||||||||||||
Loans and borrowings | (112 | ) | 50 | (62 | ) | (3,835 | ) | (1 | ) | (3,898 | ) | |||||||||||||||||||||||||||||||||
Trade and other payables and other liabilities | (119 | ) | — | (119 | ) | (161 | ) | (57 | ) | (337 | ) | |||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||
Deferred tax assets (liabilities), net | (1,615 | ) | (7,946 | ) | (29 | ) | (8 | ) | (9,598 | ) | (11,398 | ) | 872 | (10,526 | ) | 2,596 | (88 | ) | (8,018 | ) | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||
Recognised in the consolidated statement of financial position informationposition:
| December 31, 2015 | December 31, 2014 | January 1, 2014 | December 31, 2018 | December 31, 2017 | ||||||||||||||||
Deferred tax assets | 1,492 | 1,438 | 517 | 5,488 | 96 | |||||||||||||||
Deferred tax liabilities | (11,090 | ) | (3,053 | ) | (17,475 | ) | (13,506 | ) | (11,494 | ) | ||||||||||
|
|
|
|
| ||||||||||||||||
Deferred tax liabilities, net | (9,598 | ) | (1,615 | ) | (16,958 | ) | (8,018 | ) | (11,398 | ) | ||||||||||
|
|
|
|
| ||||||||||||||||
The Group offsets tax assets and liabilities if and only if it has a legally enforceable right to set off current tax assets and current tax liabilities and the deferred tax assets and deferred tax liabilities relate to income taxes levied by the same tax authority.
For financial reporting purposes, the Group has not recognised deferred tax assets in the amount of RUB 37,74733,216 million (2014:(2017: RUB 28,312 million, January 1, 2014: RUB 18,95435,161 million) on losses in the amount of RUB 177,639 million (2017: RUB 194,659 million) that are available to carry forward against future taxable income of the subsidiaries in
MECHEL PAO
Notes to the consolidated financial statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 20152018
(All amounts are in millions of Russian rubles, unless stated otherwise)
of RUB 201,624 million (2014: RUB 162,506 million, January 1, 2014: RUB 103,668 million) that are available to carry forward against future taxable income of the subsidiaries in which the losses arose. Deferred tax assets have not been recognised in respect of these losses as it is not probable that future taxable profit will be available for utilization of such assets. Deferred tax assets on net operating loss carry forwards which are considered to be realizedrealisable in the future, are mostly related to the Russian subsidiaries. For the Russian income tax purposes, certain subsidiaries of the Group have accumulated tax losses which expire in 2017-2025.
A deferred tax liability of approximately RUB 208 million, RUB 163302 million and RUB 94210 million as of December 31, 2015, 20142018 and as of January 1, 2014,2017, respectively, has not been recognised for temporary differences related to the Group’s investment in foreign subsidiaries primarily as a result of unremitted earnings of consolidated subsidiaries, as it is the Group’s intention, generally, to reinvest such earnings permanently.
Similarly, a deferred tax liability of RUB 817 million, RUB 1,090 million and RUB 1,679 million as of December 31, 2015, 20142018 and as of January 1, 2014, respectively,2017, no deferred tax liability has not been recognised for temporary difference related to unremitted earnings of consolidated domestic subsidiaries as management believes the Group has bothis able to control the abilitytiming of the reversal of these temporary differences and intentiondoes not intend to effect a tax-free reorganization or merger of major subsidiaries into Mechel.
There are no income tax consequences attached toreverse them in the payment of dividends by the Group to its shareholders.foreseeable future.
Probable income tax risks of approximately RUB 1,136 million, RUB 1,7696,314 million and RUB 2,5603,139 million as of December 31, 20152018 and 2014 and as of January 1, 20142017, respectively, have been accruedrecorded in the Group’s consolidated financial statements. Possible incomeDue to changes in the Russian tax risks of approximately RUB 131 million, RUB 494 million and RUB 4,976 million as of December 31, 2015 and 2014 and as oflegislation effective January 1, 2014, respectively, have not been recognised2017, calculation of the consolidated tax base of the consolidated group of taxpayers and the way to offset current losses and losses received in the Group’s consolidated financial statements.
| December 31, 2015 | December 31, 2014 | January 1, 2014 | ||||||||||
Trade payables | 26,300 | 26,373 | 27,131 | |||||||||
Other payables | 28,224 | 35,120 | 24,842 | |||||||||
|
|
|
|
|
| |||||||
Total trade and other payables | 54,524 | 61,493 | 51,973 | |||||||||
|
|
|
|
|
| |||||||
All trade and other payablesprevious tax periods (before January 2017) were short-term as of December 31, 2015, 2014 and January 1, 2014.
MECHEL PAO
Noteschanged. Due to the consolidated financial statements for the year ended December 31, 2015
(All amounts are in millionsabsence of Russian rubles, unless stated otherwise)
Other payables include accruals for breach of contracts, payables for property, plant and equipment acquired, salaries payable, dividends payable and other.
| December 31, 2015 | December 31, 2014 | January 1, 2014 | ||||||||||
Other payables: | ||||||||||||
Accruals for breach of contracts | 1,038 | 1,050 | — | |||||||||
Accounts payable for fixed assets | 3,593 | 4,545 | 6,201 | |||||||||
Salaries payable | 1,483 | 1,583 | 1,665 | |||||||||
Dividends payable, common shares | 36 | 103 | 108 | |||||||||
Dividends payable, preferred shares | — | 1 | 0 | |||||||||
Other | 22,074 | 27,838 | 16,868 | |||||||||
|
|
|
|
|
| |||||||
| 28,224 | 35,120 | 24,842 | ||||||||||
|
|
|
|
|
| |||||||
The balance of other payables as of December 31, 2015 includes payables for acquisition of DEMP of RUB 14,799 million. The amount of other payables as of December 31, 2014 includes payables for acquisition of DEMP of RUB 15,888 million and payables to VTB originating from the termination of interest swap agreement with VTB Bank (Austria) of RUB 5,733 million. The balance of other payables as of January 1, 2014 is mainly presented by payables for acquisition of DEMP of RUB 12,032 million.
| Rehabilitation provision | Provisions for legal claims | Tax provisions | Other provisions | Total | ||||||||||||||||
At January 1, 2014 | 4,400 | 421 | 548 | 465 | 5,834 | |||||||||||||||
Arising during the year | 284 | 834 | 41 | 240 | 1,399 | |||||||||||||||
Utilized | — | (160 | ) | (22 | ) | (103 | ) | (285 | ) | |||||||||||
Revision in estimated cash flow | 548 | — | — | — | 548 | |||||||||||||||
Unused amounts reversed | — | (178 | ) | (116 | ) | — | (294 | ) | ||||||||||||
Discount rate adjustment and imputed interest | (1,736 | ) | — | — | — | (1,736 | ) | |||||||||||||
Liabilities of disposal group held for sale/Discontinued operations | (297 | ) | — | — | (213 | ) | (510 | ) | ||||||||||||
Exchange rate differences | — | — | 169 | 3 | 172 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
At December 31, 2014 | 3,199 | 917 | 620 | 392 | 5,128 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Current | 201 | 917 | 620 | 392 | 2,130 | |||||||||||||||
Non-current | 2,998 | — | — | — | 2,998 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Arising during the year | 403 | 1,321 | 361 | 27 | 2,112 | |||||||||||||||
Utilized | — | (513 | ) | (504 | ) | (81 | ) | (1,098 | ) | |||||||||||
Revision in estimated cash flow | (1,027 | ) | — | — | — | (1,027 | ) | |||||||||||||
Unused amounts reversed | — | (325 | ) | (101 | ) | — | (426 | ) | ||||||||||||
Discount rate adjustment and imputed interest | 1,129 | — | — | — | 1,129 | |||||||||||||||
Exchange rate differences | — | — | 104 | 49 | 153 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
At December 31, 2015 | 3,704 | 1,400 | 480 | 387 | 5,971 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Current | 265 | 1,400 | 480 | 387 | 2,532 | |||||||||||||||
Non-current | 3,439 | — | — | — | 3,439 | |||||||||||||||
MECHEL PAO
Notes to the consolidated financial statements for the year ended December 31, 2015
(All amounts are in millions of Russian rubles, unless stated otherwise)
Rehabilitation provision
The Group has numerous site rehabilitation provisions that it is required to perform under law or contract once an asset is permanently taken out of service. The main part of these obligations is not expected to be paid for many years, and will be funded from the general Group’s resources at the time of removal. The Group’s rehabilitation provisions primarily relate to its steel and mining production facilities with related landfills and dump areas and its mines.
Provisions for legal claims
The Group is subject to various lawsuits, claims and proceedings related to matters incidental to the business. Accruals of probable cash outflows have been made based on an assessment of a combination of litigation and settlement strategies. It is possible that results of operations in any future period could be materially affected by changes in assumptions or by the effectiveness of such strategies.
Tax provisions
Management believes that it has paid or accrued all applicable taxes. Where uncertainty exists, the Group has accrued tax liabilities based on management’s best estimateofficial explanations of the probable outflow of resources embodying economic benefits, which will be required to settle these liabilities. In accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets,regulatory authorities concerning changes, there is an uncertainty in the Group accrued RUB 480 million, RUB 620 million and RUB 548 million of other tax claims that management believes are probable as of December 31, 2015 and 2014 and January 1, 2014, respectively.
As of December 31, 2015, theinterpretation. The Group does not believe that any other material income tax matters exist relating to the Group, including current pending or future governmental claims and demands, which would require adjustment to the accompanying consolidated financial statements in order for those statements not to be materially misstated or misleading.misleading as of December 31, 2018.
Possible income tax risks of RUB 2,745 million and RUB 794 million as of December 31, 2018 and 2017, respectively, have not been recognised in the Group’s consolidated financial statements.
Taxes and similar charges payable other than income tax |
| December 31, 2018 | December 31, 2017 | |||||||
Payroll taxes | 2,424 | 2,010 | ||||||
VAT payable | 2,233 | 3,313 | ||||||
Property tax | 511 | 504 | ||||||
Land lease | 471 | 433 | ||||||
Mineral extraction tax | 226 | 189 | ||||||
Land tax | 125 | 153 | ||||||
Other | 116 | 94 | ||||||
|
|
|
| |||||
Total | 6,106 | 6,696 | ||||||
|
|
|
| |||||
| 22. | Pensions and other post-employment benefit plans |
In addition to the state pension and social insurance required by the Russian legislation, the Group has a number of defined benefit occupational pension plans that cover the majority of production employees and some other postretirement benefit plans.
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2018
(All amounts are in millions of Russian rubles, unless stated otherwise)
A number of the Group’s companies provide their former employees with old agenon-state retirement pensions, which are conditional toon the member qualifying for the state old age pension. Some employees are also eligible for an early retirement in accordance with the state pension regulations and specificregulations. Specific coal industry rules (so-called “territorial treaties”), which also provide for certain post-retirement benefits in additional to old age pensions.upon reaching retirement age. Additionally, the Group voluntarily provides financial support, of a defined benefit nature, to its old age and disabled pensioners, who did not acquire any pension under the occupationalnon-state pension program.plans.
The Group also provides several types of long-term employee benefits such asdeath-in-service benefit and invalidity pension of a defined benefit nature. The Group may also provide theprovides former employees with reimbursement of coalfuel and woodenergy resources, coal used for heating purposes. In addition,one-time lump sum benefits are paid to employees of a number of the Group’s companies upon retirement depending on the employment service with the Group and the salary level of an individual employee. All pension plans are unfunded until the qualifying event occurs.
MECHEL PAO
Notes to the consolidated financial statements for the year ended December 31, 2015
(All amounts are in millions of Russian rubles, unless stated otherwise)
Several entities contribute certain amounts to non-state pension fund (Mechel Fund), which, together with amounts earned from investing the contributions, are intended to provide pensions to members of pension plans, which affect future contributions. However, pursuant to agreements between the Group and the non-state pension fund, under certain circumstances, these assets are not effectively restricted from possible withdrawal by the employer. Based on this fact, these assets do not qualify as “plan assets” under IFRS and these pension schemes are considered to be fully unfunded. The Group has no liabilities to provide either pension or lump sum upon retirement benefits, or both, to the employees who do not participate in the corporate pension plan.
As of December 31, 2015,2018, there were 54,86648,531 active participants under the defined benefit pension plans and 39,201other long-term benefit plans and 38,751 pensioners receiving monthly pensions or other regular financial support from these plans. As of December 31, 20142017 and January 1, 2014,2017, the related figures were 56,50848,920 and 59,19950,369 of active participants under the defined benefit pension plans and 40,574other long-term benefits and 33,91339,427 and 39,551 pensioners receiving monthly pensions or other regular financial support from these plans, respectively. The majority of employees at the Group’s major subsidiaries belong to the trade unions.
The total number of the BCG Companies’ employees and their dependents eligible for benefits as of January 1, 2014 was 364 and the total number of retirees and their dependents was 175. The majority of employees belonged to the United Mine Workers of America (UMWA).
Actuarial valuation of pensionpensions and other post-employment and postretirementlong-term benefits for the major subsidiaries was performed in April 2016,January 2019, with the measurement date of December 31, 2015, 2014, and January 1, 2014.2018. Members’ census data as of that date was collected for all relevant business units of the Group.
Pension obligations and expenses determined by the Group are supported by an independent qualified actuary in accordance with the “Projected Unit Credit method” of calculation of actuarial present value of future liabilities.
Net employee benefit obligations | December 31, 2015 | December 31, 2014 | January 1, 2014 | |||||||||
Defined benefit obligation | (4,866 | ) | (4,517 | ) | (4,170 | ) | ||||||
Other post-retirement benefit obligations | — | — | (1,610 | ) | ||||||||
|
|
|
|
|
| |||||||
Total pension obligations | (4,866 | ) | (4,517 | ) | (5,780 | ) | ||||||
|
|
|
|
|
| |||||||
As of December 31, 2018, defined benefit obligations, including pension obligations in the amount of RUB 3,806 million and other long-term benefit obligations in the amount of RUB 785 million (RUB 4,052 million and 309 million as of December 31, 2017, respectively), were presented within Pension obligations in the consolidated statement of financial position.
MECHEL PAO
Notes to the consolidated financial statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2015
(All amounts are in millions of Russian rubles, unless stated otherwise)
Changes in the present value of the defined benefit obligations and fair value of plan assets for 2014 are, as follows:
| Defined benefit obligation | Fair value of plan assets | Benefit liability | ||||||||||
January 1, 2014 | (4,353 | ) | 183 | (4,170 | ) | |||||||
Current service cost | (148 | ) | — | (148 | ) | |||||||
Net interest expense | (315 | ) | 13 | (302 | ) | |||||||
Curtailment / settlement gain | 58 | — | 58 | |||||||||
Past service cost | 96 | — | 96 | |||||||||
|
|
|
|
|
| |||||||
Sub-total included in profit or loss | (309 | ) | 13 | (296 | ) | |||||||
|
|
|
|
|
| |||||||
Benefit paid | 251 | (16 | ) | 235 | ||||||||
Business combinations | (17 | ) | — | (17 | ) | |||||||
Exchange difference | (370 | ) | 96 | (274 | ) | |||||||
Actuarial changes arising from changes in demographic assumptions | (285 | ) | — | (285 | ) | |||||||
Actuarial changes arising from changes in financial assumptions | 229 | — | 229 | |||||||||
Experience adjustments | 55 | — | 55 | |||||||||
|
|
|
|
|
| |||||||
Sub-total included in OCI | (371 | ) | 96 | (275 | ) | |||||||
|
|
|
|
|
| |||||||
Contributions by employer | — | 6 | 6 | |||||||||
|
|
|
|
|
| |||||||
December 31, 2014 | (4,799 | ) | 282 | (4,517 | ) | |||||||
Changes in the present value of the defined benefit obligations and fair value of plan assets for 2015 are, as follows:
| Defined benefit obligation | Fair value of plan assets | Benefit liability | ||||||||||
December 31, 2014 | (4,799 | ) | 282 | (4,517 | ) | |||||||
Current service cost | (167 | ) | — | (167 | ) | |||||||
Net interest expense | (418 | ) | 5 | (413 | ) | |||||||
Curtailment / settlement gain | 142 | — | 142 | |||||||||
Past service cost | (25 | ) | — | (25 | ) | |||||||
|
|
|
|
|
| |||||||
Sub-total included in profit or loss | (468 | ) | 5 | (463 | ) | |||||||
|
|
|
|
|
| |||||||
Benefit paid | 432 | (21 | ) | 411 | ||||||||
Exchange difference | (155 | ) | 45 | (110 | ) | |||||||
Actuarial changes arising from changes in demographic assumptions | 116 | — | 116 | |||||||||
Actuarial changes arising from changes in financial assumptions | (119 | ) | — | (119 | ) | |||||||
Experience adjustments | (191 | ) | — | (191 | ) | |||||||
|
|
|
|
|
| |||||||
Sub-total included in OCI | (349 | ) | 45 | (304 | ) | |||||||
|
|
|
|
|
| |||||||
Contributions by employer | — | 7 | 7 | |||||||||
|
|
|
|
|
| |||||||
December 31, 2015 | (5,184 | ) | 318 | (4,866 | ) | |||||||
MECHEL PAO
Notes to the consolidated financial statements for the year ended December 31, 20152018
(All amounts are in millions of Russian rubles, unless stated otherwise)
Changes in the present value of the pension obligations and other long-term benefits and fair value of plan assets for 2016 were as follows:
| Pension obligation | Fair value of plan assets | Benefit liability | ||||||||||
December 31, 2015 | (5,184 | ) | 318 | (4,866 | ) | |||||||
|
|
|
|
|
| |||||||
Current service cost | (149 | ) | — | (149 | ) | |||||||
Net interest expense | (381 | ) | 13 | (368 | ) | |||||||
Curtailment / settlement gain | 272 | — | 272 | |||||||||
Remeasurement of pension obligations | 53 | — | 53 | |||||||||
Past service cost | (5 | ) | — | (5 | ) | |||||||
|
|
|
|
|
| |||||||
Sub-total included in profit or loss | (210 | ) | 13 | (197 | ) | |||||||
|
|
|
|
|
| |||||||
Benefit paid | 357 | (16 | ) | 341 | ||||||||
|
|
|
|
|
| |||||||
Exchange difference | 363 | (63 | ) | 300 | ||||||||
Actuarial changes arising from changes in demographic assumptions | 80 | — | 80 | |||||||||
Actuarial changes arising from changes in financial assumptions | (397 | ) | — | (397 | ) | |||||||
Experience adjustments | 294 | — | 294 | |||||||||
|
|
|
|
|
| |||||||
Sub-total included in OCI | 340 | (63 | ) | 277 | ||||||||
|
|
|
|
|
| |||||||
December 31, 2016 | (4,697 | ) | 252 | (4,445 | ) | |||||||
|
|
|
|
|
| |||||||
Changes in the present value of the pension obligations and other long-term benefits and fair value of plan assets for 2017 were as follows:
| Pension obligation | Fair value of plan assets | Benefit liability | ||||||||||
December 31, 2016 | (4,697 | ) | 252 | (4,445 | ) | |||||||
|
|
|
|
|
| |||||||
Current service cost | (142 | ) | — | (142 | ) | |||||||
Net interest expense | (331 | ) | 17 | (314 | ) | |||||||
Curtailment / settlement gain | 1 | — | 1 | |||||||||
Remeasurement of pension obligations | 174 | — | 174 | |||||||||
Past service cost | — | — | — | |||||||||
|
|
|
|
|
| |||||||
Sub-total included in profit or loss | (298 | ) | 17 | (281 | ) | |||||||
|
|
|
|
|
| |||||||
Benefit paid | 313 | (17 | ) | 296 | ||||||||
|
|
|
|
|
| |||||||
Exchange difference | (95 | ) | 19 | (76 | ) | |||||||
Actuarial changes arising from changes in demographic assumptions | 51 | — | 51 | |||||||||
Actuarial changes arising from changes in financial assumptions | (69 | ) | — | (69 | ) | |||||||
Experience adjustments | 163 | — | 163 | |||||||||
|
|
|
|
|
| |||||||
Sub-total included in OCI | 50 | 19 | 69 | |||||||||
|
|
|
|
|
| |||||||
December 31, 2017 | (4,632 | ) | 271 | (4,361 | ) | |||||||
|
|
|
|
|
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MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2018
(All amounts are in millions of Russian rubles, unless stated otherwise)
Changes in the present value of the pension obligations and other long-term benefits and fair value of plan assets for 2018 were as follows:
| Pension obligation | Fair value of plan assets | Benefit liability | ||||||||||
December 31, 2017 | (4,632 | ) | 271 | (4,361 | ) | |||||||
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| |||||||
Current service cost | (130 | ) | — | (130 | ) | |||||||
Net interest expense | (266 | ) | (13 | ) | (279 | ) | ||||||
Curtailment / settlement gain | 4 | — | 4 | |||||||||
Remeasurement of pension obligations | (492 | ) | — | (492 | ) | |||||||
Past service cost | 70 | — | 70 | |||||||||
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Sub-total included in profit or loss | (814 | ) | (13 | ) | (827 | ) | ||||||
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Benefit paid | 299 | (17 | ) | 282 | ||||||||
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| |||||||
Exchange difference | (213 | ) | 41 | (172 | ) | |||||||
Actuarial changes arising from changes in demographic assumptions | (38 | ) | — | (38 | ) | |||||||
Actuarial changes arising from changes in financial assumptions | 354 | — | 354 | |||||||||
Experience adjustments | 171 | — | 171 | |||||||||
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| |||||||
Sub-total included in OCI | 274 | 41 | 315 | |||||||||
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| |||||||
December 31, 2018 | (4,873 | ) | 282 | (4,591 | ) | |||||||
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Amounts of the defined benefitpension obligations recognizedrecognised in the consolidated statement of the financial position were as follows:
| December 31, 2015 | December 31, 2014 | January 1, 2014 | December 31, 2018 | December 31, 2017 | ||||||||||||||||
Current liabilities | (1,120 | ) | (1,072 | ) | (823 | ) | (772 | ) | (849 | ) | ||||||||||
Noncurrent liabilities | (3,746 | ) | (3,445 | ) | (3,347 | ) | ||||||||||||||
Non-current liabilities | (3,819 | ) | (3,512 | ) | ||||||||||||||||
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|
|
|
| ||||||||||||||||
Total net pension obligations | (4,866 | ) | (4,517 | ) | (4,170 | ) | (4,591 | ) | (4,361 | ) | ||||||||||
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The plan asset allocation of the investment portfolio was as follows as of December 31, 2015, 20142018 and January 1, 2014:2017:
| December 31, 2015 | December 31, 2014 | January 1, 2014 | December 31, 2018 | December 31, 2017 | ||||||||||||||||
Debt instruments | 179 | 142 | 94 | 161 | 147 | |||||||||||||||
Equity instruments | 80 | 76 | 50 | 74 | 78 | |||||||||||||||
Cash and cash equivalents | 19 | 25 | ||||||||||||||||||
Property | 11 | 9 | 7 | 15 | 11 | |||||||||||||||
Cash and cash equivalents | 29 | 29 | 19 | |||||||||||||||||
Other assets | 19 | 26 | 13 | 13 | 10 | |||||||||||||||
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| ||||||||||||||||
Total plan assets | 318 | 282 | 183 | 282 | 271 | |||||||||||||||
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The investment strategy employed by the Group includes an overall goal to attain a maximum investment return with a strong focus on limiting the amount of risk taken. The strategy is to invest with a medium- tolong-term
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2018
(All amounts are in millions of Russian rubles, unless stated otherwise)
perspective while maintaining a level of liquidity through proper allocation of investment assets. Investment policies include rules to avoid concentrations of investments. The vast majority of plan assets are measured using quoted prices in active markets for identical assets (Level 1 assets). The investment portfolio is primarily comprised of debt and equity instruments. Real estate and other alternative investments asset can be included when these have favorable return and risk characteristics. Debt instruments include investment grade and high yield corporate and government bonds with fixed yield and mostly short- to medium maturities. Equity instruments include selected investments in equity securities listed on active exchange market. The valuation of debt and equity securities is determined using a market approach, and is based on an unadjusted quoted prices.
The expected return on plan assets takes into account historical returns and the weighted average of estimated future long-term returns based on capital market assumptions for each asset category.
Staff reduction, curtailments and amendments of benefit programs at several entities lead to appropriate curtailment gains and past service costs in reporting periods. Almost all of GroupGroup’s entities have a practice of to providelump-sum financial support to former employees as well as certain life-long benefits, so thethere is a risk of human longevity less significant than in the case of life-long benefits.longevity. This risk is controlled by using rather conservativemost recent life expectancy tables. The risk of a significant fluctuation in interest rates is offset by rather conservative actuarial best estimate assumptions in respect of discount rates. The Group does not identify the unusual, specific business plan or risk, as well as any significant risk concentrations. The Group performs sensitivity analysis calculating the whole defined benefit obligation and other long-term benefits obligation in different actuarial assumptions and comparing the results. There are no changes from the previous period in the methods and set of assumptions used in preparing the sensitivity analyses. The weighted average duration of the defined benefit obligation and other long-term benefits obligation is about 6around11-12 years at both reporting dates.
MECHEL PAO
Notes to the consolidated financial statements for the year endedas of December 31, 2015
(All amounts are in millions of Russian rubles, unless stated otherwise)
2018 and 2017.
The key actuarial assumptions used to determine defined benefit obligations were as follows as of December 31, 2015, 20142018 and January 1, 2014:2017:
| December 31, 2015 | December 31, 2014 | January 1, 2014 | ||||
Discount rate | ||||||
Russian entities | 9.70% | 11.50% | 7.90% | |||
German entities | 1.93% | 1.60% | 3.20% | |||
Ukrainian entity | varying from 9.6% to 8% | varying from 9.6% to 8% | 10.00% | |||
Austrian entities | 2.0% | 2.50% | 3.50% | |||
Inflation rates | ||||||
Russian entities | 5.80% | 6.50% | 5.00% | |||
Ukrainian entity | 7.60% | 7.60% | 5.30% | |||
Expected return on plan assets | ||||||
Austrian entities | 1.74% | 6.70% | 4.32% | |||
Rate of compensation increase | ||||||
Russian entities | 7.10% | 8.90% | 6.58% | |||
German entities | 4.00% | 4.00% | 4.00% | |||
Ukrainian entity | 10.60% | 10.60% | 5.30% | |||
Austrian entities | 2.25% | 2.25% | 2.50% |
Discount rate Russian entities German entities Ukrainian entity Austrian entities Inflation rates Russian entities Ukrainian entity Rate of compensation increase Russian entities German entities Ukrainian entity Austrian entitiesThe results of sensitivity analysis of pension benefit obligation for the Russian and Ukrainian entities as of December 31, 2015, 2014 and January 1, 2014 are presented below: December 31,
2018 December 31,
2017 8.60 % 7.60 % 1.90 % 1.80 % 11.80 % 10.10 % 1.70 % 1.50 % 4.00 % 4.40 % 6.60 % 8.60 % 5.00 % 5.40 % 4.00 % 4.00 % 9.60 % 11.60 % 2.25 % 2.25 %
| Impact on defined benefit obligation | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
Discount rate | ||||||||||||
1% increase | -6.98 | % | -4.96 | % | -5.89 | % | ||||||
1% decrease | 6.20 | % | 5.89 | % | 6.67 | % | ||||||
Inflation rate | ||||||||||||
1% increase | 3.40 | % | 2.73 | % | 1.89 | % | ||||||
1% decrease | -4.65 | % | -2.54 | % | -1.79 | % | ||||||
Rate of compensation increase | ||||||||||||
1% increase | 2.18 | % | 2.99 | % | 4.12 | % | ||||||
1% decrease | -4.09 | % | -2.69 | % | -3.65 | % | ||||||
Turnover rate | ||||||||||||
3% increase | -4.65 | % | -3.93 | % | -5.36 | % | ||||||
3% decrease | 4.27 | % | 6.21 | % | 7.19 | % | ||||||
The results of sensitivity analysis of pension benefit obligation for Austrian entities as of December 31, 2015 and 2014 and January 1, 2014 are presented below:
| Impact on defined benefit obligation | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
Discount rate | ||||||||||||
1% increase | -9.90 | % | -9.90 | % | -9.90 | % | ||||||
1% decrease | 11.90 | % | 11.90 | % | 11.90 | % | ||||||
MECHEL PAO
Notes to the consolidated financial statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 20152018
(All amounts are in millions of Russian rubles, unless stated otherwise)
The results of sensitivity analysis of pensiondefined benefit obligationobligations for the Russian and Ukrainian entities as of December 31, 2018 and 2017 are presented below:
| 2018 | 2017 | |||||||
Discount rate | ||||||||
1% increase | -6.75 | % | -8.12 | % | ||||
1% decrease | 7.85 | % | 9.64 | % | ||||
Inflation rate | ||||||||
1% increase | 5.09 | % | 6.48 | % | ||||
1% decrease | -4.37 | % | -5.42 | % | ||||
Rate of compensation increase | ||||||||
1% increase | 2.48 | % | 2.72 | % | ||||
1% decrease | -2.23 | % | -2.28 | % | ||||
Turnover rate | ||||||||
3% increase | -5.98 | % | -5.29 | % | ||||
3% decrease | 7.87 | % | 7.25 | % | ||||
The results of sensitivity analysis of defined benefit obligations for Austrian entities as of December 31, 2018 and 2017 are presented below:
| 2018 | 2017 | |||||||
Discount rate | ||||||||
1% increase | -10.03 | % | -9.70 | % | ||||
1% decrease | 11.98 | % | 11.70 | % | ||||
The results of sensitivity analysis of defined benefit obligations for German entities as of December 31, 20152018 and 2014 and January 1, 20142017 are presented below:
| Impact on defined benefit obligation | ||||||||||||||||||||
| 2015 | 2014 | 2013 | 2018 | 2017 | ||||||||||||||||
Discount rate | ||||||||||||||||||||
1% increase | -12.00 | % | -12.00 | % | -12.00 | % | -12.00 | % | -12.00 | % | ||||||||||
1% decrease | 18.00 | % | 18.00 | % | 18.00 | % | 18.00 | % | 18.00 | % | ||||||||||
The sensitivity analyses above have been determinedprepared based on a method that extrapolates the impact on the defined benefit obligationpension obligations and other long-term benefits obligations as a result of reasonable changes in key assumptions occurring at the end of the reporting period. The sensitivity analyses are based on a change in aone significant assumption, keeping all other assumptionassumptions constant. The sensitivity analysis may not be representative of an actual change in the defined benefit obligationobligations and otherlong-term benefits obligations as it is unlikely that changes in assumptions would occur in isolation of one another. The same method has been applied for the sensitivity analysis as when calculation the recognised pension liability.
The following payments are expected contributions to the defined benefit plan in the future years:
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Changes in the present value of the other post-retirement benefit obligations for 2014 are, as follows:
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MECHEL PAO
Notes to the consolidated financial statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 20152018
(All amounts are in millions of Russian rubles, unless stated otherwise)
| 23. | Provisions |
| Rehabilitation provision | Provisions for legal claims | Provisions on taxes other than income tax | Other provisions | Total | ||||||||||||||||
At December 31, 2015 | 3,704 | 1,572 | 480 | 215 | 5,971 | |||||||||||||||
Arising during the year | — | 533 | 413 | 1,678 | 2,624 | |||||||||||||||
Utilized | (52 | ) | (885 | ) | (14 | ) | (118 | ) | (1,069 | ) | ||||||||||
Revision in estimated cash flow and discount rate adjustment | (230 | ) | — | — | — | (230 | ) | |||||||||||||
Unused amounts reversed | — | (474 | ) | (31 | ) | — | (505 | ) | ||||||||||||
Unwinding of discount | 256 | — | — | — | 256 | |||||||||||||||
Exchange differences | — | — | (88 | ) | (43 | ) | (131 | ) | ||||||||||||
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At December 31, 2016 | 3,678 | 746 | 760 | 1,732 | 6,916 | |||||||||||||||
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Current | 258 | 746 | 760 | 1,732 | 3,496 | |||||||||||||||
Non-current | 3,420 | — | — | — | 3,420 | |||||||||||||||
Arising during the year | — | 2,175 | 23 | 7 | 2,205 | |||||||||||||||
Utilized | (79 | ) | (451 | ) | (1 | ) | (905 | ) | (1,436 | ) | ||||||||||
Revision in estimated cash flow and discount rate adjustment | 82 | — | — | — | 82 | |||||||||||||||
Unused amounts reversed | — | (180 | ) | (232 | ) | (551 | ) | (963 | ) | |||||||||||
Unwinding of discount | 311 | — | — | — | 311 | |||||||||||||||
Exchange differences | — | — | 26 | 32 | 58 | |||||||||||||||
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At December 31, 2017 | 3,992 | 2,290 | 576 | 315 | 7,173 | |||||||||||||||
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Current | 178 | 2,290 | 576 | 315 | 3,359 | |||||||||||||||
Non-current | 3,814 | — | — | — | 3,814 | |||||||||||||||
Arising during the year | — | 1,516 | 199 | 905 | 2,620 | |||||||||||||||
Utilized | (77 | ) | (273 | ) | — | (256 | ) | (606 | ) | |||||||||||
Revision in estimated cash flow and discount rate adjustment | (309 | ) | — | — | — | (309 | ) | |||||||||||||
Unused amounts reversed | — | (646 | ) | (188 | ) | (20 | ) | (854 | ) | |||||||||||
Unwinding of discount | 302 | — | — | — | 302 | |||||||||||||||
Exchange differences | — | 215 | (4 | ) | 4 | 215 | ||||||||||||||
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At December 31, 2018 | 3,908 | 3,102 | 583 | 948 | 8,541 | |||||||||||||||
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Current | 189 | 3,102 | 583 | 948 | 4,822 | |||||||||||||||
Non-current | 3,719 | — | — | — | 3,719 | |||||||||||||||
Rehabilitation provision
The Group has numerous site rehabilitation obligations that it is required to perform under law or contract once an asset is permanently taken out of service. The main part of these obligations is not expected to be paid in a foreseeable future, and will be funded from the general Group’s resources when respective works will be performed. The Group’s rehabilitation provisions primarily relate to its steel and mining production facilities with related landfills and dump areas and its mines.
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2018
(All amounts are in millions of Russian rubles, unless stated otherwise)
AmountsProvisions for legal claims
In the reporting period, the Group recognized unused amount reversed in respect of the other post-retirement benefit obligations recognizedvarious cases because of risk adjustments based on new information and favorable court decisions.
As of December 31, 2017, management’s estimation in respect of claims from Minmetals changed because of negative court judgment and therefore provision was recognised in the consolidated statementamount of $18 million (RUB 1,045 million at the financial position were RUB 54 million within current liabilities and RUB 1,556 million within non-current liabilities.
The key actuarial assumptions used to determine other post-retirement benefit obligations were as followsexchange rate as of December 31, 20142017 and January 1, 2014:
| December 31, 2014 | January 1, 2014 | |||
Discount rate | 4.41% | 5.37% | ||
Health care cost trend rate | 8.00% for Pre-65 Medical and 7.00% for Post-65 Medical | 8.50% for Pre-65 Medical and 7.25% for Post-65 Medical | ||
Ultimate rate | 5.00% | 5.00% | ||
Year ultimate rate reached | 2022 | 2021 for Pre-65 Medical and 2019 for Post-65 |
The results of sensitivity analysis of other post-retirement benefit obligationsRUB 1,250 million at the exchange rate as of December 31, 20142018). During 2018, a number of new claims in the amount of RUB 741 million was received from a third party and January 1, 2014a provision for the negative court judgment of these claims was recognized based on best management’s estimate.
As of December 31, 2018, management assesses the outcome of several court proceedings and claims where the Group’s companies act as defendants in the aggregate amount of RUB 16,096 million (primarily associated with the metallurgical plants as defined Note 9(b)) as possible based on the management’s analysis and discussions with the legal advisers. In 2018-2019, the Group successfully sustained its position in the first court instance and the Supreme Court of the Russian Federation for the amount of RUB 12,700 million.
Provisions on taxes other than income tax
Management believes that it has paid or accrued all applicable taxes. Where uncertainty exists, the Group has accrued tax liabilities based on management’s best estimate of the probable outflow of resources embodying economic benefits which will be required to settle these liabilities. In accordance with IAS 37 the Group recorded RUB 583 million and RUB 576 million of other tax claims that management believes are presented below:probable as of December 31, 2018 and 2017, respectively. The Group does not believe that any other material tax matters exist relating to the Group, including current pending or future governmental claims and demands, which would require adjustment to the accompanying consolidated financial statements in order for those statements not to be materially misstated or misleading as of December 31, 2018.
Possible tax liabilities on taxes other than income tax, which were identified by management as those that can be subject to different interpretations of the tax law and regulations, are not accrued in the consolidated financial statements. The amount of such liabilities was RUB 1,689 million and RUB 1,354 million as of December 31, 2018 and 2017, respectively.
| Impact on other post-retirement benefit obligation | ||||||||
| 2014 | 2013 | |||||||
Health Care rate | ||||||||
1% increase | 20.40 | % | 19.00 | % | ||||
1% decrease | -15.80 | % | -14.80 | % | ||||
Environmental
Possible liabilities, which were identified by management as those that can be subject to potential claims from environmental authorities, are not accrued in the consolidated financial statements. The amount of such liabilities was not significant.
| December 31, 2015 | December 31, 2014 | January 1, 2014 | ||||||||||
Other taxes payable | ||||||||||||
VAT payable | 2,364 | 3,282 | 2,139 | |||||||||
Payroll taxes | 3,622 | 3,502 | 3,256 | |||||||||
Property tax | 696 | 1,632 | 534 | |||||||||
Mineral extraction tax | 172 | 168 | 576 | |||||||||
Land tax | 557 | 541 | 376 | |||||||||
Land lease | 478 | 395 | 273 | |||||||||
Other | 145 | 127 | 286 | |||||||||
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Total | 8,034 | 9,647 | 7,440 | |||||||||
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| Issued capital and reserves |
Common shares
The capital stock of Mechel PAO consists of 416,270,745 common shares, each with a norminalnominal value of 10 Russian rubles, all of which are issued, outstanding and fully paid issued and outstandingfor under the Russian law. The Group is authorized to issue an additional 81,698,341 common shares with a norminalnominal value of 10 Russian rubles each.
MECHEL PAO
Notes to the consolidated financial statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 20152018
(All amounts are in millions of Russian rubles, unless stated otherwise)
Preferred shares
On April 30, 2008, Mechel’s Extraordinary Shareholders’ Meeting adopted changes to its Charter, authorizing up toAs of December 31, 2018 and 2017, the Group had 138,756,915 preferred shares with a nominal value of 10 Russian rubles each, (representingauthorized and issued under the Russian law and representing 25% of the Mechel PAO’s share capital).capital, of which 83,254,149 shares were issued, outstanding and fully paid for, and the remaining 55,502,766 shares were kept as treasury stock by one of the Group’s subsidiaries. Under the Russian law and the Mechel PAO’s Charter, these stockspreferred shares arenon-cumulative and have no voting rights, unless dividends are not paid inexcept for cases stipulated by the year.law and the Charter. The dividend yield paid per one preferred share is also fixed by the Charter and amounts to 0.2%20% of Mechel’sthe consolidated annual net income per 1%profit of the Group under IFRS divided by 138,756,915 issued preferred stocks issued.shares.
Distributions made and proposed
In accordance with applicable legislation, Mechel and its subsidiaries can distribute all profits as dividends or transfer them to reserves.reserves in accordance with applicable legislation and the charters. Dividends may only be declared from accumulated undistributed and unreserved earnings as shown in the statutory financial statements of both Russian and foreign Group’s subsidiaries. Dividends from Russian companies are generally subject to a 13% withholding tax for residents (9% for the periods prior to 2015) and 15% fornon-residents, which could be reduced or eliminated if paid to foreign owners under certain applicable double tax treaties.
Effective January 1, 2008, intercompany dividends may be subject to a withholding tax of 0% (if at the date of dividends declaration, the dividend-recipient Russian company held a controlling (over 50%) interest in the share capital of the company (Russian or foreign) of the dividend payer for a period over one year and the residence of the dividend distribution foreign company is not included into the Ministry of Finance offshore list. Herewith 0% tax rate is not applicable to the income received by foreign entities that are recognised as Russian residents in accordance with the Russian Tax Code.
On June 30, 2015, one of29, 2018, the Group’s subsidiaries declared a dividenddividends attributable tonon-controlling interests of RUB 380 thousand0.056 million and Mechel declared a dividenddividends of RUB 4,163 thousand1,387 million (RUB 16.66 per preferred share) to the holders of preferred shares for 2014. The dividends declared for 2014 were fully paid to the shareholders during the year ended December 31, 2015.2017.
On June 30, 2014, one of2017, the Group’s subsidiaries declared a dividenddividends attributable tonon-controlling interests of RUB 1,670 thousand359 million and Mechel declared a dividenddividends of RUB 4,163 thousand856 million (RUB 10.28 per preferred share) to the holders of preferred shares for 2013. The2016.
On June 30, 2016, one of the Group’s subsidiaries declared dividends attributable tonon-controlling interests of RUB 3 million and Mechel declared for 2013 were partially paiddividends of RUB 4 million (RUB 0.05 per preferred share) to the shareholders in the amountholders of RUB 870 thousand as of December 31, 2014.preferred shares for 2015.
Additional-Paid-In-CapitalAdditionalpaid-in capital
In 2015, additional-paid-in-capital2017, additionalpaid-in capital was increaseddecreased by RUB 2,7303,948 million due to the acquisition ofnon-controlling interests of 22.95%, 0.04%2.53% and 0.39%0.21% in certain Group’s subsidiaries with the negative carrying value of RUB 2,842590 million.
Earnings (loss) per share (EPS)
Basic EPS is calculated by dividing the profit (loss) for the year attributable to common equity holders of the parent by the weighted average number of common shares outstanding during the year.
There were no dilutive securities issued as of December 31, 2018, 2017 and 2016.
MECHEL PAO
Notes to the consolidated financial statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 20152018
(All amounts are in millions of Russian rubles, unless stated otherwise)
Earnings (Loss) per share (EPS)
Basic EPS is calculated by dividing the (loss) profit for the year attributable to ordinary equity holders of the parent by the weighted average number of ordinary shares outstanding during the year.
| 2015 | 2014 | |||||||
Net loss from continuing operations | (115,450 | ) | (122,265 | ) | ||||
Less: Net income from continuing operations attributable to non-controlling interests | 458 | (1,564 | ) | |||||
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| |||||
Net loss attributable to ordinary equity holders from continuing operations | (115,908 | ) | (120,701 | ) | ||||
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Net loss from discontinued operations | 822 | (11,702 | ) | |||||
Less: Net income from discontinued operations attributable to non-controlling interests | 77 | 301 | ||||||
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| |||||
Net profit (loss) attributable to ordinary equity holders from discontinued operations | 745 | (12,003 | ) | |||||
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|
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| |||||
Loss attributable to ordinary equity holders | (115,163 | ) | (132,704 | ) | ||||
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| |||||
There were no dilutive securities issued as of December 31, 2015, 2014 and January 1, 2014.
| 2015 | 2014 | |||||||
(Loss) profit per share total(Russian rubles per share) | (276.65 | ) | (318.79 | ) | ||||
Including: | ||||||||
from continuing operations (Russian rubles per share) | (278.44 | ) | (289.96 | ) | ||||
from discontinued operations (Russian rubles per share) | 1.79 | (28.83 | ) | |||||
Other income/expenses |
Administrative and other operating expenses |
General, administrative and other operating expenses are comprised of the following:
| 2015 | 2014 | 2018 | 2017 | 2016 | ||||||||||||||||
Wages, salaries and social security costs | 8,287 | 7,637 | 10,482 | 7,769 | 11,654 | |||||||||||||||
Office expenses | 1,333 | 1,274 | 1,213 | 1,211 | 1,397 | |||||||||||||||
Pension costs | 1,095 | 885 | ||||||||||||||||||
Movement in provision for legal claims | 996 | 656 | ||||||||||||||||||
Loss from disposal of property, plant and equipment | 806 | 524 | ||||||||||||||||||
Audit and consulting services | 941 | 631 | 569 | |||||||||||||||||
Provision for legal claims, net | 870 | 1,995 | 59 | |||||||||||||||||
Depreciation | 690 | 1,033 | 756 | 605 | 716 | |||||||||||||||
Audit and consulting services | 570 | 625 | ||||||||||||||||||
Fines and penalties related to business contracts | 391 | 303 | 487 | |||||||||||||||||
Social expenses | 387 | 406 | 452 | |||||||||||||||||
Consumables | 437 | 432 | 307 | 276 | 411 | |||||||||||||||
Social expenses | 387 | 444 | ||||||||||||||||||
Banking charges and services | 245 | 271 | 268 | |||||||||||||||||
Rent | 259 | 242 | 158 | 165 | 259 | |||||||||||||||
Fines and penalties related to business contracts | 236 | 275 | ||||||||||||||||||
Write off of accounts receivable | 247 | 185 | ||||||||||||||||||
Banking charges and services | 168 | 222 | ||||||||||||||||||
Business trips | 165 | 154 | 139 | 132 | 136 | |||||||||||||||
Write off of trade and other receivables | 2 | 109 | 113 | |||||||||||||||||
Net result from disposal ofnon-current assets | — | 34 | 57 | |||||||||||||||||
Other | 1,624 | 1,727 | 2,015 | 1,683 | 2,213 | |||||||||||||||
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Total | 17,300 | 16,315 | 17,906 | 15,590 | 18,791 | |||||||||||||||
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| 25.2 | Employee benefits expense |
Employee benefits expenses are comprised of the following:
| 2018 | 2017 | 2016 | ||||||||||
Included in cost of sales | ||||||||||||
Wages and salaries | 21,519 | 20,591 | 19,806 | |||||||||
Social security costs | 6,887 | 6,438 | 5,909 | |||||||||
Post-employment benefits | 130 | 142 | 126 | |||||||||
Included in selling and distribution expenses | ||||||||||||
Wages and salaries | 3,784 | 3,686 | 4,029 | |||||||||
Social security costs | 999 | 973 | 1,015 | |||||||||
Included in administrative and other operating expenses | ||||||||||||
Wages and salaries | 8,444 | 6,259 | 9,510 | |||||||||
Social security costs | 2,038 | 1,510 | 2,144 | |||||||||
|
|
|
|
|
| |||||||
Total | 43,801 | 39,599 | 42,539 | |||||||||
|
|
|
|
|
| |||||||
MECHEL PAO
Notes to the consolidated financial statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 20152018
(All amounts are in millions of Russian rubles, unless stated otherwise)
Employee benefits expenses are comprised of the following:
| 2015 | 2014 | |||||||
Included in Cost of sales: | ||||||||
Wages and salaries | 19,867 | 20,083 | ||||||
Social security costs | 1,814 | 1,953 | ||||||
Pension costs | 4,367 | 4,378 | ||||||
Post-employment benefits other than pensions | 157 | 146 | ||||||
Included in Selling and distribution expenses: | ||||||||
Wages and salaries | 3,966 | 3,928 | ||||||
Social security costs | 614 | 504 | ||||||
Pension costs | 410 | 359 | ||||||
Post-employment benefits other than pensions | — | 1 | ||||||
Included in Administrative and other operating expenses: | ||||||||
Wages and salaries | 7,631 | 6,976 | ||||||
Social security costs | 656 | 661 | ||||||
Pension costs | 1,095 | 885 | ||||||
|
|
|
| |||||
Total | 40,577 | 39,874 | ||||||
|
|
|
| |||||
| Other operating income |
Other operating income is comprised of the following:
| 2015 | 2014 | 2018 | 2017 | 2016 | ||||||||||||||||
Curtailment gain and past service costs | 142 | 58 | ||||||||||||||||||
Gain from sales of scrap materials | 378 | 226 | 190 | |||||||||||||||||
Subsidies received from the governmental authorities as a compensation for operating activities (energy tariffs) | 359 | 496 | — | |||||||||||||||||
Income from fines and penalties related to business contracts | 248 | 307 | 248 | |||||||||||||||||
Net result from disposal ofnon-current assets | 128 | — | — | |||||||||||||||||
Curtailment and result of remeasurement of pension obligations | 93 | 175 | 392 | |||||||||||||||||
Revision in estimated cash flows of rehabilitation provision | 47 | 236 | 38 | — | 375 | |||||||||||||||
Other operating income | — | 557 | ||||||||||||||||||
Insurance compensation | — | — | 153 | |||||||||||||||||
Other | 467 | 183 | 495 | |||||||||||||||||
|
|
|
|
| ||||||||||||||||
Total | 189 | 851 | 1,711 | 1,387 | 1,853 | |||||||||||||||
|
|
|
|
| ||||||||||||||||
In 2018 and 2017, the Group recognised gain on remeasurement of pension obligations because of the changes in the actuarial assumptions, fluctuation in payment amounts from year to year, adjustment in the financial support amount per one pensioner. In 2016, the Group recognised curtailment gain on cancellation of the certain pension programs for workers of Yakutugol, Mechel-Remservice OOO.
Revision in estimated cash flows of rehabilitation provision relates primarily to changes in the discount rate, in the planned volumes of works and change in costs ofexpected rehabilitation expenses and other reasons.
In 2015, the Group recognised curtailment gain on DEMP pension obligations due to mass layoffs of employees and decrease in salaries conditioned by the situation in Ukraine. In 2014, the Group recorded effect of defined benefits plans amendments at BMP and SKCC.costs.
Finance income |
Finance income is comprised of the following:
| 2015 | 2014 | 2018 | 2017 | 2016 | ||||||||||||||||
Effect of restructuring of loans and finance leases | 33,514 | 264 | 992 | |||||||||||||||||
Remeasurement of fair value of financial instruments | 320 | 197 | — | |||||||||||||||||
Interest income from investments | 134 | 98 | 207 | 158 | 177 | |||||||||||||||
Income from the discounting of financial instruments | 49 | 9 | 15 | 14 | 7 | |||||||||||||||
|
|
|
|
| ||||||||||||||||
Total | 183 | 107 | 34,056 | 633 | 1,176 | |||||||||||||||
|
|
|
|
| ||||||||||||||||
Effect of restructuring of loans and finance leases in 2018 primarily relates to VTB (Note 11.1 (b)), Gazprombank (Note 11.1 (c)) and the refinancing of thepre-export credit facility (Note 11.1 (a)).
MECHEL PAO
Notes to the consolidated financial statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 20152018
(All amounts are in millions of Russian rubles, unless stated otherwise)
Finance costs |
Finance costs are comprised of the following:
| 2015 | 2014 | 2018 | 2017 | 2016 | ||||||||||||||||
Interest on loans and borrowings | (38,664 | ) | (23,758 | ) | (35,556 | ) | (40,298 | ) | (44,164 | ) | ||||||||||
Fines and penalties on overdue loans and borrowing payments and overdue interest payments | (18,525 | ) | (1,516 | ) | (858 | ) | (1,086 | ) | (5,538 | ) | ||||||||||
Finance charges payable under finance leases | (1,673 | ) | (1,816 | ) | (1,104 | ) | (1,230 | ) | (1,500 | ) | ||||||||||
Fines and penalties on overdue finance leases | (642 | ) | (313 | ) | (10 | ) | (75 | ) | (475 | ) | ||||||||||
|
|
|
|
| ||||||||||||||||
Total interest expenses | (59,504 | ) | (27,403 | ) | ||||||||||||||||
|
| |||||||||||||||||||
Total finance costs related to loans, borrowings and | (37,528 | ) | (42,689 | ) | (51,677 | ) | ||||||||||||||
Interest expenses under pension liabilities | (400 | ) | (297 | ) | (279 | ) | (314 | ) | (368 | ) | ||||||||||
Expenses related to discounting of financial instruments | (175 | ) | (154 | ) | ||||||||||||||||
Accretion expense | (373 | ) | (256 | ) | ||||||||||||||||
Unwinding of discounting of financial instruments | (3,916 | ) | (4,179 | ) | (1,956 | ) | ||||||||||||||
Remeasurement of fair value of financial instruments (Note 11.5) | (27 | ) | (117 | ) | — | |||||||||||||||
Unwinding of discount on provisions | (302 | ) | (311 | ) | (239 | ) | ||||||||||||||
|
|
|
|
| ||||||||||||||||
Total | (60,452 | ) | (28,110 | ) | (42,052 | ) | (47,610 | ) | (54,240 | ) | ||||||||||
|
|
|
|
| ||||||||||||||||
The interestExpenses related to discounting of financial instruments include changes in the measurement of thenon-current obligation related toput-option granted on loans and borrowings includes fines and penalties on overdue loans and borrowing payments and overdue interest paymentsnon-controlling interests in the amount of RUB 18,5253,796 million (2017: RUB 4,062 million) (Note 6 and RUB 1,516 million for 2015 and 2014, respectively. The finance charges payable under finance leases includes fines and penalties on overdue finance lease payments of RUB 642 million and RUB 313 million for 2015 and 2014, respectively.Note 11.4).
Other income and other expenses |
Other income is comprised of the following:
| 2015 | 2014 | |||||||
Gain on accounts payable with expired legal term | 222 | 37 | ||||||
|
|
|
| |||||
Gain from sale of scrap materials | 185 | 20 | ||||||
Dividends received | 8 | — | ||||||
Gain on sale of investments in equity securities | — | 483 | ||||||
Gain on sales and purchases of foreign currencies | — | 143 | ||||||
Other income | 111 | 1 | ||||||
|
|
|
| |||||
Total | 526 | 684 | ||||||
|
|
|
| |||||
| 2018 | 2017 | 2016 | ||||||||||
Write-off of trade and other payables with expired legal term | 425 | 516 | 115 | |||||||||
Gain on royalty and other proceeds associated with disposal of Bluestone | 3 | 474 | 121 | |||||||||
Gain on final settlements from subsidiaries’ disposal occurred in previous years | 3 | — | 194 | |||||||||
Gain on forgiveness and restructuring of trade and other payables | — | 447 | — | |||||||||
Dividends received | — | — | 3 | |||||||||
Other income | 81 | 58 | 165 | |||||||||
|
|
|
|
|
| |||||||
Total | 512 | 1,495 | 598 | |||||||||
|
|
|
|
|
| |||||||
Other expenses are comprised of the following:
| 2015 | 2014 | |||||||
Loss on sales and purchases of foreign currencies | (273 | ) | — | |||||
Loss on securities repurchase agreement | — | (1,297 | ) | |||||
Loss from disposal of subsidiaries | (19 | ) | (89 | ) | ||||
Other expenses | (55 | ) | (100 | ) | ||||
|
|
|
| |||||
Total | (347 | ) | (1,486 | ) | ||||
|
|
|
| |||||
In 2014, the Group recognised a loss of RUB 1,297 million related to the failure of counterparty to a securities repurchase agreement to return certain securities to the Group.
| 2018 | 2017 | 2016 | ||||||||||
Loss on sales and purchases of foreign currencies | (108 | ) | (114 | ) | (130 | ) | ||||||
VEB commissions write off | — | — | (1,411 | ) | ||||||||
Provision onnon-recoverable advances to pension funds | — | — | (408 | ) | ||||||||
Other expenses | (206 | ) | (106 | ) | (54 | ) | ||||||
|
|
|
|
|
| |||||||
Total | (314 | ) | (220 | ) | (2,003 | ) | ||||||
|
|
|
|
|
| |||||||
MECHEL PAO
Notes to the consolidated financial statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 20152018
(All amounts are in millions of Russian rubles, unless stated otherwise)
Gain on sale of investments occurred as a result of disposal of investments in equity securities to third parties in 2015 and 2014. Gain on accounts payable with expired legal term constitutes gain on thewrite-off of payable amounts that werewritten-off due to legal liquidation of the creditors or expiration of the statute of limitation.
The commissions in the amount of RUB 1,411 million paid in 2014 to VEB for the opening of the credit line was written off in 2016 due to uncertainty in further financing.
Segment information |
The Group’s operations are presented in three business segments as follows:
Steel segment, comprising production and sales of semi-finished steel products, carbon and specialty long products, carbon and stainless flat products, value-added downstream metal products, including forgings, stampings, hardware, rails, balks and hardware, ferrosilicon;
Mining segment, comprising production and sales of coal (coking and steam) and middlings, coke and chemical products, and iron ore concentrate, which supplies raw materials to the Steel and Power segments and also sells substantial amounts of raw materials to third parties;
Power segment, comprising generation and sales of electricity and heat power, which supplies electricity and heat power to the Steel and Mining segments and also sells a portion of electricity and heat power to third parties.
These segments are combinations of subsidiaries and have separate management teams and offer different products and services.
The above three segments meet criteria for reportable segments. No operating segments have been aggregated to form the above reportable operating segments. Subsidiaries are consolidated by the segment to which they belong based on their products and by which they are managed. The Group’s management evaluates performance of the segments based on segment revenues, gross margin, and operating income (loss)., assets and liabilities. Transfer prices between operating segments are on anarm’s-length basis in a manner similar to transactions with third parties. The accounting policies used byIncome tax, deferred tax related to the Group in reportingconsolidated group of taxpayers and certain other assets and liabilities are not allocated to those segments internallyas they are managed on the same as those used for preparation of consolidated financial statement and in the respective quantitative and qualitative notes of the financial statements therefore no reconciliation between segment information and consolidated assets, liabilities and operating results is performed.
As of December 31, 2018 and for the year then ended | Mining | Steel | Power | Adjustments and eliminations | Consolidated | |||||||||||||||
Revenues from contracts with external customers | 96,882 | 187,918 | 27,774 | — | 312,574 | |||||||||||||||
Inter-segment revenues | 37,549 | 5,865 | 15,471 | (58,885 | ) | — | ||||||||||||||
Gross profit | 77,199 | 44,433 | 12,571 | 615 | 134,818 | |||||||||||||||
Gross margin, % | 57.4 | 22.9 | 29.1 | — | 43.1 | |||||||||||||||
Depreciation and amortisation | (7,621 | ) | (5,738 | ) | (500 | ) | — | (13,859 | ) | |||||||||||
Loss onwrite-off ofnon-current assets | (572 | ) | (258 | ) | (29 | ) | — | (859 | ) | |||||||||||
Impairment of goodwill andnon-current assets | (3,684 | ) | (819 | ) | (2,719 | ) | — | (7,222 | ) | |||||||||||
Operating profit (loss) | 32,574 | 19,831 | (3,240 | ) | 615 | 49,780 | ||||||||||||||
Share of profit (loss) of associates, net | 10 | — | — | — | 10 | |||||||||||||||
Finance income | 23,387 | 9,478 | 1,191 | — | 34,056 | |||||||||||||||
Intersegment finance income | 1,071 | 395 | 41 | (1,507 | ) | — | ||||||||||||||
Finance cost | (28,932 | ) | (12,810 | ) | (310 | ) | — | (42,052 | ) | |||||||||||
Intersegment finance cost | (220 | ) | (1,015 | ) | (272 | ) | 1,507 | — | ||||||||||||
Income tax (expense) benefit | (5,940 | ) | 531 | 83 | 2,645 | (2,681 | ) | |||||||||||||
Profit (loss) for the year | 11,489 | 1,331 | (2,544 | ) | 3,260 | 13,536 | ||||||||||||||
Segment assets | 208,123 | 97,373 | 7,519 | 4,610 | 317,625 | |||||||||||||||
Segment liabilities | 296,125 | 247,241 | 9,469 | (2,015 | ) | 550,820 | ||||||||||||||
Investments in associates | 293 | — | — | — | 293 | |||||||||||||||
Capital expenditures | (4,243 | ) | (1,942 | ) | (356 | ) | — | (6,541 | ) | |||||||||||
MECHEL PAO
Notes to the consolidated financial statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 20152018
(All amounts are in millions of Russian rubles, unless stated otherwise)
Year ended | Mining | Steel | Energy | Adjustments and eliminations | Consolidated | |||||||||||||||||||||||||||||||||||
Revenues from external customers | 80,632 | 146,032 | 26,477 | — | 253,141 | |||||||||||||||||||||||||||||||||||
As of December 31, 2017 and for the year then ended | Mining | Steel | Power | Adjustments and eliminations | Consolidated | |||||||||||||||||||||||||||||||||||
Revenues from contracts with external customers | 100,129 | 172,760 | 26,224 | — | 299,113 | |||||||||||||||||||||||||||||||||||
Inter-segment revenues | 28,091 | 6,972 | 14,990 | (50,053 | ) | — | 42,286 | 7,622 | 16,338 | (66,246 | ) | — | ||||||||||||||||||||||||||||
Gross profit | 57,442 | 33,395 | 11,288 | (318 | ) | 101,807 | 93,464 | 34,013 | 12,724 | (1,444 | ) | 138,757 | ||||||||||||||||||||||||||||
Gross margin, % | 52.8 | 21.8 | 27.2 | — | 40.2 | 65.6 | 18.9 | 29.9 | — | 46.4 | ||||||||||||||||||||||||||||||
Depreciation, depletion and amortization | 9,106 | 4,651 | 328 | — | 14,085 | |||||||||||||||||||||||||||||||||||
Loss on write-off of property, plant and equipment | 199 | 492 | — | — | 691 | |||||||||||||||||||||||||||||||||||
Depreciation and amortisation | (7,979 | ) | (5,800 | ) | (448 | ) | — | (14,227 | ) | |||||||||||||||||||||||||||||||
Loss onwrite-off ofnon-current assets | (135 | ) | (145 | ) | (41 | ) | — | (321 | ) | |||||||||||||||||||||||||||||||
Impairment of goodwill and non-current assets | — | (16 | ) | (1,444 | ) | — | (1,460 | ) | (3,800 | ) | (2,281 | ) | — | — | (6,081 | ) | ||||||||||||||||||||||||
Operating profit | 15,895 | 8,456 | 35 | (318 | ) | 24,068 | 48,190 | 9,154 | 1,267 | (1,444 | ) | 57,167 | ||||||||||||||||||||||||||||
Share of profit (loss) of associates, net | 18 | — | — | — | 18 | |||||||||||||||||||||||||||||||||||
Finance income | 142 | 38 | 3 | — | 183 | 475 | 150 | 8 | — | 633 | ||||||||||||||||||||||||||||||
Intersegment finance income | 887 | 307 | 53 | — | 1,247 | 1,335 | 567 | 49 | (1,951 | ) | — | |||||||||||||||||||||||||||||
Finance cost | (33,656 | ) | (24,767 | ) | (2,029 | ) | — | (60,452 | ) | (34,324 | ) | (12,793 | ) | (493 | ) | — | (47,610 | ) | ||||||||||||||||||||||
Intersegment finance cost | (225 | ) | (878 | ) | (144 | ) | — | (1,247 | ) | (222 | ) | (1,342 | ) | (387 | ) | 1,951 | — | |||||||||||||||||||||||
Profit (loss) after tax for the year from discontinued operations, net | 764 | 87 | (29 | ) | — | 822 | ||||||||||||||||||||||||||||||||||
Loss for the year | (71,563 | ) | (40,626 | ) | (2,121 | ) | (318 | ) | (114,628 | ) | ||||||||||||||||||||||||||||||
Income tax expense | (3,410 | ) | (203 | ) | (229 | ) | 692 | (3,150 | ) | |||||||||||||||||||||||||||||||
Profit (loss) for the year | 17,210 | (4,116 | ) | 228 | (752 | ) | 12,570 | |||||||||||||||||||||||||||||||||
Segment assets | 217,393 | 113,985 | 10,694 | — | 342,072 | 209,630 | 100,543 | 10,417 | (1,463 | ) | 319,127 | |||||||||||||||||||||||||||||
Segment liabilities | 375,153 | 216,771 | 12,002 | — | 603,926 | 371,196 | 184,952 | 9,808 | (2,696 | ) | 563,260 | |||||||||||||||||||||||||||||
Investments in associates | 284 | — | — | — | 284 | 283 | — | — | — | 283 | ||||||||||||||||||||||||||||||
Goodwill | 14,367 | 3,603 | 3,408 | — | 21,378 | |||||||||||||||||||||||||||||||||||
Capital expenditures | 4,971 | 520 | 486 | — | 5,977 | (5,852 | ) | (1,329 | ) | (321 | ) | — | (7,502 | ) | ||||||||||||||||||||||||||
Income tax (expense) benefit | (5,630 | ) | (2,795 | ) | 103 | — | (8,322 | ) | ||||||||||||||||||||||||||||||||
As of December 31, 2016 and for the year then ended | Mining | Steel | Power | Adjustments and eliminations | Consolidated | |||||||||||||||
Revenues from contracts with external customers | 89,647 | 161,639 | 24,723 | — | 276,009 | |||||||||||||||
Inter-segment revenues | 31,907 | 7,254 | 15,903 | (55,064 | ) | — | ||||||||||||||
Gross profit | 76,515 | 42,148 | 11,578 | (554 | ) | 129,687 | ||||||||||||||
Gross margin, % | 62.9 | 25.0 | 28.5 | — | 47.0 | |||||||||||||||
Depreciation and amortisation | (7,912 | ) | (5,435 | ) | (367 | ) | — | (13,714 | ) | |||||||||||
Loss onwrite-off ofnon-current assets | (863 | ) | (1,089 | ) | (1 | ) | — | (1,953 | ) | |||||||||||
Impairment of goodwill andnon-current assets | (1,336 | ) | (3,866 | ) | — | — | (5,202 | ) | ||||||||||||
Operating profit | 31,012 | 11,531 | 701 | (554 | ) | 42,690 | ||||||||||||||
Share of profit (loss) of associates, net | (17 | ) | — | — | — | (17 | ) | |||||||||||||
Finance income | 1,082 | 93 | 1 | — | 1,176 | |||||||||||||||
Intersegment finance income | 1,401 | 2,141 | 53 | (3,595 | ) | — | ||||||||||||||
Finance cost | (37,615 | ) | (16,015 | ) | (610 | ) | — | (54,240 | ) | |||||||||||
Intersegment finance cost | (1,731 | ) | (1,396 | ) | (468 | ) | 3,595 | — | ||||||||||||
Loss after tax for the year from discontinued operations, net | — | (406 | ) | (20 | ) | — | (426 | ) | ||||||||||||
Income tax benefit (expense) | 115 | 1,485 | (73 | ) | (6,420 | ) | (4,893 | ) | ||||||||||||
Profit (loss) for the year | 7,443 | 8,675 | (312 | ) | (6,974 | ) | 8,832 | |||||||||||||
Segment assets | 209,553 | 104,675 | 10,887 | 350 | 325,465 | |||||||||||||||
Segment liabilities | 375,944 | 191,242 | 11,057 | (190 | ) | 578,053 | ||||||||||||||
Investments in associates | 265 | — | — | — | 265 | |||||||||||||||
Capital expenditures | (3,958 | ) | (1,206 | ) | (360 | ) | — | (5,524 | ) | |||||||||||
MECHEL PAO
Notes to the consolidated financial statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 20152018
(All amounts are in millions of Russian rubles, unless stated otherwise)
Year ended December 31, 2014 | Mining | Steel | Energy | Adjustments and eliminations | Consolidated | |||||||||||||||
Revenues from external customers | 79,509 | 138,660 | 25,823 | — | 243,992 | |||||||||||||||
Inter-segment revenues | 21,049 | 8,207 | 13,731 | (42,987 | ) | — | ||||||||||||||
Gross profit | 49,123 | 31,382 | 10,339 | 91 | 90,935 | |||||||||||||||
Gross margin, % | 48.9 | 21.4 | 26.1 | — | 37.3 | |||||||||||||||
Depreciation, depletion and amortization | 8,747 | 5,391 | 291 | — | 14,429 | |||||||||||||||
Loss on write-off of property, plant and equipment | 309 | 242 | 110 | — | 661 | |||||||||||||||
Impairment of goodwill and non-current assets | (19 | ) | 8,015 | — | — | 7,996 | ||||||||||||||
Operating profit (loss) | 1,718 | (1,346 | ) | 424 | 91 | 887 | ||||||||||||||
Income (loss) from associates | 14 | (7 | ) | — | — | 7 | ||||||||||||||
Finance income | 74 | 32 | 1 | — | 107 | |||||||||||||||
Intersegment finance income | 704 | 358 | 46 | — | 1,108 | |||||||||||||||
Finance cost | (14,852 | ) | (12,296 | ) | (962 | ) | — | (28,110 | ) | |||||||||||
Intersegment finance cost | (183 | ) | (679 | ) | (246 | ) | — | (1,108 | ) | |||||||||||
Profit (loss) after tax for the year from discontinued operations, net | (13,141 | ) | 1,468 | (29 | ) | — | (11,702 | ) | ||||||||||||
Loss for the year | (87,758 | ) | (45,765 | ) | (535 | ) | 91 | (133,967 | ) | |||||||||||
Segment assets | 239,501 | 117,581 | 12,176 | — | 369,258 | |||||||||||||||
Assets of disposal group classified as held for sale | 8,696 | — | — | — | 8,696 | |||||||||||||||
Segment liabilities | 312,417 | 187,776 | 15,478 | — | 515,671 | |||||||||||||||
Investments in associates | 274 | — | — | — | 274 | |||||||||||||||
Goodwill | 14,367 | 3,477 | 4,853 | — | 22,697 | |||||||||||||||
Capital expenditures | 13,117 | 3,089 | 300 | — | 16,506 | |||||||||||||||
Income tax benefit | 8,435 | 374 | 13 | — | 8,822 | |||||||||||||||
Balances as of January 1, 2014 | Mining | Steel | Energy | Consolidated | ||||||||||||
Segment assets | 237,333 | 143,518 | 12,243 | 393,094 | ||||||||||||
Segment liabilities | 217,361 | 176,157 | 13,064 | 406,582 | ||||||||||||
Investments in associates | 244 | 7 | — | 251 | ||||||||||||
Goodwill | 14,367 | 3,300 | 4,853 | 22,520 | ||||||||||||
The following table presents the Group’s revenues from contracts with customers segregated between domestic and export sales. Domestic represents sales by a subsidiary in the country in which it is located. This category is further divided between subsidiaries located in Russia and other countries. Export represents cross-border sales by a subsidiary regardless of its location.
| 2015 | 2014 | |||||||
Domestic: | ||||||||
Russia | 146,701 | 141,096 | ||||||
Other | 20,817 | 19,488 | ||||||
|
|
|
| |||||
Total | 167,518 | 160,584 | ||||||
Export | 85,623 | 83,408 | ||||||
|
|
|
| |||||
Total revenue | 253,141 | 243,992 | ||||||
|
|
|
| |||||
MECHEL PAO
Notes to the consolidated financial statements for the year ended December 31, 2015
(All amounts are in millions of Russian rubles, unless stated otherwise)
| 2018 | 2017 | 2016 | ||||||||||
Domestic | ||||||||||||
Russia | 178,880 | 176,906 | 164,361 | |||||||||
Other | 29,666 | 23,445 | 22,252 | |||||||||
|
|
|
|
|
| |||||||
Total | 208,546 | 200,351 | 186,613 | |||||||||
Export | 104,028 | 98,762 | 89,396 | |||||||||
|
|
|
|
|
| |||||||
Total revenue | 312,574 | 299,113 | 276,009 | |||||||||
|
|
|
|
|
| |||||||
Allocation of total revenue from contracts with customers by country is based on the location of the customer. The Group’s total revenues from external customers by geographic area for the last two fiscal years were as follows:
| 2015 | 2014 | 2018 | 2017 | 2016 | ||||||||||||||||
Russia | 146,754 | 141,179 | 178,997 | 177,005 | 164,412 | |||||||||||||||
Asia | 40,119 | 41,177 | 61,840 | 63,182 | 54,114 | |||||||||||||||
Europe | 39,019 | 34,233 | 44,263 | 36,605 | 34,126 | |||||||||||||||
CIS | 20,231 | 21,837 | 23,877 | 19,346 | 18,630 | |||||||||||||||
Middle East | 4,222 | 3,596 | 3,130 | 2,212 | 1,536 | |||||||||||||||
USA | 581 | 531 | 258 | 286 | 707 | |||||||||||||||
Other regions | 2,215 | 1,439 | 209 | 477 | 2,484 | |||||||||||||||
|
|
|
|
| ||||||||||||||||
Total | 253,141 | 243,992 | 312,574 | 299,113 | 276,009 | |||||||||||||||
|
|
|
|
| ||||||||||||||||
The majority of the Group’snon-current assets are located in Russia. The carrying amounts of mineral licenses and property, plant and equipment pertaining to the Group’s major operations were as follows:
| December 31, 2015 | December 31, 2014 | January 1, 2014 | December 31, 2018 | December 31, 2017 | ||||||||||||||||
Russia | 250,868 | 261,269 | 262,422 | 219,504 | 228,825 | |||||||||||||||
Germany | 2,051 | 1,851 | 1,549 | 1,532 | 1,407 | |||||||||||||||
Austria | 780 | 705 | 832 | 637 | 589 | |||||||||||||||
Czech Republic | 285 | 239 | 187 | 224 | 216 | |||||||||||||||
Romania | 266 | 241 | 343 | 20 | 41 | |||||||||||||||
CIS | 25 | 21 | 1,665 | |||||||||||||||||
Switzerland/Liechtenstein | 9 | 8 | 6 | |||||||||||||||||
USA | — | — | 10,701 | |||||||||||||||||
Other | 77 | 87 | 275 | 30 | 37 | |||||||||||||||
|
|
|
|
| ||||||||||||||||
Total | 254,361 | 264,421 | 277,980 | 221,947 | 231,115 | |||||||||||||||
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|
|
|
| ||||||||||||||||
Because of the significant number of customers, there are no individual external customers that generate sales greater than 10% of the Group’s consolidated total revenue.revenue from contracts with customers.
MECHEL PAO
Notes to the consolidated financial statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 20152018
(All amounts are in millions of Russian rubles, unless stated otherwise)
The following table presents the breakdown of the Group’s revenues from contracts with external customers by major products:
| 2015 | 2014 | 2018 | 2017 | 2016 | ||||||||||||||||
Mining segment | ||||||||||||||||||||
Coal and middlings | 64,186 | 62,385 | 80,022 | 84,341 | 75,258 | |||||||||||||||
Coke and chemical products | 11,756 | 10,849 | 14,205 | 13,747 | 11,330 | |||||||||||||||
Iron ore concentrate | 1,844 | 4,011 | 839 | 220 | 126 | |||||||||||||||
Other | 2,846 | 2,264 | 1,816 | 1,821 | 2,933 | |||||||||||||||
|
|
|
|
| ||||||||||||||||
Total | 80,632 | 79,509 | 96,882 | 100,129 | 89,647 | |||||||||||||||
|
|
|
|
| ||||||||||||||||
Steel segment | ||||||||||||||||||||
Long steel products | 73,853 | 71,064 | 105,722 | 96,768 | 89,575 | |||||||||||||||
Hardware | 23,443 | 22,396 | 30,040 | 27,578 | 24,580 | |||||||||||||||
Flat steel products | 17,490 | 14,646 | 22,786 | 22,505 | 18,230 | |||||||||||||||
Forgings and stampings | 12,166 | 11,843 | 15,848 | 12,247 | 11,652 | |||||||||||||||
Semi-finished steel products | 5,027 | 2,834 | ||||||||||||||||||
Ferrosilicon | 3,528 | 2,713 | 3,927 | 2,807 | 3,368 | |||||||||||||||
Steel pipes | 3,308 | 3,391 | 3,230 | 2,733 | 3,286 | |||||||||||||||
Semi-finished steel products | 54 | 492 | 3,434 | |||||||||||||||||
Other | 7,217 | 9,773 | 6,311 | 7,630 | 7,514 | |||||||||||||||
|
|
|
|
| ||||||||||||||||
Total | 146,032 | 138,660 | 187,918 | 172,760 | 161,639 | |||||||||||||||
|
|
|
|
| ||||||||||||||||
Power segment | ||||||||||||||||||||
Electricity | 24,524 | 23,628 | 26,009 | 24,297 | 22,527 | |||||||||||||||
Other | 1,953 | 2,195 | 1,765 | 1,927 | 2,196 | |||||||||||||||
|
|
|
|
| ||||||||||||||||
Total | 26,477 | 25,823 | 27,774 | 26,224 | 24,723 | |||||||||||||||
|
|
|
|
| ||||||||||||||||
Total revenue | 253,141 | 243,992 | 312,574 | 299,113 | 276,009 | |||||||||||||||
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|
|
| ||||||||||||||||
Operating lease commitments |
Commitments
In the course of carrying out its operations and other activities, the Group and its subsidiaries enter into various agreements, which would require the Group to invest in or provide financing to specific projects or undertakings. In management’s opinion, these commitments are entered into under standard terms, which are representative of each specific project’s potential and should not result in an unreasonable loss.
As of December 31, 2015, the total Group’s contractual commitments to acquire property, plant and equipment amounted to RUB 23,231 million. Included in the commitments related to acquisition of property, plant and equipment are amounts arising from various purchase agreements in respect of railway and related infrastructure facilities construction for the Elga project. The total amount of remaining commitments under the construction contracts as of December 31, 2015 is equal to RUB 19,890 million.
MECHEL PAO
Notes to the consolidated financial statements for the year ended December 31, 2015
(All amounts are in millions of Russian rubles, unless stated otherwise)
Operating lease commitments
The Group has entered into operating property and land leases with lease terms between 20152019 and 2065 years.2067. Property and land lease expenses amounted to RUB 1,7921,877 million and RUB 1,6281,875 million for the years ended December 31, 20152018 and 2014,2017, respectively. Future minimum rentals payable undernon-cancellable operating leases as of December 31, 20152018 are as follows:
| December 31, 2018 | ||||
Within one year | ||||
After one year but not more than five years | ||||
More than five years | ||||
|
| |||
Total | ||||
|
| |||
The Group does not sublease the property leased under operating lease agreements.
Finance lease commitments
The Group has finance leases for various items of plant and machinery. The Group’s obligations under finance leases are not secured. Future minimum lease payments under finance leases together with the present value of the net minimum lease payments are as follows:
| Minimum payments | Present value of payments | |||||||||||||||||||||||
| December 31, 2015 | December 31, 2014 | January 1, 2014 | December 31, 2015 | December 31, 2014 | January 1, 2014 | |||||||||||||||||||
Payable in 1 year | 17,004 | 20,317 | 14,480 | 13,507 | 15,213 | 10,809 | ||||||||||||||||||
Payable in 2 years | 360 | 107 | 2,217 | 304 | 98 | 1,925 | ||||||||||||||||||
Payable in 3 years | 169 | 37 | 864 | 157 | 33 | 770 | ||||||||||||||||||
Payable in 4 years | 20 | 15 | 253 | 19 | 15 | 224 | ||||||||||||||||||
Payable in 5 years and thereafter | 1 | — | 57 | 1 | — | 54 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total minimum lease payment | 17,553 | 20,476 | 17,871 | 13,988 | 15,359 | 13,782 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Less amounts representing finance charges | (3,565 | ) | (5,117 | ) | (4,089 | ) | — | — | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Present value of finance lease liabilities | 13,988 | 15,359 | 13,782 | 13,988 | 15,359 | 13,782 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Current portion of finance lease liabilities | 13,507 | 15,213 | 10,809 | |||||||||||||||||||||
Non-current portion of finance lease liabilities | 481 | 146 | 2,973 | |||||||||||||||||||||
The discount rate used for the calculation of the present value of minimum lease payments equals the implicit rate for the lessor and varies on different groups of equipment from 10.4% p.a. to 13.2% p.a. (U.S. dollar-denominated contracts), from 7.6% p.a. to 22.9% p.a. (Euro-denominated contracts) and from 5.3% p.a. to 26.1% p.a. (Russian ruble-denominated contracts). Interest expense charged to the statements of profit (loss) in 2015 and 2014 amounted to RUB 1,673 million and RUB 2,002 million, respectively.
MECHEL PAO
Notes to the consolidated financial statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 20152018
(All amounts are in millions of Russian rubles, unless stated otherwise)
The Group’s finance lease contracts contain a number of covenants and restrictions, which include, but are not limited to, compliance with payment schedule and certain cross-default provisions. As of December 31, 2015,2018 and 2017, the Group was not in compliance with all majorfuture minimum rentals payable includes Group’s restrictive covenants. There was also a breachoperating lease commitments related tonon-cancellable land leases to explore or use of restrictive covenants on overdue principal amountmineral deposits and other facilities of RUB 3,523 million as of December 31, 2015. As a result, the long-term finance lease liability of RUB 7,748 million was reclassified to short-term finance lease liabilities due to covenant violations as of December 31, 2015.
The total amount of commitments under the signed lease contracts as of December 31, 2015 is equal to RUB nil.
Contingencies
Legal claim contingency
The Group’s business activities expose it to a variety of lawsuits and claims which are monitored, assessed and contested on the ongoing basis. Where management believes that a lawsuit or another claim would result in the outflow of the economic benefits for the Group, a best estimate of such outflow is included in provisions in the consolidated financial statements (Note 23).
As of December 31, 2015, the management assesses the outflow as possible for the claims of Minmetals Engineering Co.Ltd and an individual to the Group. Minmetals Engineering Co.Ltd sued CMP for work performed of $46,000 thousand (RUB 3,383 million at exchange rate as of December 31, 2015), compensation of expenses due to change of technical task of $87,000 thousand (RUB 6,348 million at exchange rate as of December 31, 2015), compensation due to increased volume of work of RUB 299 million, payment for the temporary workshop of $2,200 thousand (RUB 160 million at exchange rate as of December 31, 2015) and compensation for lost property of $1,000 thousand (RUB 73 million at exchange rate as of December 31, 2015). CMP issued a claim to Minmetals Engineering Co.Ltd in the amount of $56,000 thousand (RUB 4,099 million at exchange rate as of December 31, 2015). The individual sued to the court in order to oblige PAO Mechel to execute the sale agreement for 1,999 shares of DAVEZE LIMITED and to recognize the rights of plaintiff for these shares. The amount of an outflow of resources embodying economic benefits for this claim cannot be measured reliably.
Guarantees
As of December 31, 2015, the Group guaranteed the fulfillment of obligations to third parties for the total amount of RUB 56 million. These guarantees are given by the Group under promissory notes, which were transferred by endorsement.
Environmental
In the course of the Group’s operations, the Group may be subject to environmental claims and legal proceedings. The quantification of environmental exposures requires an assessment of many factors, including changing laws and regulations, improvements in environmental technologies, the quality of information available related to specific sites, the assessment stage of each site investigation, preliminary findings and the length of time involved in remediation or settlement. Management does not believe that any pending environmental claims or proceedings will have a material adverse effect on its financial position and results of operations.
The Group estimated the total amount of capital investments to address environmental concerns at its various subsidiaries at RUB 644 million as of December 31, 2015. These amounts are not accrued in the consolidated financial statements until actual capital investments are made.
MECHEL PAO
Notes to the consolidated financial statements for the year ended December 31, 2015
(All amounts are in millions of Russian rubles, unless stated otherwise)
Possible liabilities, which were identified by management as those that can be subject to potential claims from environmental authorities are not accrued in the consolidated financial statements. The amount of such liabilities was not significant.
Taxation
The Group is subject to taxation to the largest extent in Russia, and secondarily in other jurisdictions. The Russian tax, currency and customs legislation is subject to varying interpretations, and changes, which can occur frequently. Management’s interpretation of such legislation as applied to the transactions and activity of the Group may be challenged by the relevant regional and federal authorities. Recent events within the Russian Federation suggest that tax authorities are taking more assertive position in its interpretation of the legislation and assessments and as a result, it is possible that transactions and activities that have not been challenged in the past may be challenged. As such significant additional taxes, penalties and interest may be assessed. Fiscal periods remain open to review by the authorities in respect of the taxes for three calendar years preceding the year of review. Under certain circumstances reviews may cover longer periods.
In Russia, generally tax declarations remain open and subject to inspection for a period of three years. The fact that a year has been reviewed does not close that year, or any tax declaration applicable to that year, from further review during the three-year period.
In other tax jurisdictions where the Group conducts operations or holds shares, taxes are generally charged on the income arising in that jurisdiction. In some jurisdictions agreements to avoid double taxation are signed between different jurisdictions; however, the risk of additional taxation exists, especially in respect of certain domiciles where some of the Group entities are located and which are considered to be tax havens.
The Russian transfer pricing legislation, which came into force on January 1 2012, allows the Russian tax authority to apply transfer pricing adjustments and impose additional profits tax liabilities in respect of all “controlled” transactions if the transaction price differs from the market level of prices. The list of “controlled” transactions includes transactions performed with related parties and certain types of cross-border transactions. For domestic transactions the transfer pricing rules apply only if the amount of all transaction with related party exceeds RUB 2,000 million in 2013 and RUB 1,000 million since 2014. In cases where the domestic transaction resulted in an accrual of additional tax liabilities for one party, another party could correspondingly adjust its profit tax liabilities according to the special notification issued by the authorized body in due course.
The current Russian transfer pricing rules have considerably increased the compliance burden for the taxpayers compared to the transfer pricing rules which were in effect before 2012 due to, inter alia, shifting the burden of proof from the Russian tax authorities to the taxpayers. These rules are applicable not only to the transactions taking place in 2012 but also to the prior transactions with related parties if related income and expenses were recognised in 2012. Special transfer pricing rules apply to transactions with securities and derivatives.
Due to the uncertainty and absence of current practice of application of the current Russian transfer pricing legislation the Russian tax authorities may challenge the level of prices applied by the Group under the “controlled” transactions and accrue additional tax liabilities unless the Group is able to demonstrate the use of market prices with respect to the “controlled” transactions, and that there has been proper reporting to the Russian tax authorities, supported by appropriate available transfer pricing documentation.
Management believes that it has paid or accrued all taxes that are applicable. Where uncertainty exists, the Group has accrued tax liabilities based on management’s best estimate of the probable outflow of resources
MECHEL PAO
Notes to the consolidated financial statements for the year ended December 31, 2015
(All amounts are in millions of Russian rubles, unless stated otherwise)
embodying economic benefits, which will be required to settle these liabilities. In accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Asser, the Group accrued RUB 480 million, RUB 62053,398 million and RUB 54850,834 million, of other tax claims that management believes are probable, as of December 31, 2015, 2014 and January 1, 2014, respectively. In addition, income tax accrual was made under IAS 12 Income Taxes (Note 21).
As of December 31, 2015, the Group does not believe that any other material tax matters exist relating to the Group, including current pending or future governmental claims and demands, which would require adjustment to the accompanying financial statements in order for those statements not to be materially misstated or misleading.
Possible liabilities, which were identified by management as those that can be subject to different interpretations of the tax law and regulations are not accrued in the consolidated financial statements. The amount of such liabilities was RUB nil, RUB 2,010 million and RUB 1,080 million as of December 31, 2015, 2014 and January 1, 2014, respectively.
Events after the reporting period |
The Group evaluated subsequent events for these consolidated financial statementsfrom December 31, 2018 through the date when the consolidated financial statements were issued May 13, 2016.
Option for acquisition of a stakeand concluded that no subsequent events have occurred that would require recognition or disclosure in the Elga coal complex
On April 1, 2016, the Group signed option agreements with Gazprombank providing the bank with the option to acquire a 49% stake in the Elga coal complex for a total consideration of RUB 34,300 million. According to these agreements, the Group is obliged to sell to Gazprombank upon its request and not later than June 30, 2016, a 49% stake in Elgaugol OOO, the owner of the subsoil license for the Elga coal deposit, a 49% stake in Elga-doroga OOO, the owner of the Ulak-Elga rail line which had been contributed to the registered capital of this newly established company in March 2016, a 49% stake in Mecheltrans Vostok OOO, the rail line’s transport operator (collectively, the “target companies”).
Proceeds from the sale of these stakes will be used for repayment of debt of SKCC assigned from Sberbank to Gazprombank (or their respective assignees) in the amount of RUB 31,500 million ($423,091 thousand or RUB 28,400 million at exchange rate as of April 12, 2016 and RUB 3,100 million), and remaining amount — for repayment to Sberbank and / or Sberbank Leasing.
The agreements also include joint coordination of management over the Elga coal complex. Gazprombank will have a put option to sell its stakes (in full or in part) in the Elga coal complex within three years following a five-year period or in case of a breach of conditions stipulated by such agreement. Put options are signed by Yakutugol and Mechel-Trans OOO (sellers of the stakes in target companies) and will be guaranteed by Mechel Mining OAO, SKCC and Mechel Coke. If the Group fails to perform under these put options Gazprombank will have the right to buy out (call option) the remaining stakes owned by the Group in the target companies and a 100% stake in Mechel Port Vanino. A 1.99% stake in each of the target companies will be pledged in favor of Gazprombank as a security for the call option.
As of the date hereof Gazprombank has not requested the execution of the sale-purchase agreement under the option agreements and the stakes of the target companies have not been transferred to the bank.
MECHEL PAO
Notes to the consolidated financial statements for the year ended December 31, 2015
(All amounts are in millions of Russian rubles, unless stated otherwise)statements.
Following the assignment of the Group’s debt from Sberbank to Gazprombank in April 2016, the Group signed settlement agreements with the latter to convert the $423,091 thousand debt into RUB 28,400 million debt and to extend the maturities of such loans till June 30, 2016.F-104
Restructuring agreements with Sberbank
The Group signed amendment agreements and amicable settlement agreements with Sberbank for the existing debts restructuring of CMP of RUB 27,430 million, Izhstal of RUB 564 million, BFP of RUB 650 million, Yakutugol of RUB 48 million, Korshunov Mining Plant (KMP) of RUB 35 million, Mechel Trading of $100,000 thousand (RUB 7,288 million at exchange rate as of December 31, 2015), and SKCC of $254,890 thousand (RUB 18,577 million at exchange rate as of December 31, 2015) during February-April 2016. Restructuring of CMP debt of RUB 6,761 million is agreed and subject to the court approval of the amicable settlement agreements. Amendment agreements and amicable settlement agreements grant a grace period until April 2017 and extend the final maturity until April 2020, waive all previous defaults (including but not limited to acceleration of repayments), provide new interest rates and partial capitalization of interest, as well as new levels of financial covenants. The grace period will be extended until January 2020 and the final maturity — until April 2022, if similar terms for the grace period and interest rate are reached with VTB and other conditions have been fulfilled. Upon restructuring, overdue interest in the amount of RUR 3,600 million are capitalized and fines and penalties in the amount of RUR 1,059 million are waived. The amendment agreements became effective upon signing; however, failure to comply with certain terms will lead to their termination.
In December 2015 and the beginning of 2016, the Group signed settlement agreements with Sberbank Leasing AO which waived previous defaults and restructured future payment schedules. The settlement agreements will become effective upon approval by the court which is ongoing.
Restructuring agreements with Gazprombank
In January 2016, part of Gazprombank debt, in particular $400,000 thousand (RUB 29,153 million at exchange rate as of December 31, 2015) and $200,000 thousand (RUB 14,576 million at exchange rate as of December 31, 2015) credit facilities for SKCC and $385,777 thousand (RUB 28,059 million at exchange rate as of December 31, 2015) and $300,000 thousand (RUB 21,856 million at exchange rate as of December 31, 2015) credit facilities for Yakutugol were converted into rubles. In March 2016, Yakutugol’s loan from Gazprombank in the amount of $103,100 thousand (RUB 7,515 million at exchange rate as of December 31, 2015) was also converted into rubles. Restructuring of these credit facilities became effective in January and March 2016 providing for an extension of the grace period until April 2020 and the final maturity until April 2022. Interest rate under restructured agreements is set at the level of the Central Bank of Russia rate plus 1.5% (subject to increase to 3.5% if certain conditions are not met). Waiving of fines and penalties in the amount of RUB 6,026 million is subject to fulfilment of certain conditions. In March 2016, the Elga railway and related infrastructure facilities were pledged to Gazprombank under the credit facilities at the value of RUB 81,772 million as of December 31, 2015.
In March 2016, the restructuring under overdraft facilities of CMP and Mechel Service has become effective.
Other
The Group signed restructuring agreements with Uralsib bank which granted extended repayments of the Group’s debt of RUB 3,280 million till December 30, 2019, new tranches of RUB 1,000 million, waived all previous defaults, new interest rates, the grace period for interest repayment till December 31, 2016.
F-122