Notes to the consolidated financial statements (30‐37)

FOR THE YEAR ENDED 31 DECEMBER 2013
(all amounts are presented in thousands of Russian Roubles, unless otherwise stated)

  1. Other financial gain and loss
  2. Income tax
  3. Earnings per share
  4. Balances and transactions with related parties
  5. Contingencies, commitments and operating risks
  6. Financial and capital risk management
  7. Fair value of financial instruments
  8. Subsequent events

30 Other financial gain and loss

The components of other financial (gain) and loss were:

Note

2013

2012

Changes in the fair value of foreign exchange non-deliverable forward contracts

534,845

(2,073,641)

Changes in the fair value of cross currency interest rate swap

164,783

(562,296)

Changes in the fair value of call options


(6)

Unwinding of discount on deferred payables

210,337

145,289

Unwinding of discount on land restoration obligation

23

34,743

24,442

Total other financial (gain)/loss, net

944,708

(2,466,212)

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31 Income tax

2013

2012

Income tax expense – current

6,979,660

7,401,162

Deferred income tax – origination and reversal of temporary differences

(708,493)

686,847

Prior periods adjustments recognised in the current period for income tax

307,482

(174,947)

Effect of assets transfer between subsidiaries with different tax rates


(183,932)

Reassessment of deferred tax assets/liabilities due to change in the tax rate

115,165

Income tax expense

6,693,814

7,729,130

During the year ended 31 December 2013 the Group offset VAT receivable against income tax payables of RR 39,420 thousand (2012: RR 218,025 thousand) and other taxes payables against income tax receivables of RR 14,408 thousand (2012: RR 11,650 thousand).

A reconciliation between income tax charge calculated at the statutory tax rate of 20% enacted in the Russian Federation, where the Company is incorporated, and income tax expense calculated at effective tax rate of the Group on profit before taxation is as follows:

2013

2012

Profit before taxation

18,949,459

40,298,280

Theoretical tax charge at statutory rate of 20% (2012: 20%)

(3,789,892)

(8,059,656)

Tax effect of items which are not deductible or assessable for taxation purposes:

– Non deductible expenses

(203,578)

(328,082)

– Foreign exchange (gain)/loss of the subsidiaries with tax reporting currency different from functional currency

(295,253)

128,124

– Effects of tax rates different to 20%

(1,608,719)

685,165

– Write-off of previously recognised tax loss carry forward

(69,062)

– Unrecognised tax loss carry forward for the year

(246,619)

(257,883)

– Reassessment of deferred tax assets/liabilities due to change in the tax rate

(115,165)

– Reassessment of deferred tax assets/liabilities

(70,688)

(255,677)

– Withholding tax refund on dividends paid in prior periods

12,644

69,969

– Effect from transfer of assets between subsidiaries with different income tax rates

183,932

Prior periods adjustments recognised in the current period for income tax

(307,482)

104,978

Income tax expense

(6,693,814)

(7,729,130)

Most of the Group companies located in the Russian Federation were subject to a tax rate of 20% on taxable profits during the year ended 31 December 2013 (2012: 20%). Several subsidiaries applied reduced income tax rates within a range from 15.5% to 19.3% according to regional tax law and agreements with regional authorities.

During the year ended 31 December 2013 as a result of proceedings with the tax authorities (Note 34) OJSC ‘NAK Azot’ recalculated income tax at a maximum rate of 20% for periods in which a reduced income tax rate of 18.3% was applied and charged RR 382,794 thousand of additional income tax expenses as prior period adjustments. The deferred tax liability was also reassessed at the respective tax rate.

For the subsidiaries located outside the Russian Federation tax rates on taxable profit range from 10% to 38.3%, including two major manufacturing entities Lifosa AB, located in Lithuania, and EuroChem Antwerpen NV, located in Belgium, which apply tax rates of 15% and 33.99% on taxable profits, respectively (2012: Lifosa AB and EuroChem Antwerpen NV were subject to a tax rate of 15% and 33.99% on taxable profit, respectively).

At 31 December 2013 the Group had RR 7,081,279 thousand (31 December 2012: RR 3,573,573 thousand) of accumulated tax losses carried forward. Out of these, RR 6,130,730 thousand were recognised as deferred tax assets (31 December 2012: RR 2,869,643 thousand) as the realisation of the related tax benefits is probable through future taxable profits. The Group did not recognise deferred tax assets of RR 950,549 thousand (31 December 2012: RR 703,930 thousand) because it is not probable that future taxable profit will be available against which the Group can utilise such benefits.

The Group did not recognise a deferred tax liability in respect of temporary differences associated with investments in subsidiaries of RR 61,778,747 thousand (31 December 2012: RR 68,290,561 thousand). The Group controls the timing of the reversal of these temporary differences and does not expect to reverse them in the foreseeable future. The Group recognised a deferred tax liability in respect of temporary differences related to the investments in associates of RR 34,141 thousand (2012: nil).

The movement in deferred tax (assets) and liabilities during 2013 and 2012 was as follows:

1 January 2013

Differences recognition and reversals

Write-off of previously recognised tax loss carry forward

Currency translation difference (Note 2)

Effect of change in the tax rate

31 December 2013

Tax effects of (deductible)/ taxable temporary differences:

Property, plant and equipment and Intangible assets

4,818,795

2,323,902

(85,880)

44,295

7,101,112

Accounts receivable

(263,485)

87,452

(7,739)

58

(183,714)

Accounts payable

(218,210)

(97,168)

(11,441)

(45)

(326,864)

Inventories

(261,525)

209,650

1,538

(1,324)

(51,661)

Other

192,044

(164,595)

(1,621)

72,226

98,054

Tax losses carried-forward

(3,573,573)

(3,399,844)

69,062

(176,879)

(45)

(7,081,279)

Unrecognised deferred tax assets

703,930

246,619

950,549

Net deferred tax liability

1,397,976

(793,984)

69,062

(282,022)

115,165

506,197

Recognised deferred tax assets

(4,898,621)

(807,405)

69,062

(332,629)

8

(5,969,585)

Recognised deferred tax liabilities

6,296,597

13,421

50,607

115,157

6,475,782

Net deferred tax liability

1,397,976

(793,984)

69,062

(282,022)

115,165

506,197

1 January
2012

Differences recognition and reversals

Business combinations

Currency translation difference (Note 2)

Transfer of assets between regions with different income tax rates

31 December 2012

Tax effects of (deductible)/taxable temporary differences:

Property, plant and equipment and Intangible assets

5,246,899

1,720,847

(1,859,275)

(105,744)

(183,932)

4,818,795

Accounts receivable

(151,708)

(131,697)

13,249

6,671

(263,485)

Accounts payable

(232,899)

26,723

(17,947)

5,913

(218,210)

Inventories

(470,407)

178,850

31,443

(1,411)

(261,525)

Other

(90,933)

335,747

(56,866)

4,096

192,044

Tax losses carried-forward

(1,871,768)

(1,701,506)

(299)

(3,573,573)

Unrecognised deferred tax assets

446,047

257,883

703,930

Net deferred tax liability

2,875,231

686,847

(1,889,396)

(90,774)

(183,932)

1,397,976

             

Recognised deferred tax assets

(1,806,374)

(234,596)

(2,796,054)

(61,597)

(4,898,621)

Recognised deferred tax liabilities

4,681,605

921,443

906,658

(29,177)

(183,932)

6,296,597

Net deferred tax liability

2,875,231

686,847

(1,889,396)

(90,774)

(183,932)

1,397,976

The amounts shown in the consolidated statement of financial position include the following:

31 December 2013

31 December 2012

Deferred tax assets expected to be recovered after more than 12 months

(4,871,040)

(4,285,009)

Deferred tax liabilities expected to be settled after more than 12 months

6,161,112

6,067,344

The total amount of the deferred tax charge is recognised in profit and loss except RR 16,429 thousand which is recognised in other comprehensive income (2012: total amount of the deferred tax charge was recognised in profit and loss).

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32 Earnings per share

Basic earnings per share are calculated by dividing the net profit attributable to equity holders of the Company by the weighted average number of ordinary shares in issue during the period, excluding treasury shares (Note 18). The Company has no dilutive potential ordinary shares, therefore, the diluted earnings per share equals the basic earnings per share.

2013

2012

Net profit for the period attributable to owners of the parent

12,261,945

32,575,818

Weighted average number of ordinary shares outstanding (expressed in thousands)

58,655

61,581

Basic and diluted earnings per share (expressed in RR per share)

209.05

528.99

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33 Balances and transactions with related parties

Parties are considered to be related if the parties are under common control or if one party has the ability to control the other party or exercise significant influence or joint control over the other party in making financial or operational decisions. In considering each possible related party relationship, attention is directed to the substance of the relationship, not merely the legal form. The relationships with those related parties with whom the Group entered into significant transactions or had significant balances outstanding are detailed below:

Financial statements caption

Nature of relationship

31 December 2013

31 December 2012

Statement of financial position caption

Non-current originated loans (Note 16)

Other related parties*

415,660

Trade receivables

Associates

70

Trade receivables

Other related parties

4,474

16,689

Less: impairment provision on trade receivables

Other related parties


(16,439)

Prepayments for treasury shares

Parent company


683,999

Property, plant and equipment:

– Advances given to construction companies and suppliers of property, plant and equipment

Other related parties


2,471

Prepayments, other receivables and other current assets:

– Interest receivable

Other related parties

6,310

– Other receivables

Other related parties

33,926

863

Capital contribution (Note 18)

Other related parties**

1,589,459

Bonds issued

Other related parties

81,823

60,745

Trade payables

Associates

20,780

Trade payables

Other related parties

75,643

2,840

Financial statements caption

Nature of relationship

31 December 2013

31 December 2012

Statement of profit or loss and other comprehensive income caption

Sales

Parent company

780

Sales

Associates

59

Sales

Other related parties

123,134

78,275

Cost of sales

Associates

(1,850)

Cost of sales

Other related parties

(2,513)

(818)

Distribution costs

Associates

(243,434)

Distribution costs

Other related parties

(222,286)

(24,285)

General and administrative expenses

Other related parties

(56,016)

Other operating income/ (expense), net

Associates

(5,473)

Interest income

Parent company

16,226

Interest income

Other related parties

5,806

11,902

Financial statements caption

Nature of relationship

Note

2013

2012

Statement of cash flows caption

(Increase)/decrease in trade receivables

Other related parties

(4,224)

829

(Increase)/decrease in other receivables

Other related parties

(39,373)

61,385

Increase in trade payables

Associates

20,780

Increase in trade payables

Other related parties

72,702

278

Capital expenditure on property, plant and equipment and other intangible assets

Other related parties

(18,047)

(19,840)

Acquisition of available-for-sale investment

Other related parties

12


(59,607)

Proceeds from sale of available-for-sale investments

Parent company

12

101,489

20,415,641

Originated loans

Parent company

16

(659,482)

Originated loans

Other related parties*

16

(405,602)

(1,927,340)

Repayment of originated loans

Parent company

16

2,005,728

Repayment of originated loans

Other related parties*

16


1,920,005

Interest received

Parent company

13,848

Interest received

Other related parties


12,247

Repayment of bonds

Other related parties


(22,018)

Purchase of treasury shares

Parent company

18

(13,359,153)

(9,367,618)

Prepayments for treasury shares

Parent company

18


(683,999)

Proceeds from sale of treasury shares

Parent company

18

9,885,186

Capital contribution

Other related parties**

18

1,589,459

  • * Related parties represented by the companies under common control with the Group.
  • ** Related party represented by the companies ultimately controlled by the shareholder.

In the first quarter of 2012 the Group exchanged US$ 246,920 thousand for Euro 185,000 thousand with a related party at the Euro/US$ exchange rate prevailing in the market at the date of the transaction.

The total key management personnel compensation included in the profit and loss was RR 352,721 thousand and RR 333,361 thousand for the year ended 31 December 2013 and 31 December 2012, respectively. This compensation is paid to seven individuals (2012: six individuals) who are members of the Management Board, for their services in full time positions. Compensation is made up of an annual fixed remuneration plus a performance bonus accrual.

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34 Contingencies, commitments and operating risks

i Capital expenditure commitments

As at 31 December 2013 the Group had contractual commitments for capital expenditures of RR 24,200,405 thousand (31 December 2012:RR 14,949,923 thousand), including amounts denominated in Euro and US$ (RR 7,871,637 thousand and RR 584,619 thousand, respectively). Management estimates that, out of these, approximately RR 19.0 billion will represent cash outflows in 2014.

RR 3,982,268 thousand and RR 9,723,369 thousand out of the total amount relate to the development of potassium salt deposits and the construction of mining facilities at the Gremyachinskoe and Verkhnekamskoe potash licence areas, respectively (31 December 2012: RR 4,737,712 thousand and RR 5,014,667 thousand, respectively).

ii Tax legislation

Russian tax, currency and customs legislation is subject to varying interpretations. The Russian tax authorities may be taking a more assertive position in their interpretation of the legislation and assessments than the Management of the Group, and it is possible that transactions and activities that have not been challenged in the past may be challenged. Fiscal periods remain open to review by the authorities in respect of taxes for three calendar years preceding the year of review with possible extension of this period under certain circumstances.

Given the scale and international nature of the Group’s business, intra-group transfer pricing is an inherent tax risk as it is for other international businesses.

The amended Russian transfer pricing legislation (which has been effective since 1 January 2012) is, to a certain extent, better aligned with the international transfer pricing principles developed by the Organisation for Economic Cooperation and Development. Management has prepared transfer pricing documentation to comply with the new legislation and believes that the pricing policies and implemented procedures are sufficient to be in compliance with the legislation.

Changes in tax laws or their application with respect to matters such as transfer pricing in the countries where the Group has subsidiaries could significantly increase the Group’s effective tax rate.

As at 31 December 2013 management believes that its interpretation of the relevant legislation is generally appropriate and the Group’s tax, currency and customs positions will be sustained. Where management believes that it is probable that certain tax positions taken by the Group may not be sustained if challenged by the tax authorities, the Group recognises provisions for related taxes, interest and penalties. There were no such provisions recorded by the Group at 31 December 2013 and 31 December 2012.

The Group’s subsidiary OJSC “NAK Azot” was engaged in litigation with the tax authorities relating to the application of a reduced property tax rate. Starting from 1 January 2011 OJSC “NAK Azot” took advantage of the reduced regional property tax and profit tax rates specified in the Tula Region’s regional law. Throughout 2012, the local tax authorities performed tax audits of property tax returns and challenged the company’s application of the reduced property tax rate claiming additional property tax, penalties and late payment interest of RR 205 million. The results of these proceedings additionally influenced the reduced income tax rate and the Group would have had obligations to pay additional income tax and penalties. OJSC “NAK Azot” challenged this in court and submitted an appeal to the Supreme Court; however it lost its appeal. As a result of the proceedings, OJSC “NAK Azot” used other property tax relief under the Tula Region’s regional law which compensated property tax claims of RR 205 million from local tax authorities. Also OJSC “NAK Azot” recalculated income tax at a maximum rate of 20% for periods 2011, 2012 and year ended 31 December 2013 (Note 31).

iii Insurance policies

The Group obtains risk insurance cover as mandated by statutory requirements. The Group also holds voluntary insurance policies covering directors’ and officers’ liability (D&O insurance), general liability, physical property and business interruption insurance at nitrogen and phosphate production plants, as well as insurance policies related to trade operations, including export shipments and credit insurance of some trade debtors relating to the distribution of fertilizers.

The Group also carries voluntary life and accident insurance for employees.

Additionally, as part of the potash project the Group has voluntarily insured construction risks for the cage and skip mine shafts at the Gremyachinskoe deposit. The insurance covers the risks of destruction and damage related to the part of two shafts put into operation with the net book value of RR 494,743 thousand for the period from June 2013 to June 2014.
The Group obtains risk insurance cover as mandated by statutory requirements. The Group also holds voluntary insurance policies covering directors’ and officers’ liability (D&O insurance), general liability, physical property and business interruption insurance at nitrogen and phosphate production plants, as well as insurance policies related to trade operations, including export shipments and credit insurance of some trade debtors relating to the distribution of fertilizers.

The Group also carries voluntary life and accident insurance for employees.

Additionally, as part of the potash project the Group has voluntarily insured construction risks for the cage and skip mine shafts at the Gremyachinskoe deposit. The insurance covers the risks of destruction and damage related to the part of two shafts put into operation with the net book value of RR 494,743 thousand for the period from June 2013 to June 2014.

iv Environmental matters

Environmental regulation in the Russian Federation is evolving and the enforcement posture of government authorities is continually being reconsidered. The Group periodically evaluates its obligations under environmental regulations and an immediate response is formulated as required. Potential liabilities, which might arise as a result of changes in existing regulations, civil litigation or legislation, cannot be estimated but could be material. In the current enforcement climate under existing legislation, management believes that there are no significant liabilities for environmental damage.

v Legal proceedings

During the reporting period, the Group was involved in a number of court proceedings (both as a plaintiff and a defendant) arising in the ordinary course of business. In the opinion of management, there are no current legal proceedings or other claims outstanding which could have a material effect on the results of operations or the financial position of the Group.

In October 2012 the Group filed a claim against SHAFT SINKERS (PTY) LTD and ROSSAL 126 (PTY) LIMITED (formerly known as SHAFT SINKERS (PTY) LTD.), (“Shaft Sinkers”), the contractor involved in the construction of the mining shafts at the Gremyachinskoe potash deposit, seeking US$ 800 million compensation for the direct costs and substantial lost profits arising from the delay in commencing potash production, due to the inability of that construction company to fulfil its contractual obligations. Based upon the damages report provided by an independent expert the amount of the claim was increased up to the US$ 1.06 billion which includes net wasted costs to the amount of US$ 248 million and lost profits in the amount of US$ 812 million. In December 2012 Shaft Sinkers filed a counterclaim against the Group, seeking US$ 44 million without Russian VAT of 18% or US$ 52 million with VAT under the construction contract. In its counterclaim Shaft Sinkers admits that it will give credit, in respect of any sums awarded to it, for a deduction of US$ 30.6 million in respect of advance payments made by the Group with the result that the maximum net claim from Shaft Sinkers is US$ 14 million. Management believes that this counterclaim is without merit. The above disputes are subject to arbitration as specified in the contract.

In March 2013 the Group filed a claim against International Mineral Resources B.V. (“IMR”) which, the Group believes, held a controlling interest in Shaft Sinkers, claiming IMR is responsible for its subsidiary’s actions. In July 2013, the Dutch Court granted EuroChem definitive leave for levying the requested prejudgment attachments against IMR’s Dutch assets, while fixing the amount for which the leave is granted, including interest and cost at Euro 886 million. The court held an in-depth hearing on 21 January 2014 where it considered the arguments and witnesses of both sides. Following that hearing, the court rejected IMR’s request to suspend the case and stated that IMR would not be permitted to submit any additional evidence. The court said it will issue the judgment on 16 April 2014. The Group expects that this will be final.

In 2013 the Group was involved in legal proceedings against “Reverta AS”. In March 2013 as part of the proceeding, the court imposed injunctive relief restricting the ability of LLC “Severneft-Urengoy”, a subsidiary of the Group, to dispose of certain property. The Group contested the restriction and in June 2013 the injunction was dismissed. The case had no bearing on the Group’s ongoing activity.

vi Operating environment of the Group

The Group operates in the fertilizers industry primarily in the Russian Federation and European countries. The highly competitive nature of the market makes prices of the key Group products relatively volatile.

Possible deteriorating economic conditions may have an impact on management’s cash flow forecasts and assessment of the impairment of financial and non-financial assets.

Debtors of the Group may also become adversely affected by the financial and economic environment, which could in turn impact their ability to repay the amounts owed or fulfil the obligations undertaken.

Management is unable to predict all developments which could have an impact on the industry and the wider economy and consequently what effect, if any, they could have on the future financial position of the Group.

Management believes all necessary measures are being taken to support the sustainability and growth of the Group’s business in the current circumstances.

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35 Financial and capital risk management

35.1 Financial risk management
The Group’s activities expose it to a variety of financial risks: market risk (including foreign currency risk, interest rate risk and price risk), credit risk and liquidity risk. The overall risk management program seeks to minimise potential adverse effects on the financial performance of the Group.

(a) Market risk
(i) Foreign currency risk

The Group’s revenues, expenses, capital expenditure, investments and borrowings are denominated in foreign currencies as well as in Russian Roubles. The Group is exposed to foreign exchange risk to the extent that its future cash inflows and outflows over a certain period of time are denominated in different currencies.

The objective of the Group’s foreign exchange risk management is to minimise the volatility of the Group’s cash flows arising from fluctuations in foreign exchange rates. Management focuses on assessing the Group’s future cash flows in foreign currencies and managing the gaps arising between inflows and outflows.

Translation gains and losses arising from the revaluation of its monetary assets and liabilities are therefore not viewed as an indicator of the total impact of foreign exchange fluctuations on its future cash flows since such gains or losses do not capture the impact on cash flows of foreign exchange-denominated revenues, costs, future capital expenditure, investment and financing activities.

The table below summarises the Group’s financial assets and liabilities which are subject to foreign currency risk at the reporting date:

31 December 2013

US$

Euro

Other foreign currencies

ASSETS

Non-current financial assets:

Restricted cash

23,489

2,411

6,940

Originated loans

415,660

RR/US$ non-deliverable forwards

1,063,749

Total non-current financial assets

1,502,898

2,411

6,940

 

Current financial assets:

Trade receivables

3,925,100

189,068

2,252

Interest receivable

6,312

Other receivables

28,873

11,167

Originated loans

98,188

RR/US$ non-deliverable forward contracts

326,983

Euro/US$ deliverable forwards

4,560

Fixed-term deposits

92,506

7,650

Cash and cash equivalents

6,669,430

443,404

40,494

Total current financial assets

11,151,952

651,289

42,746

Total financial assets

12,654,850

653,700

49,686

 

LIABILITIES

Non-current liabilities:

Bank borrowings

48,099,965

1,372,876

Bonds issued

24,546,900

RR/US$ cross currency swap (gross amount)

5,206,682

Deferred payable related to mineral rights acquisition

470,898

Total non-current financial liabilities

78,324,445

1,372,876


 

Current liabilities:

Bank borrowings

5,844,522

161,515

Trade payables

646,184

2,630,921

40,951

Interest payable

142,853

12,026

Deferred payable related to mineral rights acquisition

155,130

Total current financial liabilities

6,788,689

2,804,462

40,951

Total financial liabilities

85,113,134

4,177,338

40,951

 

ASSETS

Non-current financial assets:

Restricted cash

19,563

1,642

8,638

RR/US$ non-deliverable forwards

1,925,577

Total non-current financial assets

1,945,140

1,642

8,638

 

Current financial assets:

Trade receivables

3,006,975

125,725

332

Interest receivable

2,340

Other receivables

67,741

Euro/US$ deliverable forwards

63

Restricted cash

382,758

Fixed-term deposits

2,277,953

32,073

Cash and cash equivalents

3,669,041

1,729,736

34,026

Total current financial assets

9,406,871

1,887,534

34,358

Total financial assets

11,352,011

1,889,176

42,996

 

LIABILITIES

Non-current liabilities:

Bank borrowings

39,318,403

1,372,618

Bonds issued

22,779,525

RR/US$ cross currency swap (gross amount)

4,831,801

Deferred payable related to mineral rights acquisition

557,639

Total non-current financial liabilities

67,487,368

1,372,618


 

Current liabilities:

Bank borrowings

6,350,925

675,671

Trade payables

893,805

451,090

40,951

Interest payable

109,325

7,473

Deferred payable related to mineral rights acquisition

144,387

Total current financial liabilities

7,498,442

1,134,234

40,951

Total financial liabilities

74,985,810

2,506,852

40,951

At 31 December 2013, if the RR exchange rate against the US$ had been higher/lower by 1%, all other things being equal, after tax profit for the year would have been RR 468,627 thousand (2012: RR 509,070 thousand) lower/higher, purely as a result of foreign exchange gains/losses on translation of US$-denominated assets and liabilities and with no regard to the impact of this appreciation/depreciation on sales.

The Group is disclosing the impact of such a 1% shift in the manner set out above to ease the calculation for the users of these consolidated financial statements of the impact on the after tax profit resulting from subsequent future exchange rate changes.

During 2012 – 2013 the Group entered into foreign exchange non-deliverable forward contracts to partially offset the volatility of its cash flows from any potential appreciation of the RR against the US$ (Note 21).

The Group’s sales for the years ended 31 December 2013 and 31 December 2012 are presented in the table below:

US$

Euro

RR

Other foreign currencies

Total

2013

93,689,634

37,265,468

34,172,794

11,808,703

176,936,599

53%

21%

19%

7%

100%

2012

91,090,291

29,225,652

36,204,486

9,957,300

166,477,729

55%

17%

22%

6%

100%

The Group believes that it has significant positive foreign exchange exposure towards the RR/US$ exchange rate given that the expected US$ denominated revenues exceed the planned outflows in US$, mostly related to servicing of debt and capital expenditure.

(ii) Interest rate risk

The Group’s income and operating cash flows are substantially independent of changes in market interest rates. The Group’s principal interest rate risk arises from long-term and short-term borrowings.

The Group is exposed to risk from floating interest rates due to the fact that it has RR 53,944,487 thousand of US$ denominated loans outstanding at 31 December 2013 (31 December 2012: RR 45,669,328 thousand) bearing floating interest rates varying from 1-month Libor +2.5% to 1-month Libor +3.2%, 3-month Libor +2.3% and 6-month Libor +2.5% (2012: from 1-month Libor +1.8% to 1-month Libor +3.5% and 6-month Libor +2.5%) and RR 1,534,391 thousand of Euro denominated loans outstanding at 31 December 2013 (31 December 2012: RR 2,048,289 thousand) bearing a floating interest rate of 6-month Euribor +1.95% (31 December 2012: 1-month Euribor +1.75% and 6-month Euribor +1.95%). The Group’s profit after tax for the year ended 31 December 2013 would have been RR 44,244 thousand, or 0.36% lower/higher (2012: RR 45,695 thousand, or 0.14% lower/higher) if the US$ Libor interest rate was 10 bps higher/lower than its actual level during the year. The Group’s profit after tax for the year ended 31 December 2013 would have been RR 1,195 thousand, or 0.01% lower/higher (2012: RR 2,187 thousand or 0.01% lower/higher) if the Euribor interest rate was 10 bps higher/lower than its actual level during the year. During 2013 and 2012 the Group did not hedge this exposure using financial instruments.

The Group does not have a formal policy of determining how much exposure the Group should have to fixed or variable rates for as long as the impact of changes in interest rates on the Group’s cash flows remains immaterial. However, the Group performs a periodic analysis of the current interest rate environment and depending on this analysis at the time of raising new debt management makes decisions on whether obtaining finance on a fixed-rate or a variable-rate basis would be more beneficial to the Group over the expected period until maturity.

(iii) Financial investments risk

The Group can be exposed to equity securities price risk because of investments that can be held by the Group. As at 31 December 2013 the Group was not exposed to equity securities price risk. At 31 December 2012 the Group held 2,005,434 shares, or 1.048% of the issued share capital of K+S Group with a fair value of RR 2,823,653 thousand (Note 12) that were classified on the consolidated statement of financial position as available-for-sale. The fair value of the shares was determined based on the closing price of Euro 35.00 as at the reporting date in the Xetra trading system. The Group’s other comprehensive income/loss for 2012 would have been RR 80,676 thousand if the share price were one Euro higher/lower than its actual level as at the reporting date. During 2012 and 2013 the Group did not hedge this exposure using financial instruments.

In 2012 and 2013 the Group was principally exposed to market price risks in relation to the investment in the shares of K+S Group. Management reviewed reports on the performance of K+S Group on a quarterly basis and provided recommendations to the Board of Directors on the advisability of further divestments. In 2013 the Group sold all available-for-sale investments which were comprised solely of the shares of K+S Group (Note 12).

The Group does not enter into any transactions with financial instruments whose value is exposed to the value of any commodities traded on a public market.

(b) Credit risk

Credit risk arises from the possibility that counterparties to transactions may default on their obligations, causing financial losses for the Group. Financial assets, which potentially subject Group entities to credit risk, consist principally of trade receivables, cash and bank deposits. The objective of managing credit risk is to prevent losses of liquid funds deposited with or invested in financial institutions or the loss in value of receivables.

The maximum exposure to credit risk resulting from financial assets is equal to the carrying amount of the Group’s financial assets, which at 31 December 2013 amounted to RR 31,737,104 thousand (31 December 2012: RR 30,661,344 thousand). The Group has no significant concentrations of credit risk.

Cash and cash equivalents and fixed-term deposits. Cash and short-term deposits are mainly placed in major multinational and Russian banks with independent credit ratings. No bank balances and term deposits are past due or impaired. See the analysis by credit quality of bank balances, term and fixed-term deposits in Note 17.

Trade receivables. Trade receivables are subject to a policy of active credit risk management which focuses on an assessment of ongoing credit evaluation and account monitoring procedures. The objective of the management of trade receivables is to sustain the growth and profitability of the Group by optimising asset utilisation whilst maintaining risk at an acceptable level. The Group’s trade receivables risk increased significantly upon the acquisition of EuroChem Agro.
The Group holds voluntary credit insurance policies of some trade debtors relating to the distribution of fertilizers.

Trade receivables are to a large extent secured against a default risk by means of appropriate insurance coverage. Receivables management is geared towards collecting all outstanding accounts punctually and in full and to avoid the loss of receivables.

The monitoring and controlling of credit risk is performed by the corporate treasury function of the Group. The credit policy requires the performance of credit evaluations and ratings of customers. The credit quality of each new customer is analysed before the Group provides it with the standard terms of delivery and payment. The Group gives preference to customers with an independent credit rating. New customers without an independent credit rating are evaluated on a sample basis by an appointed rating agency or the score and credit limits for new customers are set by the appointed insurance company. The credit quality of other customers is assessed taking into account their financial position, past experience and other factors.
Customers that do not meet the credit quality requirements are supplied on a prepayment basis only.

Although the collection of receivables could be influenced by economic factors, management believes that there is no significant risk of loss to the Group beyond the provision already recorded (Note 15).

The major part of trade receivables that are neither past due nor impaired relates to wholesale distributors and steel producers for which the credit exposures and related ratings are presented below:

Group of customers

Rating agency

Credit rating/other

31 December 2013

31 December 2012

Wholesale customers

Credit Insurance

5,122,073

5,060,468

Wholesale customers

Letter of credit

2,331,862

717,991

Wholesale customers

Bank guarantee

582,551

709,964

Wholesale customers

2013: BB+

and steel producers

Standard & Poor’s

2012: BB+ to BBB

899,968

935,487

Wholesale customers

Credit Reform*

Good

98,512

678,577

Dun & Bradstreet

2013: Minimum risk of failure

Wholesale customers

Credibility Corp.*

2012: Strong

448,711

506,841

Dun & Bradstreet

2013:Low than average risk

Wholesale customers

Credibility Corp.*

2012: Good

448,793

31,044

Dun & Bradstreet

Wholesale customers

Credibility Corp.*

Average risk of failure

205,620

Wholesale customers

LINCE – cerved group

B 1.1-B 1.2

8,500

Wholesale customers

ICAP

5 stars

12,523

Wholesale customers

CreditInfo

A-very good

41,926

Wholesale customers

AK&M

A

43,705

Total

10,244,744

8,640,372

  • * Independent credit agencies used by the Group for evaluation of customers’ credit quality

The rest of trade receivables is analysed by management who believes that the balance of the receivables is of good quality due to strong business relationships with these customers. The credit risk of every individual customer is monitored.

(c) Liquidity risk

Liquidity risk results from the Group’s potential inability to meet its financial liabilities, such as settlements of financial debt and payments to suppliers. The Group’s approach to liquidity risk management is to maintain sufficient readily available reserves in order to meet its liquidity requirements at any point in time.

In order to take advantage of financing opportunities in the international capital markets the Group maintains credit ratings from Fitch and Standard & Poor’s. As at 31 December 2013 these institutions had affirmed the Group’s rating at BB with stable outlook (31 December 2012: BB with stable outlook).

Cash flow forecasting is performed throughout the Group. Group finance monitors rolling forecasts of the Group’s liquidity requirements to ensure it has sufficient cash to meet operational needs while maintaining sufficient headroom on its undrawn committed borrowing facilities (Note 19) at all times so that the Group does not breach borrowing limits or covenants on any of its borrowing facilities. Such forecasting takes into consideration the Group’s debt financing plans, covenant compliance and compliance with internal balance sheet ratio targets.

The table below analyses the Group’s financial liabilities into the relevant maturity groupings based on the time remaining from the reporting date to the contractual maturity date.

Less than 1 year

Between 1 and 2 years

Between 2 and 5 years

More than 5 years

Total

As at 31 December 2013

Trade payables

8,539,042

8,539,042

Gross-settled swap:**

– inflows

(411,370)

(5,411,370)

(5,822,740)

– outflows

202,685

5,409,366

5,612,051

Derivative financial liabilities

12,963

12,963

Bank borrowings*

11,739,153

22,627,936

47,940,098

1,548,574

83,855,761

Bonds issued*

2,009,743

11,904,529

27,062,957

40,977,229

Other non-current liabilities

1,787,094

1,716,694

1,788,161

681,084

5,973,033

 

As at 31 December 2012

Trade payables

8,386,544

8,386,544

Gross-settled swap:**

– inflows

(205,685)

(411,370)

(5,411,370)

(6,028,425)

– outflows

94,046

188,091

5,019,892

5,302,029

Bank borrowings*

9,940,551

19,819,970

43,705,432

2,024,864

75,490,817

Bonds issued*

2,367,458

2,022,651

36,915,177

41,305,286

Other non-current liabilities

1,582,857

1,605,907

3,098,959

684,378

6,972,101

  • * The table above shows undiscounted cash outflows for financial liabilities (including interest together with the borrowings) based on conditions existing as at 31 December 2013
    and 31 December 2012, respectively.
  • ** Payments in respect of the gross settled swap will be accompanied by related cash inflows.

The Group controls the minimum required level of cash balances available for short-term payments in accordance with the financial policy of the Group adopted in alignment with economic realities on 29 April 2009 by the Board of Directors. Such cash balances are represented by current cash balances on bank accounts, bank deposits, short-term investments, cash and other financial instruments, which may be classified as cash equivalents in accordance with IFRS.

The Group assesses liquidity on a weekly basis using a twelve-month cash flow rolling forecast.

35.2 Capital risk management

The Group’s objectives when managing capital are to safeguard its ability to continue as a going concern, to provide returns for shareholders and benefits for other stakeholders, to have available the necessary financial resources for investing activities and to maintain an optimal capital structure in order to reduce the cost of capital. The Group considers total capital under management to be equity as shown in the IFRS consolidated statement of financial position. This is considered more appropriate than alternatives, such as the value of equity shown in the Company’s statutory financial (accounting) reports.

The Group monitors capital on the basis of the gearing ratio. Additionally, the Group monitors the adequacy of its debt levels using the net debt to EBITDA ratio.

Gearing ratio

The gearing ratio is determined as net debt to net debt plus shareholders’ equity.

The gearing ratio as at 31 December 2013 and 31 December 2012 is shown in the table below:

31 December 2013

31 December 2012

Total debt

108,405,909

98,964,249

Less: cash and cash equivalents and fixed-terms deposits

18,994,151

19,521,185

Net debt

89,411,758

79,443,064

Equity attributable to the holders of the Company

121,643,650

106,608,934

Net debt and shareholders’ equity

211,055,408

186,051,998

Gearing ratio, %

42%

43%

Net Debt/EBITDA
The Group has established a policy that the ratio of the Group’s net debt to its 12 months’ rolling EBITDA should not exceed two and a half times in normal market conditions. For this purpose net debt is determined as the sum of short-term borrowings, long-term borrowings and bonds balance outstanding, less cash and cash equivalents.

The ratio of net debt to EBITDA as at 31 December 2013 and 31 December 2012 is shown in the table below:

Note

2013

2012

EBITDA

7

42,960,681

49,167,533

EBITDA generated by fertilizer assets in Antwerp from 1 January 2012 to the date of acquisition


677,091

EBITDA of EuroChem Agro from 1 January 2012 to the date of acquisition


1,934,777

Share of net profit from OJSC Murmansk Commercial Seaport from 1 January 2013to the date of acquisition

189,653

EBITDA including EBITDA of Eurochem Antwerpen NV, EuroChem Agroand share of net profit in associates before acquisition

43,150,334

51,779,401

Net debt

89,411,758

79,443,064

Net debt/EBITDA

2.07

1.53

For the purpose of this calculation EBITDA includes EBITDA of acquired subsidiaries and share of net profit in acquired associates for the period from 1 January to the date of acquisition.

Since EBITDA is not a standard IFRS measure, EuroChem Group’s definition of EBITDA may differ from that of other companies.

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36 Fair value of financial instruments

Fair value is the amount at which a financial instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation, and is best evidenced by an active quoted market price.

The estimated fair values of financial instruments have been determined by the Group using available market information, where it exists, and appropriate valuation methodologies. However, judgement is necessarily required to interpret market data to determine the estimated fair value. Management has used all available market information in estimating the fair value of financial instruments.

Financial instruments carried at fair value. Available-for-sale investments are carried on the consolidated statement of financial position at their fair value.

Fair values of available-for-sale investments were determined based on quoted market prices and were included in level 1. Fair values of derivatives financial assets and liabilities were determined based on derived quoted market prices and were included in level 2.

Cash and cash equivalents are carried at amortised cost which approximates their current fair value.

Financial assets carried at amortised cost. The fair value of floating rate instruments is normally their carrying amount. The estimated fair value of fixed interest rate instruments is based on estimated future cash flows expected to be received discounted at current interest rates for new instruments with similar credit risk and remaining maturity. The discount rates used depend on the credit risk of the counterparty. The carrying amounts of trade receivables and originated loans approximate their fair values. Their fair values are within level 2 of the fair value hierarchy.

Liabilities carried at amortised cost. The fair value is based on quoted market prices, if available. The estimated fair values of fixed interest rate instruments with a stated maturity, for which quoted market prices were not available, were estimated based on expected cash flows discounted at current interest rates for new instruments with similar credit risks and remaining maturities. The fair value of liabilities repayable on demand or after a notice period (“demandable liabilities”) is estimated as the amount payable on demand, discounted from the first date that the amount could be required to be paid. The fair value of borrowings and issued bonds at 31 December 2013 and 31 December 2012 are disclosed in Notes 19 and 20. The fair value of borrowings and issued bonds were included in level 2 and 1, respectively.

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37 Subsequent events

The Group signed a joint agreement with H.K. Migao Industry Limited in November 2013 to set up a company which will own the plant manufacturing potassium nitrate and fertilizers in China. This company, which is in the process of legal incorporation, will be named “EuroChem – Migao Limited” and located in Hong Kong.

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