1 Mostotrest is the leading 1930 Mostotrest is founded as the USSR national trust for off-grade diversified Russian and outsized bridge construction 1941 infrastructure construction Launch of own manufacturing capacity for special bridge struc- tures and inventory metalwork. company specialising in the Mostotrest is the only specialized bridge building company in the construction and renovation country until 1941 1945 Mostotrest is integrated into of automobile and railway GlavMostStroi, the bridge building entity of the Soviet Traffic Ministry, and undergoes significant restruc- bridges, roads, airfields, turing
1954 airports, hydro engineering As part of GlavMostStroi, Mosto- trest is integrated into the newly established USSR Ministry for facilities and other Transport Infrastructure Develop- ment infrastructure 1992 Mostotrest is privatized and becomes an open joint-stock company (OJSC)
2006 Current management assumes the reins of Mostotrest
2007 Marc O’Polo Investment Ltd acquires a majority interest in Mostotrest
2010 Mostotrest acquires controlling stakes in ETS and TSM
Contents
1 2011 HIGHLIGHTS 27 2011 RESULTS 1 Key results 28 Operating Results 4 Who we are 35 Financial Results 6 What we do 8 Chairman’s Statement 49 GOVERNANCE 10 CEO’s Statement 50 Corporate Governance 12 Strategy and Business model 56 Social Responsibility 60 Risk management 17 MARKET OVERVIEW 19 Market Structure APPENDICES 21 State Company Avtodor A Consolidated Financial Statements 22 Competitive Environment B Proforma Consolidated Financial 23 Market Outlook Information
1 Jointly with Engtransstroy Corporation (ETS) and Transstroymekhanisatsiya (TSM) – Mostotrest, the Company or the Group 2011 HIGHLIGHTS
Key results
SIGNIFICANT INCREMENTAL BACKLOG2 GROWTH THROUGHOUT 2011
BACKLOG GROWTH BACKLOG GROWTH against RUB 235.0 against RUB 247.8 billion at the end billion at the end +36% of 2010 +28% of 1H 2011
CONSIDERABLE MARKET CLOUT
MARKET SHARE3 INCREASE TO IN-HOUSE CAPABILITIES4 GROWTH of the transport or RUB 8.2 billion infrastructure to RUB 49.7 billion, 8.6% construction market, +20% against RUB 41.5 compared with 8.2% billion in 2010 in 2010
STRONG FINANCIAL RESULTS
REVENUE INCREASED BY GROSS PROFIT INCREASED BY or RUB 24.1 billion to or RUB 1.9 billion to RUB 99.0 billion, against RUB 13.0 billion, against +32% RUB 74.9 billion in 2010 +18% RUB 11.1 billion in 2010
SOLID FINANCIAL POSITION
NEGATIVE NET DEBT NEGATIVE NET WORKING CAPITAL RUB billion in net cash RUB billion in net against RUB 13.3 billion working capital against 21.6 in 2010 23.0 RUB 15.2 billion in 2010
2 Backlog – the relevant entity’s backlog represents management’s estimate of the contract value of its projects that remains to be completed as at a particular date, excluding VAT. Backlog is not a measure defined by IFRS or RAS 3 Market share – total share of Mostotrest, ETS and TSM calculated as amount of works performed using own in-house capabilities in 2011 divided by total transport infrastructure market according to EMBS Group Report excluding maintenance and repair 4 Amount of works performed using own in-house capabilities is the total revenue less other revenue and cost of services of subcontractors Annual report 2011
LEADING THE WAY
IMPORTANT INFORMATION BASIS FOR PRESENTATION Information contained in this report concerning Open Joint This report contains information on the financial performance Stock Company “Mostotrest” (the Company, and together with of Open Joint Stock Company “Mostotrest” (MSTT) and its subsidiaries, Mostotrest, the Entity or the Group), is for its subsidiaries (Mostotrest, the Company or the Group), general information purposes only. The opinions presented prepared on the basis of audited consolidated financial herein are based on general information gathered at the statements for the year ended 31 December 2011 (the time of writing and are subject to change without notice. The consolidated financial statements )and unaudited pro forma Company relies on information obtained by it from sources consolidated financial information for the year ended 31 believed to be reliable but does not guarantee its accuracy or December 2010 (the pro forma financial statements). The pro completeness. forma financial statements have been prepared for illustrative purposes only and do not purport to represent what the actual These materials may contain “forward-looking statements” consolidated results of operations or the financial position regarding future events or results of the Company’s financial of Mostotrest would have been had the acquisitions of Limited operation. Forward-looking statements can be identified by Liability Company “Corporation Engtransstroy” (ETS) and the use of forward looking terminology such as “expect”, Limited Liability Company “Transstroymekhanisatsiya” “believe”, “estimate”, “anticipate”, “intend”, “will”, “could”, (TSM) occurred on 1 January 2009. The pro forma financial “may”, or “might”, or similar expressions or the negative statements do not represent the actual results of the Group’s thereof, or other variations thereof. Such forward-looking financial operations for the relevant periods. The pro forma statements may include matters that are not historical facts financial statements are not necessarily indicative of the and statements regarding the Company’s intentions, beliefs consolidated results of operations or financial position or current expectations concerning, among other things, of the Group for any future periods. The pro forma financial the Company’s results of operations, financial position, statements have been prepared on the basis of certain liquidity, prospects, growth, strategies, and the industry assumptions, which the Group believes to be reasonable in which the Company operates. By their nature, forward- and on the basis of available information and have also been looking statements involve risks and uncertainties, because prepared by making various adjustments. The actual results they relate to events and depend on circumstances that of financial operations may differ significantly from the results may or may not occur in the future. The Company cautions reflected in pro forma financial statements because of various you that forward-looking statements are not guarantees factors. of future operation and that the Company’s actual results of operations, financial position, liquidity, prospects, growth, Mostotrest has prepared this report using pro forma financial strategies and the development of the industry in which statements for the purposes of reflecting results of the the Company operates may differ materially from those Group’s financial operations for comparing accounting period described in or suggested by the forward-looking statements in more detail. The pro forma financial statements should contained in this report. In addition, even if the Company’s beread in conjunction with the Group’s audited consolidated results of operations, financial position, liquidity, prospects, financial statements, prepared in accordance with IFRS for growth, strategies and the development of the industry the year ended 31 December 2010. This report contains in which the Company operates are consistent with the some of the information provided in consolidated financial forward-looking statements contained in this report, those statements. Results of the financial operations contained results or developments may not be indicative of results or in pro forma financial statements may not correspond to developments in future periods. The Company does not intend consolidated financial statements and cannot describe future to amend these statements to reflect events or circumstances results, because ETS and TSM were not under general control occurring after the date hereof or to reflect the occurrence or management before 28 June and 13 May 2010, respectively. of unanticipated events. Many factors could cause the actual results to differ materially from those contained in forward- Except as otherwise provided in this report, all statistical looking statements of the Company, including, among others, information relating to the infrastructure construction general economic conditions, the competitive environment, market contained in this report has been reproduced from risks associated with operating in Russia, market change reports prepared by PMR dated 7 April 2011 and EMBS Group in the Russian infrastructure construction market, as well dated 12 April 2012 (the Reports). PMR and EMBS Group as many other risks specifically related to the Company and have given and not withdrawn their consent to the inclusion its operations. No reliance may be placed for any purposes of information from the Reports in this report. Information whatsoever on the information contained in this report or from the Reports has been included in the following sections on its completeness, accuracy or fairness. of this report: Chairman of the Board Statement, CEO Statement, Who We Are and Market Overview. The information in this report is subject to verification, completion and change. Accordingly, no representation or warranty, express or implied, is made or given by or on behalf of the Company or any of its shareholders, directors, officers or employees or any other person as to the accuracy, completeness or fairness of the information or opinions contained in materials of this report. None of the Company or any of its shareholders, directors, officers or any other person accepts any liability whatsoever for any loss howsoever arising from any use of the contents of this report or otherwise arising in connection therewith. Materials contained in this report do not constitute an offer or an advertisement of any securities in any jurisdiction.
С02 Mostotrest
CERTAIN DEFINED TERMS Adjusted net income is defined as “profit from continuing Net working capital is defined as the difference between operations” plus “dividends” reported in paid in ETS’s and current operating assets (net of cash and equivalents, income TSM’s statements of comprehensive income, “non-controlling tax receivable and other non-current assets) and current interest” and “depreciation and amortisation” recorded as operating non-interest bearing liabilities (net of loans and consolidation adjustments borrowings, provisions, non-controlling interest and income tax liabilities) Amount of works performed using own in-house capabilities is the total revenue from construction contracts less other PMR means PMR Ltd. sp. zo.o., an independent industry revenue and cost of services of subcontractors consultant which provides market information advisory services in respect of central and eastern European countries Average tender size is calculated on the basis of the total cost and other emerging markets and number of tenders published by the Federal Highway Agency (Rosavtodor) and State Company Russian Highways Public–private partnership (PPP) describes a government (Avtodor) service or private business venture which is funded and operated through a partnership of government and one or Backlog – the relevant entity’s backlog represents more private companies with the aim of carrying out long- management’s estimate of the contract value of its projects term investment projects under mutually agreed conditions that remains to be completed as at a particular date, excluding VAT. Backlog is not a measure defined by IFRS or RAS means Russian Accounting Standards RAS Regional governments include local governments such as EBITDA is defined as Earnings before interest, tax, Moscow city government and local authorities, Department depreciation and amortisation. EBITDA is not defined by, of transportation and road facilities of Vladimir region, etc. or presented in accordance with, IFRS or RAS. EBITDA is presented as a supplemental measure of the entity’s Rosstat – Federal Service of State Statistics operating performance. EBITDA has limitations as an analytical tool, and investors should not consider it in Share of works performed using own in-house capabilities isolation, or as a substitute for analysis of the entity’s is calculated as the amount of works performed by own in- operating results as reported under IFRS house capabilities divided by total revenue from construction contracts EBITDA margin is EBITDA divided by revenue State corporations are State-owned and State-funded EMBS Group is an independent industry consultant which corporations (mainly Russian Highways (Avtodor) and Russian provides among others market information advisory services Railways OJSC in the report) within a number of business sectors across emerging markets and developed markets globally VAT means value added tax
Federal agencies include Agencies of the Russian Ministry Weighted-average effective interest rate as at the reporting of Transportation date is determined as annual interest expense on loans and borrowings outstanding as at the reporting date divided by the FTP means the Federal Target Program “Development total amount of loans and borrowings outstanding as at that of Russia’s Transport system“, 2010-2015 date
Gross margin is gross profit divided by revenue
Gross profit is calculated by subtracting cost of sales from revenue
IFRS means International Financial Reporting Standards
Market share – total share of Mostotrest, ETS and TSM calculated as amount of works performed using own in-house capabilities in 2011 divided by total transport infrastructure market according to EMBS Group Report excluding maintenance and repair
Municipalities include Administrations, Department for motorways and arrangement of motorway traffic in cities
Net cash volumes is the negative value of net debt
Net debt is defined as the difference between the total amount of short-term and long-term loans and borrowings and cash and cash equivalents
Net margin is net profit divided by revenue
С03 Annual report 2011
LEADING THE WAY
Who we are
Mostotrest is Russia’s largest diversified infrastructure construction company. The company builds and renovates road and rail bridges, railways, roads, airfields, airports and port infrastructure facilities. Mosotrest has been closely involved in large-scale infrastructure construction projects since it was founded in 1930 and has the best-in-class team of engineers and contractors, as well as strong in-house production capabilities. Mostotrest together with its subsidiaries achieved an 8.6% share of the Russian transport infrastructure construction market in 2011.
Broad Geographic Coverage Сombined General Contractor and Building Expertise Mostotrest operates across a broad geographic area. Such breadth enables the company to make effective use of its production capacity and ensure resources Mostotrest differentiates itself from its industry peers are allocated efficiently between ongoing individual through its strong track record as a general contractor projects, meaning that the company is able to execute and its unique technical and engineering expertise. multiple projects concurrently. Central Russia remains Our ability to act as a general contractor on large the core region of our operations, with approximately projects, employing subcontractors for less complex 70% of our projects concentrated in the area. work, and making full use of our own production capabilities, has meant we have been able to complete Footprint in All Key Segments complex projects quickly and efficiently, as well as of Transport Infrastructure respond flexibly to the demands of the market. Construction Market Project Backlog Covers 3 Years of LTM Revenue Mostotrest is a full-service construction company with a strong presence in all key segments of the Russian transport infrastructure construction market. Our Mostotrest’s project backlog has almost doubled in multi-disciplinary capabilities, technical expertise, the period from 2009 to 2011 and currently covers and practical experience mean the company can 3 years of 2011 revenue. The backlog is composed participate in the largest, most complex projects from substantially of large-scale, priority infrastructure inception to completion. Bridge and road construction projects, considered central to Russia’s future remain at the core of our activities, as they did 80 years economic development. ago, and in 2011 accounted for 65% of group revenues.
С04 2011 HIGHLIGHTS Mostotrest
Corporate Structure
FULL SERVICE CONTRACTOR
CONSTRUCTION SERVICES IN CORE SEGMENTS MSTT – Bridge, road and rail infrastructure development and upgrade 50.1% 25% TSM — Road, airfield, airport, rail and hydro Mostostroy-115 — Automobile, railway and infrastructure development and upgrade city bridges and interchanges development, upgrade and maintenance
GENERAL CONTRACTOR SERVICES OPERATOR SERVICES 51% 51% ETS — Project management and design United Toll Collection Systems — Moscow- of complex turn-key projects Saint Petersburg Tollway section operation
Ownership Structure
27.1% Mostotrest Marc O’Polo Ownership Structure TransFinGroup AM % Free float as at 31.03.2012 38.6% Source: Company data 34.3%
Marc O’Polo Investments Ltd is a holding company whose beneficiaries are senior managers of the N-Trans Group (N-Trans Group is the largest private transportation company in Russia, CIS and the Baltic states): Konstantin Nikolayev, Nikita Mishin, Andrei Filatov (31.55% in equal shares) and Igor and Arkady Rotenbergs (68.45%).
TransFinGroup Asset Management Company is the pension trust management company for Blagosostoyaniye, a non-governmental pension fund established with the participation of Russian Railways.
5 Mostostroy-11 OJSC is an associated company accounted for on the equity method
С05 Annual report 2011
LEADING THE WAY
What we do
Mostotrest implements priority transport infrastructure development projects across those Russian regions that have traditionally been the biggest beneficiaries of infrastructure investments, and has an established presence in all key market segments. The Company has significant and well-developed own production capacity.
Ust-Luga Port
М-11 Narva Highway Section
M-9 Baltics Moscow – Saint Petersburg Highway Section Highway Sections: km 15-km 58 and Vyshny Volochek Bypass
Moscow 4th Ring Saint Petersburg M-1 Belarus Pskov Road Section Highway Section Sheremetyevo and Vologda Vnukovo Airports Dmitrov Businovskaya and Yaroslavl Molodogvardeiskaya Moscow Serpukhov Traffic Interchanges Kolomna Tula M-7 Volga Highway Section Nizhni Novgorod Novy Urengoy Ryazan Voronezh Khanty-Mansiysk Tambov Cheboksary Kazan Rostov-on-Don Yekaterinburg Ufa Krasnodar Volgograd Sochi Chelyabinsk Tyumen
M-4 Don Highway M-5 Ural Voronezh Bypass Highway Seсtion
Olympic Construction in Sochi: Kurortny Avenue Relief Road М-27 Dzhubga-Sochi Highway Sochi Airport (Adler) Sochi Port Media Center
Share of Central Federal District in backlog: 68% Share of Southern Federal District in backlog: 25%
С06 2011 HIGHLIGHTS Mostotrest
Top Projects:
Share in particular ROADS AND BRIDGES segment backlog % Revenue Structure 4th Ring Road, Moscow 16% 11% Vyshny Volochek Bypass, Tver Region 15% 6% Kurortny Avenue, Sochi 15% 9% Share in particular RAILWAYS segment backlog % 9% Naryn-Lugokan Railway, Baikal Region 79% 65% Roads and bridges Tuapse Refinery Railway Infrastructure, Railways Krasnodar Region 17%
Airports Share in particular Backlog Structure AIRPORTS AND AIRFIELDS segment backlog % Ports 3% 6% 3% Other Sheremetyevo Airport, Moscow 42% 3% Vnukovo Airport, Moscow 33%
Share in particular PORTS segment backlog %
Imeritinskaya Lowland Engineered 85% Protection, Sochi 78% Sochi Port 8%
Own Production Capacity:
Purchased materials 32% Own production
Capacity
3 68% Bituminous concrete, м 500,000 Precast concrete and reinforced concrete structures, t 50,000 Commercial concrete, sand/cement mix, t 900,000 Steel structures, t 35,000
Naryn-Lugokan Railway Section
Irkutsk
Sourse: Company data, consolidated financial statements, management accounts
С07 Annual report 2011
LEADING THE WAY
Chairman’s Statement
Georgy Koryashkin
Chairman of the Board of Directors Non-executive Director
Dear Shareholders,
I am pleased to note that last year the Russian eco- We achieved all this on the back of our extensive nomy continued its progressive development and general contracting expertise, our years of managing delivered positive results. GDP grew by 4.3%6, complex projects, our broad geographic presence and, while industrial production and the infrastructure of course, our team of highly qualified engineers and construction market expanded by 4.7%6 and 11.5%, managers. respectively. In addition to the sector’s strong quantitative growth, our market continued to mature During the year, we participated in integrated projects embracing new approaches to the implementation financed from a variety of sources. A significant of large-scale projects: toll road operation contracts proportion of Mostotrest’s projects were financed and life cycle contracts. by federal customers, including Avtodor State Company, which is responsible for the Russian In 2011, we continued to pursue our strategy highways network. Elsewhere, regional and municipal of solidifying our market leadership, broadening our transport infrastructure contracts also made a major ranges of competences, further developing our contribution to Mostotrest’s project portfolio. In existing competences and expanding into new addition, 2011 saw the launch of the concession- business segments. In the period under review we based project to build a section of the Moscow – St. have: Petersburg Highway, the addition to our portfolio of a number of other privately financed projects. Our • Increased our market share by increasing own business model once again proved its effectiveness in construction volumes, including through 2011, enabling us to respond flexibly to the demands participation in large general contracting projects of the market and our customers. Our participation • Entered into related business segments through in integrated general contracting projects is founded participation in life cycle and toll road operation on distributing the workload evenly among our regional projects and units, making full use of our own capacity to perform • Delivered excellent financial results. more complex work phases, and delegating simpler tasks to subcontractors. Mostotrest’s 2011 results
6 On Results of Russia’s Social and Economic Development in 2011 (February 2012, www.economy.gov.ru)
С08 2011 HIGHLIGHTS Mostotrest
reaffirmed its leadership position in the industry. The In the period under review, the Board paid particular company produced a strong operating performance, attention to the Company’s corporate governance increasing its share of the infrastructure construction arrangements. Specifically, we introduced new market to 8.6% and growing its backlog by 36% to RUB regulations including the Insider Information 319.8 billion. Regulation and a Corporate Code of Conduct. The adoption of the Insider Information Regulation The year was marked by an important milestone for will provide for better protection of the rights and the transport infrastructure construction market, the interests of the Company’s shareholders. The purpose announcement of the first ever life-cycle contracts. of the Corporate Code of Conduct is to improve and These contracts envisage not only the construction systematise our corporate governance rules that of transport infrastructure, but also the requirement govern Mostotrest’s day-to-day operations. The Code for ongoing maintenance and repair. In the period is consistent with internationally recognized standards under review, the Company entered into two such and fully complies with existing legal requirements, contracts: the reconstruction of M-4 Don Highway and is aligned to best corporate governance practices Voronezh Bypass Segment, and the construction and ethical standards. of the Vyshny Volochek Bypass on the Moscow – St. Petersburg Highway. In addition, the joint venture we Turning to 2012, it is clear that the trend within our established with Austria’s Kapsch Group was awarded industry towards increased consolidation and greater the contract to install advanced traffic management complexity within infrastructure projects is likely to solutions on segments of the M-4 Don Highway and persist. This is already evident from the new legislative subsequently, to operate the segments. This type initiatives to support the development of life-cycle of contract is a new concept in Russia, whereby the contracts, as well as from the transport infrastructure construction and operating phases are awarded as development strategies of Avtodor and the Moscow a single tender, and for which the contractor receives City Government for 2012. I am certain that these a guaranteed fixed sum for managing the ongoing developments will create new business opportunities operations, rather than carry the risk involved in for our company and further strengthen our market payment linked to toll road usage. Mostotrest’s leadership. involvement in these type of pilot contracts helps us to gain valuable experience in related business segments In conclusion, on behalf of the Board of Directors and to get a greater appreciation of how these new and myself, I wish to thank our staff who have made contracts operate. It provides a solid foundation for such an invaluable contribution to our excellent new forms of contracts going forward, including performance in 2011. Considering the size of our contracts envisioning the design stage, which will backlog, our consistent HR development, our balanced provide additional benefits to the contractor in the investment policy and our strong financial position, I form of reduced construction and operation costs, am confident that 2012 will be another successful year due to high-quality design and the use of advanced for Mostotrest. technologies.
Our operating achievements translated into strong financial results. Compared with 2010, revenue and gross profit increased by 32% and 18%, respectively. EBITDA grew by 6% to RUB 9.5 billion.
Based on our strong 2011 performance, the Board has recommended that the dividend be increased above the level approved in the Company’s dividend policy. The General Shareholders’ Meeting is invited to approve distribution as dividends of 55% of consolidated IFRS net profit, which amounts to RUB 2.0 billion and is 2.4 times more than in 2010.
С09 Annual report 2011
LEADING THE WAY
CEO’s Statement
Vladimir Vlasov
Chief Executive Officer Executive Director
Dear Shareholders, Partners and Colleagues,
2011 was one of the most successful years in the In 2011, we actively pursued implementation of history of Mostotrest. We delivered on our business complex infrastructure projects. Capitalizing on our priorities, growing our revenues, increasing our strong general contractor capabilities, our scale and project backlog, expanding into new market segments, our successful partnerships with international players, acquiring new competences and expanding our we were able, as in 2010, to reaffirm our industry headcount. leadership and again demonstrate our ability to be the first to respond to new industry trends. Indeed, during Two years on from the financial crisis, the strong the year we signed two full-cycle contracts where recovery in the infrastructure construction market has we will be responsible not only for the construction continued, supported by a Russian government which of roads but also for their subsequent maintenance regards infrastructure as a key spending priority. The and repair. These contracts, which are a completely overall market grew by 12%, with road and airport new concept in Russia, require that the general construction the most rapidly growing segments. contractor not only has an impeccable reputation, but also the appropriate managerial and technical In 2011, we expanded our backlog with the help of expertise in several areas of transport infrastructure new large-scale projects. The 36% growth we have construction. witnessed in our backlog has been supported by equally strong financial results in 2011: In May 2011, our subsidiary TSM signed Russia’s first full-cycle contract for the upgrade and subsequent • Total revenue grew 32% to RUB 99.0 billion, while maintenance of the Voronezh Bypass segment of M-4 revenue in the bridge and road construction segment Don Highway, worth RUB 16.3 billion7. In December, we rose 35% signed a second full-cycle contract for the construction • Gross profit increased by 18% to RUB 13.0 billion, of the Vyshny Volochek Bypass on the Moscow- driven by strong revenue growth Saint Petersburg Highway. This contract which is • EBITDA rose 6% to RUB 9.5 billion worth a total of RUB 42.0 billion8, covers besides the • Net profit increased to RUB 3.7 billion construction of a road the construction of toll collection
7 Company data, excluding VAT 8 Company data. Value of the construction of the road, toll systems and traffic management systems, excluding VAT. The value of the maintenance repair and operation stage could not be reliably estimated as at December 31, 2011
С010 2011 HIGHLIGHTS Mostotrest
systems and the follow on maintenance, repair and can we maintain our market leadership, ensure the operation of the toll segment. Group’s future growth and deliver on our contracts. During 2011, we increased our investment in HR Our drive to diversify our business is based development by 19%, and continued to focus on talent on developing our presence in related business development, including hiring 80 new graduates. segments. Our recent operator contract win for the maintenance, repair and toll-based operation of a 400 In 2012, we expect the gradual shift towards awarding kilometer section of the M-4 Don Highway, is an life-cycle contracts will continue. In our view, such excellent example of our diversification strategy in contracts are likely to become longer-term (3+ action. We were awarded this prestigious contract years) and to cover the entire scope of work, from in conjunction with our joint venture partners the early stage design through to post-construction Kapsch Group, Europe’s largest provider of electronic operations and maintenance. We anticipate that this tolling systems at the end of 2011. The contract covers will lead to a significant increase in the average value operation of a major section of the M-4 Don Highway, of government contracts, which, in turn, will further including maintenance, repair and operation of toll strengthen the competitive position of large diversified collection and intelligent transportation systems. I am players like Mostotrest. convinced that the joint efforts of the largest Russian transport infrastructure company and a leading We expect that the government will continue to European supplier of electronic toll collection systems encourage road-building schemes aimed at expanding and telematic solutions will drive the most efficient the road construction segment, one of our key areas development of this new segment in Russia. of operation. For 2012, as part of its investment program Avtodor has budgeted RUB 125.7 billion9 for In 2011, we also enhanced our production capacity road construction. In addition, the City of Moscow is at the Group’s two key divisions, MSTT and TSM. We earmarking RUB 106.4 billion10 for road infrastructure acquired TSM, with its own production infrastructure development in 2012 compared with RUB 79.1 billion11 and highly skilled workforce, in 2010, and since then it spent in 2011. its growth has been remarkable, so much so that in 2011 its backlog increased almost seven-fold. Avtodor’s 2012 plans also envisage the further Moreover, for the first time in its history TSM became development of toll roads and projects involving the a general contractor for major projects such as the participation of private finance. This will guarantee the reconstruction of segments of the M-4 Don and M-9 future availability of sustainable alternative sources Baltics Highways. It also acted as a key subcontractor of financing for road construction. on a number of Mostotrest’s more complex projects. In 2012, we intend to capitalise further on TSM’s Government plans for transport infrastructure impressive performance and its sizeable backlog development, the size of our backlog, the quality including by implementing a modernization of our projects and our own production capacity programme. means Mostotrest is well placed to continue to grow and deliver value to our shareholders and we remain As we anticipated, the trend toward significantly bigger optimistic about the prospects for the Group. tenders, greater general contractor responsibility, and the transfer of certain former customer functions to the general contractor persisted in 2011. This resulted in the need for Mostotrest to hire specialists in the field of site preparation and conditioning, and to develop expertise in managing large projects as general contractor in the tunneling segment.
In 2011, we placed a strong emphasis on developing our internal project design expertise. In particular, in 2011 we won several projects envisaging the co- development of project documentation. Only by recruiting and retaining appropriately skilled people
9 State company Avtodor’s investment program for the long-term period (2010-2019), approved by the Russian Government Edict №1989-r dated 14.11.2011, including VAT 10 Moscow City Law 53, dated December 8, 2010, On Moscow City Budget, including VAT 11 Moscow City 2010 Budget Utilization Report, including VAT
С011 Annual report 2011
LEADING THE WAY
Strategy and Business model
Business Model
Over the past few years, Mostotrest has evolved from of the country. Our industry-leading team of highly a niche regional bridge-building company into Russia’s skilled engineers and managers, combined with 80 largest diversified general contractor with a strong own years of building experience enable Mostotrest to production capacity. The Company has built a large- continuously improve its business model and achieve scale integrated business platform enabling it to its strategic goals. participate in projects of any complexity in any region
General Own Production Footprint in Broad Contractor Capacity and All Key Market Geography Services Technology Segments of Operations
• Access to large • Guaranteed • Ability to flexibly • Reputation as integrated projects uninterrupted respond to market reliable contractor deliveries of key demand to local customers • Overall project construction materials supervision and • Access to large • Use of local effective resource • Project key aspect and number of general workforce and distribution risks assessment contracts materials
• Access to profitable • Speed and efficiency • Effective use parts of work done of execution of own in-house using own in-house capabilities: flexible capabilities • Cost optimization relocation of workers and equipment • Direct contracts with • Hedge against price ultimate customers inflation
• Reputation as reliable contractor in charge for overall execution
С012 2011 HIGHLIGHTS Mostotrest
Strategic Goal
Mostotrest’s strategic goal is to use the existing diversifying into related business segments and business platform for future business growth and expanding its presence in those geographic regions, development in accordance with specific requirements that the Company expects to benefit from significant of our customers who are increasingly opting for investments in transport infrastructure development diversified general contractors to implement their going forward. Mostotrest assesses the size of integrated and technically complex projects. potential investments and new projects on a number of key criteria, including market volume, sustainability To achieve its strategic goal, Mostotrest intends to of market growth and profitability, cost of funding capitalize on its broad geographic presence and and projected returns on investment (e.g., cost expertise gained from working on large integrated of equipment, relocation of personnel and deployment projects, while closely monitoring market trends, of production facilities).
Strategy Description 2011 Implementation Status 2012 Plans Component
Business and • Construction volumes • Revenue up 32%, including 20% from own • Effective balanced market share growth based on the construction volumes distribution of works balanced growth of works • Market share increased to 8.6% to own in-house growth performed using own • Backlog growth: 36% resources and external in-house capabilities subcontractors and works performed by subcontractors and participation in new integrated projects
Develop new • Develop new competences • Developed underground tunneling capability • Monitor efficient infrastructure organically and through by setting up a supervisory team to manage M&A and partnership partnerships and M&A subcontractors’ work at Kurortny Avenue opportunities construction • Increase footprint in regions Relief road construction in Sochi • Step up organic segments where major infrastructures development of new projects are expected to competences come on line • Carefully assess M&A op- portunities to maximize Company value, while main- taining return on invest- ment at attractive levels
Diversify into • Strengthen prime • Entered into life-cycle contracts including • Monitor efficient related business contractor capability long-term road repair and maintenance M&A and partnership • Solidify competitive services opportunities segments advantages • Entered into toll road segment operation • Step up organic • Participate in complex projects and installation of traffic control development of new integrated projects infrastructure and toll collection systems competences • Extract additional value by • Pursued development of construction site providing related services conditioning competence and participated in using own capacity projects requiring such competence • Pursued organic development of engineering design capability, participated in co- development of project documentation
С013 Annual report 2011
LEADING THE WAY
С014 Mostotrest
С015
MARKET C019 Market Structure C021 State Company Avtodor OVERVIEW C022 Competitive Environment C023 Market Outlook Annual report 2011
LEADING THE WAY
Market overview
Construction and repair of roads, bridges, railways, The official numbers released by the government in airports, ports and coastal infrastructure accounted for first quarter of 2012 show that the trend of directing about 13%12 of expenditure in the Russian construction the funds into the key infrastructural projects was industry in 2011 which amounted to RUB 5,061.8 maintained in 2011. Despite further cuts in FTP billion, according to Rosstat. funding, the value of the infrastructure construction market increased in 2011, noting almost 12% year-on- In 2011 the transport infrastructure development was year growth. mainly based on the implementation of the Federal Target Program (FTP) “Development of Russia’s The total transport infrastructure construction transport system” 2010-2015 which from the very value for 2011 reached the level of RUB 660.1 billion beginning has been very ambitious, and first two years (excluding VAT), noting 12% growth compared to 2010, of its realization showed that full implementation when it amounted to RUB 591.8 billion (excluding VAT). is hardly possible in current economic situation. In 2010 the cuts in FTP financing were substantial in all In 2011, the government unveiled its draft Transport of the infrastructure construction segments: roads – System Development Program up to 2019, which c. 60%, railways – 65%, airports – c. 55%, ports and includes two federal target programs: Russia’s internal waterways – c. 50%. At the same time cuts Transport System Development (2010–2015) and in FTP financing were compensated by an increase Modernization of the Russian National Air Traffic of financing of the key infrastructural projects such Management System (2009-2015), as well as as Sochi Olympic Games, Kazan Universiade and programs aimed at ensuring availability of transport Valdivostok APEC Summit. Financing of those key infrastructure for 2014 Sochi Olympic Games and XXVII projects was much higher than expected, in some World Summer Universiade 2013 in Kazan. cases exceeding 200% of previously assumed budgets.
Russian Transport 660.1 594.4 591.8 Infrastructure 566.5 Market 447.0 RUB billion 355.3 (excluding VAT) 2006-2011 2006 2007 2008 2009 2010 2011 Source: PMR Reports, EMBS Group Report
12 Company’s calculations based on EMBS Group Report and Rosstat
С018 MARKET OVERVIEW Mostotrest
Market Structure
5% 31.4 34% 4% Roads and bridges 223.6 Russian Transport 28.5 Infrastructure Railways Market Structure Ports RUB billion Airports and airfields (excluding VAT), % 2011 57% Source: EMBS Group Report 376.6
Federation are now obliged to allocate annually 5%13 Highways of their regional road funds to construct paved access 13 14% roads to rural settlements and, in 2012 and 2013, 5% and Bridges additionally will be allocated to the overhaul and repair of roads within the settlements and their courtyard The budget for highways and bridges, key elements areas. of Russia’s transport infrastructure, grew by 14% and accounted for about 57% of the total transport 2011 saw commissioning of segments and engineered infrastructure construction market in 2011. In the structures of M-4 Don, M-1 Belarus, M-5 Ural and M-7 period under review, there was a strong focus placed Volga and other highways. In addition, the renovation on the construction and upgrading of the key federal and repair of federal highways resulted in 33%13 more highways network, which secured 31% of the total road length being available for use than in 2010, while investment in road development during the year. the length of repaired bridges was 1.54x13 that of 2010. As part of implementation of a program objective 2011 witnessed the start of road funding operations Toll Road System Development, new contracts were and the government defined the rules regarding the tendered in 2011, which include life cycle contracts for formation and utilization of the Federal Road Fund both road construction and subsequent maintenance, budget and also detailed new federal statistical and the operator’s contracts for operation of toll road measures to monitor and analyse the use of the segments. federal, regional and local road fund budgets. An important component of the new funding system is the linkage between the fund budget and road use The renovation and repair taxes (excise duty on fuel), and at the regional level – with the vehicle tax, as well as non-tax sources, also of federal highways resulted related to the use of roads. in 33% more road length being available for use than in 2010, The adoption of the road fund system resolved an issue that for decades has remained outside legal while the lenght of repaired regulation,namely the funding of road construction roads was 1.54x that of 2010 in rural areas. The constituents of the Russian
13 According to the Russian Transport Ministry
С019 Annual report 2011
LEADING THE WAY
Railroads 10%
Historically, Russia’s railway network has accounted compared with 2010. More than 80% of the investment for the bulk of passenger and freight traffic (according into railway infrastructure was made by RZD, Russian to Rosstat the share of railways in the country’s total Railways. freight turnover in 2011 was 43% of the total freight turnover in Russia and 85%, excluding pipelines). A number of major infrastructure projects were completed in 2011, including the upgrade of the Big Railway construction accounted for 34% of all Novorossiysk Tunnel on the North-Caucasian Railway, investment in transport infrastructure in Russia the early completion of the Kuznetsovsky Tunnel on the in 2011, while the volume of investment allocated Far-Eastern Railway, etc. to railway network development increased by 10%
Airports 18%
In 2011, air transport was the fastest growing segment In 2011, 35 air transport infrastructure projects were of the transportation system, accounting for 5% of total under development. These included the upgrade transport infrastructure spending, which was 18% of airfields at the Sochi, Vladivostok and Kazan more than in 2010. According to the Russian Transport airports, as well airports of the Moscow Aviation Hub Ministry, Russian air carriers transported 64.1 million and the Far East of Russia. In addition, large tenders passengers, with the passenger turnover of 166.6 were held for renovation and new construction at the billion passenger-kilometers, up 13% from 2010 levels. Moscow-based Vnukovo and Sheremetyevo airports.
12% Seaport and Inland Waterway Infrastructure
According to the Russian Transport Ministry, sea cargo Implementation of the sub-program Marine Transport transportation in 2011 accounted for 33.9 million tons in 2011 allowed for an increase in port capacity by 29.3 (92% growth as to compare with 2010). Cargo turnover million tons and brought the transshipment capacity accounted for 77.5 billion tons-kilometers (77% growth to 792.6 million tons per year. In 2011, infrastructure as to compare with 2010). Seaport and inland waterway projects were underway at the ports of Murmansk, infrastructure development accounted for 4% of the Vysotsk, Ust-Luga, St. Petersburg, Rostov-on-Don, total investment in transport infrastructure in 2011, the Caucasus, Taman, Novorossiysk, Sochi, Olya, which was 12% lower than in 2010. Vladivostok, Vostochny and Petropavlovsk-Kamchatsky.
IN 2011, AIR TRANSPORT WAS THE FASTEST GROWING SEGMENT OF THE TRANSPORTATION SYSTEM, ACCOUNTING FOR 5% OF TOTAL TRANSPORT INFRASTRUCTURE SPENDING, WHICH WAS 18% MORE THAN IN 2010.
С020 MARKET OVERVIEW Mostotrest
State Company Avtodor
In the past two years the state has taken several steps to create additional sources of state financing for construction and repair of roads, thereby providing guaranteed funding for the development of the segment.
Established by the government in 2009, the State Company Avtodor became fully operational in 2010. The new entity aims to minimize budget expenditure by engaging and mobilizing private capital. In 2011, Avtodor invested a total amount of RUB 82.5 billion14, of which RUB 71.3 billion14 was spent on construction and upgrade of highways that had been transferred to Avtodor. Avtodor’s key achievements in 2011 included successfully reducing the federal budget burden and attracting additional investment into the road network through the use of public-private partnerships (hereinafter – PPP), including through:
1 Concession agreements
Avtodor concluded in 2010 and launched active implementation in 2011 of 2 concession agreements, covering the construction of the 43 km head segment of the Moscow – Saint Petersburg Toll Highway and a new 18 km access to the Moscow Ring Road from M-1 Belarus Highway.
2 Long-term life-cycle contracts
As previously discussed, 2 life-cycle contracts were tendered in 2011, including for upgrade and subsequent maintenance of M-4 Don Highway Voronezh Bypass Segment, with a total contract value of RUB 16.3 billion15, and construction of the Moscow-Saint Petersburg Highway Vyshny Volochek Bypass, including construction of toll-collection systems, with subsequent maintenance, repair and toll-based operation (total construction value: RUB 42.0 billion15).
14 Avtodor Long-Term Activity Plan (2010-2019) adopted by Government Resolution 1989-r of 14 November 2011, including VAT 15 Company data, excluding VAT
С021 Annual report 2011
LEADING THE WAY
3 Development and implementation of toll-collection systems on highways under Avtodor’s trust management
The first-ever operator’s contract for a M-4 Don Highway segment maintenance, repair and toll-based operation was tendered in 2011.
Avtodor’s investment programme through to 2019 was adopted in 2011. It forecasts investing a total of RUB 1,400 billion16 on road construction and upgrade over the next decade. RUB 163.8 billion16 will be spent on road maintenance and repair. RUB 125.7 billion16 will be spent on road development in 2012. Toll revenue over the next 10 years is expected to total RUB 87.9 billion16.
Competitive Environment
Average Tender Size 3,244
2,756 Dynamics 2,577 RUB million (including VAT) 2007-2011 933 930 Source: 2007 2008 2009 2010 2011 Avtodor, Rosavtodor, Company estimates
Adoption of further amendments to the Federal In 2011, we saw the emergence of a new trend toward Law N94-FZ On Public Contracts continued to have a partial transfer of construction site conditioning a significant influence on the competitive landscape duties from customers to contractors (green space in the transport infrastructure construction market removal, rearrangement of communication and utility in 2011. New amendments substantially restrict lines, post-construction land re-cultivation, housing methods of contract enforcement, eliminate insurance construction for residential resettlement, including provisions and require contractors to provide utility infrastructure and road and street network). guarantees from major banks or other financially stable entities such as real estate owners. Tenders for transport infrastructure development projects continued to get bigger throughout 2011. In
16 Avtodor Long-Term Activity Plan (2010-2019) adopted by Government Resolution 1989-r of 14 November 2011, including VAT
С022 MARKET OVERVIEW Mostotrest
the period between 2007-2011, an average tender size contractor a broader array of competences have increased more than 3.5x, from RUB 932.9 million helped to strengthen the competitive position of large to RUB 3,243.6 million17. Larger tenders, the advent diversified players with stable relationships with credit of tighter rules governing participation criteria, and institutions and low debt. the emergence of life-cycle contracts requiring of the Market Outlook
In 2012 the market growth will continue to be driven by The government intends to substantially increase positive dynamics in the overall Russian economy and expenditure on transport infrastructure development implementation of priority national and international in 2012, while the Moscow Municipal Government projects. also foresees a 34% increase in road construction investment in 2012, to RUB 106.4 billion18 against RUB The average tender size is expected to further 79.1 billion19 in 2011. increase in 2012, especially as new life-cycle contracts come on line. A draft law on life-cycle contracts that The main focus in 2012 will be on road construction. anticipates, among other things, transfer of the design Indicative tendering plans for the period include RUB and engineering function to contractors has been 270.2 billion20 worth of projects from Avtodor and RUB submitted to the Russian Parliament in January 2012. 213.6 billion21 from the City of Moscow.
17 Company estimates based on Avtodor and Rosavtodor data, including VAT 18 Moscow Municipal Law 62 of 7 December 2011 On the Moscow Municipal Budget for 2012 and the Planning Period 2013-2014, including VAT 19 Moscow Municipal Budget Utilization Report, including VAT 20 Avtodor 2012 tenders schedule, including VAT 21 Moscow Municipal Law 56-PP of 16 February 2012 on the Moscow Investment Program for 2012-2014, including VAT С023 Annual report 2011
LEADING THE WAY
С024 Mostotrest
С025
2011 RESULTS C028 Operating Results C035 Financial Results Annual report 2011
LEADING THE WAY
Operating Results
Key Project Commissioning22
In 2011, Mostotrest completed a number of large-scale projects, commissioning a total of 32 sites, including 7.6 km of bridges and 45.7 km of roads.
Key projects commissioned in 2011
Project Contract value23
Construction of the Alpika-Service – Roza-Khutor Highway RUB 13.9 billion Reconstruction and development of Vladivostok Airport RUB 5.6 billion Segment of Krasnopresnensky Avenue as part of the Krasnopresnensky Avenue and Narodny Opolcheniya street interchange RUB 4.6 billion Adler – Alpika-Service railway line as a part of the Adler-Alpika-Combined Highway (automobile and rail road) RUB 2.2 billion Bridge over Angara river construction in Krasnoyarsk region RUB 1.8 billion
Significant Backlog Growth
As part of its ETS and TSM integration strategy, 15.7 billion23) and the Vnukovo Airport upgrade and Mostotrest continued to develop the general contractor development project (contract value: RUB 6.3 billion23). capabilities within its contracting units and drive up the backlogs at MSTT and TSM, the companies In December 2011, Mostotrest signed a second life- with developed own production capabilities. In 2011, cycle contract for the construction of the Vyshny MSTT’s and TSM’s backlogs increased by 137% and Volochek Bypass on the Moscow-Saint Petersburg 683%, respectively. For the first time in its history Highway, including construction of toll-collection TSM participated in large-scale integrated projects as systems and subsequent road maintenance, repair general contractor, including under the first-ever life- and toll-based operation (construction contract value: cycle contract in Russia for upgrade, maintenance and RUB 42.0 billion24), as well as the first-ever operator’s repair of the km 492.7 – km 517.0 segment of M-4 Don contract in Russia for maintenance, repair and toll- Highway (contract value: RUB 16.3 billion23), the M-9 based operation of the km 225.6 – km 633.0 segment Baltics Highway upgrade project (contract value: RUB of the M-4 Don Highway, including installation of advanced traffic management systems.
22 Commissioned projects include projects delivered to and accepted by customers, as per corresponding signed delivery and acceptance documentation. Project completion dates under this definition may differ from completion dates as established in revenue accounting under IFRS 23 Company data, excluding VAT 24 Company data. Value of the construction of the road, toll systems and traffic management systems, excluding VAT. The value of the maintenance repair and operation С028 stage could not be reliably estimated as at December 31, 2011 2011 RESULTS Mostotrest
Together with the Businovskaya traffic interchange In 2011, the total backlog of Mostotrest increased by rebuilding project (contract value: RUB14.4 billion25) 36% year-on-year, to RUB 319.8 billion25. The total and the M-11 Narva Highway upgrade project (contract number of projects in the Group’s backlog at the end value: RUB 7.9 billion25), all of the above projects of the reporting period was 9426 (Mostotrest: 37, ETS: accounted for the bulk of growth in the Group’s 39, TSM: 18). consolidated backlog in 2011.
Mostotrest Won Three out of Five Largest Transport Infrastructure Development Projects Tendered in Russia in 2011
Project Contract value27 General contractor
Construction, repair, maintenance and toll-based operation of km 258 – km 334 segment of Moscow-Saint Petersburg Highway (Vyshny Volochek Bypass) RUB 42.0 billion28 MSTT Upgrade, repair and maintenance of km 492.7- km 517.0 segment of M-4 Don Highway RUB 16.3 billion TSM M-9 Baltics Highway upgrade RUB 15.7 billion TSM Source: Company data, Rosavtodor, Avtodor
Backlog structure
Roads and bridges account for 85% of the Group’s backlog.
18.8 Roads and bridges BACKLOG 8.1 9.2 Airports and airfields STRUCTURE 10.8 12.7 by business seg- 12.4 Railways 18.0 ment , RUB billion 5.1 Ports 272.8 Other infrastructure 2010-2011 186.7 2010 2011 Source: Company data
25 Company data, excluding VAT 26 Only general contracts are taken into account, excluding intercompany operations 27 Contract value includes value of general contractor contracts, excluding VAT 28 Company data. Value of the construction of the road, toll systems and traffic management systems, excluding VAT. The value of the maintenance repair and operation stage could not be reliably estimated as at December 31, 2011 С029 Annual report 2011
LEADING THE WAY
Historically, the central part of Russia has been the The government remained the Company’s largest key area of the Company operations. Due to the customer in 2011. The share of federal agencies, state- progressive completion of core construction volumes owned companies, regional and municipal authorities under Sochi-based projects, the share of projects in in the Company’s total backlog stood at 81%. At the the Southern Federal District of Russia decreased by same time, due to a large number of major contracts 14% in 2011 compared to 2010. At the end of 2011, tendered by the State Company Avtodor in 2011, the 93% of projects in the Company’s backlog were in the share of state-owned customers grew by more than 4 Central and Southern federal districts. times.
BACKLOG Central Federal District 23.7 STRUCTURE Southern Federal District by federal district , 79.3 Other RUB billion 31.5 92.6 216.8 2010-2011 110.9 2010 2011 Source: Company data
Federal agencies BACKLOG 60.5 State corporations STRUCTURE 10.2 29 by customer , 49.5 54.8 Regional goverments 7.1 RUB billion Municipalities 53.5 99.5 16.7 Private customers
108.0 2010-2011 94.8 2010 2011 Source: Company data
29 Backlog structure by customer does not include projects where Mostotrest acted as subcontractor
С030 2011 RESULTS Mostotrest
Backlog30 in Detail Largest projects in MSTT backlog as at December 31, 2011
Project MSTT contract Expected % of completion Backlog Role in the project value31 completion date (as at 31-Dec-11) (as at 31-Dec-11) (RUB billion)
Construction of the Moscow Fourth Ring Road Segment 63.2 2015 29% 44.6 General Contractor Construction of Moscow – Saint Petersburg Tollway (Vyshny Volochok Bypass segment)32 42.1 2015 0% 42.1 General Contractor Construction of Kurortny Avenue Relief Road in Sochi (Phase 2 and 3) 50.3 2013 21% 39.9 General Contractor Construction of Moscow – Saint Petersburg Tollway (km 15 – km 58 segment) 41.0 2014 3% 39.8 General Contractor Upgrade of Businovskaya Traffic Interchange 14.4 2014 0% 14.4 General Contractor Upgrade of M-11 Narva Highway Segment (Ust-Luga Commercial Seaport access road) 7.9 2014 0% 7.9 General Contractor Construction of Molodogvardeiskaya Traffic Interchange 7.3 2014 1% 7.3 Subcontractor Operation of the km 225.6 – km 633.0 Segment of the M-4 Don Highway33 5.6 2015 0% 5.6 General Contractor Upgrade of Traffic Interchange at the intersection of Leningradskoye Avenue and the Moscow Ring Road 4.1 2013 0% 4.1 General Contractor Construction of Ryazan North Bypass 3.5 2013 21% 2.8 General Contractor Other projects 76.0 26.5 General Contractor/ Subcontractor TOTAL 315.4 235.0
Source: Company data
30 Backlog is not calculated in accordance with IFRS or RAS. A company backlog at a specific date reflects management estimates of the value of remaining volumes under projects to be completed in the future, excluding VAT 31 Excluding VAT 32 Company data. Value of the construction of the road, toll systems and traffic management systems, excluding VAT. The value of the maintenance repair and operation stage could not be reliably estimated as at December 31, 2011 33 Estimated value of the toll systems and traffic management systems construction stage under the operator’s contract for maintenance, repair and toll-based operation of a segment of M-4 Don Highway, with United Toll Systems, a MSTT subsidiary (JV with Kapsch TrafficCom Russia) acting as the general contractor. The value of the С031 maintenance, repair and operation stage under the contract could not be reliably estimated as at December 31, 2011 Annual report 2011
LEADING THE WAY
Largest projects in ETS backlog as at December 31, 2011
Project ETS contract Expected % of completion Backlog Role in the project value34 completion (as at 31-Dec-11) (as at 31-Dec-11) (RUB billion) date Construction of Naryn – Lugokan New Railway 25.3 2012 71% 7.3 General Contractor Construction of Sochi Flagship Media Center 11.9 2013 40% 7.1 General Contractor Engineered protection of the Imeritinskaya Valley, including shoreline fortification 7.1 2013 10% 6.4 General Contractor Construction of Malyi Akhun Property Complex in the Imeritinskaya Valley 5.3 2013 3% 5.1 General Contractor Construction of Formula-1 Racing Track 4.1 2013 3% 4.0 General Contractor Upgrade of M-1 “Belarus” Highway 3.2 2013 5% 3.0 General Contractor Construction of Dzhubga – Sochi Highway Traffic Interchange 2.5 2013 8% 2.3 General Contractor Construction of Financial Academy Building 2.5 2014 21% 2.0 General Contractor Construction of road from the complex jumps to the main grandstands with Congress on the track for Nordic Combined 1.9 2012 0% 1.9 General Contractor Construction of Tuapse Refinery 2.3 2012 31% 1.6 General Contractor Other projects 74.4 9.9 General Contractor
TOTAL 140.3 50.6
Source: Company data
Largest projects in TSM backlog as at December 31, 2011
Project TSM Contract Expected % of completion Backlog Role in the project Value34 completion (as at 31-Dec-11) (as at 31-Dec-11) (RUB billion) date Construction of Moscow – Saint Petersburg Tollway (Vyshny Volochok Bypass segment) 32.2 2015 0% 32.2 Subcontractor Construction of Moscow – Saint Petersburg Tollway (km 15 – km 58 segment) 29.5 2013 5% 28.0 Subcontractor Upgrade of M-9 Baltiya Highway (17-83 km segment) 15.7 2015 0% 15.7 General Contractor Upgrade, maintenance and repair of Voronezh Bypass on M-4 “Don” Highway 16.3 2029 24% 12.4 General Contractor “Sheremetyevo” Airport upgrade and development 4.5 2013 0% 4.5 General Contractor “Vnukovo” Airport upgrade and development 6.3 2012 11% 5.6 General Contractor Upgrade of M-5 “Ural” Highway Traffic Interchage 4.5 2013 28% 3.2 General Contractor Construction of Naryn – Lugokan New Railway 6.3 2012 60% 2.5 Subcontractor Construction of Moscow – Saint Petersburg Tollway (km 58 – km 684 segment) – site preparation 1.2 2013 5% 1.2 General Contractor Upgrade of M-10 Russia Highway (km 218 – km 231 segment) 1.1 2013 10% 1.0 General Contractor Other projects 33.1 2.3 General Contractor/ Subcontractor TOTAL 150.7 108.6
Source: Company data
34 Excluding VAT
С032 2011 RESULTS Mostotrest
Own Production Capacity
Mostotrest has its own production facilities located of goods sold. The share of basic materials (concrete, close to major transport infrastructure development metals and asphalt) in the total amount of materials projects. Availability of own production capacity consumed was slightly more than 70%. enables us, on the one hand, to ensure smooth and prompt delivery of parts and materials to project Two of the Company’s largest factories produce ready- sites and, on the other hand, to control construction mixed concrete, duct tubes, beam spans, as well costs. In 2011, the cost of raw materials, parts and as steel structures, bearings and expansion joints. components accounted for 16% of our total cost The manufacturing infrastructure of TSM includes
Purchased materials Share of Own Pro- 32% duction in Total Own productions Cost of Materials % 2011 68% Source: Management accounts
Own Production 6.1 Bituminous concrete of Construction 5.0 Precast concrete and reinforced 1.8 concrete Materials 1.4 RUB billion Concrete and sand/cement mix Steel structures 2.7 2.5
2010-2011 0.8 0.5 0.6 2010 2011 0.8 Source: Management accounts
asphalt and cement-concrete plants. The Group’s and sand/concrete mix, 49 thousand m3 of precast existing production capacity is about 900 thousand m3 concrete and reinforced concrete and 460 thousand of concrete and sand/cement mix, 50 thousand tons tons of bituminous concrete, which fully covered the of precast concrete and reinforced concrete structures, Company’s own needs. The volume of steel structures 35 thousand tons of steel structures and 500 thousand produced in 2011 was 33 thousand tons, covering tons of bituminous concrete annually. 39% of the Company’s needs. Overall, own production covered 32% of the Company’s needs for construction In 2011 the Company manufactured from purchased materials in 2011 in cash terms. materials 815 thousand m3 of commercial concrete
С033 Annual report 2011
LEADING THE WAY
Investment in New Equipment and Machinery
19% Fixed Asset 19% Real estate Investments Building machinery and equipment % 2% Transport facilities Other fixed assets35
Fixed assets under construction
22% 2011 37% Source: Management accounts
In 2011, against the backdrop of a substantial increase successful implementation of complex construction in backlog and further development of competences, projects. Mostotrest continued to invest in renewal and expansion of its fleet of construction machinery and The total amount of fleet renewal and expansion capex equipment. We consider our own fleet of equipment, in 2011 amounted to RUB 4.9 billion, which was 53% machinery and vehicles as an important factor in the higher than in 2010.
35 Other fixed assets include laboratory equipment, safety equipment, welding equipment, survey equipment and inventory structures
С034 2011 RESULTS Mostotrest
Financial Results
In 2011, the Company delivered excellent financial results:
• Revenue grew 32% to RUB 99.0 billion, driven by • Net profit grew 3.7x to RUB 3.7 billion. Adjusted net increased construction volumes profit increased by 20% to RUB 5.3 billion
• Gross profit increased by 18% to RUB 13.0 billion • Net cash position as at 2011 year-end grew 63% against RUB 11.1 billion in 2010, driven by increased year-on-year to RUB 21.6 billion, driven by advances construction volumes partly offset by increased share received, including under large contracts newly of works performed using services of subcontractors signed in 2011.
• EBITDA rose 6% to RUB 9.5 billion driven by a significant gross profit growth along with an increase in administrative and other costs; EBITDA margin was 10% in 2011
Revenue +32% Gross profit/ +18% RUB billion Gross margin 99.0 13.0 RUB billion/% 11.1 74.9
15% 2010-2011 2010-2011 13% Source: Consolidated financial statements for 2010 2011 Source: Consolidated financial statements for 2010 2011 2011, Proforma financial statements for 2010 2011, Proforma financial statements for 2010
EBITDA/ +6% Net profit/ 3.7 EBITDA margin 9.5 Net margin RUB billion/% 9.0 RUB billion/% 4%
12%
10% 1.0 2010-2011 2010-2011 1% Source: Consolidated financial statements for 2010 2011 Source: Consolidated financial statements for 2010 2011 2011, Proforma financial statements for 2010 2011, Proforma financial statements for 2010
С035 Annual report 2011
LEADING THE WAY
Key performance indicators of the Group in 2010 and 2011
MSTT ETS TSM GROUP
(RUB millions) 2010 2011 2010* 2011 2010* 2011 2010* 2011 Revenue 32,388 49,776 37,714 36,268 14,825 17,618 74,879 98,996 Cost of sales (24,510) (40,393) (34,368) (33,484) (13,170) (15,563) (63,819) (85,995) Gross profit 7,878 9,383 3,346 2,784 1,655 2,055 11,060 13,001 Gross margin, % 24.3% 18.9% 8.9% 7.7% 11.2% 11.7% 14.8% 13.1% Other income 291 114 72 170 342 91 615 364 Administrative expenses (3,708) (4,029) (984) (1,087) (394) (600) (5,084) (5,707) Other expenses (419) (414) (364) (1,257) (312) (391) (1,094) (2,125) Profit from operating activities 4,042 5,054 2,070 610 1,291 1,155 5,497 5,533 Operating profit margin, % 12.5% 10.2% 5.5% 1.7% 8.7% 6.6% 7.3% 5.6% Finance income 110 706 73 93 5 33 166 542 Finance costs, including: (1,158) (476) (1,245) (753) (373) (654) (3,525) (934) Dividends36 0 0 (1,200) (600) (200) (300) (1,400) 0 Non-controlling interest expense 0 0 0 0 0 0 (540) 207 Share of profit/loss of equity accounted investees (7) (60) 0 0 0 0 (7) (60) Profit before income tax 2,987 5,224 898 (50) 923 534 2,131 5,081 Profits tax expense (784) (1,273) (431) (105) (300) (244) (1,088) (1,376) Profit for the year 2,203 3,951 467 (155) 623 290 1,043 3,705 Profit margin, % 6.8% 7.9% 1.2% -0.4% 4.2% 1.6% 1.4% 3.7% EBITDA 5,403 6,475 2,196 749 1,871 1,853 9,004 9,549 EBITDA margin, % 16.7% 13.0% 5.8% 2.1% 12.6% 10.5% 12.0% 9.6% Adjusted net profit37 2,203 3,951 1,667 445 823 590 4,423 5,324 Adjusted net profit margin, % 6.8% 7.9% 4.4% 1.2% 5.6% 3.3% 5.9% 5.4%
To eliminate the effect of acquisitions completed in 2010 and to illustrate the dynamics of the underlying business in this document the consolidated financial statements prepared in accordance with the IFRS as at and for the year ended 31 December 2011 are compared against data from pro forma financial statements as at and for the year ended 31 December 2010 marked with {*}. In some instances the latter is complemented by data based on management accounts which is marked with {**}.
36 2010 dividends are included in financial costs in ETS and TSMs’ 2011 standalone accounts, as equity interests in ETS and TSMs’ net assets are classified as debt instruments. Such dividends are eliminated in the Group’s consolidated financial statements since shares of ETS and TSM minorities’ interest in these companies’ current period profits are recorded on an accrual basis and reported within the Group’s financial costs and income 37 Adjusted net profit is defined as profit from continuing operations net of dividends paid in ETS and TSM, non-controlling interest and depreciation reflected in С036 consolidation 2011 RESULTS Mostotrest
Revenue38
Construction and engineering services are the key contributors to the Group revenue. In addition, the Group receives revenue from sales of construction 32% materials and other services. In 2011, the Group achieved In 2011, the Group achieved revenue growth of 32% compared with 2010 pro-forma revenue, driven by revenue growth of 32% increased construction volumes in major projects, compared with 2010 pro-forma including: revenue, driven by increased • Construction stages 2 and 3 of the Kurortny Avenue construction volumes in major Relief Road in Sochi projects • Construction of segments of Fourth Ring Road • Construction of segments of M-4 Don Highway (Kashira, Voronezh) • Upgrade and development of Vnukovo Airport (Moscow) and Vladivostok Airport.
The below table provides an overview of the Group revenue structure by project type in 2010 and 2011.
Revenue 2010 2011 Change
RUB million RUB million % Revenue from contracts for construction of: - bridges and highways 47,546 64,402 16,856 35% - railway infrastructure facilities 13,781 8,932 (4,849) -35% - airfields and airports 6,876 9,265 2,389 35% - ports and in-land water infrastructure facilities 1,063 5,503 4,440 418% - other infrastructure facilities 1,896 3,321 1,425 75% - other facilities 2,409 6,258 3,849 160% Total revenue from construction contracts 73,571 97,681 24,110 33% - other revenue 1,308 1,315 7 1% Total revenue 74,879 98,996 24,117 32%
Bridges and Highways Construction
Revenue from bridges and highways construction • Increased volumes under existing construction increased by 35% or RUB 16.9 billion, from RUB 47.5* projects (segments of Fourth Ring Road (MSTT billion in 2010 to RUB 64.4 billion in 2011, driven mainly project)). by: Railway Infrastructure Development • New construction projects (Stage 2 and 3 construction of Kurortny Avenue Relief Road in Revenue from railway infrastructure projects Sochi, Stage 2 construction of M-27 Dzhubga – decreased by 35%, from RUB 13.8* billion in 2010 Sochi Highway (Adler – Veseloye segment up to the to RUB 8.9 billion in 2011, due to completion in 2011 Georgian border) (MSTT projects), upgrade of M-4 of the Adler – Alpika-Service Combined Road. No new Don Highway (Kashira, Voronezh) (TSM projects)) projects were executed in the segment in 2011. No new large tenders were won in the segment in 2011.
38 The Group recognizes revenue from long-term construction contracts according to the percentage-of-completion method or only to the extent of recoverable costs incurred when the outcome of a construction contract cannot be estimated reliably. If the revenue under the construction contract is recognized to the extent of recoverable costs incurred, the accumulated profit under this contract is recognized as of the completion date of the facility
С037 Annual report 2011
LEADING THE WAY
Airfield and Airport Construction Increased amount of works performed using services Revenue from airport and airfield construction projects increased by 35% to RUB 9.3 billion, compared of subcontractors in 2011 with RUB 6.9* billion in 2010, driven by new project launches, including Vnukovo Airport (Moscow) and Due to increased complexity of transportation Vladivostok Airport upgrade and development. infrastructure construction projects along with increased general contracting competence of the Ports and In-land Water Group the amount of works performed using services Infrastructure Development of subcontractors in the Group’s revenue increased by 50% from RUB 32.1* billion in 2010 to RUB 48.0 billion in 2011. Revenue from hydro infrastructure construction grew 5x to RUB 5.5 billion, compared with RUB 1.1* billion in 2010, driven by the launch of core construction stages at the Sochi Seaport and Sochi Seaport Cargo Handling The above change provides Area project, and the Ust-Luga Seaport Container the Group with and access Terminal. to profitable construction Other Infrastructure Projects volumes using its own production capacity along with Revenue from other transport infrastructure projects increased by 75%, from RUB 1.9* billion in 2010 to RUB overall project supervision and 3.3 billion in 2011, driven mainly by the Avtozavodskaya control and efficient resources subway line extension project in Nizhni Novgorod. allocation. Other Projects
Revenue from other projects was up 2.6x, from RUB Amount of works performed using own in-house 2.4* billion in 2010 to RUB 6.3 billion in 2011, driven capabilities39 increased by 20% from RUB 41.5* billion by the launch in 2011 of construction of the Sochi in 2010 to RUB 49.7 billion in 2011. Flagship Media Center (press center and TV center). Cost of Sales
The below table provides an overview of the Group costs in 2011 and 2010:
2010* 2011 Change
RUB million RUB million % Services of subcontractors 32,069 47,991 15,922 50% Materials 12,343 13,362 1,019 8% Personnel expenses 7,316 10,525 3,209 44% Depreciation and amortisation 3,384 3,906 522 15% Machinery, equipment, transport, and labor services provided by third parties 3,868 2,372 (1,496) -39% Fuel 802 1,417 615 77% Insurance 694 1,129 435 63% Services of principal contractors 586 663 77 13% Other cost of sales 2,757 4,630 1,873 68% Total cost of sales 63,819 85,995 22,176 35%
39 Amount of works performed using own in-house capabilities is the total revenue less other revenue and cost of services of subcontractors
С038 2011 RESULTS Mostotrest
The Group cost of sales increased by 35%, from • a 10%** headcount growth to support the anticipated RUB 63.8* billion in 2010 to RUB 86.0 billion in 2011. construction volume growth (including Moscow – The growth was mainly driven by increased services Saint-Petersburg Toll Highway) of subcontractors costs, personnel costs and materials • an increase in the rate of unified social tax in Russia costs. and • wage inflation. Specifically, the growth in subcontractor service costs by 50% or RUB 15.9 billion was the result of increase 8% or RUB 1.0 billion мaterials costs growth was in amount of works performed using services driven mainly by increase in amount of works of subcontractors as discussed above in the section performed using own in-house capabilities40 offset by of «Revenue». decreased material-intensity of construction works performed in 2011. The increase in personnel costs by 44% or RUB 3.2 billion was driven by A detailed overview of the cost structure evolution is provided below as part of analysis of segment results • RUB 1.5 billion decrease in line item «Machinery, of MSTT, ETS and TSM. equipment, transport and labour services provided by third parties» resulting in more in-sourcing of respective works
Gross Profit and Profit Margin
The Group 2011 gross profit increased by 18%, from to 13.1% in 2011, due to an increased share of works RUB 11.1* billion in 2010 to RUB 13.0 billion 2011. The performed using services of subcontractors41 in increase in gross profit was mainly driven by revenue the Group’s total revenue. Gross margin on works growth partly offset by gross margin decrease.The performed using own in-house capabilities42 remained Group’s gross profit margin fell from 14.8% in 2010 constant.
Administrative Expenses43
The Group 2011 administrative expenses increased general contracting projects, in-sourcing of auxiliary by RUB 0.6 billion or 12% year-on-year, mainly driven administrative functions previously outsourced to by personnel costs. Personnel costs rose essentially third-party consultants, an increase in the rate due to an increase in staff to manage large-scale of unified social tax in Russia as well as wage inflation.
Other Costs
Other Group costs increased by RUB 1.0 billion in and litigation claims (RUB 0.5 billion in 2011). The 2011 compared with 2010, driven by an increase more detailed information is provided in Note 11 to the in provisions for doubtful accounts receivable, consolidated financial statements for 2011. prepayments and loans given (RUB 1.1 billion in 2011)
40 Amount of works performed using own in-house capabilities is the total revenue less other revenue and cost of services of subcontractors 41 Share of works performed using services of subcontractors is calculated as costs of services of subcontractor divided by total revenue less other revenue 42 Gross margin on works performed using own in-house capabilities is calculated as amount of works performed using own in-house capabilities less cost of sales excluding services of subcontractors cost devided by amount of works performed using own in-house capabilities 43 Administrative expenses mostly include personnel expenses, expenses for consulting and audit services, social expenses С039 Annual report 2011
LEADING THE WAY
EBITDA44
EBITDA increased by RUB 0.5 billion year-on-year, driven by a significant gross profit growth along with an increase in administrative and other costs.
Finance Income, Finance Costs45 and Non-Controlling Interests
The below table provides an overview of the Group finance income and costs in 2011 and 2010.
2010 2011 Change
RUB million RUB million % Finance income: Interest income on bank deposits 101 302 201 199% Interest income on loans given 31 27 (4) -13% Foreign exchange gain 17 - (17) -100% Change in non-controlling interest - 207 207 100% Effect of discounting financial assets and liabilities 15 - (15) -100% Other finance income 2 6 4 200% Total finance income 166 542 376 227%
Finance costs: Interest expense on borrowings (1,386) (360) 1,026 -74% Interest expense on finance leases (198) (305) (107) 54% Foreign exchange loss (1) (14) (13) 1300% Change in non-controlling interest (540) 0 540 -100% Dividends (1,400) 0 1,400 -100% Effect of discounting financial assets and liabilities 0 (255) (255) 100% Total finance costs (3,525) (934) 2,591 -74%
Net finance cost (3,359) (392) 2,967 -88%
2011 interest expenses on borrowings decreased by 74% or RUB 1.0 billion year-on-year. Reduction in the weighted average interest rate from 7.7%** as at December 31, 2010 to 6.8%** as at December 31, 2011
44 EBITDA is defined as net profit from continuing operations net of income tax, net finance costs and depreciation. EBITDA is not defined by, or presented in accordance with, IFRS. EBITDA has limitations as an analytical tool, and one should not consider it in isolation, or as a substitute for analysis of the Group’s operating results as reported under IFRS 45 Finance expenses of the Group primarily consist of interest expense incurred on the borrowings and finance leases and dividends paid to ETS and TSM minority С040 participants and non-controlling interest 2011 RESULTS Mostotrest
The Group finance income increased by RUB 0.4 2011 interest expenses on borrowings decreased by billion, driven by growth of interest income on bank 74% or RUB 1.0 billion year-on-year, due to lower deposits and changes in profitability levels at ETS and average balances on borrowings, as well as a reduction TSM, reflected in the item change in non-controlling in the weighted average interest rate46 from 7.7%** as interest. at December 31, 2010 to 6.8%** as at December 31, 2011. The Group finance costs decreased by RUB 2.6 billion, mainly due to a reduction in interest expense on borrowings and zero dividend payments in 2011. Income tax expense
Income tax increased by 27% or RUB 0.3 billion, to Effective income tax rate adjusted for dividend payouts RUB 1.4 billion in 2011, against RUB 1.1* billion in and non-controlling interest increased slightly to 2010, due to the increase in profit before income tax. 27.6%** from 26.7%** in 2010.
Profit from continuing operations
Profit from continuing operations was up 3.7x, to RUB 3.7 billion in 2011, against RUB 1.0* billion in 2010.
Adjusted net profit
This indicator is calculated by the Group in order to eliminate effects of nonstandard adjustments arising from consolidation of ETS and TSM. The following table sets forth adjusted net profit for the reporting periods and its reconciliation to profit for the year from continuing operations.
2010 2011 Change
RUB million RUB million % Profit for the year from continuing operations 1,043 3,705 2,662 255% Dividends 1,400 0 (1,400) -100% Non-controlling interest 540 (207) (747) 100% Depreciation and amortisation 1,440 1,826 386 27% Adjusted profit for the year from continuing operations 4,423 5,324 901 20%
Liquidity and capital resources
The Group cash and cash equivalent balances as at Cash and cash equivalents include physical cash December 31, 2010 and 2011 were RUB 20.0 billion balances, current bank account balances and deposits and RUB 29.3 billion, respectively. The increase in with initial maturity of at least 3 months. Given the cash balances was largely due to receipt of advance RUB 7.6 billion debt as at December 31, 2011 and RUB payments from the customers, including the advance 29.3 billion cash position as at December 31, 2011, the payments for large contracts made in 2H 2011. net cash position amounted to RUB 21.6 billion.
46 Weighted average interest rate as at the reporting date is determined as annual interest expense on loans and borrowings outstanding as at the reporting date divided by the total amount of loans and borrowings outstanding as at that date
С041 Annual report 2011
LEADING THE WAY
The following table sets forth the Group’s net debt as at December 31, 2010 and 2011 (according to consolidated financial statements).
31.12.2010 31.12.2011 Change
RUB million RUB million % Loans and borrowings 5,614 5,541 (73) -1% Finance lease liabilities 1,061 2,091 1,030 97% 6,675 7,632 957 14% Cash and cash equivavelnts 19,950 29,254 9,304 47% Net debt (13,275) (21,622) (8,347) 63%
In 2011, the Group used cash to finance working capital (RUB 7.2** billion) and pursue investment program (RUB 4.9 billion). Net Working Capital47
The below table provides an overview of the Group working capital structure as at December 31, 2010 and 2011.
31.12.2010 31.12.2011 Change
RUB million RUB million % Inventories 3,938 6,559 2,621 67% Trade and other receivables 6,144 16,226 10,082 164% Amounts due from customers on construction contracts 7,084 7,873 789 11% Prepayments 13,739 16,817 3,078 22% Total working capital assets 30,905 47,475 16,570 54% Trade and other payables (16,394) (17,082) (688) 4% Amounts due to customers on construction contracts (29,701) (53,410) (23,709) 80% Total working capital liabilities (46,095) (70,492) (24,397) 53% Net working capital (15,190) (23,017) (7,827) 52%
CUSTOMERS FUNDED WORKING CAPITAL NEEDS RESULTING IN STRONG LIQUIDITY POSITION
47 The Group defines net working capital as the difference between current operating assets (net of cash and equivalents, income tax receivable and other non-current assets) and current operating non-interest bearing liabilities (net of loans and borrowings, provisions, non-controlling interest and income tax liabilities)
С042 2011 RESULTS Mostotrest
Negative net working capital increased by RUB In accordance with the existing bank agreements, open 7.8 billion to RUB 23.0 billion as at December 31, credit limits available to the Group as at December 2011, driven by an increase in advances received 31, 2011 were RUB 19.8** billion, compared with RUB on construction contracts, including big contracts 25.3** billion as at December 31, 2010. newly signed in 2H 2011, with a limited increase in current assets (inventories, receivables and advances paid).
Capital Expenditure
In 2011, the Group pursued investments in acquisition capex for fixed and intangible assets on the Group of building equipment and transport vehicles, as part balance sheet was RUB 4.9 billion, against RUB 3.2* of its fixed asset renewal program. The total 2011 billion in 2010.
Financial and Operating Results of Operating Segments48
Segment MSTT MSTT Revenue
MSTT revenue grew 54%, mainly driven by the following The increase in subcontractor costs by RUB 8.8 billion projects: or 155% was mainly driven by changes in the contract structure, with a bigger share of non-core volumes, • Phase 2 and 3 construction of the Kurortny Avenue in particular, under the contracts for construction Relief Road in Sochi of the Kurortny Avenue Relief Road in Sochi and • Construction of segments of Moscow Fourth Ring the segments of Moscow Fourth Ring Road, with Road a significant share of subcontracted volumes. • Phase 2 construction of the Adler – Veseloye segment (up to the Georgian border) of M-27 The increase in the materials costs by RUB 1.7 billion Dzhubga – Sochi Highway or 21% was driven mainly by a 32% growth in amount of works performed using own in-house capabilities49 MSTT amount of works performed using own in- and a changed structure of construction works (metal- house capabilities49 increased by 32% against a 155% consuming works decreased). increase in amount of works performed using services of subcontractors. Therefore, the share of works The increase in personnel costs by 35% or RUB 2.2 performed using own in-house capabilities50 decreased billion was mainly due to increased amount of works from 82% in 2010 to 71% in 2011. performed using own in-house capabilities49, which led to an increase in headcount by 7%** and average MSTT Cost of Sales salary growth of 13%** along with an increase in the rate of unified social tax in Russia. MSTT cost of sales increased by 65%, from RUB 24.5 billion in 2010 to RUB 40.4 billion in 2011, mainly driven by higher subcontractor service costs, personnel expenses, materials costs and other costs.
48 As defined in a segment reporting which is a part of consolidated financial statements as at and for the year ended 31 December 2011 49 Amount of works performed using own in-house capabilities is the total revenue less other revenue and cost of services of subcontractors 50 Share of works performed using own in-house capabilities is calculated as the amount of works performed by own in-house capabilities divided by total revenue less other revenue С043 Annual report 2011
LEADING THE WAY
A 2.3x or RUB 1.8 billion increase in other expenses MSTT Gross Profit and Profit Margin was due to increased costs of design and technological work, release of land for construction, bank MSTT posted a RUB 9.4 billion gross profit in 2011, guarantees and redeployment of resources. a 19% increase on 2010. MSTT gross profit margin decreased from 24.3% to 18.9%, mainly due to an increase in share of works performed using services of subcontractors51 and personnel costs. Segment ETS ETS Revenue ETS Cost of Sales
Revenue at ETS was down 4%, mainly due to In the backdrop of a 4% reduction in revenue, ETS cost construction and core phase completions under the of sales decreased by 3% to RUB 33.5 billion in 2011, following projects: from RUB 34.4* billion in 2010.
• Construction of segments of M-4 “Don” Highway ETS Gross Profit and Profit Margin • Construction of segments of the Saint Petersburg Ring Road In 2011, ETS posted a gross profit of RUB 2.8 billion, • Construction of Alpika-Service – Roza-Khutor which is 17% lower than in 2010. The reduction was automobile road mainly due to revenue decreasing slightly more than • Airport and airfield upgrades in Sochi (Adler) and costs. Vladivostok. Segment TSM TSM Revenue
TSM revenue increased by 19%, mainly driven by new labor services provided by third parties, and raw and project launches, including: construction materials and components costs.
• Construction of the km 15 – km 58 segment of the A three times or RUB 4.0 billion increase in services Moscow – Saint Petersburg Highway of subcontractors costs to RUB 5.9 billion was mainly • Construction of segments of M-4 Don Highway due to a growth in amount of works performed using • Vnukovo airport development and upgrade services of subcontractors as the Company entered the • Vladivostok airport upgrade. phase of specialized work such as design, installation of specialized equipment (lighting, meteorological TSM amount of works performed using services equipment), relocation of utility lines, as well as due to of subcontractors increased by 205%. Therefore, a shortage of own production capacity. the share of works performed using own in-house capabilities52 decreased from 86% in 2010 to 65% in The increase in personnel costs by RUB 1.0 billion or 2011. 89% to RUB 2.2 billion was mainly driven by:
TSM Cost of Sales • 22%** growth in headcount arising from a) substitution of third-party machinery and vehicles TSM cost of sales increased by 18% to RUB 15.6 by own machinery and vehicles in 2011, b) delays billion from RUB 13.2 billion* in 2010, mainly driven by in a number of major projects whereby TSM had to subcontractor service costs and personnel expenses. maintain its qualified workforce required for their At the same time, TSM significantly reduced the execution costs for machinery, equipment, transport, and • wage inflation along with • increase in the rate of unified social tax in Russia
51 Share of works performed using services of subcontractors is calculated as costs of services of subcontractor divided by total revenue less other revenue 52 Share of works performed using own in-house capabilities is calculated as the amount of works performed by own in-house capabilities divided by total revenue less other revenue
С044 2011 RESULTS Mostotrest
A RUB 1.9 billion or 68% reduction in costs for In 2011, TSM posted a gross machinery, equipment, transport, and labor services to RUB 0.9 billion provided by third parties was mainly profit of RUB 2.1 billion, which due to in-sourcing; acquisition and use in construction is 24% higher than in 2010. The of the Company’s own fleet of road building equipment, machinery and transport vehicles. increase was due to revenue growth outstripping cost of sales TSM Gross Profit and Profit Margin growth In 2011, TSM posted a gross profit of RUB 2.1 billion, which is 24% higher than in 2010. The increase was A RUB 0.8 billion or 16% reduction in materials costs due to revenue growth outstripping cost of sales to RUB 3.9 billion was mainly due to a 7% decrease growth. in amount of works performed using own in-house capabilities53 and a changed structure of construction TSM gross profit margin increased slightly to 11.7% works. (2010: 11.2%).
53 Amount of works performed using own in-house capabilities is the total revenue less other revenue and cost of services of subcontractors
С045 Annual report 2011
LEADING THE WAY
С046 Mostotrest
С047
GOVERNANCE C050 Corporate Governance C056 Social Responsibility C060 Risk Management Annual report 2011
LEADING THE WAY
Corporate Governance
The main objective of corporate governance at Mostotrest is protection of shareholder rights and interests. The Company’s modern and effective corporate governance system enables the management to effectively solve their tasks and achieve desired results.
Mostotrest’s corporate governance system is based transparency of decision-making, professional and on the principle of a clear division of responsibility ethical responsibility of Board members, management between the Company’s management bodies, and employees, as well as the Company’s overall control of such management bodies and information information transparency. transparency. Key principles and procedures, as well as competences and responsibilities of each The provisions of the Code are consistent with component are stipulated in the Company’s Articles internationally recognized standards and best of Incorporation and other internal documents. practices in the area of corporate governance and ethics. At the heart of the document is a set Our corporate governance system is based on Russian of principles recommended by the Federal Commission legislation governing the conduct of public companies on Securities Market. We intend to further improve the and the securities market. Mostotrest’s own Code going forward as we gain positive experience in governance rules go beyond the existing regulations, corporate governance and see the emergence of new targeting compliance with the latest standards and relevant Russian and international standards. international best practices.
An important 2011 milestone was approval by the Board of Directors of the Company’s Corporate Code Mostotrest’s own governance of Conduct marking a new step toward a greater efficacy of corporate governance guidelines and rules go beyond the existing rules to support optimization of internal procedures, regulations, targeting transparency of business processes, responsibility vis- a-vis our shareholders and development of a positive compliance with the latest image of the Company. standards and international best practices The purpose of the Code is to ensure effective protection of shareholder rights and legal interests,
Management Structure
The General Shareholders’ Meeting is the Company’s of the General Shareholders’ Meetings’ decisions. The supreme governing body. The Board of Directors main executive body is the CEO who is responsible for convenes General Shareholders’ Meetings at least the Company’s day-to-day operations. Independent once a year. The Board of Directors is responsible for auditors and the Company’s Revision Commission the overall management of the Company, including ensure control over financial and business operations. strategy coordination and supervision of execution
С050 GOVERNANCE Mostotrest
Board of Directors
The Board of Directors ensures strategic their successors. The size of the Board remained management of Mostotrest in the period between unchanged. Currently, the Board consists of eleven General Shareholders’ Meetings. The Board’s key directors, nine of whom are non-executive directors, responsibilities include representation of shareholders’ including the Chairman. In line with international interests, elaboration of the Company’s development practices and Russian stock exchanges, requirements, strategy, setting management targets and overseeing two non-executive directors are independent. their implementation, as well as approval of material transactions and financial reports. The Board The Board of Directors is headed by the Chairman, of Directors is governed by the Articles of Incorporation elected by members of the Board of Directors from and the Regulation on Procedures for Convocation and among themselves by a three-fourths majority vote. Meetings of the Board of Directors. The Chairman’s responsibilities include convening and supervising the Board meetings, as well as In forming our Board of Directors we target approval of the Board meeting agendas. In addition, a combination of skills and professional expertise to the Chairman controls execution of resolutions maximize benefits for the Company. In addition, we of the General Shareholders’ Meeting and decisions aim to maintain a balance between executive and non- of the Board of Directors, monitors the Company executive Board members, including independent relations with its shareholders, the Board of Directors, directors, in order to ensure the most optimal management, executive and non-executive directors. representation of interests of all shareholders, as well The Chairman also represents the Board in its as efficient management of the Company. relations with shareholders, government agencies, media and civil society organizations. Mostotrest attaches great significance to the role of independent directors as enablers reflecting the Board decisions require a three-fourths majority vote, views of the Company’s shareholders, employees and with each director having one vote. counterparties. Mosotrest’s independent directors meet all relevant criteria for independence as set out The Corporate Secretary under the Board of Directors in the Russian law, the Corporate Governance Code ensures compliance with the corporate governance and other internal Company documents. Independent rules and procedures as set out in the Russian law directors do not have any material pecuniary and the Company’s Corporate Code of Conduct. relationships or transactions with the Company, which The Corporate Secretary prepares and supports may affect the independence of their judgment. the General Shareholders’ Meeting and the Board meetings. The responsibilities of the Corporate The composition of the Board of Directors was Secretary also include document storage, disclosure established at the Annual General Shareholders’ and provision of information about the Company, and Meeting on May 16, 2011. Following the departure liaising with shareholders. Gennady Bogatyrev is the from the Board of Directors of Board members Company’s Corporate Secretary and Secretary to the Dmitry Afanasenko and Sergey Shevchuk, Arnaut Board. Dirk Lugtmeyer and Denis Demidov were elected as
THE BOARD OF DIRECTORS CURRENTLY CONSISTS OF 11 MEMBERS INCLUDING TWO INDEPENDENT DIRECTORS AS ELECTED BY THE ANNUAL GENERAL MEETING OF SHAREHOLDERS OF MAY 16, 2011
С051 Annual report 2011
LEADING THE WAY
Composition of the Board of Directors
Chairman of the Board of Directors, Non-executive Director Georgy Koryashkin Member of the Board since 2007 Deputy Chair of the Board of Directors, Non-executive Director Maria Zhurba Member of the Board since 2008 Independent Non-executive Director Arnout Dirk Lugtmeijer Member of the Board since 2011 Non-executive Director Denis Demidov Member of the Board since 2011 Non-executive Director Elena Sukhorukova Member of the Board since 2008 Non-executive Director Irina Egorova Member of the Board since 2011 Non-executive Director Irina Makanova Member of the Board since 2011 Executive Director, Deputy CEO Leonid Dobrovsky Member of the Board since 2011 Independent Non-executive Director Mikhail Noskov Member of the Board since 2011 Non-executive Director Oleg Toni Member of the Board since 2008 Executive Director, CEO Vladimir Vlasov Member of the Board since 2011
Board Procedures
The Board of Directors convenes at least four times toll-based operation of the km 258 – km 334 segment a year, in accordance with the schedule as adopted of the Moscow – Saint Petersburg Highway. at the beginning of each year. In between regular meetings the Board may convene for extraordinary Participation of Current Board Members in 2011 Board meetings to discuss urgent issues pertaining to the Meetings: Company’s business operations and adopt relevant decisions. Board Member Board Meetings
In 2011, the Board held 35 meetings, which discussed Held Attended issues pertaining to current operations and adopted Vladimir Vlasov 35 35 important strategic decisions, including: Denis Demidov54 35 19 Leonid Dobrovsky 35 35 • On the participation of the Company in United Toll Irina Egorova 35 35 Collection Systems Maria Zhurba 35 35 • On the sale of Mostotrest treasury stock Georgy Koryashkin 35 35 • On approval of the Company’s Corporate Code Arnaut Lugtmeyer54 35 17 of Conduct Irina Makanova 35 35 • On preliminary approval of transaction for Mikhail Noskov 35 35 the Businovskaya Traffic Interchange project Elena Sukhorukova 35 33 documentation development, construction site Oleg Toni 35 35 conditioning and rebuilding • On preliminary approval of transaction for construction, repair, maintenance, overhaul and
54 Member of Mostotrest Board of Directors since 16 May 2011. 23 board meetings were held for the period from 16 May 2011 till 31 December 2011
С052 GOVERNANCE Mostotrest
Compensation of the Board The variable component of the total annual of Directors compensation payable to each member of the Board depends on the Company’s net profit for the year Subject to their performing their duties in good faith, and the number of meetings attended by individual members of the Board of Directors are remunerated directors. Board member compensation is calculated for participation in the Board meetings and based on the formula set out below: reimbursed for associated expenses. NIxA Compensation = , where 100xBxC All members of the Board of Directors are entitled to compensation for their service on the Board, subject to at least 50% Board meeting attendance. The NI – Net Income; А – number of Board meetings compensation of Board members consists of fixed attended by each individual director; В – number and variable components. As a fixed component, of Board members; С – number of Board meetings in Mostotrest Board members receive a per-meeting- between annual general shareholders’ meetings. attended fee equal to 6x the minimum legal wage effective as at the date of a Board meeting. The CEO The total compensation paid to the Board members is not entitled to compensation for his service on the in 2011 amounted to RUB 39.2 million, including Board. RUB 13.3 million in meeting participation fees and RUB 25.8 million in 2010 performance bonuses.
Board Committees
To enhance Board efficiency, a system of Board committees was introduced in 2010. The aim of the Board committees is to advise the Board of Directors on relevant issues pertaining to its competences, as well as to develop recommendations to the Board of Directors and the Management Board. The Board’s Audit Committee was fully operational in 2011. As part of further development of our corporate governance system, we intend to set up a Board Remuneration Committee going forward.
Audit Committee independent director, was appointed Chairman of the Audit Committee. The Audit Committee assists the Board of Directors in controlling the completeness and accuracy Current composition of the Audit Committee: of financial and other reports, the reporting process, internal control and internal audit processes, risk • Arnaut Dirk Lugtmeyer (Committee Chair) management, as well as compliance with existing • Maria Zhurba legislation, Articles of Incorporation and other internal • Denis Demidov. regulations. The Audit Committee held three meetings in 2011, Russian law, the Company’s internal documents and which considered the following points: decisions of the General Shareholders’ Meeting and • On organization and planning of the Committee 2012 the Board of Directors govern the Audit Committee. activities • Approval of material clauses of the auditing contract The Audit Committee consists of three members of the with KPMG Board of Directors. The Committee must be chaired • On recommendation to the Board with regard to by a chairperson fully qualifying as an independent KPMG auditing fees director. In May 2011, Mr. Dirk Lugtmeyer, an • On review of the Internal Control Service activity plan.
С053 Annual report 2011
LEADING THE WAY
Senior Management
Vladimir Vlasov Mr. Vlasov has served as CEO since he joined the Company in September 2006. Prior to joining CEO, Member Mostotrest he held managerial positions in of the Board forwarding companies and seaports of Murmansk of Directors and Saint Petersburg, as well as in Severstaltrans. In 2000-2005 he served as CEO of Kolomna Plant Holding Company.
Mr. Vlasov holds an MBA degree from the Russian Academy of National Economy.
Oleg Tanana Mr. Tanana has served as Deputy CEO for Economics and Finance since 2006. Prior to joining the Group, Deputy CEO, he was Director for Economics and Finance Economics and of Kolomna Plant Holding Company and of ZAO Finance Balance-Oil.
Mr. Tanana graduated from the Belarusian State University of National Economy and holds a degree in economics and social planning.
Victor Korotin Victor Korotin joined Mostotrest in 1970 and has held various managerial positions. He has served Chief Engineer, as Mostotrest’s Chief Engineer since 1990. He is First Deputy the Group’s most senior technical officer and has CEO more than 40 years of experience in the Russian engineering and construction industry.
Mr. Korotin graduated from the Novosibirsk Institute of Railway transport for Railway Transport Engineers and holds a PhD in technology.
С054 GOVERNANCE Mostotrest
Valery Dorgan Mr. Dorgan has served as Deputy CEO for Marketing since 2010. Mr. Dorgan has over 35 Deputy CEO, years of experience in the transport infrastructure Marketing construction sector. Prior to joining the Group, he held various managerial positions at federal state enterprises responsible for highway infrastructure development in central Russia.
He graduated from the Moscow State Automobile and Highway Institute and holds a degree in airfield construction. He also received a degree in construction management from the Ordzhonikidze Moscow Management Institute, and holds a PhD in economics.
Alexander Mr. Ostrovsky joined Mostotrest in 1973 and has Ostrovsky held various managerial positions, including Head of Production and Technology and Deputy Chief Deputy CEO, Engineer of one of Mostotrest’s regional affiliates. Production Mr. Ostrovsky has more than 30 years of experience in the bridge construction industry, including more than 20 years in managerial positions.
Mr. Ostrovsky graduated from the Moscow Engineering and Construction Institute and holds a degree in hydro infrastructure development.
Vladimir Mr. Monastyrev joined Mostotrest in 2000. Before Monastyrev becoming the Deputy CEO he was a Head of Planning and Economic Department. Deputy CEO, Development He graduated from Moscow State University of Railway Transport and holds a Ph.D. in economics.
С055 Annual report 2011
LEADING THE WAY
Social Responsibility
Aiming to comply with international best practices in corporate social responsibility, Mostotrest has been taking additional measures to improve the living standards of its employees and their families, prevent negative environmental impact and build a constructive dialogue with the society.
Employees
We highly value our employees who we consider as agreement which is in force until the end of 2012. In a key driver of our success. Key objectives of our HR addition, a joint trade union committee that enhances policy include recruitment of the best talent, good protection of workers’ rights and interests has been in labor conditions, professional development and place at Mostotrest for about 75 years. career growth opportunities, stronger motivation and employees’ personal commitment to achieving best We strongly believe that our staff should receive fair overall results. and competitive compensation including fixed and variable salary components, and social benefits. In the Our team of highly skilled professional managers year under review, the average salary at Mostotrest is one of the best in the industry. Mostotrest increased by 17% to RUB 40,407. management expertise is underpinned by the unique technical knowledge of our engineers, many of whom We pay particular attention to vocational education have decades of experience in major infrastructure and training (VET). In accordance with the legislation, construction across Russia. Equally important are we organize compulsory VET courses, as well as our construction workers whose diligence helps us conversion or refresher courses for our workers and implement complex construction projects. engineers. Managers and professionals are invited to follow specialized training courses and attend Labor relationships between the Company and its seminars aimed at developing personal skills and employees are governed by the existing collective relevant professional competences.
Average monthly 40.4 HR development 14.8 salary 34.5 cost RUB ‘000 RUB million 12.4 2010-2011 2010-2011 2010 2011 2010 2011 Source: Management accounts Source: Management accounts
С056 GOVERNANCE Mostotrest
In 2011, 716 employees attended compulsory VET cultivating a pool of talent to fill the Companies courses. In addition to compulsory training, the managerial vacancies. Over the past three years we Company regularly holds seminars for chief engineers, have prepared 170 managerial prospects. In addition, process equipment operators, maintenance managers, we have been pursuing a long-term best university chief power engineers, occupational health and safety graduate hiring program. Over the past three years, engineers, accountants, economists, technicians, we have hired 162 graduates, of whom 80 were hired construction laboratory staff, etc. All professionals in 2011. attend seminars in accordance with their job profiles and professions, as required. Our investment in HR Mostotrest pays attention to team-building activities development increased by 19% in 2011. and events. We hold annual celebrations in connection with the Builder’s Day, our professional holiday, as To minimize risks associated with staff turnover, well as anniversary dates marking the creation of our Mostotrest has been implementing a talent pool regional divisions, and various contests, cultural, program in recent years. In cooperation with field- sports and recreational activities. The Company has specific universities, including Moscow State University also initiated a mass corporate sports movement: we of Railway Engineering, Moscow State University organize winter sports competitions, the WWII Victory of Geodesy and Cartography, and Moscow Automobile Day Tournament, as well as the Mostotrest Football and Road Construction University, we have been Cup.
Labor Safety
Mostotrest builds technically complex infrastructure Security System in place, which was developed projects and staff safety is therefore one of the core based, among others, on the international standard components of our quality management system. We OHSAS 18001:1999. The system encompasses a set strictly comply with existing Russian legislation and of guidelines and standards governing labor safety regulations on labor safety and industrial security. and industrial security management processes. The Company has a Labor Safety and Industrial A dedicated team in the CEO’s Office and each
С057 Annual report 2011
LEADING THE WAY
business unit of the Company oversees implementation prevention of occupational diseases and improvement of the relevant corporate policy, organizing and of workstation conditions based on relevant findings. coordinating efforts in the areas of health and labor Staff engaged in hazardous work are offered paid safety, industrial safety and environmental protection, leisure activities and treatments at health resorts in as well as providing information to and consult the South of Russia. In addition, we offer job-related management on relevant issues. life, health and accident insurance to our employees.
At Mostotrest, we do not only thoroughly monitor compliance with all the existing labor safety rules but also pay a great deal of attention to educating 34% our employees about safety and carrying out regular evaluations of their knowledge. All production-related Mostotrest’s total investments in staff are required to attend regular briefings on labor safety rules, and physical examinations. In addition, improvement of labor conditions, labor safety is prominently featured in all our VET labor safety and industrial courses, refresher and conversion courses. security were approximately Labor safety training courses for the Company RUB 111.6 million in 2011, an managers and professionals are organized at increase of 34% on 2010 professional technical schools at the recruitment stage and subsequently as required but not less frequently than once every three years. Training is provided in regional divisions by the Company’s labor safety In 2012 we intend to revise our Labor and Industrial department. Safety Management Guidelines, as well as the corporate standard Procedure for Providing Employees Employee health is a priority at Mostotrest. All our with Personal Protective Equipment, and develop construction sites and production facilities are a new standard Organization of Labor Safety at the equipped with first-aid posts. Mostotrest adopted Company. a workstation certification system aimed at
Environmental Protection
In the normal course of its business Mostotrest has technologies and equipment to prevent environmental a negative impact on the environment as a result pollution and reduce production-related risks. All of air pollution, waste water discharges and waste activities related to environmental protection are in full generation. We fully realize our environmental compliance with the applicable Russian legislation. responsibility and make our best efforts to limit the impact of our activities on the environment. The Environmental issues are a focus of attention for Company has adopted a corporate policy on labor Mostotrest’s management. An Environmental safety and environmental protection, intended Protection Service coordinating the Company’s efforts to, on the one hand, preserve the knowledge and in the area has been set up under the auspices of the experience in the field of ecology and safety, and, CEO. The service ensures implementation of a single on the other hand, develop and introduce new Company-wide environmental protection policy,
С058 GOVERNANCE Mostotrest
initiates and coordinates the relevant activities, informs protection, water protection and responsible and advises management on environmental security production and consumption waste management. and provides the relevant methodological assistance to Every year we implement an array of environmental Mostotrest business units. measures across all the above areas and undergo independent environmental audits. In 2011, Mostotrest’s environmental policy covers the following Mostotrest’s expenditures for environmental protection core areas: air protection, land and vegetation grew 31% to RUB 115 million.
Environmental 115.4 Protection Expenditure 88.2 RUB million 2010-2011 2010 2011 Source: Management accounts
Open Dialogue with Business Community
Mostotrests annually participates in trade fairs and the situation in the transport sector, international conferences, which allow the Company to publicise cooperation, new projects and innovations in the field its latest achievements, exchange experience and of transport infrastructure development. The event was knowledge with peers and jointly assess the most attended by representatives of the relevant government promising areas for future industry development. agencies, leading experts and top managers of major companies and organizations operating in the In 2011, we sponsored the exhibition Transport transport sector. of Russia 2011, where participants exhibited innovative solutions for transport and infrastructure projects. We also participated in TransCon, the IV International The objectives of the event were to facilitate financing Specialized Exhibition on Transport Infrastructure of transport infrastructure projects, promote the Development, held as part of the IV Transport establishment and development of inter-regional and Congress. The exhibition was attended by major cross-industry partnerships, and support integration industry players who exhibited transport infrastructure of the Russian transport sector into the international support modalities and the most recent achievements transport system. in the areas of engineering, road, bridge and port design and construction, scientific research, software, In the period under review we also took part in the etc. IV Transport Congress organized with support from the Russian Ministry of Transport, Moscow City We believe that participation in such events enables Government, the Russian Tunneling Association market participants to find new ways and solutions for and the International Transport Academy. The main implementation of their projects. topics of discussion at the 2011 Congress included
С059 Annual report 2011
LEADING THE WAY
Risk Management
Risk management is an essential element of the strategic management and internal control system at Mostotrest. The Company’s policy on risk management involves risk identification and assessment, risk control within acceptable limits, development of relevant response measures, continuous monitoring of risk factor dynamics, as well as ensuring the effectiveness of control measures.
Mostotrest has an integrated risk management The Board of Directors of Mostotrest is responsible and control system in place, which ensures timely for establishment and effective operation of the risk prevention and mitigation of impact of adverse factors management system. The management is responsible on the Group’s business. Core risk management for the continuous development and monitoring methods employed by the Company include: of the system. The CEO regularly reports to the Board on relevant developments. • Rejection of risky investments, unreliable partners and customers The Company has an internal control mechanism • Insurance in place, which monitors compliance with general • Financial planning requirements for business processes at Mostotrest, • Compliance with relevant standards advises departments and production units on internal • Coordination and coherence of management controls, and is actively involved in implementation programs and processes supporting Company of new processes and systems to ensure their development. compliance with internal control requirements.
Country Risks
Russia’s economy is vulnerable to market downturns, foreign investment and lead to a general deterioration including those related to slowdowns in economic of the economy. development in other countries. The global economic crisis, financial problems or heightened risk perception Macroeconomic factors negatively affecting abroad may reduce the attractiveness of Russia for government revenue, such as the effect of decreases in the price of oil or other commodities on which
С060 GOVERNANCE Mostotrest
a significant part of Russia’s economy depends, may the industry, introducing new forms of long-term ultimately lead to a reduction in government spending construction contracts aimed at improving the quality on large infrastructure projects. As the majority of the of construction, as well as adopting other relevant funding for transport infrastructure construction measures. projects in Russia comes from governmental budgets, the effect of this may be to reduce the number Mostotrest operates only in areas where infrastructure of available construction projects and thus reduce the projects are considered as an investment policy market demand for the Group’s business. priority. We implement large complex projects with guaranteed investments, such as construction However, due to deterioration of Russia’s transport of facilities for the Olympic Games in Sochi and the infrastructure, the government considers development APEC summit in Vladivostok, and are actively involved of the national road and rail network as today’s in development of the federal highway network and the priority. To this end, the government adopted and institution of toll roads in Russia. has been implementing large-scale transport infrastructure development programs and has been creating alternative sources of funding for Mostotrest operates only in areas where infrastructure projects are considered as an Industry Risks and investment policy priority Operational Risks
Mostotrest operations are subject to a number system, an internal budgeting system and project of specific risks inherent in the infrastructure management standards that establish requirements construction industry as a whole, as well as risks for elaboration of project documentation, resource associated with complex projects undertaken by the planning, budgeting and internal document Company. management. The Company’s management supervises implementation of these standards on an ongoing An essential risk is the risk of increased competition basis. from Russian and foreign companies, which could lead to a decrease in revenue, and a reduction Mostotrest’s IT system allows it to forecast the of Mostotrest’s market share. Today we are the construction completion schedule, identify the scope industry leader and we are confident about our future of works that need to be performed and to analyse the growth prospects, given our strong financial position, expenses associated with each stage of the project. backlog size ,with more than a 3-year revenue coverage and our developed general contractor An essential risk associated with our operations is expertise. the risk of fluctuations in prices for materials. As part of risk management in this area the Company The Company’s operations are also associated with the integrates into its project cost estimates, projected risk of failure to deliver contracted projects on time, price inflation and other material factors that could due to prolonged adverse weather conditions, natural affect project profitability, prior to submitting its tender calamities and disasters, as well as risks associated bids. After winning a tender Mostotrest assesses its with the use of heavy equipment and hazardous need for construction materials, determines their materials. Together with the risk of fluctuations in current market value and purchases materials under prices for materials these risks may lead to a change long-term contracts if prices for such materials are in the cost of construction and potential cost overruns expected to increase. in projects, which the Group implements. Mostotrest maintains various types of insurance To ensure effective management of operational risk, to cover a variety of other risks associated with its the Company implemented a number of procedures, projects. including an OSH and industrial safety management
С061 Annual report 2011
LEADING THE WAY
Financial Risks
Today’s financial markets are characterized by and foreign banks, as well as the fact that almost all unstable access to credit, cost of funding volatility payments to suppliers and contractors are made in and foreign currency exchange risk. Mostotrest is not rubles. In addition, there are no foreign currency- exposed to risks associated with interest rate and denominated borrowings with floating interest rates in exchange rate fluctuations, due to its stable financial Mostotrest’s loan portfolio. position, strong relationships with leading Russian
HR Risks
In the course of its business Mostotrest employs working conditions, enhance professional development significant labor resources, which exposes the and career growth opportunities and develop employee Company to a significant risk of losing skilled motivation, which helps the Company to minimize this employees. The Group’s HR Policy aims to create good risk.
In addition to the above mentioned risks, the Group is exposed to the following significant risks:
• Risks associated with the fact that the Group is • Risk of dependence on prime contractors when a provider of transport infrastructure construction acting as subcontractor and engineering services mainly to projects • Risk of insufficient insurance policy coverage ultimately originating from government agencies and • Risks associated with underdeveloped corporate government-funded customers governance standards in Russia compared with • Risks related to availability of raw materials Western Europe or the U.S., which generally reduces • Risks related to a shortage of skilled and experienced the degree of protection of shareholder interests subcontractors • Capital market risks • Risks related to the management of recently • Taxation risks. acquired companies and relationships with their minority shareholders A detailed risk profile overview is provided in • Inflation risk Mostotrest’s International IPO Memorandum available • Wage inflation risk on the Company’s website: http://mostotrest.ru/ • Risks related to requirements to comply with a wide investors/disclosing_information/international- array of laws, regulations, construction standards investment-memorandum/, Section «Risk Factors», and rules pp. 10-41. • Risks related to the need to effectively manage subcontractor services
С062 APPENDIX A CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2011 Annual report 2011
LEADING THE WAY
Contents
3 Consolidated Statement of Financial Position 4 Consolidated Statement of Comprehensive Income 5 Consolidated Statement of Changes in Equity 6 Consolidated Statement of Cash Flows 7 Notes to the Consolidated Financial Statements 58 Independent Auditors’ Report
С02 CONSOLIDATED FINANCIAL STATEMENTS Mostotrest
Consolidated Statement of Financial Position
Mln RUB Note 31 December 2011 31 December 2010 ASSETS Non-current assets Goodwill 7 2,404 2,404 Intangible assets 15 314 1,846 Property, plant and equipment 16 14,912 13,099 Trade and other receivables 21 376 51 Investments in equity accounted investees 7 1,454 1,525 Prepayments 453 - Deferred tax assets 18 395 - Other non-current assets 17 260 316 Total non-current assets 20,568 19,241 Current assets Inventories 19 6,559 3,938 Income tax receivable 19 15 Trade and other receivables 21 16,226 6,144 Amounts due from customers on construction contracts 20 7,873 7,084 Prepayments 16,817 13,739 Cash and cash equivalents 22 29,254 19,950 Other current assets 17 1,339 869 Total current assets 78,087 51,739 Total assets 98,655 70,980 EQUITY AND LIABILITIES Equity Share capital 23 136 131 Additional paid in capital 6,192 - Reserve for available-for-sale financial assets 107 141 Prepaid shares reserve - 6,185 Reserve for acquisition of own shares (561) (68) Retained earnings 12,809 9,940 Total equity attributable to equity holders of the Company 18,683 16,329 Non-controlling interests (7) - Total equity 18,676 16,329 Non-current liabilities Loans and borrowings 25 1,224 491 Trade and other payables 26 163 85 Deferred tax liabilities 18 555 358 Total non-current liabilities 1,942 934 Current liabilities Loans and borrowings 25 6,408 6,184 Non-controlling interest 425 1,076 Trade and other payables 26 17,082 16,425 Amounts due to customers on construction contracts 20 53,410 29,701 Other provisions 527 43 Income tax liabilities 185 288 Total current liabilities 78,037 53,717 Total liabilities 79,979 54,651 Total equity and liabilities 98,655 70,980
These consolidated financial statements were approved by management on 13 April 2012 and were signed on its behalf by
V.N.Vlasov O.G.Tanana General director Deputy General Director of Economics and Finance
The consolidated statement of financial position is to be read in conjunction with the notes to, and forming part of, the consolidated financial statements set out on pages 7 to 57.
С03 Annual report 2011
LEADING THE WAY
Consolidated Statement of Comprehensive Income
Mln RUB Note 2011 2010 Revenue 8 98,996 60,279 Cost of sales 9 (85,995) (51,284) Gross profit 13,001 8,995 Other income 364 222 Administrative expenses 10 (5,707) (4,557) Other expenses 11 (2,125) (949) Results from operating activities 5,533 3,711 Finance income 13 542 111 Finance costs 13 (934) (1,341) Net finance costs (392) (1,230) Share of loss of equity accounting investees, net of income tax (60) (7) Profit before income tax 5,081 2,474 Income tax expense 14 (1,376) (744) Profit for the year 3,705 1,730 Other comprehensive income Net change in fair value of available-for-sale financial assets, net of income tax (34) 31 Total comprehensive income 3,671 1,761 Profit attributable to: Owners of the parent 3,714 1,730 Non-controlling interests (9) - Profit for the year 3,705 1,730 Total comprehensive income attributable to: Owners of the parent 3,680 1,761 Non-controlling interests (9) - Total comprehensive income for the year 3,671 1,761 Earnings per share Basic and diluted earnings per share (RUB) 24 13.24 6.97
The consolidated statement of financial position is to be read in conjunction with the notes to, and forming part of, the consolidated financial statements set out on pages 7 to 57.
С04 CONSOLIDATED FINANCIAL STATEMENTS Mostotrest
Consolidated Statement of Changes in Equity Attributable to equity holders of the Company
Mln RUB Share Additional Reserve for Prepaid Reserve for Retained Total Non- Total capital paid-in available- shares acquisition earnings controlling equity capital for-sale reserve of own interests financial shares assets Balance at 1 January 2010 131 - 110 - - 9,011 9,252 - 9,252 Total comprehensive income for the year Profit for the year - - - - - 1,730 1,730 - 1,730 Net change in fair value of available-for-sale financial assets - - 39 - - - 39 - 39 Income tax on other comprehensive income - - (8) - - - (8) - (8) Total comprehensive income for the year - - 31 - - 1,730 1,761 - 1,761 Shares issued (net of related expenses) - - - 6,185 - - 6,185 - 6,185 Treasury shares acquired - - - - (68) - (68) - (68) Dividends to equity holders - - - - - (801) (801) - (801) Balance at 31 December 2010 131 - 141 6,185 (68) 9,940 16,329 - 16,329 Total comprehensive income for the year Profit for the year - - - - - 3,714 3,714 (9) 3,705 Net change in fair value of available-for-sale financial assets - - (42) - - - (42) - (42) Income tax on other comprehensive income - - 8 - - - 8 - 8 Total comprehensive income for the year - - (34) - - 3,714 3,680 (9) 3,671 Shares issued, net of related expenses (Note 23) 5 6,180 - (6,185) - - - - - Treasury shares acquired (Note 23) - - - - (539) - (539) - (539) Treasury shares sold (Note 23) - 12 - - 46 - 58 - 58 Dividends (Note 23) - - - - - (845) (845) - (845) Non-controlling interests arising on incorporation of a new subsidiary (Note 7) ------2 2 Balance at 31 December 2011 136 6,192 107 - (561) 12,809 18,683 (7) 18,676
The consolidated statement of financial position is to be read in conjunction with the notes to, and forming part of, the consolidated financial statements set out on pages 7 to 57.
С05 Annual report 2011
LEADING THE WAY
Consolidated Statement of Cash Flows
Mln RUB 31 December 2011 31 December 2010 Cash flows from operating activities Profit for the year 3,705 1,730 Adjustments for: Depreciation and amortisation 4,076 2,777 Share of loss of equity accounted investees 60 7 Change in non-controlling interest (207) 33 Loss on disposal of property, plant and equipment 219 216 Net finance costs 585 1,210 Allowance for doubtful loans given 100 - Income tax expense 1,376 744 Cash from operating activities before changes in working capital and provisions 9,914 6,717 Increase in inventories (2,447) (549) Increase in trade and other receivables (9,878) (1,036) Increase in amounts due from customers on construction contracts (1,044) (3,234) Increase in prepayments (3,531) (1,098) Increase/(decrease) in other liabilities 484 (108) Increase/(decrease) in trade and other payables 958 (914) Increase in amounts due to customers on construction contracts 23,709 17,617 Cash flows from operations before income taxes and interest paid 18,165 17,395 Income tax paid (1,655) (760) Net cash from operating activities 16,510 16,635 Cash flows from investing activities Proceeds from sale of property, plant and equipment 120 44 Interest received 271 59 Dividends received 26 44 Loans given (805) (1,414) Acquisition of property, plant and equipment (2,852) (1,217) Acquisition of equity accounted investees - (63) Proceeds from sale/(acquisition) of other investments 30 (32) Placement of funds on bank deposits (1,877) (200) Withdrawal of bank deposits 1,138 - Acquisition of intangible assets (79) (271) Repayment of the loans given 508 1,051 Net cash acquired/(disbursed) with/(for acquisition of) the subsidiaries 2 (1,142) Net cash used in investing activities (3,518) (3,141) Cash flows from financing activities Net proceeds from issuance of shares - 6,185 Aсqusition of treasury shares (539) (68) Proceeds from loans and borrowings 15,352 28,852 Repayment of loans and borrowings (15,424) (30,597) Payment of finance lease liabilities (1,307) (687) Interest paid (483) (1,289) Dividends paid to equity holders of the Company (Note 23) (843) (801) Dividends paid to non-controlling interests (444) - Net cash (used in)/from financing activities (3,688) 1,595 Net increase in cash and cash equivalents 9,304 15,089 Cash and cash equivalents at 1 January 19,950 4,861 Cash and cash equivalents at 31 December 29,254 19,950
The consolidated statement of financial position is to be read in conjunction with the notes to, and forming part of, the consolidated financial statements set out on pages 7 to 57.
С06 CONSOLIDATED FINANCIAL STATEMENTS Mostotrest
Notes to the Consolidated Financial Statements 1 Background
(A) ORGANISATION AND OPERATIONS
OJSC Mostotrest (the “Company”) and its subsidiaries (the “Group”) comprise Russian open joint stock companies (OAO) and limited liability (OOO) companies as defined in the Civil Code of the Russian Federation. The Company was established as a state-owned enterprise in 1930. The Company was privatised as an open joint stock company in December 1992.
The Company’s registered office is Myasnitskaya Street 24/7, Bld.3, Moscow, 101990, Russian Federation.
The Group’s principal activity is the construction of transport infrastructure items, including railway, highway and city bridges, overpasses, interchanges, and other engineering structures for the state municipal entities. The Group’s major customers are government agencies and other public bodies. The Group primarily operates in the European part of the Russian Federation.
The Company’s shares are traded under MSTT symbol on the Russian Trading System (RTS) and Moscow Interbank Currency Exchange (MICEX) stock exchanges in Russia.
(B) BUSINESS ENVIRONMENT
The Group’s operations are located in the Russian Federation. Consequently, the Group is exposed to the economic and financial markets of the Russian Federation which display characteristics of an emerging market. The legal, tax and regulatory frameworks continue development, but are subject to varying interpretations and frequent changes which together with other legal and fiscal impediments contribute to the challenges faced by entities operating in the Russian Federation. The consolidated financial statements reflect management’s assessment of the impact of the Russian business environment on the operations and the financial position of the Group. The future business environment may differ from management’s assessment.
2 Basis of preparation
(A) STATEMENT OF COMPLIANCE
These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRSs”).
(B) BASIS OF MEASUREMENT
The consolidated financial statements are prepared on the historical cost basis except:
• items of property, plant and equipment are stated at their fair values as at the date of the first-time adoption of IFRSs; • financial investments classified as available-for-sale are stated at fair value;
С07 Annual report 2011
LEADING THE WAY
• equity items in existence at 31 December 2002 include adjustments for the effects of hyperinflation, which were calculated using conversion factors derived from the Russian Federation Consumer Price Index published by the Russian Statistics Agency, GosKomStat. Russia ceased to be hyperinflationary for IFRS purposes as of 1 January 2003.
(C) FUNCTIONAL AND PRESENTATION CURRENCY
The national currency of the Russian Federation is the Russian Rouble (“RUB”), which is the Company’s functional currency and the currency in which these consolidated financial statements are presented. All financial information presented in RUB has been rounded to the nearest million.
(D) USE OF ESTIMATES AND JUDGMENTS
The preparation of consolidated financial statements in conformity with IFRSs requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from those estimates.
Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future periods affected.
Information about critical judgments in applying accounting policies that have the most significant effect on the amounts recognised in the consolidated financial statements is included in the following notes:
• Note 20 – construction contracts in progress; • Note 27 (b) – allowances for trade receivables.
Information about assumptions and estimation uncertainties that have a significant risk of resulting in a material adjustment within the next financial year is included in the following notes:
• Note 8 – revenue recognition based on the percentage-of-completion method on construction contracts; • Note 30 – contingencies.
С08 CONSOLIDATED FINANCIAL STATEMENTS Mostotrest
3 Significant accounting policies
The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements and have been applied consistently by Group entities.
(A) BASIS OF CONSOLIDATION
(i) Business combinations
Business combinations are accounted for using the acquisition method as at the acquisition date, which is the date on which control is transferred to the Group. Control is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, the Group takes into consideration potential voting rights that currently are exercisable.
The Group measures goodwill at the acquisition date as:
• The fair value of the consideration transferred; plus • The recognised amount of any non-controlling interests in the acquiree; plus • If the business combination is achieved in stages, the fair value of the pre-existing equity interest in the acquiree; less • The net recognised amount (generally fair value) of the identifiable assets acquired and liabilities assumed.
When the excess is negative, a bargain purchase gain is recognised immediately in profit or loss.
The consideration transferred does not include amounts related to the settlement of pre-existing relationships. Such amounts are generally recognised in profit or loss.
Transaction costs, other than those associated with the issue of debt or equity securities, that the Group incurs in connection with a business combination are expensed as incurred.
Any contingent consideration payable is recognised at fair value at the acquisition date. If the contingent consideration is classified as equity, it is not remeasured and settlement is accounted for within equity. Otherwise, subsequent changes in the fair value of the contingent consideration are recognised in profit or loss.
(ii) Accounting for acquisitions of non-controlling interests
Acquisitions of non-controlling interests are accounted for as transactions with owners in their capacity as owners and therefore no goodwill is recognised as a result. Adjustments to non-controlling interests arising from transactions that do not involve the loss of control are based on a proportionate amount of the net assets of the subsidiary.
С09 Annual report 2011
LEADING THE WAY
(iii) Subsidiaries
Subsidiaries are entities controlled by the Group. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. The accounting policies of subsidiaries have been changed when necessary to align them with the policies adopted by the Group. Losses applicable to the non-controlling interests in a subsidiary are allocated to the non-controlling interests even if doing so causes the non-controlling interests to have a deficit balance.
(iv) Loss of control
Upon the loss of control, the Group derecognises the assets and liabilities of the subsidiary, any non-controlling interests and the other components of equity related to the subsidiary. Any surplus or deficit arising on the loss of control is recognised in profit or loss. If the Group retains any interest in the previous subsidiary, then such interest is measured at fair value at the date that control is lost. Subsequently it is accounted for as an equity- accounted investee or as an available-for-sale financial asset depending on the level of influence retained.
(v) Investments in associates (equity accounted investees)
Associates are those entities in which the Group has significant influence, but not control, over the financial and operating policies. Significant influence is presumed to exist when the Group holds between 20% and 50% of the voting power of another entity. Joint ventures are those entities over whose activities the Group has joint control, established by contractual agreement and requiring unanimous consent for strategic financial and operating decisions.
Investments in associates are accounted for using the equity method and are recognised initially at cost. The cost of the investment includes transaction costs.
The consolidated financial statements include the Group’s share of the profit or loss and other comprehensive income of equity accounted investees, after adjustments to align the accounting policies with those of the Group, from the date that significant influence commences until the date that significant influence ceases.
When the Group’s share of losses exceeds its interest in an equity-accounted investee, the carrying amount of that interest including any long-term investments, is reduced to zero, and the recognition of further losses is discontinued, except to the extent that the Group has an obligation or has made payments on behalf of the investee.
(vi) Transactions eliminated on consolidation
Intra-group balances and transactions, and any unrealised income and expenses arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. Unrealised gains arising from transactions with equity-accounted investees are eliminated against the investment to the extent of the Group’s interest in the investee. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment.
С010 CONSOLIDATED FINANCIAL STATEMENTS Mostotrest
(B) FOREIGN CURRENCY TRANSACTIONS
Transactions in foreign currencies are translated to RUB at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to the functional currency at the exchange rate at that date. The foreign currency gain or loss on monetary items is the difference between amortised cost in the functional currency at the beginning of the period, adjusted for effective interest and payments during the period, and the amortised cost in foreign currency translated at the exchange rate at the end of the reporting period.
Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated to the functional currency at the exchange rate at the date that the fair value was determined. Non- monetary items in a foreign currency that are measured in terms of historical cost are translated using the exchange rate at the date of the transaction.
Foreign currency differences arising in retranslation are recognised in profit or loss, except for differences arising on the retranslation of available-for-sale equity instruments which are recognised in other comprehensive income.
(C) FINANCIAL INSTRUMENTS
(i) Non-derivative fi nancial assets
Non-derivative financial assets comprise investments in equity and debt securities, trade and other receivables, and cash and cash equivalents.
The Group initially recognises loans and receivables and deposits on the date that they are originated. All other financial assets are recognised initially on the trade date at which the Group becomes a party to the contractual provisions of the instrument.
The Group derecognises a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in transferred financial assets that is created or retained by the Group is recognised as a separate asset or liability.
Financial assets and liabilities are offset and the net amount presented in the statement of financial position when, and only when, the Group has a legal right to offset the amounts and intends either to settle on a net basis or to realise the asset and settle the liability simultaneously.
The Group classifies non-derivative financial assets into the following categories: loans and receivables and available-for-sale financial assets.
Loans and receivables
Loans and receivables are a category of financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are recognised initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition loans and receivables are measured at amortised cost using the effective interest method, less any impairment losses.
Loans and receivables category comprise the following classes of financial assets: trade and other receivables as presented in note 21 and cash and cash equivalents as presented in note 22.
С011 Annual report 2011
LEADING THE WAY
Cash and cash equivalents
Cash and cash equivalents comprise cash balances, call deposits and highly liquid investments with maturities of three months or less from the acquisition date that are subject to insignificant risk of changes in their fair value.
Available-for-sale fi nancial assets
Available-for-sale financial assets are non-derivative financial assets that are designated as available-for-sale or are not classified in any of the above categories of financial assets. Such assets are recognised initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, they are measured at fair value and changes therein, other than impairment losses (see note 3(j)(i)) and foreign currency differences on available-for-sale debt instruments (see note 3(b)), are recognised in other comprehensive income and presented within equity in the fair value reserve. When an investment is derecognised or impaired, the cumulative gain or loss in equity is reclassified to profit or loss. Unquoted equity instruments whose fair value cannot reliably be measured are carried at cost.
Available-for-sale financial assets comprise equity securities and debt securities.
Other
Other non-derivative financial instruments are measured at amortised cost using the effective interest method, less any impairment losses. Investments in equity securities that are not quoted on a stock exchange are principally valued using valuation techniques such as discounted cash flow analysis, option pricing models and comparisons to other transactions and instruments that are substantially the same. Where fair value cannot be reliably measured, investments are stated at cost less impairment losses.
(ii) Non-derivative fi nancial liabilities
The Group initially recognises debt securities issued and subordinated liabilities on the date that they are originated. All other financial liabilities (including liabilities designated at fair value through profit or loss) are recognised initially on the trade date at which the Group becomes a party to the contractual provisions of the instrument.
The Group derecognises a financial liability when its contractual obligations are discharged or cancelled or expire.
The Group classifies non-derivative financial liabilities into the other financial liabilities category. Such financial liabilities are recognised initially at fair value less any directly attributable transaction costs. Subsequent to initial recognition, these financial liabilities are measured at amortised cost using the effective interest method.
Other financial liabilities comprise loans and borrowings, bank overdrafts and trade and other payables.
Bank overdrafts that are repayable on demand and form an integral part of the Group’s cash management are included as a component of cash and cash equivalents for the purpose of the statement of cash flows.
С012 CONSOLIDATED FINANCIAL STATEMENTS Mostotrest
Non-controlling interest
In accordance with the Law on Limited Liability Companies No. 14-FZ dated 8 February 1998, each participant in a Russian limited liability company is entitled to withdraw from the company and receive the actual value of its participatory share in the company, if the company’s charter does not provide for the opposite. Such rights are recognized as a debt instrument and, therefore, profit or loss attributable to minority participants are recognized as finance costs.
(D) SHARE CAPITAL
Ordinary shares
Ordinary shares are classified as equity. Incremental costs directly attributable to issue of ordinary shares and share options are recognised as a deduction from equity, net of any tax effects.
Repurchase, disposal and reissue of share capital (treasury shares)
When share capital recognised as equity is repurchased, the amount of the consideration paid, which includes directly attributable costs, net of any tax effects, is recognised as a deduction from equity. Repurchased shares are classified as treasury shares and are presented in the reserve for own shares. When treasury shares are sold or reissued subsequently, the amount received is recognised as an increase in equity, and the resulting surplus or deficit on the transaction is presented in share premium.
(E) PROPERTY, PLANT AND EQUIPMENT
(i) Recognition and measurement
Items of property, plant and equipment are measured at cost less accumulated depreciation and accumulated impairment losses. The cost of property, plant and equipment at 1 January 2008, the date of transition to IFRSs, was determined by reference to its fair value at that date.
Cost includes expenditure that is directly attributable to the acquisition of the asset. The cost of self-constructed assets includes the cost of materials and direct labour, any other costs directly attributable to bringing the asset to a working condition for their intended use, the costs of dismantling and removing the items and restoring the site on which they are located, and capitalised borrowing costs. Purchased software that is integral to the functionality of the related equipment is capitalised as part of that equipment.
When parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items (major components) of property, plant and equipment.
The gain or loss on disposal of an item of property, plant and equipment is determined by comparing the proceeds from disposal with the carrying amount of property, plant and equipment, and is recognised net within other income/other expenses in profit or loss.
(ii) Subsequent costs
The cost of replacing a component of an item of property, plant and equipment is recognised in the carrying amount of the item if it is probable that the future economic benefits embodied within the component will flow to the Group and its cost can be measured reliably. The carrying amount of the replaced component is derecognised. The costs of the day-to-day servicing of property, plant and equipment are recognised in profit or loss as incurred.
С013 Annual report 2011
LEADING THE WAY
(iii) Depreciation
Items of property, plant and equipment are depreciated from the date that they are installed and are ready for use, or in respect of internally constructed assets, from the date that the asset is completed and ready for use. Depreciation is based on the cost of an asset less its residual value. Significant components of individual assets are assessed and if a component has a useful life that is different from the remainder of that asset, that component is depreciated separately.
Depreciation is recognised in profit or loss on a straight-line basis over the estimated useful lives of each part of an item of property, plant and equipment, since this most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset. Leased assets are depreciated over the shorter of the lease term and their useful lives unless it is reasonably certain that the Group will obtain ownership by the end of the lease term. Land is not depreciated.
The estimated useful lives of significant items of property, plant and equipment for the current and comparative periods are as follows:
2011 2010 Buildings and structures 14 23 Machinery and equipment 87 Vehicles 77 Other PPE 94
Depreciation methods, useful lives and residual values are reviewed at each financial year end and adjusted if appropriate.
(F) INTANGIBLE ASSETS
(i) Goodwill
Goodwill that arises on the acquisition of subsidiaries is included in intangible assets. For the measurement of goodwill at initial recognition, see note 3(a)(i).
Subsequent measurement
Goodwill is measured at cost less accumulated impairment losses. In respect of equity-accounted investees, the carrying amount of goodwill is included in the carrying amount of the investment, and an impairment loss on such an investment is not allocated to any asset, including goodwill, that forms part of the carrying amount of the equity-accounted investee.
(ii) Other intangible assets
Other intangible assets that are acquired by the Group, which have finite useful lives, are measured at cost less accumulated amortisation and accumulated impairment losses.
(iii) Subsequent expenditure
Subsequent expenditure is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure, including expenditure on internally generated goodwill and brands, is recognised in the profit or loss as incurred.
С014 CONSOLIDATED FINANCIAL STATEMENTS Mostotrest
(iv) Amortisation
Amortisation is calculated over the cost of the asset, or other amount substituted for cost, less its residual value.
Amortisation is recognised in profit or loss on a straight-line basis over the estimated useful lives of intangible assets, other than goodwill, from the date that they are available for use since this most closely reflects the expected pattern of consumption of future economic benefits embodied in the asset. The estimated useful lives of intangible assets are as follows:
• Construction contracts 1.5 years • Software 3 – 5 years
Amortisation methods, useful lives and residual values are reviewed at each financial year end and adjusted if appropriate.
(G) LEASED ASSETS
Leases in terms of which the Group assumes substantially all the risks and rewards of ownership are classified as finance leases. Upon initial recognition the leased asset is measured at an amount equal to the lower of its fair value and the present value of the minimum lease payments. Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that asset.
Other leases are operating leases and the leased assets are not recognised on the Group’s statement of financial position.
(H) INVENTORIES
Inventories are measured at the lower of cost and net realisable value. The cost of inventories is determined based on the weighted-average method, and includes expenditure incurred in acquiring the inventories, production or conversion costs and other costs incurred in bringing them to their existing location and condition. In the case of manufactured inventories and work in progress, cost includes an appropriate share of production overheads based on normal operating capacity.
Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses.
(I) AMOUNTS DUE FROM/ TO CUSTOMERS ON CONSTRUCTION CONTRACTS
Amounts due from customers on construction contracts represent the amount of construction contracts in progress less consideration received by the Group for works already performed. Amounts due from customers are presented separately in the statement of financial position for all contracts in which costs incurred plus recognised profits and losses exceeds consideration received.
If the consideration received for works performed to date exceeds costs incurred plus recognised profits and losses, then the difference is presented as Due to customers on construction contracts in the statement of financial position.
С015 Annual report 2011
LEADING THE WAY
Construction contracts in progress represent the gross amount expected to be collected from customers for contract work performed to date. It is measured at cost plus profit recognised to date (see note 3(m)(i)) less recognised losses. Cost includes all expenditure related directly to specific projects and an allocation of fixed and variable overheads incurred in the Group’s contract activities based on normal operating capacity.
(J) IMPAIRMENT
(i) Non-derivative fi nancial assets
A financial asset not carried at fair value through profit or loss is assessed at each reporting date to determine whether there is any objective evidence that it is impaired. A financial asset is impaired if objective evidence indicates that a loss event has occurred after the initial recognition of the asset, and that the loss event had a negative effect on the estimated future cash flows of that asset that can be estimated reliably.
Objective evidence that financial assets are impaired can include default or delinquency by a debtor, restructuring of an amount due to the Group on terms that the Group would not consider otherwise, indications that a debtor or issuer will enter bankruptcy, adverse changes in the payment status of borrowers or issuers in the Group, economic conditions that correlate with defaults or the disappearance of an active market for a security. In addition, for an investment in an equity security, a significant or prolonged decline in its fair value below its cost is objective evidence of impairment.
Loans and receivables and held-to-maturity investment securities
The Group considers evidence of impairment for loans and receivables and held-to-maturity investment securities at both a specific asset and collective level. All individually significant loans and receivables and held- to-maturity investment securities are assessed for specific impairment. All individually significant loans and receivables and held-to-maturity investment securities found not to be specifically impaired are then collectively assessed for any impairment that has been incurred but not yet identified. Loans and receivables and held- to-maturity investment securities that are not individually significant are collectively assessed for impairment by grouping together loans and receivables and held-to-maturity investment securities with similar risk characteristics.
In assessing collective impairment the Group uses historical trends of the probability of default, timing of recoveries and the amount of loss incurred, adjusted for management’s judgement as to whether current economic and credit conditions are such that the actual losses are likely to be greater or less than suggested by historical trends.
An impairment loss in respect of a financial asset measured at amortised cost is calculated as the difference between its carrying amount, and the present value of the estimated future cash flows discounted at the asset’s original effective interest rate. Losses are recognised in profit or loss and reflected in an allowance account against loans and receivables. Interest on the impaired asset continues to be recognised through the unwinding of the discount. When a subsequent event causes the amount of impairment loss to decrease, the decrease in impairment loss is reversed through profit or loss.
С016 CONSOLIDATED FINANCIAL STATEMENTS Mostotrest
Available-for-sale fi nancial assets
Impairment losses on available-for-sale financial assets are recognised by reclassifying the losses accumulated in the fair value reserve in equity, to profit or loss. The cumulative loss that is reclassified from equity to profit or loss is the difference between the acquisition cost, net of any principal repayment and amortisation, and the current fair value, less any impairment loss previously recognised in profit or loss. Changes in impairment provisions attributable to application of the effective interest method are reflected as a component of interest income.
If, in a subsequent period, the fair value of an impaired available-for-sale debt security increases and the increase can be related objectively to an event occurring after the impairment loss was recognised in profit or loss, then the impairment loss is reversed, with the amount of the reversal recognised in profit or loss. However, any subsequent recovery in the fair value of an impaired available-for-sale equity security is recognised in other comprehensive income.
(ii) Non-fi nancial assets
The carrying amounts of the Group’s non-financial assets, other than inventories and deferred tax assets are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. For goodwill and intangible assets that have indefinite lives or that are not yet available for use, the recoverable amount is estimated each year at the same time. An impairment loss is recognised if the carrying amount of an asset or its related cash-generating unit (CGU) exceeds its estimated recoverable amount.
The recoverable amount of an asset or CGU is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre- tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset or CGU. For the purpose of impairment testing, assets that cannot be tested individually are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or CGU. Subject to an operating segment ceiling test, for the purposes of goodwill impairment testing, CGUs to which goodwill has been allocated are aggregated so that the level at which impairment testing is performed reflects the lowest level at which goodwill is monitored for internal reporting purposes. Goodwill acquired in a business combination is allocated to groups of CGUs that are expected to benefit from the synergies of the combination.
The Group’s corporate assets do not generate separate cash inflows and are utilised by more than one CGU. Corporate assets are allocated to CGUs on a reasonable and consistent basis and tested for impairment as part of the testing of the CGU to which the corporate asset is allocated.
Impairment losses are recognised in profit or loss. Impairment losses recognised in respect of CGUs are allocated first to reduce the carrying amount of any goodwill allocated to the CGU (group of CGUs), and then to reduce the carrying amounts of the other assets in the CGU (group of CGUs) on a pro rata basis.
An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses recognised in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised.
С017 Annual report 2011
LEADING THE WAY
(K) EMPLOYEE BENEFITS
(i) Defi ned contribution plans
A defined contribution plan is a post-employment benefit plan under which an entity pays fixed contributions into a separate entity and will have no legal or constructive obligation to pay further amounts. Obligations for contributions to defined contribution pension plans, including Russia’s State pension fund, are recognised as an employee benefit expense in profit or loss in the periods during which services are rendered by employees. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in future payments is available. Contributions to a defined contribution plan that are due more than 12 months after the end of the period in which the employees render the service are discounted to their present value.
(ii) Other long-term employee benefi ts
The Group’s net obligation in respect of long-term employee benefits other than pension plans is the amount of future benefit that employees have earned in return for their service in the current and prior periods; that benefit is discounted to determine its present value, and the fair value of any related assets is deducted. The discount rate is the yield at the reporting date on Russia Government bonds that have maturity dates approximating the terms of the Group’s obligations and that are denominated in the same currency in which the benefits are expected to be paid. The calculation is performed using the projected unit credit method. Any actuarial gains or losses are recognised in profit or loss in the period in which they arise.
(iii) Short-term benefi ts
Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided. A liability is recognised for the amount expected to be paid under short-term cash bonus or profit-sharing plans if the Group has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee, and the obligation can be estimated reliably.
(L) PROVISIONS
A provision is recognised if, as a result of a past event, the Group has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. The unwinding of the discount is recognised as finance cost.
(i) Warranties
A provision for warranties is recognised when the underlying products or services are sold. The provision is based on historical warranty data and a weighting of all possible outcomes against their associated probabilities.
С018 CONSOLIDATED FINANCIAL STATEMENTS Mostotrest
(ii) Onerous contracts
A provision for onerous contracts is recognised when the expected benefits to be derived by the Group from a contract are lower than the unavoidable cost of meeting its obligations under the contract. The provision is measured at the present value of the lower of the expected cost of terminating the contract and the expected net cost of continuing with the contract. Before a provision is established, the Group recognises any impairment loss on the assets associated with that contract.
(M) REVENUE
(i) Construction contracts
Contract revenue includes the initial amount agreed in the contract plus any variations in contract work, claims and incentive payments, to the extent that it is probable that they will result in an inflow of economic benefits and can be measured reliably. As soon as the outcome of a construction contract can be estimated reliably, contract revenue is recognised in profit or loss in proportion to the stage of completion of the contract. Contract expenses are recognised as incurred unless they create an asset related to future contract activity.
The stage of completion is assessed by reference to the share of the costs incurred to date in the total estimated contract costs. The contract costs that relate to future activity on the contract are excluded from costs incurred to date in determining the stage of completion (deferred recognition) and recognized as inventories.
When the outcome of a construction contract cannot be estimated reliably, contract revenue is recognised only to the extent of contract costs incurred that are likely to be recoverable. An expected loss on a contract is recognised immediately in profit or loss.
(ii) Revenue from general contractor services
For certain operations the Group undertakes to perform general contractor services. In this type of contracts being the general contractor, the Group acts as a principal, and, therefore, recognizes revenue from ultimate customer and the related cost incurred from the subcontractors on gross basis.
(iii) Commissions
When the Group acts in the capacity of an agent rather than as the principal in a transaction, the revenue recognised is the net amount of commission earned by the Group.
(iv) Other revenue
Revenue from other activities is recognised when significant risks and rewards of ownership have been transferred to the buyer, recovery of the consideration is probable, the associated costs and possible return of goods can be estimated reliably, and there is no continuing management involvement with the goods, and the amount of revenue can be measured reliably.
С019 Annual report 2011
LEADING THE WAY
(N) OTHER EXPENSES
(i) Lease payments
Payments made under operating leases are recognised in profit or loss on a straight-line basis over the term of the lease. Lease incentives received are recognised as an integral part of the total lease expense, over the term of the lease.
Minimum lease payments made under finance leases are apportioned between the finance expense and the reduction of the outstanding liability. The finance expense is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability.
(ii) Determining whether an arrangement contains a lease
At inception of an arrangement, the Group determines whether such an arrangement is or contains a lease. This will be the case if the fulfilment of the arrangement is dependent on the use of a specific asset and the arrangement contains a right to use the asset.
At inception or upon reassessment of the arrangement, the Group separates payments and other consideration required by such an arrangement into those for the lease and those for other elements on the basis of their relative fair values. If the Group concludes for a finance lease that it is impracticable to separate the payments reliably, then an asset and a liability are recognised at an amount equal to the fair value of the underlying asset. Subsequently the liability is reduced as payments are made and an imputed finance charge on the liability is recognised using the Group’s incremental borrowing rate.
(iii) Social expenditure
To the extent that the Group’s contributions to social programs benefit the community at large and are not restricted to the Group’s employees, they are recognised in profit or loss as incurred.
(O) FINANCE INCOME AND COSTS
Finance income comprises interest income on funds invested (including available-for-sale financial assets), dividend income, gains on the disposal of available-for-sale financial assets, and gains on the remeasurement to fair value of any pre-existing interest in an acquiree. Interest income is recognised as it accrues in profit or loss, using the effective interest method. Dividend income is recognised in profit or loss on the date that the Group’s right to receive payment is established, which in the case of quoted securities is normally the ex-dividend date.
Finance costs comprise interest expense on borrowings, unwinding of the discount on provisions, and contingent consideration, losses on disposal of available-for-sale financial assets, and impairment losses recognised on financial assets (other than trade receivables).
Borrowing costs that are not directly attributable to the acquisition, construction or production of a qualifying asset are recognised in profit or loss using the effective interest method.
Foreign currency gains and losses are reported on a net basis as either finance income or finance cost depending on whether foreign currency movements are in a net gain or net loss position.
С020 CONSOLIDATED FINANCIAL STATEMENTS Mostotrest
(P) INCOME TAX
Income tax expense comprises current and deferred tax. Current tax and deferred tax are recognised in profit or loss except to the extent that it relates to a business combination, or items recognised directly in equity or in other comprehensive income.
Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years. Current tax payable also includes any tax liability arising from the declaration of dividends.
Deferred tax is recognised in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognised for:
• temporary differences on the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit or loss; • temporary differences related to investments in subsidiaries and jointly controlled entities to the extent that it is probable that they will not reverse in the foreseeable future; and • taxable temporary differences arising on the initial recognition of goodwill.
Deferred tax is measured at the tax rates that are expected to be applied to the temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date.
In determining the amount of current and deferred tax the Group takes into account the impact of uncertain tax positions and whether additional taxes, penalties and late-payment interest may be due. The Group believes that its accruals for tax liabilities are adequate for all open tax years based on its assessment of many factors, including interpretations of tax law and prior experience. This assessment relies on estimates and assumptions and may involve a series of judgments about future events. New information may become available that causes the Group to change its judgment regarding the adequacy of existing tax liabilities; such changes to tax liabilities will impact the tax expense in the period that such a determination is made.
Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax assets and liabilities, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realised simultaneously.
In accordance with the tax legislation of the Russian Federation, tax losses and current tax assets of a company in the Group may not be set off against taxable profits and current tax liabilities of other Group companies. In addition, the tax base is determined separately for each of the Group’s main activities and, therefore, tax losses and taxable profits related to different activities cannot be offset.
A deferred tax asset is recognised for unused tax losses, tax credits and deductible temporary differences, to the extent that it is probable that future taxable profits will be available against which they can be utilised. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised.
С021 Annual report 2011
LEADING THE WAY
(Q) EARNINGS PER SHARE
The Group presents basic and diluted earnings per share (“EPS”) data for its ordinary shares. Basic EPS is calculated by dividing the profit or loss attributable to ordinary shareholders of the Company by the weighted average number of ordinary shares outstanding during the period, adjusted for own shares held. Diluted EPS is determined by adjusting the profit or loss attributable to ordinary shareholders and the weighted average number of ordinary shares outstanding, adjusted for own shares held, for the effects of all dilutive potential ordinary shares, which comprise convertible notes and share options granted to employees.
(R) SEGMENT REPORTING
An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the Group’s other components. All operating segments’ operating results are reviewed regularly by the Group’s CEO, who is the Group’s chief operating decision maker, to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available.
Segment results that are reported to the Group’s CEO include items directly attributable to a segment as well as those that can be allocated on a reasonable basis.
Segment capital expenditure is the total cost incurred during the year to acquire property, plant and equipment, and intangible assets other than goodwill.
С022 CONSOLIDATED FINANCIAL STATEMENTS Mostotrest
4 New Standards and Interpretations
A number of new Standards, amendments to Standards and Interpretations are not yet effective as at 31 December 2011, and have not been applied in preparing these consolidated financial statements. Of these pronouncements, potentially the following will have an impact on the Group’s operations. The Group plans to adopt these pronouncements when they become effective.
• IAS 27 (2011) Separate Financial Statements will become effective for annual periods beginning on or after 1 January 2013. The amended standard carries forward the existing accounting and disclosure requirements of IAS 27 (2008) for separate financial statements with some clarifications. The requirements of IAS 28 (2008) and IAS 31 for separate financial statements have been incorporated into IAS 27 (2011). The amended standard will become effective for annual periods beginning on or after 1 January 2013. Early adoption of IAS 27 (2011) is permitted provided the entity also early-adopts IFRS 10, IFRS 11, IFRS 12 and IAS 28 (2011).
• IAS 28 (2011) Investments in Associates and Joint Ventures combines the requirements in IAS 28 (2008) and IAS 31 that were carried forward but not incorporated into IFRS 11 and IFRS 12. The amended standard will become effective for annual periods beginning of or after 1 January 2013 with retrospective application required. Early adoption of IAS 28 (2011) is permitted provided the entity also early-adopts IFRS 10, IFRS 11, IFRS 12 and IAS 27 (2011).
• IFRS 9 Financial Instruments will be effective for annual periods beginning on or after 1 January 2015. The new standard is to be issued in phases and is intended ultimately to replace International Financial Reporting Standard IAS 39 Financial Instruments: Recognition and Measurement. The first phase of IFRS 9 was issued in November 2009 and relates to the classification and measurement of financial assets. The second phase regarding classification and measurement of financial liabilities was published in October 2010. The remaining parts of the standard are expected to be issued during 2012. The Group recognises that the new standard introduces many changes to the accounting for financial instruments and is likely to have a significant impact on Group’s consolidated financial statements. The impact of these changes will be analysed during the course of the project as further phases of the standard are issued. The Group does not intend to adopt this standard early.
• IFRS 10 Consolidated Financial Statements will be effective for annual periods beginning on or after 1 January 2013. The new standard supersedes IAS 27 Consolidated and Separate Financial Statements and SIC-12 Consolidation – Special Purpose Entities. IFRS 10 introduces a single control model which includes entities that are currently within the scope of SIC-12 Consolidation – Special Purpose Entities. Under the new three- step control model, an investor controls an investee when it is exposed, or has rights, to variable returns from its involvement with that investee, has the ability to affect those returns through its power over that investee and there is a link between power and returns. Consolidation procedures are carried forward from IAS 27 (2008). When the adoption of IFRS 10 does not result a change in the previous consolidation or non- consolidation of an investee, no adjustments to accounting are required on initial application. When the adoption results a change in the consolidation or non-consolidation of an investee, the new standard may be adopted with either full retrospective application from date that control was obtained or lost or, if not practicable, with limited retrospective application from the beginning of the earliest period for which the application is practicable, which may be the current period. Early adoption of IFRS 10 is permitted provided an entity also early-adopts IFRS 11, IFRS 12, IAS 27 (2011) and IAS 28 (2011).
С023 Annual report 2011
LEADING THE WAY
• IFRS 12 Disclosure of Interests in Other Entities will be effective for annual periods beginning on or after 1 January 2013. The new standard contains disclosure requirements for entities that have interests in subsidiaries, joint arrangements, associates and unconsolidated structured entities. Interests are widely defined as contractual and non-contractual involvement that exposes an entity to variability of returns from the performance of the other entity. The expanded and new disclosure requirements aim to provide information to enable the users to evaluate the nature of risks associated with an entity’s interests in other entities and the effects of those interests on the entity’s financial position, financial performance and cash flows. Entities may early present some of the IFRS 12 disclosures early without a need to early-adopt the other new and amended standards. However, if IFRS 12 is early-adopted in full, then IFRS 10, IFRS 11, IAS 27 (2011) and IAS 28 (2011) must also be early-adopted.
• IFRS 13 Fair Value Measurement will be effective for annual periods beginning on or after 1 January 2013. The new standard replaces the fair value measurement guidance contained in individual IFRSs with a single source of fair value measurement guidance. It provides a revised definition of fair value, establishes a framework for measuring fair value and sets out disclosure requirements for fair value measurements. IFRS 13 does not introduce new requirements to measure assets or liabilities at fair value, nor does it eliminate the practicability exceptions to fair value measurement that currently exist in certain standards. The standard is applied prospectively with early adoption permitted. Comparative disclosure information is not required for periods before the date of initial application.
• Amendment to IAS 1 Presentation of Financial Statements: Presentation of Items of Other Comprehensive Income. The amendment requires that an entity present separately items of other comprehensive income that may be reclassified to profit or loss in the future from those that will never be reclassified to profit or loss. Additionally, the amendment changes the title of the statement of comprehensive income to statement of profit or loss and other comprehensive income. However, the use of other titles is permitted. The amendment shall be applied retrospectively from 1 July 2012 and early adoption is permitted.
Various Improvements to IFRSs have been dealt with on a standard-by-standard basis. All amendments, which result in accounting changes for presentation, recognition or measurement purposes, will come into effect not earlier than 1 January 2011. The Group has not yet analysed the likely impact of the improvements on its financial position or performance.
С024 CONSOLIDATED FINANCIAL STATEMENTS Mostotrest
5 Determination of fair values
A number of the Group’s accounting policies and disclosures require the determination of fair value, for both financial and non-financial assets and liabilities. Fair values have been determined for measurement and for disclosure purposes based on the following methods. When applicable, further information about the assumptions made in determining fair values is disclosed in the notes specific to that asset or liability.
(A) PROPERTY, PLANT AND EQUIPMENT
The fair value of property, plant and equipment recognised as a result of a business combination is based on market values. The market value of property is the estimated amount for which a property could be exchanged on the date of valuation between a willing buyer and a willing seller in an arm’s length transaction after proper marketing wherein the parties had each acted knowledgeably and willingly. The fair value of items of plant, equipment, fixtures and fittings is based on market approach and cost approaches using quoted market prices for similar items when available.
When no quoted market prices are available, the fair value of property, plant and equipment is primarily determined using depreciated replacement cost. This method considers the cost to reproduce or replace the property, plant and equipment, adjusted for physical, functional or economical depreciation, and obsolescence.
(B) INTANGIBLE ASSETS
The fair value of construction contracts acquired in a business combination is based on the discounted cash flows expected to be derived from the benefits of these contracts.
(C) EQUITY AND DEBT SECURITIES
The fair value of equity and debt securities is determined by reference to their quoted closing bid price at the reporting date, or if unquoted, determined using a valuation technique. Valuation techniques employed include market multiples and discounted cash flow analysis using expected future cash flows and a market-related discount rate. The fair value of held-to-maturity investments is determined for disclosure purposes only.
(D) TRADE AND OTHER RECEIVABLES
The fair value of trade and other receivables is estimated as the present value of future cash flows, discounted at the market rate of interest at the reporting date. This fair value is determined for disclosure purposes or when acquired in a business combination.
(E) NON-DERIVATIVE FINANCIAL LIABILITIES
Fair value, which is determined for disclosure purposes, is calculated based on the present value of future principal and interest cash flows, discounted at the market rate of interest at the reporting date. For finance leases the market rate of interest is determined by reference to similar lease agreements.
С025 Annual report 2011
LEADING THE WAY
6 Operating segments
(A) INFORMATION ABOUT REPORTABLE SEGMENTS
In 2010 the Group was organized into 17 operating segments that included 15 branches and 2 newly acquired subsidiaries. These business units are managed separately as they are located in different regions, operate different construction projects and require different technology strategies.
Given the significant business expansion due to the acquisitions of ETS and TSM, the Group put in place a new structure in early 2011 to develop synergies across the Group, make commercial decisions more quickly and improve performance. Under the new structure, the Group conducts its business through 3 major strategic business units:
• Mostotrest (which combines 15 former operating segments) – construction of bridges • ETS – engineering and principal contractor services • TSM – construction of highways and airports
The Group also revised its internal management reports due to the changes in (1) key financial measures used to assess the operating performance of the units, and (2) accounting basis used to prepare such reports. Effective 1 January 2011, financial information for strategic business units is prepared in accordance with the same accounting standards as those used to prepare the Group’s consolidated financial statements under IFRS. Financial information presented to the Group’s CEO is derived from the internal management reports. The Group’s CEO reviews operating performances of the three units on at least a quarterly basis and allocates resources on this basis.
Financial results of ETS and TSM for the comparative period include financial data from the dates on which the Company obtained control over these entities through 31 December 2010.
С026 CONSOLIDATED FINANCIAL STATEMENTS Mostotrest
Financial measure / Segment Mostotrest ETS TSM Total Eliminations Consolidated segments and other
2011 2011 2011 2011 2011 2011 Revenue 49,776 36,268 17,618 103,662 (4,666) 98,996 revenue by type of activity - construction of: - bridges and highways 42,382 14,710 9,173 66,265 (1,863) 64,402 - railway infrastructure facilities 3,230 6,646 1,251 11,127 (2,195) 8,932 - airfields and airports - 3,178 6,394 9,572 (307) 9,265 - ports and in-land water infrastructure facilities 61 5,442 - 5,503 - 5,503 - other infrastructure facilities 3,321 - - 3,321 - 3,321 - other facilities 206 6,027 100 6,333 (75) 6,258 other revenue 576 265 700 1,541 (226) 1,315 revenue by type of contractor: -external revenue 48,729 36,114 12,877 97,720 1,276 98,996 -intersegment revenue 1,047 154 4,741 5,942 (5,942) - Cost of sales (40,393) (33,484) (15,563) (89,440) 3,445 (85,995) including costs of: - services of subcontractors (14,527) (32,188) (5,939) (52,654) 4,663 (47,991) - materials (9,423) (227) (3,943) (13,593) 231 (13,362) - personnel expenses (8,328) - (2,197) (10,525) - (10,525) - amortisation of intangible assets on construction contracts - - - - (1,569) (1,569) - depreciation and amortisation (1,384) (77) (678) (2,139) (198) (2,337) - machinery, equipment, transport, and labor services provided by third parties (1,454) - (918) (2,372) - (2,372) - fuel (954) - (463) (1,417) - (1,417) - services of principal contractors (587) (93) (290) (970) 307 (663) - insurance (547) (497) (85) (1,129) - (1,129) other (3,189) (402) (1,050) (4,641) 11 (4,630) Gross profit 9,383 2,784 2,055 14,222 (1,221) 13,001 Other income and сosts, net (300) (1,087) (300) (1,687) (74) (1,761) Administrative expenses (4,029) (1,087) (600) (5,716) 9 (5,707) including depreciation and amortisation (97) (62) (20) (179) 9 (170) Operating profit 5,054 610 1,155 6,819 (1,286) 5,533 Finance income and costs, net 230 (660) (621) (1,051) 659 (392) including dividends payable and non- controlling interest - (600) (300) (900) 1,107 207 Share of loss of equity accounting investees, net of income tax (60) - - (60) - (60) Profit before income tax 5,224 (50) 534 5,708 (627) 5,081 Income tax expense (1,273) (105) (244) (1,622) 246 (1,376) Segment result 3,951 (155) 290 4,086 (381) 3,705
Capital expenditures 3,526 214 1,130 4,870 - 4,870
С027 Annual report 2011
LEADING THE WAY
Financial measure / Segment Mostotrest ETS TSM Total Eliminations Consolidated segments and other
31.12.2011 31.12.2011 31.12.2011 31.12.2011 31.12.2011 31.12.2011 Non-current assets 17,255 1,250 2,823 21,328 (760) 20,568 Current assets 54,283 14,295 13,504 82,082 (3,995) 78,087 including: Cash and cash equivalents 22,101 4,097 3,056 29,254 - 29,254 Other current assets 331 722 286 1,339 - 1,339 Inventories 5,097 520 942 6,559 - 6,559 Trade and other receivables 26,735 8,956 9,220 44,911 (3,995) 40,916 Income tax receivable 19 - - 19 - 19 Total assets 71,538 15,545 16,327 103,410 (4,755) 98,655 Non-current liabilities 1,652 1 305 1,958 (16) 1,942 including: Loans and borrowings 918 1 305 1,224 - 1,224 Other non-current liabilities 734 - - 734 (16) 718 Current liabilities 50,491 15,070 16,285 81,846 (3,809) 78,037 including: Loans and borrowings 6,125 3 280 6,408 - 6,408 Trade and other payables 44,264 14,645 15,817 74,726 (4,234) 70,492 Non-controlling interest - - - - 425 425 Other current liabilities 102 422 188 712 - 712 Total liabilities 52,143 15,071 16,590 83,804 (3,825) 79,979
Non-controlling interest (7) - - (7) - (7)
С028 CONSOLIDATED FINANCIAL STATEMENTS Mostotrest
Financial measure / Segment Mostotrest ETS TSM Total Eliminations Consolidated segments and other
2010 2010 2010 2010 2010 2010 Revenue 32,387 22,903 10,986 66,276 (5,997) 60,279 revenue by type of activity - construction of: - bridges and highways 21,543 15,761 4,257 41,561 (3,149) 38,412 - railway infrastructure facilities 8,275 1,530 1,001 10,806 (40) 10,766 - airfields and airports - 2,954 4,423 7,377 (2,073) 5,304 - ports and in-land water infrastructure facilities - 804 - 804 - 804 - other infrastructure facilities 1,664 386 - 2,050 - 2,050 - other facilities 529 1,070 314 1,913 (363) 1,550 other revenue 376 398 991 1,765 (372) 1,393 revenue by type of contractor: -external revenue 32,209 22,530 6,160 60,899 (620) 60,279 -intersegment revenue 178 373 4,826 5,377 (5,377) - Cost of sales (24,510) (21,445) (9,878) (55,833) 4,549 (51,284) including costs of: - services of subcontractors (5,692) (20,790) (1,535) (28,017) 5,004 (23,013) - materials (7,773) (72) (3,764) (11,609) 135 (11,474) - personnel expenses (6,153) - (1,018) (7,171) - (7,171) - amortisation of intangible assets on construction contracts - - - - (830) (830) - depreciation and amortisation (1,314) (47) (418) (1,779) (56) (1,835) - machinery, equipment, transport, and labor services provided by third parties (1,022) - (1,913) (2,935) - (2,935) - fuel (530) - (182) (712) - (712) - services of principal contractors (383) (121) (427) (931) 291 (640) - insurance (234) (293) (39) (566) - (566) other (1,409) (122) (582) (2,113) 5 (2,108) Gross profit 7,877 1,458 1,108 10,443 (1,448) 8,995 Other income and costs, net (129) (328) (74) (531) (196) (727) Administrative expenses (3,710) (568) (241) (4,519) (38) (4,557) including depreciation and amortisation (55) (16) (14) (85) (27) (112) Operating profit 4,038 562 793 5,393 (1,682) 3,711 Finance income and costs, net (1,048) (19) (129) (1,196) (34) (1,230) including dividends payable and non- controlling interest - (1,200) (200) (1,400) 1,367 (33) Share of loss of equity accounting investees, net of income tax (7) - - (7) - (7) Profit before income tax 2,983 543 664 4,190 (1,716) 2,474 Income tax expense (783) (120) (176) (1,079) 335 (744) Segment result 2,200 423 488 3,111 (1,381) 1,730
Capital expenditures 1,873 158 519 2,550 - 2,550
С029 Annual report 2011
LEADING THE WAY
Financial measure / Segment Mostotrest ETS TSM Total Eliminations Consolidated segments and other
31.12.2010 31.12.2010 31.12.2010 31.12.2010 31.12.2010 31.12.2010
Non-current assets 15,218 585 2,393 18,196 1,045 19,241 Current assets 36,774 11,958 3,532 52,264 (525) 51,739 including: Cash and cash equivalents 15,394 4,444 112 19,950 - 19,950 Other current assets 614 203 52 869 - 869 Inventories 3,153 71 714 3,938 - 3,938 Trade and other receivables 17,598 7,240 2,654 27,492 (525) 26,967 Income tax receivable 15 - - 15 - 15 Total assets 51,992 12,543 5,925 70,460 520 70,980 Non-current liabilities 583 89 136 808 126 934 including: Loans and borrowings 367 4 136 507 (16) 491 Other non-current liabilities 216 85 - 301 142 443 Current liabilities 34,609 11,824 6,341 52,774 943 53,717 including: Loans and borrowings 5,201 5 1,008 6,214 (30) 6,184 Trade and other payables 29,239 11,729 5,261 46,229 (103) 46,126 Non-controlling interest - - - - 1,076 1,076 Other current liabilities 169 90 72 331 - 331 Total liabilities 35,192 11,913 6,477 53,582 1,069 54,651
Non-controlling interest ------
С030 CONSOLIDATED FINANCIAL STATEMENTS Mostotrest
Major customers
In 2011, revenue from two customers individually exceeded 10% of the Group’s total revenue. Revenue from one of the customers accounted for RUB 12,355 million (12% of the Group’s total revenue) and is included in ETS and Mostotrest segments. The other customer contributed RUB 10,372 million (10% of the Group’s total revenue) and is included in Mostotrest segment.
In 2010, revenue from two customers individually exceeded 10% of the Group’s total revenue. Revenue from one of the customers accounted for RUB 10,825 million (18% of the Group’s total revenue) and is included in ETS and Mostotrest segments. The other customer contributed RUB 8,275 million (14% of the Group’s total revenue) and is included in Mostotrest segment.
7 Incorporation of new subsidiary and acquisition of non-controlling interests
(A) INCORPORATION OF NEW SUBSIDIARY IN 2011
On 17 May 2011, in conjunction with Kapsch TrafficCom Russia LLC and AEGROTUS Beteiligungsverwaltungs GmbH, the Company incorporated, by investing RUB 2 million cash in exchange for 51% equity interest in United Toll Systems (“UTS”), a limited liability company, in Moscow, Russia. UTS is to engage in the organization of the toll road management systems and their operation on the territory of the Russian Federation.
(B) ACQUISITION OF SUBSIDIARIES IN 2010
On 13 May 2010 the Group obtained control of OOO Transstroymekhanisatsiya (“TSM”), the company engaged in the construction and renovation of highways and airports with its own facilities for production of asphalt and concrete, by acquiring 50.1% of equity interest for a consideration of RUB 1,264 million, paid in cash.
On 28 June 2010 the Group obtained control over OOO Engtransstroy Corporation (“ETS”), a design and engineering company operating in the infrastructure construction industry, by acquiring 51% of equity interest for a consideration of RUB 2,220 million, paid in cash.
The acquisitions were made to expand geographical market and enter new market segments of construction industry including the highway and airports infrastructure facilities construction segments. This diversification was also an important step to fulfill the strategic goal of the Group to develop into the leading construction company in Russia.
С031 Annual report 2011
LEADING THE WAY
Identifi able assets acquired and liabilities assumed
The identifiable assets acquired and the liabilities of OOO Transstroymekhanisatsiya and OOO Engtransstroy Corporation assumed were as follows:
Mln RUB TSM ETS Total Property, plant and equipment 3,060 720 3,780 Intangible assets 583 1,818 2,401 Other non-current assets 371 88 459 Amounts due from customers for the construction contracts, trade and other receivables 2,012 2,768 4,780 Amounts due to customers, trade and other payables (6,073) (15,178) (21,251) Other current assets / liabilities, net 902 11,930 12,832 Long-term liabilities (554) (324) (878) Net identifiable assets, liabilities and contingent liabilities 301 1,822 2,123 Non-controlling interest (150) (893) (1,043) Acquirer's share in net identifiable assets 151 929 1,080 Goodwill on acquisition 1,113 1,291 2,404 Consideration paid 1,264 2,220 3,484 Cash acquired (306) (2,036) (2,342) Net cash outflow 958 184 1,142
Goodwill
Goodwill has been recognized as a result of the acquisitions as follows:
Mln RUB TSM ETS Total Total consideration transferred 1,264 2,220 3,484 Non-controlling interest, based on their proportionate interest in the recognised amounts of the assets and liabilities of the acquiree 150 893 1,043 Less value of identifiable assets (301) (1,822) (2,123) Goodwill 1,113 1,291 2,404
Goodwill is attributable mainly to the synergies expected to be achieved from integration of the acquired companies into the Group’s business.
There were no impairment of goodwill from the dates of acquisition of subsidiaries till the reporting date.
(C) ACQUISITION OF ASSOCIATE IN 2010
On 16 February 2010 the Group acquired a 25.002% equity interest in OAO Mostostroy-11 for a consideration of RUB 1,575 million paid in cash. The entity is a bridge-construction entity located in the West-Siberian region of the Russian Federation.
С032 CONSOLIDATED FINANCIAL STATEMENTS Mostotrest
The following summarizes the effect of this acquisition:
OAO Mostostroy 11
Mln RUB 2011 2010 Company's ownership interest at the beginning of the period 1,525 - Effect of increase in Company's ownership interest - 1,575 Share of comprehensive loss (60) (7) Dividends received (11) (43) Company's ownership interest at the end of the period 1,454 1,525
Assets and liabilities of the company at the acquisition date were as follows:
OAO Mostostroy 11
Mln RUB 2011 2010 date of acquisition Non-current assets 5,091 5,523 5,968 Current assets 4,607 4,271 3,131 Long-term liabilities 853 (889) (914) Short-term liabilities 3,698 (3,473) (2,550) Net identifiable assets, liabilities and contingent liabilities 5,147 5,432 5,635 Acquirer's interest in net identifiable assets and liabilities 1,288 1,359 1,409 Goodwill on acquisition 166 166 166 Consideration paid - - 1,575 Carrying amount of investments in equity accounting investees 1,454 1,525 1,575 Revenue 7,311 7,978 - Loss for the period (241) (30) -
8 Revenue
Mln RUB 2011 2010 Revenue from contracts for construction of: bridges and highways 64,402 38,412 airfields and airports 9,265 5,304 railway infrastructure facilities 8,932 10,766 ports and in-land water infrastructure facilities 5,503 804 other infrastructure facilities 3,321 2,050 other facilities 6,258 1,550 Total revenue from construction contracts 97,681 58,886 Other revenue 1,315 1,393 Total revenue 98,996 60,279
Below is the information on the geographical allocation of revenues from construction contracts. This allocation is made based on the geographical location of construction sites:
С033 Annual report 2011
LEADING THE WAY
Mln RUB 2011 2010 Southerm Federal District 37,486 23,036 Central Federal District 36,984 19,518 Volga Federal District 6,888 3,382 Far Eastern Federal District 5,872 2,888 Northwestern Federal District 5,320 6,921 Siberian Federal District 5,131 3,141 Total revenue from construction contracts 97,681 58,886
As at 31 December 2011 revenue from construction contracts for total amount of RUB 17,650 million (2010: RUB 0 million) were pledged as a security under guarantees issued to customers by banks on behalf of the Group.
9 Cost of sales
Mln RUB 2011 2010 Services of subcontractors 47,991 23,013 Materials 13,362 11,474 Personnel expenses 10,525 7,171 Depreciation and amortisation 3,906 2,665 Machinery, equipment, transport, and labor services provided by third parties 2,372 2,935 Fuel 1,417 712 Insurance 1,129 566 Services of principal contractors 663 640 Other 4,630 2,108 85,995 51,284
10 Administrative expenses
Mln RUB 2011 2010 Personnel expenses 3,307 2,417 Consulting and audit services 402 496 Social expenses 347 330 Taxes other than income tax 236 154 Rent expense 196 104 Depreciation and amortisation 170 112 Materials 125 109 Insurance 104 108 Bank fees 93 67 Charity 8 121 Other administrative expenses 719 539 5,707 4,557
С034 CONSOLIDATED FINANCIAL STATEMENTS Mostotrest
11 Other expenses
Mln RUB 2011 2010 Allowance for doubtful accounts receivable, prepayments and loans given 1,122 436 Provision for claims received 490 - Loss on disposal of property, plant and equipment 219 216 Other expenses 294 297 2,125 949
12 Personnel costs
Mln RUB 2011 2010 Wages and salaries 11,158 8,159 Contributions to State pension fund 2,674 1,429 13,832 9,588
13 Finance income and finance costs
Mln RUB 2011 2010 Recognised in profit or loss: Interest income on bank deposits 302 51 Non-controlling interest 207 - Interest income on loans given 27 31 Effect of discounting financial assets and liabilities -15 Foreign exchange gain -13 Other finance income 6 1 Total finance income 542 111
Interest expense on borrowings (360) (1,138) Interest expense on finance leases (305) (170) Effect of discounting financial assets and liabilities (255) - Foreign exchange loss (14) - Non-controlling interest - (33) Finance costs (934) (1,341) Net finance costs recognized in profit or loss (392) (1,230)
С035 Annual report 2011
LEADING THE WAY
14 Income tax expense
The Group’s applicable tax rate is the income tax rate of 20% for Russian companies (2010: 20%).
Mln RUB 2011 2010 Current tax expense Current year 1,553 1,216 Adjustments of prior years tax 13 48 1,566 1,264 Deferred tax expense Origination and reversal of temporary differences (190) (520) Total income tax expense recognised in profit or loss 1,376 744 Income tax recognised in other comprehensive income 8 (8) Total income tax expense 1,384 736
Reconciliation of eff ective tax rate:
2011 2010
Mln RUB % Mln RUB % Profit before income tax 5,081 100% 2,474 100% Income tax at applicable tax rate 1,016 20% 495 20% Non-deductible expenses 404 8% 255 10% Non-taxable income (72) (1%) (54) (2%) Adjustments of prior years tax 13 0% 48 2% Tax on dividends 15 0% - 0% 1,376 27% 744 30%
С036 CONSOLIDATED FINANCIAL STATEMENTS Mostotrest
15 Intangible assets
Mln RUB Construction Software Total contracts Actual cost Balance at 1 January 2010 -3333 Additions - 271 271 Acquisitions through business combinations 2,399 2 2,401 Balance at 31 December 2010 2,399 306 2,705 Additions -7979 Disposals - (8) (8) Balance at 31 December 2011 2,399 377 2,776
Amortisation and impairment losses Balance at 1 January 2010 -77 Amortisation for the year 830 22 852 Balance at 31 December 2010 830 29 859 Amortisation for the year 1,569 42 1,611 Disposals - (8) (8) Balance at 31 December 2011 2,399 63 2,462
Carrying amounts At 1 January 2010 - 26 26 At 31 December 2010 1,569 277 1,846 At 31 December 2011 - 314 314
Intangible asset on construction contracts was recognised as a result of the acquisition of subsidiaries TSM and ETS, see note 7 (b).
С037 Annual report 2011
LEADING THE WAY
16 Property, plant and equipment
Mln RUB Land Buildings Machinery Vehicles Other Construction Total and and in progress structures equipment Cost or deemed cost Balance at 1 January 2010 312 4,414 4,465 2,071 319 204 11,785 Additions 2 259 671 791 253 303 2,279 Acquisitions through business combinations - 319 1,481 1,677 149 154 3,780 Disposals (1) (52) (210) (228) (177) (19) (687) Transfers - 274 33 13 7 (327) - Balance at 31 December 2010 313 5,214 6,440 4,324 551 315 17,157 Additions 1 933 1,792 1,034 117 914 4,791 Disposals (2) (74) (308) (283) (133) (146) (946) Transfers 2 349 418 (337) 106 (538) - Balance at 31 December 2011 314 6,422 8,342 4,738 641 545 21,002
Depreciation and impairment losses Balance at 1 January 2010 - 335 1,318 665 46 - 2,364 Depreciation for the year - 224 917 628 156 - 1,925 Impairment loss - - (4) - - - (4) Disposals - (14) (35) (56) (122) - (227) Balance at 31 December 2010 - 545 2,196 1,237 80 - 4,058 Depreciation for the year - 302 1,094 913 170 - 2,479 Disposals - (22) (160) (146) (119) - (447) Balance at 31 December 2011 - 825 3,130 2,004 131 - 6,090
Carrying amounts Balance at 1 January 2010 312 4,079 3,147 1,406 273 204 9,421 Balance at 31 December 2010 313 4,669 4,244 3,087 471 315 13,099 Balance at 31 December 2011 314 5,597 5,212 2,734 510 545 14,912
С038 CONSOLIDATED FINANCIAL STATEMENTS Mostotrest
In 2011 depreciation expense of RUB 2,337 million (2010: RUB 1,835 million) was charged to cost of sales, RUB 128 million (2010: RUB 90 million) to administrative expenses, and RUB 14 million (2010: RUB 0 million) to work-in-progress.
(A) SECURITY
No material assets were pledged at 31 December 2011 and 2010.
(B) LEASED PROPERTY, PLANT, AND EQUIPMENT
The Group leases production equipment under a number of finance lease agreements. Certain leases provide the Group with the option to purchase the asset at a beneficial price at the end of the lease terms. At 31 December 2011 the net book value of leased property, plant, and equipment was RUB 3,129 million (2010: RUB 2,852 million). The leased property, plant, and equipment secure lease obligations.
17 Other assets
Mln RUB 2011 2010 Loans given 394 717 Available-for-sale investments 196 268 Bank deposits with maturities more than 3 months 979 200 Other investments 30 - 1,599 1,185 Non-current 260 316 Current 1,339 869 1,599 1,185
Available-for-sale investments comprise equity instruments of financial institutions that are mainly listed either on the RTS or MICEX stock exchanges. The fair value of available-for-sale equity investments was determined by reference to their quoted market prices.
The Group’s exposure to credit, currency and interest rate risks related to other investments is disclosed in note 27.
С039 Annual report 2011
LEADING THE WAY
18 Deferred tax assets and liabilities
(A) RECOGNISED DEFERRED TAX ASSETS AND LIABILITIES
Deferred tax assets and liabilities are attributable to the following:
Mln RUB Assets Liabilities Net
2011 2010 2011 2010 2011 2010 Property, plant and equipment - - (1,327) (1,347) (1,327) (1,347) Intangible assets - - - (314) - (314) Investments - - (2) (25) (2) (25) Inventories 443 261 (149) (50) 294 211 Trade and other receivables 325 146 (11) (5) 314 141 Construction contracts (including due from and due to customers) 368 926 - (13) 368 913 Loans and borrowings 8 8 (117) (148) (109) (140) Trade and other paybles 124 57 - - 124 57 Provisions 106 54 - - 106 54 Other 60 114 - (26) 60 88 Tax loss carry-forwards 12 4 - - 12 4 Net tax assets/liabilities 1,446 1,570 (1,606) (1,928) (160) (358) Set off of tax (1,051) (1,570) 1,051 1,570 - - Tax assets 395 - - - 395 - Tax liabilities - - (555) (358) (555) (358)
(B) UNRECOGNISED DEFERRED TAX LIABILITY
At 31 December 2011 the temporary differences associated with investments in subsidiaries amounted to RUR 610 million. They are expected to be reversed in the foreseeble future through distribution of dividends to the Company. The deferred tax assets and liabilities were not recognised as at 31 December 2011 since such dividends are taxed at 0% rate.
С040 CONSOLIDATED FINANCIAL STATEMENTS Mostotrest
(C) MOVEMENT IN TEMPORARY DIFFERENCES DURING THE YEAR
Mln RUB 1 January 2010 Recognised in Recognised Acquisition 31 December profit or loss in other through 2010 comprehensive business income combination Property, plant and equipment (1,067) 148 - (428) (1,347) Intangible assets - 166 - (480) (314) Investments 21 (38) (8) - (25) Inventories 4 - - 207 211 Trade and other receivables (5) 130 - 16 141 Construction contracts (including due from and due to customers) 668 (25) - 270 913 Trade and other payables - 26 - 31 57 Loans and borrowings 70 (77) - (133) (140) Provisions (1) 51 - 4 54 Other (47) 136 - (1) 88 Tax loss carry-forwards 1 3 - - 4 (356) 520 (8) (514) (358)
Mln RUB 1 January 2011 Recognised in Recognised 31 December profit or loss in other 2011 comprehensive income Property, plant and equipment (1,347) 20 - (1,327) Intangible assets (314) 314 - - Investments (25) 15 8 (2) Inventories 211 83 - 294 Trade and other receivables 141 173 - 314 Construction contracts (including due from and due to customers) 913 (545) - 368 Trade and other payables 57 67 - 124 Loans and borrowings (140) 31 - (109) Provisions 54 52 - 106 Other 88 (28) - 60 Tax loss carry-forwards 4 8 - 12 (358) 190 8 (160)
19 Inventories
Mln RUB 2011 2010 Construction materials 6,314 3,799 Work in progress 245 139 6,559 3,938
No inventories were pledged at 31 December 2011. At 31 December 2010 inventories with a carrying amount of RUB 1,496 million were pledged to secure loans and borrowings (see Note 25).
С041 Annual report 2011
LEADING THE WAY
20 Construction contracts in progress
Mln RUB 2011 2010 Progress billings 180,039 105,412 Unbilled revenue 3,945 - Billed in excess of contract revenue recognized - (1,905) Contract revenue accumulated to the period end 183,984 103,507 Contract costs accumulated to the period end (157,814) (87,066) Recognised profits less recognised losses 26,170 16,441 Contract revenue accumulated to the period end 183,984 103,507 Progress payments and advances received (229,521) (120,836) Net payables to customers of acquired subsidiaries - (5,288) Net payables to customers (45,537) (22,617) Due from customers 7,873 7,084 Due to customers (53,410) (29,701) (45,537) (22,617) Retentions 1,681 558
The retentions on construction contracts are amounts of progress billings that are not paid until the satisfaction of conditions specified in the contract for the payment of such amounts or until defects have been rectified.The retentions are measured at the fair value of the consideration receivable based on the expected timing of cash inflows.
21 Trade and other receivables
Mln RUB 2011 2010 Trade receivables 3,126 1,004 Value added tax on advances from customers 9,332 4,776 Security deposits for participation in tenders 3,287 - Value added tax recoverable on purchases 142 119 Taxes other than income tax 15 10 Other receivables 700 286 16,602 6,195 Non-current 376 51 Current 16,226 6,144 16,602 6,195
The Group’s exposure to credit and currency risks and impairment losses related to trade and other receivables are disclosed in notes 27(b) and 27(d)(i).
С042 CONSOLIDATED FINANCIAL STATEMENTS Mostotrest
22 Cash and cash equivalents
Mln RUB 2011 2010 Petty cash 21 Cash at banks 4,453 4,582 Bank deposits with maturities less than 3 months 24,799 15,367 29,254 19,950
The Group’s exposure to interest rate risk and a sensitivity analysis for financial assets and liabilities are disclosed in note 27.
23 Capital and reserves
(A) SHARE CAPITAL
Number of shares unless otherwise stated
Ordinary shares
2011 2010 Authorised shares 282,215,500 282,215,500 Par value 0.14 RUB 0.14 RUB
On issue at 1 January 281,731,100 1,241,200 Effect of split of shares 200 for 1 - 246,998,800 On issue after share split 281,731,100 248,240,000 Issued for cash - 33,975,500 Sold for cash 332,500 - Acquired for cash (2,300,327) (484,400) On issue at end of period, fully paid 279,763,273 281,731,100
Ordinary shares
All shares rank equally with regard to the Company’s residual assets.
The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at shareholders’ meetings. In respect of the Company’s shares that are held by the Group, all rights are suspended until those shares are reissued.
The share capital of RUB 35 million was formed prior to 31 December 2002, when the Russian economy was considered to be hyperinflationary for IFRS purposes. Therefore the share capital was adjusted for the effect of hyperinflation by RUB 96 million as at 31 December 2002. As a result, the carrying value of the share capital amounted to RUB 131 million since that date until the issue of additional shares in 2010.
On 30 June 2010 the General Meeting of the shareholders approved the split of the Company’s outstanding shares in the ratio of 200 for 1 and additional issue of up to 248,240,000 ordinary shares with par value of RUB 0.14 each.
On 2 September 2010 the Federal Commission for the Securities Market registered the split of the Company’s outstanding shares in the ratio of 200 for 1. As a result, the number of outstanding shares after the split amounted to 248,240,000 with the par value of RUB 0.14 per share.
С043 Annual report 2011
LEADING THE WAY
During the period from 9 November to 9 December 2010 the Company issued 33,975,500 additional ordinary shares with the par value of RUB 0.14 per share for a consideration of RUB 193/USD 6.25 per share by way of an open subscription under the Russian law.
The changes in the Company’s Charter relating to the additional issue of shares were registered in January 2011 resulting in an increase of the share capital by RUB 5 million. The difference in the amount of RUB 6,180 million between the consideration received of RUB 6,185 million and the par value of the shares issued of RUB 5 million was recognized in the additional paid-in capital during the year ended 31 December 2011.
(B) RESERVE FOR ACQUISITION OF OWN SHARES
The reserve for aqusition of the Company’s own shares represents the cost of the Company’s shares held by the Group. At the reporting date the Company held 2,452,227 (2010: 484,400) of its own shares.
During the year ended 31 December 2010 Company redeemed 484,400 ordinary shares for cash consideration of RUB 68 million.
During the year ended 31 December 2011 the minority shareholders of the Company exercised their rights to demand mandatory redemption of the shares by the Company as provided by the applicable Russian law. The Company redeemed 2,300,237 shares with nominal value of RUB 0.14 per share for RUB 234.59 per share (RUB 539 million).
During the year ended 31 December 2011 the Company re-sold 332,500 treasury shares for cash consideration of RUB 58 million. The difference of RUB 12 million between the consideration received and the par value of the treasury shares was recorded in the additional paid-in capital.
(C) DIVIDENDS
In accordance with Russian legislation the Company’s distributable reserves are limited to the balance of retained earnings as recorded in the Company’s statutory financial statements prepared in accordance with Russian Accounting Principles.
Dividends in the amount of RUB 845 million, or RUB 3.00 per share were accrued during the year ended 31 December 2011 (2010: RUB 801 million, or RUB 3.23 per share). Out of RUB 845 million, RUB 843 million dividends were paid in 2011.
24 Earnings per share
The calculation of basic earnings per share at 31 December 2011 was based on the profit attributable to the ordinary shareholders of RUB 3,714 million (2010: RUB 1,730 million), and a weighted average number of ordinary shares outstanding of 280,416,951 (2010: 248,199,633), calculated as shown below. The Company does not have dilutive potential ordinary shares.
2011 2010 Issued shares at 1 January 247,755,600 1,241,200 Effect of split shares in September 2010 - 246,998,800 Effect of share issue on 12 January 2011 33,975,500 - Effect of redemption of own shares (1,314,149) (40,367) Weighted-average number of shares for the year ended 31 December 280,416,951 248,199,633 Profit attributed to shareholders (mln RUB) 3,714 1,730 Basic and diluted earnings per share (RUB) 13.24 6.97
С044 CONSOLIDATED FINANCIAL STATEMENTS Mostotrest
25 Loans and borrowings
This note provides information about the contractual terms of the Group’s interest-bearing loans and borrowings, which are measured at amortised cost. For more information about the Group’s exposure to interest rate, foreign currency and liquidity risk, see note 27.
Mln RUB 2011 2010 Current liabilities Secured bank loans - 700 Unsecured bank loans 5,541 4,914 Current portion of finance lease liabilities 867 570 6,408 6,184 Non-current liabilities Finance lease liabilities 1,224 491 1,224 491
Total loans and borrowings 7,632 6,675
Finance lease liabilities are payable as follows:
Mln RUB Future minimum Interest Present value of lease payments minimum lease payments 2010 Less than one year 705 135 570 Between 1 and 5 years 551 60 491 1,256 195 1,061 2011 Less than one year 1,127 260 867 Between 1 and 5 years 1,384 160 1,224 2,511 420 2,091
The carrying amounts of substantially all of the Group’s loans and borrowings are denominated in RUB.
The bank loans are attracted in RUB under fixed and floating interest rates based primarily on the MosPrime 3M rate. The weighted-average effective interest rates at the reporting date were as follows:
2011 2010 Bank loans 6.8% 7.7% Finance lease liabilities 13.2% 20.7%
The outstanding bank loans for total amount of RUB 700 million at 31 December 2010 were secured by inventories with the carrying amount of RUB 1,496 million, see Note 19.
Finance lease liabilities are secured by the leased assets, see Note 16.
С045 Annual report 2011
LEADING THE WAY
26 Trade and other payables
Mln RUB 2011 2010 Trade payables 8,107 9,186 Value added taх payables 4,524 3,500 Value added tax on advances to suppliers 2,414 1,499 Payables to personnel 1,524 1,208 Taxes payable other than income tax and value added tax 381 281 Other payables and accrued expenses 295 836 17,245 16,510 Long-term 163 85 Short-term 17,082 16,425 17,245 16,510
The Group’s exposure to currency and liquidity risk related to trade and other payables is disclosed in note 27(d)(i) and 27(c).
27 Financial instruments and risk management
(A) OVERVIEW
The Group has exposure to the following risks from its use of financial instruments:
• credit risk • liquidity risk • market risk
This note presents information about the Group’s exposure to each of the above risks, the Group’s objectives, policies and processes for measuring and managing risk, and the Group’s management of capital. Further quantitative disclosures are included throughout these consolidated financial statements.
Risk management framework
The Board of Directors has overall responsibility for the establishment and oversight of the Group’s risk management framework. The management is responsible for developing and monitoring the Group’s risk management policies. The management reports regularly to the Board of Directors on its activities.
The Group’s risk management policies are established to identify and analyse the risks faced by the Group, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the Group’s activities. The Group, through its training and management standards and procedures, aims to develop a disciplined and constructive control environment in which all employees understand their roles and obligations.
С046 CONSOLIDATED FINANCIAL STATEMENTS Mostotrest
The Group’s Audit Committee oversees how management monitors compliance with the Group’s risk management policies and procedures and reviews the adequacy of the risk management framework in relation to the risks faced by the Group. The Group’s Audit Committee is assisted in its oversight role by Internal Audit. Internal Audit undertakes both regular and ad hoc reviews of risk management controls and procedures, the results of which are reported to the Audit Committee.
(B) CREDIT RISK
Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Group’s receivables from customers, loans given and investment securities.
(i) Exposure to credit risk
The carrying amount of financial assets represents the maximum credit exposure. The maximum exposure to credit risk at the reporting date was:
Carrying amount
Mln RUB 2011 2010 Available-for-sale financial assets 196 268 Amounts due from customers on construction contracts 7,873 7,084 Loans and receivables 7,507 2,007 Bank deposits with maturities more than 3 months 979 200 Cash and cash equivalents 29,254 19,950 45,809 29,509
(ii) Trade and other receivables
The Group’s exposure to credit risk is influenced mainly by the individual characteristics of each customer. However, management also considers the demographics of the Group’s customer base, including the default risk of the industry and country, in which customers operate, as these factors may have an influence on credit risk, particularly in the currently deteriorating economic circumstances. There is no concentration of credit risk geographically or with respect to sales transactions with a single customer.
The management has established a credit policy under which each new customer is analysed individually for creditworthiness before the Group’s standard payment and delivery terms and conditions are offered. The Group’s review includes external ratings, when available, and in some cases bank references. Purchase limits are established for each customer, and represent the maximum open amount without requiring approval from the management; these limits are reviewed quarterly. Customers that fail to meet the Group’s benchmark creditworthiness may transact with the Group only on a prepayment basis.
In monitoring customer credit risk, customers are grouped according to their credit characteristics, including whether they are an individual or legal entity, whether they are a wholesale, retail or end-user customer, geographic location, industry, aging profile, maturity and existence of previous financial difficulties. Customers that are graded as “high risk” are placed on a restricted customer list and monitored by the management, and future sales are made on a prepayment basis with approval of the management.
С047 Annual report 2011
LEADING THE WAY
The Group establishes an allowance for impairment that represents its estimate of incurred losses in respect of trade and other receivables and investments. The main components of this allowance are a specific loss component that relates to individually significant exposures, and a collective loss component established for groups of similar assets in respect of losses that have been incurred but not yet identified. The collective loss allowance is determined based on historical data of payment statistics for similar financial assets.
Impairment losses
The aging of trade and other receivables and amounts due from customers on construction contracts at the reporting date was as follows:
Mln RUB Gross Impairment Gross Impairment
2011 2011 2010 2010 Trade and other receivables Not past due 5,701 - 1,070 - Past due 0-183 days 1,327 (3) 307 (134) Past due more than 183 days 702 (614) 429 (382) Amounts due from customers on construction contracts Not past due 7,908 (35) 7,126 (42) 15,638 (652) 8,932 (558)
Based on historic default rates, the Group believes that, apart from the above, no impairment allowance is necessary in respect of trade receivables not past due or past due by up to 183 days; the main portion of the trade receivables balance relates to customers that have a good track record with the Group.
The allowance accounts in respect of trade receivables are used to record impairment losses unless the Group is satisfied that no recovery of the amount owing is possible; at that point the amounts are considered irrecoverable and are written off against the financial asset directly. At 31 December 2011 and 2010 the Group did not have any collective impairment on its trade receivables or its held-to-maturity investments.
In addition, the majority of the balance of construction in progress due from customers (note 20) is from government agencies and other public bodies, therefore, there is a concentration of credit risk with such type of customers.
(iii) Investments
The Group limits its exposure to credit risk by only investing in liquid securities. Management actively monitors credit ratings and given that the Group only has invested in securities with high credit ratings, management does not expect any counterparty to fail to meet its obligations.
(iv) Cash and cash equivalents
The Group held cash and cash equivalents of RUB 29,254 million at 31 December 2011 (2010: RUB 19,950 million), which represents its maximum credit exposure on these assets. The cash and cash equivalents are held with bank and financial institution counterparties, which are rated BB to BBB+, based on rating agency Fitch and Standard & Poor’s ratings.
С048 CONSOLIDATED FINANCIAL STATEMENTS Mostotrest
(v) Guarantees
The financial guarantees provided to third parties and outstanding as at 31 December 2011 amounted to RUB 299 million (2010: no guarantees were outstanding).
(C) LIQUIDITY RISK
Liquidity risk is the risk that the Group will encounter difficulty in meeting the obligations associated with its financial liabilities that are settled by delivering cash or another financial asset. The Group’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group’s reputation.
The Group maintains several lines of credit with large banks operating in Russia.
The following are the contractual maturities of financial liabilities, including estimated interest payments and excluding the impact of netting agreements.
С049 Annual report 2011
LEADING THE WAY
Mln RUB Carrying Contractual 0-6 mth 6-12 mth 1-2 yrs 2-3 yrs over 3 yrs amount cash flows 31 December 2011 Non-derivative financial liabilities Bank loans 5,541 5,797 204 5,593 - - - Finance lease liabilities 2,091 2,511 597 530 896 466 22 Trade payables 8,107 8,107 6,363 1,721 23 - - Non-controlling interest 425 425 139 286 - - - 16,164 16,840 7,303 8,130 919 466 22 31 December 2010 Non-derivative financial liabilities Bank loans 5,614 5,782 3,912 1,870 - - - Finance lease liabilities 1,061 1,256 353 352 358 183 10 Trade payables 9,186 9,186 6,870 2,316 - - - Non-controlling interest 1,076 1,076 228 848 - - - 16,937 17,300 11,363 5,386 358 183 10
С050 CONSOLIDATED FINANCIAL STATEMENTS Mostotrest
(D) MARKET RISK
Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity prices will affect the Group’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return.
(i) Currency risk
As at 31 December 2011 and 2010 the Group was not exposed to significant currency risks.
(ii) Interest rate risk
Changes in interest rates impact primarily loans and borrowings by changing either their fair value (fixed rate debt) or their future cash flows (variable rate debt). Management does not have a formal policy of determining how much of the Group’s exposure should be to fixed or variable rates. However, at the time of raising new loans or borrowings management uses its judgment to decide whether it believes that a fixed or variable rate would be more favourable to the Group over the expected period until maturity.
Profile
At the reporting date the interest rate profile of the Group’s interest-bearing financial instruments was:
Mln RUB Carrying amount
2011 2010 Fixed rate instruments Financial assets 1,373 917 Financial liabilities (7,632) (3,263) (6,259) (2,346) Variable rate instruments Financial liabilities - (3,412)
Fair value sensitivity analysis for fixed rate instruments
The Group does not account for any fixed rate financial instruments as fair value through profit or loss or as available-for-sale. Therefore a change in interest rates at the reporting date would not have an effect in profit or loss or in equity.
Cash flow sensitivity analysis for variable rate instruments
A change of 100 basis points in interest rates at the reporting date would have no material impact on equity and profit or loss of the Group.
(iii) Other market price risk
Management of the Group monitors the mix of debt and equity securities in its investment portfolio based on market indices. Material investments within the portfolio are managed on an individual basis and all buy and sell decisions are approved by the management. The primary goal of the Group’s investment strategy is to maximise investment returns.
С051 Annual report 2011
LEADING THE WAY
The Group does not enter into commodity contracts other than to meet the Group’s expected usage and sale requirements; such contracts are not settled net.
The majority of the Group’s equity investments are listed either on the RTS or MICEX stock exchanges. For such investments, classified as instruments available for sale, an increase of the RTS index or MICEX index by 5% at the reporting date, would lead to an increase in shareholders’ equity of RUB 7 million after tax (2010: increase by RUB 9 million); similar reduction in these indices would lead to a decrease in shareholders’ equity of 7 million after tax (2010: decrease of RUB 9 million. Such sensitivity analysis of the fair value reflects the sensitivity of each equity instrument to the appropriate market index.
(E) FAIR VALUES VERSUS CARRYING AMOUNTS
The fair values of financial assets and liabilities as at the reporting dates were not significantly different from their carrying amounts. The basis for determining fair values is disclosed in note 5. Inputs for the valuation of the available-for-sale financial assets are primarily based on the observable market data (hierarchy level 1).
(F) CAPITAL MANAGEMENT
The Group has no formal policy for capital management but management seeks to maintain a sufficient capital base for meeting the Group’s operational and strategic needs and to maintain confidence of market participants. This is achieved with efficient cash management, constant monitoring of Group’s revenues and profit, and long- term investment plans mainly financed by the Group’s operating cash flows. With these measures the Group aims for steady profits growth.
28 Operating leases
Non-cancellable operating lease rentals are payable as follows:
Mln RUB 2011 2010 Less than 1 year 218 133 From 1 to 5 years 343 147 More than 5 years 739 763 1,300 1,043
The Group leases a number of land plots, warehouses and production equipment under operating leases. The leases typically run for an initial period of 5 to 49 years for land plots, one to two years for production equipment and other property, with an option to renew the lease after that date. Lease payments are usually increased annually to reflect market rentals.
Since the title to land plots and other property does not pass to the Group, the lease payments are regularly revised based on the market rates, and the Group does not have an interest in the residual value of the leased property, all the risks and rewards incidential to ownership of these assets remain with the lessor. As such, the Group classifies these leases as operating leases.
During the year ended 31 December 2011 the Group recognized RUB 439 million operating lease expenses in the profit or loss (2010: RUB 319 million).
С052 CONSOLIDATED FINANCIAL STATEMENTS Mostotrest
29 Capital commitments
As at 31 December 2011 and 2010 the Group did not have significant contractual obligations to purchase property, plant and equipment.
30 Contingencies
(A) INSURANCE
The insurance industry in the Russian Federation is in a developing state and many forms of insurance protection common in other parts of the world are not yet generally available. The Group does not have full coverage for its plant facilities, business interruption, or third party liability in respect of property or environmental damage arising from accidents on Group property or relating to Group operations. Until the Group obtains adequate insurance coverage, there is a risk that the loss or destruction of certain assets could have a material adverse effect on the Group’s operations and financial position.
The Group is responsible for the violation of the Law on Urban Planning, including for causing injury to life, health or property of third parties as a result of conducting construction works or defects in construction, renovation, overhaul of capital construction assets. The Group will also be held responsible for accidental loss of or damage to property being constructed. In order to reduce the risk of losses and obligations to third parties as a consequence of conducting construction works, the Group has obtained full insurance coverage against civil liabilities arising under the construction contracts in accordance with the terms of these contracts.
(B) WARRANTIES
The Group has certain warranty obligations under construction contracts terms of which range from one to seven years. The Group performed analysis of historical data on actual compensations paid and defects rectified under these warranties for the past seven years. Based on this analysis, the Group concluded that the probability of the constructions works carried out during the reporting period will not satisfy the quality conditions specified in the contract and require repair, is low. Therefore the Group did not recognize a warranty liability on construction contracts as at the reporting date.
The retentions held by customers under the construction contracts are usually returned in full.
(C) LITIGATION
As at 31 December 2011 and 2010 the Group was not engaged in litigations, the outcome of which might have material effect on the consolidated financial statements.
С053 Annual report 2011
LEADING THE WAY
(D) TAXATION CONTINGENCIES
The taxation system in the Russian Federation continues to evolve and is characterised by frequent changes in legislation, official pronouncements and court decisions, which are sometimes contradictory and subject to varying interpretation by different tax authorities. Taxes are subject to review and investigation by a number of authorities, which have the authority to impose severe fines, penalties and interest charges. A tax year remains open for review by the tax authorities during the three subsequent calendar years; however, under certain circumstances a tax year may remain open longer. Recent events within the Russian Federation suggest that the tax authorities are taking a more assertive and substance-based position in their interpretation and enforcement of tax legislation.
These circumstances may create tax risks in the Russian Federation that are substantially more significant than in other countries. Management believes that it has provided adequately for tax liabilities based on its interpretations of applicable Russian tax legislation, official pronouncements and court decisions. However, the interpretations of the relevant authorities could differ and the effect on these consolidated financial statements, if the authorities were successful in enforcing their interpretations, could be significant.
Tax compliance of the Group’s suppliers
The Group regularly enters into transactions with various suppliers. These entities are fully responsible for their own tax and accounting compliance. However, due to existing tax authorities’ practice, if these entities’ tax compliance is challenged by the tax authorities as not being in full conformity with the applicable tax legislation, this may result in additional tax risks for the Group. Should these suppliers be successfully challenged, the Group may become liable to additional tax payments, although management of these entities is primarily responsible for the correctness and timeliness of the entities’ tax payments. Management of the Group believes that it is not practicable to estimate the financial effect of potential tax liabilities, which ultimately could be imposed on the Group due to transactions with suppliers. However, if such liabilities were imposed, the amounts involved, including penalties and interest, could be material.
If the cases described above were successfully challenged by the Russian tax authorities, the additional payments could become due together with penalties, ranging from 20% – 40% of the amount of underpaid taxes, and late-payment interest. Management has not provided any amounts in respect of such obligations in these consolidated financial statements as it believes that it is possible, but not probable, that an outflow of economic benefits will be required to settle such obligations.
С054 CONSOLIDATED FINANCIAL STATEMENTS Mostotrest
31 Related party transactions
(A) CONTROL RELATIONSHIPS
During 2010 Marc O’Polo Investments Ltd (Cyprus) lost control over the Company as a result of additional shares issued by the Company for free float. As at 31 December 2011 the Mostotrest’s shareholder structure was as follows:
• 38.6% - Marc O’Polo Investments • 26.5% - Blagosostoyanie Pension Fund • 34.9% - free-float.
(i) Management remuneration
During 2011 key management received remuneration in the amount of RUB 476 million (2010: RUB 627 million) that is included in personnel costs.
During the reporting period there were no other material transactions conducted with key management personnel and their close family members.
(B) TRANSACTIONS WITH OTHER RELATED PARTIES
The Group’s other related party transactions are disclosed below.
(i) Sales
Mln RUB Transaction value Outstanding balance
2011 2010 2011 2010 Sale of goods to: Investments in equity accounting investees 17 114 4 - Other related parties 470 120 94 37 Services rendered to: Investments in equity accounting investees 81 301 121 177 Other related parties 1,071 563 611 1,949 1,640 1,098 829 2,163
С055 Annual report 2011
LEADING THE WAY
(ii) Purchases
Mln RUB Transaction value Outstanding balance
2011 2010 2011 2010 Purchase of goods from: Other related parties 334 575 (65) 39 Services received from: Investments in equity accounted investees 375 108 - 8 Other related parties 16,211 7,707 (244) 2,284 16,920 8,390 (310) 2,331
(iii) Loans
Mln RUB Transaction value Outstanding balance
2011 2010 2011 2010 Promissory notes: Other related parties - 815 - - Loans given: Other related parties 15 50 51 100 15 865 51 100
The loans given to the related parties and outstanding as at 31 December 2011 bear interest at 8% per annum and are repayable in 2012. Interest income on these loans for 2011 amounted to RUB 8 million (2010: RUB 2 million).
Mln RUB Transaction value Outstanding balance
2011 2010 2011 2010 Loans received: Other related parties 5,281 6,111 37 650 5,281 6,111 37 650
The loans received from the related parties and outstanding as at 31 December 2011 bear interest at 9% per annum and are repayable in 2012. Interest expense on these loans for 2011 amounted to RUB 51 million (2010: RUB 392 million).
32 Group entities
Ownership interest
Subsidiary Country of incorporation 31 December 2011 31 December 2010 OOO "Engtransstroy Corporation" Russia 51% 51% OOO "Transstroymechanizatsiya" Russia 50.1% 50.1% ООО "Taganka Most" Russia 100% 100% ООО "United Toll Systems" Russia 51% - ООО "Mostotrest SPB" Russia - 100% ООО "Sledyashie test-Systemy" Russia - 51%
С056 CONSOLIDATED FINANCIAL STATEMENTS Mostotrest
33 Events subsequent to the reporting date
No significant subsequent events.
С057 Annual report 2011
LEADING THE WAY
ZAO KPMG Telephone +7 (495) 937 4477 10 Presnenskaya Naberezhnaya Fax +7 (495) 937 4400/99 Moscow, Russia 123317 Internet www.kpmg.ru
Independent Auditors’ Report
Board of Directors OJSC Mostotrest
We have audited the accompanying consolidated financial statements of OJSC Mostotrest (the “Company”) and its subsidiaries (the “Group”), which comprise the consolidated statement of financial position as at 31 December 2011, and the consolidated statements of comprehensive income, changes in equity and cash flows for the year then ended, and notes, comprising a summary of significant accounting policies and other explanatory information.
Management’s Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the 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 audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Group as at 31 December 2011, and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards.
ZAO KPMG, a company incorporated under the Laws of the Russian Federation, a subsidiary of KPMG Europe LLP, and a member firm ZAO KPMG of the KPMG network of independent member firms affiliated with 13 April 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. APPENDIX B PROFORMA CONSOLIDATED FINANCIAL INFORMATION FOR THE YEAR ENDED 31 DECEMBER 2010 AND 2009 Annual report 2011
LEADING THE WAY
Contents
3 Proforma consolidated statement of income for the year ended 31 December 2009 4 Proforma consolidated statement of financial position as at 31 December 2009 6 Proforma consolidated statement of income for the year ended 31 December 2010 7 Notes to the proforma consolidated financial information
С02 PROFORMA CONSOLIDATED FINANCIAL INFORMATION Mostotrest
Proforma consolidated statement of income for the year ended 31 December 2009
Mln RUB MSTT ETS TSM Subtotal Adjustment for Adjustment Adjustment for Total PRO- elimination of for financing depreciation adjust- FORMA intercompany arrange- and amortisa- ments GROUP transactions (e) ments (c) tion (d) Revenues 32,392 46,805 12,790 91,987 (13,016) – – (13,016) 78,971 Cost of sales (24,211) (44,068) (11,555) (79,834) 12,914 – (1,440) 11,474 (68,359) Gross profit 8,181 2,737 1,235 12,153 (102) - (1,440) (1,542) 10,611 Other income 194 57 170 421 – – – – 421 Administrative expenses (3,827) (1,049) (513) (5,389) – – – – (5,389) Other expenses (261) (618) – (879) – – – – (879) Results from operating activities 4,287 1,127 892 6,306 (102) - (1,440) (1,542) 4,764 Finance income 300 98 5 403 (45) – – (45) 358 Finance costs (1,116) (375) (911) (2,402) 45 (508) – (463) (2,865) Net finance costs (816) (277) (906) (1,999) – (508) – (508) (2,507) Profit before income tax 3,471 850 (14) 4,307 (102) (508) (1,440) (2,049) 2,257 Income tax expense (867) (282) (158) (1,307) 20 102 288 410 (897) Profit for the year from continuing operations 2,604 568 (172) 3,000 (82) (406) (1,152) (1,640) 1,361
Discontinued operations Profit from discontinued operations – – 274 274 – – – – 274 Profit for the year 2,604 568 102 3,274 (82) (406) (1,152) (1,640) 1,634
Depreciation and amortisation 1,421 99 432 1,952 - - 1,440 1,440 3,392 Capital expenditures 255 134 658 1,047 – – – – 1,047
С03 Annual report 2011
LEADING THE WAY
Proforma consolidated statement of financial position as at 31 December 2009
Mln RUB MSTT ETS TSM Subtotal Adjustment for Adjustment Adjust- Adjust- Total PRO- elimination of for financing ment for ment for adjust- FORMA intercompany arrange- acquisition acquisition ments GROUP transactions (e) ments (c) of ETS (b) of TSM (a) ASSETS Non-current assets Goodwill – – – – – – 1,091 918 2,009 2,009 Intangible assets 26 1 1 28 – – 908 292 1,200 1,228 Property, plant and equipment 9,421 511 1,772 11,704 – – 162 998 1,160 12,864 Trade and other receivables 14 90 – 104 (46) – – – (46) 58 Other investments 196 – – 196 – 3,484 (2,220) (1,264) – 196 Loans given 20 – 25 45 – – – – – 45 Deferred tax assets – 321 279 600 20 102 – – 122 722 Other non-current assets 1,512 – – 1,512 – – – – – 1,512 Total non-current assets 11,189 923 2,077 14,189 (26) 3,586 (59) 944 4,445 18,634 Current assets Inventories 2,473 61 455 2,989 – – – – – 2,989 Income tax receivable 1,065 – – 1,065 – – – – – 1,065 Trade and other receivables 810 1,898 868 3,576 (77) – – – (77) 3,499 Amounts due from customers on construction contracts 3,095 198 1,025 4,318 (1,102) – – – (1,102) 3,216 Loans given 331 143 – 474 (268) – – – (268) 206 Prepayments 1,103 5,998 238 7,339 (88) – – – (88) 7,251 Cash and cash equivalents 4,861 7,718 213 12,792 – – – – – 12,792 Total current assets 13,738 16,016 2,799 32,553 (1,535) – – – (1,535) 31,018 TOTAL ASSETS 24,927 16,939 4,876 46,742 (1,561) 3,586 (59) 944 2,910 49,652
С04 PROFORMA CONSOLIDATED FINANCIAL INFORMATION Mostotrest
Proforma consolidated statement of financial position as at 31 December 2009
Mln RUB MSTT ETS TSM Subtotal Adjustment for Adjustment Adjust- Adjust- Total PRO- elimination of for financing ment for ment for adjust- FORMA intercompany arrange- acquisition acquisition ments GROUP transactions (e) ments (c) of ETS (b) of TSM (a) EQUITY AND LIABILITIES Equity Share capital (131) – – (131) – – – – – (131) Reserve for available- for-sale financial assets (110) – – (110) – – – – – (110) Retained earnings (9,011) (9,011) (259) 406 1,144 878 2,169 (6,842) Total equity attributable to equity holders of the Company (9,252) – – (9,252) (259) 406 1,144 878 2,169 (7,083)
Long-term liabilities Loans and borrowings (273) (1) (109) (383) – (3,992) – – (3,992) (4,375) Non-controlling interest – (163) 1,180 1,017 – – (871) (1,564) (2,435) (1,418) Long-term trade and other payables (306) – – (306) 88 – – – 88 (218) Deferred tax liabilities (356) – – (356) – – (214) (258) (472) (828) Total long-term liabilities (935) (164) 1,071 (28) 88 (3,992) (1,085) (1,822) (6,811) (6,839) Short-term liabilities Loans and borrowings (6,010) (38) (475) (6,523) 444 – – – 444 (6,079) Trade and other payables (4,565) (7,063) (3,598) (15,226) 174 – – – 174 (15,052) Amounts due to customers on construction contracts (3,194) (9,557) (1,788) (14,539) 1,114 – – – 1,114 (13,425) Construction contracts loss provision (170) – – (170) – – – – – (170) Other provisions (112) (25) (4) (141) – – – – – (141) Current tax liabilities (689) (92) (82) (863) – – – – – (863) Total short-term liabilities (14,740) (16,775) (5,947) (37,462) 1,732 – – – 1,732 (35,730) TOTAL EQUITY AND LIABILITIES (24,927) (16,939) (4,876) (46,742) 1,561 (3,586) 59 (944) (2,910) (49,652)
С05 Annual report 2011
LEADING THE WAY
Proforma consolidated statement of income for the year ended 31 December 2010
Mln RUB MSTT Decon- MSTT ETS TSM Subtotal Adjust- Adjust- Adjust- Adjust- Total PRO- 2010 solida- 2010 2010 2010 ment for ment for ment ment for adjust- FORMA Con- tion of unaudited unau- unau- elimina- financing for non- ments GROUP solidated ETS and stand- dited dited tion of arrange- depre- controlling Financial TSM (g) alone stand- stand- inter- ments ciation interest State- Financial alone alone company for and liability to ments Informa- Financial Financial transac- acquisi- amor- minorities tion Informa- Informa- tions (е) tion of tisation of ETS and tion tion ETS and (d) TSM (f) TSM (с) Revenue 60,279 (27,891) 32,388 37,714 14,825 84,927 (10,048) – – – (10,048) 74,879 Cost of sales (51,284) 26,774 (24,510) (34,368) (13,170) (72,048) 9,669 – (1,440) – 8,229 (63,819) Gross profit 8,995 (1,117) 7,878 3,346 1,655 12,879 (379) – (1,440) - (1,819) 11,060 Other income 222 69 291 72 342 705 (90) – – – (90) 615 Administrative expenses (4,557) 849 (3,708) (984) (394) (5,086) 2 – – – 2 (5,084) Other expenses (949) 530 (419) (364) (312) (1,095) 1 – – – 1 (1,094) Results from operating activities 3,711 331 4,042 2,070 1,291 7,403 (466) – (1,440) - (1,906) 5,497 Finance income 111 (1) 110 73 5 188 (22) – – – (22) 166 Finance costs (1,341) 183 (1,158) (45) (173) (1,376) 22 (231) – – (209) (1,585) Dividends and non- controlling interest – – – (1,200) (200) (1,400) – – – (540) (540) (1,940) Net finance costs (1,230) 182 (1,048) (1,172) (368) (2,588) – (231) – (540) (771) (3,359) Share of profit/loss of equity accounted investees (7) – (7) – – (7) – – – – – (7) Profit before income tax 2,474 513 2,987 898 923 4,808 (466) (231) (1,440) (540) (2,677) 2,131 Income tax expense (744) (40) (784) (431) (300) (1,515) 93 46 288 – 427 (1,088)
Profit for the year 1,730 473 2,203 467 623 3,293 (373) (185) (1,152) (540) (2,250) 1,043
Depreciation and amortisation 2,777 (1,409) 1,368 126 580 2,074 – – 1,440 – 1,440 3,514 Capital expenditures 1,848 – 1,848 186 1,164 3,198 – – – – – 3,198
С06 PROFORMA CONSOLIDATED FINANCIAL INFORMATION Mostotrest
1 Explanatory notes
(a) The transaction
OJSC Mostotrest (“MSTT”) is an open joint stock company as defined by the Civil Code of the Russian Federation.
On 13 May 2010 OJSC Mostorest obtained control over OOO Transstroymekhanisatsiya (“TSM”) by acquiring a 50.1% interest in the company’s share capital for a consideration of RUB 1,264 million paid in cash.
In addition, during the period 13 May 2010 to 28 June 2010 OJSC Mostotrest obtained control over OOO Engtransstoy Corporation (ETS) by acquiring a 51% interest in the company’s share capital for a consideration of RUB 2,220 million paid in cash.
TSM and ETS together are further referred to as the Acquirees.
The total cost of the business combinations has been allocated to the tangible and identifiable intangible assets acquired, and liabilities and contingent liabilities assumed on the basis of their estimated fair values on the acquisition date. MSTT accounted for the business combination in its consolidated financial statements as at and for the year ended 31 December 2010.
This proforma consolidated financial information has been prepared to illustrate the effect that the acquisition of the Acquirees would have had on MSTT’s consolidated statements of comprehensive income for the years ended 31 December 2009 and 2010 and consolidated statement of financial position as at 31 December 2009 if the acquisitions had taken place on 1 January 2009.
The proforma adjustments are based on available information and a number of assumptions. Since MSTT and the Acquirees were not under common control or management for periods prior to 13 May and 28 June 2010, the proforma consolidated financial results may not be comparable to, or indicative of, future performance. This proforma consolidated financial information should be read in conjunction with the historical consolidated financial statements of MSTT and the Acquirees, respectively.
(b) Accounting principles of the underlying historical financial information
MSTT and the Acquirees prepare their financial statements in accordance with International Financial Reporting Standards (“IFRS”).
(c) Sources of information
The proforma consolidated statement of financial position as at 31 December 2009, and the proforma consolidated statement of income for the year ended 31 December 2009 have been prepared on the basis of: • the audited consolidated financial statements of MSTT prepared in accordance with IFRS as at and for the year ended 31 December 2009; • the audited preliminary IFRS consolidated financial statements of TSM as at and for the year ended 31 December 2009 prepared in accordance with IFRS 1 First-time Adoption of International Financial Reporting Standards; • the audited preliminary IFRS financial statements of ETS as at and for the year ended 31 December 2009 prepared in accordance with IFRS 1 First-time Adoption of International Financial Reporting Standards.
The proforma consolidated statement of income for the year ended 31 December 2010 has been prepared on the basis of: • the audited consolidated financial statements of MSTT prepared in accordance with IFRS as at and for the year ended 31 December 2010 (Column MSTT 2010 Consolidated Financial Statements);
С07 Annual report 2011
LEADING THE WAY
• Unaudited management information of MSTT as at and for the year ended 31 December 2010 (column MSTT Unaudited Standalone Financial Information); • Unaudited management information of ETS as at and for the year ended 31 December 2010 (column ETS Unaudited 2010 Financial Information); • Unaudited management information of TSM as at and for the year ended 31 December 2010 (column TSM Unaudited 2010 Financial Information).
(d) Capital expenditures
The capital expenditures in the proforma consolidated statement of income include purchases of property, plant and equipment and intangible assets.
2 Underlying assumptions
The following assumptions have been made in preparing this proforma consolidated financial information:
(a) The acquisition date
The transaction described in note 1(a) occurred on 1 January 2009.
(b) The cost of the business combination
The cost that would have been incurred for the shares in the Acquirees had the acquisition taken place on 1 January 2009, would have been equal to the actual consideration paid in April 2010 amounting to RUB 1,264 million and RUB 2,220 million.
(c) Fair values
The estimated fair values of tangible assets, identifiable intangible assets, including construction contracts, liabilities and contingent liabilities of the Acquirees on 1 January 2009 were the same as their fair values at 13 May 2010 for TSM and at 28 June 2010 for ETS, adjusted for the amount of recognized gains and losses and other changes in shareholders’ equity of the Acquirees from 1 January 2009 to the respective dates of acquisitions.
(d) The financing of the transaction
The transactions to acquire the respective interests in the Acquirees were financed with RUB denominated loans obtained on 1 January 2009.
The proforma consolidated financial information assumes no cash settlements of interest and principal amounts of the loans from 1 January 2009 till the actual date of their repayment in 2010.
С08 PROFORMA CONSOLIDATED FINANCIAL INFORMATION Mostotrest
3 Proforma adjustments
The adjustments below have been reflected in the proforma consolidated financial information.
(a) Adjustment for acquisition of TSM
The adjustment corresponds to the proforma goodwill on the investment in TSM assuming that the acquisition was made on 1 January 2009. The acquisition of TSM is assumed to involve proforma goodwill on consolidation as shown below:
Mln RUB
Proforma cost of business combination 1,264 Proforma fair value of the net identifiable assets acquired (346) The excess of the consideration paid over the fair value of the net identifiable assets, liabilities and contingent liabilities (proforma goodwill) 918
The proforma goodwill of RUB 918 million differs from the actual goodwill on the acquisition of TSM amounting to RUB 1,113 million by the amount of recognized gains and losses and other changes in shareholders’ equity of TSM from 1 January 2009 to 13 May 2010 – refer notes 2(b) and 2(c) for assumptions applied to the cost of the business combination and the fair values of the net identifiable assets.
(b) Adjustment for acquisition of ETS
The adjustment corresponds to the proforma goodwill on the investment in ETS assuming that the acquisition was made on 1 January 2009. The acquisition of ETS is assumed to involve proforma goodwill on consolidation as shown below:
Mln RUB Proforma cost of business combination 2,220 Proforma fair value of the net identifiable assets acquired (1,129) The excess of the consideration paid over the fair value of the net identifiable assets, liabilities and contingent liabilities (proforma goodwill) 1,091
The proforma goodwill of RUB 1,091 million differs from the actual goodwill on the acquisition of ETS amounting to RUB 1,291 million by the amount of recognized gains and losses and other changes in shareholders’ equity of ETS from 1 January 2009 to 28 June 2010 – refer notes 2(b) and 2(c) for assumptions applied to the cost of the business combination and the fair values of the net identifiable assets.
(c) Adjustment for financing arrangements
The adjustment represents the interest that would have been payable for 2009 and 2010 based on an assumed interest rate of 14.57% per annum determined as at 1 January 2009. The actual interest rate on the loan taken out for the acquisition of TSM and ETS was 11% per annum, and the corresponding actual interest expense for the period from the date of loan disbursement until repayment date amounted to RUB 277 million. At an interest rate of 11% per annum the interest expense on the loan would have amounted to RUB 383 million annually. The related income tax effect of 20% would have been applied to additional interest expense.
С09 Annual report 2011
LEADING THE WAY
(d) Adjustment for depreciation and amortization
The adjustment represents amortization of the construction contract asset and depreciation of the difference between the fair value and cost of property, plant and equipment of TSM and ETS. The construction contract asset has been identified as part of purchase price allocation of TSM and ETS at the date of acquisition. The amortization period was set up at 24 months since this period represents the average duration of the projects. The property, plant and equipment of TSM and ETS are depreciated over 5 and 6 years, respectively, based on the average useful lives of these assets.
(e) Adjustment for elimination of intercompany transactions
The adjustment represents elimination of transactions and balances between MSTT and the Acquirees.
(f) Adjustment for non-controlling interest liability to minorities of TSM and ETS
The adjustment represents the liability to minorities of TSM and ETS with regard to their interest in profit or loss for the year. In accordance with the Law on Limited Liability Companies No.14-FZ dated 8 February 1998 and the Charters of TSM and ETS, a participant may unilaterally withdraw from the entity. In such circumstances, the entity is obliged to pay a withdrawing participant its share of the net assets of the entity, if provided in the Charter of the company. The payment should be made no later than twelve months after the end of the year in which the withdrawal occurs on the basis of the participant’s share of the entity’s net assets at their carrying amounts in the entity’s statutory financial statements (prepared under Russian accounting standards).
As a result, the contributions of the participants of TSM and ETS are classified as debt instruments, and accordingly, profit/loss attributable to non-controlling interest is classified as a finance cost in the financial statements.
(g) Deconsolidation of TSM and ETS
The adjustment represents de-consolidation of the financial results of TSM and ETS which have been included into the annual financial statements of MSTT from May and June 2010, accordingly. Their annual financial results are further consolidated under columns ETS and TSM.
4 Breakdowns of selected proforma accounts
(a) Revenues
Mln RUB 2009 2010 Revenue from contracts for construction of: bridges and highways 41,184 47,546 railway infrastructure facilities 9,657 13,781 airfields and airports 3,220 6,876 other infrastructure facilities 20,276 2,959 other facilities 3,238 2,409 Total revenue from construction contracts 77,575 73,571 other revenue 1,396 1,308 Total revenue 78,971 74,879
С010 PROFORMA CONSOLIDATED FINANCIAL INFORMATION Mostotrest
(b) Cost of sales
Mln RUB MSTT ETS TSM Adjustments PROFORMA GROUP
2009 2010 2009 2010 2009 2010 2009 2010 2009 2010 Services of subcontractors 6,799 5,692 38,842 33,397 3,219 1,945 (11,973) (8,965) 36,887 32,069 Materials 6,277 7,773 3,557 72 3,834 4,705 (277) (207) 13,391 12,343 Personnel expenses 4,784 6,153 – – 853 1,162 – 1 5,637 7,316 Machinery, equipment, transport, and labor services provided by third parties 1,054 1,021 132 21 1,576 2,826 (1) – 2,761 3,868 Depreciation and amortisation 1,409 1,314 65 93 341 537 1,440 1,440 3,255 3,384 Fuel 405 530 – – 202 272 – – 607 802 Insurance 104 234 673 419 1 41 – – 778 694 Services of principal contractors 465 390 143 121 584 566 (584) (491) 608 586 Other cost of sales 2,914 1,403 655 245 945 1,116 (79) (7) 4,435 2,757 Total cost of sales 24,211 24,510 44,067 34,368 11,555 13,170 (11,474) (8,229) 68,359 63,819
(c) Administrative expenses
Mln RUB MSTT ETS TSM Adjustments PROFORMA GROUP
2009 2010 2009 2010 2009 2010 2009 2010 2009 2010 Personnel expenses 2,098 1,939 561 544 138 196 – – 2,797 2,679 Consulting and audit services 518 475 6 22 3 17 – – 527 514 Social expenses 173 330 – – – 0 – – 173 330 Rent expense 19 27 138 120 33 29 – (2) 190 174 Taxes other than income tax 126 128 11 7 10 16 – – 147 151 Depreciation and amortisation 20 56 34 33 67 44 – – 121 133 Charity 103 121 11 4 – 0 – (4) 114 121 Materials 136 91 – – 157 19 – – 293 110 Bank fees 92 61 2 2 9 8 – – 103 71 Other administrative expenses 542 480 286 252 96 65 – 4 924 801 Total administrative expenses 3,827 3,708 1,049 984 513 394 – (2) 5,389 5,084
С011 Annual report 2011
LEADING THE WAY
(d) Finance income and finance costs
Mln RUB MSTT ETS TSM Adjustments PROFORMA GROUP
2009 2010 2009 2010 2009 2010 2009 2010 2009 2010 Finance income: Interest income on bank deposits 56 53 19 48 1 – – – 76 101 Interest income on loans given 150 30 55 19 3 4 (45) (22) 163 31 Foreign exchange gain 92 14 0 2 1 1 – – 93 17 Other income 2 13 24 4 – – – – 26 17 Total finance income 300 110 98 73 5 5 (45) (22) 358 166
Finance costs: Interest expense on borrowings (1,045) (1,081) (12) (39) (169) (57) (463) (209) (1,689) (1,386) Interest expense on finance leases (71) (78) (59) (5) (72) (115) – – (202) (198) Foreign exchange loss – – (1) (1) – – – – (1) (1) Total finance costs (1,116) (1,159) (72) (45) (241) (172) (463) (209) (1,892) (1,585)
Dividends and non-controlling interest – – (303) (1,200) (670) (200) – (540) (973) (1,940)
Net finance cost (816) (1,049) (277) (1,172) (906) (367) (508) (771) (2,507) (3,359)
С012 PROFORMA CONSOLIDATED FINANCIAL INFORMATION Mostotrest
5 Non-IFRS measures
(a) Earnings before interest, tax, depreciation and amortization (EBITDA)
2009 MSTT ETS TSM Total PROFORMA Mln RUB adjustments GROUP
Net Profit/(Loss) from continuing operations 2,604 568 (172) (1,640) 1,361 Plus/(Minus) Income tax expense 867 282 158 (410) 897 Net finance costs 816 277 906 508 2,507 Depreciation and amortisation 1421 99 432 1,440 3392 EBITDA 5,708 1,226 1,324 (102) 8,157
2010 MSTT ETS TSM Total PROFORMA Mln RUB adjustments GROUP
Net Profit/(Loss) from continuing operations 2,203 467 623 (2,250) 1,043 Plus/(Minus) Income tax expense 784 431 300 (427) 1,088 Net finance costs 1,048 1,172 368 771 3,359 Depreciation and amortisation 1,368 126 580 1,440 3,514 EBITDA 5,403 2,196 1,871 (466) 9,004
С013 Annual report 2011
LEADING THE WAY Mostotrest NOTES ©Design by YellowDog www.mostotrest.ru
OJSC MOSTOTREST Annual report 2011