Annual report 2010 In this Annual Report unless the context requires otherwise, references to “we,” “our,” “us” and the “Group”, the “Company”, or “UralChem” are to UralChem Holding P.L.C. and its subsidiaries, taken together. For official names of our significant subsidiaries and the respective short names as used in this Annual Report see Annex.
Except when otherwise specified, all information and data contained in this Annual Report are as of December 31, 2010...... As substantially all of our operations are located in the Russian Federation, references to “export (s)” are to the sale and delivery of goods produced in the Russian Federation to customers located outside of the Russian Federation.
2 2010 in figures We produced > 4.8 million tonnes of mineral fertilizers and chemicals, that is, 10.3% more than in 2009 ...... We increased sales +7.1% of mineral fertilizers
...... We delivered 2.9 million tonnes of fertilizers to 53 countries, 937.6 thous. t of fertilizers to 70 regions of the Russian Federation
3 Table of content ...... Letter from the Chairman of UralChem Holding 2. Corporate profile ...... 36 3. Corporate Governance...... 60 Board of Directors...... 7 1. Industry overview ...... 8 Corporate history...... 40 Corporate Governance Structure...... 63 Corporate Calendar...... 42 General meeting of shareholders...... 64 Long Term Growth Factors ...... 10 Official data...... 44 Board of Directors, commitees, external The Mineral Fertilizers Global Industry Oveview...... 11 Key Assets...... 47 (independent) and internal auditor...... 65 The Russian Mineral Fertilizers Market...... 24 Product Range overview...... 54 Senior Management...... 75 International Business of UralChem...... 58 Risks...... 79
4 ...... 4. Management Report...... 80 5. Consolidated financial Annex ...... 178 statements for the year Overview of 2010 perfomance...... 84 Significant subsidiaries and significant Increase Drivers and SWOT analysis...... 86 ended 31 December 2010 ...... 118 investments (full official names, names as used Production complex...... 89 in the Annual Report, Sales...... 93 Statement of management’s responsibilities registered adresses) ...... 179 Financial performance...... 102 for the preparation and approval Logistics...... 104 of the consolidated financial statements Strategic Development...... 107 for the year ended 31 December 2010...... 120 Human resource Management...... 111 Independent auditors’ report ...... 121 Corporate Liability...... 114 Consolidated financial statements Directors’ responsibility Statement...... 117 for the year ended 31 December 2010: Consolidated income statement...... 122 Consolidated statement of comprehensive income.....123 Consolidated statement of financial position...... 124 Consolidated statement of cash flows...... 125 Consolidated statement of changes in equity...... 126 Notes to the consolidated financial statements...... 127
5 UralChem financial ...... Adjusted EBITDA** thous. highlights 2010* $ 309 163
* Consolidated financial statements, 2010 ** “Adjusted EBITDA” represents EBITDA for the period before net gain/loss from operations with derivatives (no such operations in 2010), impairment of non-current assets, share of profit/loss of associates, foreign exchange gain/ Revenue $1 389 119 thous. loss from financing activities and other financial expenses. Adjusted EBITDA equals operating profit before depreciation and amortization and net gain/loss from operations with derivatives. Operating profit$ 205 231 thous.
Net profit $ 29 566 thous.
6 Dmitry Mazepin Chairman of UralChem Holding Board of Directors:
In 2010, the mineral fertilizers industry could be characterized by Our initial public offering was planned for April 2010, but at that the apparent recovery in world demand. As for selected products, precise moment Greek economy almost failed, leading to a crash we even observed significant growth in comparison to pre-crisis on the world financial markets. levels. Investors were not ready to invest without guaranteed discount This had a positive influence on mineral fertilizer production covering the risks. volumes as well as on sales. Stipulated terms were not acceptable for the Company as we Demand for fertilizers has been driven by complicated weather considered discounts to be unequal. We were subsequently proved conditions in recent years, population increase and a shortage of right by the Company’s financial and production results. land suitable for agricultural operations. We believe that the same factors and drivers as in the second part The favourable market situation helped UralChem to achieve a of 2010 will determine the mineral fertilizers market in 2011: that level of US$309 million in EBITDA. is increase in prices and demand growth. UralChem’s total production was .4.86 mln. t., 10% more than in We will increase the Company’s production volumes year by year the previous year. to achieve production levels of up to 5.6 mln tonnes by 2015. Production of ammonia increased by 24%. Having analyzed our consumers’ demand in previous years, we These impressive results were realised due to a balanced range of plan to increase manufacture of products with an additional profit commodities and premium products, access to a unique resource margin. base and developed production and logistics infrastructures, and UralChem will ccontinue to optimize its logistics chains and a considerable share in Russian and international distribution in construct our own port capacities. more than 50 countries of the world. Projects aimed at productivity increase of the present capacities Azot achieved a record 1 mln tonnes of prilled ammonium nitrate and launching new capacities are scheduled for the UralChem production volume in 2010. production facilities. It took less than a year to produce another 1 mln tons of ammo- nium nitrate at KCCW Mineral Fertilizer Plant. However, we encountered a number of difficulties. We were forced to postpone the IPO. Dmitry Mazepin
7 1. Industry overview Page 10 Page 11 Page 24 Long Term Growth Factors Mineral Fertilizer Global Industry The Russian Mineral Fertilizers Overview Segment
Increased population and improved quality of life A growing demand for mineral fertilizers, develop- Access to a unique resource base and a developed result in a higher food demand, increasing demand ing along with agriculture and related segments, logistics infrastructure allow Russian players to take for mineral fertilizers provides 3% long-term average annual growth. leading positions in the global market. UralChem Rapid soil impoverishment creates increasing is one of the largest Russian producers of nitrogen demand for fertilizers and sets up a long term stable and phosphate fertilizers with a balanced variety of growth of the N, P and K fertilizer market. products from basic to premium. The company has a significant share of the Russian market and distrib- utes internationally to over 50 countries.
9 1 | industry overview
Long Term Growth Factors
Food ration World population*: Global Fertilizer Consumption (average person by nutrients*: daily calorie intake)*:
In 2010 – In 2050 over In 2010 – 2789 kcal In 2050 – 3130 kcal Today – about 160 million tons By 2050 – 215 million tons over 6.9 billion people 9.1 billion people ...... *Source: UN Department of Economic and Social Affairs * Source: Food and Agriculture Organization of the United Nations (FAO) * Source: United Nations Food and Agriculture Organization (FAO)
Production in agriculture should increase Products made from crops grown with application of mineral by 70% by 2050** fertilizers feed over 50% of the world’s 10% – exploitation of new land population currently. 90% -intensification in agricultural production In the future an increase is expected.* ...... ** Source: Food and Agriculture Organization of the United Nations (FAO) * Source: EFMA (European Fertilizers Manufacturers Association)
10 Mineral Fertilizer Key Facts on the Mineral Fertilizer Industry: • The main raw material sources for mineral fertilizer production are naturally limited;
Global Industry • Production facilities are defined by a high capex level and are concen- trated mainly near raw material sources, seaports or key markets; Overview • A considerable export share is typical for the industry due to concentra- tion of production facilities and their geographical remoteness from the regions with high mineral fertilizer consumption.
Global Market Trends:
• Demand for all types of fertilizers is increasing; • Consumption of mineral fertilizers increases; • Production facilities are being integrated with distribution and transpor- Nina Khangaldyan tation networks; Head of the market research and trade policy Department • The industry is consolidating around the major players; • Additional demand for mineral fertilizers is being driven by new seg- ...... ments such as biofuel production. Mineral fertilizer production tends to to be one of the most important industries for the economy because it supports efficient production of agricultural products. Market trends in 2010: Since the middle of the last century, the international mineral fertilizer market has developed rapidly due to • Stabilization of the global economy after the economic crisis of 2008- the growth of global economy and new technologies in 2009 resulted in a recovery in the mineral fertilizer market. These trends had a positive effect on mineral fertilizers production and sales volumes; agriculture. As a result, world consumption of fertilizers • A particularly rapid recovery was observed in the phosphate and potas- has increased almost 5 times over the last 30 sium fertilizer segments, while the increase of ammonia and nitrogen years. The average long-term growth rate seems to be production volumes has provided a recovery in the nitrogen segment up stable at about 3% per year. to the levels observed over the long-term period.
11 1 | industry overview
Growth Factors of Global Fertilizer Consumption:
+ Demand for Fertilizer –
Growth in the world population results in the increased demand Reduction of agricultural areas per capita. for staple food. (!) This has led to a need for new technologies in agriculture and thus to higher demand for mineral fertilizers as well. (!) Recent years have been characterized by a constant decrease in the ratio of crop stocks to production index. The most significant reduction in supply was observed in 2010 due to unfavourable weather conditions in almost all main production regions.
Increase in per capita income in countries with developing economies leads to an The struggle with greenhouse gases emissions improvement in food rations. (!) The demand for biofuel (bio ethanol, bio diesel) is increasing, thereby creating additional demand for fertilizers as well. (!) Increased meat and dairy product consumption leads to demand for additional plant cultivation, and therefore a higher demand for mineral fertilizers.
12 Fertilizer Appliance according to types of Agricultural Crops:
Fruit and vegetables
Sugar plants
14% 15% Cotton
Other oil plants 4% Oil palm
4% Soybeans 17% 5% Other grains Mikhail Genkin 2% Corn Business Development Director: Rice
4% ...... The UralChem product portfolio combines basic products 5% Wheat with innovative brands that are exceptionally effective in certain regions on particular types of soils. UralChem 15% Other crops fertilizers cover requirements for nitrogen, phosphate, 15% potassium and other elements that help reach higher yield Source: IFA information capacity for a wide variety of crops.
13 1 | industry overview
N P K
Key nutrition element for production of proteins, enzymes and Macronutrient that is important for growth as it contributes to Macronutrient responsible for resistance to stress and quality major vitamins elaboration. photosynthesis, accelerates crop maturation and is involved in the of the crop. synthesis of proteins and compound carbohydrates.
Primary element required in agricultural production on an annual Price and volumes are determined by limited access to phosphate Product margin is high due to limited raw material base. basis. resources. Demand satisfaction depends on production opportunities, based in Total N consumption volume exceeds the volumes of P+K. turn on availability of raw material. The continuous increase in demand is driven by agricultural produc- tion growth in developing countries.
30 –170 kg/ hectare 60%* 25%* 15%* Global fertilizer consumption Global fertilizer consumption Global fertilizer consumption
UralChem is one of the world’s leading producers of Nitrogen and Phosphate fertilizers.
* –Source: IFA information
14 N ...... P Global production Global consumption Global production Global consumption of nitrogen fertilizers* of nitrogen of phosphate of phosphate fertilizers** fertilizers** fertilizers**
Rest of the World China Rest of the World China Rest of the World United States Rest of the World China 38% 34% 36% 31% 28% 24% 32% 32%
Australia Tunisia 2% Ukraine Brazil 7% Russia Brazil India India India 6% Russia 3% Pakistan Morocco 17% 9% United States United States 10% United States 15% China 16% 6% 9% 3% 12% 8% 16% 9%
*Source: IFA. **Source: Fertecon. Dmitry Konyaev Commercial Director***:
Up to 80% of all of UralChem’s production is nitrogen (N) and phosphate (P) based fertilizers – and they are exceptionally marketable.
***As of the date of approval of this Annual Report Mr. Konyaev holds the position of CEO. Our new Commercial Director is Alexey Strakhov. 15 1 | industry overview
thous., t Dynamics 200000 of World Consumption 150000 of Mineral 100000 Fertilizers
...... 50000 Nitrogen fertilizers
Phosphate fertilizers 0 Potassium fertilizers 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 ... 2014
Source: IFA information ...... 111.7 million tons 43.7 million tons 31.9 million tons N by 2014 P by 2014 K by 2014
16 mln.,t 200 Forecast 180 160 for basic 140 fertilizer 120 100 consumption 80 in key markets. 60 40 20 ...... K2O 0 World China India Brazil West & Central United States P2O5 Europe N-Nitrogen
2009/10 2010/11 2011/12
Source: IFA information, UralChem
17 1 | industry overview
usd. Price dynamics 1000 900 for major types 800 of fertilizers and 700 600 ammonia in 500 2007 – 2010 400 $/t. 300 200 Source: Fertecon, UralChem 100 0 04/01/2007 04/01/2008 04/01/2009 04/01/2010 ...... Price fluctuation dynamics for ammonia in 2007-2010 FOB Yuzhny CFR US Gulf/Tampa Price fluctuation dynamics for urea in 2007-2010 FOB Yuzhny FOB middle east
18 usd.
600
500
400
300
200
100
0 04/01/2007 04/01/2008 04/01/2009 04/01/2010 ...... Price fluctuation dynamics for ammonium nitrate (AN) in 2007-2010 FOB Yuzhny CFR US Gulf/Tampa
19 1 | industry overview
usd. 1400 Price Dynamics 1200 for Main Types 1000 of Fertilizers 800 and Ammonia 600 in 2007-2010, 400 $/т. 200 Source: IFA information 0 26/06/2008 26/12/2008 26/06/2009 26/12/2009 26/06/2010 26/12/2010
...... DAP price fluctuation in 2008-2010 FOB US Gulf bulk FOB Baltic bulk
20 Main Factors of the Mineral Fertilizers Industry Development in 2010: ...... Global economy recovery after 2008-2009 crisis. Restoration of global demand for mineral Restoration of global demand for mineral The launching of urea and MOP production facilities around fertilizers and forecasts for growth recovery fertilizers and forecasts for growth recovery the world, delayed previously due to the crisis, as well as the up to the levels of previous periods. up to the levels of previous periods. growing impact of India and China on the global mineral + fertilizers trade.
Significant reduction in leading producers’ stocks ...... Widespread delay and postponement (excluding along with the major importers. China) of financial support for the new mineral fertilizer facilities projects. - Mikhail Genkin Business Development Director:
Urea production growth is primarily aimed at satisfying the demand of the Earth’s “urea belt” (Middle East and South-East Asia). These markets are not key trade directions for the Company.
21 1 | industry overview
Demand factors overview Russia 140,4 mln. people World today 61.7 mln. tons 31.8 mln. tons 0.6 mln. tons 8.0 mln. tons ...... Europe 6% – Ammonia 58% – AN 732,8 mln. people 18% – NPK 6% – MAP/DAP 138.1 mln. tons 10% – UREA USA 154.2 mln. tons 2% – other 2.0 mln. tons 317.6 mln. people 29.8 mln. tons 60,4 mln. tons ...... China 349,2 mln. tons 21% – UREA 6,9 mln. tons 42% – Nitrates 1354,1 mln. people 11% – UAN 98,9 mln. tons 16% – NPK 115.1 mln. tons ...... 4% – DAP/MAP 164.1 mln. tons 20% – UREA 6% – other India 136.6 mln. tons 27% – Ammonia 57.2 mln. tons 3% – Nitrates Argentina 1214,5 mln. people Australia ...... 28% – UAN 67% – UREA 12% – NPK Brazil 80.7 mln. tons 40,7 mln. people and Oceania 19% – ABC 5% – DAP/MAP 34.2 mln. tons 8% – NPK 5% – other 5 mln. tons 195,4 mln. people 89.1 mln. tons 35,8 mln. people 7% – DAP/MAP 58,6 mln. tons 5 mln. tons 31.7 mln. tons 21.9 mln. tons 1% – other 7,7 mln. tons 58,6 mln. tons ...... 11.1 mln. tons 71,5 mln. tons 7,7 mln. tons 81% – UREA 3% – NPK 0.1 mln. tons 71,5 mln. tons 15% – DAP/MAP 2.6 mln. tons ...... 1% – other 56% – UREA Key consumption elements 13% – Nitrates 7% – NPK
by agricultural products* 11% – DAP/MAP
...... *Source: IFA 2008/2009 12% – AS ...... Wheat Other 15% Other Wheat 16% Population distribution Current world grain production Rice 16% 17% by continent as of 2010** 2009/10*** 14% Fruit & veg Fruit & veg Rice Africa 1033,0 mln. people N+P+K 16% Nitrogen – Wheat 682,1 mln. tons 17% 16% Europe EU-27 732,8 mln. people – Fodder 1,107,9 mln. tons Sugar Arab states 359,4 mln. people Sugar crops – Rice 441,2 mln. tons crops Maize Asia 4 166,7 mln. people – Olive cultures 441,1 mln. tons 3% Maize 4% Cotton 15% Cotton Latin America and Caribbean 588,6 mln. people Oilseeds Other cereal Oilseeds 17% 4% 4% Other cereal **Source: UNFPA (The United Nations Population Fund), 2010 ***Source: FAS, USDA, December 2010 10% 5% 6% 5% 22 World tomorow ** Nitrogen consumption growth in key markets for 2009-2014 Source: IFA, CAGR 09-14 Russia
116.1 mln. people by 2050* + 1.2% N consuption Europe per year** 691.0 mln. people by 2050* + 2.1% N consuption China
per year** 1 417.0 mln. people by 2050* + 1.2% N consuption India per year** USA Brazil 1 613.8 mln. people by 2050* 403.9 mln. people by 2050* 218.5 mln. people + by 2050* 2.2% N consuption per year** + 1.9% N consuption Australia per year** Africa and Oceania 1 998.5 mln. people by 2050* 51.3 mln. people by 2050*
+ 1.2% N consuption per year** ......
Argentina Global wheat production forecast***: Global fertilizer consumption forecast * 50.9 mln. people By 2020 – by 2050* 734 596 thousands tons 2014 2020 N 111.7 125.5 By 2050 – 947 611 thousands tons P2O5 43.7 51.9 ***Source: Projection by the A. A. Nikonov, K2O 31.9 38.9 Russian Institute of Agricultural Issues and Computer Science, and the Russian-German Total 187.3 216.4 Management School of the Academy of National Economics ****Source: IFA, Fertecon, UralChem
23 1 | industry overview
The Russian Mineral Fertilizers market
...... The Russian Federation is one of the largest exporters The Russian of all types of mineral fertilizer Federation 10% of the global mineral fertilizer production World Ammonium nitrate Dmitry Konyaev №1 (AN) producer* Commercial Director*: №2 World Ammonia (NH3) exporter* Agrochemical production ranks third in export ...... volumes after the power generation sector and metal 1.8% production sectors. №3 World MAP producer* The mineral fertilizer industry produces over 20% of global fertilizer consumption of the entire chemical and petrochemical industry commercial turnover in Russia. №4 World DAP producer* *Source: IFA. *As of the date of authorisation of this Annual Report Mr. Konyaev holds the position of CEO. Our new Commercial Director is Alexey Strakhov.
24 Russian Producers’ Competitive Overview of the Advantages Russian production*
Access to a rich resource base within the country = optimal low price for raw materials and energy resources Developed logistical resources, including seaports TOTAL: +30% 17,9 million tons in nutrients
Nitrogen fertilizers ...... 7.6 million tons in nutrients (N) Phosphate fertilizers 3.2 million tons in nutrients (P2O5) Potassium fertilizers 2010 7.1 million tons in nutrients (K2O)
*Source: AzotEcon-Plus, Chem-Courier, UralChem
25 1 | industry overview
Nitrogen fertilizers Production of Nitrogen Fertilizers in Russia in 2010 Structure of nitrogen containing Structure of nitrogen containing Fertilizers Production Fertilizers Production +2.6% N fertilizers in 2009 in 2010
Ammonium nitrate and urea, including their derivatives took Urea Ammonium nitrate Urea Ammonium nitrate the leading positions among the various nitrogen fertilizers and CAN and CAN produced in Russia. 35.2% 36.4% 33.7% 36.0%
Dmitry Osipov CEO*
The product line of nitrogen fertilizers produced in Russia in 2010 was close to the parameters it had reached before the Others Stab. ammonium Others Stab. ammonium economic crisis occurred. Primarily it reflects the correlation 4.4% nitrate (SAN) 4.2% nitrate (SAN) between straight and complex nitrogen fertilizers. Compared 2.5% 1.8% to last year the share of urea and stabilized ammonium nitrate decreased; however the share of UAN increased at the same NPKS UAN NPKS UAN time. Compared with 2009, production of complex fertilizers 6.6% 4.3% 7.3% 5.1% increased by 13% and production of MAP increased 1.6 times, Ammonia Ammonia DAP MAP DAP MAP while production of high-N NPKS increased by 13%. sulphate (AS) sulphate (AS) 5.0% 2.1% 3.5% 4.8% 3.3% 3.7%
Source: AzotEcon-Plus
*As of the date of authorisation of this Annual Report Mr. Osipov holds the posi- tion of Deputy Chairman of the Board of Directors of United Chemical Company UralChem. Our new CEO is Dmitry Konyaev.
26 4% 1%1% 4% 20 Leading Global Producers of AN-Fertilizers 25% 5% and their Derivatives, million tons* Production of Nitrogen Fertilizers 5% in Russia in 2010* Yara 12% Uzkimyosanoat UralChem 17% Acron 13% Fertiberia 13% Ocirica 2% 2% BASF 5% 27% DSM 6% GPN/Total Production of Ammonium 6% Cherkassy Azot Nitrate in Russia in 2010* Incitec Pivot/Dyno Nobel 13% Achema AB Terra 18% 21% Sibur JSC Revneazot 3% 1% Tugsas 4% 8% 21% Nitrogenmuvek Agrofert Production of Ammonia 8% ZA Pulawy in Russia in 2010* Others (30.3 min t) 12% 16% 0.0 4.0 8.0 12.0 *Source: Companies, UralChem 12% 15% Mikhail Genkin Business Development Director: UralChem Phosagro Salavatnefteorgsynthes EuroChem OJSC Kuibyshevazot LLC Mendeleevskazot Akron OJSC Minudobreniya, Rossosh OJSC Shekinazot We have observed the highest production levels since 1991 for Sibur-Minudobreniya OJSC Tolyattiazot uploaded capacities.
27 1 | industry overview
P fertilizers K fertilizers Production of Phosphate Production of Potassium Fertilizers in Russia in 2010 Fertilizers in Russia in 2010
+22% P fertilizers +89% K fertilizers
The principal phosphate fertilizers produced in Russia are MAP and DAP. 6% 1% 9% 11% 52% 50% 50%
21% Nina Khangaldyan Head of the market research and trade policy Department UralChem Uralkali Silvinit
...... EuroChem This growth is caused by the delayed increase in demand Akron Source: Uralkali, Silvinit that originated from the 2009 post-crisis period. Phosagro OJSC Minudobreniya, Rossosh State Unitary Enterprise After the steep drop in global potassium consumption in Gidrometallurgicheskiy zavod Lermontov 2009, production of active substances increased from 3.8 to 7.1 million tons in 2010. The total volume of potassium chloride produced in the country was 10.3 million tons.
28 Russian Consumption Overview ...... million tons 2.375 million tons 2 in active substances in active substances in 2010 in 2009 12% total Russian production in 2010
Following a peak in crop yield in 2008, a significant setback was suffered due to unfavourable weather conditions. As a result, fertilizer consumption in the country decreased by 15.9% compared to the 2009 results (2.375 million tons) and by 11.5% compared to 2008 (2.256 million tons).
29 1 | industry overview
Mineral Fertilizer Russian Market Cost Structure Environment Market demand for mineral fertilizers is directly linked to the ratio of key manufacturing costs of production to purchasing power of target consumers – (farmers)...... Demand Supply Yield Prices for basic raw materials, rubles Dominant influence on purchasing power
Natural gas, Electric Thermal Gross yield for main agricultural crops in all operational thous.m3 energy, energy, categories, mln. tons MW/h. Gcal
110 2005 1436 914 411 100 2006 1582 1016 444 90 Dmitry Konyaev 2007 1856 1009 513 Commercial Director*: 80 2008 2312 1284 603 70 2009 2764 1551 700 60 ...... Internal gas prices are subject to government control. 2010 3081 1539 757 The largest natural gas supplier, which also has a 50 monopoly on its transfer to the market, is Gazprom. 40 The largest shareholder in this corporation is the government of the Russian Federation. Since 2006 30 a gradual program to implement internal Russian 20 gas prices on the basis of Gazprom export prices has been introduced. According to Ministry of Economic 10 Development plans, the maximum increase in 0 natural gas prices in the Russian market will not exceed 15% in 2011 and 15% in 2012.** 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 *As of the date of approval of this Annual Report Mr. Konyaev holds the position of CEO. Our new Grain Potato Commercial Director is Alexey Strakhov. Sugar beet (manufactured) Vegetables **Report of the Ministry of Economic Development of the Russian Federation, July 2009. Sunflower Source: Rosstat
30 Dynamics of Fertilizers Price Index Change in the Russian Federation in 2010
Producers’ price indexes for fertilizer and nitrogen compounds in the Russian Federation in 2010 – 2011. At the end of the period, in % by December, 2009 180 170 160 150 140 130 Dmitry Osipov CEO *: 120
110 ...... According to an “agreement concerning interaction 100 to satisfy the needs of agricultural producers in the agroindustrial complex of the Russian Federation for 90 mineral fertilizers in 2008-2009”, compiled between the Agroindustrial Union of the Russian Federation and the 80 Russian Association of Fertilizer Producers, leading Russian producers declared a maximum threshold for transfer XII I II III IV V VI VII VIII IX X XI XII I prices for major fertilizer brands for Russian agricultural producers. As one of the main founders and active 2009 2010 2011 members of the Russian Association of Fertilizer Producers, our Company believes that support for Russian agriculture is our priority, and our policy is to supply Russian farmers at Source: Rosstat Nitrogen fertilizer and compounds Nitrogen mineral or chemical fertilizers preferential prices. Phosphate mineral or chemical fertilizers Potassium mineral or chemical fertilizers *As of the date of approval of this Annual Report Mr. Osipov Fertilizers not included into other groups holds the position of Deputy Chairman of the Board of Directors of UralChem OJSC. Our new CEO is Dmitry Konyaev.
31 1 | industry overview
Basic Fertilizers, Russian market*
Ammonium Nitrate (AN) 3 283 K tons 3 483 K tons MAP 382 K tons 326 K tons
NPKS (DAFK) 10:26:26 335 K tons 351 K tons Dmitry Osipov CEO* NPK 16:16:16 703 K tons 578,5 K tons ...... “In January 2010 the “Principles of Food Safety in the Russian Federation” were approved. Together with other UREA 544 K tons 636 K tons important guidelines, it outlined the agricultural plan to increase soil fertility and yield and to expand crop volumes through enhancement of unexploited arable land. This 380 K tons 351 K tons means that we should expect a significant increase in MOP agricultural production, which we believe will be success- ful with active government support. I suggest that it could *Source: UralChem trigger an expansion in the mineral fertilizers market.”
“UralChem possesses one of the most balanced trade offers on the market. UralChem’s product portfolio offers 2009 2010 basic standard products with innovative advanced brands. That is our main competitive advantage”.
*As of the date of authorisation of this Annual Report Mr. Osipov holds the position of Deputy Chairman of the Board of Directors of UralChem OJSC. Our new CEO is Dmitry Konyaev.
32 Overview of Market Competition: ......
Holding AKRON Mineral Chemical PhosAgro UralChem Holding in Russia 23.3% №1 company Company Eurochem 19% ...... Akron Nevinnomysskiy azot Cherepovetsk Azot Azot (Berezniki) Nitrogen Dorogobuzh Novomoskovsk joint-stock KCCW Mineral fertilizer Plant 18.5% Assets Hunzhi-Akron company Azot (China) 9% ...... Ammophos Voskresensk Phosphate Belorechensk Minudo- Mineral Fertilizers breniya Balakovskiye 1% Assets Lifosa (Lithuania) Minudobreniya ...... - Raw Materials Kovdor mining complex Apatit Assets Phosphorite UralChem market shares in 2010 Nina Khangaldyan Head of the market research and trade policy Department
We have more than 20 mineral fertilizer production facilities in the Russian Federation. Most of these facilities belong to four vertically integrated groups that have been formed in the Russian nitrogen and phosphate mineral fertilizer industry in recent years as a result of market maturing. They produce a large share of Russia’s nitrogen and phosphate mineral fertilizers (excluding potassium fertilizers). 33 1 | industry overview
2010 for UralChem* in ammonium nitrate (AN) and its derivatives production *Based on volumes produced in Russia №1 1.674 million tons of mineral fertilizers
in ammonia and nitrogen fertilizers production №2 17.7% increase in production volume
in phosphate fertilizers production share in total volume of phosphate fertilizer pro- №3 duction 15% in 2010 (2009 – 13.3%)*
34 Increase of UralChem Activity in Nitrogen market share Fertilizer Segment in nitrogen and thous. t. phosphate fertilizers of active materials 2000 1800 thous. t. 1600 of active materials 1400 1200 Sergey Gurnakov 3000 Production director 2500 1000
2000 800 ...... In 2010 the Company saw a 5.1% increase in nitrogen 1500 600 fertilizer production (in N equivalent) which mainly 1000 400 happened owing to the increased (4%) output of ammonia that was further processed into nitrogen fertilizers. 500 200 0 0 EuroChem Fosagro UralChem Akron Sibur- EuroChem Fosagro UralChem Akron Sibur- Minudob- Minudob- reniya reniya
2009 2179.9 2409.2 1342.4 1279.1 938.0 2009 1730.4 904.2 1202.4 1020.1 938.0 Dmitry Osipov CEO*: 2010 2516.0 2499.6 1616.8 1251.7 951.5 2010 1872.6 893.6 1263.9 978.5 951.5 In 2010 production at VMF doubled, so the Group’s production increased by 20.4% (in N and P2O5 equivalent) and the Company became the leader of growth. Source: AzotEcon-Plus *As of the date of approval of this Annual Report Mr. Osipov holds the position of Deputy Chairman of the Board of Directors of UralChem OJSC. Our new CEO is Dmitry Konyaev. 35 2. Corporate profile Page 40–41 Page 42–43 Page 44–46 Corporate history Corporate Calendar Official data
We mention the most important events that made We describe just seven of the hundreds of events that • Incorporation, conversion into a public company, UralChem what it is today. seem to have had the most important influence on registered number, registered office, telephone, the Company and its business in 2010. website At present, UralChem is one of the largest companies on the mineral fertilizers market of the Russian • Share capital and shareholder Federation, the CIS and Eastern Europe and is enjoying rapid and dynamic development. • Secretary
37 Page 47–52 Page 54–57 Page 58–59 Key Assets Product Range overview International Business of UralChem Key production assets* UralChem’s product range is one of the most The seasonal fluctuation of agricultural demand is diversified and well-balanced ranges on the market. It balanced by the wide product range suitable Azot, Perm region contains raw materials of different types for industrial for a number of climate zones in various parts of the One of the largest facilities producing ammonia and consumption (about 20% of total production) along world. nitrogen fertilizers. with the products that form the core business of the Over 1.9 million tons of commercial output in 2010. Company-wide range of mineral fertilizers (80% of The flexibility of the production opportunities offers KCCW Mineral Fertilizer Plant, total production). high business differentiation: fertilizer commodities Kirov region make up the business base and specialized fertilizers One of the most advanced industrial complexes in the Development strategy within the framework of allow business to develop. country. Its product range includes over 15 types of the core business direction, namely production of nitrogen, phosphate and complex mineral fertilizers. mineral fertilizers, is based on the combination of Over 2.1 million tons of commercial output in 2010. commodities and specific premium products , with increased focus on premium products, reflecting the VMF, Moscow region increasing demand for more efficient fertilizers in One of the four largest Russian producers of keeping with the intensification of agricultural soil phosphate containing fertilizers, feed additives, usage and new agro-technologies in the key markets. phosphorus and sulphuric acid. 800,000 tons of commercial output in 2010. Key logistics assets UralChem Trans Was created in 2007 for transportation of the Company’s production by rail. Managed by UralChem Trans fleet consists of about 5000 units of rolling-stock including mineral transporters and cisterns. Key trading assets UralChem Trading (Latvia) Consolidation of UralChem export sales and distributions operations. Was established in 2009. UralChem Trading House Promotion and sales of UralChem products in Russia and the CIS since 2008.
*As of 31 December, 2010 UralChem OJSC managed Azot and KCCW Mineral Fertilizer Plant. For details see Corporate History (December 2010). 38 Dmitry Osipov, CEO*: UralChem is currently one of the largest companies producing nitrogen and phosphate fertilizers in the Russian Federation UralChem is more than 12 300 people Making up a team of highly professional specialists employed in Azot, Perm Region KCCW Mineral Fertilizer Plant, Kirov Region VMF, Moscow Region UralChem Trans UralChem Trading House UralChem Trading (Latvia)
Produce** 2.5 million tons of ammonium nitrate 2.2 million tons of ammonia 0.8 million tons of MAP and DAP 0.8 million tons of complex fertilizers (NPK/S) 0.5 million tons of urea Delivering to our consumers development, control, promotion, sales support and logisticss *As of the date of approval of this Annual Report Mr. Osipov holds the position of Deputy Chairman of the Board of Directors of UralChem OJSC. Our new CEO is Dmitry Konyaev. **Production capacities on the basis of annual workload
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Corporate history ...... 2007 2008 UralChem Holding, a Cyprus company, and CI-Chemical Invest Limited completed the transfer of its controlling June its Russian subsidiary, UralChem OJSC, were both formed interests in Kirovo-Chepetsk Chemical Works OJSC and Azot to the Group We acquired a 71.7% interest in VMF. Following this acquisition, we to facilitate the reorganisation and consolidation of the and since that time we have increased our voting interests in Kirovo- made a mandatory tender offer for the remaining shares. The offer ownership of the fertiliser businesses of CI-Chemical Chepetsk Chemical Works OJSC and Azot to 100%. closed in October 2008, and we purchased an additional 3.1% interest Invest Limited. in VMF pursuant to that offer. September UralChem Trans acquired Murashi Depot for repairs and maintenance of We established UralChem Freight in order to provide forwarding our railcar fleet, and it became a branch of UralChem Trans For purposes of IFRS consolidated financial statements, services, trans-shipment services in ports and sea freight services for the Group is deemed to have been formed on our Russian production facilities in relation to their exports. Later, the June and October 29 December 2006, the date on which CI-Chemical Invest functions of UralChem Freight were transferred to UralChem Trading We formed UralChem Handel and UralChem Trading (Brazil) to Limited acquired control of Kirovo-Chepetsk Chemical (Latvia), a new subsidiary established in April 2009 to consolidate further focus our marketing and sales efforts in Germany and Brazil Works OJSC. our export sale and distribution operations and locate them in close respectively. proximity to the Port of Riga, one of the key trans-shipment points for our exports. July We acquired a 7.5% interest in Togliattiazot. Since that time, we have December increased our interest to 9.7% through a number of open market We established UralChem Trans to consolidate the ownership and purchases. operation of all our Russian rail and logistics assets. December We established UralChem Trading House to arrange sales and promote our products in the Russian and CIS markets.
40 ...... 2009 2010 November January We established Riga Fertiliser Terminal in a joint venture with Riga We increased our interest in VMF to 75% in January. In October we Commercial Port (RTO), a leading operator of ports and transporta- purchased VMF shares from Shades of Cyprus Limited and, as a result, tion infrastructure in Latvia. Our interest in Riga Fertiliser Terminal is our interest in VMF reached 89.9%. 51.0%. The main purpose of Riga Fertiliser Terminal is the development of specialised terminal in the Port of Riga for the transshipments and December Dmitry Mazepin storage of fertiliser and related chemical products. We completed first stage of the project to transfer to a single stock: the Chairman of UralChem Holding • merged two Kirovo-Chepetsk companies – one having no produc- Board of Directors: December tion assets and the other controlling our Kirovo-Chepetsk Plant We acquired a 44.3% interest in PMF from CI-Chemical Invest limited – to have one legal entity owning the plant. For this legal entity ...... “Since the first days of the Company existence constant and currently own a 46.5% interest in PMF. UralChem OJSC has acted as the sole executive body. dynamic development of resources base, production • merged UralChem Management CJSC and Open Joint Stock facilities, and professional competence, ideas and Company “Azot” with UralChem OJSC and set up Azot Branch of Open Joint Stock Company United Chemical Company UralChem possibilities as well has been the basis for our strategy. I in Berezniki (Azot) which operates all the production assets in am convinced that we can succeed on the international Berezniki. competitive market only combining these factors. That is the base for our effective development, recipe for becoming more significant and important player of the world market”.
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Corporate .01 ...... 02 ...... 03 ...... 04 ...... 05 ...... 06 ...... 07 ...... 08 ...... 09 ...... 10 ...... 11 ...... 12 28.01.10 16.03.10 30.04.10 15.06.10 19.11.10 13-14.12.10 Calendar 2010 15.12.10
...... January 28, 2010 March 16, 2010 April 30, 2010
Agricultural efficiency tests of calcium-ammonium nitrate (CAN) UralChem supplied the first batch of stabilized ammonium nitrate Unfavourable market trends forced UralChem Holding to delay its IPO and calcium nitrosulphate (CAN with sulphur; CNS) developed (nitrophosphate SAN 33:3) to the British market. performance. by UralChem were officially completed.
Mikhail Genkin, Dmitry Konyaev, Dmitry Mazepin, Business Development Director: Commercial Director*: the Chairman of UralChem Holding Board of Directors: “New types of nitrogen fertilizers produced by Kirovo-Chepetsk “The first supply of SAN 33:3, which represents the intellectual “Despite significant interest on the part of international institutional Chemical Works OJSC were tested during 2008-2009 on two main substitution of ammonium nitrate with active “spring” phosphorus investors, unfortunately, the Company could not be estimated agricultural crops widespread in the Central and Privolzhsky federal gave us an opportunity not only to expand the presence of the Company at a level reflecting its real fair value under market conditions regions, namely wheat and barley. The results of field experiments on the premium market of Great Britain but also to demonstrate the existing at that time”. performed at the “N. V. Rudnitskiy Zonal Research and Development advantages of the product through real application by British farmers” Institute of North-Eastern Agriculture” base proved once again that UralChem offers effective and high quality products to the market”.
42 June 15, 2010 December 13-14, 2010
The Board of Directors of UralChem Holding approved the plans UralChem completed first stage of the project to transfer to a single *As of the date of Approval of this Annual Report Mr. related to conversion to a single stock. Four companies of the group stock. As a result, we formed one legal entity operating our Kirovo- Konyaev holds the position of CEO. Our new Commercial were to be reorganized by the end of 2010. Chepetsk Plant with UralChem OJSC acting as the sole executive body for Director is Alexey Strakhov. the entity. We merged Azot as separate company with UralChem OJSC ** As of the date of Approval of this Annual Report Mr. Dmitry Osipov, and set up a Azot Branch of Open Joint Stock Company United Chemical Osipov holds the position of Deputy Chairman of the Board CEO**: Company Uralchem to operate our production assets in Berezniki. In of Directors of UralChem OJSC. Our new CEO is Dmitry .01 .02 .03 .04 .05 .06 .07 .08 .09 .10 .11 .12 «The proposed reorganization will allow us to improve financial flows addition, UralChem Management CJSC merged with UralChem OJSC. Konyaev. management in the Group and significantly decrease administrative 28.01.10 16.03.10 30.04.10 15.06.10 19.11.10 13-14.12.10 and management costs. In addition, reorganization will make the Group Maxim Bakov, more attractive as an investment». Chief Financial Officer: «Reorganization will increase operating efficiency at UralChem due to the decreased number of intra-group transactions. Transfer to a single stock will significantly reduce administrative costs and management expenses, and will make cash flow management inside UralChem Group more effective»...... November 19, 2010 December 15, 2010
UralChem is one of the first Russian producers to register all its UralChem obtained certificate of participation in UNO international company group products with the European Chemicals Agency. 27 program – Responsible Care. substances have been registered. This procedure is specified in EC Regulation 1907/2006 concerning registration, assessment, approval Sergey Gurnakov, and restriction of chemical substances (REACH). Production Director: “It proves the Company involvement into international initiative aimed Dmitry Osipov, CEO**: at improvement and increase of technical safety level, environment and “According to REACH regulations, all producers, importers, distributors labour protection, improvement of products and production processes. and consumers of chemical products are responsible for carrying out We joined Responsible Care initiative in December, 2009 according research works to analyse the dangerous properties of substances to our commitment to the most advanced international standards included in their products, and they must also register them. The in these spheres. Consolidated statements that have been prepared European Union assumes strict measures to prevent distribution of by the Company within the frames of participation in this program poor-quality chemical products. We have undergone over 60 complex enabled to provide new approaches to solution of these difficult chemical analyses in order to identify substances included into problems. Having received certificate UralChem is included into rather UralChem fertilizers. Having registered our products according to REACH a small group of companies honored to be official participants, kind regulations, we observe all the requirements of the European Chemicals of ambassadors of this important program”. Agency. Compliance with REACH requirements guarantees stability of our supplies to European Union countries”.
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Official data ...... UralChem Holding was incorporated as a private company limited Share Capital and Shareholders Secretary by shares and registered in Cyprus on 4 May 2006 under the name ACF-AGROCHEM FINANCE LIMITED, pursuant to the certificate of The authorised share capital of UralChem Holding consists of In accordance with Section 171 of the Company Law (Cap. 113) of incorporation issued by the Office of the Registrar of Companies in 360,000,000 ordinary shares the Republic of Cyprus, UralChem Holding must have a Secretary Cyprus. On 20 November 2009, the shareholders of ACF-AGROCHEM responsible for the Company’s compliance and liaison with the FINANCE LIMITED resolved that the company should be converted The issued share capital of UralChem Holding* consists of regulatory bodies of Cyprus. The secretarial responsibilities are shared into a public company and that its name be changed to UralChem , including Holding P.L.C. The change of name was effective from 21 December 175,000,000 ordinary shares 10,110 Class A between Belserve Consultants Limited of Michail Georgiou, 70, 2009 as per the Certificate of Change of Name issued by the Registrar shares each with a nominal value of €1.71 and 174,989,890 Class Athienou, P.C. 7600, Larnaca, Cyprus, the Company’s Secretary, and of Companies. B shares each with the nominal value of €0.00515. Anastasia Tolstaya of 249 28 Oktovriou Str., Lophitis Business Centre, For the list of our shareholders see Corporate Governance Section, 1st Floor, Office 101, P.C. 3035, Limassol, Cyprus, Assistant Secretary UralChem Holding’s registered number is 175909, and its registered page 64. of the Company. Both were appointed by the Board of Directors on 27 office is located at 249, 28 Oktovriou Street, Lophitis Business center, February 2010. 1st floor, Office 101, Limassol 3035, Cyprus. The telephone number of * Class A and Class B shares rank pari passu, have the same voting and UralChem Holding’s registered office is +357 25 818 815. Its internet dividend rights and do not provide any preferences in comparison to address is www.uralchem.com.cy (or www.uralchem.com). shares of the other class.
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Corporate structure UralChem Holding 99,9% The following chart shows our key subsidiaries and investments and our ownership in these entities, as of the date31 December, 2010 UralChem OJSC Azot
87,4% 89,9% 99,9% 100% 100% 100% 9,7% 2,2%
100% 100%
KCCW 44,3% VMF UralChem Freight Mineral Fertilizer Plant
51%
Riga Fertilizer Terminal
– Holding companies
– Transport and logistics UralChem Trading (Brazil) UralChem Trading (Latvia) UralChem Trans Togliattiazot – Production sites
– Investments UralChem Trading House UralChem Handel Murashi Depot PMF – Trading
46 Riga Fertilizer Terminal
UralChem Trading (Latvia) Key assets UralChem Trans
UralChem Handel Corporate geography Azot
– UralChem – Minority stakes of UralChem UralChem Trading House – Eurochem VMF – Acron KCCW Mineral – Other Fertilizer Plant
– UralChem’s core region
– Eurochem’s core region
– Acron’s core region
UralChem Trading (Brazil)
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Key production assets
KCCW Mineral Fertilizer Plant
KCCW Mineral Fertilizer Plant is one of the largest enterprises in the Russian Federation producing a wide range of mineral fertilizers:
• ammonium nitrate; • various types of complex fertilizers Sergey Drinevsky Director, The production facility has its own capacities for production of KCCW Branch of UralChem OJSC in Kirovo-Chepetsk ammonia, which is partially sold as commercial output and processed into nitric acid and fertilizers. By the end of 2010 KCCW Mineral
Construction of the chemical plant that later became ...... Fertilizer Plant had produced the millionth ton of ammonium nitrate. Kirovo-Chepetsky Chemical Works named after B. P. Konstantinov (KCCW) was started in 1938. In 1946 the new production facility was put in production. In Total production volume in 2010 – 2.169 miilion tons the mid-1970s construction of the Okhansk – Kirovo- Chepetsk gas pipeline was completed and gas supply of commercial output. was provided to enable commencement of production of nitrogen and complex mineral fertilizers in 1978.
48 Azot
Azot is one of the largest on-base Russian producers of ammonia and nitrogen fertilizers on its base (ammonium nitrate and urea).
Since 2005 the enterprise has been producing porous modified ammonium nitrate that meets the requirements of leading explosive Dmitry Ivanov industry companies all over the world (Australia, Indonesia, Latin Director*, Azot Branch of UralChem OJSC in Berezniki America and other countries). Sodium nitrate (LDAN), potassium
nitrate and crystalline sodium nitrite are also produced...... The plant in Berezniki was founded in 1929. In 1932 the first synthetic ammonia was produced at the enterprise and became the main product in the manufactured products range. During the period 1970 – 1980 the enterprise was significantly modernized and two large bulk ammonia units Production volume in 2010 – over 1.918 miilion tons and workshops for nitric acid, prilled ammonium nitrate, of commercial output. urea, nitrite and nitrate salts and potassium nitrate were constructed.In 1996 the production of the new product for industrial purposes (porous ammonium nitrate) was started and continued with the new modified type of porous AN (EGAN) in 2005. Open Joint Stock Company Azot was established according to Decree of the President of the Russian Federation No. 721 *As of 31 December, 2010 Felix Palutin was Director of Azot. dated July 1 1992, “concerning organizational measures As of the date of approval of this Annual Report this position for reorganization of state enterprises and voluntary is held by Dmitry Ivanov reorganization of the state enterprises into joint stock companies”. After reorganization of the state enterprise Berezniki Production Association Azot, Open Joint Stock Company «Azot» , registered by Decree of Head of Municipal Administration dated December 2 1992, is its direct assignee.
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Voskresensk Mineral Fertilizers
VMF is one of Russia’s four largest facilities for phosphate fertilizer production. Murad Chaparov There are the following main products of VMF: CEO, VMF • MAP; • DAP; • complex fertilizers; In 1930 a ground phosphate workshop with the capacity ...... • phosphoric and sulphuric acids of various brands; up to 200 mt per year was constructed in Voskresensk. • salts of phosphoric acid. That moment marked the start of the history of Voskresensk Chemical Plant. By 1932 SSP and sulphuric acid workshops had been put into operation along with Total production volume in 2010 –773 thousands tons. the industrial complex of the first stage of Lopatinsk Mines. Workshops for production of precipitated calcium of commercial output. superphosphate, silica gel and contact sulphuric acid had already been commissioned before the Second World war. Unique production of colloid and graphite products was developed in 1940. During the early post-war years from 1946 to 1950, workshops for granular SSP and sulphonated coal (product required for heat power plant operation) represented one of the most important start- ups for the Plant. We were the first and only organisation to produce this coal for almost twenty years. During the next stage in the plant’s history, existing capacities were periodically modernised and workshops for production of new types of fertilizer constructed and commissioned.
50 Sergey Momcemlidze Key logistical assets CEO, UralChem Trans ...... UralChem Trans
Was created in 2007 for transportation of the Company’s products by rail. The fleet of URALCHEM-TRANS LLC consists of about 5,000 units of rolling stock, including mineral transporters and tank trucks, almost 1,300 of which are owned by the Company, 1,600 leased and rented long-term, and 2,100 used on the basis of short-term rent agreements. The products are transported by rail within the Russian Federation and the CIS.
Transportation volume in 2010 – 5.49 miilion tons
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Valentin Lavrentyev CEO, UralChem Trading (Latvia) Key trading assets ...... UralChem Trading (Latvia)
Was created in 2009 to consolidate UralChem export sales, distributions and worldwide logistics operations.
Total sales volume in 2010 - 2.888 miilion tons
52 Alexey Strakhov CEO*, UralChem Trading House
...... UralChem Trading House
Promotion and sales of UralChem products in Russia and the CIS since 2008.
Total sales volume in 2010 - 2.007 million tons
*As of the date of approval of this Annual report Mr.Strakhov holds the position of Commercial director of UralChem OJSC. Dmitry Peker is the new CEO of UralChem Trading House.
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Product Range 3 915 893 tonnes in 2010 515 947 tonnes in 2010 overview* Finished agricultural Raw materials for processing, UralChem has one of the most diversified and well-balanced product ...... products industrial usage range on the market. Manufactured products can be divided into four main categories: Production Structure in 2010 • Nitrogen fertilizers, including ammonium nitrate, urea and 4% 6% premium derivatives of ammonium nitrate, such as calcium 80% ammonium nitrate, calcium ammonium nitrate with sulphur Ammonia, 10% and others including sales and internal industrial consumption • Complex NPK, NPKS-fertilizers with high added value • Phosphate fertilizers, including MAP and DAP
Inorganic (mineral) acids, including sulphuric, phosphoric and nitric Porous ammonium nitrate (EGAN), sodium nitrite, sodium nitrate, acid and other chemical products, such as calcium carbonate, nitric concentrated nitric acid salts, nitric acid salts, potassium nitrate and urea
Mineral fertilizers Ammonia Inorganic acids and other products Raw materials for industrial application Raw materials for civil Raw materials for processing, explosives industry, industrial Dmitry Osipov industrial consumption CEO**: consumption First and foremost we aim at satisfaction of final consumers demand. According to our business strategy we pay special attention to 279 418 tonnes in 2010 177 243 tonnes in 2010 increasing of production volumes of premium products with maximum *Based on the 2010 production results **As of the date of approval of this Annual Report Mr. Osipov added value. Mineral fertilizers is the core business for our company. holds the position of Deputy Chairman of the Board of Directors of UralChem OJSC. Our new CEO is Dmitry Konyaev. 54 Dmitry Konyaev Commercial director*: Simplified We are capable of introducing one of the most diversified and well-balanced Carbonic production Natural product ranges to the market. scheme gas acid of the main 850–1300 130–200 cub.m./t cub.m./t nitrogen 0.78 t/t fertilizers Ammonia Mineral Fertilizers – corebusiness of the Company
0.29 t/t 0.22 t/t 0.58 t/t
Nitric 0,8 т/т Ammonium UREA Conversion Factors acid nitrate (liquid) (liquid) ...... 1.01 t/t 0.45 t/t 0.35 t/t 1.01 t/t Nitrogen (N) Ammonia 82% N UAN Urea 46% N 28–32% N ......
Phosphate (P2O5) Phosphate Rock 39% P2O5 Urea MAP 52% P O Ammonium 2 5 DAP 46% P2O5 nitrate ......
Potash (K2O) MOP (KCl) 60% K2O MARKET
*As of the date of approval of this Annual Report Mr. Konyaev holds the position of CEO. Our new Commercial deirctor is Alexey Strakhov.
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Products Key Components Application Key Markets in 2010
......
Basic products 34% nitrogen • Nitrogen fertilizer containing nitrogen in the form that is the most available for • The Russian Federation, countries of Latin America and Turkey Ammonium Nitrate (AN) the rapid fixation by plants are the main markets for UralChem ammonium nitrate and its • Base for production of premium nitrogen fertilizers such as CAN, SAN, NS and NPK/S derivatives ...... Urea 46% nitrogen • The most widely distributed nitrogen fertilizer • UralChem produces prilled urea and delivers most of it to the Latin American market ...... DAP DAP contains 18% nitrogen & 47% • Complex mineral fertilizer based on two active substances: phosphorous and nitrogen • Europe, Asia, Russia and Latin America are the main markets
phosphorus (P2O5); for MAP and DAP UralChem MAP MAP contains 12% nitrogen and 52% phosphorous (P O ) ...... 2 5 Stabilized ammonium nitrate 33% nitrogen and 3% phosphorus • High quality fertilizer used as intellectual alternative for standard ammonium nitrate • We produce SAN especially for Latin American (SAN) and European markets
...... Calcium-ammonium nitrate 27% nitrogen and 20% calcium • Granular fertilizer containing calcium carbonate and ammonium nitrate • Designed for acidic soils of Northern Europe (CAN) (CaO) ...... Calcium-nitrosulphate (CNS) 27% nitrogen, 4% sulphur and 7% • Premium version of calcium-ammonium nitrate with addition of sulphur • Produced for acidic soils distinguished by sulphur deficiency calcium (CaO) as on the North European market ...... Nitrat sulphate (NS) Level of nitrogen content from 26% • Premium nitrogen fertilizer with addition of sulphur • Aimed at cereal crops for which sulphur is required, to 32%, sulphur: from 5% to 14% for example, cereals and oil-bearing cereal crops on the European and Latin American markets...... Complex (NPK, NPKS) fertilizers NPK-fertilizers contain three main • UralChem can produce up to 20 types of NPK fertilizers • UralChem sells NPK products on the European market in such nutrient elements: nitrogen, phos- with variable content of nitrogen from 9-27%, phosphorus from 6-30% and potassium countries as Sweden, Denmark, Ireland and Great Britain phorous and potassium in different from 6-30%. • Fertilizers with NPK formulas distinguished by high level proportions • Sulphur content can reach 2% in NPKS fertilizers of nitrogen on the markets of North Europe and Asia • NPK fertilizers distinguished by low level of nitrogen are NPKS also contains sulphur mostly applied on the Latin American and European markets
56 Formation of Premium Supply
Basic Nitrogen-containing Products with High Products (straight N fertilizers) Added Value ...... Ammonium nitrate (AN) Stabilized ammonium nitrate (SAN) ...... +P Calcium-ammonium nitrate (CAN) ...... UREA Calcium-nitrosulphate (CAN + S) +K Nitrate sulphate (NS) ...... NPK: high nitrogen NPK Ammonia low nitrogen NPK +S NPK+S NPK low CL/CL-free • Aimed at cereal crops for which sulphur is required, for example, cereals and oil-bearing cereal crops on the European and Latin American markets..
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Denmark Key markets by volume 2010 International business and Sweden – 6.6% of CNS market The RUSSIAN Great Britain of UralChem and Ireland – FEDERATION 15.2% of CAN market AN – 70.7% Russia and CIS – 30% NPK – 12.2% MAP – 9.8% Europe – 30% Asia – 3% MOP – 4.9% EUROPE Urea – 2.4%
Nitrates – 42% Urea – 21% NPK – 16% Other countries – 8% CHINA UAN – 11% Turkey – DAP/MAP – 4% 11% Urea – 67% Other – 6% of AN market ABC – 19% The USA Mexico – Morocco – DAP/MAP – 7% 75% 25% NPK – 6% UAN – 28% of AN market of AN market Other – 1% Ammonia – 27% Urea – 20% NPK – 12% INDIA DAP/MAP – 6% Mexico – Latin America – 29% Nitrates – 3% 31.3% of AN Urea – 81% Other – 4% and SAN market BRAZIL DAP/MAP – 15% NPK – 3% Urea – 56% Other – 1% (the largest supplier Nitrates – 13% on the market) AS – 12% Chile and Peru – DAP/MAP – 11% NPK – 7% 18.5% of AN and SAN market
58 SPRING APPLICATION AUTUMN APPLICATION
january february march april may june july august september october november december
corn The USA soybeans wheat
rice CHINA corn wheat
rice INDIA wheat sorghum
soybeans BRAZIL corn sugar cane
wheat EUROPE barley corn
wheat The RUSSIAN potato FEDERATION sugar cane
– Planting AN, CAN, CNS, AS, NPKS MAP, DAP, NPK 10:26:26, NPS – Harvesting
59 3. Corporate Governance Page 63 Page 64 Page 65-74 Corporate Governance General meeting Board of Directors, committees, Structure of shareholders external (independent) and internal auditor
In corporate governance we apply UK Corporate The general meeting of shareholders is the supreme Our Board of Directors is elected by the General Governance Code («UK Code») as governance governing body. Shareholders Meeting. The Board consists of 9 standard and adopt practices to comply with certain members, including 2 independent non-executive provisions of the UK Code in so far as we deem directors. There are three committees formed by practicable and appropriate for us. the Board of Directors. The committees review and Effectiveness of our corporate governance is based consider the matters delegated to them by the Board on separation of powers between the Board of and provide expert advice. Directors being our key decision-making body and Internal and external auditors audit the company’s carrying out overall management and control in the financial and economic activities. Company, and senior management being in charge of day-to-day operations at UralChem.
61 Page 75–78 Page 79 Senior Management Risks
Our senior management is made up of the key execu- Our main risks were reviewed regularly by the tives being in charge of day-to-day operations in the Audit Committee with recommendations on risk Company each in his/her area of expertise. minimization being made.
62 Corporate governance structure Although we are incorporated in Cyprus, because our shares are not listed on the Cyprus stock exchange, we are not required to and do SHAREHOLDERS not comply with the corporate governance regime of Cyprus. Nomination and Remuneration In addition, notwithstanding that a substantial majority of our Committee operations are conducted in the Russian Federation, because we are a Cyprus company we are not subject to and do not comply with the INTERNAL corporate governance standards applicable to Russian companies, except in so far as our Russian incorporated subsidiaries are required AUDITOR to comply with the corporate governance requirements contained in Russian company law. BOARD Audit Committee UralChem Holding chose to apply UK Code as corporate governance OF DIRECTORS standard. As of 31 December, 2010, we have adopted practices to EXTERNAL comply with certain provisions of the UK Code. Over time we intend AUDITOR to move to a position of compliance in all material respects with the UK Code in so far as practicable and appropriate for us. Strategy and Development We believe the adoption of these corporate governance practices Committee will help to prevent abuse by the controlling shareholder and result in better governance from the perspective of minority shareholders. SENIOR MANAGEMENT Functions and authority of our management bodies are specified in the articles of association, internal regulations and terms of reference that are available on our official web site at www.uralchem.com
63 3 | corporate governance General meeting of shareholders In accordance with the Company Law (Cap.113) of the Republic As of 31 December, 2010, the shareholders of UralChem Holding were as follows: of Cyprus and the Company’s Articles of Association, the general meeting of shareholders is the supreme governing body of the Company. Directors of the Company are elected and removed from Name of Shareholder Number of Ordinary Shares Class of Shares % of Share Capital the Board by the general meeting of shareholders...... The Company held an Annual General Meeting in November 2010 with joint attendance of shareholders. The remaining decisions CI-Chemical Invest Limited 167,151,149 Class B (167,141,139) 95.51% were taken during 2010 by the General Meeting of Shareholders in Class A (10,010) ...... the form of five unanimous written resolutions. The shareholders’ resolutions were concerned with election of members of the board Fina Sun Limited 3,412,500 Class B 1.95% of directors, approval of the new articles of association, adoption of ...... the financial statements and report for 2009, etc. Dalton Mews Limited 2,388,750 Class B 1.37% ...... Ash Trading Limited 1,706,250 Class B 0.98% ...... Kappa Associates Limited 341,250 Class B 0.19% ...... Chemical Invest Limited 100 Class A less than 0,01% ...... Agrochem Invest Limited 1 Class B less than 0,01% ...... Total 175,000,000 100.00% ......
64 Board of Directors, As of 31 December, 2010, the membership committees, external of our Board of Directors was as follows:
(independent) Name Position Year of Birth • The Company has established a nomination and remuneration committee consisting of two independent non-executive Chairman 1968 directors. Dmitry Mazepin and internal auditor • The Company has established an audit committee consisting of two independent non-executive directors (although the Paul Ostling (1), (2), (3), (4) Director 1948 The Company is managed by the Board of Directors of the Company Company is not a small company under the UK Code, it currently (‘the Board’), whose role is to lead and control the Uralchem group follows the recommendations applicable to small companies in John Van Brunt (1), (2), (3), (4) Director 1942 and its strategies with the intention of enhancing the long-term this regard because of its early stage of development as a public company), and one member of the audit committee has recent value of the Company and to regularly evaluate the Company’s Director 1959 performance and its success in realization of its strategy. The Board and relevant financial experience; and Christos Kinanis has collective responsibility for ensuring that there is a sound and • The Company has established a strategy and development effective system of risk-management and internal control committee consisting of two independent non-executive Charalambos Meivatzis Director 1979 in the Group. directors and one executive director. Victor Zorkin Director 1951 The current composition of the Board is in line with relevant UK Code The Chairman of the Board is responsible for organizing the Board activities. He sets the appropriate agenda for Board meetings as principles, in particular: (4) well as ensuring proper communication and constructive relation- Maxim Bakov Director 1975 • The positions of chairman and chief executive officer are ships between Board members, the Board and its committees, the and Chief separate. Board and executive management, and between the Company and Financial • There are two independent non-executive directors (although the its shareholders. The Chairman also facilitates effective contribution Officer Company is not a small company under the UK Code, it currently of non-executive directors in the company’s success. follows the recommendations applicable to small companies in Denis Yartsev Director 1972 this regard because of its early stage of development as a public The Board consists of nine members. Current size and composition company). of the Board meet the requirements of our business, and the Board Alexander Gorshkov Director 1959 • The independence of independent non-executive directors has been has the appropriate balance of knowledge, skills and independence. evaluated using the standard of independence set out in the UK Code. (1) Independent director (2) Member of the Audit Committee (3) Member of the Nomination and Remuneration Committee (4) Member of the Strategy and Development Committee
65 Board of directors
...... Denis ...... Victor ...... Alexander ...... Yartsev Zorkin Gorshkov Paul John Christos Charalambos Director Administrative Director Director
Ostling Van Brunt Kinanis Meivatzis ...... Director Director Director Director Maxim Bakov Chief Financial Officer ...... Dmitry Mazepin Chairman 66 Senior management ...... Nina Sergey Korotkova Gurnakov
Human Resource Production Director ...... Mikhail Dmitry Yuliya Director Dmitry Dmitry Dmitry Genkin Osipov Orlovskaya Konyaev Tatyanin Sakhno Business Development Chief Executive Officer* Executive Director Commercial Director** Legal Director Public Relations Director Director
67 3 | corporate governance
Board of Directors
Dmitry Mazepin ...... Paul Ostling ...... John Van Brunt
Mr. Mazepin was elected as a member and Chairman of our Board Mr. Ostling was elected as a member of our Board of Directors in Mr. Van Brunt was elected as a member of our Board of Directors of Directors in 2010. In 2010 Mr. Mazepin also served as Chairman of 2010. In 2010 Mr. Ostling also served as the Chairman of the Board of in 2010. In 2010 Mr. Van Brunt also served as Vice Chairman of Spur the Board of UralChem OJSC, a position he had held since December Directors and CEO of Phoenix NefteGaz Services LLC and as Deputy Ventures Inc., a position he had held since 2004. From 1993 to 2003, 2007 and as Chairman of the Board of Directors of Halopolymer Chairman of Cool nrg PTY, positions he had held since 2009 and he served as President and Chief Executive Officer of Agrium, Inc. OJSC, a position he had held since 2008. From 2005 to 2007, Mr. 2007 respectively. Mr. Ostling was also a member of the Board of and from 2003 to 2004 was a member of the Board of Directors Mazepin served as Director-General of Constructive Bureau LLC. Directors of Mobile TeleSystems OJSC and PromSvyazBank, positions of Agrium. From 1991 to 1993, Mr. Van Brunt was President of the From 2002 to 2003, Mr. Mazepin served as President of Sibur. In he had held since 2007 and 2008 respectively. From 2007 to 2009, Fertiliser Division at Cominco, Ltd., the former parent company 2002, Mr. Mazepin served as Vice President of the Russian Federal Mr. Ostling served as President of Kungur Oilfield Equipment & of Agrium, Inc. Mr. Van Brunt also held other positions at Cominco, Property Fund. In 2001 Mr. Mazepin served as Chief Executive Officer Services. From 2003 to 2007 he served as Chief Operating Officer including Vice-President of Operations of Fertiliser Division from of Kuzbassugol Coal Company. From 1998 to 1997, Mr. Mazepin of Ernst & Young Global, where he held other positions including 1985 to 1991, General Manager of Gold Operations from 1983 to served as Executive Managing Director of Nizhnevartovsk Oil & Executive Partner from 1995 to 2003, Vice-Chairman and Director of 1985, General Manager of Potash Operations from 1980 to 1983, Gas and, in 1997, he was Vice President of Tyumen Oil Company. Human Resources from 1985 to 1995, and Associate General Counsel and Manager of Industrial Relations from 1977 to 1980. From 2003 Mr. Mazepin graduated from the Suvorov Military School in Minsk and Assistant General Counsel from 1977 to 1985. Mr. Ostling is to 2005, Mr. Van Brunt also served as President of the International and holds a degree in economics from Moscow State Institute of Chairman of the Financial Committee at the Business Council for Fertiliser Industry Association (IFA). Mr. Van Brunt holds a degree in International Relations. His business address is 10 Presnenskaya International Understanding. Mr. Ostling holds a degree in law from chemical engineering from Queen’s University, Canada. His business Naberezhnaya, Moscow 123317, Russian Federation. In May 2009, Fordham University School of Law and a degree in mathematics and address is 35 Wood Willow Bay SW, Calgary, Alberta T2W 4H6, Mr. Mazepin was elected as Vice-President for Eastern Europe and philosophy from Fordham University. His business address is 1196 Canada. Central Asia of the International Fertiliser Industry Association. Smith Ridge Road, New Canaan, Connecticut 06840, United States of America.
68 Christos Kinanis ...... Victor Zorkin ...... Maxim Bakov
Mr. Kinanis was elected as a member of our Board of Directors in Mr. Zorkin was elected as a member of our Board of Directors Mr. Bakov was elected as a member of our Board of Directors and 2010. In 2010 Mr. Kinanis served as Managing Director of Kinanis and appointed as our Administrative Director (Chief Operating appointed as our Chief Financial Officer in 2010. From 2006 to LLC, which he founded in 1983. Mr. Kinanis is a practiscing lawyer Officer) in 2010. From 2009 to 2010 Mr. Zorkin served as Director 2009 he held the positions of chief financial and chief executive in Cyprus and a member of the Cyprus Bar Association. Mr. Kinanis of Engineering and Construction Company LLC (Moscow branch). officer in NKK, Interros and Profmedia Groups. Prior to 2006 Mr. holds a degree in law from the University of Athens, Greece and a From 2008 to 2010 Mr. Zorkin served as Chairman of the Board of Bakov held various advisory positions in Arthur Andersen and master’s degree (LLM) in law from Cambridge University, UK. His Directors of Kirovo-Chepetsk Chemical Works OJSC. From 2008 to PricewaterhouseCoopers, as well as several positions in the financial business address is, 12 Egypt Street, Nicosia 1097, Cyprus. 2009, Mr. Zorkin served as Administrative Director of CJSC Kamsk departments of Cadbury and JTI. Mr. Bakov holds a degree in finance Phosphorites and ChimEngineeringGroup LLC. From 2007 to from Saint-Petersburg State University of Economics and Finance. 2008, Mr. Zorkin served as Administrative Director of UralChem His business address is 10, Presnenskaya Naberezhnaya, Moscow Management and UralChem OJSC. From 2005 to 2007, Mr. Zorkin 123317, Russian Federation. served as Deputy General Director of Constructive Bureau LLC. From 2004 to 2005, Mr. Zorkin served as Senior Vice-President of Neotek-Group LLC. Mr. Zorkin holds degrees in military science from the Moscow Border Command KGB School and the Higher KGB School. His business address is 249 28 Oktovriou Street, Limassol 3035, Cyprus.
69 3 | corporate governance
Denis Yartsev ...... Alexander Gorshkov ...... Charalambos Meivatzis
Mr. Yartsev was elected as a member of our Board of Directors Mr. Gorshkov was elected as a member of our Board of Directors in Mr. Meivatzis was elected as a member of our Board of Directors in in 2010. In 2010 Mr. Yartsev also served as Executive Director 2010. In 2010 Mr. Gorshkov was also the Deputy General Director 2010. In 2010 Mr. Meivatzis served as a Senior Manager and Head of Zemelia Ltd., a position he had held since 2006. From 2002 and a member of the Board of Directors of OJSC Amtel-Fredestein, of the Accounting Division at Kinanis LLC, a position he had held to 2004, Mr. Yartsev served as Deputy Director of the Pokrovski a position he had held since 2009. From 2006 to 2009, Mr. Gorshkov since 2006. From 2002 to 2006, Mr. Meivatzis worked at Ernst & Biopharmaceuticals Factory. Mr. Yartsev holds a degree in law from served as Deputy Director of TNK-BP Management. From 2005 to Young. Mr. Meivatzis is a member of the Institute of Certified Public the Moscow Labour and Social Relations Academy. His business 2006, Mr. Gorshkov was General Director of Centre of Financial Accountants of Cyprus and a member of the Institute of Chartered address is 249 28 Oktovriou Street, Limassol 3035, Cyprus. and Legal Analysis LLC. From 2003 to 2004, Mr. Gorshkov served Accountants of England and Wales. Mr. Meivatzis holds a degree in as Deputy Director of the Corporate Department of Alfa Group LLC. accounting and finance from the University of Southampton. His Mr. Gorshkov has served as an insolvency officer appointed by the business address is 12 Egypt Street, Nicosia 1097, Cyprus. court in connection with the insolvencies of the following Russian companies: OJSC Chernogorneft from 1999 to 2000, OJSC Moscow Tyre Factory in 1999, and OJSC Verkhnevazhskiy Lesopromkhoz from 1997 to 1998. Mr. Gorshkov holds a degree in government administration from Moscow Management University and a degree in crisis management from the Russian Academy of State Service. His business address is 249 28 Oktovriou Street, Limassol 3035, Cyprus.
Chairman The initial composition of our Board was different from that of 31 December 2010 (and its current composition). The first Board Dmitry Mazepin of the Board of Directors: of Directors was elected on 25 February 2010. On 17 August 2010 Elena Zevako, Chief Financial Officer, resigned from the position and Maxim Bakov was appointed Chief Financial Officer of the company as from 30 August 2010. In 2010 the Board focused very much on financial issues, our primary goal being to restructure the Company’s debt. In addition, the important business decisions taken by the Board during 2010 included The Board of Directors operates in accordance with the approved Terms of Reference published on the company’s website (www. key appointments, approval of our strategy, conversion to a single UralChem.com) that provides for functions of the Board, Chairman’s responsibilities and procedure for meetings. stock, and many other issues. I am pleased with the work of the Board and expect great performance and success in future.
70 ATTENDANCE AT MEETINGS IN 2010
DIRECTORS BOARD OF AUDIT NOMINATION AND DIRECTORS COMMITTEE REMUNERATION COMMITTEE ...... Held Attendance Held Attendance Held Attendance
Alexander Gorshkov 10 10 - - - -
Christos Kinanis 10 10 - - - -
Charalambos Meivatzis 10 10 - - - -
Denis Yartsev 10 10 - - - -
Dmitry Mazepin 10 4 - - - - Anastasia Tolstaya Secretary of the Board of Directors Elena Zevako 10 3 - - - - ...... 10 9 7 7 2 2 During 2010 the Board met on 10 occasions, always on the John Maynard Van Brunt basis of joint attendance. All members of the Board were involved in the decision-making process as much as was Maxim Bakov 10 5 - - - - expected of them. Every member of the Board contributed sufficient time and effort to fulfil his role and duties to the Company. The non-executive directors demonstrated their Paul James Ostling 10 10 7 7 2 2 concern and active interest in the Company and its business.
Victor Zorkin 10 10 - - - -
71 3 | corporate governance
Nomination and remuneration Strategy and development committee committee ...... The nomination and remuneration committee consists of two The committee’s mandate in relation to nominations is to prepare The strategy and development committee consists of three independent directors. Currently the nomination committee is selection criteria for members of the Board and to review the directors, the majority of whom are independent directors, and chaired by Mr. Ostling, and Mr. Van Brunt is a member. structure, size and composition of the Board on a regular basis. meets at least once a year. Currently the strategy and development In undertaking this role, the committee shall refer to the skills, committee is chaired by Mr. Van Brunt, with the other members The Committee operates in accordance with the approved Terms of knowledge and experience required of the Board in view of the being Mr. Ostling and Mr. Bakov. Reference, published on the company’s website (www.uralchem. Company’s stage of development and make recommendations to com), which specify the functions and reporting responsibilities of the Board as to any changes. The committee is also charged with The Committee operates in accordance with the approved Terms of the Committee, the Chairman’s role and the procedure for meetings. considering future appointments and with nominating candidates Reference, published on the company’s website (www.uralchem. for approval by the Board to fill the Board vacancies when they com), which provide for functions and reporting responsibilities of Paul Ostling, arise. The committee’s mandate in relation to remuneration is the Committee, Chairman’s role and procedure for meetings. The Chairman of the Committee: the determination and review of, inter alia, the remuneration of committee’s responsibilities include considering and providing executive directors and senior management. The remuneration recommendations to the Board with respect to strategic priorities In 2010 members of the committee approved major of non-executive directors is a matter for the general meeting and key risks facing UralChem, as well as advising on UralChem’s appointments, monitored the composition and of shareholders on the basis of recommendations of the Board investment activities and capital expenditure plans. performance of the Board and senior executives, Chairman and executive directors. No director or manager may be and reviewed and approved the Board’s principles of involved in any decisions as to his or her own remuneration. John Van Brunt, formation and remuneration. In 2011, I plan to hold more meetings if necessary, monitor all appointments with due Chairman of the Committee: attention, and apply the world’s best practice to allocate remuneration. I believe that in 2010 the Committee did everything necessary to keep the Company’s strategy in compliance with the market conditions, the Company’s financial situation and themany challenges that we faced. Faced with an ever-changing environment, the members of the Committee continuously monitored the world fertilizer and economic climate in order to react quickly to the new circumstances.
72 Audit committee
The audit committee consists of two independent directors. The audit committee must consider, inter alia: (1) the integrity of Currently the audit committee is chaired by Mr. Ostling, and Mr. Van our financial statements, including our annual and interim reports, Brunt is a member. and the effectiveness of our internal controls and risk management systems; (2) auditors’ reports; and (3) candidates to be appointed as The Committee operates in accordance with the approved Terms of internal and external (independent) auditor and other issues related Reference, published on the company’s website (www.uralchem. to their appointment. The committee supervises and monitors, and com), which provide for functions of the committee with respect to advises the Board on risk management and control systems and the Paul Ostling external and internal audit, financial reporting and internal control implementation of audit-related codes of conduct. In addition, the Chairman of the Committee and risk management, as well as reporting on the responsibilities of audit committee supervises the preparation and submission of our the Committee, Chairman’s role and procedure for meetings. financial statements and a number of other audit-related functions...... I believe that the Audit Committee plays a great role for the company. In 2010 we did a great deal to ensure that Anastasia Tolstaya, the company operates in accordance with the highest Secretary of the Committee: standards. We maintained regular contact with both the external and the internal auditor, and provided for “The Audit Committee proved to be the most active efficient coordination and support from the company’s committee of the Board due to its intensive involvement management. At the end of the year the Board appointed in monitoring the reliability of the Company’s financial a new internal auditor and this, I am sure, will also be a statements and the quality of external and internal audit.” move towards further positive changes. The committee urged that management should pay more attention to risks and monitor possible threats, to be ready to prevent negative impact on the company. From the middle of the year onwards, every committee meeting started with a brief report on the company’s financial situation and debt restructuring issues and opportunities. In addition, the committee regularly reported on current group company litigations and their expected outcome. Today, I know that the company has a strong platform for future growth.
73 3 | corporate governance
Independent (external) Internal auditor auditor ...... The consolidated financial statements of UralChem Holding for the Initially, Sergey Tsykin was elected as the company’s internal year ended 31 December 2010 have been audited by CJSC Deloitte auditor. After his resignation the company’s Board of Directors & Touche CIS, independent (external) auditors, whose address elected Natalya Soboleva as internal auditor at the meeting on is at 5 Ulitsa Lesnaya, Moscow 125047, Russian Federation. CJSC 22 December 2010. At the same meeting the Board approved the Deloitte & Touche CIS is a member of the Audit Chamber of Russia. Internal Audit Activity Charter, which is, we believe, a valuable Their appointment was approved by the annual general meeting of guide for the auditor for complying with best practice. The Charter shareholders on 19 November, 2010. is available on the company’s website at www.uralchem.com.
74 Senior Management
Name Position Year of Birth
Dmitry Osipov Chief Executive Officer* 1966
Yuliya Orlovskaya Executive Director 1972
Administrative Director 1951 Victor Zorkin (Chief Operating Officer)
Maxim Bakov Chief Financial Officer 1975
Mikhail Genkin Business Development Director 1967
Dmitry Konyaev Commercial Director** 1971
Sergey Gurnakov Production Director 1951
Nina Korotkova Human Resource Director 1976
Dmitry Tatyanin Legal Director 1967
Dmitry Sakhno Public Relations Director 1969
75 3 | corporate governance
Dmitry Osipov* Yuliya Orlovskaya Mikhail Genkin ...... Mr. Osipov was our Chief Executive Officer as of 31 December, 2010. Ms. Orlovskaya was our executive director as of 31 December, Mr. Genkin was our Business Development Director as of 31 In 2010 Mr. Osipov was also a member of the Board of Directors of 2010. In 2010 she was also a member of the Board of Directors December, 2010. In 2010 Mr. Genkin was also a member of the UralChem OJSC, Azot, Kirovo-Chepetsk Chemical Works OJSC, KCCW of UralChem OJSC and advisor to the Chairman of the Board of Board of Directors of UralChem OJSC, Kirovo-Chepetsk Chemical Mineral fertilizer Plant, VMF and Halopolymer OJSC. From 2005 Directors of UralChem OJSC. From 2008 to 2009, Ms Orlovskaya Works OJSC, Azot, VMF and Halopolymer OJSC. From 2006 to 2007, to 2007, Mr. Osipov served as General Director of Kirovo-Chepetsk held the position of Marketing Director at GE Money Bank. From Mr. Genkin served as Executive Director of Constructive Bureau Chemical Works OJSC. From 2004 to 2005, Mr. Osipov served as 2005 to 2008 she was Marketing Director at SladCo Confectionary LLC. From 2004 to 2006, he served as Executive Director of National Deputy Chief Executive Officer of ChemProm. In 2004, Mr. Osipov Association. From 1996 to 2005 Ms Orlovskaya held a number of Gas Company. From 2003 to 2004, he served as Executive Director served as Executive Director of Propane-Butane Company and, positions in marketing at the Coca-Cola Company and Kraft Foods. of Siberian-Ural Gas Energy Company and, from 2002 to 2003, as from 2002 to 2003, as Chief Executive Officer of Sibur-ChemProm. She holds a degree in international economics from the Moscow Senior Vice President of the Production and Realisation Department Mr. Osipov holds a degree in radiophysics and cybernetics from State Institute of International Relations (University) of the Ministry of Sibur. Mr. Genkin holds a degree in radiophysics and cybernetics Lobachevsky Gorkovsky State University. His business address is 10, of Foreign Affairs of Russia. Her business address is 10, Presnenskaya from Lobachevsky Gorkovsky University. His business address is 10 Presnenskaya Naberezhnaya, Moscow 123317, Russian Federation. Naberezhnaya, Moscow 123317, Russian Federation. Presnenskaya Naberezhnaya, Moscow 123317, Russian Federation.
*As of the date of approval of this Annual Report Mr.Osipov holds the position of Deputy Chairman of the Board of Directors of UralChem OJSC.
For the biographies of Victor Zorkin and Maxim Bakov, see “Board of Directors”.
76 Dmitry Konyaev** Sergey Gurnakov Nina Korotkova ...... Mr. Konyaev was our Commercial Director as of 31 December, 2010. Mr.Gurnakov was our Production Director as of 31 December, Ms. Korotkova was our Human Resources Director as of 31 In 2010 Mr. Konyaev was also Chairman of the Board of Directors 2010. From 1972 to 2008 Mr. Gurnakov held various management December, 2010. In 2010 she was also a member of the Board of of UralChem Trans and a member of the Board of Directors of Azot. positions at Nevinnomysskiy Azot, OJCS owned by EuroChem Directors of UralChem OJSC. From 2006 to 2010 she held a number From 2005 to 2007, Mr. Konyaev served as Commercial Director of MCC, OJSC. Mr. Gurnakov holds a degree in non-organic matters of positions in HR, including National HR Manager (production and Constructive Bureau LLC. In 2005, Mr. Konyaev served as Director of technology from Novocherkassk Polytechnic Institute. He holds the logistics personnel) at SUN InBev in Moscow from 2009 to 2010. Singapore Regional Office of Uralkali Trading SA, and from 2003 to title of outstanding specialist in chemical industry. His business Ms Korotkova has a wealth of experience in HR management and 2004, as Director of Business Development of Fertexim Ltd. From address is 10 Presnenskaya Naberezhnaya, Moscow 123317, Russian processes, team formation and corporate culture. She graduated 2001 to 2003, Mr. Konyaev served as Commercial Director of Mineral Federation. from Volgograd State Pedagogical University. Her business address Trading LLC and, from 1998 to 1999, he was Head Representative is 10, Presnenskaya Naberezhnaya, Moscow 123317, Russian of Sederrot International AB (Moscow). Mr. Konyaev holds a degree Federation. in economics from Moscow State University and holds a masters degree in management from California State University (East Bay). His business address is 10 Presnenskaya Naberezhnaya, Moscow 123317, Russian Federation.
*As of the date of approval of this Annual Report Mr.Konyaev serves as the Chief Executive Officer of UralChem OJSC.
77 3 | corporate governance
Remuneration of Directors Dmitry Tatyanin Dmitry Sakhno and senior management ...... Mr. Tatyanin was our Legal Director as of 31 December, 2010. In Mr. Sakhno was our Public Relations Director as of 31 December, We paid the total of around $11 million in salary and bonuses to 2010 Mr. Tatyanin was also a member of the Boards of Directors 2010. From 2001 to 2003 he was Administrative Director of Rapp our senior managers and members of the Board of Directors for the of UralChem OJSC, Azot, VMF and Halopolymer OJSC. From 2005 Collins Ltd in Moscow. From 2003 to 2004 Mr. Sakhno was CEO at JTT year 2010. to 2007, Mr. Tatyanin served as General Counsel of Legal Invest Advertising Agency. From 2005 to 2008 he was President of Aaron Group, LLC. From 2003 to 2005, Mr. Tatyanin served as General Lloyd Advertising Agency. From 2008 to 2009 he held the positions Employment contracts with senior management provide for a Counsel of Irwin Consulting Inc. (Moscow). From 2002 to 2003, of the Marketing Director at MIRAX Group and Chief Executive severance pay in case of termination of employment by mutual he served as General Counsel of Sibur and, from 1999 to 2002, as Officer at MIRAX Media. Mr. Sakhno is a graduate of the Belarusian agreement between the parties. The size of severance pay shall Deputy Head of the Department of Investment and Development at State Polytechnic Academy. His business address is 10 Presnenskaya depend on the length of work in the company with maximum Alfa-Ekho Group. From 1998 to 1999, Mr. Tatyanin served as Legal Naberezhnaya, Moscow 123317, Russian Federation. severance pay totaling 12 salaries effective as of the time of Director of KredoBank and, from 1993 to 1998, as Deputy General termination of employment for the senior managers who have been Director of Infistrakh Insurance. Mr. Tatyanin holds a degree in law employed with the company for over 5 years. We do not provide any from Voronezh State University and a master’s degree in business pensions, retirement or similar benefits to members of our Board administration from the Institute of Business and Commercial of Directors and senior management, other than those required by Administration of the National Economy. His business address is 10 law. Presnenskaya Naberezhnaya, Moscow 123317, Russian Federation.
78 Risks ...... In the normal course of business, the Company’s financial position, In the year 2010 and as of today our most important risks are the Risks Relating to Taxation results of operations and cash flows are exposed to various risks following: that have been identified, evaluated and managed by the Company. • We may be exposed to taxation in Russia if our activities We understand that timely identification of risks and development Risks Relating to Our Business are treated as creating a Russian permanent establishment. of management solutions to reduce these risks to acceptable levels • Withholding income tax could be imposed in Russia on dividends distributed from our Russian subsidiaries to are of crucial importance. Therefore, further improvement of risk • We have a substantial amount of outstanding UralChem Holding. indebtedness that reached USD 1,354.00 million as of 31 management process and internal control system in the Company • We may be subject to Defence Tax in Cyprus. December, 2010, is one of the key tasks for the year 2011 as seen by the Board of • Our business has significant exposure to taxation in • We benefit from favourable prices of key raw materials Directors. Russia. and inputs and lower labour costs and increases in our • Russian direct and indirect subsidiaries of UralChem production costs could negatively impact our operating Holding are subject to tax audits by the Russian tax margins. authorities which may result in additional tax liabilities. • An increase in existing trade barriers, the imposition of • The Russian transfer pricing rules are vaguely drafted new trade barriers in our principal export markets or the re- and are subject to varying interpretations by Russian tax imposition of export duties on Russian fertiliser producers authorities and courts. could cause a significant decrease in the demand for our products in those markets. • We depend on a limited number of suppliers for certain Economic Risks of the raw materials and inputs used in the production of our products, such as natural gas, electricity, apatite and • Fluctuations in the global economy have an immediate potash. impact on the Russian economy. • The fertiliser industry is cyclical and demand and supply • Russia is an emerging market and is subject to significant factors may result in reduced operating margins. economic downturns. • Demand for fertiliser is affected by agricultural product prices and other factors that influence the agricultural Litigation Risks market generally, such as lower agricultural product prices, adverse weather conditions, adverse government • UralChem like any other business is subject to the risk of agricultural policies, becoming involved in disputes and litigation. • We face the risk of product liability claims and associated adverse publicity. • We are subject to numerous environmental and health and safety laws and regulations, as well as potential environmental liabilities, which may require us to make substantial expenditures or engage in clean-up and other activities. • Fluctuations in exchange rates could negatively impact our operating results and margins. • Inflation could increase our costs and decrease operating margins. 79 4. Management Report
80 Page 84–85 Page 86–88 Page 89–92 Overview of 2010 performance Increase Drivers and Production Complex SWOT analysis
46.3% increase in revenue and 180% increase in The strategic development of UralChem business 10.3% increase in production volume compared with Adjusted EBITDA parameter is based on asset restructuring with the aim 2009, due to development of the phosphate segment. of providing the most effective management, diversifying the product range and integrating with distributors, logistics networks, and access to unique base resources.
81 Page 93–101 Page 102–103 Page 104–106 Sales Financial performance Logistics
10.5% increase in sales, rising to 4.8 million tons of Revenue 5.49 million tons of freight was transported by products. The following key international markets + 46% the railway system. Volumes of trans-shipments for UralChem in 2010 are: Latin America, Western of mineral fertilizers and ammonia in the ports of and Eastern Europe, Africa, and the CIS. In its leading Vyborg, Saint Petersburg, the southern part of the Net profit position on the Russian nitrogen fertilizer market, Russian Federation, Ukraine, and Estonia totalled 2.6 recovered to $29 566 thousands the Company provided almost 45% of annual million tons. In 2010 the first ammonia shipment was output of the most required product in the country - made via the new Riga fertilizer terminal in Latvia. Adjusted EBITDA ammonium nitrate (568 thousands tons) in 2010. + 180%
82 Page 107–110 Page 111–113 Page 114-116 Strategic Development Human Resource Management Corporate Liability
The investment and development program is As of December 31 2010, the total number of In 2010, within the framework of the corporate geared to product range development, switching Company employees increased to 12,000 people. liability program, URALCHEM implemented an from commercial ammonia sales to granular Effective human resources management in the initiative concerning reductions of greenhouse fertilizer sales and improvement of the transport UralChem is based on professional development, gas emissions and energy conservation, voluntary logistics infrastructure. In 2010 UralChem started to high levels of social protection, and attention to fulfilment of European legislation in the sphere implement a staged program of target optimization safety and labour protection. of chemical substances treatment (REACH), control and reduction of internal expenses through and observance of EU regulations concerning the reorganization of subsidiaries, using single stock classification, labelling and packaging (CLP); it companies. is an active participant in the global program of environmental responsibility in the chemical industry, known as Responsible Care.
83 4 | management report
Overview of the 2010 performance
CONSUMPTION OF RESOURCES PRODUCTION SITES MAIN PRODUCTION SALES LOGISTICS
Commercial Natural gas 3.04 bln m³ Azot Ammonia 516 Kt
Phosphate 975.3 kt AN/SAN 2 235 kt Increase on Own and rented KCCW Mineral 10.5% (464. 4 thous. t) transportation logistics up to facilities on the basis of Potash 110.1 kt Fertilizer Plant UREA 447.7 kt 4 896.1 thous. t. UralChem Trans (over 5,000 vehicles, Murashi Depot) and UralChem Trading Electric energy 1232 GWh VMF NPKS/CAN/S 866.6 kt (Latvia)
DAP/MAP 545.2 kt
Nitric acid 70.8 kt
84 TRADING FINANCIAL INDICATORS
UralChem Trading (Latvia) Revenue $1 389 119 thous. 46.3% increase
UralChem Trading House Net profit $ 29 566 thous. Dmitry Osipov CEO*:
Dmitry Osipov, CEO*:
Recovery of profitability after 2009 crisis in fertilizers ...... 2010 was a year of recovery for UralChem. Against the industry. background of the nitrogen market and in particular the phosphate fertilizers market, recovering after 2009, a Trade agent in Great Britain very difficult year for the whole industry, we managed to achieve parameters close to one of the most successful recent years before the crisis – 2008. Using the positive situation on the phosphate market, and the whole sales structure and scheme, we managed to provide a UralChem Trading (Brazil) Adjusted EBITDA significant improvement of EBITDA in 2010. $ 309 163 thous. * As of the date of approval of this Annual Report Mr. 180% increase Osipov holds the position of Deputy Chairman of the Board of Directors of UralChem OJSC. Our new CEO is Dmitry Konyaev.
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Drivers of the business
Leading positions on the Russian market Leadership in supplies to the Russian market of the best- Management and selling types of nitrogen and phosphate fertilizers. In 2010, the portion of total production volume of nitrogen and Strategic Development phosphate fertilizers in the Russian Federation constituted 15%. AN, meanwhile, ranked first ...... Balanced product portfolio Depending on various groups of consumers and multiple and diversified supplies markets enables diversification of risks and successful risk management...... Integration of manufacturing facilities Improves logistics and simplifies consumer access. with distributors and transportation networks ...... Restructuring of assets Enables reduced administrative costs and increased management quality.
86 Resources and Logistics Access to a rich resource base with optimal low The Russian Federation is known for having very rich price of raw materials and energy resources. resources of natural gas and electricity generating capacities. It ranks among countries with low gas prices, phosphate and potassium resources and energy products...... Access to developed transportation system A number of developed railways and seaports enable effective delivery of the products to consumers...... Increased demand for all types of fertilizers During the last 30 years, world demand has increased by Global Trends an average of 3% per year. The main factor is additional demand for mineral fertilizers due to new branches of industry, such as production of biological fuel.
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UralChem business SWOT Strengths Weaknesses
• Average demand for fertilizers has increased up to 3% per year • Dependence on increasing natural gas price. during the last 30 years. • Remoteness of main consumers. • Access to rich base of natural resources. • Industry is the subject to strict govermantal control. • Optimal low price of most raw materials and energy resources. • Aged railway system. • Access to developed transport system. • Leader in terms of volume of deliveries of the most widely used Russian fertilizer– ammonium nitrate. • Diversified supplies.
Opportunities Threats
• Strengthening of the leader positions on the world market of • Considerable increase of gas prices in the Russian Federation. mineral fertilizers. • Considerable increase of capacities for fertilizer production in • Increase of the share of high-margin products in total the world. production volume. • Economic instability in countries consuming fertilizers. • Expansion of product ranges. • New requlatory matters and laws adopted in the enviromental • Corporate and risk management quality improvement . protection sphere in the key markets.
88 Production complex
Production volume increased by 10.3% in 2010. In 2010 VMF increased its own holding in the total production volume of the Company.
Production Volume Production Part according to businesses
thous. t.
6 000 100%
5 000 80% KCCW KCCW 4 000 MFP MFP 60% 3 000 VMF VMF 40% 2 000
1 000 20% AZOT AZOT
0 0% AZOT VMF KCCW UralChem AZOT VMF KCCW UralChem MFP MFP 2009 2010 2009 2010
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Ammonium nitrate and its derivatives constitutes 51.7% of UralChem production.
Portion held by Product in Total Change of Product Portion in 2010 Production Volume in 2010 compared with 2009
0.02% 1.5% 100% 0.13% 3.29% 90% 0.22% 51.70% 80% 6.87% 70% 4.34% 60% Other chemical products Sulphuric acid 50% 12.11% Phosphoric acid 40% Other mineral fertilizer NPS 9.21% 30% MAP DAP 20% 10.61% Complex fertilizers 10% Urea Ammonia Ammonium nitrate MAP 0% Ammonium nitrate and its derivatives and its derivatives NPS Ammonia Other mineral fertilizers Urea Phosphoric acid 2009 2010 Complex fertilizers Sulphuric acid DAP Other chemical products
Sergey Gurnakov Production Director:
The portion of complex fertilizers and of MAP and DAP increased in 2010 90 Consumption of Resources in 2010
KCCW Azot 2009 2010 VMF MFP (Berezniki)
Natural Gas 3 bln. m³ 3.04 bln. m³ Production 773.9 kt 2.169 mln. t 1.918 mln. t Sergey Gurnakov +10.3% Production Director Phosphate 382 kt 975.3 kt increase +35.7% increase +8.3% decrease –0.1% ...... The 10% increase of production, up to 4.861 million tons, Dmitry Konyaev, CEO*: Dmitry Konyaev, CEO*: Dmitry Konyaev, CEO*: Potash 150 kt 110.1 kt was achieved with a general reduction of electric energy and Recovery of precrisis Increase in production The slight decrease potash consumption. This was the result of an optimization volumes and premium and export is connected with program aimed at decreasing resource losses within the Electric mln. t strengthening of oriented complex brands, planned modernization production network. VMF, the main phosphate asset of the 1280 GWh 1232 GWh 4.861 energy UralChem companies and increased market operations carried Group, made a significant contribution to the volume. VMF position in phosphate presence of phosphate out at the loading increased volume of final output rose to 773,9 thousands tons, segment fertilizers. enterprises having used 2.5 times more phosphate rock.
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The Quality Management System of the Group Companies
In order to provide complete observation of consumers’ requirements and normative documents, to secure quality improvement of manufactured products and increase of activity efficiency quality management systems are successfully introduced and applied at the Group enterprises. Functioning of Management Systems at the Group Enterprises СО 9001-2001
ISO 9001 ISO 14001 OHSAS 18001 GOST R ISO 9001
Enterprise ......
KCCW Introduction in 2008, certification Introduction in 2008, certification Introduction in 2008, certification Introduction in 2008, certification in 2011. in 2011. in 2011. in 2011.
Azot Certified from 2004. Certified from 2009. Certified from 2009. Certified from 2004.
VMF Certified from 2002. Certified from 2006. Certified from 2010. Certified from 2002.
Sergey Gurnakov Production Director: Efficiency of the management systems existing at the enterprises is approved by certifying, controlling and supervising authorities on the basis of supervisory audits results every92 year. Sales
Cash cost* * Cost of sales less depreciation
52.2% of total sales 46.4% of total sales 8% 38% 5% 36% 12% 10%
17% 17% 2009 2010 Dmitry Konyaev Commercial Director*
8% ...... The price of our products depends directly on the current 9% 2% price level of raw materials and energy. This dependence 10% refers not only to prices of natural gas, phosphate rock, 1% 5% 3% 19% MOP and other micro and mid elements but also to energy and logistics costs. As the sole procurement operator for the group, we can influence price conditions through the Natural gas Other raw materials volumes of materials and resources purchased and choose Phosphate rock Energy and utilities the most flexible suppliers on competitive procedure basis; Potassium chloride Wages and sallaries in this way, we optimize the costs. Sulphur Other *As of the date of approval of this Annual Report Mr. Konyaev holds the position of CEO. Our new Commercial director is Alexey Strakhov.
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1% 7% 1% 7% 4% 41% 3% 41% 4% 5% Railway tariff Selling and distribution expenses* Freight and transshipment 6% 4% Rail cars rent expenses Other transportation Selling and distribution expenses increased by $56.3 million or 8% 6% Wages and salaries 21.2% to $321.7 million for the year ended 31 December 2010 from 2009 2010 Advertising and marketing $265.5 million for the year ended 31 December 2009. Сlearance charges Other *Key expenses less depreciation 29% 33%
94 Total volume of sales in 2010 ......
In 2010 UralChem Group sold the following volumes of products:
4 578.6 thous. t Mineral fertilizers – Mineral Fertilizers of the main commercial 3 809.3 thous. t (78%) output Commercial ammonia 407 thous. t (8%) Sale of mineral fertilizers 78% of sales 3 809. 3 thous. t Other products, including acids, UralChem in 2010 of mineral fertilizers sold in physical weight oxygen, argon 679.7 thous. t (14%) ......
In 2010 sales increased by Increase of sales 464. 4 thous. t. or 10.5 %. as compared 7.1% 253.6 thous. t with 2009 constituted Supply geography: 70 regions of the Russian Federation Dmitry Konyaev Commercial Director*: and 53 countries Mineral fertilizers remain the core product of the Company. This is our main profit source.
*As of the date of approval of this Annual report Mr. Konyaev holds the position of CEO. Our new Commercial Director is Alexey Strakhov.
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Directions of Mineral Fertilizers Supplies*
*By volume of sales in tonnes 10% 25% 65%
2010 Dmitry Konyaev Commercial Director*: ...... Striving to provide support initially to the Russian consumers of fertilizers, UralChem is a significant international player distinguished by the world geography of its supplies, determined by its production volume and business level. Export Internal market *As of the date of approval of this Annual report CIS Mr. Konyaev holds the position of CEO. Our new Commercial Director is Alexey Strakhov.
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Ammonium Nitrate and its Derivatives Nitrogen Fertilizers Export (ammonium nitrate and its derivatives) ...... 59.9% 2 280.8 thous.tons 54% 68% of total mineral fertilizer sales of ammonium nitrate and its derivatives sold in 2010 UralChem part in All-Russia export Export volume in UralChem sales of ammonium nitrate and its derivatives structure of ammonium nitrate and volume in 2010 its derivatives 1 219.3 thous.tons The Group production facilities produce and sell several ammonium nitrate for agriculture (AN) types of ammonium nitrate and its derivatives: • ammonium nitrate for agriculture (GOST 2-85, 306.6 thous.tons brand B); calcium-ammonium nitrate (CAN) • industrial grades of ammonium nitrate: water- resistant, porous; 370.1 thous.tons • calcium-ammonium nitrate (CAN) and CAN with sulphur (calcium nitrosulphate – CAN+S); stabilized ammonium nitrate (SAN) • stabilized ammonium nitrate nitro-phosphate – SAN 33:3 brand; 384.8 thous.tons • ammonium nitrate solutions. ammonium nitrate for industrial usage (EGAN)
Dmitry Konyaev Commercial Director*: We have exported ammonium nitrate and its derivatives primarily to the markets of Latin America, Central, Western, Northern and Southern Europe, and Africa and the CIS.
98 In the Russian Federation: According to UralChem information:
......
...... Ammonium nitrate for agriculture
732.1 thous. t Urea ...... of ammonium nitrate and its 568 thous. t Export derivatives delivered (64% of total volume) 24% to the internal market in 2010 76% The main regions: UralChem UralChem part Others 440.3 thous. t 437.3 thous. t Central and Ural parts on the Russian (99 %) of the Russian Federation Latin and Central America, and Volga regions market West Europe
Dmitry Konyaev Commercial Director*:
“UralChem is the largest supplier of ammonium nitrate that is the strategic and the widely used fertilizer among Russian farmers”.
*As of the date of approval of this Annual report Mr. Konyaev holds the position of CEO. Our new Commercial Director is Alexey Strakhov.
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Phosphate and Complex Fertilizers 1 054.6 thous.tons of phosphate and complex fertilizers sold
Complex fertilizers produced by UralChem Group are represented by a wide range of NPK types with high nitrogen content such as NPKS 27-6-6-2, NPKS 22-7-12-2, and low nitrogen content like NPK 16-16-16 and NPK 10-26-26. The main production base for complex fertilizers are KCCW.
......
Internal Russian supplies Export The main markets:
constitute ......
Dmitry Konyaev – Central, Commercial Director*: West and Northern Europe, thous.tons 83 % – Southern Asia, ...... 177.5 – the CIS. We are one of the largest Russian exporters of phosphate of phosphate and complex fertilizers of total volume and complex fertilizers providing up to 12% of total volume of export supply from Russia. We plan to increase The main regions: our activity within this segment in the nearest future. including NPKs of different grades Southern and Central parts of *As of the date of approval of this Annual report 877.1 thous.tons Russian Federation and Volga Mr. Konyaev holds the position of CEO. Our new 102.9 thous.tons regions Commercial Director is Alexey Strakhov.
100 Chemical Raw Materials Directions of Chemical Raw materials for Industrial Usage supplies for industrial application Dmitry Konyaev Commercial Director*: Production and sale of chemical raw materials for industrial 14% 86% application represents the second most significant business Internal Export Total sales of all types of chemical raw materials for industrial application reached direction. supplies 464,4 thousand tons. Ammonia accounted for88% of the total volume in 2010. Direction of Chemical Raw materials supplies for industrial application
...... Ammonia 407 thous.tons UralChem – 16% Key regions of supplies: in the structure of Russian ammonia export – Northern, Eastern and Western Europe Much of the ammonia produced by UralChem Group is used for production of mineral fertilizers internally and excessive stock is – The USA sold out. – Africa Russian consumption 9.5 thous.tons 1.6% of commercial ammonia increase in 2010 Export: 98% of total volume of ammonia sales
*As of the date of approval of this Annual report Sergey Gurnakov Production Director Mr. Konyaev holds the position of CEO. Our new Commercial The comparatively low increase of 1.6% was dictated by an increase of dry Director is Alexey Strakhov. mineral fertilizers production and planned shutdowns of ammonia aggregates during the year. 101 Financial performance Revenue split 2010 by key products 4%1% 3% 10% 82% UralChem is a dynamically developing player on the world market for nitrogen and phosphate fertilizers, operating in numerous countries. The key indicators of UralChem Group financial performance during 2008 – 2010 as per the Group’s IFRS consolidated financial statements are presented below:
Mineral fertilizers Ammonia Explosive grade ammonium nitrate Inorganic acids Financial highlights, thous. US dollars Other chemical products Maxim Bakov Chief Financial Officer: 2010 Change 2009 2008 ...... The market situation seriously affected the financial 1 389 119 46% 949 073 1 696 853 performance of UralChem in 2010. Additional possibilities Revenue were created by the recovery of phosphate fertilizers Operating profit/loss 205 231 3745% –5 631 467 932 market, increased demand on the Russian market among western consumers and, of course, the flexibility of the Net profit/loss 29 566 130% –97 044 76 224 Company production facilities. The market achieved stable growth, reaching its pre-crisis level during the last Adjusted EBITDA* 309 163 180% 110 467 622 410 9 months of 2010, with an increase in the average world 22.3% — 11.6% 36.7% prices of ammonia up to 47.3%, ammonium nitrate – EBITDA margin not less than 31.5%, DAP – up to 40.1%, UREA – 3.9% * “Adjusted EBITDA” represents EBITDA for the period before net gain/loss from operations with derivatives (no such operations in 2010), impairment of non-current assets, share of profit/ compared with the same period in 2009. loss of associates, foreign exchange gain/loss from financing activities and other financial expenses. Adjusted EBITDA equals operating profit before depreciation and amortization and net gain/loss from operations with derivatives.
102 Fertilizers segment performance Revenue split Revenue overview according to key markets 24% 9% 18% 51% 21% 76% 71% 70% 16% 65% 22% 18% 60% 71% 18% 59%
7% 23% 2009 2010 2009 2010 21% 19% 31% 8% 22%
Nitrogen based fertilisers ...... CIS Russia Export Phosphate based fertilisers Nitrogen based fertilisers Complex fertilisers Phosphate based fertilisers Complex fertilisers
Maxim Bakov Chief Financial Officer Flexibility of production processes helps bring the company into line with the market situation. It helps shift to the most currently marketable products and thus realise the highest return.
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Logistics
Railway Transportation Determination of managed Rolling-Stock Size for most Significant Russian Mineral Fertilizer Market Members* In order to manage the railway transportation logistics of all UralChem enterprises, URALCHEM-TRANS LLC was established in 2007 and is authorized to represent the interests of all Group Eurochem c. 7 000 production facilities in all spheres connected with transportation of UralChem c. 5 000 finished products and main raw components by rail. Silvinit c. 5 000 Uralkali c. 4 000 PhosAgro c. 4 000 Sergey Momcemlidze Acron c. 3 000 CEO, UralChem Trans: UralChem Trans ......
Consolidation of the UralСhem railway transportation ...... system has enabled if to provide complex management Volumes transported Kirovo-Chepetsk VMF AZOT Chemical Works OJSC and optimization of UralChem logistics. It sets up a strong by rail in 2010 rolling-stock base in between the production facilities, 5.49 million tonnes 2.27 million tonnes 1.56 million tonnes 1.66 million tonnes redistributing, providing operative interaction with contracting forwarding agents, decreasing transportation *According to the information of companies, UralChem expenses, and increasing the general efficiency of logistical operations.
104 Structure of Granular Mineral Fertilizers according to Shipping Directions in 2010 9% in CIS
28% in the Russian Federation 63% Export
Export Rolling-Stock Structure in 2010 Internal market (average annual parameters) CIS Dmitry Osipov CEO*:
We decided to carry out a final consolidation of the assets within Rolling-Stock Type Amount Specific Weight, % UralChem Trans, with the aiming of increasing logistics efficiency. To achieve this goal we plan to associate railway workshops and ...... production facilities with railway approach lines to UralChem Trans; Tank-trucks 1 244 24% ( ammoniac and chemicals) this will give us an opportunity to set up the major centre ...... of responsibility for complete cycle of logistical operations. Bulk railway wagons 3 186 62% ...... Open-top railway car and covered 715 14% railway car * As of the date of approval of this Annual Report ...... Mr. Osipov holds the position of Deputy Chairman of the ...... Board of Directors of United Chemical Company UralChem. TOTAL 5 145 100% Our new CEO is Dmitry Konyaev.
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Shiftment and Freight
Shiftment volumes of mineral fertilizers and ammonia produced by the Company are distinct from the 2009 level and total 2.6 million tons. Own water transportation totalled 865 thousand tonnes.
Shipment per Ports in 2010
Cost Effective Directions Cost-based Directions
Vyborg St. Petersburg Riga Southern ports of the Russian Federation and Ukraine 45% 53% 50% 12%
In addition: • • Shipments from Azot branch of Open Joint Stock Company United Chemical Company URALCHEM in Berezniki, by river during summer navigation, increased by 30%, reaching 210 thousand tonnes. • Shipment of mineral fertilizers in containers has started. • The first 67 thousand tonnes were shipped via a new ammonia shipment terminal in Estonia.
106 Strategic Development
The Main Directions
Product range ...... Logistics ...... Sales
Dmitry Osipov, In order to increase efficiency of mineral fertilizers sales the Implementation of vertical integration strategy aimed at dealing CEO*: projects concerning improvement of transport with the final consumers is being continued. “The main task of the nearest future is to recast step by step infrastructure are being elaborated. from sales of ammonia to the following processing into Dmitry Konyaev, granular fertilizers. The main part of the Group investment Mikhail Genkin, Commercial Director*: program is connected with this purpose.” Business Development Director: “We aim to develop our own sales networks in Europe and «Infrastructure projects have been started and South America to increase sales margin”. UralChem continues to implement the projects that enable to implemented by now: the construction of the reloading introduce new products on the market within limited time periods, terminal in Riga and the expansion of Berezniki river port. UralChem’s own distributive nets in Russia are being developed for example, such as, for example, complex fertilizers without Development of the transport aspect will help considerably by UralChem Trading House and its agricultural chemical chlorine. Simultaneously it is planned to develop interaction with reduce logistical expenses, guarantee stable sales channels, centres in regions of the Russian Federation. Warehouses belonging local key market distributors for niche goods (NPK/S, CAN, CNS, NS, and minimize the influence of agents on final production to the Company will help build up UralChem’s own stocks in the SAN, partially MAP, NPS). costs.» key regions for storage with consequent sale during the high season on the basis of maximum prices. Besides, the * As of the date of approval of this Annual Report Company is putting together a complete range of agrochemical Mr. Osipov holds the position of Deputy Chairman of the services that it is planned to promote in the very near future Board of Directors of United Chemical Company UralChem. through agricultural chemical centres.
Our new CEO is Dmitry Konyaev.
*As of the date of approval of this Annual Report Mr. Konyaev holds the position of CEO. Our new Commercial Director is Alexey Strakhov.
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Production and producing assets ...... Operating efficiency
UralChem plans to increase fertilizer packing capacities, In 2010 we launched the project to transfer to a single which will help differentiate loading opportunities for fertilizers stock. Our goals were to: according to consumer needs and form its own flexible sales · Increase the efficiency of financial flow management strategy. in the Group · Improve the Group’s financial results Sergey Gurnakov, · Make UralChem more attractive as an investment Production Director: · Avoid all risks of corporate conflicts “The Company pays much attention to modernization By the end of 2010 we completed a number of mergers of existing facilities. In the very near future the second inside the Group and finished first stage of the project to modernization stage will be continued. We expect transfer to a single stock by 14 December, 2010. In 2011 we that it will enable us to provide additional increases in expect to further streamline our corporate structure and productivity of the main aggregates and to decrease complete second stage of the project. resource consumption standards”.
The Group plans to invest significantly in the reconstruction of a sewage disposal plant to preserve a favourable environment at the sites. The priorities of the company are production safety and environmental and social responsibility.
108 Innovations and Scientific Work Mikhail Genkin Business Development Director UralChem has established active cooperation with the leading scientific centres of the Russian Federation and abroad. Outstanding scientists and key experts Investments in agronomy and chemistry all over the world are implementing the integrated program of scientific expert in development support, elaboration of progressive solutions, monitoring ...... We invested in implementation of new production projects and introduction of innovations. and technical upgrading of existing facilities in accordance with the approved plan for 2010. We believe it will increase Analysis of agronomic efficiency of the standard product production of high-margin products for premium markets portfolio, and of new products, is one of the prior activities. and decrease resource consumption. Agricultural efficiency tests on various crops and soil types are performed on an annual basis.
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Analysis of agronomic efficiency of the basic product Quality analysis and technology improvements Production process safety portfolio and new fertilizers
In association with the following organizations: In association with the following organizations: In association with the following organizations: • The Moscow State University Chemical Department • The Centre of Expertise of Federal State Unitary Enterprise • The Moscow State University Chemical Department. and Department of Soil Science, “Russian Scientific Centre Applied Chemistry”, • The All-Russia Scientific Research Institute of agricultural • BAM Federal Institute for Materials Research and Testing, chemistry named after D. N. Pryashnikov, of the Russian Germany (BAM), Academy of Agricultural Sciences, • he ЕС Inspectorate Estonia AS Laboratory, • The Russian State Agrarian University MTAA named after • Laboratoire SADEF (France). K. A .Timiryazev, • The Poznan University of Life Science, • The Lithuanian research centre for agriculture and forestry..
Michael Genkin, Michael Genkin, Michael Genkin, Business Development Director: Business Development Director: Business Development Director: Not only do we strive to absorb and apply scientific experience, but we also As an innovative company we pay great attention to the most advanced methods We pay special attention to the issues of production safety and quality control. share our own progressive achievements. For this reason, we take part of quality improvement and to introduction of advanced technologies into In order to maintain high results we continually analyse, test and certify in scientific conferences and publish results of our research works in the key production process. our products and procedures. agrochemical mass media.
Michael Genkin Business Development Director: Numerous tests and surveys prove that all UralChem products are outstanding in high efficiency, stable quality and confirmity to the EU, UNO and Russian Federation requirements.
110 Human Resources Management
The Main Purposes of the Company’s Human Resources strategy ...... The best staff recruitment The best employee retention
• improvement the system of corporate and individual goals setting; • introduction of new staff motivation system; Nina Korotkova • introduction of integrated approach to staff appraisal and development; Human Resources Director: • increase of individual employee engagement levels.
...... Over 12,000 employees work for the Company today. Parts of the Company are separated from each other by huge distances, varying from hundreds of kilometres Principles of Human inside the Russian Federation to thousands of kilometres abroad. We do our utmost to create an internal corporate Resources Management environment, the territory of UralChem HR-brand being distinguished by comfort, interest, job prestige Assistence to successful business development Creation of professional teams. Elaboration and implementation of the most advanced and and attractive prospects. The main goal is to form a of the Group. effective technologies for attraction, motivation, retention and united team that achieves joint results irrespective of development of the best employees. geographical location and time.
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UralChem Employee Figures in 2010
Staff on the Azot KCCW MFP VMF Other Companies Total Payroll ...... 2010 3.456 4.518 3.077 1.274 12.325
Purpose No1 in the reinforcement of sphere of human resources UralChem HR-brand management for 2011 as an attractive employer
112 Industrial Safety and Labour System of Labour Protection Protection at UralChem Management
Production Facilities Sergey Gurnakov Production Director: All operations aimed at ensuring labour protection on PREVENTION of Group sites are performed according to regulatory legal industrial injuries ...... The efficiency of labour protection and industrial safety acts, the plans of the main institutional arrangements management systems applied at Azot and VMF in 2010 and collective agreements. was proved by two audits by independent international IMPROVEMENT of certified institutions specialising in professional health and safety. labour conditions and health of employees Sergey Gurnakov Production Director Manufacturing supervision was exercised in the industrial safety and labour protection departments by means of organization of and participation in integrated inspections of industrial safety and labour protection conditions in the corresponding departments. The instructions of the State Supervision Authorities (Federal Service for Ecological, Technological and Atomic Supervision, Federal Supervision Agency for Customer Protection and Human Welfare, the Ministry of the Russian Federation on Civil Defence, Emergency Situations and Response to Accidents’ Implications, the State Labour Inspection Service) are monitored, and performance notices are provided within specified time limits.
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Corporate Liability
Environment Protection DIRECTIONS
Principles technical production improvement of environmental construction and reconstruction of on the basis of the re‑equipment characteristics of production systems applied environmental preserving objects • Environmental and social best available technologies distinguished – improvement of principal production by high environmental safety RESPONSIBILITY; technologies, usage of environmentally safe • Effectiveness and PRODUCTIVITY materials of environmental activities; • ACCESSIBILITY for interaction with concerned parties.
Sergey Gurnakov Production Director
UralChem acknowledges its liability to society for preservation of favourable environment in the regions where it has a presence. The Company follows a transparent environment policy. Environmental activity is a matter of priority in the Company’s strategic development.
114 GREENHOUSE GAS EMISSIONS AND Specific amount of atmospheric emissions, in kg/t ENERGY CONSERVATION of commercial output
In 2010, the specific total of atmospheric emissions of UralChem 5.00 Sergey Gurnakov Production Director Group compared with the previous decreased by 0.37% 4.00 year, totalling 2.67 kg/t of commercial output. The Company’s total 3.00 UralChem is moving towards solving the problem of the increase atmospheric emissions of the Company increased by not more than of contaminants in atmosphere emissions, including solid 16.39% compared to the previous year and totalled 9,9 thousands 2.00 particles and greenhouse gases, step by step in accordance with tons due to production increases at VMF and KCCW. 1.00 our internal plan.
0.00 AZOT VMU KCCW MFP Total for UralChem group 2007 2008 2009 2010
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In 2010, 147 analyses were performed in Russian and European Community laboratories. In October 2010 (well before the term specified in REACH regulations), Observance of European Legislation registration dossiers for all 27 substances defined by the 2010 registration term were forwarded to the European Chemicals Agency. Their completeness and in the Sphere of Chemical Substances compliance with the regulations of the European Chemicals Agency was verified and all dossiers were given registration numbers. Treatment (REACH) Subsequent registration of substances, distinguished by later registration terms in 2013 and 2018, will be performed according to the approved registration plan.
......
Observance of Requirements of the Euro- According to the requirements of EC regulation 1272/2008 (CLP) concerning classification, marking and packing of substances exported to EU countries, 27 substances have been notified. According to the requirements of CLP regulations, notification dossiers have been compiled and new classifications pean Regulations concerning Classifica- of single-component substances produced. The provided documents were verified in ECHA and notification numbers obtained. The new classification was shown in the new product safety data sheets delivered to our European consumers; markings, risk factors and measures of safe tion, Marking and Packing (CLP) product treatment, according to regulations 1272/2008 and 453/2010, are specified in these new safety data sheets.
Sergey Gurnakov Production Director “The Company ensured absolute stability of its supplies to the EC market and showed our consumers in EU countries a responsible approach to observance of the requirements concerning chemical substance treatment”.
...... In 2010 UralChem took part in the questionnaire survey concerning requirements of international Responsible Care program. It represents the large-scale Responsible Care program initiative of chemical industry representatives aimed at improving and increasing technical safety, providing labour and environment protection and improving products and production processes. The specified questionnaire survey was conducted by the International Council of Chemical Associations (ICCA), Sergey Gurnakov Production Director through the Russian operator of the Russian Association of Chemists Program. “We continue to prove our commitment to ensuring production process safety, safe labour conditions for our employees, and health protection of population A year after joining the Program, UralChem Group became a competent official participant of the Responsible Care Program. Having successfully passed numerous living in proximity to the Company’s businesses through systematic reduction tests and supervisory audits in mid-December, the Company obtained the corresponding certificate during the annual meeting of the International Council of Chemi- cal Associations Committee (ICCA) concerning implementation of the international program. of their negative influence on the environment.”
116 Directors’ responsibility statement
We confirm that to the best of our knowledge: • The consolidated financial statements, prepared in accordance On behalf of the Board, which approved the making of the with IFRS, give a true and fair view of the assets, liabilities, financial position and profit or loss of the UralChem Group and the undertakings included in the consolidated statements as a responsibility statement for the Company at the meeting whole; • This annual report includes a fair review of the development and of the Board of Directors on 31st March 2011 performance of the business and position of UralChem Group and the description of the principal risks and uncertainties that they face • The “going concern” assumption is appropriate in the preparation of the Group’s consolidated financial statements
117 5. 5. Consolidated financial statements for the year ended 31 December 2010
118 Table of contents
Statement of management’s responsibilities for the preparation and approval of the consolidated financial statements for the year ended 31 December 2010...... 120 Independent auditors’ report...... 121
Consolidated financial statements for the year ended 31 December 2010: Consolidated income statement...... 122 Consolidated statement of comprehensive income...... 123 Consolidated statement of financial position ...... 124 Consolidated statement of cash flows...... 125 Consolidated statement of changes in equity...... 126 Notes to the consolidated financial statements...... 127
119 5 | URALCHEM HOLDING P.L.C. Consolidated financial statements
Statement of management’s responsibilities for the preparation and approval of the consolidated financial statements for the year ended 31 December 2010
The following statement, which should be read in conjunction with In preparing the consolidated financial statements, management is the independent auditors’ report set out on pages responsible for: 2-3, is made with a view to distinguishing the respective responsibilities of management and those of the independent • selecting suitable accounting principles and applying auditors in relation to the consolidated financial statements of them consistently; • making judgements and estimates that are reasonable UralChem Holding P.L.C. and its subsidiaries (the “Group”). and prudent; • stating whether IFRS have been followed, subject to any Management is responsible for the preparation of consolidated material departures disclosed and explained in financial statements that present fairly the financial position of the the consolidated financial statements; and Group as at 31 December 2010, the results of its operations, cash • preparing the consolidated financial statements on a flows and changes in equity for the year ended 31 December 2010, going concern basis, unless it is inappropriate to presume in accordance with International Financial Reporting Standards that the Group will continue in business for the foreseeable (“IFRS”) as issued by the International Accounting Standards Board. future. Management, within its competencies, is also responsible for: • designing, implementing and maintaining an effective system of internal controls, throughout the Group; • maintaining statutory accounting records in compliance with local legislation and accounting standards in the respective jurisdictions in which the Group operates; • taking steps to safeguard the assets of the Group; and • detecting and preventing fraud and other irregularities.
The consolidated financial statements for the year ended 31 December 2010 were approved and signed on 31 March 2011 by:
Victor N. Zorkin Maksim Kh. Bakov Director Chief Financial Officer
Limassol, Cyprus 31 March 2011
120 Independent auditors’ report To the Shareholders of UralChem Holding P.L.C.: Auditors’ responsibility Basis for qualified opinion
We have audited the accompanying consolidated financial Our responsibility is to express an opinion on these As discussed in note 18, the Group was unable to account statements of UralChem Holding P.L.C. and its subsidiaries consolidated financial statements based on our audit. for its investment in Open Joint Stock Company Perm (the “Group”), which comprise the consolidated statement We conducted our audit in accordance with International Mineral Fertilisers using the equity method of accounting of financial position as at 31 December 2010 and the Standards on Auditing. Those standards require that we in accordance with IAS 28 Investments in Associates. As a consolidated income statement, consolidated statement comply with ethical requirements and plan and perform the result we were unable to satisfy ourselves as to the carrying of comprehensive income, consolidated statement of cash audit to obtain reasonable assurance about whether the value of investment in this associate as at 31 December flows and consolidated statement of changes in equity consolidated financial statements are free from material 2010 stated at USD 24,541 thousand (2009: USD 24,578 for the year then ended and a summary of significant misstatement. thousand) and the Group’s share of profits of this associate accounting policies and other explanatory notes. for the year ended 31 December 2010. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in Qualified opinion Management’s responsibility for the consolidated financial the consolidated financial statements. The procedures statements selected depend on the auditors’ judgment, including In our opinion, except for the effects of the matter the assessment of the risks of material misstatement described in the basis for qualified opinion paragraph, Management is responsible for the preparation and fair of the consolidated financial statements, whether due the consolidated financial statements present fairly, in presentation of these consolidated financial statements to fraud or error. In making those risk assessments, the all material respects, the financial position of UralChem in accordance with International Financial Reporting auditors consider internal control relevant to the entity’s Holding P.L.C as at 31 December 2010, and of its financial Standards, and for such internal control as management preparation and fair presentation of the consolidated performance and its cash flows for the year then ended determines is necessary to enable the preparation of financial statements in order to design audit procedures in accordance with International Financial Reporting consolidated financial statements that are free from that are appropriate in the circumstances, but not for the Standards. material misstatement, whether due to fraud or error. purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our Moscow, Russia qualified audit opinion. 31 March 2011
121 5 | URALCHEM HOLDING P.L.C. Consolidated financial statements
Year ended Year ended Year ended Consolidated income statement Notes 31 December 2010 31 December 2009 31 December 2008 for the year ended 31 December 2010 Revenue Sales of goods 7 1,318,937 891,725 1,609,773 All amounts are in thousands of US Dollars unless otherwise stated Other sales 8 70,182 57,348 87,080 Total revenue 1,389,119 949,073 1,696,853 Cost of sales 9 (726,381) (574,130) (726,286) Gross profit 662,738 374,943 970,567 Selling and distribution expenses 10 (321,735) (265,475) (290,111) General and administrative expenses 11 (120,927) (101,417) (162,881) Net loss from derivative financial instruments 38 - (15,657) (60,793) Other operating income 12 5,467 11,685 18,236 Other operating expenses 12 (20,312) (9,710) (7,086) Operating profit/(loss) 205,231 (5,631) 467,932 Interest income 13 1,137 39,198 15,988 Interest expense 14 (150,304) (156,995) (92,841) Other financial expenses (2,357) - - Impairment of non-current assets 16, 17, 18, 20, 22 (11,147) (3,622) (42,895) Share of profit/(loss) of associates 18 15,952 (1,040) (131) Foreign exсhange loss from financing activities (5,646) (18,128) (189,756) Profit/(loss) before tax 52,866 (146,218) 158,297 Income tax 15 (23,300) 49,174 (82,073) Profit/(loss) for the year 29,566 (97,044) 76,224 Attributable to: Shareholders of the parent 33,900 (77,066) 25,124 Non-controlling interests (4,334) (19,978) 51,100 29,566 (97,044) 76,224 Earnings/(loss) per share Weighted average number of ordinary shares in issue during the year» 175,000,000 21,615,041 10,105 Basic and diluted earnings/(loss) per share (US dollars per share) 0,2 (3,6) 2,486,3
122 The notes are an on integral to pages 177 part 127 of these consolidated financial statements. Consolidated statement of comprehensive income for the year ended 31 December 2010 All amounts are in thousands of US Dollars unless otherwise stated
Year ended Year ended Year ended 31 December 2010 31 December 2009 31 December 2008
Profit/(loss) for the year 29,566 (97,044) 76,224 Other comprehensive loss: Effect of translation to presentation currency (2,726) (21,688) (82,245) Other comprehensive loss: (2,726) (21,688) (82,245) Total comprehensive income/(loss) for the year 26,840 (118,732) (6,021) Total comprehensive income/(loss) for the year attributable to: Shareholders of the parent 31,684 (94,217) (36,561) Non-controlling interests (4,844) (24,515) 30,540 26,840 (118,732) (6,021)
The notes are an on integral to pages 177 part 127 of these consolidated financial statements. 123 5 | URALCHEM HOLDING P.L.C. Consolidated financial statements
Notes 31 December 2010 31 December 2009 31 December 2008 ASSETS Non-current assets Property, plant and equipment 16 638,073 722,938 753,212 Goodwill 17 168,329 169,624 174,611 Consolidated statement of financial position Intangible assets 11,426 8,158 2,558 Investments in associates 18 34,715 35,304 15,892 as at 31 December 2010 Inventories 19 32,704 29,605 31,388 Available-for-sale investments 20 176,530 177,837 187,997 All amounts are in thousands of US Dollars unless otherwise stated Long-term accounts receivable 23 3,072 - - Other financial assets 21 4,833 7,359 142,886 Deferred tax assets 32 72,305 55,153 4,838 1,141,987 1,205,978 1,313,382 Current assets Assets held for sale 22 9,274 - - Inventories 19 112,938 101,502 117,510 Trade and other receivables 23 103,115 40,583 29,827 Advances paid and prepaid expenses 24 33,776 28,948 46,266 Income tax receivable 5,482 10,119 14,985 Other taxes receivable 25 54,788 95,306 115,386 Other financial assets 21 1,689 36,973 49,181 Cash and cash equivalents 26 46,410 53,658 118,301 367,472 367,089 491,456 TOTAL ASSETS 1,509,459 1,573,067 1,804,838 EQUITY AND LIABILITIES Capital and reserves Share capital 27 1,374 1,374 24 Additional paid-in capital 152,223 152,223 155,204 Foreign currency translation reserve (68,852) (66,636) (49,485) (Accumulated deficit)/ Retained earnings (262,630) (259,386) 23,667 Equity attributable to shareholders of the parent (177,885) (172,425) 129,410 Non-controlling interests 33,639 73,121 72,867 Total equity (144,246) (99,304) 202,277 Non-current liabilities Loans and borrowings 28 881,043 887,366 846,121 Obligations under finance leases 29 37,543 43,094 63,671 Trade and other payables 30 8,936 17,628 - Retirement benefit obligations 31 8,655 7,635 8,798 Deferred tax liabilities 32 43,627 53,879 72,396 979,804 1,009,602 990,986 Current liabilities Loans and borrowings 28 473,263 533,604 470,329 Derivative financial obligations 33 - - 41,157 Obligations under finance leases 29 10,604 11,500 12,152 Trade and other payables 30 114,911 69,302 51,248 Advances received 56,041 39,705 27,458 Income tax payable 13,782 2,018 303 Other taxes payable 34 5,300 6,640 8,928 673,901 662,769 611,575 Total liabilities 1,653,705 1,672,371 1,602,561
124 TOTAL EQUITY AND LIABILITIES 1,509,459 1,573,067 1,804,838 The notes are an on integral to pages 177 part 127 of these consolidated financial statements. Consolidated statement of cash flows for the year ended 31 December 2010 All amounts are in thousands of US Dollars unless otherwise stated
Year ended Year ended Year ended Year ended Year ended Year ended 31 December 2010 31 December 2009 31 December 2008 31 December 2010 31 December 2009 31 December 2008 Operating activities Acquisition of promissory note (35,000) - - Profit/(loss) before tax 52,866 (146,218) 158,297 Repayment of promissory note 35,000 - - Adjustments for: Dividends received from associates 16,423 - - Depreciation of property, plant and equipment 101,815 97,997 92,501 Interest received 16,602 8,058 3,707 Amortisation of intangible assets 2,117 2,444 1,184 Net cash generated from/(used in) investing activities 4,181 (114,626) (873,362) Change in fair value of derivative financial instruments - (38,118) 47,450 Financing activities Impairment of non-current assets 11,147 3,622 42,895 Proceeds from short-term loans and borrowings 387,996 428,457 1,116,202 Compensation of key management personnel paid by shareholders - - 45,295 Proceeds from long-term loans and borrowings 27,087 32,857 747,287 Change in provisions and allowances 20,168 (883) (699) Repayment of short-term loans and borrowings (494,198) (347,498) (912,055) Write-down of inventory to net realisable value 2,224 3,965 26,032 Repayment of long-term loans and borrowings - (2,773) (61,085) Loss on disposal of property, plant and equipment» 2,267 4,016 1,762 Increase of ownership in subsidiaries (59,913) (786) (185,859) Foreign exchange loss, net 8,242 9,963 173,365 Repayment of principal amounts of finance leases (6,424) (6,413) (5,052) Share of (profit)/loss of associates (15,952) 1,040 131 Dividends paid to non-controlling interests - (3,584) (208) Interest income (1,137) (39,198) (15,988) Proceeds from issue of shares - 1,350 200 Other financial expenses 2,357 - - Proceeds from issue of shares by a subsidiary 508 25,547 - Interest expense 150,304 156,995 92,841 Net cash (used in)/generated from financing activities (144,944) 127,157 699,430 Operating cash flows before working capital changes 336,418 55,625 665,066 Net (decrease)/increase in cash and cash equivalents (5,845) (57,951) 91,177 (Increase)/decrease in inventory (16,220) 9,467 (77,517) Cash and cash equivalents at the beginning of the year» 53,658 118,301 28,908 (Increase)/decrease in trade and other receivables (66,314) (9,784) 2,656 Effect of exchange rate changes on the balance of cash held in foreign currencies (1,403) (6,692) (1,784) (Increase)/decrease in advances paid and prepaid expenses (4,660) 15,683 21,261 Cash and cash equivalents at the end of the year 46,410 53,658 118,301 Decrease/(increase) in other taxes receivable 31,140 15,897 (78,184) The following non-cash transactions were excluded from investing and financing activities: Increase/(decrease) in retirement benefit obligations 1,082 (869) (1,459) Settlement of income tax against VAT 8,761 111 8,297 (Decrease)/increase in trade and other payables (1,685) (3,382) 2,165 Net-off of loans issued to the parent company and accounts payable to the Increase/(decrease) in advances received 16,267 12,458 (41,342) parent company for acquisition of an associate - 110,711 - (Decrease)/increase in other taxes payable (996) (1,942) 2,167 Net-off of promissory notes receivable from related parties and accounts - 3,200 - Cash generated from operations 295,032 93,153 494,813 payable for purchases of property, plant and equipment» Interest paid (132,131) (155,025) (82,968) Settlement of deferred sales proceeds on disposal of subsidiaries against promissory notes held by related parties and offset against payables to - - (57,989) Income tax paid (27,983) (8,610) (146,736) related parties Net cash generated from/(used in) operating activities 134,918 (70,482) 265,109 Property, plant and equipment acquired under finance leases» - - (79,520) Investing activities 8,761 114,022 (129,212) Acquisition of subsidiaries, net of cash acquired - - (355,221) Acquisition of available-for-sale investments (38) (431) (233,187) Acquisition of investments in associates - - (18,015) Deferred consideration received - - 3,807 Payments for property, plant and equipment (47,644) (162,896) (132,002) Proceeds from sale of property, plant and equipment» 2,817 3,589 9,774 Payments for intangible assets (5,459) (7,929) (2,395) Loans issued (47,743) (123,194) (235,622)
The notes are an on integral to pages 177 part 127 of these consolidated financial statements. Proceeds from repayment of loans issued 69,223 168,177 85,792 125 5 | URALCHEM HOLDING P.L.C. Consolidated financial statements
Consolidated statement Attributable to shareholders of the parent Foreign Retained currency earnings/ of changes in equity Additional translation (accumulated Non-controlling Notes Share capital paid-in capital reserve deficit) Total interests Total for the year ended 31 December 2010 Bаlance as at 1 January 2008 24 104,644 12,200 26,739 143,607 107,525 251,132 All amounts are in thousands of US Dollars unless otherwise stated Dividends 27 - - - - - (5,025) (5,025) Profit for the year - - - 25,124 25,124 51,100 76,224 Other comprehensive loss - - (61,685) - (61,685) (20,560) (82,245) Total comprehensive (loss)/income for the year - - (61,685) 25,124 (36,561) 30,540 (6,021) Issuance of additional shares 27 - 200 - - 200 - 200 Compensation of key management personnel paid by shareholders 35 - 45,295 - - 45,295 - 45,295 Non-controlling interests arising on business combinations 5 - - - - 99,095 99,095 Increase of ownership in subsidiaries acquired by the Group 5 - - (26,591) (26,591) (159,268) (185,859) Ownership of subsidiaries transferred from shareholders 5 - - - (1,605) (1,605) - (1,605) Non-cash contribution from shareholders 20 - 1,714 - - 1,714 - 1,714 Other transactions with entities under common control - 3,351 - - 3,351 - 3,351 Bаlance as at 31 December 2008 24 155,204 (49,485) 23,667 129,410 72,867 202,277 Loss for the year - - (77,066) (77,066) (19,978) (97,044) Other comprehensive loss - - (17,151) - (17,151) (4,537) (21,688) Total comprehensive loss for the year - - (17,151) (77,066) (94,217) (24,515) (118,732) Issuance of additional shares 27 1,350 - - - 1,350 - 1,350 Increase of ownership in subsidiaries 5 - - - 93 93 (879) (786) Distribution to shareholders 35 - - - (206,080) (206,080) - (206,080) Non-controlling interests arising on business combination - - - - - 101 101 Increase in non-controlling interests due to additional share issue by a subsidiary 5 - - - - - 25,547 25,547 Other transactions with entities under common control - (2,981) - - (2,981) - (2,981) Bаlance as at 31 December 2009 1,374 152,223 (66,636) (259,386) (172,425) 73,121 (99,304) Profit/(loss) for the year - - 33,900 33,900 (4,334) 29,566 Other comprehensive loss - - (2,216) - (2,216) (510) (2,726) Total comprehensive (loss)/income for the year - - (2,216) 33,900 31,684 (4,844) 26,840 Increase of ownership in subsidiaries 5 - - - (22,419) (22,419) (37,494) (59,913) Increase in non-controlling interests due to additional share issue by a subsidiary» - - - - - 508 508 Decrease of ownership in subsidiaries 5 - - - 913 913 2,348 3,261 Distribution of dividends received from the associate to the shareholders» 35 - - - (15,638) (15,638) - (15,638) Bаlance as at 31 December 2010 1,374 152,223 (68,852) (262,630) (177,885) 33,639 (144,246)
126 The notes are an on integral to pages 177 part 127 of these consolidated financial statements. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2010 All amounts are in thousands of US Dollars unless otherwise stated
1. General information
Organisation Market conditions
UralChem Holding P.L.C. is a public limited company which The Group was significantly impacted by a dramatic fall Subsequent to the end of the reporting period, the Group was incorporated in Cyprus on 4 May 2006. in agricultural commodity prices such as corn, wheat and renegotiated the terms of its loan agreements with As at 31 December 2010, the Company was 95.5% owned soybeans during the fourth quarter of 2008 that continued Raiffeisen Bank and UniCredit Bank that resulted in the by CI-Chemical Invest Limited, incorporated in Cyprus. into 2009. The decrease in agricultural commodity prices postponing of the maturities of the loans in the amount of The remaining 4.5% of the Company’s shares were held by resulted in a decline in demand for nitrogen and phosphate USD 247,000 thousand from 2011 to 2012 (refer to note 39). management. The principal beneficial shareholder of the based fertilisers (which are predominantly produced In addition to renegotiating existing borrowings, the Group Company is Mr. Dmitry A. Mazepin. The Company’s main and sold by the Group). The demand for nitrogen and is also in the process of obtaining additional credit facilities. office is located at office 249, 28th Oktovriou Street, Lophitis phosphate based fertilisers began to recover in the third Management believes that the Group will be successful in Business Center, 1st floor, Office 101, P.C. Limassol 3035, quarter of 2009, with the strongest development in nutrient obtaining these additional credit facilities based on the Cyprus. demand recorded in Asia. Group’s experience in restructuring its borrowings during 2009 and 2010. Global economic conditions continued to improve during Principal business activities 2010 and had a positive impact on fertiliser markets. The Management believes based on the information discussed positive outlook in the fertiliser markets has been driven by above, that the Group will be able to meet its borrowing The principal business activities of the Group are the strong demand for nitrogen and phosphate based fertilisers obligations and that the Group will continue to generate production and distribution of mineral fertilisers. The main during the application season in the northern hemisphere. positive operating cash flows. products of the Group are nitrogen based, phosphate based Global market prices for ammonia increased on average and complex fertilisers. The major production facilities by 49.0%, for ammonium nitrate by 35.8% and for of the Group are located in the Moscow, Perm and Kirov diammonium phosphate by 48.0% during the year ended regions of the Russian Federation. 31 December 2010 in comparison with the year ended 31 December 2009. Urea prices have increased by 15.7% during the same period.
As at 31 December 2010, the Group had a working capital deficiency of USD 306,429 thousand (2009: USD 295,680 thousand; 2008: USD 120,119 thousand). The primary cause of the working capital deficit relates to the Group’s short- term loans and borrowings in the amount of USD 473,263 thousand (2009: USD 533,604 thousand; 2008: USD 470,329 thousand) which are repayable within twelve months from the end of the reporting period.
The notes are an on integral to pages 177 part 127 of these consolidated financial statements. 127 5 | URALCHEM HOLDING P.L.C. Consolidated financial statements
Notes to the consolidated financial statements for the year ended 31 December 2010 All amounts are in thousands of US Dollars unless otherwise stated The principal business activities of the Group’s major operating entities and effective ownership of the Group are presented below:
Effective ownership at 31 December, %
Subsidiaries Principal activity Location 2010 2009 2008
UralChem OJSC 1,2 Holding company Russia 100,0 100,0 100,0
KCCW Mineral Fertiliser Plant*3 Production of mineral fertilisers Russia 97,5 98,3 97,7
Voskresensk Mineral Fertilisers Production of mineral fertilisers Russia 89,9 74,8 74,8
Trading house UralChem Sales and marketing Russia 100,0 100,0 100,0
SIA UralChem Trading4 Sales and marketing Latvia 100,0 100,0 -
Upravleniye Avtomobilnogo Transporta* «Transportation and logistics Russia 97,5 98,3 97,7
UralChem Freight Limited «Transportation and logistics Cyprus 100,0 100,0 100,0
UralChem Trans «Transportation and logistics Russia 100,0 100,0 100,0
SIA Riga Fertiliser Terminal5 Transportation and logistics Latvia 51,0 51,0 -
Remontno-Mekhanichesky Zavod* Industrial services Russia 97,5 98,3 97,7
KCCW Energy Supply Company* Industrial services Russia 97,5 98,3 97,7
...... *Calculated based on both ordinary and preference shares. 1Azot OJSC merged with UralChem OJSC on 14 December 2010; starting from 15 December 2010 is referred to as «Azot branch». 2UralChem Management LLC merged with UralChem OJSC on 13 December 2010. 3Kirovo-Chepetsk Chemical Works OJSC merged with KCCW Mineral Fertiliser Plant OJSC on 13 December 2010. 4Established during 2009. 5Acquired during 2009.
128 The notes are an on integral to pages 177 part 127 of these consolidated financial statements. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2010 All amounts are in thousands of US Dollars unless otherwise stated
2. Adoption of new and revised standards
Standards and Interpretations effective in the current period IAS 27 Consolidated and Separate Financial Statements (revised) IAS 7 Statements of Cash Flows (amended)
In the current year, the Group has adopted all revised This revised standard requires the effects of all transactions The amendments to IAS 7 specify that only expenditures and new Standards and Interpretations issued by with non-controlling interests to be recorded in equity if that result in a recognised asset in the statement of financial the International Accounting Standards Board and there is no change in control and these transactions will no position can be classified as investing activities in the International Financial Reporting Interpretations longer result in goodwill or gains and losses. The standard statement of cash flows. The application of amendments Committee that are mandatory for adoption in the annual also specifies the accounting when control is lost. When to IAS 7 has resulted in a change of presentation of cash periods beginning on 1 January 2010. control of a subsidiary is lost as a result of a transaction, outflows in respect of increase of ownership in certain event or other circumstance, the revised Standard requires Group’s subsidiaries without gaining control over them. The following new and revised Standards and the Group to derecognise all assets, liabilities and non- Interpretations effective for annual periods beginning controlling interests at their carrying amount and to Specifically, cash in the amount of USD 59,913 thousand on 1 January 2010 and adopted in these consolidated recognise the fair value of the consideration received. Any used for the increase of ownership in subsidiaries are financial statements had a material impact on the Group’s retained interest in the former subsidiary is recognised at its included in cash flow from financing activities in the accounting policies. fair value at the date control is lost. The resulting difference consolidated statement of cash flows. The adoption of the is recognised as a gain or loss in the income statement. amended standard also resulted in a reclassification of the comparative financial information for the years ended IFRS 3 Business Combinations (revised) 31 December 2009 and 2008 in the amount of USD 786 thousand and USD 185,859 thousand, respectively. Standards and Interpretations adopted with no effect on The revised standard continues to apply the purchase the consolidated financial statements method to business combinations but with some changes. All payments to purchase a business are recorded at fair value at the acquisition date, with contingent payments IFRS 2 Share-Based Payment (amendments) classified as debt subsequently remeasured through the IFRS 5 Non-current Assets Held for Sale and Discontinued income statement. There is a choice on an acquisition-by- Operations (amendments) acquisition basis to measure the non-controlling interest in the acquiree either at fair value or at the non-controlling IFRS 8 Operating Segments (amendments) interest’s proportionate share of the acquiree’s net assets. IAS 1 Presentation of Financial Statements (amendments) All acquisition-related costs are expensed. This revised standard has been applied in the current year prospectively IAS 17 Leases (amendments) to business combinations for which the acquisition date is IAS 36 Impairment of Assets (amendments) on or after 1 January 2010. IAS 38 Intangible Assets (amendments) IAS 39 Financial Instruments: Recognition and Measurement (amendments) IFRIC 9 Reassessment of Embedded Derivatives IFRIC 16 Hedges of a Net Investment in a Foreign Operation IFRIC 17 Distributions of Non-cash Assets to Owners IFRIC 18 Transfers of Assets from Customers
The notes are an on integral to pages 177 part 127 of these consolidated financial statements. 129 5 | URALCHEM HOLDING P.L.C. Consolidated financial statements
The adoption of other new and revised Standards and Interpretations in issue but not yet adopted Standards and Interpretations effective on or after 1 January 2010 as listed above, had no material impact on these consolidated financial At the date of authorisation of these consolidated financial statements, the following Standards and Interpretations were in issue but not yet statements. effective: Effective on or for annual periods beginning Standards and Interpretations on or after
IFRS 3 Business Combinations (amendments)...... 1 July 2010 IFRS 7 Financial Instruments: Disclosures (amendments)...... 1 January 2011 IFRS 9 Financial Instruments: Classification and Measurement ...... 1 January 2013 IAS 1 Presentation of Financial Statements (amendments)...... 1 January 2011 IAS 12 Income Taxes (amendments)...... 1 January 2012 IAS 24 Related Party Disclosures (revised)...... 1 January 2011 IAS 27 Consolidated and Separate Financial Statements (amendments)...... 1 July 2010 IAS 32 Financial Instruments: Presentation (amendments)...... 1 February 2010 IAS 34 Interim Financial Reporting (amendments)...... 1 January 2011 IFRIC 13 Customer Loyalty Programmes (amendments)...... 1 January 2011 IFRIC 14 The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction...... 1 January 2011 IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments ...... 1 July 2010
The impact of adoption of these Standards and Interpretations in the preparation of the consolidated financial statements in future periods is currently being assessed by management. Management anticipates that, except for IFRS 9 Financial Instruments - Classification and Measurement (“IFRS 9”), the adoption of these Standards and Interpretations will have no material impact on the consolidated financial statements of the Group in the period of initial adoption.
IFRS 9 introduces new requirements for the classification and measurement of financial assets. All recognised financial assets that are currently within the scope of IAS 39 Financial Instruments: Recognition and Measurement, will be measured at either amortised cost or fair value.
130 The notes are an on integral to pages 177 part 127 of these consolidated financial statements. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2010 All amounts are in thousands of US Dollars unless otherwise stated
3. Significant accounting policies
Statement of compliance Changes in the Group’s ownership interests in subsidiaries At the acquisition date, the identifiable assets acquired and that do not result in the Group losing control over the the liabilities assumed are recognised at their fair value, The consolidated financial statements of the Group have subsidiaries are accounted for as equity transactions. The except that: been prepared in accordance with International Financial carrying amounts of the Group’s interests and the non- Reporting Standards, except for accounting for investments controlling interests are adjusted to reflect the changes in • deferred tax assets or liabilities and liabilities or in associates (refer to note 18). their relative interests in the subsidiaries. Any difference assets related to employee benefit arrangements are between the amount by which the non-controlling interests recognised and measured in accordance with IAS 12 Basis of preparation are adjusted and the fair value of the consideration paid Income Taxes and IAS 19 Employee Benefits respectively; or received is recognised directly in retained earnings and • liabilities or equity instruments related to share-based The consolidated financial statements have been prepared attributed to owners of the Company. payment arrangements of the acquiree or share-based on the historical cost basis except for mark-to-market payment arrangements of the Group entered into to valuation of certain financial instruments, in accordance When the Group loses control of a subsidiary, the profit or replace share-based payment arrangements of the with IAS 39 Financial Instruments: Recognition and loss on disposal is calculated as the difference between the acquiree are measured in accordance with IFRS 2 Share- Measurement. aggregate of the fair value of the consideration received based Payment at the acquisition date; and and the fair value of any retained interest and the previous • assets that are classified as held for sale in accordance Basis of consolidation carrying amount of the assets (including goodwill), and with IFRS 5 Non-current Assets Held for Sale and liabilities of the subsidiary and any non-controlling Discontinued Operations are measured in accordance interests. The fair value of any investment retained in with that Standard. The consolidated financial statements incorporate financial the former subsidiary at the date when control is lost statements of the Company and entities controlled by is regarded as the fair value on initial recognition for Non-controlling interests that are present ownership the Company (its subsidiaries). Control is achieved where subsequent accounting under IAS 39 Financial Instruments: interests and entitle their holders to a proportionate share the Company has the power to govern the financial and Recognition and Measurement or, when applicable, the of the entity’s net assets in the event of liquidation may operating policies of an entity so as to obtain benefits from cost on initial recognition of an investment in an associate be initially measured either at fair value or at the non- its activities. or a jointly controlled entity. controlling interests’ proportionate share of the recognised amounts of the acquiree’s identifiable net assets. The Other than transactions which were part of the Business combinations: choice of measurement basis is made on a transaction-by- reorganisation of the Group, the results of subsidiaries transaction basis. acquired or disposed of during the year are included in the consolidated income statement from the effective date Acquisitions of subsidiaries and businesses, other than of acquisition and up to the effective date of disposal, as acquisitions from entities under common control, appropriate. Total comprehensive income of subsidiaries are accounted for using the purchase method. The is attributed to the owners of the Company and to the consideration transferred in a business combination is non-controlling interests even if this results in the non- measured at fair value, which is calculated as the sum of controlling interests having a deficit balance. the acquisition date fair values of the assets transferred by the Group, liabilities incurred by the Group to the former All intra-group transactions, balances, income and owners of the acquiree and the equity interests issued expenses are eliminated in full on consolidation. by the Group in exchange for control of the acquiree. Acquisition-related costs are generally recognised in the income statement as incurred.
The notes are an on integral to pages 177 part 127 of these consolidated financial statements. 131 5 | URALCHEM HOLDING P.L.C. Consolidated financial statements
When the consideration transferred by the Group in the combination occurs, the Group reports provisional Any excess of the cost of acquisition over the Group’s share a business combination includes assets or liabilities amounts for the items for which the accounting is of the net fair value of the identifiable assets, liabilities and resulting from a contingent consideration arrangement, incomplete. Those provisional amounts are adjusted during contingent liabilities of the associate recognised at the the contingent consideration is measured at its the measurement period (see above), or additional assets date of acquisition is recognised as goodwill. The goodwill acquisition-date fair value and included as part of the or liabilities are recognised, to reflect new information is included within the carrying amount of the investment consideration transferred in a business combination. obtained about facts and circumstances that existed at the and is assessed for impairment as part of that investment. Changes in the fair value of the contingent consideration acquisition date that, if known, would have affected the Any excess of the Group’s share of the net fair value of the that qualify as measurement period adjustments are amounts recognised at that date. identifiable assets, liabilities and contingent liabilities over adjusted retrospectively, with corresponding adjustments the cost of acquisition, after reassessment, is recognised against goodwill. Measurement period adjustments Business combinations that took place prior to 1 January immediately in the income statement. are adjustments that arise from additional information 2010 were accounted for in accordance with the previous obtained during the ‘measurement period’ (which cannot version of IFRS 3. Where a Group entity transacts with an associate of the exceed one year from the acquisition date) about facts and Group, profits and losses are eliminated to the extent circumstances that existed at the acquisition date. Investments in associates of the Group’s interest in the relevant associate.
The subsequent accounting for changes in the fair value An associate is an entity over which the Group has Goodwill of the contingent consideration that do not qualify as significant influence and that is neither a subsidiary nor measurement period adjustments depends on how an interest in a joint venture. Significant influence is the Goodwill arising on acquisition is recognised as an the contingent consideration is classified. Contingent power to participate in the financial and operating policy asset and is carried at cost as established at the date of consideration that is classified as equity is not remeasured decisions of the investee but is not control or joint control acquisition of the business less accumulated impairment at subsequent reporting dates and its subsequent over those policies. losses, if any. Goodwill is measured as the excess of the sum settlement is accounted for within equity. Contingent of the consideration transferred, the amount of any non- consideration that is classified as an asset or a liability is The results and assets and liabilities of associates are controlling interests in the acquiree, and the fair value of remeasured at subsequent reporting dates in accordance incorporated in the financial statements using the equity the acquirer’s previously held equity interest in the acquiree with IAS 39, or IAS 37 Provisions, Contingent Liabilities and method of accounting, except when the investment is (if any) over the net of the acquisition date amounts of the Contingent Assets, as appropriate, with the corresponding classified as held for sale, in which case it is accounted for identifiable assets acquired and the liabilities assumed. If, gain or loss being recognised in the income statement. in accordance with IFRS 5 Non-current Assets Held for Sale after reassessment, the net of the acquisition date amounts and Discontinued Operations. Under the equity method, of the identifiable assets acquired and liabilities assumed When a business combination is achieved in stages, the an investment in an associate is initially recognised in exceeds the sum of the consideration transferred, the Group’s previously held equity interest in the acquiree is the consolidated statement of financial position at cost amount of any non-controlling interests in the acquiree and remeasured to fair value at the acquisition date (i.e. the and adjusted thereafter to recognise the Group’s share of the fair value of the acquirer’s previously held interest in the date when the Group obtains control) and the resulting the profit or loss and other comprehensive income of the acquiree (if any), the excess is recognised immediately in gain or loss, if any, is recognised in profit or loss. Amounts associate. When the Group’s share of losses of an associate profit or loss as a bargain purchase gain. arising from interests in the acquiree prior to the acquisition exceeds the Group’s interest in that associate (which date that have previously been recognised in other includes any long-term interests that, in substance, form Goodwill is not amortised but is reviewed for impairment comprehensive income are reclassified to income statement part of the Group’s net investment in the associate), the at least annually. For the purpose of impairment testing, where such treatment would be appropriate if those Group discontinues recognising its share of further losses. goodwill is allocated to each of the Group’s cash- interests were disposed of. Additional losses are recognised only to the extent that generating units expected to benefit from the synergies of the Group has incurred legal or constructive obligations or the combination. Cash-generating units to which goodwill If the initial accounting for a business combination is made payments on behalf of the associate. has been allocated are tested for impairment annually, or incomplete by the end of the reporting period in which more frequently when there is an indication that the unit
132 The notes are an on integral to pages 177 part 127 of these consolidated financial statements. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2010 All amounts are in thousands of US Dollars unless otherwise stated
may be impaired. If the recoverable amount of the cash- be expected to qualify for recognition as • estimated customer returns, rebates and other similar generating unit is less than the carrying amount of the unit, a completed sale within one year from the date of allowances. the impairment loss is allocated first to reduce the carrying classification. amount of any goodwill allocated to the unit and then Revenue is recognised to the extent that it is probable to the other assets of the unit pro-rata on the basis of the When the Group is committed to a sale plan involving loss that economic benefits will flow to the Group and the carrying amount of each asset in the unit. An impairment of control of a subsidiary, all of the assets and liabilities revenue and costs incurred or to be incurred in respect of loss recognised for goodwill is not reversed in a subsequent of that subsidiary are classified as held for sale when the the transaction can be reliably measured. Cash received period. criteria described above are met, regardless of whether the in advance from customers is not included in current year Group will retain a non-controlling interest in its former revenue, and is recognised within advances received. On disposal of a subsidiary, the attributable amount of subsidiary after the sale. Non-current assets and disposal goodwill is included in the determination of the gain or loss groups classified as held for sale are measured at the lower Sales of goods on disposal. of their previous carrying amount and fair value less costs Revenue from sale of goods comprises revenue from sales of to sell. mineral fertilisers, ammonia, explosive grade ammonium nitrate, inorganic acids and other chemical products and is Common control transactions Discontinued operations recognised when significant risks and rewards of ownership are transferred to the buyer in accordance with the shipping The assets and liabilities of subsidiaries acquired from A discontinued operation is a component of the Group’s terms specified in the sales agreements. entities under common control are recorded at the carrying business that represents a separate major line of business values recognised by the transferor. Any difference between or geographical area of operations that has been disposed the carrying value of the net assets of subsidiaries acquired, Other sales of or is held for sale at the end of the reporting period. and the consideration paid by the Group is accounted for The Group provides the following principal types of services: Classification as a discontinued operation occurs upon as an adjustment to shareholders’ equity. The net assets • supply of electricity and heat energy; disposal or when the operation meets the criteria to be of the subsidiaries and the results of their operations are • construction, repairs and maintenance services; and classified as held for sale, if earlier. When an operation is recognised retrospectively from the date on which control • transportation services. classified as a discontinued operation, the comparative over the subsidiaries was obtained by the transferor. The income statement is restated as if the operation had been cost of assets acquired from entities under common control Revenue from contracts to provide services is recognised discontinued from the earliest period presented. The is measured as the carrying value of the asset given up by when the services are rendered. comparative statement of financial position is not restated the transferor at the date of the transaction. Any difference for information related to discontinued operations. between the carrying value of the assets acquired, and the Dividend and interest income consideration paid by the Group is accounted for as an Where the discontinued operations was disposed of adjustment to shareholders’ equity. Dividend income from investments is recognised when the through a distribution to an entity under common control Group’s right to receive payment has been established. and ownership, any difference between the consideration Non-current assets held for sale received and the carrying value of net assets disposed is Interest income from a financial asset is recognised when recognised directly in equity. Non-current assets and disposal groups are classified as it is probable that the economic benefits will flow to the Group and the amount of income can be measured reliably. held for sale if their carrying amount will be recovered Revenue recognition principally through a sale transaction rather than through Interest income is accrued on a time basis, by reference to continuing use. This condition is regarded as met only when the principal outstanding and at the effective interest rate Revenue is measured at the fair value of the consideration applicable, which is the rate that discounts estimated future the sale is highly probable and the asset (or disposal group) received or receivable, excluding: is available for immediate sale in its present condition. cash receipts through the expected life of the financial asset • value added tax; to that asset’s net carrying amount. Management must be committed to the sale, which should • custom duties; and
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Leasing – the Group as lessee Foreign currencies
Leases are classified as finance leases whenever the terms The individual financial statements of each Group entity convenience of the users of these consolidated financial of the lease transfer substantially all the risks and rewards are presented in the currency of the primary economic statements. of ownership to the lessee. All other leases are classified as environment in which the entity operates (its functional operating leases. currency), which reflects the economic substance of its The translation from functional currency into presentation operations. The functional currency of the Company and currency is performed as follows: Assets held under finance leases are initially recognised as other subsidiaries, registered in Cyprus, is the US Dollar • assets and liabilities are expressed in USD using assets of the Group at their fair value at the inception of (“USD”) or the Euro (“EUR”), while the functional currency exchange rates prevailing at the reporting date; the lease or, if lower, at the present value of the minimum of all subsidiaries registered in the Russian Federation is • income and expense items are translated at exchange lease payments. The corresponding liability to the lessor is the Russian Rouble (“RUR”) and the functional currency of rates that approximate the exchange rates at the dates included in the statement of financial position as a finance subsidiaries registered in the European Union is EUR. of the transactions, unless exchange rates fluctuated lease obligation. significantly during that period, in which case the In preparing the financial statements of each individual exchange rates at the dates of the transactions are used; Lease payments are apportioned between finance expenses group entity, transactions in currencies other than the • exchange differences arising, if any, are recognised in and reduction of the lease obligation so as to achieve a entity’s functional currency (foreign currencies) are other comprehensive income and accumulated in equity; constant rate of interest on the remaining balance of the recorded at the rates of exchange prevailing at the dates of and liability. Finance expenses are recognised immediately the transactions. At the end of each reporting date, • in the consolidated statement of cash flows, cash in profit or loss, unless they are directly attributable to monetary items denominated in foreign currencies are balances at the beginning and end of each period qualifying assets, in which case they are capitalised in retranslated at the rates prevailing at that date. Non- presented are translated at exchange rates at the accordance with the Group’s general policy on borrowing monetary items carried at fair value that are denominated respective dates. All cash flows are translated at costs (see below). Contingent rentals are recognised as in foreign currencies are retranslated at the rates prevailing exchange rates that approximate the exchange rates expenses in the periods in which they are incurred. at the date when the fair value was determined. at the dates of the transactions, unless exchange rates Non-monetary items that are measured in terms of fluctuated significantly during that period, in which Operating lease payments are recognised as an expense historical cost in a foreign currency are not retranslated. case the exchange rates at the dates of the transactions on a straight-line basis over the lease term, except where are used. Resulting exchange differences, if any, are another systematic basis is more representative of the time Exchange differences are recognised in profit or loss in the presented as effect of exchange rate changes on the pattern in which economic benefits from the leased asset period in which they arise, except for: balance of cash held in foreign currencies. are consumed. Contingent rentals arising under operating • exchange differences on foreign currency borrowings leases are recognised as an expense in the period in which relating to assets under construction for future On the disposal of a foreign operation (i.e. a disposal of they are incurred. productive use, which are included in the cost of those the Group’s entire interest in a foreign operation, or a assets where they are regarded as an adjustment to disposal involving loss of control over a subsidiary that interest costs on those foreign currency borrowings; and includes a foreign operation, a disposal involving loss of • exchange differences on monetary items receivable joint control over a jointly controlled entity that includes a from or payable to a foreign operation for which foreign operation, or a disposal involving loss of significant settlement is neither planned nor likely to occur influence over an associate that includes a foreign (therefore forming part of the net investment in the operation), all of the exchange differences accumulated foreign operation), which are recognised initially in other in equity in respect of that operation attributable to the comprehensive income and reclassified from equity to owners of the Company are reclassified to profit or loss. Any profit or loss on repayment of the monetary items. exchange differences that have previously been attributed to non-controlling interests are derecognised, but they are Management of the Group has chosen to present not reclassified to the income statement. consolidated financial statements in USD for the
134 The notes are an on integral to pages 177 part 127 of these consolidated financial statements. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2010 All amounts are in thousands of US Dollars unless otherwise stated
In the case of a partial disposal that does not result in the Current tax The carrying amount of deferred tax assets is reviewed Group losing control over a subsidiary that includes a The tax currently payable is based on taxable profit for the at the end of each reporting period and reduced to the foreign operation, the proportionate share of accumulated year. Taxable profit differs from profit as reported in the extent that it is no longer probable that sufficient taxable exchange differences are re-attributed to non-controlling consolidated income statement because of items of income profits will be available to allow all or part of the asset to be interests and are not recognised in profit or loss. For all or expense that are taxable or deductible in other years recovered. other partial disposals (i.e. reductions in the Group’s and items that are never taxable or deductible. The Group’s ownership interest in associates or jointly controlled liability for current tax is calculated using tax rates that Deferred tax assets and liabilities are measured at the tax entities that do not result in the Group losing significant have been enacted or substantively enacted by the end of rates that are expected to apply in the period in which the influence or joint control), the proportionate share of the the reporting period. liability is settled or the asset realised, based on tax rates accumulated exchange differences is reclassified to the (and tax laws) that have been enacted or substantively income statement. Deferred tax enacted by the end of the reporting period. The Deferred tax is recognised on temporary differences measurement of deferred tax liabilities and assets reflects Goodwill and fair value adjustments on identifiable assets between the carrying amounts of assets and liabilities the tax consequences that would follow from the manner in and liabilities acquired arising on the acquisition of a in the consolidated financial statements and the which the Group expects, at the end of the reporting period, foreign operation are treated as assets and liabilities of the corresponding tax bases used in the computation of taxable to recover or settle the carrying amount of its assets and foreign operation and translated at the rate of exchange profit. Deferred tax liabilities are recognised for all taxable liabilities. prevailing at the end of each reporting period. Exchange temporary differences. Deferred tax assets are recognised differences arising are recognised in equity. for all deductible temporary differences to the extent that Deferred tax assets and liabilities are offset when there is a it is probable that taxable profits will be available against legally enforceable right to set off current tax assets against Borrowing costs which those deductible temporary differences can be current tax liabilities and when they relate to income utilised. Such deferred tax assets and liabilities are not taxes levied by the same taxation authority and the Group Borrowing costs directly attributable to the acquisition, recognised if the temporary difference arises from goodwill intends to settle its current tax assets and liabilities on a net construction or production of qualifying assets, which are or from the initial recognition (other than in a business basis. assets that necessarily take a substantial period of time to combination) of other assets and liabilities in a transaction get ready for their intended use or sale, are added to that affects neither the taxable profit nor the accounting Current and deferred tax are recognised in profit or loss, the cost of those assets, until such time when the assets profit. except when they relate to items that are recognised in are substantially ready for their intended use or sale. other comprehensive income, in which case, the current and Investment income earned on temporary investment of Deferred tax liabilities are recognised for taxable temporary deferred tax are also recognised in other comprehensive specific borrowings pending their expenditure on qualifying differences associated with investments in subsidiaries and income respectively. Where current tax or deferred tax arises assets is deducted from the borrowing costs eligible for associates, except where the Group is able to control the from the initial accounting for a business combination, capitalisation. reversal of the temporary difference and it is probable that the tax effect is included in the accounting for the business the temporary difference will not reverse in the foreseeable combination All other borrowing costs are recognised in the income future. Deferred tax assets arising from deductible statement in the period in which they are incurred. temporary differences associated with such investments and interests are only recognised to the extent that it is Income tax probable that there will be sufficient taxable profits against which to utilise the benefits of the temporary differences Income tax expense represents the sum of the tax currently and they are expected to reverse in the foreseeable future. payable and deferred tax.
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Property, plant and equipment Construction in-progress
Items of property, plant and equipment are stated at cost, Construction in-progress comprises costs directly related to have suffered an impairment loss. If any such indication less accumulated depreciation and impairment losses. construction of property, plant and equipment including exists, the recoverable amount of the asset is estimated an appropriate allocation of directly attributable variable in order to determine the extent of the impairment loss (if Where parts of an item of property, plant and equipment overheads that are incurred in construction as well as any). Where it is not possible to estimate the recoverable have different useful lives, they are accounted for as costs of purchase of other assets that require installation amount of an individual asset, the Group estimates the separate items of property, plant and equipment. The or preparation for their use. Depreciation of these assets, recoverable amount of the cash-generating unit to which Group recognises in the carrying amount of an item of on the same basis as for other property assets, commences the asset belongs. Where a reasonable and consistent basis property, plant and equipment the cost of replacing part when the assets are put into operation. Construction of allocation can be identified, corporate assets are also of such an item if it is probable that the future economic in-progress is reviewed regularly to determine whether its allocated to individual cash-generating units, or otherwise benefits embodied with the item will flow to the Group and carrying value is fairly stated and an appropriate provision they are allocated to the smallest group of cash-generating the cost of the item can be measured reliably. All other costs for impairment is made, if necessary. units for which a reasonable and consistent allocation basis are recognised in income statement as incurred. can be identified. Intangible assets An item of property, plant and equipment is derecognised Intangible assets with indefinite useful lives and intangible upon disposal or when no future economic benefits are Intangible assets, other than goodwill, are reported at cost assets not yet available for use are tested for impairment expected to arise from the continued use of the asset. Any less accumulated amortisation and impairment losses. annually, or more frequently when there is an indication gain or loss arising on the disposal or retirement of an item Amortisation is charged on a straight-line basis over their that the asset may be impaired. The recoverable amount is of property, plant and equipment is determined as the estimated useful lives. the higher of fair value less cost to sell and value in use. In difference between the sales proceeds and the carrying assessing value in use, the estimated future cash flows are amount of the asset and is recognised in profit or loss. The estimated useful lives for the major classes of intangible discounted to their present value using a pre-tax discount assets are as follows: rate that reflects current market assessments of the time Depreciation Software 1-5 years value of money and the risks specific to the asset. Licences 1-20 years Depreciation is calculated on a straight-line basis over the Other 1-20 years If the recoverable amount of an asset (or cash-generating estimated useful lives of each item of property, plant and unit) is estimated to be less than its carrying amount, the equipment. Assets held under finance lease arrangements The estimated useful lives are reviewed annually, with the carrying amount of the asset (cash-generating unit) is are depreciated over the shorter of their estimated useful effect of any changes in estimate being accounted for on a reduced to its recoverable amount. An impairment loss is lives and lease terms. If there is reasonable certainty that prospective basis. recognised immediately in profit or loss, unless the relevant the lessee will obtain ownership by the end of the lease asset is carried at a revalued amount, in which case the term, the period of expected use is the useful life of the An intangible asset is derecognised on disposal, or when no impairment loss is treated as a revaluation decrease. asset. Land is not depreciated. future economic benefits are expected from use or disposal. Gains or losses arising from derecognition of an intangible Where an impairment loss subsequently reverses, the The estimated useful lives for the major classes of assets are asset, measured as the difference between the net disposal carrying amount of the asset (cash-generating unit) is as follows: proceeds and the carrying amount of the asset, are increased to the revised estimate of its recoverable amount, Buildings and structures 15-60 years recognised in profit or loss when the asset is derecognised. but so that the increased carrying amount does not exceed Machinery, equipment and transport 5-30 years the carrying amount that would have been determined had Other 2-10 years Impairment of tangible and intangible assets excluding goodwill no impairment loss been recognised for the asset (cash- generating unit) in prior years. A reversal of an impairment The estimated useful lives are reviewed annually, with the At the end of each reporting period, the Group reviews the loss is recognised immediately in profit or loss unless the effect of any changes in estimate being accounted for on a carrying amounts of its tangible and intangible assets to relevant asset is carried at a revalued amount, in which prospective basis. determine whether there is any indication that those assets case the reversal of the impairment loss is treated as a revaluation increase.
136 The notes are an on integral to pages 177 part 127 of these consolidated financial statements. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2010 All amounts are in thousands of US Dollars unless otherwise stated
Financial assets
Financial assets are recognised and derecognised on a A financial asset is classified as held for trading if: reliably measured which are accounted for at cost less any trade date where the purchase or sale of an investment • it has been acquired principally for the purpose of impairment. Fair value of AFS financial assets is determined is under a contract whose terms require delivery of the selling in the near future; or as follows: investment within the timeframe established by the market • on initial recognition it is a part of a portfolio of • the fair value of AFS financial assets with standard concerned, and are initially measured at fair value, plus identified financial instruments that the Group manages terms and conditions and traded on active markets is transaction costs, except for those financial assets classified together and has a recent actual pattern of short-term determined with reference to quoted market prices; and as fair value through profit or loss, which are initially profit-taking; or • the fair value of other AFS financial assets is measured at fair value. • it is a derivative that is not designated and effective as determined in accordance with generally accepted a hedging instrument. pricing model based on discounted cash flow Financial assets are classified into the following specified analysis using prices from observable current market categories: A financial asset other than a financial asset held transactions. • financial assets at fair value through profit or loss (“FVTPL”); for trading may be designated as FVTPL upon initial • available-for-sale investments; recognition if: Gains and losses arising from changes in fair value • held-to-maturity investments; and • such designation eliminates or significantly reduces a are recognised in other comprehensive income and • loans and receivables. measurement or recognition inconsistency that would accumulated in the investments revaluation reserve with otherwise arise; or the exception of impairment losses, interest calculated The classification depends on the nature and purpose of • the financial asset forms part of a group of financial using the effective interest rate method and foreign the financial assets and is determined at the time of initial assets or financial liabilities or both, which is managed exchange gains and losses on monetary assets, which recognition. and the performance of which is evaluated on a fair are recognised in profit or loss. Where the investment is value basis, in accordance with the Group’s documented disposed of or is determined to be impaired, the cumulative Effective interest method risk management or investment strategy, and gain or loss previously accumulated in the investments information about the grouping is provided internally on revaluation reserve is reclassified to profit or loss. If, in a The effective interest method is a method of calculating that basis; or subsequent period, the amount of the impairment loss the amortised cost of a debt instrument and of allocating • it forms part of a contract containing one or more attributable to AFS financial assets decreases and the interest income over the relevant period. The effective embedded derivatives, and IAS 39 Financial Instruments: decrease can be related objectively to an event occurring interest rate is the rate that exactly discounts estimated Recognition and Measurement permits the entire combined after the impairment was recognised, the previously future cash receipts (including all fees paid or received contract (asset or liability) to be designated at FVTPL. recognised impairment loss is reversed through other that form an integral part of the effective interest rate, comprehensive income and presented in the investment transaction costs and other premiums or discounts) Financial assets at FVTPL are stated at fair value, with any revaluation reserve as an increase in fair value of AFS through the expected life of the debt instrument, or, where gain or loss resulting from re-measurement recognised in financial assets. appropriate, a shorter period to the net carrying amount on profit or loss. The net gain or loss recognised in profit or loss initial recognition. incorporates any dividend or interest earned on Dividends on AFS equity instruments are recognised in the financial asset. Fair value is determined in the manner the income statement when the Group’s right to receive Income is recognised on an effective interest rate basis for described in note 37. payments is established. The fair value of AFS monetary debt instruments other than financial assets designated at assets denominated in a foreign currency is determined in FVTPL Available-for-sale (“AFS”) financial assets that foreign currency and translated at the exchange rate Listed and unlisted shares and redeemable notes held at the end of each reporting period. The foreign exchange Financial assets at fair value through profit or loss by the Group that are traded in an active market are gains and losses that are recognised in profit or loss are Financial assets are classified as FVTPL where the financial classified as being AFS and are stated at fair value, except determined based on the amortised cost of the monetary asset is either held for trading or is designated at FVTPL. for investments in shares for which there are no available asset. Other foreign exchange gains and losses are market quotations and whose fair value cannot be recognised in other comprehensive income.
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Held-to-maturity investments are recognised in profit or loss. production overheads. Net realisable value represents the Promissory notes and debentures with fixed or estimated selling price for inventories less all estimated determinable payments and fixed maturity dates which the With an exception of AFS equity instruments, if in a costs of completion and costs necessary to make the sale. Group has the positive intent and ability to hold to maturity subsequent period the amount of the impairment loss are classified as held-to-maturity investments. Held-to- decreases and the decrease can be related objectively to an Cash and cash equivalents maturity investments are recorded at amortised cost less event occurring after the impairment was recognised, the impairment, if any. Interest income is recognised using the previously recognised impairment loss is reversed through Cash and cash equivalents comprise cash in hand, current effective interest method. profit or loss to the extent that the carrying amount of the accounts and cash deposits with banks and highly liquid investment at the date the impairment is reversed does not investments with original maturities of three months or less, Loans and receivables exceed what the amortised cost would have been had the that are readily convertible to known amounts of cash and Trade receivables, loans issued, and other receivables that impairment not been recognised. In respect of AFS equity are subject to an insignificant risk of changes in value. have fixed or determinable payments that are not quoted securities, impairment losses previously recognised through in an active market are classified as loans and receivables. profit and loss are not reversed through profit or loss. Any Financial liabilities Loans and receivables are measured at amortised cost increase in fair value subsequent to impairment loss is using the effective interest method less any impairment. recognised in other comprehensive income. Impairment Financial liabilities are classified into the following specified Interest income is recognised by applying the effective losses on AFS equity instruments accounted for at cost are categories: interest rate, except for short-term receivables when the not reversed. • financial guarantee contract liabilities; and recognition of interest would be immaterial. • other financial liabilities. Derecognition of financial assets Impairment of financial assets The Group derecognises a financial asset only when the Financial guarantee contract liabilities Financial assets, other than those at FVTPL, are assessed contractual rights to the cash flows from the asset expire; Financial guarantee contract liabilities are measured for indicators of impairment at the end of each reporting or it transfers the financial asset and substantially initially at their fair values and are subsequently measured period. Financial assets are impaired where there is all the risks and rewards of ownership of the asset to at the higher of: objective evidence that, as a result of one or more events another entity. If the Group neither transfers nor retains • the amount of the obligation under the contract, that occurred after the initial recognition of the financial substantially all the risks and rewards of ownership and as determined in accordance with IAS 37 Provisions, asset, the estimated future cash flows of the investment continues to control the transferred asset, the Group Contingent Liabilities and Contingent Assets; and have been affected. For financial assets carried at recognises its retained interest in the asset and an • the amount initially recognised less, where amortised cost, the amount of the impairment is the associated liability for amounts it may have to pay. If appropriate, cumulative amortisation recognised in difference between the asset’s carrying amount and the the Group retains substantially all the risks and rewards accordance with the revenue recognition policies set out present value of estimated future cash flows, discounted at of ownership of a transferred financial asset, the Group above. the financial asset’s original effective interest rate. continues to recognise the financial asset and also recognises a collateralised borrowing for the proceeds Other financial liabilities The carrying amount of the financial asset is reduced by received. Other financial liabilities, including loans and borrowings, the impairment loss directly for all financial assets with the are initially measured at fair value, net of transaction exception of trade and other receivables where the carrying Inventories costs. Financial liabilities are subsequently measured at amount is reduced through the use of an allowance amortised cost using the effective interest method, with account. When a trade or other receivable is considered Inventories are stated at the lower of cost and net interest expense recognised on an effective interest basis. uncollectible, it is written-off against the allowance realisable value. Cost is determined by using the weighted account. Subsequent recoveries of amounts previously average method. The cost of finished goods and work in written-off are credited against the allowance account. progress includes direct costs and the allocation of related Changes in the carrying amount of the allowance account
138 The notes are an on integral to pages 177 part 127 of these consolidated financial statements. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2010 All amounts are in thousands of US Dollars unless otherwise stated
Provisions and accruals
Provisions are recognised when the Group has a present Defined benefit plans obligation (legal or constructive) as a result of a past event, For defined benefit retirement plans, the cost of providing it is probable that the Group will be required to settle the benefits is determined using the Projected Unit Credit obligation, and a reliable estimate can be made of Method, with actuarial valuations being carried out at the amount of the obligation. the end of each reporting period and with immediate recognition of all actuarial gains and losses in the income The amount recognised as a provision is the best estimate statement. Past service cost is amortised on a straight-line of the consideration required to settle the present basis over the average period until the benefits become obligation at the end of each reporting period, taking vested. into account the risks and uncertainties surrounding the obligation. Where a provision is measured using the cash The retirement benefit obligation recognised in the flows estimated to settle the present obligation, its carrying statement of financial position represents the present amount is the present value of those cash flows. value of the defined benefit obligation as adjusted for unrecognised past service cost. When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, the receivable is recognised as an asset if it is virtually certain that reimbursement will be received and the amount of the receivable can be measured reliably.
Employee benefit obligations
Remuneration to employees in respect of services rendered during the reporting period, including accrual for unused vacation and bonuses and related social taxes, is recognised as an expense in the period when it is earned.
Defined contribution plan Subsidiaries registered in the Russian Federation are legally obliged to make defined contributions to the State Pension Fund. This defined contribution plan is financed on a pay- as-you-earn basis.
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4. Critical accounting judgements and key sources of estimation uncertainty
In the application of the Group’s accounting policies, described in note 3, management is required to make judgements, estimates and assumptions about the carrying amounts of assets and liabilities and recognised amounts of income and expenses that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods.
The most significant areas requiring the use of management estimates and assumptions relate to: • impairment of assets; • impairment of goodwill; • allowances for doubtful receivables; • obsolete and slow-moving raw materials; • employee benefit obligations; and • taxation.
Impairment of fixed assets and intangible assets excluding goodwill estimate in the Group’s cash flow model is the expected rates used in the cash-generating unit cash flow model; (iii) increase in the price of natural gas on the territory of the projected long-term growth rates used in the derivation Tangible fixed assets and intangible assets are reported at Russian Federation which is based on the announced of terminal year values; and (iv) the exchange rate used in cost, less accumulated depreciation and impairment losses. government policy on natural gas prices. the cash-generating unit cash flow model. These and other At the end of each reporting period, the Group determines assumptions are impacted by economic conditions and whether any indicators of impairment exist. If there are Impairment of goodwill expectations of management and will change in the future any such indicators, the recoverable amount of the assets based on period specific facts and circumstances. Changes in the management’s assumptions could materially impact is calculated and compared to the carrying amount. The Goodwill is tested for impairment annually, or more the fair value estimates. excess of the carrying amount over the recoverable amount frequently when there is an indication that a cash is recognised as an impairment. generating unit may be impaired, by comparing the carrying amount of the goodwill to its estimated The recoverable amount is calculated as the higher of an recoverable amount. An impairment is recorded if the asset’s or cash-generating unit’s fair value less costs to carrying amount exceeds the recoverable amount. sell and its value in use. The calculation of value in use The recoverable amount is the higher of fair value less requires the Group to make estimates regarding the Group’s cost to sell and value in use. Value in use is determined future cash flows. The estimation of future cash flows using discounted cash flow models involving several involves significant estimates and assumptions regarding assumptions. The key assumptions include (i) present value the market growth, market demand for the products, factors used in determining the fair value of the cash- profitability of products and discount rates. A critical generating units; (ii) projected average revenue growth
140 The notes are an on integral to pages 177 part 127 of these consolidated financial statements. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2010 All amounts are in thousands of US Dollars unless otherwise stated
Allowances for doubtful receivables Employee benefit obligations Taxation
Accounts receivable are stated at amortised cost after The Group’s employees participate in pension benefit The Group is primarily subject to income taxes in the deducting an allowance for doubtful receivables. The plans. The costs of pension benefits and related liabilities Russian Federation. Russian tax, currency and customs allowance for doubtful receivables is the Group’s best with respect to the Group’s employees participating in legislation is subject to varying interpretations. The estimate of probable credit losses in the Group’s existing defined benefit plans have been determined based upon Group recognises liabilities for anticipated additional tax accounts receivable balances. When evaluating the actuarial computations. The Group records the unfunded assessments as a result of tax audits based on estimates adequacy of the allowance for doubtful receivables, status associated with these plans in accordance with the of whether it is probable that additional taxes will be due. management bases its estimates on the current overall requirements of IAS 19 Employee Benefits and records the Where the final tax outcome of these matters is different economic conditions, the ageing of accounts receivable actuarially determined pension costs during each period. from the amounts that were initially recorded, such balances, historical write-off experience, customer Pension costs in respect of defined-benefit pension plans differences will impact the income tax provisions in the creditworthiness and changes in payment terms. primarily represent the increase in the actuarial present period in which such determinations are made. Uncertainties regarding changes in the financial condition value of the obligation for pension benefits based on of customers, either adverse or positive, could impact the employee service during the year and the interest on this Deferred tax assets are reviewed at the end of each amount and timing of allowances for doubtful receivables obligation in respect of employee service in previous years. reporting period and are reduced to the extent that it is not that may be required. probable that sufficient taxable profit will be available to In calculating the obligation and expense, the Group is allow all or part of the deferred tax assets to be utilised. Obsolete and slow-moving raw materials required to select certain actuarial assumptions. These Various factors are considered in assessing the probability assumptions include discount rate, expected salary of the future utilisation of deferred tax assets, including Inventories are stated at the lower of cost or net realisable and pension increases and mortality projection. The past operating results, operational plans, expiration of tax value. Cost is determined by using the weighted average assumptions are determined based on current market losses carried forward, and tax planning strategies. If actual method of accounting. Reserves for excess or obsolete conditions, historical information and consultation with results differ from these estimates or if these estimates must inventory are recorded based on a variety of factors, and input from the Group’s actuaries. Changes in the key be adjusted in future periods, the financial position, results including product changes and improvements, changes assumptions can have a significant impact on the projected of operations and cash flows may be negatively affected. in raw material availability, new product introductions, benefit obligations, funding requirements and periodic Due to a change in estimate, in 2009 the Group recognised estimated future demand and market conditions. pension cost incurred. a deferred tax asset in the amount of USD 29,573 thousand in respect of tax losses from prior years, which was not In addition, certain finished goods and raw materials of recognised in 2008, as the Group did not believe it would be the Group are carried at net realisable value. Estimates of able to offset it in future periods. net realisable value of inventories are based on the most reliable evidence available at the time the estimates are made. These estimates take into consideration fluctuations of prices or costs directly relating to events occurring subsequent to the reporting date to the extent that such events confirm conditions existing at the end of the reporting period. The adequacy of the Group’s reserves could be materially affected by changes in the supply and demand for products, subsequent changes to prices or costs or regulatory actions.
The notes are an on integral to pages 177 part 127 of these consolidated financial statements. 141 5 | URALCHEM HOLDING P.L.C. Consolidated financial statements
5. Business combinations
Open Joint Stock Company Voskresensk Mineral Fertilisers The fair values of VMF’s assets, liabilities and contingent (“VMF”) liabilities as at 6 June 2008, were as follows:
Acquisition of controlling interest in VMF in 2008 by the Fair value at the date of acquisition Group ASSETS At the date of acquisition VMF did not prepare consolidated On 6 June 2008, the Group entered into an agreement to acquire Property, plant and equipment 325,123 financial statements in accordance with IFRS. Thus, it was not practicable to determine the carrying amounts of the 437,115,724 or 71.7% of the total outstanding ordinary shares of Intangible assets 354 VMF for an aggregate purchase price of USD 380,537 thousand. VMF acquired assets, liabilities and contingent liabilities in Inventories 42,554 is an unlisted company, specialising in the production of phosphate accordance with IFRS immediately before the acquisition, Other financial assets 2,516 and they were not presented in these consolidated financial based and complex mineral fertilisers, sulphuric and phosphoric Trade and other receivables 17,838 statements. acids and other chemical products with its main production facilities Advances paid and prepaid expenses 24,444 located in Voskresensk, Moscow region of the Russian Federation. Income tax receivable 5,803 VMF and its subsidiaries contributed USD 240,841 thousand VMF’s output is intended both for the domestic and export markets. of revenue and USD 9,508 thousand of loss for the period Other taxes receivable 27,998 The main products (monoammonium phosphate and diammonium from 6 June 2008 to 31 December 2008. phosphate) are primarily sold in export markets. Other phosphate Cash and cash equivalents 26,010 based and complex fertilisers and chemical products are primarily Total assets 472,640 Goodwill arising on the acquisition of VMF relates to the sold in the domestic market. LIABILITIES benefits of expected synergy, revenue growth and cost Loans and borrowings 29,412 saving, future market development and the assembled Retirement benefit obligations 3,845 workforces of the acquired entities. These benefits are not recognised separately from goodwill as the future economic Deferred tax liabilities 70,770 benefits arising from them cannot be reliably measured. Trade and other payables 18,923 Advances received 5,014 Income tax payable 8,628 Other taxes payable 3,583 Total liabilities 140,175 Net assets at the date of acquisition 332,465 Less: Share of net assets attributable to minority shareholders (99,095) Group’s share of net assets acquired 233,370 Add: Goodwill arising on acquisition 147,167 Total consideration 380,537 Net cash flow arising on acquisition: Cash consideration (380,537) Cash and cash equivalents acquired 26,010 Net cash outflow on acquisition of subsidiary (354,527)
142 The notes are an on integral to pages 177 part 127 of these consolidated financial statements. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2010 All amounts are in thousands of US Dollars unless otherwise stated
Pro-forma condensed consolidated income statement data Increase of ownership interest in VMF in 2009 by the Group Open Joint Stock Company Kirovo-Chepetsk Chemical (unaudited) During the year ended 31 December 2009, the Group acquired, through a number of transactions with non- Works (“KCCW”) The potential effect of the acquisition of VMF on the results controlling shareholders, an additional 0.005% of VMF’s shares for a total cash consideration of USD 64 thousand, Increase of ownership interest in KCCW in 2008 by the Group of the Group’s operations, as if this subsidiary was acquired During the year ended 31 December 2008, the Group on 1 January 2008, is analysed as follows: increasing its ownership in the company to 74.8%. The carrying value of VMF’s net assets at the dates when the acquired, through a number of transactions with non- Year ended shares were acquired ranged from USD 192,787 thousand to controlling shareholders, an additional 20.3% of KCCW’s 31 December 2008 USD 194,688 thousand. As a result of these transactions, the shares for a total cash consideration of USD 90,635 (unaudited) Group recognised a decrease in net assets attributable to thousand, increasing its ownership in the company to Revenue from continuing operations 1,919,776 non-controlling interest in the amount of USD 14 thousand. 97.7%. The carrying value of KCCW’s net assets as at the Profit before tax from continuing operations 183,654 The excess of the consideration paid over the Group’s share dates when the shares were acquired ranged from USD Profit for the year from continuing operations 91,500 in net assets acquired of USD 50 thousand was recognised 287,839 thousand to USD 402,875 thousand. As a result directly in the statement of changes in equity as a decrease of these transactions, the Group recognised a decrease These unaudited pro-forma amounts are provided for in retained earnings. in net assets attributable to non-controlling interest in illustrative purposes only and do not present the results the amount of USD 71,252 thousand. The excess of the of operations of the Group had the transactions assumed Additional share issue by VMF in 2009 consideration paid over the Group’s share in net assets acquired of USD 19,383 thousand was recognised directly in therein occurred on or as at the date indicated, nor is it During the year ended 31 December 2009, VMF issued the statement of changes in equity as a decrease in retained necessarily indicative of the results of operations which may additional ordinary shares in the amount of USD 99,647 earnings. be achieved in the future. This pro-forma information does thousand. The Company purchased additional shares not present the actual result of operations of the Group. in proportion to its existing shareholding in VMF in the In determining the pro-forma revenue and profit for the amount of USD 74,100 thousand. The proportion of the Increase of ownership interest in KCCW in 2009 by the Group year of the Group had VMF been acquired on 1 January share issue that was purchased by the new investors in the During the year ended 31 December 2009, the Group 2008, the Group has calculated depreciation of property, amount of USD 25,547 thousand was accounted for as an acquired, through a number of transactions with non- plant and equipment acquired on the basis of the fair increase in non-controlling interests in these consolidated controlling shareholders, an additional 0.6% of KCCW’s values arising from the initial accounting for the business financial statements. shares for a total cash consideration of USD 722 thousand, combination. increasing its ownership in the company to 98.3%. The Increase of ownership interest in VMF in 2010 by the Group carrying value of KCCW’s net assets at the dates when the shares were acquired ranged from USD 104,153 thousand Increase of ownership interest in VMF in 2008 by the Group During the year ended 31 December 2010, the Group to USD 152,414 thousand. As a result of these transactions, During the period since 6 June 2008 to 31 December 2008, acquired, through a number of transactions with non- the Group recognised a decrease in net assets attributable the Group acquired, through a number of transactions controlling shareholders, an additional 15.1% of VMF’s to non-controlling interest in the amount of USD 865 with non-controlling shareholders, an additional 3.1% of shares for a total cash consideration of USD 58,505 thousand. The excess of the Group’s share in net assets VMF’s shares for a total cash consideration of USD 14,073 thousand, increasing its ownership in the company to acquired over the consideration paid of USD 143 thousand thousand, increasing its ownership in the company to 89.9%. The carrying value of VMF’s net assets at the dates was recognised directly in the statement of changes in 74.8%. The carrying value of VMF’s net assets as at the dates when the shares were acquired ranged from USD 238,001 equity as an increase in retained earnings. when the shares were acquired ranged from USD 262,975 thousand to USD 266,890 thousand. As a result of these thousand to USD 323,107 thousand. As a result of these transactions, the Group recognised a decrease in net assets transactions, the Group recognised a decrease in net assets attributable to non-controlling interest in the amount of attributable to non-controlling interest in the amount of USD 36,410 thousand. The excess of the consideration paid USD 9,136 thousand. The excess of the consideration paid over the Group’s share in net assets acquired of USD 22,095 over the Group’s share in net assets acquired of USD 4,937 thousand was recognised directly in the statement of thousand was recognised directly in the statement of changes in equity as a decrease in retained earnings. changes in equity as a decrease in retained earnings.
The notes are an on integral to pages 177 part 127 of these consolidated financial statements. 143 5 | URALCHEM HOLDING P.L.C. Consolidated financial statements
Open Joint Stock Company Azot, Berezniki (“Azot”)
Increase of ownership interest in KCCW in 2010 by the Group Increase of ownership interest in Azot in 2008 by the Group During the year ended 31 December 2010, the Group During the year ended 31 December 2008, the Group acquired, through a number of transactions with non- acquired, through a number of transactions with controlling shareholders, an additional 0.5% of KCCW’s non-controlling shareholders, an additional 21.3% of shares for a total cash consideration of USD 1,408 thousand, Azot’s shares for a total cash consideration of USD 81,151 increasing its ownership in the company to 98.8%. The thousand, increasing its ownership in the company to carrying value of KCCW’s net assets at the dates when the 100.0%. The carrying value of Azot’s net assets as at the shares were acquired ranged from USD 166,052 thousand dates when the shares were acquired ranged from USD to USD 229,288 thousand. As a result of these transactions, 281,264 thousand to USD 429,078 thousand. the Group recognised a decrease in net assets attributable As a result of these transactions, the Group recognised to non-controlling interest in the amount of USD 1,084 a decrease in net assets attributable to non-controlling thousand. The excess of the consideration paid over the interest in the amount of USD 78,880 thousand. The excess Group’s share in net assets acquired of USD 324 thousand of the consideration paid over the Group’s share in net was recognised directly in the statement of changes in assets acquired of USD 2,271 thousand was recognised equity as a decrease in retained earnings. directly in the statement of changes in equity as a decrease in retained earnings. Decrease of ownership interest in KCCW in 2010 by the Group During the year ended 31 December 2010, the Group sold Other acquisitions in 2008 a 1.3% interest in KCCW, or 17,000 ordinary shares, to third During the year ended 31 December 2008, the Group parties for a total consideration of USD 3,261 thousand, acquired 100.0% of Kamskiy mining-and-processing plant decreasing its ownership in the company to 97.5%. The from an entity under common control and 100.0% of total consideration receivable was outstanding as of 31 Limited Liability Company ChemProject from a third party December 2010 and was recorded as other receivables for a total cash consideration of USD 764 thousand. As a in these consolidated financial statements. The carrying result of these transactions, the Group recognised goodwill value of KCCW’s net assets at the dates when the shares of USD 632 thousand carried over from the transaction were sold ranged from USD 186,589 thousand to USD with the entity under common control, and goodwill of 229,288 thousand. As a result of these transactions, the USD 142 thousand relating to the acquisition of Limited Group recognised an increase in net assets attributable Liability Company ChemProject from third parties. The to non-controlling interest in the amount of USD 2,348 difference between the cash consideration paid and the net thousand. The excess of the consideration received over the liabilities assumed as a result of the transaction with the Group’s share in net assets sold of USD 913 thousand was entity under common control of USD 1,605 thousand was recognised directly in the statement of changes in equity as recognised as a decrease in retained earnings (refer to note an increase in retained earnings. 3 for the Group’s accounting policy for common control transactions).
144 The notes are an on integral to pages 177 part 127 of these consolidated financial statements. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2010 All amounts are in thousands of US Dollars unless otherwise stated
6. Segment information
For management purposes the Group is organised into two by the chief operating decision maker. Costs and assets of segments, Nitrogen Fertilisers and Phosphate Fertilisers. subsidiaries of the Group engaged in other operations are Reports reviewed by the Chief Executive Officer (the not allocated to operating segments within management “chief operating decision maker”) that are used to assess reports reviewed by the chief operating decision maker. performance and allocate resources are prepared on the same basis. Segment information provided to the chief operating decision maker for the reportable segments for the years ended 31 December 2010, 2009 and 2008 is as follows: • Nitrogen Fertilisers: The nitrogen fertilisers segment Year ended 31 December 2010 Nitrogen fertilisers Phosphate fertilisers Total comprises subsidiaries engaged in the production of nitrogen based fertilisers, complex fertilisers, ammonia, Revenue from external customers 1,025,333 293,604 1,318,937 inorganic acids and other chemical products. The major Inter-segment revenue 32,821 413 33,234 subsidiaries and branches allocated to the nitrogen Total segment revenue 1,058,154 294,017 1,352,171 fertilisers segment are KCCW MFP, located in the Kirov OIBDA 335,672 19,180 354,852 region of the Russian Federation, and Azot branch of Interest income 2,450 413 2,863 Uralchem OJSC (“Azot branch”), formerly OJSC Azot Interest expense (39,531) (1,787) (41,318) (refer to note 1), located in the Perm region of the Russian Other financial expenses (1,610) (713) (2,323) Federation; and Impairment of non-current assets (7,374) (3,773) (11,147) • Phosphate Fertilisers: The phosphate fertilisers Depreciation and amortisation (55,143) (44,560) (99,703) segment comprises subsidiaries engaged in the Income tax (expense)/benefit (35,359) 6,031 (29,328) production of phosphate based fertilisers, complex fertilisers and inorganic acids. The major subsidiary Year ended 31 December 2009 Nitrogen fertilisers Phosphate fertilisers Total allocated to the phosphate fertilisers segment is VMF, Revenue from external customers 775,583 116,142 891,725 located in the Moscow region of the Russian Federation. Inter-segment revenue 1,673 2,807 4,480 Total segment revenue 777,256 118,949 896,205 The chief operating decision maker does not regularly OIBDA 178,083 (34,518) 143,565 review the operating results of other operations, and Interest income 19,489 3,508 22,997 these operations are not reported as separate operating Interest expense (38,199) (5,085) (43,284) segments. These other operations contain smaller Net loss from derivative financial instruments (15,657) - (15,657) subsidiaries which engage in a variety of businesses, Depreciation and amortisation (51,814) (44,095) (95,909) for example electricity and heat energy generation, Income tax (expense)/benefit (16,831) 15,021 (1,810) construction, repairs and maintenance and processing of waste water. The profitability of the two operating Year ended 31 December 2008 Nitrogen fertilisers Phosphate fertilisers Total segments is primarily measured based on OIBDA, which the Revenue from external customers 1,379,546 230,227 1,609,773 Group defines as operating profit adjusted for depreciation Total segment revenue 1,379,546 230,227 1,609,773 and amortisation. Since this term is not a standard IFRS OIBDA 609,897 15,460 625,357 measure, the Group’s definition of OIBDA may differ from Interest income 42,042 285 42,327 that of other companies. Costs and assets of subsidiaries of Interest expense (30,812) (2,500) (33,312) the Group engaged in transportation, sales and marketing Impairment of non-current assets - (40,240) (40,240) activities are allocated (pro rata volume of services Net loss from derivative financial instruments (60,793) - (60,793) rendered by these companies to the operating segments) to Depreciation and amortisation (57,310) (30,098) (87,408) operating segments within management reports reviewed Income tax (expense)/benefit (92,691) 14,332 (78,359)
The notes are an on integral to pages 177 part 127 of these consolidated financial statements. 145 5 | URALCHEM HOLDING P.L.C. Consolidated financial statements
The total reportable segment revenue is reconciled to consolidated revenue as follows:
Year ended 31 December 2010 Nitrogen fertilisers Phosphate fertilisers Total Total segment revenue 1,058,154 294,017 1,352,171 Inter-segment revenue (32,821) (413) (33,234) Other revenue 70,182 Total consolidated revenue 1,389,119
Year ended 31 December 2009 Nitrogen fertilisers Phosphate fertilisers Total Total segment revenue 777,256 118,949 896,205 Inter-segment revenue (1,673) (2,807) (4,480) Other revenue 57,348 Total consolidated revenue 949,073
Year ended 31 December 2008 Nitrogen fertilisers Phosphate fertilisers Total Total segment revenue 1,379,546 230,227 1,609,773 Other revenue 87,080 Total consolidated revenue 1,696,853
During the year ended 31 December 2010, the Nitrogen Fertilisers segment and Phosphate Fertilisers segment earned approximately USD 147,357 thousand of revenue from operations with a single customer, which constituted more than 10.0% of the Group’s consolidated revenue.
During the year ended 31 December 2009, there was no single customer which constituted more than 10.0% of the Group’s consolidated revenue.
During the year ended 31 December 2008, the Nitrogen Fertilisers segment earned approximately USD 196,011 thousand of revenue from operations with a single customer, which constituted more than 10.0% of the Group’s consolidated revenue.
146 The notes are an on integral to pages 177 part 127 of these consolidated financial statements. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2010 All amounts are in thousands of US Dollars unless otherwise stated
The total reportable segment OIBDA is reconciled to consolidated profit/ (loss) before tax as follows:
Year ended 31 December 2010 Nitrogen fertilisers Phosphate fertilisers Total Year ended 31 December 2008 Nitrogen fertilisers Phosphate fertilisers Total Segment OIBDA 335,672 19,180 354,852 Segment OIBDA 609,897 15,460 625,357 Unallocated operating activity, Unallocated operating activity, Depreciation and amortisation (103,932) Depreciation and amortisation (93,685) Corporate overheads (44,922) Corporate overheads (84,092) Other (44,175) Other (11,999) Inter-segment operations 43,408 Inter-segment operations 32,351 Group operating profit 205,231 Group operating profit 467,932 Interest income 1,137 Interest income 15,988 Interest expense (150,304) Interest expense (92,841) Other financial expenses (2,357) Impairment of non-current assets (42,895) Impairment of non-current assets (11,147) Share of loss of associates (131) Share of profit of associates 15,952 Foreign exсhange loss from financing activities (189,756) Foreign exсhange loss from financing activities (5,646) Group profit before tax 158,297 Group profit before tax 52,866
Year ended 31 December 2009 Nitrogen fertilisers Phosphate fertilisers Total Segment OIBDA 178,083 (34,518) 143,565 Unallocated operating activity, Depreciation and amortisation (100,441) Corporate overheads (36,608) Other (38,995) Inter-segment operations 26,848 Group operating loss (5,631) Interest income 39,198 Refer to notes 16, 17, 18, 20, 22 for details of impairment of Interest expense (156,995) non-current assets. Impairment of non-current assets (3,622) Share of loss of associates (1,040) Sales between segments are carried out at market prices. Foreign exсhange loss from financing activities» (18,128) The revenue from external parties reported to the chief operating decision maker is measured in a manner Group loss before tax (146,218) consistent with that in the income statement.
The notes are an on integral to pages 177 part 127 of these consolidated financial statements. 147 5 | URALCHEM HOLDING P.L.C. Consolidated financial statements
Total reportable segment assets are reconciled to consolidated assets as follows:
As of 31 December 2010 Nitrogen fertilisers Phosphate fertilisers Total The amounts provided to the chief operating decision Total segment assets 793,932 355,022 1,148,954 maker with respect to total assets are measured in a Deferred tax assets 72,305 manner consistent with that in the financial statements. Current tax assets 5,482 These assets are allocated based on the operations of the Corporate assets 247,722 segment. Other 97,955 Investments in shares (classified as available-for-sale Inter-segment assets (62,959) financial assets or investments in associates) held by the Total consolidated assets 1,509,459 Group are not considered to be segment assets but are rather managed at the corporate headquarters by the As of 31 December 2009 Nitrogen fertilisers Phosphate fertilisers Total strategic investment function. Total segment assets 806,213 377,758 1,183,971 Deferred tax assets 55,153 Current tax assets 10,119 Corporate assets 265,845 Other 95,396 Inter-segment assets (37,417) Total consolidated assets 1,573,067
As of 31 December 2008 Nitrogen fertilisers Phosphate fertilisers Total Total segment assets 1,294,010 436,983 1,730,993 Deferred tax assets 4,838 Current tax assets 14,985 Corporate assets 409,536 Other 42,111 Inter-segment assets (397,625) Total consolidated assets 1,804,838
Non-current assets other than financial instruments and deferred tax assets are located primarily in the Russian Federation, the location of the Group’s major production facilities. The total of non-current assets located in other Additions to non-current assets excluding deferred tax assets, financial instruments and post-employment benefits are as follows: countries, including Cyprus, are not significant. Nitrogen fertilisers Phosphate fertilisers Total Information about the revenue from external customers Year ended 31 December 2010 42,761 11,004 53,765 attributed to individual countries is not available as the cost Year ended 31 December 2009 44,367 12,214 56,581 to develop it would be excessive. Therefore this information Year ended 31 December 2008 179,101 25,143 204,244 is not disclosed in these consolidated financial statements.
148 The notes are an on integral to pages 177 part 127 of these consolidated financial statements. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2010 All amounts are in thousands of US Dollars unless otherwise stated
7. Sales of goods
Year ended 31 December 2010 Total Export Russian Federation Other CIS countries Mineral fertilisers Nitrogen based fertilisers 648,356 448,343 146,617 53,396 Phosphate based fertilisers 244,609 170,117 42,478 32,014 Complex fertilisers 190,691 136,316 36,196 18,179 Ammonia 131,997 127,410 2,686 1,901 Explosive grade ammonium nitrate 50,955 6,188 39,758 5,009 Inorganic acids 19,298 - 19,298 - Other chemical products 33,031 3,052 29,002 977 Total 1,318,937 891,426 316,035 111,476 Year ended 31 December 2009 Mineral fertilisers Nitrogen based fertilisers 506,472 376,073 89,305 41,094 Complex fertilisers 154,552 114,267 27,361 12,924 Phosphate based fertilisers 51,773 40,116 11,598 59 Ammonia 93,835 89,611 3,657 567 Explosive grade ammonium nitrate 43,646 12,366 27,737 3,543 Inorganic acids 17,248 - 17,167 81 Other chemical products 24,199 352 23,157 690 Total 891,725 632,785 199,982 58,958 Year ended 31 December 2008 Mineral fertilisers Nitrogen based fertilisers 837,235 618,790 163,472 54,973 Complex fertilisers 235,919 220,925 14,401 593 Phosphate based fertilisers 179,754 130,975 3,543 45,236 Ammonia 227,189 216,756 5,454 4,979 Inorganic acids 48,229 20 47,843 366 Explosive grade ammonium nitrate 47,547 17,031 27,378 3,138 Other chemical products 33,900 916 31,146 1,838 Total 1,609,773 1,205,413 293,237 111,123
The notes are an on integral to pages 177 part 127 of these consolidated financial statements. 149 5 | URALCHEM HOLDING P.L.C. Consolidated financial statements
Year ended 31 December 2010 Year ended 31 December 2009 Year ended 31 December 2008 Electricity and heat energy 41,004 27,775 43,999 8. Other sales Construction, repairs and maintenance services 5,602 5,973 7,606 Substantially all other sales were made on the territory of the Processing of waste water 4,268 3,811 3,647 Russian Federation. Transportation 3,389 4,916 7,633 Other 15,919 14,873 24,195 Total 70,182 57,348 87,080
Year ended 31 December 2010 Year ended 31 December 2009 Year ended 31 December 2008 Raw materials, including: 9. Cost of sales Natural gas 232,487 188,631 215,222 Apatite 125,580 50,193 117,946 Potassium chloride 17,563 24,336 11,886 Sulphur 15,004 4,317 38,691 Other raw materials 50,204 43,799 78,671 Energy and utilities 106,286 83,024 104,640 Depreciation 81,324 79,022 73,799 Wages and salaries 67,090 59,354 70,970 Social taxes 16,557 14,071 17,183 Repairs and maintenance 5,213 4,740 9,994 (Increase)/decrease in inventory balance of work in-progress and finished goods (9,119) 5,092 (34,399) Other 18,192 17,551 21,683 Total 726,381 574,130 726,286
Year ended 31 December 2010 Year ended 31 December 2009 Year ended 31 December 2008 Transportation, including: 10. Selling Railway tariff 128,474 103,552 105,328 Freight and transshipment 103,766 73,509 105,164 Rail cars rent expenses 18,858 21,101 22,981 and distribution Other transportation expenses 13,420 15,928 13,629 Wages and salaries 13,863 9,713 7,709 Depreciation 11,365 10,140 9,635 expenses Advertising and marketing 9,456 11,140 3,328 Customs clearance charges 2,525 3,120 6,427 Social taxes 2,307 1,770 1,425 Commissions and agent fees 1,610 437 1,328 Other 16,091 15,065 13,157 Total 321,735 265,475 290,111
150 The notes are an on integral to pages 177 part 127 of these consolidated financial statements. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2010 All amounts are in thousands of US Dollars unless otherwise stated
11. General and administrative expenses Year ended 31 December 2010 Year ended 31 December 2009 Year ended 31 December 2008 Wages and salaries 53,216 43,298 96,708 Audit, legal and consulting services 12,200 7,792 9,169 Depreciation 9,126 8,835 9,067 Social taxes 7,211 6,375 6,911 Rent 3,760 3,135 4,622 Security 3,575 3,641 5,488 Bank charges 1,824 4,084 6,275 Fines and penalties 1,168 2,862 3,757 Other 28,847 21,395 20,884 Total 120,927 101,417 162,881 12. Other operating income and expenses Year ended 31 December 2010 Year ended 31 December 2009 Year ended 31 December 2008 Other operating income Gain on disposal of assets 408 - - Foreign exchange gain on operating activities - 8,165 16,391 Other income 5,059 3,520 1,845 Total 5,467 11,685 18,236 Other operating expenses Provision for unfavorable court decision 7,807 - - Research expenses 4,503 4,992 - Foreign exchange loss on operating activities 2,596 - - Loss on disposal of assets - 2,451 3,076 Other expenses 5,406 2,267 4,010 Total 20,312 9,710 7,086 13. Interest income Year ended 31 December 2010 Year ended 31 December 2009 Year ended 31 December 2008 Interest on loans issued and deposits 1,137 20,704 13,456 Effect of change in finance lease rates (refer to note 29) - 14,833 - Effect of discounting of long-term accounts payable - 3,661 - Unwinding of discount on deferred sales proceeds on disposal of subsidiaries - - 2,532 Total 1,137 39,198 15,988
The notes are an on integral to pages 177 part 127 of these consolidated financial statements. 151 5 | URALCHEM HOLDING P.L.C. Consolidated financial statements
14. Interest expense
Year ended 31 December 2010 Year ended 31 December 2009 Year ended 31 December 2008 During the years ended 31 December 2010, 2009 and 2008 Interest on loans and borrowings 144,033 150,440 87,536 the corporate income tax rate applicable to the Company, which is registered in Cyprus, was 10.0%. The corporate Interest on obligations under finance leases 6,271 6,555 5,305 income tax rates applicable to the Group’s subsidiaries Total 150,304 156,995 92,841 incorporated in the Russian Federation, the primary location of the Group’s production entities, varied from 15.5% to 20.0% during the years ended 31 December 2010 and 2009, and varied from 20.0% to 24.0% during the year 15. Income tax ended 31 December 2008. In 2008, the Government of the Russian Federation enacted Year ended 31 December 2010 Year ended 31 December 2009 Year ended 31 December 2008 a change in the Russian corporate income tax rate from Current income tax expense 50,814 14,613 130,189 24.0% to 20.0% (and from 20.0% to 15.5% in some regions Deferred tax benefit (40,412) (63,787) (31,963) of the Russian Federation). The new corporate income tax Effect of changes in income tax rate due to the reorganisation of the Group 12,898 - - rates became effective from 1 January 2009, and deferred Effect of changes in statutory income tax rates - - (16,153) tax balances of all of the Group’s subsidiaries registered Total 23,300 (49,174) 82,073 on the territory of the Russian Federation have been re- measured as of 31 December 2008, accordingly. On 14 December 2010, OJSC Azot, located in the Perm region of the Russian Federation merged with OJSC Uralchem registered in Moscow (refer to note 1). As at 31 December 2010, tax rates applicable to companies registered in the Perm region of the Russian Federation Reconciliation of the statutory income tax, calculated at the rate effective in Cyprus, where the Company is located, to the amount of actual income tax expense is as follows: and Moscow were 15.5% and 20%, respectively. After completion of the merger of OJSC Azot with OJSC Uralchem, the effective income tax rate applicable to the combined Year ended 31 December 2010 Year ended 31 December 2009 Year ended 31 December 2008 entities approximated 15.6%. Previously recognised Profit/(loss) before tax 52,866 (146,218) 158,297 deferred tax balances were recalculated using this rate Income tax calculated at 10% 5,287 (14,622) 15,830 and the changes in deferred tax balances were accounted Effect of different tax rates of subsidiaries operating in other jurisdictions 10,707 (18,982) 15,420 for as an effect of changes in income tax rate due to the reorganisation of the Group. Tax effect of bonuses, interest expenses and other expenses that are non- deductible 7,214 14,003 16,078 Deferred taxes arising from transfer of assets between Group companies (12,806) - - Effect of changes in income tax rate due to the reorganisation of the Group 12,898 - - Effect of previously unrecognised and unutilised tax losses and tax offsets now recognised as deferred tax assets - (29,573) - Impact of change in income tax rate in the Russian Federation - - (16,153) Effect of unused tax losses and tax offsets not recognised as deferred tax assets - - 41,240 Tax effect of goodwill impairment - - 9,658 Income tax at effective income tax rate of 44% (2009: 34%, 2008: 52%) 23,300 (49,174) 82,073
152 The notes are an on integral to pages 177 part 127 of these consolidated financial statements. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2010 All amounts are in thousands of US Dollars unless otherwise stated
16. Property, plant and equipment During the year ended 31 December 2010, the Group Buildings Machinery, equipment Construction determined that a group of fixed assets, mainly associated and structures and transport Other in progress Total with the ammonia production facility at VMF, was impaired Cost by USD 3,773 thousand. The main factor contributing to the Balance at 1 January 2008 161,037 313,798 6,224 23,310 504,369 impairment of the ammonia production facility at VMF was Additions 16,378 113,015 9,735 79,149 218,277 the temporary stoppage of the production of ammonia at VMF. Acquisitions through business combinations 178,041 125,133 18,050 4,136 325,360 Management decided to stop the production of ammonia at Transfers 2,351 28,201 4,532 (35,084) - VMF until ammonia market prices recover to a level which will Disposals (402) (6,034) (4,032) (2,820) (13,288) ensure profitability of ammonia production at VMF. Disposal of subsidiaries - - (199) (6) (205) Effect of translation to presentation currency (62,920) (95,351) (5,589) (12,743) (176,603) During December 2009, the Group acquired commercial Balance at 31 December 2008 294,485 478,762 28,721 55,942 857,910 real estate property, which is in the final stage of Additions 5,544 8,727 2,301 82,792 99,364 construction, from an entity under common control Transfers 4,973 13,391 3,076 (21,440) - with the Group for a cash consideration of USD 109,421 Disposals (853) (1,881) (1,140) (4,852) (8,726) thousand. The commercial real estate property represents Effect of translation to presentation currency (7,898) (12,690) (658) (1,063) (22,309) two floors in an office building located in Moscow. Balance at 31 December 2009 296,251 486,309 32,300 111,379 926,239 Additions 4,589 14,370 441 28,986 48,386 The commercial real estate property was recorded at Transfers 6,985 37,396 1,311 (45,692) - cost, which was measured as the carrying value at which the commercial real estate property was recorded by the Reclassified to assets held for sale (refer to note 22) (802) (5,928) (10) (11,136) (17,876) transferor at the date of the transaction which amounted to Disposals (2,216) (4,751) (2,565) (1,191) (10,723) USD 45,390 thousand. The carrying value of the commercial Effect of translation to presentation currency (2,285) (3,881) (255) (627) (7,048) real estate property for the transferor comprised historical Balance at 31 December 2010 302,522 523,515 31,222 81,719 938,978 cost of USD 109,421 thousand less accumulated impairment Accumulated Depreciation and Impairment Losses loss of USD 64,031 thousand. The difference between the Balance at 1 January 2008 (9,023) (22,901) (352) - (32,276) cash consideration and the carrying value in the amount Charge for the year (22,977) (67,255) (2,269) - (92,501) of USD 64,031 thousand was recorded in the statement Disposals 155 1,503 94 - 1,752 of changes in equity as a distribution to shareholders Disposal of subsidiaries - - 117 - 117 in accordance with the Group’s accounting policy for Effect of translation to presentation currency 4,845 13,063 302 - 18,210 transactions with entities under common control (refer to Balance at 31 December 2008 (27,000) (75,590) (2,108) - (104,698) note 35). Charge for the year (25,853) (68,920) (3,224) - (97,997) Disposals 245 709 167 - 1,121 As at 31 December 2010, property, plant and equipment Effect of translation to presentation currency (480) (1,164) (83) - (1,727) included advances paid for acquisition of the property, Balance at 31 December 2009 (53,088) (144,965) (5,248) - (203,301) plant and equipment in the amount of USD 45,914 Charge for the year (27,503) (70,791) (3,521) - (101,815) thousand (2009: USD 55,110 thousand; 2008: USD 18,436 Reclassified to assets held for sale (refer to note 22) 100 1,121 7 - 1,228 thousand). Impairment (846) (2,911) (16) - (3,773) Disposals 1,869 2,475 497 - 4,841 The Group leases certain items of machinery, equipment Effect of translation to presentation currency 497 1,351 67 - 1,915 and transport under a number of finance lease agreements Balance at 31 December 2010 (78,971) (213,720) (8,214) - (300,905) with third parties. As at 31 December 2010, the net book Carrying value value of leased machinery, equipment and transport was At 31 December 2008 267,485 403,172 26,613 55,942 753,212 USD 45,065 thousand (2009: USD 53,542 thousand; 2008: At 31 December 2009 243,163 341,344 27,052 111,379 722,938 USD 62,357 thousand). At 31 December 2010 223,551 309,795 23,008 81,719 638,073
The notes are an on integral to pages 177 part 127 of these consolidated financial statements. 153 5 | URALCHEM HOLDING P.L.C. Consolidated financial statements
Assets pledged as collateral
The carrying values of property, plant and equipment pledged to secure loans and borrowings granted to the Group were as follows (refer to note 28): 31 December 2010 31 December 2009 31 December 2008 Machinery, equipment and transport 136,300 183,973 111,597 Buildings and structures 21,433 49,723 1,117 Other 1,276 1,563 493 Total 159,009 235,259 113,207
17. Goodwill Cost 31 December 2010 31 December 2009 31 December 2008 Balance at the beginning of the year 208,715 214,851 113,844 Additional amounts recognised from business combinations occurring during the year - - 147,941 Effect of translation to presentation currency (1,594) (6,136) (46,934) Balance at the end of the year 207,121 208,715 214,851 Accumulated impairment losses Balance at the beginning of the year (39,091) (40,240) - Impairment losses recognised during the year - - (40,240) Effect of translation to presentation currency 299 1,149 - Balance at the end of the year (38,792) (39,091) (40,240) Carrying amount At the beginning of the year 169,624 174,611 113,844 At the end of the year 168,329 169,624 174,611
Allocation of goodwill to cash-generating units
The carrying amount of goodwill was allocated to the following cash-generating units: 31 December 2010 31 December 2009 31 December 2008 Nitrogen Fertilisers 91,494 92,197 94,908 Phosphate Fertilisers 76,189 76,775 79,033 Other 646 652 670 Total 168,329 169,624 174,611
154 The notes are an on integral to pages 177 part 127 of these consolidated financial statements. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2010 All amounts are in thousands of US Dollars unless otherwise stated
Annual test for impairment
For the purpose of impairment testing, the recoverable amount of the relevant cash-generating unit was assessed by reference to value in use. These calculations use pre-tax cash flow projections based on budgets approved by the Group and covering a five-year period. Cash flows beyond the five-year period are extrapolated by using the expected forecasts stated below. The key assumptions used by management for value in use determination are as follows: 31 December 2010 31 December 2009 31 December 2008 Gross margin 10.0-35.0% 15.0-20.0% 20.0-35.0% Growth rate 3,0% 3,0% 3,0% Discount rate 14,0% 14,7% 17,3% Raw materials price inflation 4.1-15.0% 3.0-18.0% 2.0-18.0% Exchange rate (RUR to 1 USD) 31,0 32,2 36,9
These assumptions have been used for analysis of each cash-generating unit within the Group’s nitrogen and phosphate fertilisers segments.
Management determined budgeted gross margin based on past performance and its expectation of the current market development. The gross margin and raw material price inflation ranges relate to a variety of products produced and raw materials consumed by the cash- generating unit, respectively. The weighted average growth rates used are consistent with the forecast included in industry reports.
During the year ended 31 December 2008, the Group determined that goodwill associated with VMF was impaired by USD 40,240 thousand. The main factor contributing to the impairment of the cash generating unit was a decrease in Russian and international phosphate based fertiliser prices by approximately 60.0% during the fourth quarter of 2009. Goodwill associated with VMF is included in the Phosphate Fertilisers segment in note 6.
18. Investments in associates
Details of the Group’s associates are as follows: Effective ownership, % Name of associate Principal activity 31 December 2010 31 December 2009 31 December 2008 Perm Mineral Fertilisers Production of mineral fertilisers 46,5 46,5 2,2 NPK Karbon- Shungit Mining and processing 49,7 49,7 49,7 ZhDTsekh Other services 50,0 50,0 50,0
The notes are an on integral to pages 177 part 127 of these consolidated financial statements. 155 5 | URALCHEM HOLDING P.L.C. Consolidated financial statements
Movements in the carrying amount of investments in associates were as follows: Investments in associates – at cost
31 December 2010 31 December 2009 31 December 2008 During the year ended 31 December 2008, the Group Investments in associates – equity method acquired 2.2% of Open Joint Stock Company Perm Mineral Balance at the beginning of the year 10,726 15,892 - Fertilisers (“PMF”), which was recorded as an available-for- sale investment. Acquisitions - - 18,015 Impairment - (3,622) - On 30 December 2009, the Group acquired an additional Share of post-acquisition losses (471) (1,040) (131) 44.3% interest in PMF from an entity under common Effect of translation to presentation currency (81) (504) (1,992) control with the Group for a consideration of USD 162,000 Balance at the end of the year 10,174 10,726 15,892 thousand, increasing its ownership in PMF to 46.5%. Investments in associates – at cost The additional investment was recorded at historic cost, which was measured as the carrying value at which the Balance at the beginning of the year 24,578 - - investment was recorded by the transferor at the date Acquisitions - 19,951 - of the transaction which was USD 19,951 thousand. The Reclassification from AFS due to increase in ownership - 4,977 - difference between the consideration and the carrying Effect of translation to presentation currency (37) (350) - value was recorded in the statement of changes in equity Balance at the end of the year 24,541 24,578 - in accordance with the Group’s accounting policy for Total 34,715 35,304 15,892 transactions with entities under common control (refer to note 35).
The Group does not have any information related to the Investments in associates – equity method financial position of PMF as at 31 December 2010 and 2009 and its financial results for the years then ended. Thus, it is During the year ended 31 December 2009, the Group recognised an impairment loss on its investment in NPK Karbon-Shungit in the amount impracticable for the Group to account for this investment of USD 3,622 thousand (2008: nil). The impairment loss is due to a decrease in NPK Karbon-Shungit’s manufacturing output and a decrease applying equity method and the Group has continued to in shungit prices during 2009. The amount of the impairment loss was measured as the difference between the carrying amount of the account for this investment at cost. As at 31 December 2008, investment and the present value of estimated future cash flows discounted at the rate of 17.3%. the investment in PMF was classified in these consolidated financial statements as available-for-sale (refer to note 20). Summarised financial information in respect of the Group’s associates accounted for under the equity method: PMF is a Russian-based company engaged in the 31 December 2010 31 December 2009 31 December 2008 production of nitrogen based mineral fertilisers, whose Total assets 25,834 28,037 39,591 main operating facilities are located in the Perm region of Total liabilities (5,415) (6,329) (7,344) the Russian Federation. Net assets 20,419 21,708 32,247 Group’s share of net assets of associates 10,174 10,726 15,892 Dividends received from PMF during the year ended 31 December 2010 in the amount of USD 16,423 thousand are included in share of profits of associates in the consolidated income statement (refer to note 35). Year ended 31 December 2010 Year ended 31 December 2009 Year ended 31 December 2008 Revenue 8,548 2,863 6,658 (Loss)/profit for the period (944) (2,090) 429 Share of loss of associates (471) (1,040) (131)
156 The notes are an on integral to pages 177 part 127 of these consolidated financial statements. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2010 All amounts are in thousands of US Dollars unless otherwise stated
19. Inventories
31 December 2010 31 December 2009 31 December 2008 Inventories expected to be recovered after twelve months Catalytic agents 29,983 25,583 26,272 Other inventories 2,721 4,022 5,116 32,704 29,605 31,388 Inventories expected to be recovered in the next twelve months Raw materials, net of allowance for obsolescence 51,556 48,552 57,505 Finished goods 54,287 37,456 51,905 Work in-progress 6,785 10,311 7,059 Goods for resale 310 5,183 1,041 112,938 101,502 117,510 Total 145,642 131,107 148,898
During the year ended 31 December 2010, the Group recognised a write down of USD 2,224 thousand to reduce the carrying amount of inventories to net realisable value (2009: USD 3,965 thousand; 2008: USD 26,032 thousand). At 31 December 2010, inventories in the amount of USD 5,526 thousand were stated at net realisable value (2009: USD 18,784 thousand; 2008: USD 37,973 thousand).
At 31 December 2010, raw materials were presented net of allowance for obsolescence of USD 4,902 thousand (2009: USD 4,902 thousand; 2008: USD 5,415 thousand). During the year ended 31 December 2010, the Group recognised USD 1,119 thousand (2009: USD 281 thousand; 2008: USD 1,828 thousand) and released USD 1,119 thousand (2009: USD 794 thousand; 2008: USD 3,325 thousand) of allowance for obsolescence of raw materials.
Certain inventories were pledged to secure bank loans and borrowings granted to the Group, as follows:
31 December 2010 31 December 2009 31 December 2008 Carrying value of pledged inventories (refer to note 28) 38,981 58,492 83,256
The notes are an on integral to pages 177 part 127 of these consolidated financial statements. 157 5 | URALCHEM HOLDING P.L.C. Consolidated financial statements
20. Available-for-sale investments
At 31 December 2010, available-for-sale investments At 31 December 2008, the available-for-sale investment represent a 9.7% investment in Open Joint Stock Company in PMF of USD 4,977 thousand was accounted for at cost Togliattiazot (“Togliattiazot”) of USD 176,459 thousand as the fair value of the investment could not be reliably (2009: USD 177,779 thousand; 2008: 182,938 thousand) and estimated. other available-for-sale investments of USD 71 thousand (2009: USD 58 thousand; 2008: USD 82 thousand). The During the year ended 31 December 2008, the Group available-for-sale investment in Togliattiazot is accounted recognised an impairment loss on its investment in PMF in for at cost as the fair value of the investment cannot be the amount of USD 2,655 thousand. The impairment loss reliably measured. was due to a decrease in PMF’s manufacturing output and a decrease in Russian and international fertiliser prices. In December 2008, the Group acquired 2.2% interest in PMF The amount of the impairment loss was measured as the from an entity under common control with the Group for a difference between the carrying amount of the investment consideration of USD 5,918 thousand. The investment was and the present value of estimated future cash flows recorded at cost which was measured as the carrying value discounted at a rate of 17.3%. at which the investment was recorded by the transferor at the date of the transaction which amounted to USD 7,632 On 30 December 2009, the Group acquired 44.3% of PMF thousand. The difference between the consideration and from an entity under common control. At the date of the the carrying value of USD 1,714 thousand was recorded in transaction, the Group reclassified the 2.2% available-for- the statement of changes in equity in accordance with the sale investment in PMF to investments in associates (refer to Group’s accounting policy for transactions with entities note 18, 35). under common control. 21. Other financial assets
31 December 2010 31 December 2009 31 December 2008 As at 31 December 2010, interest rates on loans issued Non-current varied from 6.0% to 17.0% (2009: from 5.0% to 19.5%; Loans issued, at amortised cost 4,833 7,359 142,631 2008: from 6.0% to 14.0%) per annum. As at 31 December Other financial assets - - 255 2009 the majority of loans issued were unsecured, 4,833 7,359 142,886 USD -denominated and receivable from related parties Current (refer to note 35). Loans issued, at amortised cost 583 35,931 41,718 Promissory notes, at amortised cost 429 326 128 Promissory notes of related parties, at amortised cost 349 351 7,086 Other financial assets 328 365 249 1,689 36,973 49,181 Total 6,522 44,332 192,067
158 The notes are an on integral to pages 177 part 127 of these consolidated financial statements. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2010 All amounts are in thousands of US Dollars unless otherwise stated
22. Assets held for sale
The Group has decided to stop the development of the Sordinsky Plot at the Vyatsko-Kamsky phosphate deposit and intends to sell the fixed assets which were purchased exclusively for the development of this project. As of 31 December 2010, the net selling price of these assets after deduction of the related costs to sell was estimated at USD 9,274 thousand which is USD 7,374 thousand lower than the original carrying value of these assets prior to their reclassification to assets held for sale.The write down of the assets to their net selling price was recorded as an impairment loss. 23. Trade and other receivables 31 December 2010 31 December 2009 31 December 2008 The average credit period for the Group’s customers varies Long-term from 60 to 90 days. During this period no interest is charged on the outstanding balances. The Group has provided Other receivables 3,072 - - fully for all receivables over 360 days because historical 3,072 - - experience is such that receivables that are outstanding Short-term beyond 360 days are generally not recoverable. Before Trade receivables 81,761 33,890 24,102 accepting a new customer, the Group uses an internal credit Other receivables 24,991 9,953 9,465 system to assess the potential customer’s credit quality 106,752 43,843 33,567 and defines credit limits separately for each individual customer. Credit limits available to customers are reviewed Less: allowance for doubtful receivables (3,637) (3,260) (3,740) on an annual basis. As at 31 December 2010, the Group’s 103,115 40,583 29,827 five largest debtors (individually exceeding more than 5.0% Total 106,187 40,583 29,827 (2009: 4.2%; 2008: 2.9%) of the total current receivables balance) represented 52.6% (2009: 39.9%; 2008: 34.8%) of the outstanding balance of accounts receivable.
Included in the Group’s receivables balance at 31 December 2010 are debtors of USD 9,398 thousand (2009: USD 7,810 thousand; 2008: USD 6,492 thousand) which are past due but not impaired. The Group did not hold any collateral over these outstanding balances. The weighted average age of these receivables is 264 days (2009: 348 days; 2008: 176 days).
Movements in the allowance for doubtful receivables were as follows: Year ended 31 December 2010 Year ended 31 December 2009 Year ended 31 December 2008 Balance at the beginning of the year 3,260 3,740 440 Recognised in the income statement 1,741 1,498 4,414 Amounts written-off (892) (1,862) (824) Amounts recovered during the year (447) (63) (88) Effect of translation to presentation currency (25) (53) (202) Balance at the end of the year 3,637 3,260 3,740
The notes are an on integral to pages 177 part 127 of these consolidated financial statements. 159 5 | URALCHEM HOLDING P.L.C. Consolidated financial statements
24. Advances paid and prepaid expenses
31 December 2010 31 December 2009 31 December 2008 Advances for transportation services 11,085 3,034 16,012 Advances paid for apatite 6,699 2,733 1,566 Advances paid for supply of natural gas 832 11,522 15,949 Other advances and prepaid expenses 15,160 11,659 12,739 Total 33,776 28,948 46,266 25. Other taxes receivable
31 December 2010 31 December 2009 31 December 2008 Value added tax reimbursable 53,600 94,234 105,559 Other taxes 1,188 1,072 9,827 Total 54,788 95,306 115,386
26. Cash and cash equivalents
31 December 2010 31 December 2009 31 December 2008 Сurrent accounts, including: USD-denominated 25,405 25,886 23,284 RUR-denominated 8,978 3,378 6,886 EUR-denominated 1,792 8,660 20,473 Bank deposits maturing within three months: RUR-denominated 7,927 15,616 61,000 USD-denominated 2,258 65 6,586 Other cash and cash equivalents 50 53 72 Total 46,410 53,658 118,301
At 31 December 2010, interest rates on deposits at UniCredit bank, Bank Vozrozhdenie, Sberbank and VTB bank varied from 1.8% to 5.0% (2009: 0.5% to 4.8%; 2008: 1.0% to 16.5%) per annum.
160 The notes are an on integral to pages 177 part 127 of these consolidated financial statements. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2010 All amounts are in thousands of US Dollars unless otherwise stated
27. Share capital
Number of authorised ordinary shares Number of issued ordinary shares Class A Class B Class A Class B Share capital Balance at 1 January 2008 10,100 - 10,100 - 24 Issue of ordinary shares on 7 July 2008 with par value of EUR 1.71 each at premium of EUR 12.720 each (total premium of USD 200 thousand) - paid in cash 10 - 10 - - Balance at 31 December 2008 10,110 - 10,110 - 24 Increase of authorised share capital on 21 October 2009 - 249,989,890 - - - Issue of ordinary shares on 16 November 2009 with par value of EUR 0.00515 each - in exchange for shares in subsidiaries - - - 164,639,890 1,270 Issue of ordinary shares on 17 November 2009 with par value of EUR 0.00515 each - paid in cash - - - 10,350,000 80 Increase of authorised share capital on 20 November 2009 - 110,000,000 - - - Balance at 31 December 2009 and 2010 10,110 359,989,890 10,110 174,989,890 1,374
There were no changes in the share capital of the Company Retained earnings and dividends during the year ended 31 December 2010. The statutory financial statements of the Group entities Shareholders of Class A and Class B ordinary shares have are the basis for the profit distribution and other the same rights, voting powers, preferences and restrictions. appropriations. Class A ordinary shares have a par value of EUR 1.71 each and Class B ordinary shares have a par value of EUR 0.00515 KCCW, a subsidiary of the Company, declared dividends each. of USD 182,348 thousand, which were approved at the annual general shareholder meeting on 31 December 2008, At 31 December 2010, share capital was fully paid. At 31 of which USD 5,025 thousand was attributable to non- December 2009, share capital in the amount of USD 18 controlling shareholders. thousand (2008: USD 7 thousand) related to 100 Class A shares and 7,848,751 Class B shares (2008: 3,100 Class A Earnings/ (loss) per share shares) remained unpaid. Earnings/(loss) per share were calculated by dividing net On 16 November 2009, the Company issued 164,639,890 profit/(loss) attributable to shareholders of the Company class B ordinary shares in exchange for 1.0% of UralChem for the years ended 31 December 2010, 2009 and 2008 by OJSC’s ordinary shares which was owned by an entity the weighted average number of ordinary shares in issue under common control with the Group. The change during the respective year. in the Company’s ownership in UralChem OJSC has been accounted for retrospectively from the date of incorporation of the Company.
The notes are an on integral to pages 177 part 127 of these consolidated financial statements. 161 5 | URALCHEM HOLDING P.L.C. Consolidated financial statements
28. Loans and borrowings In November 2010, the Group reached an agreement with Sberbank to extend: • the repayment of the current portion of a long-term 31 December 2010 31 December 2009 31 December 2008 loan in the amount of USD 99,933 thousand from Loans denominated in USD 1,163,365 1,149,585 1,063,657 May - November 2011 to May 2012. The commission for Loans denominated in RUR 190,941 262,955 252,230 loan restructuring was USD 6,000 thousand and was Loans denominated in EUR - 8,165 288 capitalised as an offset to the principal amount of the Promissory notes - 265 275 loan. The annual interest rate on this loan remained Total 1,354,306 1,420,970 1,316,450 unchanged; • the repurchase of 9,452,559 shares of Togliattiazot Less: current portion repayable within twelve months and shown under current liabilities (473,263) (533,604) (470,329) under REPO agreement, which represent 9.7% of the investee’s share capital, in the amount of USD 75,750 Long-term portion of loans and borrowings 881,043 887,366 846,121 thousand, from November 2010 to November 2011. The annual interest rate on this repurchase obligation In March 2010, the Group reached an agreement with Loans denominated in USD remained unchanged. Sberbank to extend the repayment of USD 65,800 thousand obtained under a revolving credit facility agreement from In February 2010, the Group reached an agreement with The loans denominated in USD had a weighted average 2010 to 2011. In accordance with the agreement, the bank UniCredit Bank to extend the repayment of short-term annual interest rate of 8.1% during the year ended 31 provided the Group with a new multi-currency revolving loans in the amount of USD 200,000 thousand from 2010 December 2010 (2009: 9.7%; 2008: 10.0%) and included the credit facility with a borrowing limit of USD 65,800 to 2011. The average interest rate on the loans increased following borrowings: thousand. The annual interest rate under this facility is 9.0% from 6.1% to 6.3% per annum. The commission for loans • USD 84,797 thousand (2009: USD 795,354 thousand; as compared to the annual interest rate of 16.0% under the restructuring amounted to USD 750 thousand and was 2008: USD 714,309 thousand) at fixed rates varying from old credit facility. The commission for loan restructuring included as interest expense in the consolidated income 7.0% to 9.0% (2009: from 7.0% to 11.5%; 2008: from 9.4% amounted to 0.5% of the borrowing limit and is included statement. The agreements foresaw that if an initial public to 12.0%) per annum; in interest expense in the consolidated income statement. offering (“IPO”) of UralChem Holding P.L.C. occurred • USD 1,002,118 thousand (2009: USD 260,225 thousand; In August 2010, the Group reached an agreement with the before 31 July 2010 the entire outstanding amount should 2008: USD 345,680 thousand) at floating rates linked to Sberbank to extend the repayment of USD 27,000 thousand have become due on 1 March 2011, otherwise, the Group Libor 1m and Libor 3m, varying from 6.2% to 7.7% (2009: obtained under a credit facility agreement from August was required to make installments starting from 31 July from 5.2% to 9.2%; 2008: from 5.6% to 9.4%) per annum; 2010 to February 2012. In accordance with the agreement, 2010 with the final payment due on 1 March 2011. In April • USD 76,450 thousand (2009: USD 75,914 thousand; the bank provided the Group with a new revolving credit 2010, the Group decided to postpone the IPO of UralChem 2008: nil) at a fixed REPO rate of 8.0% (2009: 8.0%; 2008: facility with a borrowing limit of USD 27,000 thousand. The Holding P.L.C. аnd reached agreements with UniCredit nil) per annum. Bank to postpone the instalments that were due in 2010. As annual interest rate under this facility is Libor 3m + 6.7% as compared to the annual interest rate of 7.5% under the at 31 December 2010, the total outstanding amount of loan The loans denominated in USD are due in the years 2011 old credit facility. The commission for loan restructuring was due in February 2011. to 2013. As at 31 December 2010, USD-denominated loans amounted to 0.6% of the borrowing limit and was included in the amount of USD 1,144,504 thousand (2009: USD in interest expense in the consolidated income statement. In March 2010, the Group reached an agreement with 1,048,268 thousand; 2008: USD 880,029 thousand) are Raiffeisen Bank to extend the repayment of a short-term secured by 100.0% of OJSC Uralchem’s shares, 74.8% of In September 2010, the Group reached agreements with loan in the amount of USD 60,000 thousand from 2010 to VMF’s shares (2009: 74.8%; 2008: nil), 87.4 % of KCCW MFP’s Sberbank to decrease interest rates on several loans, 2011. The commission for loan restructuring amounted to shares (2009: 100%; 2008: nil) and 44.3% of PMF’s shares including: USD 300 thousand and was included in interest expense in (2009: nil; 2008: nil) held by the Group and certain fixed • loan in the amount of USD 699,933 thousand from the consolidated income statement. In June 2010, the Group assets and inventories (refer to notes 16 and 19). As at 31 9.0% to Libor 3m+7.4% per annum; reached an agreement with Raiffeisen Bank to decrease the December 2009 and 2008 these loans were also secured by • loan in the amount of USD 65,800 thousand from 9.0% interest rate from Libor 1m + 9.0% to Libor 1m + 6.5% per 100.0% and 14.9% of Azot’s shares and by 62.4% and 87.4% to 7.5% per annum. annum. of KCCW, correspodingly.
162 The notes are an on integral to pages 177 part 127 of these consolidated financial statements. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2010 All amounts are in thousands of US Dollars unless otherwise stated
Loans denominated in RUR
In June 2010, the Group reached an agreement with quarterly instalments starting from 20 June 2012 with the As at 31 December 2010, the Group’s bank loans are subject Sberbank to decrease the interest rate on a loan in the final instalment due on 24 June 2013 and other loans of USD to restrictive covenants, including but not limited to: amount of USD 157,744 thousand from 16.0% to 13.0% per 32,861 thousand (2009: USD 103,580 thousand; 2008: USD annum. 88,107 thousand) that bear interest at fixed rate of 10.0% • set-up limits for the total amount of borrowings of (2009: from 14.5% to 16.0%; 2008: from 11.3% to 15.5%) certain Group subsidiaries; In November 2010, the Group reached an agreement with per annum and are due in June 2011. The majority of loans • bank approval for any transfer of pledged property; Sberbank to extend the repayment of the current portion are secured by 100.0% of OJSC Uralchem’s shares, 74.8% of • set-up limits for the amount of cash collections of of a long-term loan in the amount of USD 67,921 thousand VMF’s shares (2009: 74.8%; 2008: nil), 87.4% of KCCW MFP’s certain Group subsidiaries that have to be transferred to from March - December 2011 to June - September 2012. The shares (2009: 100.0%; 2008: nil) and 44.3% of PMF’s shares the accounts at defined banks; and annual interest rate on this loan remained unchanged. (2009: nil; 2008: nil) held by the Group and certain fixed • set-up limits for disposal of assets with a carrying value assets and inventories (refer to notes 16 and 19). As at 31 of more than USD 3,306 thousand for OJSC UralChem. Loans denominated in RUR consist of a loan of USD 158,080 December 2009 and 2008 these loans were also secured by thousand (2009: USD 159,375 thousand; 2008: USD 164,123 100.0% and 77.0% of Azot’s shares and by 62.4% and 87.4% All loan agreements have acceleration clauses, allowing thousand) that bears interest at a fixed rate of 13.0% of KCCW, correspodingly. the creditors to request early repayment of outstanding (2009: 16.0%; 2008: 12.0%) per annum and is repayable in amounts in case of non-compliance with these covenants.
The Group breached the covenant stipulated in the loan Total loans and borrowings were repayable as follows: agreements with one of the banks as at 31 December 2010 and 2009. The amount of loans outstanding as at 31 31 December 2010 31 December 2009 31 December 2008 December 2010 under these agreements was USD 201,128 Due within three months 268,756 166,150 69,901 thousand (2009: USD 200,134 thousand) and was payable Due from three to six months 37,399 190,792 145,655 within three months. As of 31 December 2010 and 2009, the Due from six to twelve months 167,108 176,662 254,773 lender waived his right to request accelerated repayment Total current portion repayable within twelve months 473,263 533,604 470,329 of the loans. The Group’s covenant is waived until the next Due in the second year 414,988 199,867 191,421 covenant test date, 31 December 2011. The terms of these loans were renegotiated in February 2011 (refer to note 39). Due in the third year 466,055 317,142 295,227 Due in the fourth year - 370,357 359,473 Total long-term portion of loans and borrowings 881,043 887,366 846,121
The notes are an on integral to pages 177 part 127 of these consolidated financial statements. 163 5 | URALCHEM HOLDING P.L.C. Consolidated financial statements
29. Obligations under finance leases Minimum lease payments Present value of minimum lease payments The Group leases certain items of machinery, equipment Year ended 31 December Year ended 31 December and transport under a number of finance lease agreements 2010 2009 2008 2010 2009 2008 (refer to note 16). The average lease term is 111 months. For Due within one year 11,250 12,264 14,159 10,604 11,500 12,152 the year ended 31 December 2010 the weighted average effective annual interest rate was 11.2% (2009: 11.7%; 2008: Due from two to five years 40,458 43,351 58,431 29,373 31,451 38,263 12.0%). All leases are on a fixed repayment basis and are Due thereafter 17,105 25,513 49,058 8,170 11,643 25,408 predominantly denominated in USD; insignificant part 68,813 81,128 121,648 48,147 54,594 75,823 of leases is RUR-denominated. In January and July 2009, Less: future finance charges (20,666) (26,534) (45,825) - - - the Group amended its finance lease agreements with Present value of lease liabilities 48,147 54,594 75,823 48,147 54,594 75,823 Brunswick Rail Leasing, reducing the minimum daily lease Less: amount due for settlement within one year and shown under current rates which resulted in a reduction of the carrying amount liabilities (10,604) (11,500) (12,152) of the finance lease liabilities. During the year ended 31 Total non-current finance lease liabilities 37,543 43,094 63,671 December 2009, the Group recognised interest income in the amount of USD 14,833 thousand (refer to note 13) as a result of the reduction in the finance lease liabilities. 30. Trade and other payables Year ended 31 December 2010 Year ended 31 December 2009 Year ended 31 December 2008 Long-term other accounts payable represent the amounts Long-term payable to the parent company and are repayable within Other accounts payable 8,936 17,628 - two years. Other short-term accounts payable include the amounts payable to the parent company of USD 42,387 8,936 17,628 - thousand which is due in next twelve months. Short-term Trade accounts payable 31,116 14,961 19,512 The table below summarises the maturity profile of the Other accounts payable 46,789 38,302 9,774 Group’s trade accounts payable and payables for property, Accrual of performance - based bonuses 12,820 - - plant and equipment based on undiscounted contractual Provision for unused vacation 8,769 7,150 7,809 payments: Provision for unfavorable court decisions 7,780 - - Year ended Year ended Year ended 31 December 31 December 31 December Unpaid salaries 5,421 4,808 5,412 2010 2009 2008 Payables for property, plant and equipment 1,651 3,627 6,814 Due within three months 32,372 16,782 12,948 Accrued expenses 565 454 1,927 Due from three to six months 120 67 2,248 114,911 69,302 51,248 Due from six to twelve months 275 1,739 11,130 Total 123,847 86,930 51,248 Total 32,767 18,588 26,326
The average credit period on the purchase of inventories and services in the Russian Federation is 67 days (2009: 59 days; 2008: 19 days).
164 The notes are an on integral to pages 177 part 127 of these consolidated financial statements. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2010 All amounts are in thousands of US Dollars unless otherwise stated
31. Retirement benefit obligations
Defined contribution plan The principal assumptions used for the purposes of the actuarial valuations were as follows: 31 December 2010 31 December 2009 31 December 2008 Social taxes for the year ended 31 December 2010 included Discount rate 7.5% 9.5% 9.0% contributions to the State Pension Fund in the amount of USD 19,994 thousand (2009: USD 16,120 thousand; 2008: Expected salary increase 9.2% 9.7% 10.2% USD 18,936 thousand). Expected pension increase 5.0% 5.5% 6.0% Employee turnover rate 5.0% 5.0% 5.0% At 31 December 2010, outstanding contributions to the Age of retirement State Pension Fund amounted to USD 749 thousand Male 53 years 53 years 53 years (2009: USD 806 thousand; 2008: USD 961 thousand). Female 50 years 50 years 50 years Average life expectancy of members from date of retirement Defined benefit plans Male 20 years 20 years 20 years The Group operates a number of unfunded defined benefit Female 31 years 31 years 31 years plans for qualifying employees of subsidiaries located in the Russian Federation. The actuarial valuation of the Group’s Amounts recognised in the income statement in respect of these defined benefit plans were as follows: defined benefit obligations as at 31 December 2010, 2009 Year ended 31 December 2010 Year ended 31 December 2009 Year ended 31 December 2008 and 2008 was performed by an independent actuary. Actuarial loss/(gain) recognised in the year 1,093 (1,599) (2,755) Interest expense 698 716 767 Under these plans a retired employee (or his/her family Gain on settlements (609) - (419) members) is entitled to the following payments: Current service cost 198 247 312 • one-time payment on retirement varying from USD Total pension costs/(income) recognised in the income statement 1,380 (636) (2,095) 16 (2009: USD 16; 2008: USD 17) to two monthly salaries, depending on the seniority of employee; Amounts included in the statement of financial position in respect of defined benefit plans were as follows: • quarterly allowance varying from USD 13 to USD 16 31 December 2010 31 December 2009 31 December 2008 (2009: from USD 7 to USD 12; 2008: from USD 9 to USD 16) Present value of unfunded defined benefit obligations 8,655 7,635 8,798 for the rest of his/her life; • one-time payment upon death varying from USD 144 to three official minimum monthly salaries Movements in the present value of the unfunded defined benefit obligations were as follows: (2009: from USD 139 to ten official minimum monthly Year ended 31 December 2010 Year ended 31 December 2009 Year ended 31 December 2008 salaries; 2008: from USD 150 to three official minimum Balance at the beginning of the year 7,635 8,798 8,385 monthly salary). As at 31 December 2010 the official Actuarial loss/(gain) recognised in the year 1,093 (1,599) (2,755) minimum monthly salary was USD 142 (2009: USD 144; Interest expense 698 716 767 2008: USD 147)); and • other payments stipulated in labour agreements such Current service cost 198 247 312 as anniversary payments, disability compensation, etc. Benefits paid (298) (233) (277) Liabilities assumed in business combinations - - 3,845 Liabilities assumed in other transactions - - 867 Gain on settlements (609) - (419) Effect of translation to presentation currency (62) (294) (1,927) Balance at the end of the year 8,655 7,635 8,798
The notes are an on integral to pages 177 part 127 of these consolidated financial statements. 165 5 | URALCHEM HOLDING P.L.C. Consolidated financial statements
32. Deferred taxes
1 January 2008 Acquired (Charged)/ Effect of 31 December (Charged)/ Effect of translation through credited to translation to 2008 1 January 2010 credited to the to presentation 31 December 2010 business the income presentation income statement currency combina- tions statement currency Property, plant and equipment (72,731) 24,348 469 (47,914) Property, plant and equipment (58,578) (66,106) 12,890 23,576 (88,218) Inventories (4,415) 4,676 18 279 Inventories (4,490) (5,923) 9,485 319 (609) Trade and other receivables 660 942 (8) 1,594 Trade and other receivables (592) (505) (722) 1,714 (105) Trade and other payables (151) 5,462 (19) 5,292 Obligations under finance leases 10,887 (1,183) (80) 9,624 Trade and other payables 695 - (248) (62) 385 Tax loss carried forward 68,811 (9,226) (558) 59,027 Obligations under finance leases 6 - 18,327 (3,293) 15,040 Provisions for deferred tax assets (2,671) 2,235 12 (424) Foreign currency forward and option (419) - 7,853 (614) 6,820 Other 884 260 56 1,200 contracts Total 1,274 27,514 (110) 28,678 Tax loss carried forward 4,942 - 2,479 (2,944) 4,477 Provisions for deferred tax assets (6,101) - 387 918 (4,796) Other 195 1,764 (2,335) (176) (552)
(Charged)/ Effect of translation Total (64,342) (70,770) 48,116 19,438 (67,558) 1 January 2009 credited to the to presentation 31 December 2009 income statement currency Property, plant and equipment (88,218) 12,363 3,124 (72,731) Amounts recognised in the income statement for the year ended 31 December 2008 included USD 16,153 thousand Inventories (609) (3,644) (162) (4,415) related to the effect of the change in the Russian statutory Trade and other receivables (105) 726 39 660 income tax rate (refer to note 15). Trade and other payables 385 (501) (35) (151) Obligations under finance leases 15,040 (3,551) (602) 10,887 Foreign currency forward and option contracts 6,820 (6,316) (504) - Tax loss carried forward 4,477 61,458 2,876 68,811 Provisions for deferred tax assets (4,796) 1,895 230 (2,671) Other (552) 1,357 79 884 Total (67,558) 63,787 5,045 1,274
166 The notes are an on integral to pages 177 part 127 of these consolidated financial statements. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2010 All amounts are in thousands of US Dollars unless otherwise stated
Certain deferred tax assets and liabilities were offset by jurisdiction, where the subsidiaries of the Group have a legally enforceable right to At 31 December 2010, the Group had unused tax losses of offset related taxes. The deferred tax balances (after offset) recorded in the statement of financial position were as follows: USD 59,027 thousand (2009: USD 68,811 thousand; 2008: USD 4,477 thousand) available for offset against future 31 December 2010 31 December 2009 31 December 2008 profits. During the year ended 31 December 2008, the Group did not recognise deferred tax assets for unused tax Deferred tax assets 72,305 55,153 4,838 losses of USD 41,240 thousand. During the year ended 31 Deferred tax liabilities (43,627) (53,879) (72,396) December 2009, the Group recognised deferred tax assets Total 28,678 1,274 (67,558) for previously unrecognised tax losses based on changes in its estimates of whether the Group will be able to utilise such losses to offset future profits or that it has tax planning Temporary differences in relation to investments in subsidiaries for which deferred tax assets have not been recognised are attributable to the strategies that will allow it to utilise the losses. The majority following: of tax losses will expire in 2018 and 2019.
31 December 2010 31 December 2009 31 December 2008 Russian subsidiaries 644,002 676,394 395,920 Other subsidiaries 11,704 (9,584) (824) Total 655,706 666,810 395,096
33. Derivative financial obligations
31 December 2010 31 December 2009 31 December 2008 During the years ended 31 December 2008 and 2007, the Foreign currency forward contracts, at FVTPL - - 21,572 Group entered into foreign currency forward and option contracts to hedge risks arising from exchange rate Foreign currency collar contracts, at FVTPL, including: fluctuations from its export sales pertaining to US Dollar call options sold - - 19,588 cash receipts (refer to note 37), expired during the years put options bought - - (3) ended 31 December 2009 and 2008. Total - - 41,157
The notes are an on integral to pages 177 part 127 of these consolidated financial statements. 167 5 | URALCHEM HOLDING P.L.C. Consolidated financial statements
34. Other taxes payable 31 December 2010 31 December 2009 31 December 2008 Property tax 1,203 1,088 1,445 Value added tax 1,168 1,925 4,195 Social taxes 1,161 948 1,214 Other taxes 1,768 2,679 2,074 Total 5,300 6,640 8,928 35. Related parties transactions and outstanding balances Related parties include shareholders, entities under The Group had the following outstanding balances with related parties: common ownership and control with the Group and 31 December 2010 31 December 2009 31 December 2008 members of key management personnel. The Group enters Parent company into transactions with related parties in the ordinary course of business for the purchase and sale of goods and services Loans issued, at amortised cost - 35,116 174,307 and in relation to the provision of financing arrangements Loans and borrowings (18,754) (1,087) (3,109) to and from its parent entity or entities under common Other payables (51,323) (47,628) - ownership. Entities under common ownership and control with the Group Trade and other receivables 5,070 4,277 4,571 Loans issued, at amortised cost - 1,781 6,769 Promissory notes of related parties, at amortised cost 349 351 7,086 Other financial assets - - 63 Trade and other payables (1,621) (2,816) (3,118)
Included in the Group’s receivables balance at 31 December The Group entered into the following transactions with related parties: 2010 were amounts receivable from related parties of USD Year ended 31 December 2010 Year ended 31 December 2009 Year ended 31 December 2008 1,429 thousand which were past due but not impaired Parent company (2009: USD 2,472 thousand; 2008: USD 2,856 thousand). Loans issued (19,839) (112,878) (187,270) Proceeds from repayment of loans issued 38,580 156,223 40,732 Interest income 78 19,576 9,771 Other (expense)/income (201) (41) 315 Entities under common ownership and control with the Group Sales of goods and services 41,999 31,932 55,587 Purchases of goods and services (9,689) (12,511) (21,392) Loans issued - (5,832) (16,383) Proceeds from repayment of loans issued 1,519 7,020 14,540 Dividends received 16,423 - - Interest income 155 235 377 Interest expense - (18) (591)
168 Other income 659 3,246 5,489 The notes are an on integral to pages 177 part 127 of these consolidated financial statements. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2010 All amounts are in thousands of US Dollars unless otherwise stated
Transactions with related parties assets in settling the loans was USD 271,421 thousand, During the year ended 31 December 2010, the Group which comprised of USD 109,421 thousand related to the received dividends from PMF in the amount of USD Sale and purchases of goods commercial real estate property which was based on the 16,423 thousand. The Group is obliged to transfer USD Sales of goods to related parties were made on terms original price paid by the parent company of the Group 15,638 thousand from this amount to its parent company similar to those that were used in transactions with third when the commercial real estate property was acquired in accordance with the terms of the original purchase parties, including average discounts of 3.0% to 5.0% and USD 162,000 thousand related to PMF which was the agreement. This amount has been recorded in other applicable to the Group’s largest customers. Sales of parent company’s estimate of fair value. payables in the consolidated statement of financial services, which mainly consisted of sales of electricity and position (refer to note 30) and recorded as a distribution to heat energy, were made at prices established by the Federal These assets have been recorded based on the historical shareholders in the consolidated statement of changes in Utility Committee, a government regulator responsible carrying value in accordance with the Group’s accounting equity. for establishing and monitoring the prices on the utility policy for transactions with entities under common control. market in the Russian Federation. Purchases from related The difference between the carrying value of the above Compensation of key management personnel parties which primarily included purchases of inventories assets and the amount settled by the Group was treated for production of nitrogen fertilisers were made at market as a distribution to shareholders and was recorded in the The compensation of key management personnel of the prices plus an insignificant premium of 1.0% to 2.0% as statement of changes in equity as a decrease in retained Group for the year ended 31 December 2010 comprised reimbursement for operating expenses of those entities. earnings in the amount of USD 206,080 thousand. The net salaries and cash bonuses in the amount of USD 10,966 effect of the above transactions is accounts payable to the thousand (2009: USD 4,506 thousand; 2008: USD 51,638 Loans issued to related parties parent company of the Group of USD 47,628 thousand. thousand), including social taxes in the amount of USD The loans issued to related parties are primarily loans issued This amount has been recorded in other payables in the 214 thousand (2009: USD 419 thousand; 2008: USD 538 to the parent company of the Group for financing of its consolidated statement of financial position (refer to note thousand). investing activities. As at 31 December 2009, loans issued to 30). As at 31 December 2010, the outstanding amount related parties included an amount of USD 35,116 thousand related to the above mentioned transactions equals USD denominated in USD (2008: USD 177,604 thousand). These 35,685 thousand. loans bore interest at a fixed rate of 12.0% (2008: varying 31 December 2010 31 December 2009 31 December 2008 from 6.0% to 12.0%) per annum. As at 31 December 2009, Short term benefits, including: loans issued to related parties included an amount of USD 1,781 thousand denominated in RUR (2008: USD 3,472 Salaries 6,169 3,088 4,320 thousand). These loans bore interest at a fixed rate of 11.0% Cash bonuses 4,797 1,418 26,618 (2008: varying from 6.0% to 12.0%) per annum. 10,966 4,506 30,938 Share based payments - - 20,700 Loans received from related parties Total 10,966 4,506 51,638 As at 31 December 2010, loans received from related parties included an amount of USD 18,754 thousand denominated On 28 December 2008, the controlling shareholder of the Group entered into agreements with members of key management of the Group to in USD. This loan bears interest at a fixed rate of 7.0% per pay bonuses in the amount of USD 24,595 thousand to them. The payment of the bonuses by the controlling shareholder to members of key annum. management of the Group was recognised directly in the statement of changes in equity as additional paid-in capital.
Settlement of loans to related parties On 31 December 2008, the controlling shareholder of the Group entered into agreements with members of key management of the Group During the year ended 31 December 2009, the Group to transfer 4.14% of the Company`s ordinary shares to them as an additional bonus for services provided to the Group. At the date of the entered into an agreement with its parent company agreements, the fair value of the shares to be transferred by the controlling shareholder of the Group to members of key management of to settle amounts due to the Group through a series Group was USD 20,700 thousand and was recognised directly in the statement of changes in equity as additional paid-in capital. The fair of transactions. This agreement included transfers of value of the Company`s shares was determined by comparing the Company to similar public traded companies. The transfer of 4.14% of the commercial real estate property and a 44.3% investment Company`s ordinary shares to members of key management of the Group was completed during the year ended 31 December 2009. in PMF to the Group. The total value assigned to these The total amount of compensation of key management personnel was included as wages and salaries in note 11.
The notes are an on integral to pages 177 part 127 of these consolidated financial statements. 169 5 | URALCHEM HOLDING P.L.C. Consolidated financial statements
36. Commitments and contingencies
Purchase of natural gas Future minimum costs under non-cancellable purchase agreements were as follows:
In December 2007, the Group entered into binding purchase 31 December 2010 31 December 2009 31 December 2008 agreements with Gazprom and Novatek, to purchase Due in one year 271,899 238,856 187,249 defined volumes of natural gas. Due from two to five years 248,471 436,738 658,955 Total 520,370 675,594 846,204
Purchase of apatite concentrate Future minimum costs under non-cancellable purchase agreement were as follows:
In October 2010, the Group entered into purchase 31 December 2010 31 December 2009 31 December 2008 agreement with Apatit, to purchase defined volumes of Due in one year 103,577 - - apatite concentrate. Due from two to five years 103,577 - - Total 207,154 - -
Purchase of potassium chloride Future minimum costs under non-cancellable purchase agreements were as follows:
In November 2010, the Group entered into purchase 31 December 2010 31 December 2009 31 December 2008 agreements with Uralkaliy and Silvinit, to purchase defined Due in one year 17,585 - - volumes of potassium chloride. Due from two to five years 46,550 - - Total 64,135 - -
Capital commitments
As at 31 December 2010, the Group’s contractual capital commitments for acquisition of property, plant and equipment amounted to USD 4,684 thousand (2009: USD 13,250 thousand; 2008: USD 27,328 thousand).
Operating leases: Group as a lessee Future minimum rental expenses under non-cancellable operating leases were as follows:
The Group leases certain machinery, equipment and office 31 December 2010 31 December 2009 31 December 2008 premises. The respective lease agreements have an average Due in one year 29,280 18,748 13,685 life of one to five years with no renewal option at the end of Due from two to five years 46,082 46,840 34,648 the lease term. Total 75,362 65,588 48,333
170 The notes are an on integral to pages 177 part 127 of these consolidated financial statements. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2010 All amounts are in thousands of US Dollars unless otherwise stated
Guarantees issued
As at 31 December 2010, 2009 and 2008, the Group issued financial guarantees in respect of loans obtained by related and third parties. The total amount of outstanding guarantees issued by the Group was as follows:
31 December 2010 31 December 2009 31 December 2008 Related parties - 6,723 28,270 Third parties 3 13 28 Total 3 6,736 28,298
The Group’s maximum exposure to credit risk in the event of and currency control matters), are subject to review and continue to evolve. The Group is unable to predict the non-performance by parties to these financial guarantees investigation by a number of authorities, which are enabled timing or extent to which those laws and regulations may is limited to the contractual amounts disclosed above. At by law to impose severe fines, penalties and interest change. Such change, if it occurs, may require that the 31 December 2010, 2009 and 2008, management assessed charges. These facts create tax risks in Russia that are more Group modernise technology and upgrade production the risk of non-performance by parties to these financial significant than typically found in countries with more equipment to meet more stringent standards. guarantees as remote. developed tax systems. Generally, tax declarations remain open and subject to inspection for a period of three years Management of the Group regularly reassesses Litigation following the tax year. environmental obligations related to its operations. Estimates are based on management’s understanding The Group has a number of claims and litigation relating While management believes that it has adequately of current legal requirements and the terms of licence to sales and purchases. Management believes that none provided for tax liabilities based on its interpretation of agreements. Should the requirements of applicable of these claims, individually or in aggregate, will have a current and previous legislation, the risk remains that tax environmental legislation change or be clarified and material adverse impact on the Group. authorities in the Russian Federation could take different amended, the Group may incur additional environmental positions with regard to interpretive issues. This uncertainty obligations. The Group faces several unresolved claims in the amount may expose the Group to additional taxation, fines and of USD 7,780 thousand, for which 100% provision had been penalties that could be significant. Russian Federation risk made as at 31 December 2010 (refer to Note 30). Environmental matters The economy of the Russian Federation, while deemed Taxation contingencies in the Russian Federation to be of market status, continues to display certain The Group is subject to extensive federal, state and local traits consistent with that of an emerging market. These The Russian Federation currently has a number of laws environmental controls and regulations in the regions characteristics have in the past included higher than related to various taxes imposed by both federal and of the Russian Federation in which it operates. The normal inflation, insufficient liquidity of the capital regional governmental authorities. Applicable taxes Group’s operations involve the discharge of materials, markets, and the existence of currency controls. The include VAT, corporate income tax and social taxes, contaminants and waste water into the environment that continued success and stability of the Russian economy will together with others. Laws related to these taxes have not could potentially impact on flora and fauna, and give rise to be subject to their government’s continued actions with been in force for significant periods, in contrast to more other environmental concerns. regard to supervisory, legal and economic reforms. developed market economies; therefore, the government’s implementation of these regulations is often inconsistent or The Group’s management believes that its production nonexistent. Accordingly, few precedents with regard to tax facilities are in compliance with all current existing rulings have been established. Tax declarations, together environmental legislation in the regions in which it with other legal compliance areas (for example, customs operates. However, environmental laws and regulations
The notes are an on integral to pages 177 part 127 of these consolidated financial statements. 171 5 | URALCHEM HOLDING P.L.C. Consolidated financial statements
37. Fair value of financial instruments
The fair value of financial assets and liabilities is determined As at 31 December 2008, management believes that as follows: the carrying values of all significant financial assets and • the fair value of financial assets and financial liabilities financial liabilities recorded at amortised cost in the with standard terms and conditions and traded on active consolidated financial statements approximated their fair liquid markets are determined with reference to quoted values, except for the following assets and liabilities: market prices; and • the fair value of other financial assets and financial 31 December 2008 liabilities are determined in accordance with generally accepted pricing models based on discounted cash flow Carrying value Fair value Difference analysis using prices from observable current market Financial assets transactions. Loans issued, at amortised cost 184,349 194,055 (9,706) Total assets 184,349 194,055 (9,706) As at 31 December 2010 and 2009, management believes Financial liabilities that the carrying value of financial assets and liabilities Loans denominated in USD 1,063,657 1,054,464 9,193 approximated their fair values due to (i) their short term nature for current financial assets and liabilities, (ii) the fact Loans denominated in RUR 252,230 241,541 10,689 that interest rates on loans receivable approximate current Total liabilities 1,315,887 1,296,005 19,882 market rates for similar debt instruments, and (iii) the fact that the interest rates on long-term liabilities approximate the current market rates for similar instruments as the majority of loans and borrowings were renegotiated in 2010 and 2009 (refer to note 28).
172 The notes are an on integral to pages 177 part 127 of these consolidated financial statements. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2010 All amounts are in thousands of US Dollars unless otherwise stated
38. Financial risk management
Capital risk management 31 December 2010 31 December 2009 31 December 2008 The Group manages its capital to ensure that entities of Financial assets the Group will be able to continue as a going concern AFS investments 176,530 177,837 187,997 while maximising the return to the shareholders through the optimisation of the Group’s debt to equity ratio. Loans issued and accounts receivable 111,603 83,873 214,176 Management of the Group reviews the capital structure Cash and cash equivalents 46,410 53,658 118,301 on a regular basis. Based on the results of this review, the Promissory notes of third parties, at amortised cost 429 326 128 Group takes steps to balance its overall capital structure Promissory notes held by related parties, at amortised cost 349 351 7,086 through the payment of dividends, new share issues as well Other financial assets 328 365 504 as the issue of new debt or the redemption of existing debt. Total financial assets 335,649 316,410 528,192 Financial liabilities Major categories of financial instruments Loans and borrowings 1,354,306 1,420,970 1,316,450 The Group’s principal financial liabilities comprise loans Trade and other payables 88,492 74,518 36,100 and borrowings and trade payables. The main purpose Obligations under finance leases 48,147 54,594 75,823 of these financial instruments is to raise finance for the Foreign currency forward contracts, at FVTPL - - 21,572 Group’s operations. The Group has various financial assets Foreign currency option contracts, at FVTPL - - 19,585 such as available-for-sale investments, trade and other Total financial liabilities 1,490,945 1,550,082 1,469,530 receivables and loans issued, cash and cash equivalents and promissory notes. The main risks arising from the Group’s financial instruments are foreign currency, interest rate, credit and liquidity risks.
Foreign currency risk The carrying amounts of the Group’s foreign currency denominated monetary assets and liabilities as at 31 December 2010, 2009 and 2008 were as follows: Currency risk is the risk that the financial results of the USD-denominated EUR-denominated Group will be adversely impacted by changes in exchange 31 December 31 December rates to which the Group is exposed. The Group undertakes 2010 2009 2008 2010 2009 2008 certain transactions denominated in foreign currencies. Assets During the years ended 31 December 2008 and 2007, the Group entered into foreign currency forward and option Trade and other receivables 41,695 9,092 2,799 4 3,588 6,804 contracts to manage its foreign currency risk exposure (see Other financial assets - 35,116 174,307 - - - below). Cash and cash equivalents 27,497 25,881 84,050 246 7,892 6,886 Total assets 69,192 70,089 261,156 250 11,480 13,690 Liabilities Loans and borrowings 1,162,642 1,148,367 1,060,738 - 8,165 289 Obligations under finance leases 48,004 53,808 74,522 - - - Trade and other payables 2,737 47,842 616 162 811 578 Total liabilities 1,213,383 1,250,017 1,135,876 162 8,976 867 Total net (liabilities)/assets (1,144,191) (1,179,928) (874,720) 88 2,504 12,823
The notes are an on integral to pages 177 part 127 of these consolidated financial statements. 173 5 | URALCHEM HOLDING P.L.C. Consolidated financial statements
Sensitivity analysis The total net loss from derivative financial instruments recognised in the income statement during the year ended The table below details the Group’s sensitivity to the strengthening of the Russian Rouble against the US Dollar and the Euro by 10.0%. The 31 December 2009 amounted to USD 15,657 thousand analysis was applied to monetary items at the end of the reporting period denominated in (2008: USD 60,793 thousand). currencies different than the respective entity’s functional currency. A positive number indicates an increase in profit where the Russian Rouble strengthens against the US Dollar and Euro. At 31 December 2008 if the RUR had weakened 10.0% against the USD with all variables held constant, the fair USD-impact EUR -impact value of the foreign currency collar contracts would have 31 December 31 December been USD 27,978 thousand. On contrary, if the RUR had 2010 2009 2008 2010 2009 2008 strengthened 10.0% against the USD with all other variables Profit/(loss) 114.419 117.993 87.472 (9) (250) (1.282) held constant, the fair value of the foreign currency collar contracts would have been USD 11,191 thousand.
Impacts of the sensitivity analysis on equity would be the same as that on profit/loss as shown in the table above. At 31 December 2008 if the RUR had weakened 10.0% against the USD with all variables held constant, the fair value of the foreign currency forward contracts would have been USD 29,634 thousand. On contrary, if the RUR had strengthened 10.0% against the USD with all other variables Derivative financial obligations held constant, the fair value of the foreign currency forward contracts would have been USD 12,761 thousand. During the years ended 31 December 2008 and 2007, the Group entered into foreign currency forward and option contracts to hedge risks arising from exchange rate fluctuations from its export sales pertaining to USD cash receipts, all of which expired during the years ended 31 Interest rate risk December 2009 and 2008. Interest rate risk is the risk that changes in floating interest The following table details the foreign currency forward contracts and foreign currency collar contracts outstanding as at 31 December 2008: rates will adversely impact the financial results of the Group. The Group does not use any derivatives to manage 31 December 2008 interest rate risk exposure. The majority of the Group’s Weighted average exchange rate Contract value Fair value financial liabilities are at fixed rates and, accordingly, interest rate risk is limited. Foreign currency forward contracts, including: Sell USD for RUR The table below details the Group’s sensitivity to an increase Due less than three months 25.30 47.317 10.067 of 1.0% in the Libor interest rate. The analysis was applied Due from three to six months 25.26 20.951 5.386 to loans and borrowings based on the assumption that Due from six to twelve months 25.45 21.588 6.119 the amount of the liability outstanding as at the end of the Sell EUR for USD reporting period was outstanding for the whole year. Due less than three months 1.39 4.881 - Foreign currency collar contracts, including: LIBOR – impact Call options sold 31 December 2010 31 December 2009 31 December 2008 Due less than three months 26.70 120.000 19.588 Loss 10.021 2.600 3.450 Put options bought Due less than three months 24.35 120.000 (3) Impacts of sensitivity as loss analysis on equity would be Total 334.737 41.157 the same as that on profit as shown in the table above.
174 The notes are an on integral to pages 177 part 127 of these consolidated financial statements. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2010 All amounts are in thousands of US Dollars unless otherwise stated
Credit risk
Credit risk is the risk that a customer may default or not meet its obligations to the Group in time, leading to financial losses to the Group.
For the year ended 31 December 2010, revenue from the Group’s five largest customers constituted over 25.7% of the Group’s total revenue (2009: 23.6%; 2008: 36.3%). However, 31 December 2010 the Group is not dependent on these customers because of Fixed rate financial liabilities, at amortised cost the existence of a liquid commodity market for the majority of fertilisers and its by-products. Obligations under finance leases Loans and borrowings Total Principal Interest Principal Interest At 31 December 2010, amounts receivable from the Group’s Due within three months 1,477 1,361 14 10,316 13,168 five largest customers were USD 43,516 thousand (2009: USD 4,968 thousand; 2008: USD 1,981 thousand), which Due from three to six months 1,552 1,310 33,172 8,994 45,028 represented approximately 42.2% of the total outstanding Due from six to twelve months 3,076 2,474 159,144 13,823 178,517 balance of accounts receivable (2009: 12.2%; 2008: 8.5%). Due in the second year 6,552 4,467 102,371 13,852 127,242 Due in the third year 7,189 3,758 55,372 3,473 69,792 Due in the fourth year 7,130 2,976 - - 10,106 Liquidity risk Due in the fifth year 6,136 2,250 - - 8,386
Liquidity risk is the risk that the Group will not be able to Due thereafter 15,035 2,070 - - 17,105 settle all its liabilities as they fall due. The Group’s liquidity 48,147 20,666 350,073 50,458 469,344 position is carefully monitored and managed. The Group Floating rate financial liabilities, at amortised cost has a detailed budgeting and cash forecasting process to help ensure that it has adequate cash available to meet its Due within three months - - 260,000 24,471 284,471 payment obligations. Due from three to six months - - - 19,920 19,920 Due from six to twelve months - - - 39,840 39,840 Presented below is the maturity profile of the Group’s financial liabilities (the maturity profile for trade accounts Due in the second year - - 314,433 64,311 378,744 payable and payables for property, plant and equipment Due thereafter - - 412,500 18,997 431,497 is presented in note 30) as at 31 December 2010, 2009 and 2008 based on undiscounted contractual payments, - - 986,933 167,539 1,154,472 including interest payments: Total 48,147 20,666 1,337,006 217,997 1,623,816
The notes are an on integral to pages 177 part 127 of these consolidated financial statements. 175 5 | URALCHEM HOLDING P.L.C. Consolidated financial statements
31 December 2009 Fixed rate financial liabilities, at amortised cost Obligations under finance leases Loans and borrowings Total Principal Interest Principal Interest Due within three months 1,405 1,579 33,292 38,120 74,396 Due from three to six months 1,509 1,495 128,833 28,245 160,082 Due from six to twelve months 3,457 2,819 76,424 49,155 131,855 Due in the second year 6,133 5,126 199,814 95,538 306,611 Due in the third year 6,556 4,470 317,142 66,510 394,678 Due in the fourth year 7,193 3,760 370,357 33,092 414,402 Due in the fifth year 7,135 2,978 - - 10,113 Due thereafter 21,206 4,307 - - 25,513 54,594 26,534 1,125,862 310,660 1,517,650 Floating rate financial liabilities, at amortised cost Due within three months - - 124,289 4,180 128,469 Due from three to six months - - 61,959 2,105 64,064 Due from six to twelve months - - 100,000 1,748 101,748 - - 286,248 8,033 294,281 Total 54,594 26,534 1,412,110 318,693 1,811,931
31 December 2008 Fixed rate financial liabilities, at amortised cost Obligations under finance leases Loans and borrowings Total Principal Interest Principal Interest Due within three months 735 2,214 29,224 33,436 65,609 Due from three to six months 1,634 2,177 12,387 24,437 40,635 Due from six to twelve months 3,449 3,950 33,317 47,894 88,610 Due in the second year 7,540 8,260 140,691 86,542 243,033 Due in the third year 7,362 7,031 295,227 60,360 369,980 Due in the fourth year 7,959 6,201 359,473 22,933 396,566 Due in the fifth year 8,819 5,259 - - 14,078 Due thereafter 38,325 10,733 - - 49,058 75,823 45,825 870,319 275,602 1,267,569 Floating rate financial liabilities, at amortised cost Due within three months - - 31,199 10,031 41,230 Due from three to six months - - 133,268 6,857 140,125 Due from six to twelve months - - 221,456 6,458 227,914 Due in the second year - - 50,730 592 51,322 - - 436,653 23,938 460,591 Total 75,823 45,825 1,306,972 299,540 1,728,160
176 The notes are an on integral to pages 177 part 127 of these consolidated financial statements. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2010 All amounts are in thousands of US Dollars unless otherwise stated
39. Events subsequent to the reporting period
Loans restructuring
In January 2011, the Group reached an agreement with Sberbank to decrease the interest rate on a loan denominated in RUR in the amount of USD 32,812 thousand from 14.0% to 10.0% per annum. The new interest rate is effective retrospectively from December 2010.
In January 2011, the Group reached an agreement with Raiffeisen Bank to extend the repayment of a short-term loan denominated in USD in the amount of USD 57,000 thousand from 2011 to February – May 2012. The agreement requires early partial repayment of the amount in the event of an IPO or a bond offering by UralChem Holding P.L.C. The average interest rate on the loan remained unchanged.
In February 2011, the Group reached an agreement with UniCredit Bank to extend the repayment of short-term loans in the amount of USD 190,000 thousand from February 2011 to February - May 2012 and of USD 10,000 thousand from February 2011 to June 2011. The commission for loans restructuring amounted to USD 1,100 thousand. The annual interest rate under these facilities decreased from Libor 1m + 5.9% - 6.15% to Libor 1m + 5.8%.
The notes are an on integral to pages 177 part 127 of these consolidated financial statements. 177 Annex
178 Full name Name as used in this report Registered office address 249, 28 Oktovriou Street, Lophitis Business Center, 1st floor, Office URALCHEM HOLDING P.L.C. UralChem Holding 101, P.C. 3035, Limassol, Cyprus 10, Presnenskaya naberezhnaya, Moscow 123317, Russian The following table sets forth Open Joint Stock Company United Chemical Company Uralchem UralChem OJSC Federation full names and registered office 10, Presnenskaya naberezhnaya, Moscow 123317, Russian Uralchem Management, Closed Joint Stock Company Uralchem Management CJSC1 addresses of our significant Federation KCCW Mineral Fertilizer Plant2 10, Presnenskaya naberezhnaya, Moscow 123317, Russian Kirovo-Chepetsky Khimichesky Kombinat, Open Joint Stock Company subsidiaries and their names as used KCCW MFP Federation in this Annual Report: 7, Pozharny pereulok, Kirovo-Chepetsk 613040, Kirov region, Kirovo-Chepetsk Chemical Works, Open Joint Stock Company Kirovo-Chepetsk Chemical Works OJSC3 Russian Federation 1 The company merged with UralChem OJSC on 13 December, 2010 2 75, Churtanskoye shosse, Berezniki 618401, Perm region, Kirovo-Chepetsk Chemical Works OJSC merged with KCCW Mineral Open Joint Stock Company “Azot”4 Azot Fertilizer Plant on 13 December, 2010 Russian Federation 3 The company merged with KCCW Mineral Fertilizer Plant on 13 1, Zavodskaya ulitsa, Voskresensk 140200, Moscow region, Open Joint Stock Company “Voskresensk Mineral Fertilizers” VMF December, 2010 Russian Federation 4 On 14 December, 2010 the company merged with UralChem OJSC. The 10, Presnenskaya naberezhnaya, Moscow 123317, Russian Limited Liability Company “URALCHEM-TRANS” UralChem Trans latter set up Azot Branch of Open Joint Stock Company United Chemical Federation Company Uralchem in Berezniki which is also referred to as “Azot” in Limited Liability Company “Trading house URALCHEM” UralChem Trading House 63, Lenina ulitsa, Perm 614068, Perm region, Russian Federation this Annual Report. SIA URALCHEM Trading UralChem Trading (Latvia) 7, Vesetas, Riga 1013, Latvia URALCHEM FREIGHT LIMITED UralChem Freight Agiou Pavlou, 15 Ledra House, Nicosia 1105, Cyprus URALCHEM Assist GmbH UralChem Assist 10, Johannssenstrasse, Hannover, 30159, Germany URALCHEMHandel GmbH UralChem Handel 10, Johannssenstrasse, Hannover, 30159, Germany 120, Rua Samuel Morse, 2 anadar, conjunto 21, Brooklin, San URALCHEM TRADING DO BRASIL LTDA. UralChem Trading (Brazil) Paolo, 04576-060, Brazil SIA “Riga fertilizer terminal Riga Fertilizer Terminal or RFT 7, Vesetas, Riga 1013, Latvia The following table sets forth the official names and registered office adresses of our significant Full name Name as used in this report Registered office address investments and their names as Public Joint Stock Company “Minudobrenia” PMF 96 Promyshlennaya Str. 614055. Perm Russia 32, Povolgskoe shosse, Tolyatti, 445653, Samara region, Russian Joint Stock Company “TOGLIATTIAZOT” Togliattiazot or TOAZ used in this Annual Report: Federation
179 www.uralchem.com