ANNUAL REPORT 2016 Annual Report 2016 Report SUEK Annual
FAR DEEPLY REACHING INVOLVED SUEK1 is the leading coal producer in Russia and one of the largest coal companies in the world. Our business is deeply rooted in Russia, with our operations spreading from east to west, providing employment for almost 33,500 people, and contributing to the social and economic development of our country. Meanwhile, our global trading and distribution network enables us to deliver our products to customers in Asia and Europe.
What’s inside
Strategic report Financial statements 1 About this Report 94 Auditors’ report 2 Year highlights 96 Consolidated statement 4 SUEK at a glance of profit or loss and other 14 Where we operate comprehensive income 16 Global trends and SUEK 97 Consolidated statement of financial position 18 Market review 98 Consolidated statement 22 Chairman’s statement of cash flows 24 CEO’s statement 99 Consolidated statement 26 Materiality of changes in shareholders’ 30 Stakeholder engagement equity 32 Business model 100 Notes to the consolidated 34 Strategy implementation financial statements 42 Risk management 50 Our assets Additional information 54 Operating review 124 GRI Tables 2016 59 Financial review 136 Glossary 64 Health and safety 138 Information on the company 69 Environment 140 Contacts 73 Our people 77 Communities
Corporate governance 81 Statement by the Chairman of the Strategy Committee 82 Corporate governance overview 86 Board of Directors 88 Strategy Committee 89 Nomination and Compensation Committee 90 Audit Committee 91 Management Board and Executives
1 In this Report, each of the terms ‘SUEK’, ‘SUEK Group’, ‘the Group’, ‘the company’, ‘we’ refer to all companies consolidated in the IFRS financial statements of JSC SUEK (Russia), including, inter alia, SUEK LTD, SUEK AG and their subsidiaries. – 1 –
About this Report
Our 2016 Annual Report aligns with the principles Within this Report, we have also addressed how of integrated reporting, as set out in the International the company adjusts its strategy and governance Integrated Reporting Council (IIRC)’s Framework. to changing macroeconomic conditions and stakeholder In disclosing non-financial information, it also adheres requests. We have disclosed our key strategic goals to the Global Reporting Initiative (GRI)’s G4 Core level together with the company’s risks, enabling our guidelines, as well as Russian legislative requirements. stakeholders to better understand our future focus, challenges and opportunities. Through our engagement with integrated reporting, our goal is to prioritise and focus the Report on We believe that this development of our reporting ‘material matters’– those aspects of our business practice reflects our commitment to sustainable and its impacts which are currently most relevant to the development in all areas of our performance – financial, company’s value creation as well as to key stakeholders operational, social and environmental – and to value (for the list of stakeholders, see pages 30-31). To ensure creation for all stakeholders. this Report addresses material matters and relevant This Annual Report should be read together with topics, in 2016 we carried out in-depth engagement our 2016 audited financial statements, prepared and consultation with our stakeholders. The methods in accordance with International Financial Reporting we used to determine relevant topics and material Standards (IFRS). matters are set out in the ‘Materiality’ section of this Report. Overall, our research revealed that internal and external stakeholders considered various aspects of our business to have been material in 2016, including our financial performance, health and safety, production The Report was prepared under the supervision of efficiency and product quality, as well as corporate SUEK’s Chief Financial Officer, with the Audit Committee governance. of the Board of Directors also collectively contributing to its preparation and ensuring its overall integrity. The Report was approved by the Board in March 2017. It is published in both English and Russian.
As part of our commitment to continuous improvement, we would be keen to hear your thoughts on this Report. Please send your feedback to: [email protected]
For more information This Annual Report is also available please visit www.suek.com online as an interactive document at www.ar2016en.suek.com
SUEK ANNUAL REPORT 2016 – 2 – YEAR HIGHLIGHTS
A SOLID PERFORMANCE
Our effective integrated business model allows SUEK to ensure sustainable results in all market conditions. In 2016, despite continued challenging market environment, we achieved a record operational performance and maintained financial stability. Constantly committed to the responsible development of our business, we continued to pay special attention to health and safety and environmental protection.
Despite historically low coal prices in the first half of 2016, the company delivered a strong financial performance and managed to preserve and strengthen its leading position in the Russian and international markets. This was the result of timely investments in washing capacities and transport infrastructure, as well as the expansion of trading activities. A particular focus on operational efficiency and safety also led to increased productivity and a significantly reduced injury rate.
Production Coal washed Lost time injury frequency (million tonnes) (million tonnes) rate (LTIFR) 37.3 1.57 105.4 98.9 97.8 33.3 32.1 1.23 0.94 +8% +12% -24% ‘14 ‘15 ‘16 Year-on-year ‘14 ‘15 ‘16 Year-on-year ‘14 ‘15 ‘16 Year-on-year
STRATEGIC PRIORITY: STRATEGIC PRIORITY: STRATEGIC PRIORITY: FOCUSING ON EFFICIENT S1 IMPROVING OPERATIONAL S2 ACHIEVING HIGH SAFETY S4 GROWTH EFFICIENCY AND PRODUCTIVITY STANDARDS
In 2016, the SUEK Group’s coal In 2016, we washed and processed In 2016, LTIFR at our production units mining units produced a record 37.3 million tonnes of coal at our fell by 24% to 0.94, the lowest in 105.4 million tonnes of coal, an 8% washing plants, a 12% rise compared SUEK’s 15-year history and one of the year-on-year increase compared to to the previous year. This increase in lowest levels in the global coal 2015. This significant uplift in volumes was due to the expansion of industry. This was a result of the production volumes was the result of our coal-washing capacities, achieved continuing improvements we are further implementation of our by upgrading and increasing the load making to our industrial safety operational efficiency programme, the of existing plants to satisfy the systems and the promotion of a safety launch of new highly productive growing demand for coal of a higher culture across the сompany. mining equipment at mines in Kuzbass calorific value. and Khakasia, and the development of the Nikolsky hard-coal open pit in Buryatia.
FOR OUR STRATEGY, SEE PAGES 34-49. FOR OPERATING REVIEW, SEE PAGES 54-58. FOR FINANCIAL REVIEW, SEE PAGES 59-63.
SUEK ANNUAL REPORT 2016 at our minesandopenpits. efficiency andstaffdevelopment programmes of modernised equipment,improved operational increased by12%in2016.Thiswastheresult Labour productivity atourproduction units AND PRODUCTIVITY IMPROVING OPERATIONAL EFFICIENCY STRATEGIC PRIORITY: which represented 2%year-on-year growth. record salesof103.1milliontonnes ofcoal, of SUEK’s export salesnetwork,contributed to for imported coal,coupledwiththedevelopment In 2016,strong demandfrom thePacific region (tonnes perman-month production workers Productivity ofminingunit (million tonnes) Total salesvolumes FOCUSING ONEFFICIENTGROWTH STRATEGIC PRIORITY: ‘ ‘ 1 1 4 421 4 95.3 ‘ ‘ 1 1 5 5 435 101.1 ‘ ‘ 1 1 6 6 489 103.1 + +2% Year-on-year Year-on-year 1 2% ) S2 S1
in Russia. plants. Still, wemaintaineda40%market share Far Eastsupported higheroutputathydropower as highwater levelsinSiberiaandtheRussian due to lowercoal consumptionbypowerplants, The 6%year-on-year declineinsaleswasmainly volumes suppliedto power-generating plants. totalled 51.2million tonnes ofcoal,with77% In 2016,SUEK’s salesto theRussianmarket FOCUSING ONEFFICIENTGROWTH STRATEGIC PRIORITY: EBITDA EBITDA margin(%) (million tonnes) Sales totheRussianmarket thermal coalmarket Share ofsuppliestotheRussian 24% in2016,upfrom 21%ayearearlier. distribution network,ledto anEBITDA margin of assets andtheexpansion ofoursalesand regarding costs, theefficiencyofourlogistic increase insalesto premium markets, caution 2015, to $965m.Factors includingasubstantial In 2016,EBITDA increased by9%compared to FOCUSING ONEFFICIENTGROWTH STRATEGIC PRIORITY: ‘ ‘ 1 1 4 1,044 21% 4 49.7 38% ‘ ‘ SUEK ANNUAL REPORT 2016 1 1 5 5 887 21% 54.2 39% CORPORATE GOVERNANCE FINANCIAL STATEMENTS ($m) ‘ ‘ 1 1 STRATEGIC REPORT 6 965 24% 6 51.2 40% +9% -6% Year-on-year Year-on-year – 3 (%) S1 S1 increased. the NetherlandsandMediterranean countries sales mix:suppliesto theUKfell,whilesalesto compared to 2015,butthere wasachangeinthe Atlantic market, salesvolumesincreased by3% South Korea, Japan,ChinaandTaiwan. Inthe Asian markets, withthelargest volumesgoingto increased by11%.We saw16%growth inthe In 2016,SUEK’s international salesvolumes FOCUSING ONEFFICIENTGROWTH STRATEGIC PRIORITY: (million International salesvolumes (ratio) Net debt/bankEBITDA sufficient funds tomeetitsfinancialobligations. These figures demonstrate thatthecompany has 4.0х provisioned byourcurrent loanagreements. stood at2.94х,substantiallybelowthemaximum At 31December2016,netdebtto bankEBITDA FOCUSING ONEFFICIENTGROWTH STRATEGIC PRIORITY: ‘ ‘ 1 1 4 4 2.99 00 45.6 ‘ ‘ 1 1 5 5
2.96 46.9 t onnes) ‘ ‘ 1 1 6 6 2.94 51.9 + - Year-on-year Year-on-year 1 1 % 1% S1 S1
– 4 – SUEK AT A GLANCE
STABLE COAL COMPANY
A LEADING COAL PRODUCER
SUEK is one of the ten largest coal SUEK is a vertically integrated business with extensive control of its value chain. We oversee all producers in the world by output and stages of the coal lifecycle, from extraction, sales, with hard coal reserves set to processing and transportation through to worldwide sales and distribution. We have last for over 30 years. large-scale open pits and underground mines in Siberia and Far-Eastern Russia, as well as modern washing and processing facilities that enable us to enhance the quality of our coal. We also own our railway and port infrastructure, which means we can efficiently reach our customers in Russian, Atlantic and Asia-Pacific markets.
A RELIABLE COAL SUPPLIER
Our product portfolio, infrastructure and Our aim is to enhance our position as the largest exporter of coal from Russia, focusing particularly extensive sales network enable us to on supplying high-quality coal. Some of our assets satisfy customer demand in Russia and are located much closer to the Asia-Pacific markets than those of most other Russian coal abroad. companies – 4,300 km closer, in the case of our We are the largest supplier of thermal coal to the Urgal production facilities. This means our delivery Russian market, accounting for 40% of domestic times are shorter and transportation is more sales. Located close to major consumers, and with reliable, giving us a distinct competitive advantage. a large railcar fleet, we provide fuel for major Similarly, our ports in the west and east of Russia power-generating companies, which in turn supply help us avoid shipping bottlenecks, even in the electricity and heat to industry and households busiest seasons. across the country.
FOCUSED ON SUSTAINABILITY
Our sustainability priorities include Across our business, we invest in the health and safety of our employees and support their achieving high standards of industrial professional and personal advancement. Our and environmental safety, improving regular technical improvements help to make the workplace safer, more efficient and more the efficiency of our production, and productive. looking after our employees’ health, We also harness technologies which are designed wellbeing and development. to reduce the negative environmental impacts of our operations. Our coal-washing facilities enhance the calorific value of mined coal by reducing ash and moisture, enabling our customers to decrease emissions during coal combustion.
SUEK ANNUAL REPORT 2016 – 5 –
STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS
Coal production by the world’s Coal production by leading leading companies in 2016 Russian companies in 2016 5.4 27 (million tonnes) Billion tonnes Open pits and reserves1 underground
538.8 mines 1 1. SUEK 27% 2. UGMK 13% 3. SDS-Ugol 7% 4. Mechel 6% 5. Evraz Group 6% 289.8 6. Other 41% 9 3 2 Washing Ports 159.3 plants 124.9 0 . 94.8
105.4 6 86.5 84.8 3 81.0
72.0 3 5 5 4
Coal Coal Arch BH P Coal India Bumi Anglo China Adaro SUEK
Billiton Sources: SUEK’s estimates, companies’ reporting Shenhua Peabody Glencore American Sources: SUEK’s estimates, companies’ reporting
Coal export sales by the world’s Advantageous assets leading producers in 2016 1,70 0 25 and port locations (million tonnes) Customers in Trading and 38 countries distribution 129.5 offices in Russia and key 91.4 global markets 55.3 53.4 51.9 41.8 40.6
34.5 Our ports in the Some of our assets 27.8 24.5 23.6 west and east of are located much Russia help us closer to the Bumi Adaro SUEK avoid shipping Asia-Pacific markets Banpu UGMK Kideco Rio Tinto Peabody Glencore bottlenecks, even than those of other
BHP Billiton in busiest Russian coal
Anglo American seasons. companies. Sources: SUEK’s estimates, companies’ reporting
One of the lowest LTIFR in Russian and global mining 33,429 $15m $11m Employees work Spent on community Spent on 6 for SUEK projects in 2016 environmental
5 in ten countries activities in 2016
4
3 LTIFR 2 SUEK 1
0 0 50 100 150 200 250 300 350 400 450 500 550 600 650 700 750 Coal production by the world’s leading 1 SUEK’s proven and probable reserves, according to the April 2011 report by SRK Consulting, amounted to 5.9 exporters in 2016, million tonnes billion tonnes. Taking into account extraction between April 2011 and December 2016 and SRK’s assessment of the Apsatsky coalfield carried out in 2015, these reserves stood at 5.4 billion tonnes as at 31 December 2016.
SUEK ANNUAL REPORT 2016 – 6 – FAR REACHING / DEEPLY INVOLVED
SPANNING FROM WEST TO EAST
FAR REACHING DEEPLY INVOLVED From Murmansk in the west to Khabarovsk in the east, From urban centres to remote areas, SUEK operates effectively in all climates and conditions. SUEK’s operations are interwoven with the In heat, wind, ice and snow. Across eight Russian regions Russian landscape, people and economy, and seven time zones. Through forest, tundra helping to sustain social wellbeing and permafrost. and development. 22:00
Buryatia (MSK+5)
Buryatia, Tugnuisky open pit
SUEK ANNUAL REPORT 2016 – 7 –
STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS
SUEK’s coal can be shipped efficiently in all weather conditions.
WINTER TEMPERATURE: 17:00 -40C° SUMMER TEMPERATURE: Murmansk (MSK) +30C° COAL SHIPPED THROUGH PORT: 14.2Mt
Murmansk Commercial Seaport
SUEK is involved in the life of every family in the remote Buryatia town of Sagan-Nur.
SAGAN-NUR POPULATION : 7,000 EMPLOYED BY SUEK: 2,067
SUEK’S KEY ASSETS IN SAGAN-NUR:
2 OPEN PITS
1 WASHING PLANT 140km OWN LOADING AND RAILWAY INFRASTRUCTURE
1 SWIMMING POOL
SUEK ANNUAL REPORT 2016 – 8 – FAR REACHING / DEEPLY INVOLVED 33,429 Employees at SUEK
1,500 PROFESSIONS AT SUEK
SUEK fire alarm training at 17 EDUCATIONAL CENTRES Kharanorsky open pit, Zabaikalye AT SUEK
Since 2012, SUEK has been actively developing the Apsatsky coking coalfield, situated near the Trans-Siberian railway and around 1,000km away from the nearest city and surrounding infrastructure. We have built a new employee camp, with essential social infrastructure including accommodation, canteen and sports and recreational facilities. 2nd LARGEST DEPOSIT OF COKING COAL IN RUSSIA 337 JOBS PROVIDED BY SUEK $9m INVESTED OVER THE LAST FIVE YEARS IN THE DEVELOPMENT OF APSATSKY OPEN PIT AND ITS LIVING AND RECREATIONAL INFRASTRUCTURE
SUEK ANNUAL REPORT 2016 – 9 –
STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS SUPPORTING REGIONAL ECONOMIES
FAR REACHING DEEPLY INVOLVED As one of the largest employers in the Russian coal Wherever we operate, SUEK aims to bring stability industry, we provide jobs for almost 33,500 people and development. As one of the largest payers of across different regions, from miners and engineers to tax in the regions where we operate, we directly lab specialists and machine operators. We also invest support regional budgets while helping to develop in remote areas and provide opportunities for external social and economic infrastructure. contractors in local industries. $59 m SUEK’s total tax contributions in 2016
Employee camp at the Apsatsky coking coal open pit, Zabaikalye
SUEK ANNUAL REPORT 2016 – 10 – FAR REACHING / DEEPLY INVOLVED
SOCIALLY INVOLVED
FAR REACHING DEEPLY INVOLVED SUEK’s operations touch the lives of people of every SUEK cares deeply about the local communities age, nationality and background. People from every where it operates. We support schools and walk of life. From west to east, our business programmes for children, as well as care initiatives embraces and reflects the social diversity of Russia. for the elderly. And we provide internships for young people and students, investing in the future of our company and our country.
Krasnoyarsk chess club
SUEK ANNUAL REPORT 2016 – 11 –
STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS
Miner’s Day in Kemerovo, August 2016
SUEK spent on social and community SUEK provides assistance for veterans, programmes people with disabilities, retirees, large and in 2016 low-income families and $15 m their public associations.
In June 2016, Krasnoyarsk hosted the first inter-regional SUEK ‘Chess Hopes’ tournament for the children of our employees. 35 PARTICIPANTS 21 GAMES, PLAYED SIMULTANEOUSLY WITH THE WORLD CHAMPION ANATOLY KARPOV
SUEK ANNUAL REPORT 2016 – 12 – FAR REACHING / DEEPLY INVOLVED
The Vanino Bulk Terminal is equipped with state-of-the-art equipment that prevents the impact of dust on employee health and safety and the environment at every stage of the shipping process. 38% DUST SUPPRESSION BY FOG GENERATORS
Closed WATER CYCLE
Fog generators at Vanino Bulk Terminal
over 30ha of cedar trees planted at the Berezovsky open pit as part of a land reclamation programme
SUEK ANNUAL REPORT 2016 – 13 –
STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS MINIMISING OUR IMPACT
FAR REACHING DEEPLY INVOLVED Wherever SUEK operates, we take care to minimise Through efficiency measures such as methane utilisation, our impact on the local environments with which we coal washing, dust control, land reclamation and other interact. Looking to balance commercial interests measures, we take responsibility for our actions and try with ecological considerations, we aim to tread to reduce our environmental footprint. We also seek to responsibly as we move forward. meet the demand for innovative technologies for the production of cleaner, high-grade coal. 397ha of land restored by SUEK in 2016
Reclaimed land at the Berezovsky open pit, Krasnoyarsk
SUEK ANNUAL REPORT 2016 – 14 – WHERE WE OPERATE
FAVOURABLE GEOGRAPHICAL POSITION
Our facilities are located across a range of geographical zones, while our engagement with the local communities where we operate means we influence and enhance the lives of many people. The geographic spread of our operations and access to key transport infrastructure enable us to supply coal effectively to Russian, Western and Eastern markets.
OUR GLOBAL PRESENCE
Murmansk Commercial Seaport Finland
Ust-Luga Port St. Petersburg
Belarus SUEK Baltic SUEK Shanghai SUEK AG Lithuania Trading Co. Japan office SUEK Polska Ltd Beijing Branch Japan Poland China SUEK Korea Ltd Moscow SUEK Logistic SUEK Shanghai Seoul, RUSSIA Moscow Branch Trading Co. Limited South Korea Russia China SUEK AG, SUEK AG SUEK Shanghai Trading Taiwan Ukraine Switzerland Co. Harbin Branch China SUEK AG Corp. US Branch office PT. SUEK Indonesia US Indonesia Azov Port
Port facilities, where SUEK Hard coal assets is one of the major shareholders Kazakhstan Brown coal assets Third-party ports
Open-pit mining SUEK Head Office
Underground mining RZhD Railways
Washing plants and processing facilities
SUEK ANNUAL REPORT 2016 – 15 –
STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS
OUR PRODUCTION ASSETS We are highly competitive in the coal industry thanks to our well‑developed assets. These include large, high-quality coal deposits, modern quality-assured washing plants, efficient logistics and sales networks.
1 2 3 4 5 6 7
Kemerovo Khakasia Krasnoyarsk Buryatia Zabaikalye Khabarovsk Primorye
Coal Coal Coal Coal Coal Coal Coal production: production: production: production: production: production: production: Hard 37.7Mt Hard 13.2Mt Brown 27.1Mt Hard 14.0Mt Coking 0.3Mt Hard 5.5Mt Hard 0.6Mt Brown 4.1Mt Brown 2.9Mt
Employees: Employees: Employees: Employees: Employees: Employees: Employees: 14,540 3,161 5,122 2,067 1,466 2,431 1,766
2 3 3 2 3 1 1
Murmansk 9 1 1 1 Commercial Seaport 4 1 1 2 1
Distance to ports in Far-Eastern Russia 5,450-6,000km 4,950km 4,520-5,180km 3,500-3,700km 2,550-2,950km 980-1,560km 315km
Distance to Murmansk Commercial Seaport 4,750km 5,250km 3,500-3,700km
Weighted average distance by rail to Russian customers
264km 1,497km 670km 702km From Apsatsky 1,028km 263km open pit – 2,772km From Kharanorsky and Vostochny open pits – 225km
5
6 3 3 Vanino Bulk 1 3 Terminal Krasnoyarsk Chegdomyn Leninsk-Kuznetsky 1 Khabarovsk 2 Kiselevsk 2 2 Abakan China Chita 4 5 Ulan-Ude
7 7
Mongolia Vladivostok Maly Port Vostochny Port
SUEK ANNUAL REPORT 2016 – 16 – GLOBAL TRENDS AND SUEK
GLOBAL TRENDS AND SUEK
The coal industry is facing the double challenges of rising demand for cheap and reliable power, and ever more urgent and rigorous environmental regulations. SUEK strives to meet these challenges by balancing the pursuit of commercial opportunities with the implementation of environmentally-sustainable production processes.
Coal industry and power Macro trends generation adaptation SUEK’s response
GROWING Rapid development Stable supplies of coal to POPULATION of coal-fired power developing economies and growth NEEDING BETTER generation in the of trade network. ACCESS TO regions where other ELECTRICITY sources are less economically viable. +8% CAGR of export sales over five years
PARIS Construction of higher- Coal washing to meet customers’ CLIMATE efficiency coal-fired requirements for cleaner coal. CHANGE power stations. AGREEMENT Spread of co-generation >50% power stations of SUEK’s hard coal producing heat and is washed electricity. Development of Carbon Capture and Storage GROWING (CCS). Investments in most cost-efficient projects REQUIREMENTS with best prospects. OF GREEN Greater focus on health, safety and INVESTMENTS environmental improvements to reduce operational impact, including construction of treatment facilities. Focus on coal washing to reduce emissions from final product and to meet requirements of new-generation coal-fired stations.
SUEK ANNUAL REPORT 2016 – 17 –
STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS
Macro trends Electricity generation by source Going forward, analysts anticipate conservative coal market growth, driven by Generating energy from coal remains the (TWh) stable growth in Pacific region countries world’s most reliable and cost-efficient 40000 such as Japan, South Korea, Taiwan, power supply option. Coal can and will Malaysia, Vietnam and others. These continue to meet the global challenge of 35000 forecasts are based on the following providing energy for 1.2 billion people 30000 market drivers: worldwide, who still have no access to 25000 electricity, heat or water treatment, and • Economic growth in China and India, who lack functioning schools and hospitals 20000 albeit at slower rates; and modern household utilities. 15000 • Continued industrialisation in Asia;
Meanwhile, the global environment agenda 10000 • Growing world population and increasing has been communicated through the Paris demand for electricity. agreement on climate change, which came 5000 into force in October 2016. The agreement 0 2015 2025 2040 Challenges and opportunities urges the world “to undertake ambitious for SUEK efforts to combat climate change and Coal Hydrogeneration adapt to its effects, with enhanced support Natural gas Nuclear fuel Despite global coal-price volatility, in 2016 SUEK continued to benefit from its to assist developing countries to do so”1. Renewable energy sources Oil integrated business model. Based on As a result, many countries have pledged Sources: IEA, World Energy Outlook, 2016 to reduce their GHG emissions within the economies of scale, cost efficiency and next two decades. Furthermore, if Carbon Capture and effective logistics, this ensures sustainable Storage (CCS) technologies become value creation. The relatively weak Russian One of the most significant recent widespread, there will be increased Rouble also helped to maintain our strong technological trends is the accelerated use opportunity to reduce emissions from competitive position against global of electricity. On the one hand, electricity is coal-fired power plants, enabling society to exporters. Even so, the company remained the basis for better industrial and social enjoy the advantages of coal, such as high focused on further improving the efficiency development. On the other, it enables a affordability and versatility, cost of its facilities and operational processes. shift from diesel and petrol-fuelled effectiveness and its relative ease of transport to electric engines, decreasing As SUEK invests in coal washing and the extraction and transportation. emissions in large cities. According to the development of premium-quality deposits, International Energy Agency (IEA), if current Industry developments such as those at Urgal, Apsatsky, Nikolsky energy-efficiency pledges are introduced and Kemerovo, we are able to meet the In 2016, the global seaborne thermal coal growing demand for higher-quality coal and fulfilled, by 2040 the number of electric market was volatile. The global price vehicles on the road will have grown 115 from countries including Japan, South indices dropped to below $50 per tonne in Korea, Malaysia, the Philippines, Thailand times and electricity use will have risen by February and reached a peak level of more 67% compared to present levels2. and Hong Kong. India and China are also than $100 per tonne in November, before constructing high-efficiency coal plants that Massive investments in clean energy have starting to retreat once more. Such will require higher coal grades. also been reported. However, currently significant price movements were mainly only 23% of total electricity is produced caused by Chinese regulations on internal Possible changes in national regulations from renewable sources, with the majority coal production, which influenced the relating to environmental issues and climate accounted for by hydro2. Coal, meanwhile, balance of supply and demand. change could negatively impact coal sales in certain markets. In 2016, Germany, the accounts for 40% of global electricity In the Asian market, the consumption of generation. UK and some of the Nordic states imported thermal coal grew by 4% articulated plans to reduce or completely Demand for higher-calorific-value coal is compared to 2015, totalling 708 million eliminate coal-fired power generation. being stimulated by the construction of tonnes for the full year. In Japan and South Meanwhile, the expansion in power plants new-generation coal-fired power plants, Korea, stable demand persists for high- in the developing world is providing new which are more efficient and less carbon- quality thermal coal with a calorific value markets for coal-fired power generation, intensive than their predecessors. Every exceeding 5,600 kcal/kg, and we expect making up for decreased consumption in 1% rise in energy efficiency decreases 2CO consumption to increase. At the same certain developed countries. We expect emissions by 2-3%, and already over 50% time, the Atlantic market weakened slightly stable demand from middle-income regions, of international coal trading is focused on in its cumulative volume of imports, the such as China and the Mediterranean. Coal higher-grade coal. balance between importers has changed. consumption in Russia is also stable, and coal remains one of the country’s key 1 United Nations Framework Convention on Climate Change, www.unfccc.int/files/essential_background/convention/ energy sources. application/pdf/english_paris_agreement.pdf 2 International Energy Agency, World Energy Outlook 2016, www.iea.org/media/publications/weo/WEO2016Infographic.jpg
SUEK ANNUAL REPORT 2016 – 18 – MARKET REVIEW
COAL MARKET
In 2016, the international coal market was characterised by unexpectedly high levels of price volatility. The main cause of this turbulence was a series of reforms carried out during the year by the Chinese government to regulate China’s domestic coal market, which in turn impacted the entire international market. However, the overall international seaborne thermal coal market was stable at 879 million tonnes.
Thermal coal price indices ($ per tonne)
100 globalCOAL NEWC – Australia, FOB Newcastle
API2 – North-Western Europe, CIF Rotterdam 80 API8 – China, CIF south ports
60
40
JAN 16 FEB 16 MAR 16 APR 16 MAY 16 JUN 16 AUG 16 SEP 16 OCT 16 NOV 16 DEC 16 JAN 17 FEB 17 MAR 17 month-to-date Sources: Argus McCloskey Index, globalCOAL
Thermal coal exports Thermal coal imports (million tonnes) (million tonnes)1
901 920 881 916 873 879 873 871 822 811 Other Atlantic countries Other Mediterranean countries US North-Western Europe South Africa Other Pacific countries Colombia
Russia India
Australia China
Indonesia Japan, South Korea, Taiwan 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016
Sources: public filings, SUEK estimates Sources: public filings,1 SUEK estimates coal stocks variation. Sources: public filings, SUEK estimates 1 Total import volumes differ from total exports due to time lag and coal stocks variation.
SUEK ANNUAL REPORT 2016 – 19 –
STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS
INTERNATIONAL In India, meanwhile, increased domestic On the supply side, there were no production and stagnating overall demand significant changes compared to 2015. COAL MARKET combined with high levels of inventory at Exports from Indonesia in the first half of mines, power plants and ports. Together, the year went down, while in the second Pacific market these factors drove import volumes of half of the year they partially ramped up, 138.5 million tonnes, a 13% decline despite severe rainy weather. The The Pacific market was fairly year-on-year. However, the potential for increment in prices was a welcome respite strong in 2016, with imports of growth in India remains, primarily through for the Indonesian coal mining industry; it power sector reforms. moved up in the Free On Board (FOB) cash thermal coal totalling 711 million cost curve, as their cost structure is mainly In East Asia, demand from Japan, South in US Dollars and therefore did not benefit tonnes, a 4% increase on 2015. Korea and Taiwan was moderate at from national currency depreciation as 279 million tonnes. In 2016, coal imports to In 2016, developments in China continued other exporters did in previous years. to have a major impact on the international Japan reduced by 3% to 130.6 million coal market. The year started with tonnes. This was partly due to increased- In Australia, exports were largely flat at industry-wide losses and market fragility calorific-value imports during the first half 200 million tonnes, down by 1.6 million due to growing oversupply and Chinese of the year, which enabled consumers to tonnes year-on-year. The substantial rise of coal producers facing potential bankruptcy. use less tonnage for the same energy the hard-coking coal price also influenced In response, the Chinese government cut content. The demand outlook in Japan is the PCI and semi-soft coking coal market. working hours for coal miners, introducing still very positive, with about 20 GW of new This incentivised companies to maximise a new 276 working-day regime (compared coal-fired power generation coming online sales of washed coal volumes sold as to 330 days) which delivered 303 million in the next five to ten years. Pulverised coal injection (PCI) and semi-soft coking coal, which reduced the tonnes of supply reduction in 2016, a 10% Despite the commissioning of new availability of thermal coal on the market. decrease year-on-year. As a result, the coal-fired power plants, delays and In addition, a number of mines were Chinese domestic market started to transmission problems meant that South suspended, shut down or involved in sales rebalance. Moreover, due to weather Korea did not perform as expected. procedures, which also resulted in coal conditions, hydrogeneration reduced However, during the second half of 2016, shortages. However, after the global coal drastically in 3Q 2016, which meant coal nuclear outages caused by an earthquake price recovery, some companies consumption increased and stocks triggered sudden coal demand that announced the re-start of idle mines depleted rapidly. At the same time, reports contributed to a more bullish scenario. (mainly those mining metallurgical coal). of a potentially cold winter began to Similarly, while demand in Taiwan was circulate. Combined, these factors caused somewhat flat, coal consumption Meanwhile, South Africa and Russia global prices to reach more than $100 per increased as the year progressed due to increased their coal supplies to the Pacific tonne by November. Seeing the rapid nuclear capacity shortage. market, by 5 million tonnes and 9.1 million increase in prices, the Chinese government tonnes respectively. However, restricted Meanwhile, South-East Asia saw robust decided to take action, initially lifting the railway capacity and lack of railcars imports to the Philippines, Thailand, 276 working-day regime for ‘advanced constrained Russian coal transportation in Malaysia and, most notably, to Vietnam, mines’, then for all mines by mid‑November the second part of the year, preventing with imports increasing by 13% to 2016 until March 2017. At the same time, further export growth. the government also decided to regulate 71 million tonnes across the region as a prices and pushed coal miners to sign whole. long-term contracts with power plants. By the end of the year, Chinese imports totalled 174 million tonnes, which is 22% higher than in 2015. The Chinese government will continue to monitor the situation closely and is likely to intervene further in 2017 if prices break the corridor levels of RMB 470 on the downside or RMB 600 on the upside.
SUEK ANNUAL REPORT 2016 – 20 – MARKET REVIEW / CONTINUED
Atlantic market As a result of limited coal supply and a RUSSIAN COAL colder winter, Atlantic market conditions in In 2016, demand for imported the second half of 2016 were much better MARKET thermal coal in the Atlantic than in the first half. There was a significant drop in US exports, by 7.5 million tonnes market fell by 11% year-on-year In 2016, supplies of Russian over the year, including the 5-million-tonne thermal coal increased by to 169 million tonnes. reduction in supply to the Atlantic market. A series of bankruptcies restricted the 3 million tonnes compared to This decline was mainly due to a sharp, ability of US suppliers to respond to price 2015, totalling 278 million 80% reduction in UK imports, to 4.2 million increases on the international market, 1 tonnes. This was caused by higher gas causing US producers to focus tonnes . consumption linked to rising carbon tax predominantly on their domestic market. This increase was due to an uplift in and the decommissioning of several The US market also improved during the exports, while domestic shipments coal-fired plants. Spain and Portugal also year, making it more profitable for US decreased slightly. Substantial growth in saw reduced imports in 2016, primarily due producers to concentrate their efforts hydropower generation resulted in lowered to record levels of generation from domestically. hydroelectric power plants. In the consumption at coal-fired power plants, Colombia responded to decreasing Netherlands, coal consumption suffered which led to weakened demand for thermal demand in Europe by diverting about 8 due to the decommissioning of three coal in Russia. The major increase in million tonnes of coal from Atlantic to Asian coal-fired power plants at the end of 2015. export shipments was delivered through markets (India, Pakistan, South Korea, Consumption in Italy decreased mainly in seaports and across borders in the East of Japan, Taiwan, the UAE and Thailand). the first part of the year as a result of warm Russia, while westward export shipments weather and technical issues. The Russia also decreased seaborne exports to remained similar to the previous year. decrease in imports to all these countries, the Atlantic market by about 5.4 million At year-end, brown coal production in including the UK, amounted to 18.7 million tonnes. In the first half of 2016, this decline Russia remained similar to 2015, tonnes. was mainly due to extremely low prices in amounting to 71 million tonnes, while the region. In the second half, supplies Demand from Scandinavian countries was production of hard thermal coal increased were impacted by railway constraints stable, with a weak start due to a mild by 6% to 230 million tonnes. Brown coal is related to increased railcar usage. winter followed by an uplift in the second mostly supplied to Russian power- half of the year linked to low levels of Similarly, South Africa’s supply to the generation and public utilities. Hard coal is hydrogeneration. Atlantic market reduced drastically, with an also used by these industries, as well as overall reduction of 9 million tonnes as for the production of cement, metals and In the Mediterranean region, there were South African prices exceeded those other industrial uses. several positive developments. Demand in Europe. from Turkey continued to improve, despite International thermal coal prices in 2016 a tax on coal imports which came into were highly volatile. At the start of the year force in August 2016, while demand in they reached a multi-year low, then jumped Egypt was boosted by higher consumption two-fold in the second half of the year in the cement industry. Demand from before starting to settle (see International Morocco also improved slightly. This market review on pages 18-20). Russian growth was partially balanced by lower market prices remained relatively constant imports in Israel, following the during this period. Most coal is shipped to government’s imposition of a 15% Russian consumers under long-term reduction in coal consumption due to contracts, with prices normally adjusted environmental regulations. every year based on changes in inflation rates and transportation costs.
1 Statistical data from Russian government agencies, SUEK estimates.
SUEK ANNUAL REPORT 2016 – 21 –
STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS
Russian market supplies Export supplies Shipments of coal to the UK, which until a Supplies of thermal coal to the Russian At year-end, Russian thermal coal exports few years ago was one of the key export market decreased by 4% in 2016, totalling increased by 10 million tonnes (+7%) to markets for Russian coal, dropped 129 million tonnes. This decrease was due 149 million tonnes1. There was an increase significantly due to the conversion of many to weakened demand for coal among in coal shipped to the East, while westward power plants to natural gas. Exports to energy producers. Heavy rain in the deliveries remained similar to the previous Spain, Italy, the Netherlands and Belgium summer resulted in high levels of year. Shipments to Asia-Pacific markets also declined. However, exports to hydropower generation, both in Siberia and accounted for 48% of total Russian Mediterranean countries – Turkey, Morocco the Far East (where most coal-fired power exports of thermal coal, totalling 71 million and Egypt – increased in line with the plants are located) and across the rest of tonnes. growing demand in those countries. Russia. According to data from the Unified It should be noted that, due to substantial In the East, major importers purchased Energy System grid operator, electric growth in demand for and prices of thermal more Russian coal during the year, with the power generated by Russian hydropower coal on the international market during the biggest uplifts seen in China, Vietnam and plants increased by 10% in 2016 to second half of 2016, Russian exporters India. Overall, the largest importers of 187 TWh, while hydropower generation in might have achieved better results. Coal Russian thermal coal during 2016 were Siberia and the Far East grew by 15% to exports were limited by the shortage of South Korea, China, Japan, Turkey and the 113 TWh. As a result, by year-end, coal 2 railcars across the railway network. Netherlands . supplies to power producers had decreased by 8% to 87 million tonnes. Structural changes to the seaborne export of Russian thermal coal in 2016 affected Coal supplies to public utilities during 2016 both the Atlantic and Asia-Pacific markets. remained similar to the previous year, with annual deliveries of thermal coal to this sector amounting to 21 million tonnes. Russian imports of thermal coal, which mainly comes from Kazakhstan, decreased by 9% to 20 million tonnes. This was due to reduced consumption at coal-fired power plants and the conversion of several power plants to natural gas.
Thermal coal supplies to the Russian thermal coal supplies Russian market by customer to the international market (million tonnes) (million tonnes) 149 145 139 71 135 139 136 131 129 125 100 91 62 94 119 56 87 87 47 43 78
Power 80 78 77 76 generating companies 25
23 Asia-Pacific 23 21 21 Public utilities market 23 21 21 21 22 Other customers Atlantic market ‘12 ‘13 ‘14 ‘15 ‘16 ‘12 ‘13 ‘14 ‘15 ‘16
Sources: statistical data from Russian Sources: statistical data on railway government agencies, SUEK estimates coal transport, SUEK estimates
1 Statistical data on seaborne coal exports, SUEK estimates.
SUEK ANNUAL REPORT 2016 – 22 – CHAIRMAN’S STATEMENT
A YEAR OF QUALITY CHANGES
Leading the way in social development We’re committed to supporting local people and communities through numerous programmes, initiatives and investments. SUEK is a responsible payer SUEK is about so much more than just of taxes, making a significant contribution coal production and sales. We are not to federal, regional and municipal budgets, and is a key player in the economy of the only far reaching in the geographical Russian Federation. spread of our operations and the In 2016, the Russian Union of Industrialists numbers of people we employ, but also and Entrepreneurs acknowledged SUEK a deeply involved in the social and special award for our contribution to the social development of the territories in economic development of our nation. which we operate. Of the many prizes we have received, this is among the most important to me. For many years, SUEK has been stimulating social and economic development in nearly 50 towns in the remote regions of Siberia and the Russian Far East, and it is very gratifying that our contribution in this area has been recognised.
SUEK ANNUAL REPORT 2016 – 23 –
STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS
Adapting to change In 2017, the Board and management will Outlook It’s common knowledge that the last five maintain a strong focus on health, safety In 2017, we will further refine our internal years have been a very volatile period for and the environment, with a view to driving management processes in order to the energy resources markets. Additionally, improvements that will reduce our overall increase efficiency, transparency and the the coal industry is facing the twin operational impact. We will also oversee overall profitability of the business. challenges of rising demand for cheap and the development of our coal-washing We will also continue to adhere to best reliable power, and increasing pressure capabilities in order to reduce the reporting practice, setting new quality from stricter environmental regulations and emissions from our products and meet the standards among Russian mining intensified efforts towards decarbonisation. requirements of new-generation coal-fired companies. In the beginning of 2017, the To overcome such challenges, SUEK stations. ‘Leaders of Russian Business’ award went strives to balance its response to In response to the present market volatility, to SUEK for the quality of our sustainable customers’ demands with the our overriding aim is to ensure we are in a development reports. And I am absolutely implementation of environmentally strong position to deliver steady business certain that 2017 will be another year of sustainable production processes. growth, and withstand the challenges of strong results and high achievements. During 2016, in response to shifting market the ever-changing macroeconomic Beyond all doubt, with our relentless focus conditions, the Board revised the environment. To these ends, in 2016 the on improving operational efficiency, SUEK company’s ten-year consolidated strategy Board of Directors endorsed a number of remains exceptionally well placed to deliver and key strategic objectives. Our strategic special measures, including strict steady, sustainable growth and achieve goal is to develop a sustainable portfolio of investment controls, an increased focus on ultimate success. high-quality thermal and coking coal in operational efficiency, cost savings, and the development of our own distribution order to satisfy market demand and ALEXANDER LANDIA customer requirements. We will focus our and logistics networks. CHAIRMAN OF THE BOARD OF DIRECTORS key investment projects on developing Corporate development high-quality deposits and coal-washing During 2016, we implemented a new capacities in order to ensure higher- comprehensive compliance system to help calorific-value products. We will therefore strengthen our approach to corporate be able to strengthen our presence in governance. Our new compliance premium, high-margin markets, especially processes will add to the best practices we in the Asia-Pacific region, focusing in currently employ. They will ensure that all particular on Japan, South Korea, Taiwan business decisions are made as effectively and South-East Asia. as possible, taking into account the SUEK will also maintain stable supplies of interests of the company’s stakeholders coal to developing economies in regions and society as a whole. where other energy sources are less effective. Additionally, efficient supply chain management and distribution will contribute to the optimum allocation of deliveries to targeted markets.
FOR OUR MISSION, VISION AND VALUES, SEE PAGE 34. FOR CORPORATE GOVERNANCE, SEE PAGES 81-93.
SUEK ANNUAL REPORT 2016 – 24 – CEO’S STATEMENT
STABILITY AND ACHIEVEMENT
A milestone year 2016 was a milestone year for the Russian coal-mining industry. For the first time in history, the 100 million tonne production mark by a single company was surpassed in our country; and I am proud to announce With our core strategic focus on cost that it was SUEK, in its 15th year of efficiency, product quality improvement, operation, that achieved this remarkable feat. I hope that, with this achievement, we environmental safety and network have brought some light to the coal-mining expansion, we can look ahead with community, which for so long has operated confidence, and with a deep conviction in challenging market conditions. Extreme coal-price volatility was the most in our capabilities and self-reliance. crucial feature of the global market in 2016. The Pacific market increased, while the Atlantic market saw a continuous decline in demand. The Russian market remained relatively stable, although high water levels in the rivers of Siberia and the Far East led to decreased coal consumption by power-generation companies.
SUEK ANNUAL REPORT 2016 – 25 –
STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS
In this challenging market environment, This vital achievement came as a result of Alongside safety comes our firm SUEK’s achievements were only possible concerted efforts to protect the health and commitment to social and environmental through well-coordinated teamwork and wellbeing of our employees, such as the responsibility, upheld through our deep the efficient cooperation of all our implementation of the most advanced involvement in the lives and wellbeing of branches. Our strategic focus on the available technologies and procedures Russian people and communities, and in development of high-quality deposits, the across our production assets. In December the protection of our national landscape. expansion of our coal-washing capacity, 2015, SUEK’s management unveiled a new At SUEK, we consider it a point of duty to and the modernisation of existing plants, SUEK’s Code of Corporate Ethics that do everything possible to preserve the delivered remarkable results. Increased placed Safety and Efficiency at the top of a environment for future generations, and in productivity, the use of higher-capacity list of corporate values. We seek that the 2016 we signed important agreements with mining equipment, and the improvement of whole community of 33,500 SUEK the Ministry of Natural Resources and the our logistical and distribution network, employees strongly adheres to these Environment, and with several regional enabled us to achieve stable operational safety principles. Indeed, health and safety authorities. These agreements will form a growth: +8% year-on-year in production, is now deeply embedded across the reliable framework for our environmental +12% year-on-year in coal-washing organisation, both in our everyday actions activities in 2017, which has been declared volumes, and +2% year-on-year in sales as individuals, and in our collective ethos the Year of Ecology across the Russian volume. and commitments. Federation. In 2016, we efficiently adapted to changing In 2016, we analysed our operational Outlook market conditions and demonstrated high performance against that of other leading Despite our strong operational and flexibility in our sales. Thus, given the international coal producers. Based on the financial results in 2016, we know there is reduced consumption of brown coal results of this exercise, we implemented a still uncertainty within the global industry. domestically, we increased its export, and number of measures designed to achieve However, even in such circumstances, we for the first time in the company’s history further improvements in efficiency, are uniquely placed to tackle any future we supplied over 1 million tonnes of brown including changes in our coal storage challenges we may encounter. With our coal to other countries. management, the monitoring of coal core strategic focus on cost efficiency, quality in transportation, and the Our efforts led to stable financial results. product quality improvement, enhancement of our drilling and blasting EBITDA grew 9% compared to 2015, to environmental safety and network operations. The analysis also enabled us to $965m, while our EBITDA margin increased expansion, we can look ahead with study and understand the various by 3% to 24%, mainly due to our focus on confidence, and with a deep conviction in breakdowns, incidents, accidents and premium markets and increased sales our capabilities and self-reliance. injuries that occur within the coal industry, efficiency. Net profit, meanwhile, grew by and to take prompt steps to prevent such half to $303m. situations arising at our own production VLADIMIR RASHEVSKY Key focus areas: safety, efficiency and facilities. Examples of complex accident CHIEF EXECUTIVE OFFICER sustainable development control initiatives rolled out during the year The health and safety of our people include the introduction and operational remains our number-one priority. As such, adaptation of our company-wide one of the most important results we automated safety system, as well as the achieved in 2016 was a significant close monitoring and improvement of all decrease in the accident rate at our health, safety and environmental measures. production units. Our Lost Time Injury Frequency Rate (LTIFR) fell by a quarter, not only to the lowest level in SUEK’s history, but to one of the lowest levels in the global coal industry.
SUEK ANNUAL REPORT 2016 – 26 – MATERIALITY
HOW WE RESPOND
In defining our strategic priorities and the content of our corporate reports, we analyse the matters that are most important to the company, our value-creation processes and our stakeholders. Continuous monitoring of our operational, financial and social activities, along with the identification of interrelated and significant material matters, gives us a better view of the impact that our business has on the world around us, and of how our future value creation may be impacted by our stakeholders.
TO DEFINE MATERIALITY, WE: 1 2 3 4 5
Made a Surveyed key Surveyed Built a 2016 Prioritised preliminary list company external matrix based material of relevant employees stakeholders on internal and matters. matters regarding the regarding the external according to importance and importance and surveys. their potential to priority of these priority of these affect our ability matters, and matters, and to create value. added other added other matters they matters they considered considered significant. significant.
Our assessment of these identified matters helps us to understand their causes and interrelationships and organise our work, taking into account their impact on our business processes and value creation. See how these matters affect our performance and how we manage them in the relevant sections of this Report.
SUEK ANNUAL REPORT 2016 – 27 –
STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS
We have defined ‘material matters’ Through this process, we identified Based on the importance and impact of as those which are of significance to relevant matters which we believe are relevant matters, we made a list of material the company’s value-creation potential, important for the growth, success and matters, which was subsequently used in and those which are important to our sustainability of our business, such as the assessment of our long-term goals, key stakeholders. In preparing this reputation, financial performance, delivery strategic priorities and governance, as well Annual Report, we conducted a thorough of strategy and licence to operate. as in defining the content of the Report. In analysis of the external and internal total, in 2016 we identified 14 key issues, environment, carried out surveys among of which the first five were deemed the our employees, and interacted with most material for the year. a number of external stakeholders.
2016 MATERIALITY MATRIX Key material matters
Financial stability M1 and development prospects M1 Industrial safety and emergency M2 Higher preparedness Quality of corporate governance M3 and risk management
M4 Production efficiency M2 Product quality and M5 high-value products M3 M4 M5 Other important matters
M10 M8 M11 M6 Attitude towards climate change Fair remuneration and social M7 support for employees M13
Importance stakeholders for key Human resources policy M8 and labour relationships M6 M9 M12 M14 M7 Staff training, including training
Lower M9 for new jobs Company participation in the M10 development of local communities Lower Higher Environmental impact of the M11 company’s operations and Importance for SUEK’s value creation environmental measures Clear specifications and M12 requirements for suppliers and support for local suppliers
M13 Mutual adherence to business ethics Company’s role in the development of M14 the potential of mono-industry towns
SUEK ANNUAL REPORT 2016 – 28 – MATERIALITY / CONTINUED
Material issue SUEK’s context in 2016 Impact on our value creation How we responded
• In 2016, the coal market An inability to finance our • SUEK managed to prove that M1 experienced unpredicted operating activities could the company has a positive cash price volatility. adversely affect the flow, sustainable margins and Financial • During the reporting year, company’s operations and comprehensive environmental stability and due to geopolitical business as a whole. An programmes. These enabled it development complications, several increase in the cost of to secure a $1.3bn pre-export prospects international banks applied investment and operating finance facility from a pool of restrictions on the financing costs, as well as the need international banks. of Russian companies. to attract more financing, • Moreover, the company used may impact SUEK’s • Moreover, in light of the favourable conditions in the financial results. Paris climate change Russian market to issue RUB agreement and unclear coal 8bn in bonds. industry prospects, some international banks introduced restrictions on the financing of coal projects.
• Coal mining is associated with Industrial accidents and • SUEK implements a M2 risks related to geological emergencies may result comprehensive health and factors, technical conditions in human fatalities, safety programme, including Industrial within mines, emergency environmental damage or the promotion of international safety and situations and human error. suspension of operations. safety standards, employee emergency These risks are of ongoing Subsequently, they can training, the provision of modern major importance to the result in direct losses for the personal protective equipment preparedness company, its employees and company, fines, reputational and the modernisation of regulatory authorities. Despite damage, refusal of business production facilities. all our efforts, in 2016 there partners to continue • We also conduct thorough were three fatal accidents at relationships, or claims investigations of every the company’s production from lenders for early accident, with the aim of facilities. We deeply regret loan repayments. preventing them in future. this loss of life and extend • In 2016, these measures enabled our condolences to the families us to further reduce our LTIFR to and friends of the deceased. 0.94, which is one of the lowest levels in the Russian and global coal-mining industries.
• In 2016, following political Lack of transparency in • We are committed to best M3 developments in Russia, corporate governance, as practice in corporate governance. our key stakeholders in well as non-compliance with In 2016, SUEK completed its Quality of Russia and abroad increased national regulations, can lead intragroup reorganisation, corporate their focus on transparency to additional requests from consolidating its reporting and governance and the quality of our state authorities, lenders and corporate governance under JSC corporate governance and business partners; it can SUEK, which is headquartered in and risk compliance procedures. also impact the company’s Moscow, Russia. management operations as claims to the • In 2016, new independent and company are extended. highly experienced directors were appointed to our Board of Directors; currently five out of nine Directors are independent. • SUEK also created a Compliance Officer Service in June 2016, which led to the development and launch of a comprehensive compliance policy for the company at all levels. All procedures are planned to be completed by June 2017.
SUEK ANNUAL REPORT 2016 – 29 –
STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS
Material issue SUEK’s context in 2016 Impact on our value creation How we responded
• A multi-year low in international Inefficient production • SUEK regularly carries out M4 coal prices, and decreasing processes can increase costs modernisation programmes, demand in several countries in and diminish the company’s substituting outdated equipment Production 1H 2016, made all coal competitive advantages. with more efficient kit. We efficiency producers focus on cost constantly analyse all business efficiency to maintain financial processes to make them more stability. effective and efficient, as well as • Moreover, tighter optimising space-planning environmental regulations solutions in our mines. following the Paris climate • SUEK pays particular attention to change agreement have operational-efficiency projects increased demand for higher- associated with reducing the quality coal. duration of longwall face equipment moves and increasing energy efficiency. • As a result of these initiatives, in 2016 the productivity of our mining personnel increased by 12%. The company also managed to keep its costs in the lowest quartile of the global cost curve, and achieved record production levels exceeding 105 million tonnes.
• In 2016, many Pacific countries Tighter domestic and • We invest in the development of M5 increased demand for higher- international environmental high-grade coal deposits and quality coal. This was due to standards on coal quality, and improved washing capacities to Product tighter environmental stricter requirements from new meet demand for higher-quality quality and regulations and the coal-fired power stations, may products from international high-value introduction of more efficient result in a lower demand for markets. products coal-fired plants requiring lower-grade coal. This trend • We also develop sales of sized higher grades of coal; could adversely impact the and metallurgical coals. In 2016, • The 2016 International Energy company’s financial and we increased sales of higher- Outlook forecasts that by operational performance. calorific thermal coal and coking 2040, around 400 GW of new coal by 8%. supercritical and 330 GW of new ultra-supercritical coal-fired power generation will be built. It also predicts that the share of coal demand coming from subcritical plants will drop from around 70% today to 30% in 2040. These new plants require high-quality coal.
SUEK ANNUAL REPORT 2016 – 30 – STAKEHOLDER ENGAGEMENT
COMMITTED TO OPEN DIALOGUE Effective stakeholder engagement is an integral part of how SUEK operates. In the process of developing relations with our stakeholders, we are committed to open dialogue and trusted partnership. This enables us to understand and respond to the interests and expectations of key stakeholders.
We determine our key stakeholders by When interacting with stakeholders our corporate website, a ‘hotline’ and assessing the impact that different groups regarding identified material matters, we conferences for employees. In addition, we have, or might have, on our performance, use a comprehensive communications regularly hold staff meetings, attended by as well as the impact that the company system. This system helps to ensure the management, at which topical matters are has on their wellbeing. completeness, timeliness, objectivity, discussed. reliability and consistency of information, When building stakeholder relationships, We use special channels that are designed as well as providing free and open access the basic principles we adhere to are both to inform our stakeholders about all to this information. defined in SUEK’s Code of Corporate material matters that could affect the Ethics. They include: For communication with stakeholders, in company’s operations, and to gather their 2016 we used a range of communications feedback on our financial and non-financial • Regulation of stakeholder relations by channels, such as the corporate website, disclosures. These channels include law in Russia and other countries where press releases, interviews and media conferences, round tables, seminars and SUEK operates; reports, press conferences, visits to public hearings at which we disclose • Respect for the interests of all production sites, and meetings with information relevant to certain stakeholder stakeholders, and the promotion of management. To reach out to our groups. active cooperation based on honesty, employees, we employ internal transparency and mutual respect; communications channels such as • Informational transparency; corporate media, the SUEK intranet portal, • Compliance with ethical standards relating to business conduct.
The company’s stakeholders Relevant Channels and formats material of engagement issues
Shareholders • General Meeting of Shareholders M1 • Corporate reporting We seek to ensure sustainable growth for the company and increase its • Corporate media long-term value for the benefit of our shareholders. We always respect M2
shareholders’ rights and enable full access to necessary company data and information. M3
Financial stakeholders • Meetings with banks and M1 and potential investors potential investors • Corporate reporting M3 Our relations with financial stakeholders and potential investors are based • Corporate website, press releases on the improvement of the company’s investment potential through the and investor presentations development of our corporate governance and operational efficiency. M5 We aim for maximum disclosure of relevant information in this area, including information regarding the company’s strategy, production and financial performance.
Employees • Staff training and M2 development systems Across the business, we offer fair remuneration, fulfil our social • Meetings between management M3 commitments and provide professional and personal development and and employees training for our staff. We also aim to improve labour efficiency and safety, • Corporate media protect workers’ health and implement social programmes to raise living standards for our employees and their families. • Staff opinion surveys • Agreements with trade unions and collective arrangements • Social programmes • Multi-channel hotline
SUEK ANNUAL REPORT 2016 – 31 –
STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS
The company’s stakeholders Relevant Channels and formats material of engagement issues
Suppliers and business partners • Cooperation agreements M3 • Business meetings In our relations with suppliers and business partners, we try to create • Conferences and exhibitions and develop long-term and constructive partnerships. Our principles of M4 cooperation are based on the observance of business ethics and the • Open tenders complete fulfilment of contractual obligations, as well as responsible • Participation in professional Russian and supply chain management (for details on our supply chain, see page 57). international unions and organisations We also include health, safety, social and environmental issues in our • Section of website, www.suek.ru, arrangements with contractors. that is dedicated to suppliers • Publication in the media
Customers • Cooperation agreements M1 • Conferences and exhibitions We focus on providing the highest-quality service, which means ensuring • Business meetings seamless, uninterrupted and timely delivery of coal shipments. We are M4 constantly improving our product quality and strive to personalise our • Claims resolution and approach with each and every one of our customers. We also use an IT M5 accounting systems system dedicated to customer claims, ensuring we respond to all queries • Corporate reporting and communications in a timely and efficient way. • Our corporate media system, which includes a special section on the corporate website where customers can submit online coal purchase requests
State authorities • Social and economic M3 partnership agreements Our key objectives in cooperating with state authorities include: the • Joint working groups development of partnerships to improve the competitiveness of the • Committees and conferences national and regional economies; the promotion of social development throughout the regions; and the creation of solutions to environmental • Round tables and meetings problems. The company’s interaction with the state is based on strict • Corporate reporting adherence to all applicable laws and requirements. We actively cooperate with representatives of state bodies of the Russian Federation, at both federal and regional levels. Government agencies also call upon our industry expertise to help inform strategic decision-making on Russian fuel and energy issues and purpose-oriented programmes.
Local communities in the regions where we operate • Employment of local population M2 • Social, charity and environmental projects In our interaction with local communities, we aim to jointly develop social • Public hearings and round tables infrastructure, create human capital, implement social activities, and M4 deliver projects focused on environmental protection. We implement • Seminars and conferences social and charity projects in healthcare, education, housing • Corporate reporting improvement and development. We also provide communal services, • Our corporate media system culture, sports and business development initiatives, as well as support to disadvantaged social groups. In addition, we encourage and enable local communities to get involved in solving urgent social problems, which is a pre-requisite for sustainable development.
Expert organisations and NGOs • Joint implementation of social projects M2 • Seminars Engagement with expert and public organisations allows us to receive • Round tables feedback on how to deliver better business, social and environmental M4 outcomes. We engage specialist organisations and Non-Governmental • Corporate reporting Organisations (NGOs) in the study, evaluation and implementation of social projects and programmes in the field of environmental management. Our relations with such organisations rely on open dialogue, transparency and parity.
SUEK ANNUAL REPORT 2016 – 32 – BUSINESS MODEL
HOW WE CREATE VALUE
VALUE CHAIN
MINING WASHING AND PROCESSING
Our cost-efficient mining activities deliver a sustainable supply of Washing plants and processing facilities adjacent to our mines and open pits high-quality thermal coal. Using open-pit and underground mines, improve the quality of our coal. Washing reduces ash, increases heat content we produce brown and hard coal. By investing in regular upgrades and ultimately improves our coal’s market value. The coal is also crushed and of our production units, SUEK is able to maintain a leading position screened so that it can precisely meet customers’ size specifications without within its sector. affecting quality.
OUR ASSETS Natural Financial Human Operational Social and relationships
5.4Bt of coal Optimal 33,429 12 mines and 12,000 higher- Open engagement reserves1 capital structure employees 15 open pits capacity railcars with stakeholders Water, air, soil Skills and 9 washing under management experience and processing 3 ports facilities Extensive Research and international trade Development (R&D) and distribution Institute2 network
DRIVERS FOR SUSTAINABLE GROWTH
Product development Efficiency increase Corporate governance Stakeholder engagement Our R&D team constantly looks at Our investments in modern mining We are committed to high We engage actively with our ways to increase the quality of our equipment and operational standards of corporate governance stakeholders, ensuring we remain coal, while also developing improvements deliver increased in line with international good focused on creating value for them coal-based products for use in a productivity and cost efficiency. practice. at all times. wide range of industries.
1 SUEK’s proven and probable reserves, according to the April 2011 report by SRK 2 At our Siberian Coal Processing Research Institute, located in Moscow, with branch Consulting, amounted to 5.9 billion tonnes. Taking into account extraction between offices in Kuzbass and Krasnoyarsk, we design coal-processing plants and develop April 2011 and December 2016 and SRK’s assessment of the Apsatsky coalfield specific resource-saving technologies for coal processing. We also look at ways of carried out in 2015, these reserves stood at 5.4 billion tonnes as at 31 December improving workplace safety and of enhancing production and processing technologies 2016. at existing facilities.
SUEK ANNUAL REPORT 2016 – 33 –
STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS
OUR MAIN DIFFERENTIATORS Our business model is based on integrated operations, which enable operational and cost controls over the whole business cycle. Such an integrated model results in the following competitive advantages:
Economies Own rail and port Own trade and 1 of scale 2 infrastructure 3 distribution
LOGISTICS SALES
The favourable location of our assets, with good access to key SUEK’s extensive sales network ensures reliable coal supplies to transport infrastructure, enables SUEK to reliably and cost-efficiently customers in 38 countries. Our established offices in all key markets help supply the major markets of Russia, Europe and Asia-Pacific. mitigate business risks and allow us to sell products in local currency. More than 80% of our international sales are direct to end users.
Through our focus on operational efficiency, cost control and corporate responsibility, we deliver value to a wide range of stakeholders, including:
DELIVERING VALUE TO OUR STAKEHOLDERS Shareholders Employees Customers Suppliers Local State and financial and business communities authorities stakeholders partners
We deliver SUEK offers We are able to We have established SUEK improves SUEK provides sustainable competitive assure a quality long-term and personal wellbeing a significant tax capital returns. remuneration and product mutually beneficial through social contribution to benefits at all levels Our coal is delivered relationships with projects in all the federal, regional We offer stimulating on time and our suppliers, regions where and municipal and challenging according contractors and we operate. budgets. career development to contract. other counterparties. opportunities. $15m investments in $59m paid $965m EBITDA 33,429 jobs 103.1Mt coal sold social activities in taxes
Health, safety and Personnel development Risk management environmental protection By investing in our people, we not Proactive management of internal Our priority is to minimise safety only increase employees’ skill levels and external risks at every stage of and environmental risks at each and job satisfaction, we also our business cycle helps us meet improve the company’s operational strategic targets and secure stage of the operational cycle. SEE OUR 2016 KEY RESULTS efficiency. long-term growth. ON PAGES 2-3 AND KPI PERFORMANCE ON PAGES 36-41.
SUEK ANNUAL REPORT 2016 – 34 – STRATEGY IMPLEMENTATION
STRATEGY IMPLEMENTATION
We believe that our focus on efficiency, safety, continuous improvement and value growth will help us fulfil our mission and achieve our targets.
MISSION VISION Our mission is to fuel the world by producing Already the top coal producer in Russia, we want to be one coal safely and sustainably, helping to ensure of the leading coal companies in the world. We will achieve global energy security while delivering value to this by expanding our existing mining and processing assets, all our stakeholders. investing in new production facilities and further developing our transportation and logistics systems. We also aim to increase output from deposits located closer to our target markets, while continuing to drive innovation and change across the business.
VALUES
Safety and efficiency Professionalism and Stability and Social responsibility We are a results-oriented cooperation development We seek to have a positive company. As such, we are Professionalism for us means The stability of our company is impact on the world around us. always looking to improve making an active contribution underpinned not only by our We take seriously our efficiencies and maximise to the company and supporting financial and operational commitments to society and opportunities. colleagues. Cooperation is the strength, but by the skills and the environment, and to the communities and regions in But our returns must never ability to listen, understand and also commitment of our which we operate, and follow compromise safety. Coal respect each other. employees. SUEK puts the best practice in social and mining has inherent high welfare and development of its As part of our commitment to environmental responsibility. production risks, and we apply people above all else. We aim corporate responsibility and Company interaction with local every effort to mitigate them. to offer fair remuneration, good professionalism, we comply authorities and public and Safety is embedded in all our benefits and decent working with all applicable laws and business associations is processes and is a non- conditions, thereby ensuring regulations, build respect into focused on the long term, and negotiable part of everyday life that our employees can operate all our interactions with on mutually beneficial interests across the business. to the very best of their abilities. stakeholders, and constantly and objectives. evolve in order to maintain our Continual development is also high level of performance. crucial to our success. We progress by implementing new technologies, improving working conditions, delivering high-quality products and ensuring the safety, health and productivity of our employees.
SUEK ANNUAL REPORT 2016 – 35 –
STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS
Securing our leading position in the industry is an important goal for SUEK. We continually look for opportunities to reinforce competitive advantage, expand our market share and develop a socially responsible business. To meet these objectives, we have identified five strategy pillars.
S1 S2 S3 S4 S5
FOCUSING IMPROVING DEVELOPING ACHIEVING COMMITTED ON EFFICIENT OPERATIONAL COAL SUPPLY HIGH SAFETY TO SUSTAINABLE GROWTH EFFICIENCY LOGISTICS STANDARDS DEVELOPMENT AND PRODUCTIVITY
Our priorities
Increasing production of high-quality and Improving the Developing the Promoting high Developing social desirable coal products. efficiency of company’s rail international infrastructure in the production facilities infrastructure and standards in health regions where we Achieving balanced management of the and processes. rail fleet. and safety. operate. reserves portfolio. Developing washing Ensuring the Reducing adverse Strengthening our position in the Asia- capacities to efficient environmental Pacific region and retain our presence in improve coal quality. management of port impacts. the Atlantic market. facilities and expand our ship-loading Retaining our position as the largest coal capacity to producer and supplier of thermal coal in maximise exports Russia. from Russia. Increasing sales in metallurgical and sized coal in premium markets.
Stakeholders
Shareholders Shareholders Customers Employees Local communities
Financial stakeholders and potential Financial Suppliers and Local communities Employees investors stakeholders and business partners potential investors State authorities State authorities Employees Employees Shareholders NGOs Customers Suppliers NGOs Financial stakeholders and Customers potential investors
Shareholders
SUEK ANNUAL REPORT 2016 – 36 – STRATEGY IMPLEMENTATION / CONTINUED
S1 FOCUSING ON EFFICIENT GROWTH Our objective is to increase supply to and strengthen our presence in high-margin markets, particularly in the Asia-Pacific region. To this end, we are growing the share of washed coal within our product portfolio, developing sales of sized coal and increasing our trade in semi-soft and hard coking coal with international and Russian metallurgical customers. Currently, our investments in the development of new coal deposits are solely targeted at the most economically efficient projects. We also expect to maintain synergies through our association with the Russian electric power industry by signing long-term contracts with energy producers.
2016 results KPIs, 2016 performance 2017 plans Increasing production of high-quality and desirable coal products
SUEK’s production exceeded 105Mt for the first time in TOTAL PRODUCTION The company’s priority is to the company’s history. increase the profitable production During 2016, we developed a number of hard coal deposit of high-quality and desirable coal sites, including the Magistralny mine in Kuzbass and the 105.4Mt +8% products through the delivery of Nikolsky open pit in Buryatia. These will compensate for Year-on-year key investment projects along the depleting capacities at nearby sites. value chain, with a key focus on TOTAL SALES production and washing. We increased the efficiency and output of the Komsomolets mine washing plant, exceeding the annual We plan to sustainably increase targets for this plant by 35%. our volume of washed coal to 103.1Mt +2% satisfy the growing demand for At our new Taldinskaya-Zapadnaya 1 washing plant, we Year-on-year high-grade coals in premium achieved an annual total capacity utilisation of 87%, markets. exceeding the 80% target. COAL WASHED We are committed to delivering our key investment projects in production and washing on budget 37.3 Mt +12% Year-on-year and on time.
Achieving balanced management of the reserves portfolio
The company is maintaining a sustainable, high-quality RESERVES1 Our goal is to ensure a sustainable reserves portfolio of thermal and coking coal. portfolio of high-quality thermal and coking coal in order to satisfy market demand and customer 5.4Bt requirements. We will continue to monitor AVERAGE LIFE OF HARD attractive coal deposits. COAL DEPOSITS
over 30 years Strengthening our position in the Asia-Pacific market and retain our presence in the Atlantic market
SUEK’s coal sales to Asia totalled 32.1Mt in 2016, TOTAL INTERNATIONAL SALES We intend to enhance our 16% higher than in 2015. presence in Japan, South Korea, Our 2016 coal sales to the Atlantic market totalled Taiwan and premium markets in South-East Asia. 19.8Mt, 3% over 2015. 51.9Mt +11% Year-on-year Coal sales to the premium Japanese market increased We plan to increase direct sales by by 6%. further developing our distribution SALES TO ASIAN COUNTRIES networks in China, South Korea, We increased our presence in Poland, Turkey, Indonesia Poland and the Baltic states. and the Baltic states through strategic partnerships and the acquisition of distributors. 32.1Mt +16% Year-on-year
1 SUEK’s proven and probable reserves, according to the April 2011 report by SRK Consulting, amounted to 5.9 billion tonnes. Taking into account extraction between April 2011 and December 2016 and SRK’s assessment of the Apsatsky coalfield carried out in 2015, these reserves stood at 5.4 billion tonnes as at 31 December 2016.
SUEK ANNUAL REPORT 2016 – 37 –
STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS
2016 results KPIs, 2016 performance 2017 plans Retaining our position as the largest coal producer and supplier of thermal coal in Russia
We remained the leading thermal coal supplier in Russia, SHARE OF SUPPLIES TO RUSSIAN THERMAL We plan to maintain our leadership with a market share of 40%. COAL MARKET in the Russian market and to seek new opportunities to increase sales to Russian customers. 40% We intend to continue selling coal to the major Russian energy SALES TO RUSSIAN MARKET producers – SGK, Unipro, Gazprom Energoholding, TGK-14, DGK and others. 51.2Mt -6% Year-on-year
SALES TO SGK 23.8Mt 0% Year-on-year Increasing sales in metallurgical and sized coal in premium markets
International sales of metallurgical coal grew to 2.7Mt METALLURGICAL COAL SALES TO We plan to develop our presence in 2016, while Russian sales totalled 0.4Mt. INTERNATIONAL MARKET in the metallurgical coal export Our sized coal sales in 2016 totalled 2.8Mt, including sales market through the sale of Kirova of sized coal to Poland which increased by 30% compared mine concentrate and by with 2015. 2.7Mt +50% increasing supplies to customers Year-on-year in this sector in Asia. We also aim to increase sales of METALLURGICAL COAL SALES sized coal to international markets TO RUSSIAN MARKET in a sustainable way, mainly through doubling sales to Poland 0.4Mt +95% and Turkey over the next few years. Year-on-year
SIZED COAL INTERNATIONAL SALES 2.8Mt +22% Year-on-year
Strategy in action Developing assets to substitute for depleting capacities The company has a coal-mining licence for the Nikolsky hard coal deposit located near the Tugnuisky open pit and washing plant. The Nikolsky deposit contains 270 million tonnes of mineable reserves. Nikolsky coal is high quality, and will facilitate the production of washed products with higher calorific value, thereby increasing the prospect of sales within premium markets. We actively developed the Nikolsky open pit in 2016 and produced the first million tonnes of coal from Nikolsky at year-end. Our target for 2017 is 2 million tonnes. In 2016, we also accelerated the development of the Magistralny site in Kuzbass, which will enable us to retain the team from the November 7th mine, where reserves have been depleted. The tentative commissioning date for the first longwall panel at Magistralny is the end of 2017.
SUEK ANNUAL REPORT 2016 – 38 – STRATEGY IMPLEMENTATION / CONTINUED
S2 IMPROVING OPERATIONAL EFFICIENCY AND PRODUCTIVITY We maintain efficient, low-cost coal production by refining our operational processes and modernising our equipment and production units. We will continue to improve internal management processes with the express intention of boosting the overall profitability of the business.
2016 results KPIs, 2016 performance 2017 plans Improving the efficiency of production facilities and processes
We achieved a number of new productivity records in 2016: PRODUCTIVITY OF MINING UNIT We plan to increase overall • The Kotinskaya mine produced 1,050 tonnes of coal in PRODUCTION PERSONNEL production by improving our one month from a longwall face – an all-time Russian underground mine layouts record; (including expanding longwall length up to 400m), overcoming • SUEK reached 100Mt of production on 14 December; 489 tonnes per geological challenges in some • The Chernogorsky open pit set a new world excavation reserve areas, improving record using a Komatsu PC-4000 (1,075 tonnes per man-hour +12% operational efficiency and Year-on-year month). modernising equipment. Technological and automation upgrades and ELECTRICITY CONSUMPTION We also plan to continue achievements in 2016 include: PER UNIT OF OUTPUT implementing an energy-efficiency improvement programme across all • Commissioning of an ESh-20/90 dragline, with our production sites. innovative switched reluctance drives for pull, lift and swing, at our Tugnuisky open pit. An upgrade of a 13.7kWh -1% Year-on-year dragline on this scale has never been undertaken in Russia before. All of the drives were manufactured at INVESTMENT IN MODERN We will remain focused on our own Borodinsky machinery and repair plant. This MINING EQUIPMENT modernising our equipment as one technology has reduced unit power consumption by of the levers for improved 55% and increased productivity by 10%. operational efficiency. $235m +12% Year-on-year
Developing washing capacities to improve coal quality
During 2016, we upgraded the Polysaevskaya mine COAL WASHED We intend to maximise the washing plant. utilisation and improve the We increased the efficiency and output of the productivity of our coal-washing facilities. Komsomolets mine washing plant, exceeding the annual 37.3 Mt +12% targets for the plant by 35%. Year-on-year Plans to increase our coal-washing The new Taldinskaya-Zapadnaya 1 washing plant capacities include the engineering achieved an annual utilisation rate of 87%, exceeding the of a new washing plant at the 80% target. Kotinskaya mine and the expansion of the existing washing plant at the Tugnuisky open pit. We will also improve and optimise the portfolio of products we offer at our coal-washing facilities.
Strategy in action Improvements in blasting and maintenance In the first half of 2016, the company started to implement a new strategy for improving drilling and blasting operations. As part of this process, we identified the following key improvement factors: reducing the cost and consumption of explosives, and reducing drilling costs. In 2016, we also began to implement a new technical policy, ‘Labour- saving equipment for ancillary processes’. This has the objective of ensuring that systematic and standardised labour-saving equipment is provided for ancillary work and maintenance tasks. To date, we have developed generic solutions for equipping automotive, maintenance, installation and railway workshops and boiler houses under this policy.
SUEK ANNUAL REPORT 2016 – 39 –
STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS
S3 DEVELOPING COAL SUPPLY LOGISTICS We plan to keep our costs under control by making focused investments. Increasing the loading capacity of our port facilities will maximise the exports we can ship from our own ports. Working with Russian Railways, we are also carrying out projects to reduce the time it takes to deliver coal by rail.
2016 results KPIs, 2016 performance 2017 plans Developing the company’s rail infrastructure and rail fleet
In 2016, the fleet of higher-capacity railcars under SUEK’s RAILCARS WITH HIGHER CAPACITY UNDER We aim to increase our loading- management grew by 30%, to 12,000 by the end of MANAGEMENT station capacity in line with the year. production growth. We also received a new main-line locomotive at our We plan to acquire additional Tugnuisky open pit, while our railcar turnover was 12,000 +30% higher-capacity railcars. This will improved. Year-on-year further reduce transportation costs We continued our collaboration with Russian Railways and increase coal shipments to develop the traffic capacity of our own railway stations. through our port facilities. Other key achievements in 2016 include: • Development of Murmansk station (to be completed in 2017); • Development of Vanino Bulk Terminal railway infrastructure (to be completed in 1H 2017); • Increase of Kamyshta station capacity for the Vostochno-Beisky open pit in Khakasia by 60%.
Ensuring the efficient management of port facilities and expand our ship-loading capacity to maximise exports from Russia
We continued to develop our Vanino Bulk Terminal. SHIP-LOADING CAPACITY We intend to meet all our We commissioned the first and second facilities as part THROUGH OUR PORTS ship-loading needs through our of our ‘External development of Far East transportation own dedicated ports. hub’s railway infrastructure’ project. We plan to increase the ship- We also commissioned new portal cranes and other 41.5Mt loading capacity of Vanino Bulk higher-capacity equipment at Murmansk Commercial Terminal to 24Mt by 2018, and of Murmansk Commercial Seaport to Seaport and Maly Port and started expanding railway SHIPPED THROUGH OUR PORTS infrastructure at Murmansk Commercial Seaport. 16Mt by the end of 2017.
36.5Mt +6% Year-on-year
Strategy in action Increasing coal shipment through Murmansk Commercial Seaport In 2016, we began to modernise our railway infrastructure at Murmansk Commercial Seaport, with the aim of increasing the number of railcars handled to 600 units a day. Our main priority is to remove any constraints created by capacity limitations on the railway which leads to the port. We plan to complete the final stage of expanding the railway infrastructure in mid-2017, with the goal of achieving an annual shipment capacity of 16 million tonnes from this port. We have also installed seven new portal cranes at the port and are using higher-capacity bucket grabs, which increase shipment capacity and suppress dust generation. We expect to install another six cranes in the next three years. Murmansk Commercial Seaport is the largest year-round ice-free seaport north of the Arctic Circle. At the year-end SUEK held a 75.5% stake in the voting shares of the port. The port is able to service ships with a deadweight of up to 160,000 tonnes. It ships both bulk and general loads and provides regular access to the Atlantic Ocean and links to ports in Western Europe, the Mediterranean and on the eastern seaboard of the US.
SUEK ANNUAL REPORT 2016 – 40 – STRATEGY IMPLEMENTATION / CONTINUED
S4 ACHIEVING HIGH SAFETY STANDARDS All SUEK companies comply with leading international standards in occupational and industrial safety. Our fundamental aims are to reduce injury rates and prevent fatal accidents.
2016 results KPIs, 2016 performance 2017 plans Promoting high international standards in health and safety
SUEK continued to invest time and money in developing LTIFR We are committed to ongoing monitoring and safety alert systems. investment and improvement in the In 2016, as part of our commitment to continuous staff monitoring and provision of safety training and health and safety awareness, we equipped all 0.94 -24% alerts, particularly for ventilation, our mining facilities with terminals for complex pre-shift Year-on-year gas drainage and stone-dusting examination. Now, before starting a shift, all miners take a systems, and in the installation of FATAL ACCIDENTS test to check their knowledge on health and modern explosion-proof starters. safety matters. We plan to deliver additional The occupational health and safety management system personnel training programmes for open-pit coal mining and processing in Khakasia was 3 to help reduce the number of certified as conforming to the OHSAS 18001:2007 standard. accidents at our sites. INVESTMENTS IN HEALTH AND SAFETY $48m
Strategy in action SUEK rescue team among leaders at the International Mines Rescue Competition in Canada In 2016 SUEK’s auxiliary mine rescue team placed 5th at the International Mines Rescue Competition (IMRC) held in Sudbury, Canada. For the first time in Russian history, a team of non-professional rescuers participated in the international rescue competition. To be a member of the team requires a high level of training. SUEK’s team was headed by Oleg Yurchenko, an experienced rescuer and a member of Russia’s Militarised Mine Rescue Unit for 15 years.
The IMRC has been held since 1999, and represents a unique opportunity for rescue teams of volunteers and professionals from around the world to meet and improve their mine rescue skills, while sharing technical and organisational knowledge and practical experience. In Sudbury, 27 teams from 13 countries (Canada, Russia, China, Poland, Australia, Ireland, the US, Slovakia, Vietnam, India, Colombia, and an Americas team) competed in six competitive events at the IMRC, including underground firefighting, first aid, mine rescue simulation, as well as in a technician competition and theory exam. The next IMRC will be held in Russia in 2018 in the city of Novokuznetsk, Kemerovo region.
Unified control and analytical centre The company’s head office features a unified control and analytical centre, where the objectives are to improve the quality and efficiency of managerial decisions and to prevent crisis and emergency situations. It aims to achieve these goals by conducting timely reviews, ensuring real-time access to information resources and videoconferences, and by conducting briefings using visualisation tools. Our unified information space provides the technological basis for managing industrial safety at SUEK. For example, our IT-technologies, containing mine atmospheric safety and emergency preparedness solutions, help us to meet industrial safety standards, organise the operational management of production processes and improve planning efficiency. Our integrated industrial-safety system includes a range of key processes – from geology to surveying and power supply – and is implemented through our head office, regional offices and each individual mine.
SUEK ANNUAL REPORT 2016 – 41 –
STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS
S5 COMMITTING TO SUSTAINABLE DEVELOPMENT Our aim is to contribute to global energy security by producing coal safely and sustainably, while also delivering value to all our stakeholders. Our environmental programmes are designed to minimise any negative impacts our business might have. SUEK also seeks to sustain its position as one of the most attractive employers in the Russian mining industry, primarily through the quality of our employee training and development programmes. In addition, through ongoing investment in environmental, public, educational and social projects, we aim to improve quality of life in the communities where SUEK operates.
2016 results KPIs, 2016 performance 2017 plans Developing social infrastructure in the regions where we operate
We continued to collaborate with regional and municipal INVESTMENT IN PUBLIC AND SOCIAL SUEK has a long-term commitment governments to develop social and educational PROJECTS to developing social infrastructure, infrastructure in the communities where we work. and supports local communities in We provided support for various local infrastructure the regions where we operate. development initiatives and gave financial assistance $15m We will continue to invest in key to 20 projects across Russia. public and social projects. We continued to support charities and organisations that NEW ORGANISATIONS CONTRIBUTING TO provide treatment and care for children. We extended our COMMUNITY DEVELOPMENT IN THE REGIONS involvement in a care programme for children from WHERE WE OPERATE coal-mining regions, which we run in cooperation with the Office of the President of the Russian Federation. The company also worked on a range of educational 66 +18% programmes, including leadership, economic and social Year-on-year entrepreneurship programmes. Reducing adverse environmental impacts
2016 key environmental projects included water treatment, INVESTMENT IN ENVIRONMENTAL ACTIVITIES SUEK aims to minimise its reduction of greenhouse gas emissions and land environmental impact by rehabilitation. implementing appropriate In 2016, we utilised 8.55 million m3 of methane captured $11m programmes, including projects for from mines to generate heat and electricity, a 14% reducing methane emissions and increase compared to 2015. the construction of treatment METHANE UTILISATION facilities. We constructed water-treatment facilities at the Kotinskaya mine. We will continue to implement energy-saving schemes by At Murmansk Commercial Seaport, we continued to use 3 8.55mln m +14% introducing automated energy- higher-capacity grabs to suppress dust, reducing Year-on-year management systems. This will emissions by 20% over the last four years. In 2016, we enable us to monitor and control launched a fog-generation dust suppression system, SUSPENDED AND DISSOLVED SOLIDS IN energy consumption linked to which allowed us to reduce dust generation by 49%. We WASTEWATER mining equipment, and ultimately carried out the pre-project modelling of shields that to decrease emissions. suppress over 80% of the dust generation. By the end of 2017, we plan to SUEK Khakasia was certified in compliance with the ISO 0.23kg per tonne complete the design works of 50001:2011 energy management system. dust-suppression shields at SUEK signed environmental agreements with relevant of production -12% Murmansk Commercial Seaport, regional governments, including plans for the construction Year-on-year along with commissioning of storm of water-treatment facilities, installing fog-generation water treatment facilities. equipment (to decrease airborne dust) and other projects. LAND REHABILITATED Total expenditure to be involved amounts to $40m.
397ha +85% Year-on-year
Strategy in action Creating comfortable living environment In 2016, for the sixth consecutive year, SUEK ran a multi-regional competition for development projects to improve urban land. Called ‘Comfortable Living Environment’, the competition includes five categories: ‘Cosy courtyard, cosy home’, ‘Beauty around us’, ‘Clean city – healthy future’, ‘Health zone’ and ‘Discovering Russia’. SUEK received 230 applications, almost a third of the total number of applications received over the past six years. Of these, 20 projects received financial support. The winners included the following proposals: new street lights for the town of Sagan-Nur and development of a playground in Nikolsk town in Buryatia; construction of a playground in Leninsk-Kuznetsky in Kemerovo; park landscaping in Primorye and in the Khabarovsk region; development of a sports ground in Khakasia; construction of a health and sports ground and a mobile library for children in the Krasnoyarsk region; creating an ‘Autotown’ ground for children to learn traffic regulations in Zabaikalye.
SUEK ANNUAL REPORT 2016 – 42 – RISK MANAGEMENT
PROACTIVE RISK MANAGEMENT
Effective risk management is essential to the achievement of SUEK’s strategic goals. We are committed to the continuous improvement of our risk management system, which enables us to identify external and internal risks, analyse them, and develop efficient mitigation measures.
Board of Directors
Overseeing the company’s risk management system and its development
Audit Committee Nomination and Compensation • Assessing the effectiveness of the Committee company’s internal control and risk Supervising the following areas and management systems; relevant risks: • Supervising the preparation of financial • Health and safety; statements and audit performance; • Environmental performance; • Supervising the operation of the Internal • Effectiveness of the company’s Control and Audit Service. social policy.
Strategy Committee • Developing the company’s overall strategy, strategic plans, operational and investment goals; • Taking into account all relevant risks.
Internal Control and Management Board Audit Service • Introducing processes to improve the • Assessing the internal control system; company’s risk management and internal control systems; • Assessing the risk management system; • Identifying risks, assessing them in a • Evaluation of the corporate governance timely fashion, and taking measures to system; mitigate them; • Assessment of information systems and • Promoting a culture of risk awareness information security. among our employees.
Risk Management Committee of the Management Board • Reviewing the company’s risks and evaluating the final risk matrix; • Monitoring the risk management process.
SUEK ANNUAL REPORT 2016 – 43 –
STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS
Risk management system We monitor changes in risk levels through our established, annually-reviewed risk Given the nature of the coal-mining Risk mitigation achievements map. The risk map helps to analyse the industry, we pay close attention to the in 2016: identified risks and determine the most risks related to our operations. We critical risks in each area of the company’s understand that, as our operational, The Risk Management Committee operations. The responsibility for managing commercial and financial activities grow, analysed the risk map for 2015, after specific risks is then delegated to and as the external environment remains which it reviewed and approved a new employees within the relevant volatile, the need to manage a wider range risk map for 2016, incorporating new departments. of risks increases. To this end, we continue risks and a new approach to risk to improve our corporate risk management assessment. system by developing additional risk- mitigation measures and introducing them In view of continuing changes in the across the company. macroeconomic and market environment, the Risk Management Our Risk Management Committee of the Committee focused on the following Management Board of SUEK controls and risk-mitigation initiatives: monitors the company’s risk management system, working closely with the Audit • Monitoring restrictions on coal Committee of the Board of Directors. The use resulting from international risk management process is carried out in and national regulatory decisions accordance with the risk management and PR campaigns; procedure developed and approved by the • Monitoring legislative Risk Management Committee. This amendments that could affect the procedure includes the main objectives company; and principles of risk management, and methods for their identification, • Implementing measures to assessment and mitigation. The Risk prevent an increase in rail costs Management Committee holds meetings due to structural changes in how at least once a quarter and considers rail tariffs are set; changes within the area of controlled risks. • Approving measures to monitor Where appropriate, adjustments are made social and regulatory restrictions to the risk management action plan and that may prevent planned actions the risk management system is changed relating to unprofitable assets. as needed. The Risk Management Committee also ensures cross-functional interaction between senior managers and internal operational experts. Employees responsible for managing certain types of risks devise appropriate responses to emerging issues, and inform the Risk Management Committee of all measures taken to mitigate the risks in question. In order to ensure a timely response to possible adverse developments, we continuously monitor and analyse trends in key markets and related industries, and in the macroeconomic situation, both in Russia and in countries importing SUEK’s products. Based upon this analysis, we can further adjust the company’s production, sales and financial policies.
SUEK ANNUAL REPORT 2016 – 44 – RISK MANAGEMENT / CONTINUED
REVIEW OF KEY RISKS Below we set out a list of the key risks which may have a major impact on SUEK’s operational and financial performance. Within this Annual Report, the list of risks which may affect the company’s operations and financial situation is not exhaustive. There are other inherent risks which are not listed below and may have an adverse impact on SUEK’s performance.
External risks Description of risk and its potential impact Change over the year Actions to mitigate the risk
Risk of reduction in coal prices
Reduced use of coal by power-generation companies and the emergence We wash our coal to improve its of alternative fuels may result in lower demand for coal. This trend could quality, enabling us to meet demand adversely impact the Group’s performance. Tighter international In 2016, Germany, the UK for higher-value products from environmental standards on coal quality and production conditions could and some of the Nordic international markets. We constantly also result in reduced demand for the coal we produce. states articulated plans to monitor the production, sales and reduce or completely market environment within the eliminate coal-fired power industry, and prepare coal-demand generation to fulfil their forecasts based on studies and reports pledges under the Paris by investment analysts. We diversify agreement on climate our sales to stable and growing change. markets to make up for declining sales in slowing markets. We also expand our presence in emerging markets and STRATEGIC FOR MORE DETAILS, participate in projects to develop new PRIORITY S1 SEE GLOBAL CONTEXT ON PAGES 16-17 AND MARKET technologies of coal-fired power REVIEW ON PAGES 18-21. generation.
Inflation risk
Inflation risk relates to rising inflation rates in the countries where SUEK’s In order to ensure the appropriate level companies conduct their main operations, as well as to individual of protection, we hedge inflation risks business transactions. Rising inflation can result in higher In 2015, the continuation of by using derivatives and investing production costs. sanctions imposed by the available cash assets in a stable US and the EU in 2014, as foreign currency. Most export contracts well as OPEC’s decisions on for coal are concluded in US Dollars, limiting oil output, resulted in which largely compensates for the the devaluation of the effect of inflation in Russia on the Russian Rouble. In 2016, we Group’s EBITDA. saw the return of more stable exchange rates against the US Dollar, the Euro and other currencies, although the macroeconomic and political environment, coupled with an unpredictable rate of inflation in Russia, may still impact SUEK’s financial performance in 2017. In addition, pricing methods based on export netbacks fixed in various foreign currencies, which are used by most equipment manufacturers and suppliers, may increase the cost of the Group’s investment projects.
STRATEGIC PRIORITY S1
SUEK ANNUAL REPORT 2016 – 45 –
STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS
Key to the risks
The risk has decreased
The risk has not changed
The risk has increased
External risks Description of risk and its potential impact Change over the year Actions to mitigate the risk
Risk of changes in current legislation
The company follows Russian statutory regulations and other regulatory We constantly monitor proposed acts in the jurisdictions where it produces and sells its products. We also projects to amend legislation, as well abide by the regulations of the countries and regions from which the During 2016, the Russian as Russian legislative and other Group imports goods and services. authorities introduced new regulatory requirements. We also In Russia, changes in legislation can relate to tax, customs and foreign tax regulations, effective review and summarise law exchange regulations, securities market law, anti-monopoly and corporate from 1 January 2017, enforcement practices, taking into law, licensing and mineral resources law and judicial practices. They can which set out new taxation consideration the company’s also arise through the tightening of environmental protection procedures. The Russian operation. This enables us to quickly requirements. SUEK’s business can be significantly affected by decisions government’s tax policy for adapt our business processes and made by Russian governmental agencies to impose tariffs, quotas, trade 2017-2019 is aimed at organisational structure to any changes restrictions, restrictions on the ownership rights of non-residents, further changing of tax in the legislative environment, and to subsidies, licensing and anti-monopoly policies and refinancing rates. legislation. operate in full compliance with the current regulatory and legal framework. In the international market, we operate via our subsidiary SUEK AG, which has representative offices and subsidiaries in Poland, China, Japan, South SUEK’s senior managers and experts Korea, Lithuania, Indonesia, the US and Taiwan. The Group’s companies are actively involved in governmental operate in full compliance with the statutory and regulatory requirements policy panels for the coal-mining of all of these countries and regions. industry, coal markets, transportation, technical supervision, social and labour SUEK’s companies can also be affected by unfavourable regulatory acts relations and financial markets. implemented by foreign authorities. Such changes can involve additional controls on export coal and its subsequent sale in certain countries and SUEK constantly monitors (either regions, or the setting of special conditions for importing goods and independently or through external services to Russia. consultants) relevant changes in legislation and law enforcement in International sanctions against Russian individuals and legal entities, as other countries where our transactions well as industry (sectoral) sanctions, can also impose the limitations on may fall under local jurisdiction. The certain sectors of the Russian economy. At the moment, existing company’s management also monitors sanctions do not directly target Russia’s coal-mining industry, the Group’s international sanctions and informs companies or their operation. However, a number of economic limitations SUEK’s companies and employees do currently affect our business and necessitate special control in the about relevant limitations and what selection of counterparties (while closing financial deals, for example). they mean for their activities. They also affect the availability of financial resources across the Russian market in general, and make it difficult for companies operating in Russia to import certain types of equipment.
STRATEGIC PRIORITIES S1 S2 S3
Credit risk
Increase in overdue receivables under domestic coal supply contracts. We focus on liaising with the financial Transition of overdue receivables to problematic or uncollectible accounts, departments of regional governments which results in direct losses for the company. In the Russian housing and where we supply coal. The aim here is public utilities sector, the to improve or establish a mechanism situation regarding late or which would ensure timely payments non-payment for supplied by housing and public utility coal under contractual companies, as well as upfront payment obligations has continued to clauses in supply contracts. deteriorate. The company may suspend coal deliveries to customers who carry debt, and if necessary re-direct supplies to more financially reliable customers – for example, retail and small-scale wholesale buyers using our own storage network. STRATEGIC PRIORITY S1
SUEK ANNUAL REPORT 2016 – 46 – RISK MANAGEMENT / CONTINUED
External risks Description of risk and its potential impact Change over the year Actions to mitigate the risk
Regulatory risk
Our production operations are governed by numerous laws and regulations We make every effort to comply with covering natural-resource management, mineral exploration and mining, current legislation, thereby minimising healthcare and industrial safety. the risk of suspension of operations at Coal-mining licences, obtained by production companies, can be our production units. We rigorously suspended, terminated ahead of schedule or left unrenewed upon expiry. monitor any changes in the legislative These risks are mostly dependent on the decisions made by the environment. supervisory agency (Rosnedra) holding scheduled and ad hoc inspections SUEK’s companies have implemented at the Group’s companies. procedures in order to ensure Changes in national environmental and labour regulations may also compliance with licence requirements influence the thermal coal market. for timely renewal or new applications. If any discrepancies with licence requirements are detected, we strive to complete the instructions from the regulator as quickly as possible. We also seek to adjust our product STRATEGIC quality in line with the regulations of the PRIORITY S1 countries where our customers operate.
Anti-monopoly risk
SUEK’s companies occupy leading positions in the production and sale of SUEK has implemented procedures thermal coal in a number of Russian regions. Consequently, our ensuring full compliance with the operations are subject to the anti-monopoly requirements set out in applicable anti-monopoly regulations. Russian legislation, including obligations and limitations introduced to protect competition within the thermal coal market.
STRATEGIC PRIORITY S1
Risk of reduction in coal prices
The company’s business may be affected by a decline in demand for coal We continuously monitor and forecast and a reduction in coal prices due to oversupply and growth in demand the price behaviour of commodities in for other types of fuel. A reduction in global prices for coal and natural gas general and coal in particular. We also (the main types of fuel in the power industry) is a key factor which could monitor trade policies relating to change the situation for the worse. long-term contracts. We constantly analyse the correlation between demand trends, coal-mine opening and expansion, the closure of existing mines and the postponement of development projects.
STRATEGIC PRIORITY S1
SUEK ANNUAL REPORT 2016 – 47 –
STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS
Key to the risks
The risk has decreased
The risk has not changed
The risk has increased
External risks Description of risk and its potential impact Change over the year Actions to mitigate the risk
Foreign exchange and interest rate risks
Changes in market indicators such as currency exchange and interest SUEK analyses the risks relating to rates can have an adverse effect on the Group’s financial performance. changes in currency exchange and They can also impact our debt burden and the value of the financial interest rates on a regular basis. We instruments on the company’s balance sheet. Currency and interest rate strive to keep these risks within risks need to be managed to mitigate the unfavourable effects of acceptable limits, and to achieve exchange and interest rate fluctuations. optimal profitability where possible. We also make use of ‘natural hedging’ as a significant part of the company’s revenue, and the majority of our loans are denominated in US Dollars.
STRATEGIC PRIORITY S1
Liquidity risk
Liquidity risk is directly related to cash turnover. It arises if the company We continuously monitor loan cannot fulfil its payment obligations. It is often linked to the effects of covenants and use a comprehensive inflation, foreign exchange and interest rate risk. The effective forecasting system to ensure we management of liquidity risk requires maintaining an adequate level of comply with them. At present, the cash and cash equivalents while ensuring the prompt raising of funds amount of credit lines provided to using available lines of credit. SUEK fully covers its financing needs. Liquidity risk also arises from decreases in coal sales volumes or price, which can result in insufficient revenue being generated to serve the Group’s external debt.
STRATEGIC PRIORITY S1
Risk of emergency situations
Coal mining is inherently dangerous. The risk of accidents and emergency We continuously monitor hazards at all situations at our production facilities is therefore constant and requires stages of operation, paying close robust management and mitigation. attention to safe production processes Preventing fatal accidents and decreasing the number of injuries we and procedures. All accidents are experience is one of the company’s most important tasks. Damage to or thoroughly investigated by experts who destruction of property due to explosions, fire or failures in equipment serve as members of special panels. operation can result in direct losses. The costs of emergency response and Based on the results of their work, we recovery, as well as forced downtime at individual production units, can prepare packages of measures to also negatively impact the Group’s financial results. prevent similar accidents from happening in the future. STRATEGIC PRIORITY S4
SUEK ANNUAL REPORT 2016 – 48 – RISK MANAGEMENT / CONTINUED
Operational risks Description of risk and its potential impact Change over the year Actions to mitigate the risk
Production risk
In our operations, we face various production risks linked to different At all of our production units, we have factors. These can be either internal (downtime, adverse geology, reduced introduced Life of Mine (LoM) deposit coal quality) or external (growth of fuel, electricity and equipment development models. Based on requirements and service prices, and the failure of suppliers and geological data and created using contractors to fulfil their obligations). Such factors can affect production XPAС-XERAS software, the LoM targets, which sometimes requires additional expenses, resulting in an models enable each production unit to increase in our overall production costs. check its annual budgeted and actual expenses on a regular basis. As part of this process, we pay special attention to operational-efficiency projects associated with reducing the duration of longwall face moves. We also monitor projects designed, among other aims, to improve work rates and increase the availability and deployment of opencast mining equipment. In addition, we employ a monthly reporting procedure based on Key Performance Indicators (KPIs), and Enterprise Resource Planning (ERP) systems, allowing management to STRATEGIC assess the performance of SUEK and PRIORITIES S1 S2 its subsidiaries on a regular basis.
Health and safety risk
Coal mining is associated with an elevated risk of accidents and Every meeting of the Board of Directors emergencies, which can occur due to geological factors, technical and the Nomination and Compensation conditions and the action or inaction of individuals. Major emergencies Committee of the Board starts with a can negatively impact SUEK, leading to a possible increase in reputational review of health and safety issues. Our risk, the discontinuation of business partnerships or claims from the Industrial Safety Committee of the company’s lenders for early loan repayments. Management Board analyses every injury sustained at our sites and proposes actions to prevent similar accidents in the future. As owners of dangerous industrial equipment, all the Group’s companies maintain general liability insurance against possible damage to life, health and the property of third parties. In addition, we insure our employees against permanent or temporary disability.
STRATEGIC PRIORITY S4
SUEK ANNUAL REPORT 2016 – 49 –
STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS
Key to the risks
The risk has decreased
The risk has not changed
The risk has increased
Operational risks Description of risk and its potential impact Change over the year Actions to mitigate the risk
Human resource risk
Experienced and highly qualified personnel, in particular mining engineers SUEK develops a system of employees and mine workers, are the company’s most important assets. Failure to training and professional development. recruit and retain qualified personnel can result in missed production We also work to improve motivation targets and increased costs. initiatives and enhance remuneration. The socio-demographic situation in Russia increases the risk of a In terms of recruitment, we actively qualitative and quantitative human-resource deficit. Factors complicating search out and support talented recruitment include a decline in birth rates and underdeveloped housing vocational college and university infrastructure in the regions where we operate, plus a shortage of students, providing them with vocational training institutions and low levels of professional skills among employment opportunities at SUEK’s graduates. companies. In addition, we implement projects aimed at delivering social development, including improving STRATEGIC housing conditions in the regions PRIORITIES S2 S4 where we operate.
Risk of restricted infrastructure availability
When it comes to infrastructure availability, risks consist of reduced The Group’s production and logistics access to railway and port infrastructure, electricity networks and water units actively create long-term relations facilities. with infrastructure providers. When Limited access to infrastructure can result in reduced profit due to higher executing contracts, we pay special operational costs, and losses due to downtime at our production units. attention to the technical conditions For SUEK, this risk can increase as a number of our companies operate in and servicing of railway tracks at regions where harsh environments can impact power supply and connecting stations, railway and transportation. Availability of infrastructure is also dependent, to a port-loading facilities, electrical significant degree, on whether our service providers meet their substations and networks. obligations. Refusal to provide services can result in forced suspension of We also invest in the development of production, which in turn can negatively impact our operational and infrastructure that is critical to our financial performance. business, such as Vanino Bulk Certain infrastructure is operated by state-owned monopolies. Operation Terminal. of such facilities is subject to tariff regulation, which can affect the availability and quality of the services in question.
STRATEGIC PRIORITIES S1 S3
Environmental risk
The environmental risks related to coal mining and washing include air We seek to minimise environmental emissions of pollutants and coal dust, contamination of soil and water risks by developing and implementing and noise pollution. These negative impacts can result in claims from projects for land rehabilitation, mine regulatory authorities and the suspension of operations, which in turn methane disposal, and health affect the company’s operational and financial performance. protection in case of production operations in the immediate vicinity of inhabited areas. The company takes measures to reduce environmental and ecosystem impacts and pollutant emissions, and to ensure the efficient disposal and recycling of waste. The frequency of these measures is determined by current legislation, as well as by the company’s STRATEGIC PRIORITIES environmental policy and protection S2 S5 programme.
SUEK ANNUAL REPORT 2016 – 50 – GROUP’S ASSETS
OUR ASSETS
RUSSIA
1 Kemerovo 2 Khakasia
In the Kemerovo region, SUEK mines Production units Our units in the Minusinsk basin in Khakasia high-quality hard coal from underground Kamyshansky open pit produce premium hard thermal coal with a mines and open pits located in the high calorific value. Coal is mined from three Kuznetsk basin (Kuzbass). Kirova mine open pits and one underground mine and To refine the mined coal and achieve the Komsomolets mine washed at a single washing plant. quality required by our customers, we treat Kotinskaya mine We export more than half of the coal from this it at four washing plants. Products with November 7th mine region (including deliveries of premium sized calorific values of 5,800-6,100 kcal/kg are thermal coal) to Europe and Asia. An integral Polysaevskaya mine principally supplied to energy companies in part of the company’s strategy is to increase Europe and Asia. High-quality concentrate Rubana mine sales of washed, sized coal with a calorific from Kirova mine is supplied to Taldinskaya-Zapadnaya 1 mine value of 5,500–5,700 kcal/kg from Khakasia metallurgical coal markets in Asia and to the Atlantic market, as it is sold at a Taldinskaya-Zapadnaya 2 mine Russia. Meanwhile, coal with a calorific premium compared to un-sized thermal coal. Yalevskogo mine value of 5,000–5,700 kcal/kg is mainly Our largest Russian customers are power required by Russian power-generation Zarechny open pit plants and coal-distribution companies companies. supplying households and public utilities. In 2016, we rolled out capacity Washing facilities In 2016, we focused on increasing the share development projects aimed at increasing of export-quality coal and developing Kirova mine WP (modules No.1 and No.2) the efficiency of export-quality coal environmental initiatives. Key projects production. These included: Komsomolets mine WP included: • Launching new highly productive mining Polysaevskaya mine WP • Developing the Chernogorsky open pit and equipment at the Yalevskogo and Taldinskaya-Zapadnaya 1 mine WP Chernogorsky washing plant; Taldinskaya-Zapadnaya mines; • Constructing water-treatment facilities at In addition, the company also operates five • Continuing the modernisation of the the Vostochno-Beisky open pit. Polysaevskaya mine washing plant. coal-sizing facilities in the region. SUEK is fully committed to the social As one of the major employers and development of the region, and provides taxpayers in the region, SUEK makes a funds for various education, healthcare and significant contribution to social infrastructure initiatives. As part of our work development in Kemerovo region. Each with the Global Environment Facility and year, we fund and support various United Nations Development Programme education, healthcare and infrastructure (UNDP), we have been running a project development projects. called ‘Mainstreaming Biodiversity Conservation into Russia’s Energy Sector Policies and Operations’.
Production units Chernogorsky open pit Izykhsky open pit Khakasskaya mine Vostochno-Beisky open pit
Washing facility Chernogorsky WP
In addition, the company also operates three Key to the assets coal-sizing facilities in the region.
Underground Russian sales Hard coal Port mine market
Brown Open-pit Washing International coal mine plant sales market
SUEK ANNUAL REPORT 2016 – 51 –
STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS
SUEK’s operations in Russia extend from west to east across eight regions and seven time zones. Our efficient production assets, port facilities and rail infrastructure are widely spread across the country, enabling strong connections with our customers in all key markets. As one of the largest companies and employers in Russia, we are also deeply committed to sustainable business development, providing social, environmental and economic support to the regions where we operate.
3 Krasnoyarsk 4 Buryatia 5 Zabaikalye
Our production units in Krasnoyarsk region We extract high-quality hard coal at the In Zabaikalye, two open pits – Kharanorsky extract brown coal from three open pits in the Tugnuisky open pit and the Nikolsky open pit, and Vostochny – produce brown coal, which Kansk-Achinsk basin. This coal is supplied located in Buryatia and Zabaikalye. We use is supplied predominantly to local Russian mostly to the Russian market, principally to modern equipment and employ sophisticated power stations. heat and power stations and public utilities planning, operational and management In 2012, SUEK started to develop the within the region. systems at these pits. Apsatsky coking coal deposit. Located 40km Our mining operations in Krasnoyarsk are Coal from the open pits is washed at the from the Baikal-Amur Mainline (BAM) railway, relatively straightforward and low-cost due to Tugnuisky washing plant, which has an annual Apsatsky extracts high-quality, mid-volatile limited overburden thickness. This means the capacity of 10.3 million tonnes. Washing coking coal, which is in high demand in Asian units here have the lowest stripping ratio reduces ash content from 28% to 18% and coking coal markets and in Russian among SUEK’s production units. Operational increases calorific value from 4,830 kcal/kg to metallurgical markets. efficiency is also boosted by the fact that the 5,340 kcal/kg. During 2016, Zabaikalye continued to coal loading is performed directly into railcars Most of this coal is exported to the Asia- participate in our ‘Comfortable Living or onto conveyor belts. Pacific market. The low-nitrogen hard coal Environment’ competition, which identifies As part of our commitment to sustainable extracted at Tugnuisky and Nikolsky meets and supports the best ideas for the development in Krasnoyarsk, our Berezovsky the requirements of Japanese power utilities. development of the natural environment. open pit team completed the reforestation of Some coal is delivered directly to China by rail Winners of the regional and interregional former coal-mining areas in 2016. Planting across the Russian–Chinese border. It is also stages receive funding to support their cedar saplings over 30 hectares of land, they sold to Russian power plants and utilities. efforts. SUEK also continued to focus on set a new record for the region. In 2016, key capacity-development projects improving the living conditions in the included: Apsatsky open-pit camp, where employees Production units work on a rotational basis. • Developing the Nikolsky open pit, including Berezovsky open pit the purchase of additional excavating Production units Borodinsky open pit, named after M.I. equipment and dump trucks; Shchadov Apsatsky open pit • Starting the construction of pit water Kharanorsky open pit Nazarovsky open pit treatment facilities at the Tugnuisky and Nikolsky open pits. Vostochny open pit In addition, the company also operates two coal-sizing facilities in the region. On the social development side, SUEK In addition, the company also operates two encourages social entrepreneurship in the coal-sizing facilities in the region. region. We have set up a resource centre in Buryatia to support small businesses and NGOs by providing targeted education for their future leaders. Buryatia also participates in a company programme aimed at promoting social entrepreneurship among young people called ‘Future of the region – future of SUEK’. Production units Nikolsky open pit Tugnuisky open pit
Washing facility Tugnuisky WP
In addition, the company also operates one coal-sizing facility in the region.
SUEK ANNUAL REPORT 2016 – 52 – GROUP’S ASSETS / CONTINUED
RUSSIA (CONTINUED)
6 Khabarovsk 7 Primorye
The company’s mining operations in Located on Russia’s east coast, the Vanino Our assets in Primorye are located in the Khabarovsk are located on the Urgal deposit Bulk Terminal (JSC Daltransugol) was Pavlovsky brown-coal basin and the in the Bureinsky basin. The proximity of constructed in 2008 by SUEK specifically for Lipovetsky hard-coal basin. SUEK’s Primorye Khabarovsk’s assets to our Vanino Bulk the shipment of our coal. The terminal is a mines are situated near Russia’s eastern Terminal represents a significant strategic crucial export gateway from Russia to the coast, which generates significant savings on advantage. Asia-Pacific market. It provides the shortest transportation costs when supplying coal to The Bureinsky open pit and the Severnaya route from our production facilities (with direct Asia-Pacific markets. underground mine both produce hard coal. access to the Trans-Siberian Railway and The Pavlovsky open pit produces brown coal This coal is washed at the processing facility Baikal-Amur Mainline) to customers in China, with a calorific value of 2,800-3,000 kcal/kg and at our state-of-the-art Chegdomyn South Korea, Japan and Taiwan. In 2016, for the Russian market. The Vostochnoe washing plant, increasing its calorific value SUEK shipped 19.5 million tonnes through the underground mine produces hard coal with a from 4,600 kcal/kg to 5,850 kcal/kg. Coal terminal. The company continued to develop calorific value of 4,800 kcal/kg. from this region is mainly transferred to our external railway infrastructure at the Vanino In the Primorye region, SUEK ships coal nearby Vanino Bulk Terminal and to the Bulk Terminal to increase annual loading through Maly Port, where the Group is one of Asia-Pacific market, and also to Russian capacity to 24 million tonnes and procured the port’s major shareholders (49.9%). In power-generation customers located in the new equipment for the terminal to ensure 2016, we shipped 2.8 million tonnes through Khabarovsk and Primorye regions. As the environmental safety. Maly Port to Asia-Pacific customers, mainly in Urgal deposit mines high-calorific-value hard As part of our commitment to sustainable Japan, South Korea, China, Taiwan and coal and is well located strategically, the development, during 2016 we continued to run Vietnam. company invests significantly in its mining, our School of Social Entrepreneurship in the During the year, SUEK continued to support washing and transshipment capacity, as well Khabarovsk region, providing support to staff as its environmental safety. social and environmental projects in the at municipal authorities, local NGOs and small region, including ongoing sponsorship of the In 2016, capacity-development projects at businesses. In order to attract qualified staff, ‘Land of the Leopard’ national park. Urgal included: we have also been constructing new houses for employees. • Increasing the capacity of thermal mining Production units facilities with new conveyors and trucks; Production units Pavlovsky open pit • Purchasing new transport and mining Bureinsky open pit Vostochnoe mine equipment; Severnaya mine • Constructing infrastructure for the Coal processing facility development of the Pravoberezhny mining Dry coal separator at Vostochnoe mine site. Washing and processing facilities Chegdomyn WP In addition, the company also operates one Processing facility at Bureinsky open pit coal-sizing facility in the region. Port Port Vanino Bulk Terminal Maly Port
SUEK ANNUAL REPORT 2016 – 53 –
STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS
INTERNATIONAL
SUEK’s international operations 8 Murmansk region Rail assets mainly include financial, sales, trading and distribution activities.
In the Murmansk region, located in north- Railway transport is crucial to the coal SUEK is active in the international debt western Russia, SUEK ships coal through production and distribution chain. In 2016, capital markets, and coordinates its activities Murmansk Commercial Seaport (in which SUEK’s coal constituted 6.1% of the total through SUEK Ltd (Cyprus). SUEK holds 75.5% of voting shares). The cargo conveyed on Russian railways, which International coal trading and sales are port provides access to the Atlantic Ocean are operated by the state monopoly Russian conducted by SUEK AG (based in and the ports of western Europe, the Railways (RZhD). SUEK operates one of the Switzerland), whose main role is to maximise Mediterranean and the east coast of the US. largest rail fleets in Russia. We also run 190 the efficiency of coal sales and secure the In 2016, SUEK shipped 14.2 million tonnes of locomotives and have 16 dedicated loading company’s position in the international coal through Murmansk Commercial Seaport stations. market. We achieve sales goals through our to European countries, including the UK, Our rail system provides efficient connections own network of branch offices and Germany and the Netherlands. between the national rail network and the subsidiaries registered in jurisdictions of company’s mines and port facilities. strategic importance, such as Poland, China, In 2016 SUEK started modernisation of its Japan, Taiwan, South Korea, Indonesia, railway infrastructure at Murmansk Lithuania and the US. Commercial Seaport, with the aim of Length of own railway increasing the number of railcars handled to In 2016 we increased our presence in Poland, lines connecting 600 units a day. We also installed seven new Turkey, Indonesia and the Baltic states by company’s mines and 746km portal cranes and are using higher-capacity strategic partnerships and acquisitions of port facilities with RZhD bucket grabs, which increase shipment distributors. network capacity and reduce dust generation. This marketing structure allows SUEK AG to conduct its sales and resource procurement Port Average number of in local currency, arrange delivery directly to railcars involved in the end users’ sites, and provide corresponding Murmansk Commercial Seaport 48,500 transportation of services to customers. SUEK AG continually SUEK’s coal each analyses the international coal market, and month gathers information that influences the balance of supply and demand. In particular, Fleet of higher-capacity it looks at information related to the 75- and 77-tonne 12,000 deployment of new power-generating railcars operated capacities, changes in coal production and in 2016 export, and the dynamics of logistics capacity.
Sales network in Russia
In the Russian market, SUEK sells coal to 1,700 customers large industrial companies, key energy providers and smaller customers through our commercial network of local offices covering in 38 countries different regions. International trading and distribution network China Lithuania Switzerland Indonesia Poland Taiwan Japan South Korea US
SUEK ANNUAL REPORT 2016 – 54 – OPERATING REVIEW
PROGRESS AND ACHIEVEMENT
In 2016, we delivered Operational highlights an outstanding operational million tonnes 2016 2015 % performance through the Mining implementation of our strategic Production 105.4 97.8 8% • hard coal 71.3 61.1 17% programme, with a core focus • brown coal 34.1 36.7 (7%) on efficiency improvements at • open-pit 69.6 69.2 1% our mining, washing and • underground 35.8 28.6 25% transportation facilities and on Washing Coal washed 37.3 33.3 12% the development of our sales Transportation and distribution network. Rail shipments on public tracks 87.9 82.9 6% For the first time in SUEK’s history, coal Shipment by sea 46.5 43.8 6% production for the year exceeded • Vanino Bulk Terminal 19.5 18.3 7% 100 million tonnes, while sales volumes • Murmansk Commercial Seaport 14.2 13.6 4% also rose due to the strong demand • Maly Port 2.8 2.6 8% in the Asia-Pacific market. In addition, • Other ports 10.0 9.3 8% expanded washing and transportation Sales 103.1 101.1 2% capacities helped us to achieve better coal-washing and shipment results. International sales 51.9 46.9 11% • Asia-Pacific market 25.6 21.8 17% • Atlantic market 17.3 14.9 16% • Third-party coal 9.0 10.2 (12%) Domestic sales 51.2 54.2 (6%) • brown coal 32.8 35.9 (9%) • hard coal 18.4 18.3 1%
Sales highlights In 2016, our sales volumes increased by Sales structure by markets 2% year-on-year, reaching 103.1 million Sale 19.8Mt s t o A 19% of total sales tonnes of coal. We sold 50% to Russian tl an tic customers and 50% to export markets. m a rk International sales volumes grew by 11% e t to 51.9 million tonnes. The main markets 51.2Mt Netherlands4.1Mt Germany 2.2Mt we sold to globally included South Korea, 50% of total sales Morocco 2.0Mt t t Other e Japan, China, Taiwan, the Netherlands, e countries k rk 11.5Mt r a India, Germany, Turkey and Poland. In a m m
n accordance with SUEK’s strategic n a
ai i South Korea 7.9Mt s
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R 103.1Mt
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Japan 7.0Mt a a
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uplift was achieved as a result of the higher a
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n in Poland, Turkey, Indonesia and Lithuania. e t 32.1Mt 31% of total sales
SUEK ANNUAL REPORT 2016 – 55 –
STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS
SUEK’s sales to Asia grew by 16% We also focused on sales of sized coal SUEK’s Russian sales structure to 32.1 million tonnes. This was the result through our own distribution networks in of increased exports to the traditional Poland and in the domestic market of West premium markets of Japan, South Korea, Siberia. In total, sales of sized coal Taiwan and Hong Kong, as well as new increased by 22% to 3.25 million tonnes. 1. SGK 46% markets such as Vietnam and Thailand. Sales of metallurgical coal rose by 50% to 4 1 2. Other power Coal shipments to the Atlantic market grew 2.7 million tonnes. plants 31% by 3% to 19.8 million tonnes. The sales Sales to the Russian market totalled 3. Public 3 mix among countries in the Atlantic market 51.2 million tonnes, 39.5 million tonnes utilities 15% 4. Other 8% continued to change in 2016. This meant of which were sold to electric power the decline in UK sales was offset by plants. The 6% decline in sales compared strong demand for our products from the to 2015 is explained by the significant Netherlands and Germany, as well as expansion of Russia’s hydropower sector, countries from the Mediterranean region, resulting in lower loads within coal-fired 2 including Morocco and Turkey. power plants. An additional contributing factor was a fire in one of the units at Berezovskaya GRES, a coal-fired power plant in the Krasnoyarsk region. The damaged unit was decommissioned for unscheduled repairs in February 2016.
Mining highlights Strong demand for SUEK’s products and High-quality hard coal accounted for 68% Brown coal production decreased by 7% stable operations at our production of our total production, more than half of year-on-year, as a result of reduced facilities enabled us to produce which was produced at the mines and demand for coal from Russian power- 105.4 million tonnes of coal in 2016, an open pits of the Kemerovo region. Hard generating companies, due to the growth overall increase of 8%. Underground coal production increased by 17%, mainly of hydropower generation. Brown coal mining rose by 25% to 35.8 million tonnes due to the introduction of high-tech accounted for 32% of total production of coal, while open-pit mining grew by 1% solutions based on new high-performance output, 79% of which was mined from the to 69.6 million tonnes year-on-year. equipment at our production sites in open pits of the Krasnoyarsk region. Buryatia, Khakasia and Kemerovo. The productivity of production workers at our mining units increased by 12% as a result of improved operational efficiency and staff development programmes.
Production by mining method Production by coal type Productivity of mining unit (million tonnes) (million tonnes) production workers (tonnes per man-month) 105.4 105.4 98.9 98.9 97.8 97.8 97.5 97.5 96.5 96.5 489 34.1 35.8 33.9 30.9 36.7 37.3 31.4 28.6 34.3 30.3 435 421 391 389 Underground Brown coal 71.3 69.6 69.2 68.0 66.1 66.2 Open-pit 65.0 Hard coal 62.2 61.1 60.2 +8% +8% +12% ‘12 ‘13 ‘14 ‘15 ‘16 Year-on-year ‘12 ‘13 ‘14 ‘15 ‘16 Year-on-year ‘12 ‘13 ‘14 ‘15 ‘16 Year-on-year
SUEK ANNUAL REPORT 2016 – 56 – OPERATING REVIEW / CONTINUED
Washing highlights Coal washed Washed coal share In line with the strategic priority of (million tonnes) of hard coal produced (%) increasing our output of high-quality
products, the total volume of washed coal 37.3 55% 52%
grew by 12% to 37.3 million tonnes 33.3 49% 32.1 year-on-year. This was achieved through 45% capacity upgrades and increased volumes 28.1 38% at our existing washing plants. Washed 23.0 coal, as a share of produced hard coal, was 52% in 2016 compared to 55% in 2015. This decline was due to an increase in the production of high-quality coal that +12% does not require washing. ‘12 ‘13 ‘14 ‘15 ‘16 Year-on-year ‘12 ‘13 ‘14 ‘15 ‘16
Industrial safety Regrettably, there were three fatal Lost time injury Ensuring safe working conditions for accidents at the company’s production frequency rate (LTIFR) employees, and minimising the risks facilities in 2016. These occurred during open-pit mining operations in Buryatia and
associated with coal mining and 1.92 processing, are among our top priorities. the Krasnoyarsk region, and during underground mining operations in 1.57
From 2012 to 2016, our main indicator of 1.50 industrial safety – the Lost Time Injury Kuzbass. We deeply regret this loss of life Frequency Rate (LTIFR) – fell from 1.92 to and extend our heartfelt condolences to 1.23 the families and friends of the deceased. 0.94 at our production units. We have 0.94 allocated additional funding to To avoid such accidents in the future, we programmes aimed at improving industrial are carefully analysing their causes and safety and labour protection, reaching continue to implement best health and safety practice across the company. -24% $48m in 2016. Furthermore, as a result of ‘12 ‘13 ‘14 ‘15 ‘16 Year-on-year adopted measures, our overall injury rate We also rolled out training sessions for our has decreased by 51% over the last five safety managers and professionals to years. In 2016, we registered 49 industrial increase levels of awareness, competence accidents at our production sites, and skill and organised express safety- compared to 62 in 2015, a 21% decrease. knowledge testing among our production workers.
Transportation highlights Rail transportation Eastern Polygon development programme, of transported coal. This will benefit our developing production units in Kuzbass, For SUEK, rail provides a vital means of which involves the expansion by 2018 of Khakasia and Buryatia. cost-efficient coal transportation and tracks and major junctions across the delivery. The Russian railway network is of Trans-Siberian Railway and the Baikal- With 48,500 railcars used monthly for coal crucial strategic importance to SUEK, and Amur Mainline (BAM). By eliminating transportation, SUEK currently manages in 2016 we transported 80.1 million tonnes infrastructural restraints along the routes one of the largest railcar fleets in Russia. In of coal via Russian Railways (RZhD). This we use for cargo transportation, we will be 2016, we were able to reduce our numbers amount constituted 24%1 of the total able to increase our export shipments of of third-party railcars by 9% compared to tonnage of coal transported on the network coal, including those that pass through the 2015, due to the increase in railroad during the year. Vanino Bulk Terminal. delivery speed along SUEK’s routes. Our fleet also includes 12,000 new railcars We use railways to deliver our products to Our own railway infrastructure includes under SUEK’s management, with 75- and Russian consumers and reach ports in the 746km of railway track, 16 internal loading 77-tonne capacity (compared to the Far East and the north-west of Russia. stations and about 190 locomotives, 69-tonne capacity of conventional cars) Together with RZhD, we are carrying out providing access to the national railway and a service life of up to 32 years. In projects to increase the capacity of the network. Projects are underway to increase 2016, the company increased its fleet by railways and to make a more efficient use the throughput of our internal railway 3,000 of these high-capacity cars. of railcars. Also of key importance is the stations and tracks to increase the volumes
1 RZhD statistics.
SUEK ANNUAL REPORT 2016 – 57 –
STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS
Coal shipment infrastructure, and in 2016 we successfully Coal shipment (million tonnes) completed second-stage construction of
In 2016, we increased our total amount of 46.5 railways, roads and other facilities. This shipped coal by 6% to 46.5 million tonnes. 43.8 41.7 project is due to be completed in the first 19.5
Shipment through our own ports 18.3
half of 2017. 17.0 represented 78% of the total shipment 35.3
volume. In 2016, SUEK consolidated a 75.5% share 31.0 13.7 of Murmansk Commercial Seaport. We
The amount of coal shipped to Asia-Pacific 12.0 shipped 14.2 million tonnes of coal to the
customers via our Vanino Bulk Terminal 14.2 Vanino Bulk 13.6
Atlantic market through the port in 2016, a 13.9 was 19.5 million tonnes, 7% more than in Terminal
4% year-on-year increase. 13.1 2015. Throughout the year, we continued Murmansk 11.6
8 Commercial We also shipped 2.8 million tonnes through . to upgrade Vanino Bulk Terminal, with a 6 2 . 6 2 .
2 Seaport 2 view to reaching our target annual capacity Maly Port, located in the Russian Far East, . 2 5 . 9.3 10.0 2 of 24 million tonnes. Our main project an 8% increase year-on-year; and 8.2 Maly Port 6.3 includes measures to expand public rail 10.0 million tonnes through other ports. 4.9 Other ports ‘12 ‘13 ‘14 ‘15 ‘16
Product quality In accordance with SUEK’s Quality Policy, ISO 9001:2008. The system is in use and the company’s mining units and washing subject to a regular external audit at the As a responsible supplier, SUEK strives to plants run strict quality-control systems company’s units in Kemerovo, Krasnoyarsk meet customers’ needs for product quality that provide: and Khakasia. At other units, product and to ensure strict fulfilment of contractual quality control is carried out in accordance obligations. Our work at all levels – from • Quality control for produced, washed with SUEK’s Quality Policy. exploration, design and development of and shipped coal at every stage of the production to warehousing, shipping, process; Our main approach to improving the quality transportation and end-use by our • Compliance with relevant regulatory of our products is to increase the volume customers – is aimed at ensuring the requirements; and depth of coal washing. Washing coal required level of product quality. reduces its ash content and increases its • Effective interaction with our customers calorific value, which enables us to deliver on product quality issues. high-quality products with high added Since 2009, SUEK has been implementing value and improve our business a quality management system according to profitability.
Supply chain industrial safety and labour protection. number of SUEK’s suppliers totalled 6,816, Adherence to standards in this area is one a 12% increase over 2015. About 99% of Our interaction with suppliers and business of our contractual requirements for the company’s suppliers are located in partners is aimed at the development of suppliers. We also closely monitor quality Russia. Only when we need equipment reliable, long-term relationships based on control within suppliers’ production that is unobtainable in Russia, we do look the strict fulfilment of contractual processes. to leading international manufacturers. obligations and compliance with business ethics. SUEK’s supplier selection process is based on regulated competitive procedures. This We pay special attention to our suppliers’ provides the necessary level of compliance with the principles of social transparency and efficiency for all responsibility, particularly in the field of procurement activities. In 2016, the
SUEK ANNUAL REPORT 2016 – 58 – OPERATING REVIEW / CONTINUED
Investment projects • Increasing production of thermal, export-quality coal in the Kuzbass Due to the challenging market environment mines, including the transition to in 2016, our main investment focus was on developing a 400-metre wide longwall in projects relating to maintenance, industrial the Kotinskaya mine (a unique safety and environmental safety, on key undertaking in Russia, which is in line development projects and on those with best international practices); projects close to completion. Total capital expenditures in 2016 reached $492m. • Completing the second phase of infrastructure development at Vanino In 2016, the company implemented a Bulk Terminal; range of key investment projects, including: • Expanding our railcar fleet under management by 3,000 railcars with • Developing the Pravoberezhny area in higher capacity; Urgal, with a prospective annual • Investment in environmental capacity up to 3 million tonnes, and programmes, including early developing the Magistralny area in construction of treatment facilities for a Kuzbass, with a prospective annual number of units using advanced capacity up to 3.5 million tonnes; wastewater treatment technology.
Our priorities for 2017 In addition, we intend to increase washing After the completion of the main stage volumes, primarily at the Chegdomyn and of infrastructure development at Vanino Our priorities for 2017 are to achieve Polysaevskaya mine washing plants. As a Bulk Terminal, shipment volumes to the long-term competitive advantages by result, our production of thermal coal with Asia-Pacific market through the terminal improving the operational efficiency of the a high calorific value, along with may exceed 21 million tonnes in 2017. entire business chain, developing our metallurgical and sized coal, will grow SUEK also plans to ship 3 million tonnes railway and port logistics, expanding our significantly in 2017. of coal through Maly Port to Asia, and over coal washing capacities, and investing in 14 million tonnes of coal through assets that maximise our export margins. In terms of logistics, we will continue to Murmansk Commercial Seaport to change our transportation structure, in In 2017, the main emphasis of our Atlantic market. particular, by significantly increasing the investment programme will be on share of owned and leased railcars we Safety improvements remain our top maintaining the capacity achieved and on manage (both standard and modern priority, and in 2017 we aim to avoid fatal implementing key development projects. high-capacity railcars), with the aim to accidents and to further decrease our In 2017, we plan to produce more than guarantee 70% of the railcar volume we LTIFR ratio. 104 million tonnes of coal. As part of our require. Furthermore, our development development strategy, we are going to programme is aimed at improving the reduce production at mines that are shortly efficiency of rail transportation in general. to cease production due to resource depletion: November 7th mine and Vostochnoe mine; we will also develop the Magistralny site in Kuzbass, Pravoberezhny site, Severnaya mine and Bureinsky open pit in Urgal in the Khabarovsk region.
SUEK ANNUAL REPORT 2016 – 59 –
STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS FINANCIAL REVIEW
Despite ongoing volatility in the Financial highlights thermal coal market, in 2016 $m 2016 2015 Change, % SUEK increased its profitability Revenue 4,002 4,132 (3%) Revenue from international sales compared to the previous year, (including purchased coal) 2,965 3,023 (2%) and maintained financial stability. Revenue from sales in Russia 915 993 (8%) Other revenue 122 116 5% The decline in world coal prices in the first Cost of sales (including transportation) (3,314) (3,576) (7%) half of 2016, and a reduction in domestic 1 demand, affected the company’s revenue, Cash cost of coal sold (990) (1,124) (12%) which decreased compared to 2015. Transportation (1,365) (1,267) 8% However, several key factors helped to Depreciation (395) (448) (12%) neutralise the negative impact of these Purchased coal (including transportation) (470) (653) (28%) conditions on SUEK’s financial results, Other (94) (84) 11% including the redistribution of volumes to Gross profit 688 556 24% premium Asian markets and an increase in coal prices in the second half of the year; Gross profit margin, % 17% 13% – the effective management of our railcar Selling, general and administrative expenses (114) (102) 12% fleet; and the development of our trade and EBITDA 965 887 9% distribution network. Our investments in EBITDA margin, % 24% 21% – highly productive equipment and coal Income tax (85) (81) 5% washing capacities, as well as our own Net profit 303 200 52% logistics, will also help to ensure we remain Net margin, % 8% 5% – cost-competitive and occupy a strong and financially sustainable position for many Capital expenditure 492 355 39% years to come. Debt 3,308 2,890 14% Cash and cash equivalents 330 104 218% Overview Net debt 2,978 2,786 7% SUEK supplies 50% of its coal to the Net debt/bank EBITDA ratio2 2.9x 3.0x (3%) international markets and receives a substantial portion of its revenues (about Bank EBITDA/interest expense ratio 7.54x 7.52x 0.3% 74%) in US Dollars. Accordingly, changes to conditions and extending its own trade In 1Q 2016, the depreciation of the Russian the global macroeconomic environment have and distribution network to robust markets. Rouble continued, due to the negative a significant impact on the company’s In 2016, our international sales volumes grew market environment. A rise in oil prices and operational and financial performance. by 11% compared to 2015, reaching the strengthening of the national currency The majority of our costs are denominated in 51.9 million tonnes and reinforcing our from April onwards did not fully offset the Russian Roubles because our production position as one of the top five largest coal negative trend seen at the beginning of the facilities are located in Russia. Therefore, the suppliers in the world. year, and on average the Russian Rouble economic situation in the country also depreciated by 10% compared to 2015. On During 2016, Russian coal prices remained influences our financial performance. the one hand, our revenue from Russian fairly stable. At the same time, there was a sales went down in US Dollar terms; but on 2016 was another challenging year for the reduction in demand from coal-fired power the other, this decrease helped the company coal industry, which witnessed extreme price plants due to increased hydropower maintain its position in the lower segment of volatility in the world markets: from a generation linked to high water levels in the global cost curve. historical low in the first half of the year, to a Siberia and the Far East. SUEK maintained gradual recovery in the second half of the its leading position in the domestic market, year. This positive trend was due mainly to with our sales to Russian customers totalling rising prices in the Asian markets linked to 51.2 million tonnes. regulatory measures adopted by the Chinese Exchange rates authorities to cut working hours for coal miners, which led to increased demand for RUB/US$ 2016 2015 Change, % imported coal. Average for the year 67.03 60.96 10% Despite the volatility of the global coal At the year end 60.66 72.88 (17%) market, SUEK maintained its leading position Source: Central Bank of Russia by responding quickly to changing 1 Less non-cash cost items. 2 Bank EBITDA is calculated in accordance with our existing credit agreements.
SUEK ANNUAL REPORT 2016 – 60 – FINANCIAL REVIEW / CONTINUED
Revenue Revenue by market Average price of coal sold on In 2016, SUEK’s export revenue from coal sales ($m) international markets, FOB basis decreased by 2% to $2,965m. This downward ($ per tonne) trend was due to a 13% decrease in the sales 1 1. International 57 price factor, partially offset 11% by an increase market 55 in the sales volume factor. Actual sales prices 2,965 2. Russian had a delayed reaction to changes in market 2 market conditions, as a result of the prices within certain 915 contracts, fixed as at the date of agreement, while contract implementation and revenue recognition are delayed. Revenues in the Russian market in US Dollar -4% terms declined by 8% to $915m. This scenario ‘15 ‘16 is explained by weaker year-on-year sales volumes (-6%) and the effect of Rouble Average price of coal sold in Russia devaluation, partially offset by higher average ($ per tonne) (RUB per tonne) Rouble prices in the Russian market (+8%). Sales volumes were weakened by reduced demand from domestic coal-fired power plants 18 18 1,201
(see above), and by a fire in one of the units 1,116 at the Berezovskaya GRES coal-fired power plant in the Krasnoyarsk region. The damaged unit was decommissioned for unscheduled repairs in February 2016. 0% +8% ‘15 ‘16 ‘15 ‘16
Transportation costs Transportation costs In 2016, rail transportation costs in US Dollar $m 2016 2015 Change, % terms increased by 8% ($76m) compared to the Rail costs 991 915 8% previous year, due to greater rail transportation Freight costs 195 212 (8%) volumes (+6%), and higher average Port costs: 166 130 28% Rouble‑denominated transportation costs offset by the weakening Rouble. The growth of • Own ports 43 29 48% transportation costs was due mainly to the • Third-party ports 123 101 22% extension of routes because of the increased Other 13 10 30% share of exports in the turnover structure. Total transportation costs 1,365 1,397 (2%) Higher Rouble rates for domestic and export traffic (+9 and +10%, respectively) were the result of an increase in operator rates in 4Q 2016 Transportation cost structure and a lack of available railcars. Railcars fleet consolidation in the market and the accelerated write-off of old railcars led to limited vehicle 5 1 1. Rail costs availability, while demand for new railcars 4 (international outstripped supply. However, the effective market) 57% 2. Rail costs management of our fleet and timely changes (Russian market) to SUEK’s logistic chain helped to minimise 15% 3 the negative impact of the above-mentioned 3. Freight costs external factors. (international market) 15% 4. Port costs 12% 2 5. Other 1%
SUEK ANNUAL REPORT 2016 – 61 –
STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS
Transportation costs (continued) Rail costs (international market) ($ per tonne) (RUB per tonne) As part of the strategy to enhance our railcar fleet, in 2016 we increased the number of innovative railcars under SUEK 19 19 management to 12,000. 1,295 1,182 SUEK is among the few coal companies in Russia with its own port facilities for coal shipment: Vanino Bulk Terminal, Murmansk Commercial Seaport and Maly Port. In the reporting year, our share in the Murmansk Commercial Seaport was raised to 75.5% 0% +10% after acquiring a 36% stake from ‘15 ‘16 ‘15 ‘16 EuroChem. In 2016, 78% of the coal we supplied to the international market was Rail costs (Russian market) shipped through our ports, which provided ($ per tonne) (RUB per tonne) additional savings on shipment costs. Overall, coal shipments via our ports 5 5 increased by 6%. As a result, port costs 358 per tonne of shipped coal were down 15% 329 compared to 2015. Freight costs also decreased by 8% year-on-year, following the fall of the freight cost in the international markets. However, due to an increase in coal volumes shipped to premium Asian 0% +9% markets under the favourable pricing ‘15 ‘16 ‘15 ‘16 conditions in the second half of 2016, we did incur some higher shipment costs at Port costs (international market) Freight costs (international market) third-party ports. ($ per tonne) ($ per tonne) 4 10 8 3
-25% -20% ‘15 ‘16 ‘15 ‘16
Cash cost of coal sold Average cash cost of coal sold In 2016, the cash cost of coal sold per ($ per tonne) (RUB per tonne) tonne in US Dollar terms did not change compared to 2015 because of the lower 11 11 Rouble exchange rate. However, the cash 727 671 cost of coal sold per tonne in Rouble terms increased by 8% due to inflation and the structural shift in production – that is, an increase in the more expensive underground mining of hard coal, and a decrease in the less expensive, open-pit mining of brown coal. 0% +8% ‘15 ‘16 ‘15 ‘16
SUEK ANNUAL REPORT 2016 – 62 – FINANCIAL REVIEW / CONTINUED
Selling, general and General and administrative General and administrative administrative expenses expenses ($m) expenses structure In 2016, our selling, general and 1 1. Salaries 56% administrative expenses went up by 12%, 6 114 5 2. Consulting 17% mainly due to growth in wages and 4 102 3. Charity 13% increased charitable donations. 4. Oce rent 4% 5. Customs 3 duties 2% EBITDA 6. Other 8% In 2016, an increase in the volume of international coal sales, and a decrease in the cost of sales in US Dollar terms due to +12% 2 Rouble devaluation, compensated for the ‘15 ‘16 adverse effect of falling international coal prices in the first half of the year. EBITDA was up 9% on the previous year, totalling $965m, while the return on EBITDA rose by 3%, amounting to 24%.
Net profit In 2016, SUEK’s net profit increased by $101m, totalling $303m.
Capital expenditure In 2016, we implemented the following key • Capacity development, including an SUEK remains a major investor in coal investment projects: open pit in the Pravoberezhny area in Urgal, with prospective capacity of mining industry in Russia. Our total capital • Increased production of export-quality 3 million tonnes per year, and the expenditure in 2016 amounted to $492m, thermal coal in the Kuzbass mines, Magistralny underground site in which represents a 39% increase including the initial development works Kuzbass, with prospective capacity of compared to the previous year. Given the for the construction of a 400-metre 3.5 million tonnes per year; market conditions at the beginning of longwall in the Kotinskaya mine, which 2016, our main goal was to focus on is a first in Russia and is in line with best • Our investments in 2016 also had a investment projects related to international practices (the completion strong environmental focus, for example maintenance, industrial and environmental of development works is planned in 1H in the construction of treatment facilities safety, as well as the implementation of 2017); at a number of units, using advanced wastewater treatment technology. key development projects. The more • Completion of the second phase of favourable pricing environment in the infrastructure development at Vanino second half of 2016 also made it possible Bulk Terminal; to initiate a number of development projects with a short payback period. • Expanded our railcar fleet under management by 3,000 higher-capacity railcars; Capital expenditure1 Capital expenditure by type Expansion capital expenditure ($m) by project
1 1. Maintenance, 1 1. Kemerovo 36% 492 health, safety 5 2. Port facilities and environment 34% capital 4 3. Urgal 355 expenditure (Khabarovsk) 53% 11% 2. Expansion 3 4. Primorye 8% capital 5. Other 11% expenditure +39% 47% 2 ‘15 ‘16 2 1 The graph represents costs incurred during the year.
SUEK ANNUAL REPORT 2016 – 63 –
STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS
Operating cash flow and net Operating cash flow vs Debt structure as at debt capital expenditure 31 December 2016 In 2016, the company saw its cash flow ($m) ($m) from operating activities decrease by 4 1 1. Debt in 3 US Dollars 84% $353m (39%) on 2015, totalling $552m. 1,260 2 2. Debt in Euros This trend was influenced by a significant 8% increase in our working capital compared 905 3. Rouble debt
to the previous year, for example a rise in 761 hedged by trade receivables by $125m, in finished cross-currency 552 552 and interest 489 goods and materials inventory by $146m, 483 rate swaps 5% and recoverable taxes by $30m. 342 4. Debt in Russian As of 31 December 2016, our net debt was Roubles 3% ‘13 ‘14 ‘15 ‘16 up 7% on 2015, totalling $2,978m. At that date, the ratio of net debt to our bank Operating cash inflow EBITDA was 2.94x, which meets the Capital expenditure (cash outflow) current covenants of our loan agreements, according to which this ratio must not exceed 4.0x. As of 31 December 2016, most of the Group’s bank loans (84%) were denominated in US Dollars, with an effective interest rate of 4.4%. The rest of the debt is denominated in Euros, with an Ba3, Stable outlook effective interest rate of 1.5%, and in SUEK’s rating confirmed by Moody’s Roubles, with an effective rate of 7.9% In April 2016, Moody’s confirmed SUEK’s Ba3 rating with a stable outlook. Moody’s (with currency-interest swaps taken into positively assessed the company’s ability to control operating costs via an increase in account). We chose US Dollars as the main operational efficiency and effectiveness; its substantial coal reserves; favourable functional currency because this allows us geological conditions; control over a considerable portion of the transportation to use natural hedging (meaning the debt infrastructure (including port facilities); its well-diversified Russian and international can be serviced, as we have a positive US customer base; high profitability; and adequate liquidity. Dollar cash flow generated by international sales). In addition, loans in US Dollars have a lower interest rate than loans denominated in Roubles. Our main borrowing instrument is pre- export finance secured by international revenue. In 2016, its share together with financing provided by export credit agencies (ECAs) accounted for 80% of the company’s total debt portfolio. In addition, flexible financing was ensured through open credit lines: at 31 December 2016, the company had $1,560m of available credit lines.
SUEK ANNUAL REPORT 2016 – 64 – HEALTH AND SAFETY
HEALTH AND SAFETY
Providing a safe working environment for our people and minimising the risks related to coal production are key priorities within SUEK’s operations.
Degasation station in Kemerovo
SUEK ANNUAL REPORT 2016 – 65 –
STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS
Our approach Overview Fire alarm training at The system we have in place for managing From 2012 to 2016, the lost time injury Kharanorsky open pit in health and safety across the company is frequency rate (LTIFR) across SUEK’s Zabaikalye regulated by our internal Occupational production sites went down from 1.92 to Health and Safety Policy and complies with 0.94. In 2016, the LTIFR was down 8% on the most up-to-date international the previous year, with total lost time standards. It is designed to minimise amounting to 7,421 days. Our production injuries and accidents at our production sites recorded 49 industrial injuries, sites. Our corporate health and safety compared to 62 in 2015. standards cover company staff and Despite all our efforts, there were three contractors providing services at our sites industrial fatalities at our production sites and facilities. Our production facilities in in 2016. These occurred during open-pit Kuzbass, Krasnoyarsk and Khakasia mining operations in Buryatia and undergo regular audits to assess our Krasnoyarsk, and during underground compliance with the OHSAS 18001 mining works in Kuzbass. We deeply regret occupational health and safety this loss of life and extend our heartfelt management standard. condolences to the families and friends of To minimise industrial risks, every year the the deceased. The main causes of these company updates and implements a fatalities were organisational failures comprehensive range of health and safety relating to the violation of health and safety measures. In 2016, SUEK allocated $48m requirements, as well as a lack of discipline to health and safety programmes, and skill in key health and safety areas. To interventions and initiatives. avoid such accidents in the future, we OUR PRIORITIES: carefully analyse them and implement best Allocation of funding for practice in the field of occupational health and safety. We also fully understand the Continually improve our production health and safety in 2016 need to educate those who take management to ensure occupational unnecessary risks in the workplace, and and workplace safety; are urging each and every one of our 7 8 1 Address atmospheric safety issues; 6 employees to be more responsible for their 5 own safety and that of their colleagues. In Ensure our production sites have the 2016, we rolled out training sessions for latest equipment and introduce modern our safety managers and professionals to increase levels of awareness, competence safety systems and monitoring 4 instruments; and skill and continued to organise express safety-knowledge testing among our Ensure our health and safety information production workers. 2 system functions at a company-wide level; 3
Improve the skills and capabilities of 1. Technical measures 39% Lost time injury frequency safety professionals, through the 2. Mine rescue teams and other emergency rate (LTIFR) provision of dedicated training, staff response units 18% education on safe working practices and 3. Improvements in the hygiene and technical improvements in workplace discipline; conditions of sites and facilities 15% 1.92 4. Procurement of personal protective
equipment 14% 1.57 Reduce the negative impacts of coal 1.50 5. Organisational measures 8% production on employee health and 6. Health and safety research and design work 3% 1.23 wellbeing; 7. Procurement of equipment and instruments 2% 8. Insurance 1% 0.94 Ensure all employees are supplied with modern, high-quality work clothes and protective equipment, in line with our -24% corporate standards; and ‘12 ‘13 ‘14 ‘15 ‘16 Year-on-year
Implement special preventative medical FOR MORE INFORMATION ABOUT HEALTH AND SAFETY STRATEGIC programmes. PRIORITIES AND KPIS, SEE PAGE 40; FOR RISK MANAGEMENT, SEE PAGE 48.
SUEK ANNUAL REPORT 2016 – 66 – HEALTH AND SAFETY / CONTINUED
Our efforts to improve health and safety Currently, the company’s mines operate a In our Komsomolets mine in Kuzbass, we systems and emergency response number of subsystems as part of the have piloted an automated remote system procedures are coordinated by the general multifunctional health and safety for monitoring the safety of mining Industrial Safety Committee of SUEK’s system, including: operations, which enables information support, control and the management of Management Board. In 2016, the • Atmospheric safety system in charge of: Committee held three in-person meetings, technological processes in normal and during which 17 agenda items were • Monitoring and control of stationary emergency conditions. It also helps us to considered. These included: fan systems, local ventilation fans and identify critical changes in operating gas-suction units; parameters and predicts pre-emergency • Analysis of the circumstances and • Monitoring and control of gas- situations. At this stage in the project, causes of industrial injuries with severe drainage units and networks; monitored items include stationary fans or fatal outcomes; • Monitoring of air and gas conditions. and gas-drainage units. We plan to • Status of actions taken and planned to develop the system further with a view to prevent similar accidents in the future; • Systems for the monitoring and improving safety conditions within our • Programme of organisational and prediction of gas-dynamic phenomena; mines. technical measures to improve the level • Systems for detecting early signs of Improving gas drainage of industrial and occupational safety at endogenous and exogenous fires; our sites; To reduce the risk of explosive • Systems for the monitoring and concentrations of methane forming, we • Introduction of the wireless information management of fire, water supply and carry out comprehensive gas drainage in system for surveillance, providing drainage; our mines where methane content exceeds warning and tracking for people who 10 m3/tonne of coal. We remove methane may be caught up in an accident; • Systems enabling workforce communication, warning and tracking: from our mining areas via a system of • Results of the development and integrated gas-drainage wells. Since 2010, • Tracking the location of personnel in implementation of a pilot project the total depth of our gas-drainage wells underground mines; enabling industrial safety to be has increased by 50% to 331km, including monitored and controlled remotely. • Locating people caught up in 272km of gas-drainage wells in accidents; underground mines. We are constantly The Nomination and Compensation • Delivering emergency underground introducing new methods, equipment and Committee of the Board of Directors also communication and alerts via technology to maximise the efficiency of regularly reviews health and safety issues. loudspeakers. the gas-drainage process. To ensure we are more energy efficient, we Measures to improve We have developed a range of measures use some of the methane removed from designed to improve the reliability of our health and safety the workings to generate heat and multifunctional health and safety system. The main risks in coal mining include the electricity at the mines. This also allows us At the SUEK head office in Moscow, our formation of potentially explosive to reduce our greenhouse gas (GHG) situational analytical centre is designed to concentrations of methane, and the emissions, thereby minimising our monitor our systems in real time. At this pollution of working areas in mine sites by environmental footprint. explosive airborne coal dust. The company centre, we also analyse system parameters therefore pays particular attention to and coordinate efforts with regional measures for improving air quality and branches and industrial facilities during conditions. emergencies. In addition, we have established a Improving the reliability of centralised health and safety control and Reducing coal dust multifunctional health and safety analysis centre in Kuzbass. Here, our To reduce the risk of coal dust explosions, systems and systems for monitoring health and safety controllers receive SUEK mines have in place strict rules and air and gas conditions underground information about atmospheric conditions requirements regarding stone-dusting Our mines are equipped with a and gas levels, as well as the safety of using inert dust. Activities in this area multifunctional system that ensures production processes in our mines. This include: the safety and control of our mining information is monitored 24/7 to control • Improving the quality of stone-dusting in operations, and the safe management production teams are not adversely of technological and manufacturing our mines through the use of more than affected by inappropriate atmospheric 300 mechanical stone-dusting units; processes under normal and conditions. emergency conditions. • Delivering a threefold increase in stone-dusting in our Kuzbass mines in the past six years, from 6,100 to 18,040 tonnes per year.
SUEK ANNUAL REPORT 2016 – 67 –
STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS
We are also constantly looking to enhance In 2016, as part of our commitment to and competitions. Winners were awarded the efficiency of the measures we deploy continuous staff training and health and in the categories of ‘Best facility’, ‘Best to reduce coal dust emissions: safety awareness, we equipped all our structural unit’ and ‘Best Health and Safety mining facilities with computer terminals to Officer’. • Introducing vacuum collection, enable complex pre-shift examination. transportation and discharge of fine coal Identifying employees who are prone Now, before starting a shift, each miner dust at our washing plants in Khakasia to excessive risk-taking takes a test to check their health and and Buryatia; safety knowledge. We test candidates applying for job • Equipping production facilities and vacancies and engineering positions to warehouses at Vanino Bulk Terminal with In June 2016, under the supervision of determine whether these potential hires are fog-generation units and foam SUEK’s Chief Operations Officer, Vladimir prone to excessive risk-taking. Our tests generators that use foam and water to Artemiev, Krasnoyarsk hosted our annual include factors such as a candidate’s risk suppress dust – a unique technology conference on industrial and occupational appetite, and their ability to learn and that has never been used anywhere else safety, medicine and ecology. The follow rules. These tests form an integral before; conference, at which we presented results part of our recruitment and selection from 2015 and set targets for the future, • Pre-project modelling of shields that will process, informing our hiring decisions at was attended by more than 150 company suppress over 80% of the dust all levels. employees. It included a modelling generated at Murmansk Commercial workshop, attended by directors of Provision of modern work clothes and Seaport. The design works are planned production facilities and heads of health personal protective equipment to be completed by the end of 2017. We and safety services, to identify the causes To minimise the negative impact of also launched a fog-generation dust and prevent hazardous production occupational hazards on our staff, the suppression system, which allowed us to situations. company has developed standard reduce dust generation by 49%, along requirements for work clothes, footwear with storm water treatment facilities to Promoting health and safety and other personal protective equipment. be commissioned in 2017. In addition to training videos on safe All SUEK employees receive up-to-date working methods, SUEK has developed a protective kit in the form of special clothing Tighter health and safety controls series of video manuals on how to use and and footwear, helmets, respirators and SUEK has a zero-tolerance policy for maintain personal protective equipment. goggles. In addition, our units carry out violations of health and safety regulations. Each video manual lasts between three regular inspections to ensure compliance Preventing such violations plays a vital role and four minutes, and is accessible via with corporate standards in this area. in reducing the risk of accidents and information panels in office buildings, injuries at our sites. To this end, we have briefing rooms and on company buses. In 2016, SUEK’s units conducted six developed and introduced specialised workshops on the use of personal SUEK’s production sites also feature an software to keep track of all health and protective equipment in Kuzbass, HSE feedback system called Alarm Sheet, safety-related incidents. This software Krasnoyarsk region, and Khakasia. The whereby employees can write down any prevents shift tasks from being issued until workshops were devoted to the practical hazards associated with a specific all identified health and safety violations use of personal protective equipment, workplace or process. In the reporting have been dealt with. The system has major changes to health and safety year, the company organised a traditional already been deployed at all mining and legislation and preventative measures to health and safety contest using Alarm processing sites across the company. reduce occupational injuries and diseases. Sheet, under the slogan ‘Reward Personnel training and development Vigilance’. All winners were awarded prizes The company has also set up an automated system of accounting for We work hard to ensure all employees from SUEK. personal protective equipment, thereby have the knowledge, skills and training In 2016, in order to promote a culture of improving planning and enabling the timely they need to carry out their roles safely and safety across all our production sites, we purchase of clothing, kit and equipment responsibly. All equipment purchased by held regular health and safety months for employees. the company comes with a special training video showing how to maintain high levels of health and safety during assembly, operation and maintenance.
SUEK ANNUAL REPORT 2016 – 68 – HEALTH AND SAFETY / CONTINUED
Healthcare In order to minimise the risk of Health School programme occupational diseases, SUEK promotes In 2016, as part of our commitment to preventative measures and healthy health and safety, we implemented a lifestyles among employees. We always try ‘Health School’ programme aimed at to make sure all our employees understand promotion of a healthy lifestyle and the importance of looking after their own culture, which included the following health and adhering to health and safety initiatives: regulations at work. Our goal is to develop • As part of the company-wide Health effective health and safety measures that programme, we made planned take into account both industrial and purchases of equipment for health individual risk factors. posts, medical units and canteens Since 2010, as part of our company-wide totalling $0.8m; Health programme, we have been working • As part of our anti-smoking to identify occupational diseases in their initiative, we developed campaign early stages, carrying out systematic posters and a programme to healthcare work and promoting healthy support the company’s employees lifestyles. All our employees are offered in quitting smoking, including the medical services, education about various use of special medications and medical conditions, consultations, individual consultations. SUEK’s diagnostic services and treatment. units also organised mass The Health programme not only improves anti‑smoking sports and the living standards of our employees, but entertainment events. As a result, also translates into savings for the more than 1,200 SUEK employees company as it reduces lost time due to have quit smoking; injuries and illness. In the period 2010- • To implement our Healthy Eating 2016, time lost through sick leave fell by programme at our facilities in the more than 50% across the company, Krasnoyarsk and Primorye regions averaging 6.9 days per employee per year. and Kuzbass, we provided partially We have set up a special medical unit at subsidised hot meals for our office in Moscow, staffed by highly- employees, based on a special skilled practising doctors. The main task of low-calorie menu; this unit is to ensure the necessary • We are also running a pilot project conditions for the preservation, protection called Firefly, in which SUEK and promotion of workers’ health, taking employees and their families are into account production risks and made aware of the need to ensure individual risks alike. Its main areas of visibility on the road; reflectors are focus include: regularly issued to employees free of charge; • Preventing occupational diseases; • To help prevent viral infections, we • Reducing the temporary incapacity rate; regularly administer vaccinations for • Reducing the number of employees with flu, pneumococcus and tick-borne recurrent or long-term illnesses. encephalitis; As part of our efforts to ensure adherence • Our First Aid programme includes to labour laws, in 2016 we completed a regular training sessions for rescue special assessment of working conditions teams in the company’s mines and at our sites across the company, which open pits. included identifying and measuring risk factors and updating workplace classifications in accordance with hazard levels. We are adopting special measures Water treatment aimed at protecting workers’ health as indicated by the findings of the facility in Kemerovo assessment.
SUEK ANNUAL REPORT 2016 – 69 –
STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS ENVIRONMENT
Environmental considerations and commitments underpin all our managerial and production decisions. We are aware of the environmental impact of our operations and the environmental risks inherent in coal mining, washing and shipment. We are also aware of our responsibility to help protect and preserve the environment for present and future generations.
OUR PRIORITIES:
Create conditions that facilitate employee involvement in environmental risk mitigation activities, and improve our environmental management system and performance indicators;
Improve the company’s environmental management system and relevant performance indicators;
Allocate relevant financial, engineering, human and other resources for these purposes and ensure their efficient use; and
Disclose environmental reports, ensuring transparency of environmental information, and engage public and local authorities in preparing, discussing, making and implementing environmental decisions.
Wastewater quality control in Khakasia
SUEK ANNUAL REPORT 2016 – 70 – ENVIRONMENT / CONTINUED
Our approach Our approach to environmental safety is We also provide training so our employees enshrined in SUEK’s Environmental Policy. can enhance their environmental Ensuring environmental safety, minimising This document defines our principles, knowledge and qualifications. We ecological risks and maximising commitments and mechanisms for collaborate with research bodies and environmental protection measures are an implementation in the field of expert organisations to introduce integral part of SUEK’s sustainable environmental protection. It provides the innovative and efficient environmental development strategy. Our programmes in foundation for the development and safety technologies. And we regularly the field of environmental protection delivery of all our environmental publish information relating to the results of include measures to reduce emissions, programmes and initiatives. In addition, our our sustainable development projects. protect water resources, process and Environmental Policy is based on the dispose of waste, reclaim land and achieve SUEK invested $11m in environmental environmental legislation of the Russian energy efficiency. These initiatives activities during 2016. Federation. The company also adheres to contribute to the sustainable development international law and the precautionary of the regions where we operate, improve principle as an approach to environmental the quality of people’s lives, help us reduce risk reduction. operational risks and enhance our overall performance. In addition, we participate in At SUEK’s facilities in Khakasia, international and Russian projects aimed at Krasnoyarsk and Kemerovo, we have an FOR MORE INFORMATION ABOUT the prevention of climate change and environmental management system in ENVIRONMENTAL STRATEGIC PRIORITIES AND KPIS, SEE PAGE 41; biodiversity conservation; among other place that meets the requirements of the FOR RISK MANAGEMENT SEE PAGE 49. initiatives, these include the Clean Coal ISO 14001:2004 international standards. Association, the Russian National Carbon Our sites regularly undergo independent Agreement, the Bureau of Best Available external audits to assess their Air Technologies technical working group, and management systems against these In order to improve mine safety, we the Mainstreaming Biodiversity standards. In 2016, SUEK’s facilities in regularly conduct gas drainage within our Conservation into Russia’s Energy Sector Khakasia were certified and recertified for mines. This process results in methane Policies and Operations project. compliance with these standards. (natural gas) emissions, which account for 88% of SUEK’s total air emissions. In all our mining areas, where methane Public recognition in 2016 content exceeds 10 m3/tonne of coal, we carry out comprehensive gas drainage In 2016, our environmental projects won a number of awards: which includes the preliminary removal of Winner of the ‘Best Comprehensive Winner of the ‘Clean Production gas from working coal seams, and the Solution in the Field of Green Development’ category at the EraEco extraction of gas from mined-out areas. It Technologies’ category at the Evolution Awards, for measures aimed at is achieved via drilled surface holes and Awards. These Awards recognise reducing the negative impact of mine openings. achievements relating to environmental industrial operations on the aspects of sustainable development environment, with support from UNIDO within the Russian Federation, including (United Nations Industrial Development the development and use of green Organization) and the Ministry of technologies. The key projects presented Natural Resources of the Russian by SUEK were ‘Clean Water’ and ‘Clean Federation. These measures Methane utilisation Air’. The core of the ‘Clean Water’ project encompassed initiatives aimed at the 3 (million m of CH4) is the construction of wastewater reduction of emissions (including treatment facilities at the Rubana mine in methane usage), the management and Kuzbass. Unique for the coal industry, treatment of wastewater (in particular, these facilities treat water used in the use of clean technologies at the production processes and return it to the Rubana mine), land reclamation (joint 8.55 environment cleaner than before being project between the Chernogorsky 7.51 used. The ‘Clean Air’ project aims to open pit and the Khakasia Research 5.89 guarantee the full recovery of methane Institute of Agrarian Problems on 5.68 5.09 emissions from longwalls, therefore biological land reclamation), improving limiting greenhouse gas emissions. This energy efficiency, and the conservation project has been successfully of biodiversity in the regions where implemented at SUEK Kuzbass mines. SUEK operates. +14% ‘12 ‘13 ‘14 ‘15 ‘16 Year-on-year
SUEK ANNUAL REPORT 2016 – 71 –
STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS
In 2016, as part of our commitment to Water In addition to its economic benefits, this reducing our environmental impact and programme enables us to achieve an Most of the wastewater used by the supporting the Paris agreement on climate important environmental objective, as company during its production cycle is change, we continued to utilise captured reducing our energy consumption helps natural water that is pumped out of mining methane for power generation and boiler to minimise our overall impact on the areas during mining operations, with combustion, thereby reducing greenhouse environment. characteristics typical of local groundwater. gas (GHG) emissions into the air. Our The company does not withdraw water In 2016, these measures helped us to reduce Kirova and Komsomolets mines are from sources believed either to be our rate of electricity consumption per unit of equipped with recovery systems and vulnerable and protected by the state, or output by 5% compared to 2015. Our engine plants that capture gas and use it to especially valuable for local communities electricity consumption rate per m3 of rock generate heat and electricity. In 2016, we and biodiversity. extracted decreased by 6% year-on-year. utilised 8.55 million m3 of methane captured from mined-out areas. SUEK production sites are equipped We also achieved other energy-efficiency with facilities for treating industrial targets: utilisation time and the diesel The rest of our air emissions relate to CO, wastewater and sewage. Through consumption of our dump trucks per NO and SO , which are below the limits x 2 our continuous pollution-control and tonne-kilometre. prescribed by Russian legislation. resource‑conservation efforts, in 2016 Since 2014, we have been running an Energy our suspended and dissolved solids in Saving staff incentive Programme for energy wastewater level decreased to 0.23 kg efficiency performance improvement. In per tonne of production, or by 9% 2015-2017 we plan to reduce the year‑on‑year. consumption of key energy resources by an Additionally, we work to decrease dust In 2016, we continued to design and average of 4-5% per m3 of extracted rock. emissions across the whole production construct advanced treatment facilities for To implement our Energy Efficiency and transportation cycle from mine to port. mine, open-pit and household wastewater, We use state-of-the-art technology for the Programme, in 2016 we carried out the and we overhauled our existing water following activities: vacuum collection, transportation and supply and sewage system. These efforts discharge of fine coal dust at our washing should further reduce the concentration of • Scheduled replacement of eight obsolete plants in Khakasia, Buryatia and Vanino solids in wastewater at a number of our excavators with modern, energy-efficient Bulk Terminal. In 2016, we carried out the facilities. models; pre-project modelling of shields that will • Upgraded excavator control and power suppress over 80% of the dust generated supply systems at the following open pits: at Murmansk Commercial Seaport. The Chernogorsky in Khakasia, Vostochny in design works are planned to be finalised Zabaikalye and Borodinsky in the by the end of 2017. We also launched a Krasnoyarsk region; fog-generation dust suppression system, Energy efficiency • At the Tugnuisky open pit we which allowed us to reduce dust As part of the Russian government’s commissioned an ESh-20/90 dragline, with generation by 49%, along with storm water nationwide energy-efficiency initiative, innovative switched reluctance drives for treatment facilities to be commissioned SUEK has developed and implemented pull, lift and swing. As a result, the unit in 2017. an Energy Saving and Energy Efficiency power consumption reduced by 55% and Programme designed to reduce the productivity increased by 10%; company’s energy consumption. • Automated pumping stations at the The eect from methane utilisation Suspended and dissolved Kharanorsky and Vostochny open pits in ($m) solids in wastewater Zabaikalye and the Tugnuisky open pit in (kg per tonne of production) Buryatia; • Implemented voltage stabilisation programmes in the Yalevskogo and Rubana 1.2
0.40 mines in Kuzbass; 1.1 • Reconstructed power-supply networks at
0.9 the Yalevskogo and Kotinskaya mines in 0.30 0.8 0.8
0.26 Kuzbass;
0.23 • Scheduled energy audits at our facilities in Buryatia, Khakasia, Khabarovsk, Primorye 0% -12% and Zabaikalye; ‘12 ‘13 ‘14 ‘15 ‘156 Year-on-year ‘13 ‘14 ‘15 ‘16 Year-on-year
SUEK ANNUAL REPORT 2016 – 72 – ENVIRONMENT / CONTINUED
• In Krasnoyarsk and Khakasia, introduced project in partnership with the Research energy management systems, including Institute of Agrarian Problems of incentive schemes designed to reduce Khakasia, with the aim of developing energy consumption by promoting best recommendations on biological practices and ensuring staff are engaged forestry restoration. and interested; and This process involves the creation of • At all sites, optimised production ‘biodynamical’ focal points in the hollows processes to boost the operating between coal dump ridges. In the autumn, the efficiency of energy-consuming rock waste in the hollows becomes seeded equipment through reducing idle time with grass, bushes and trees, which we treat and route optimisation. with bio-fertilisers. During the winter, the seeds are protected by snowfall from wind and solar We also made considerable efforts to radiation. They then emerge in the spring to improve the reliability of metering data for create a humus layer that allows plants to energy consumption. All the company’s spread across the dump areas, helping to energy-intensive facilities now have improve floral diversity and grass cover. In automated measurement systems in place seven to ten years, this reclamation method that quantify the financial value of the can transform coal dumps into comprehensive electric power we consume. We use these ecosystems. systems to clarify and calculate settlements with electricity suppliers for all In 2016, SUEK supported the construction of SUEK sites. two major projects: the Sable Rehabilitation Centre in the Barguzin State Nature Biosphere Across SUEK facilities, we have a number Reserve, and the Seal Centre in Zabaikalye of systems designed to track energy National Park. consumption for commercial purposes. In addition, all fuel-consuming machinery has We also launched a new environmental charity been equipped with automated control project in Kiselevsk, Kemerovo region. Called systems, including a performance- ‘Save the Leopard Together’, this project aims monitoring system for mine trucks and to raise funds for the Land of the Leopard other transport. This has enabled us to National Park in Primorye. We also encouraged develop an effective system to control fuel and enabled the town of Borodino, consumption based on reliable Krasnoyarsk region, to organise a charity fair instrumental measurements. supporting the rare Far Eastern leopard. Land reclamation and biodiversity None of SUEK’s production sites are situated on protected or natural reserve Tyre-recycling in Khakasia areas; no rare or endangered species of animals, plants and fungi have been In December 2016, a tyre-recycling project was launched in identified at our operational sites. the city of Chernogorsk (Khakasia), the aim of which is to convert worn dump-truck tyres into new products: tiles for Most of the waste generated from coal injury-free sports coatings, as well as rubber granules for mining consists of non-hazardous road surfacing. This recycling unit has enough capacity to overburden, which is stored in internal and recycle all the worn tyres from every SUEK mine and open external dumps. This is used for filling pit in the region, and the recycling process it uses is sinkholes, backfilling and reclaiming land completely environmentally safe. disturbed by mining operations, in accordance with approved programmes for The rubber granules, when mixed into road asphalt, improve the use of mineral-resource deposits. grip and make road surfaces more resistant to temperature change. Rubber gives elasticity to the surface and prevents We run extensive reclamation projects on it from cracking through expansion or contraction. Porous land disturbed by SUEK mining projects, rubber tiles, meanwhile, can be used as an injury-free including rock-dump levelling, soil coating for sports grounds. Such an integrated recycling remediation, tree planting and landscaping. processing is primarily aimed at reduction of the amount of For many years, we have been conducting waste and re-using tyres to extend their life cycle. a unique land-reclamation and research
SUEK ANNUAL REPORT 2016 – 73 –
STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS OUR PEOPLE
Our people are our most important asset, and we strive to create the most favourable conditions for them. We continually work to improve health and safety, promote personal and professional development, and provide social support to all employees and their families.
BELAZ dump truck driver at Chernogorsky open pit in Khakasia
OUR PRIORITIES:
Ensure a high level of industrial safety and labour protection;
Improve quality of life for all employees, creating favourable conditions at work and at rest;
Improve our professional training and development system, and enhance career opportunities across the company;
Recruit qualified employees to meet the company’s needs;
Develop the internal communications system and promote our corporate culture.
Miners of Kotinskaya mine in Kuzbass
SUEK ANNUAL REPORT 2016 – 74 – OUR PEOPLE / CONTINUED
Overview 2016 achievements: • Continued development of ‘HiPo’ programme for talented employees; SUEK operates in eight regions of Russia Headcount planning and is the largest employer in the Russian and staff expenses • Ongoing creation of a succession pool coal industry. It is also represented in ten • Further development of labour for key management positions. other countries and territories around the standards for personnel operating our Assessment of current level of world – Poland, China, Japan, South main production equipment; employees’ competency versus Korea, Indonesia, the US, Taiwan, Cyprus, existing competency models. Switzerland and Lithuania. • Further development of automation of Realisation of individual development 1 staff budget and actual expenses plans. Our average headcount is 33,429 calculation. employees, 73% of whom are production Internal communications workers and 27% are managers, specialists Recruitment and retention and corporate culture and administration staff. The socio- • Increased staff mobility between the • Introduction of new internal demographic characteristics of our company’s units and regions. By communications tools providing better workforce remain consistent. In 2016, the managing internal resources through transparency (bulletin boards, plasma average age of our employees was 40.2, the redeployment of employees, we displays, information desks etc.); while the ratio of men to women remained retained qualified staff and harnessed practically unchanged from 2015, with men • Rollout of internal information their skills to focus on priority goals making up 75% and women 25% of our campaigns and other activities to and objectives; workforce. Staff turnover has also decreased support SUEK’s corporate values; • Development and implementation of a steadily over the past three years. • Further SUEK’s Code of Corporate comprehensive housing programme Human resources management is Ethics promotion. for employees; regularly reviewed by the Nomination and • Implementation of a programme aimed HR administration Compensation Committee of the Board of Directors (for details see page 89). at attracting talented young people • Refinement of internal processes to into the company. reflect changes in labour laws; Assessment, remuneration Assessment, development • Introduction of changes within our HR and social support administration processes; and training SUEK regularly analyses the labour market • Further development of a training • Updated regulations on units and job and participates in annual salary surveys, system for various staff categories descriptions. which allows the company to make flexible (from Mine Foremen to Unit Directors); and fair decisions related to pay and remuneration, taking into account the dynamics of salaries and trends in the
Composition of employees Gender diversity of employees Composition of employees by age by personnel categories
1 1. Production 1 1. Men 75% 5 1 1. 18-30 years 21% workers 73% 2. Women 25% 2. 31-40 years 31% 2. Managers and 3. 41-50 years 24% specialists 27% 4. 51-60 years 20% 5. over 60 years 4% 2 4 2 2
3
1 The average number of SUEK personnel in 2016 increased following the consolidation of Murmansk Commercial Seaport by SUEK in December 2016.
SUEK ANNUAL REPORT 2016 – 75 –
STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS
provision of social benefits. SUEK regularly and managers participated in this long- In 2016, total expenditure linked to benefits adjusts employees’ salaries in response to term motivation programme as part of their prescribed in collective arrangements the data provided by the Russian Federal involvement in one or more projects. amounted to $21m. State Statistics Service. As of the end of The following benefits extend to all SUEK also actively cooperates with trade 2016, indexation of tariff rates and fixed employees within our production units. unions, in keeping with the principles of salaries amounted to 12.9%. They are based on current legislation, social partnership and constructive Our remuneration system for production industry agreements with trade unions and dialogue. This cooperation helps us to workers and specialists includes fixed and collective arrangements: avoid or diffuse any tensions or grievances variable elements. The former is paid for the • Voluntary medical insurance; among our workforce, to respond quickly performance of professional duties at the to changes in social climate and to resolve required level. The variable part is an • Payment upon retirement of 15% of an any problems quickly and efficiently. incentive to improve working efficiency. The employee’s average salary for each year SUEK’s social commitments are also ratio of the fixed to the variable elements is of employment in the coal industry; enshrined in bilateral regional agreements set at 70/30. Among other criteria, the • Payment for travel to holiday resorts for with trade unions and collective variable part consists of bonuses for basic employees and their families; arrangements regulating social and labour production and commercial operations, and • Financial aid for pensioners, parental relations between employer and for compliance with industrial and technical leave, high-priced medical treatment or employees. To date, 94% of our directives, safety rules and rules of the for the funerals of company employees; employees are covered by such collective operation of machinery. arrangements. • Supply of coal to miners for domestic SUEK also applies a system of annual heating; As well as financial incentives for incentives for its management staff, based • Compensation for energy and other employees, SUEK makes extensive use of on compliance with key performance expenses; non-material incentive schemes. As part of indicators (KPIs) and on the achievement this approach, the best employees receive of individual and company goals. This • Compensation for the medical treatment state, departmental and corporate awards. system focuses employees’ efforts on key and rehabilitation of employees and their In 2016, the following awards were granted objectives and contributes to the children; for exceptional work: implementation of the company’s strategy • Christmas gifts for children of • According to the Russian Presidential in various functional areas. employees. Decree, 27 SUEK employees received We have also developed a special bonus One of the most important aspects of our state awards, including the highest state system for employees participating in social support for employees is our health awards for seven senior managers in projects. The system includes long-term promotion programme. Since 2014, we recognition of their effective strategic projects, operational have extended voluntary medical management of one of Russia’s largest improvements and business-development insurance1 to all employees at our companies; programmes. As of 2016, 426 specialists production sites and facilities.
Sta turnover rate (%) Housing for employees from Chegdomyn As part of our commitment to enhancing quality of life through local development, in 2016 we began building a new residential area for employees at Urgal,
20% Khabarovsk region. A pilot project, the ‘Miner’ residential complex is being developed as part of our efforts to improve living conditions in Chegdomyn, a town 16% with 12,200 inhabitants. It will include 180 apartments, each fully refurbished, and 14% will feature a large recreation area with a playground, sports facilities and a sports field, as well as onsite parking. The complex is due to be completed in the first half of 2017. SUEK employees who choose to buy an apartment in the ‘Miner’ complex will -2% receive an advantageous mortgage offer based on the lowest interest rates. They ‘14 ‘15 ‘16 Year-on-year will also receive a soft loan from the company to help pay their first instalment, which can be written off at a later date. SUEK is also engaging with the relevant local authorities to facilitate additional subsidies for individual employees. 1 Medical insurance is among the highest-priority benefits for employees, according to SUEK’s surveys.
SUEK ANNUAL REPORT 2016 – 76 – OUR PEOPLE / CONTINUED
• 135 employees received awards from This includes education at the country’s the Ministry of Energy of Russia; leading mining universities and internships • Over 1,000 SUEK employees were at production facilities in Japan, during granted corporate awards. which they study the principles of lean manufacturing and general management. Training and staff development In 2016, the Applied Science Youth Forum ‘Mining School’ won the ‘HR Leader of the When implementing our approved HR Year’ award at the XII Russian Mining management strategy, we focus closely on Forum. improving our training and development system for our employees, both at local Since 2014, SUEK’s production facilities and corporate level. have also hosted youth councils comprising over 800 members. The youth The key areas of staff development are: councils’ members develop projects aimed • Professional training, retraining and at improving production efficiency. They qualification enhancement; also participate in training programmes • Training in new occupations, and the devoted to the development and career development of talent for key positions growth of young professionals. at different levels. Corporate culture and internal communications Professional training at SUEK (training, We introduced an updated edition of our retraining and development) is carried out SUEK’s Code of Corporate Ethics1 at the at our 17 training centres. We are actively end of 2015, as part of our efforts to upgrading and improving our training develop our system of internal facilities and materials, and we continually communications and improve staff loyalty. update our training programmes in line with company requirements. Training centres We currently employ over 40 Ethics now feature a mentoring system designed Coordinators and run Ethics Commissions to enable the sharing of knowledge and with the involvement of our enterprise experience, and to improve the process of heads. Employees can put questions about induction and adaptation for younger staff. the Code to their Ethics Coordinator In 2016, SUEK’s training centres provided (anonymously if they prefer) via special training for over 30,000 employees. messaging boxes, either via an electronic form on the corporate portal or by using a Working with young staff multi-channel hotline. SUEK is committed to the ongoing During 2016, we received more than 500 recruitment of young specialists. Targeted messages from employees through our education for students, especially those system for enforcing the Code. These from the regions where the company messages were mainly concerned with operates, improves our selection process health and safety, technical devices and and accelerates the integration of new personal protective equipment, voluntary recruits. In 2016, more than 400 students medical insurance and holiday and participated in our targeted education treatment centres. All messages were programmes at seven vocation-oriented recorded and analysed, and mandatory universities in Russia. feedback was provided to the senders (if SUEK has been involved in the Applied not anonymous). Science Youth Forum ‘Mining School’ In 2017, we will roll out initiatives and since 2012. In 2016, 120 young specialists activities to help further implement the took part in its activities, and half of them SUEK’s Code of Corporate Ethics. These (students from technical colleges in the will include photo exhibitions at the Kemerovo and Khabarovsk regions) company’s production units, thematic expressed a desire to work for SUEK. contests, newsletters and meetings with Each year, the Forum winners receive managers. training under the Presidential Programme for the Training of Engineers. 1 THE FULL VERSION OF CODE OF CORPORATE ETHICS IS AVAILABLE ON OUR WEBSITE: WWW.SUEK.COM
SUEK ANNUAL REPORT 2016 – 77 –
STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS COMMUNITIES
Social activities are an integral part of SUEK’s strategy. We implement various programmes focused on the development of the regions where we operate, with a view to improving the living standards of our employees, their families and local communities, and enabling open dialogue with all stakeholders. We coordinate our actions with regional governments and engage with non-profit organisations and the business community.
Swimming pool in the town of Sagan-nur in Buryatia
OUR PRIORITIES:
Create a favourable and stable social environment in the regions where we operate;
Together with regional governments, improve housing facilities and develop education, sports, medical care and culture for the inhabitants of mining cities and towns;
Increase awareness among young people of coal mining as a career opportunity;
Improve the efficiency of the company’s community investments by implementing modern technologies and approaches in the social sphere.
The village of Kirba near Vostochno- Beisky open pit in Khakasia
SUEK ANNUAL REPORT 2016 – 78 – COMMUNITIES / CONTINUED
Our approach SUEK implements community We regularly assess the efficiency of our development programmes at all its key social investments based on quantitative Our social strategy is aimed at capacity facilities. Overall, in 2016 SUEK and qualitative measures. building, that enables further development implemented 150 social and charitable of local infrastructure and knowledge. We Quantitative measures: projects. The amount spent on community firmly believe that the development of • Number of new organisations investment totalled $15m. human capital is the basic pre-condition contributing to community development for the sustainable development of regions SUEK to the Regions, a non-profit created as a result of the company’s and territories. charitable organisation, is the main tool for social activities; implementing the company’s social policy Our Corporate Social Policy is based on • Amount of funds raised from various at regional level. The fund enables our international standards including the UN sources; regional teams to develop programmes Global Compact, the Social Charter of based on the needs of individual • Number of beneficiaries; Russian Business, the ISO 26000 Standard communities. • Number of events held. and recommendations of the Global Reporting Initiative. Planning and assessment Qualitative measures: Overview of social programmes • Increased efficiency of public-private SUEK’s social and charitable programmes The planning and execution of our social partnership programmes; can be divided into the following programmes is based on our analysis of • Sustainability of previously implemented categories: the social environment in each region social projects (a project continues to where we operate, while their run independently, raising funds from • Education; implementation is assessed by various sources, with no financial • Sports and healthy lifestyle; independent and corporate experts. support from the company); • Medical care; Regional and local community • Favourable conditions for interaction development is monitored using integrated • Urban land and infrastructure with state authorities, the public and social research, cluster polls and feedback development; other stakeholders; on activity outcomes. • Leisure, culture and fulfilment of creative • Enhancement of SUEK’s reputation as a potential; Most of the company’s social programmes socially responsible company. are long term. We test each programme in • Development of local community one or two of the regions, and disseminate During the reporting period, 12 members’ social and business skills; successful models to other regions. This programmes were assessed for efficiency. • Affordable housing and public utilities; networked project format allows us to • Improving local self-governance; optimise budget, maintain created new • Environment; social organisations to and raise federal and regional funds for community • Charity and assistance to vulnerable development. social groups.
Social investment Assessment of community investment programme efficiency performance indicators 2016 2015 2014 Number of programmes assessed for efficiency 12 10 9
66 Number of participants within these programmes 6,002 5,017 4,551 Number of created new organisations contributing 56 to community development 66 56 35 35 +18% 6,002 Year-on-year 5,017 4,551 +20% Year-on-year ‘14 ‘15 ‘16
Number of created new organisations contributing to community development Number of direct participants in these programmes
SUEK ANNUAL REPORT 2016 – 79 –
STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS
Our ‘Future of the Community – Future of Economic Camp for schoolchildren SUEK’ programme aims to develop public social initiatives in education, youth and SUEK’s ‘Economic Camp’ programme for schoolchildren aims to develop initiative child development, and maternal support. and entrepreneurial spirit among young people, and to help schoolchildren achieve Helping to identify enterprising (and a sense of professional identity. By creating a talent pool across the regions where primarily young) individuals, the we operate, the programme stimulates a desire for knowledge and helps young programme includes training workshops on people develop self-study skills. It also supports teenagers from dysfunctional social design, as well as an inter-regional families. In 2016, 32 students from grades 8 to 11 attended the ‘Economic Camp’. social project competition. By engaging The students learned skills which are essential for finding a job and establishing young people, non-profit organisations and oneself in adult life. Through business games and project competitions, they gained other groups, we have established a new knowledge in important areas such as the development of leadership skills, mechanism for disseminating social design the ability to work as a team, time planning, project planning and information experience and skills among different processing. They also acquired a range of useful contacts and interpersonal communities. This has particularly communication skills. improved the quantity and quality of the social project proposals submitted to our Efficiency assessments of the programmes Key programmes in 2016 annual ‘Comfortable Living Environment’ we implement show that the social competition. Urban land improvement and investment principle (i.e. when we fund Since 2005, we have implemented the infrastructure development programmes with the potential for ‘SUEK’s Work Teams’ programme, which development and measurable outcomes, In 2016, for the sixth consecutive year, we aims to support teenagers during their rather than individual social projects) is the held our inter-regional urban land summer vacations. The project’s main most effective tool for tackling regional development competition called objectives are to prevent infringements of socio-economic problems, for the following ‘Comfortable Living Environment’. Taking the law by minors, to support lower- reasons: place in every region in Russia where we income and multi-child families, provide operate, its objective is to identify and • Development of small and medium-sized professional guidance to teenagers, support the best ideas for creating promote mining as a career and improve businesses allows the local population to comfortable living environments. It also purchase goods and services in their the condition of mining towns. In 2016, aims to engage non-profit organisations 2,113 teenagers enrolled on the local area, creates new jobs and reduces and citizens’ action groups in local urban the outflow of funds from the region; programme. They helped with urban land land development. development, tree planting, providing • Development and execution of social assistance to organisations, veterans and programmes enables us to engage local the disabled, looking after monuments, communities and finance to help tackle and restoring and installing architectural current problems and create new landscape features. They also became Development of social and business organisations for social infrastructure; acquainted with production practices at skills and activities • Development of small businesses and SUEK facilities. As part of the programme, the non-commercial sector increases Our ‘School of Social Entrepreneurship’ our regional offices held charity fairs whose several times the efficiency of programme focuses on tackling regional proceeds went towards the Kommersant community-based real estate and social problems by supporting enterprising Publishers’ ‘Rusfond’ and the ‘Land of the infrastructure facilities; individuals who want to start their own Leopard’ national park in Primorye. business. In 2016, participants • Targeted increases in the skills of implemented over 50 social and business SUEK’s ‘Young Leaders Course’ focuses community workers enable us to attract projects, which included setting up new on developing young people’s leadership significant budgets and state funds for social infrastructure facilities in education, and entrepreneurial skills and design infrastructure development in a more medical care, culture, sports, youth experience. Based on acquired knowledge efficient manner. development and personal services. and skills, in 2016 the young participants identified social issues and developed appropriate projects under three categories: social entrepreneurship, social design, and inventive and investigative thinking. Projects designed by the participants will be implemented in the regions where SUEK operates.
SUEK ANNUAL REPORT 2016 – 80 – COMMUNITIES / CONTINUED
The ‘Leadership and Entrepreneurial Skills In January 2016, we launched ‘Dream Ski’, Medical care Training’ programme focuses on developing a programme which aims to help In cooperation with the Department of a system of general and vocational training rehabilitate children and adults with various Presidential Affairs of Russia, SUEK has throughout the regions, in line with modern disorders. With SUEK’s support, activities been organising medical treatment and educational standards. In 2016, we held took place at the Tashtagol downhill skiing healthcare since 2009 for the company’s four training workshops for the staff of and snowboarding centre in the Kemerovo employees and children from mining general and vocational educational region. In February, during the Krasnoyarsk regions. All treatment is provided at the institutions and departments from Economic Forum, we launched a second Rehabilitation Centre of the Department of Khabarovsk, Khakasia, Krasnoyarsk, ‘Dream Ski’ site at the Bobrovy Log centre Presidential Affairs, a modern multi- Primorye, Buryatia and Kemerovo. Since in Krasnoyarsk. During the year, over 200 disciplinary facility practising cutting-edge May 2016, the teachers trained as part of children from Kemerovo and Krasnoyarsk medical science. In 2016, over 180 children the programme have been developing and attended the rehabilitation programme, from eight Russian regions received running entrepreneurship marathons among which is also supported by the Civic high-quality medical diagnostics and a schoolchildren on ‘Carbon gold for the 21st Chamber of the Russian Federation. range of health services. In addition, over century’. These events cover about 2,000 In March, we initiated a programme called 40 SUEK employees received expert students from 15 schools and colleges. ‘Chess to Mining Regions’, which is medical assistance at the Centre. We also Education designed to promote chess in mining launched a programme called ‘Telemedicine’, with pilot projects in Sagan- SUEK’s ‘Our New Kindergarten’ towns and improve the skills of young Nur township in Buryatia and Chegdomyn programme focuses on introducing chess players. This programme was township in the Khabarovsk region. These innovative types of education and followed in June by our first interregional are aimed at providing medical counselling childrearing in line with current educational children’s chess competition, ‘Chess services to local residents at leading standards to kindergartens in the regions Hopes of SUEK’, which was held in medical centres and facilities. where SUEK operates. In 2016, we held Krasnoyarsk. Young chess players training workshops for heads of representing the top six coal-mining Since 2013, the company has also been kindergartens from Krasnoyarsk, Khakasia regions of Russia – Krasnoyarsk, providing assistance for the medical and Kemerovo. The new educational Khabarovsk, Zabaikalye, Primorye, treatment and rehabilitation of children with methods enable communities to achieve a Kemerovo and Khakasia – were given the disabling conditions such as cancer, new level of developmental progress and opportunity to compete against Anatoly cerebral palsy and musculoskeletal system help to better prepare children for school. Karpov, the 12th World Chess Champion. disorders. This programme is underpinned by cooperation with several Russian Sports and healthy lifestyle Leisure, culture and fulfilling creative potential charitable funds: Rusfond (Kommersant Each year, we hold the ‘Children’s Olympic Publishers), Gift of Life, and the Union of Our annual ‘Children’s Art Festival’, also Games’ to promote sport and healthy Charitable Organisations of Russia. During called ‘Little Stars’, targets young artistic lifestyles among teenagers, with a view to the year, we also provided financial talent among the 6-18 age group in the identifying promising athletes and bringing support to regional charity funds, such as Krasnoyarsk region. The festival our employees’ children together. In April Shield and Happy Childhood, which encompasses three categories: vocal 2016, 150 athletes took part in the Games, support disabled children. held in the town of Nazarovo in Krasnoyarsk music, instrumental music and region. Aged 13 to 16, the athletes came choreography. Since the start of the from mining towns located in Krasnoyarsk, programme in 2013, the number of Kemerovo and Khakasia regions. They participants has doubled. In 2016, 2,000 competed in eight sports overall: darts, talented youngsters and about 300 chess, draughts, volleyball, basketball, performance groups took part in football, table tennis and a relay race. the festival. In December, we held the ‘SUEK Winter Since 2007, we have been organising tours Olympics’ in the city of Leninsk-Kuznetsky by Moscow theatre companies throughout (Kemerovo region). The competition, which the regions where we operate. Over the celebrated the company’s 15th anniversary, years, with SUEK’s support, more than hosted nine children’s teams from all the 10,000 residents of Kuzbass and regions, with each team competing in six Krasnoyarsk have watched charitable sports: an individual ski race, a skiing performances. At the end of each medley relay, athletics, winter mini-football, performance, actors meet with our tug-of-war and a ‘winter fun’ relay race. employees and sometimes visit our mines. Evgeny Ustyugov, a two-time Olympic biathlon champion, attended the event as a guest of honour.
SUEK ANNUAL REPORT 2016 – 81 – STATEMENT BY THE CHAIRMAN OF THE STRATEGY COMMITTEE
ADAPTING STRATEGY AND CORPORATE GOVERNANCE
We are convinced that qualified and competent corporate governance is a key element of a successful, efficient and consistently developing business, helping to secure the long-term leadership and growth of the company.
In 2016, due to high market volatility and situation, including strict control of In order to further develop our corporate the renewed urgency of environmental investments, further enhancing operational governance system, in 2016 SUEK issues and regulations, the Board focused efficiency, reducing costs (including introduced a new compliance system. This closely on the company’s development production costs), and developing our own system aims to ensure the full compliance strategy with a view to ensuring the logistics capacity and sales network. of our operations and employees with legal sustainability of our business for the short requirements and with SUEK’s own internal In 2016, we continued to strengthen and and long term. standards. It will achieve this by improve SUEK’s corporate governance implementing the necessary procedures The management and the Strategy system. Our Board of Directors welcomed and regulations, as well as promoting a Committee updated SUEK’s ten-year two new Independent Directors – Olga culture of compliance, best practice and consolidated strategy, refined the target Vysotskaya and Natalia Izosimova. In efficiency. vectors of our segment strategies, adjusted October, Kuzma Marchuk, who previously key investment projects due to changed held the position of SUEK’s Chief Financial We have also completed the reorganisation market conditions, and determined our Officer, also joined the Board. I believe that of our company. Now, SUEK’s target operational values for strategic and the current composition of the Board of headquarters in Moscow are the centre for budgetary planning. Directors constitutes a very strong team of our consolidation and the Group’s professionals with a wealth of expertise in corporate governance. The following principles are at the core of mining, energy and finance, who are able our updated strategy: the development of to provide expert strategic leadership and coal deposits with high calorific value and ANDREY MELNICHENKO, are well placed to meet the challenges we the optimal distribution of products across CHAIRMAN OF THE STRATEGY COMMITTEE face today, and those we may face in the our target markets, based on effective future. supply chain management; enhancing our productivity and the environmental safety I am sincerely grateful for professionalism of our production and transportation and outstanding contribution to the activities. The Board has approved the development of the company made by updated strategy. Richard Sheath, Kent Potter, Nicholas Page and Christakis Santis, who left the Board During the year, we also implemented a of Directors in 2016. number of special measures to reduce the negative impact of the macroeconomic
SUEK ANNUAL REPORT 2016 – 82 – CORPORATE GOVERNANCE OVERVIEW
Overview Committee, the Audit Committee and the reliability and objectivity of public Nomination and Compensation information about the company. The Board SUEK’s system of corporate governance is Committee, which include Independent of Directors is entitled to make decisions underpinned by the following set of and Non-Executive Directors with on priority issues for the company’s principles: relevant experience; development. • Protecting our shareholders’ interests • When making decisions, Board members SUEK seeks to maximise the efficiency of and rights, ensuring equal treatment for avoid potential conflicts of interest. the Board of Directors’ activities. This is all shareholders; ensured by the high proficiency of its • Ensuring efficient strategic and Governing bodies members, the personal responsibility of operational management, and efficient SUEK’s governing bodies are: each Board member and the collective mechanisms of internal control and responsibility of the Board as a whole for • General Meeting of Shareholders; audit; its decisions. • Ensuring the company’s informational • Board of Directors; The Board of Directors consists of and financial transparency by providing • Executive bodies: Management Board competent professionals with extensive stakeholders with accurate information; and CEO. experience. Most members are • Adhering to rigorous ethical standards in Independent Directors, whose experience business; General Meeting of Shareholders in the mining, power-generation and • Providing a decent working environment The General Meeting of Shareholders is financial sectors promotes a high-quality for employees. SUEK’s highest governing body. It makes strategic view. decisions on the most important issues The Board of Directors runs three The key internal documents relating to relating to our business. These include: Committees: SUEK’s corporate governance are the amendments to the Charter; any Charter, Regulation on the Board of reorganisation of the company; the • Strategy Committee; Directors, Regulation on the Management increase or decrease of authorised capital; • Audit Committee; Board, Corporate Governance Code, the distribution of profit; and the selection • Nomination and Compensation SUEK’s Code of Corporate Ethics and the of members of the Board of Directors and Committee. Information Policy. The procedure for external auditors. preparing, convening and holding the Throughout 2016, the company’s sole The activities of all Committees are aimed General Meeting of Shareholders is also shareholder took decisions relating to the at improving the efficiency and quality of governed by relevant regulations. These competence of the General Meeting. In the decisions made by the Board of Directors. documents are available on the company’s reporting period, the General Meeting of website. Composition of the Board of Directors Shareholders approved a new version of On 12 October 2016, we revised the In developing our system of corporate the Charter, revised the composition of the membership of the Board of Directors governance, we are guided by the Board and approved a liability insurance of SUEK. Now it includes nine members. provisions of the Corporate Governance agreement for Directors and Officers. At Five of the nine Board Directors are Code recommended by the Bank of the Annual General Meeting of Independent Non-Executive Directors: Russia, as well as the best international Shareholders, the 2015 Annual Report and Klaus-Dieter Beck, Natalia Izosimova, practices. The company has adopted a set financial statements were approved, the Stefan Judisch, Iain Macdonald and Olga of recognised international approaches: members of Internal Audit Commission Vysotskaya. Three of the nine Board • The Board’s work is assessed on an were elected and JSC KPMG was Directors are Non-Executive Directors: annual basis; re-appointed as SUEK’s external auditor Alexander Landia, Andrey Melnichenko for 2016. • The positions of Board Chairman and and Kuzma Marchuk. The Board also CEO are separate; Board of Directors includes SUEK’s CEO Vladimir Rashevsky. Alexander Landia serves as the new • The company’s Board of Directors The Board of Directors is a key element of Chairman of the Board. consists mainly of Independent Non- SUEK’s corporate governance system. The Executive Directors; legislation of the Russian Federation and • The status of Independent Director is internal documents of the company vest confirmed by the Board of Directors; the Board with authority to ensure the efficient management of the company. The • The Board includes the Strategy key objectives of the Board include the long-term increase in value of the company’s assets, the protection of shareholders’ rights and legitimate interests, and ensuring the completeness,
SUEK ANNUAL REPORT 2016 – 83 –
STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS
The criteria that Independent Directors Board effectiveness and evaluation were those actions taken to prevent such must satisfy are defined in the Regulation The Board’s effectiveness is assessed incidents in the future. It was noted that on the Board of Directors and comply with on a regular basis. In 2016, the annual general injury rates decreased year-on- the Corporate Governance Code assessment was overseen by the year. The company maintained a low injury recommended by the Bank of Russia. Nomination and Compensation Committee. rate while hitting production targets in Board members are elected for the period This took the form of a questionnaire in 2016, which exceeded the levels of the up until the next Annual General Meeting, which each Director assessed various previous year. with the possibility of re-election. aspects of the Board’s activities. A substantial part of the Board’s work was Board members regularly communicate The Directors expressed their general dedicated to the strategic development of with the company’s management teams. approval of the Board’s effectiveness, but SUEK as a whole and of the company’s Between meetings, Non-Executive also suggested specific improvements. For individual business segments. The Board Directors receive monthly management Directors to have better awareness of the updated the ten-year consolidated reports, notifications about significant company’s business and its subsidiaries, strategy, refined target vectors of segment events and overviews of the coal-mining the induction policy for new Directors was strategies, adjusted key investment industry. Members of the Board also updated, promoting the most efficient projects due to changes in market regularly consult industry experts and visit performance of their roles and functions conditions, and determined target the company’s production sites. During by Non-Executive Directors on the Board. operational values for strategic and these visits, Directors can personally In the near future, the Board will focus on budgetary planning. evaluate the state of our assets, issues related to legal and organisational The Board took into account the need to communicate with regional managers and changes in the company, to make sure that adapt the company’s communication assess our corporate culture and safety structural reforms are aimed at the processes to the updated corporate systems at first hand. development and growth of the business. strategy. As a result, it approved SUEK’s Members of the Board have access to Board report communication strategy, which is aimed at information on the activities of all Board developing current information activities, In 2016, the Board’s work included the Committees and can attend any including those in the field of international review of strategic initiatives, the approval Committee meeting at any time. Directors communications. of major transactions and the analysis often exercise this right, meaning that, of the business short- and long-term During the year, the Board oversaw the typically, reviews of complex issues are financing to ensure the company’s overall intragroup restructuring programme, which attended by the majority of Board debt portfolio remains manageable. resulted in making JSC SUEK the centre of members, with relevant members of the In addition, it included regular issues, such consolidation and corporate governance. Management team also taking part. as the revision of strategy, budget and The Board also carried out its regular work Board meetings investment planning, setting objectives on assessing the progress of senior The Board’s schedule and work plan are for top managers and assessing their managers towards their goals set in 2015. approved for the following year, with accomplishments. Board members also It set the senior management targets for adjustments every six months. In 2016, the considered other matters that require 2017 as part of the company’s strategic Board of Directors held nine meetings (six Board approval in accordance with objectives. in-person meetings, two in-absentia the Charter. Additionally, the Board updated a number meetings and one conference call), at In light of the volatile market situation, the of internal documents that regulate the which decisions were taken on issues Board focused during 2016 on maintaining corporate governance of the company, affecting different areas of the company’s business stability and responding including the Corporate Governance Code operations. All in-person meetings effectively to changes in the economic of SUEK. The updated Corporate benefited from full attendance, while the environment. Board members supported Governance Code sets out general conference call meeting was attended by management proposals to reduce the standards and principles of corporate the majority of members. impact of negative market conditions. governance adopted by SUEK. It also The Corporate Secretary supports the work These measures included stringent formalises the recommendations of the of the Directors and Board Committees. investment discipline, further improvement Russian Corporate Governance Code, The Corporate Secretary and CEO provide of operational efficiency, the reduction of making them mandatory for the Board members with the materials for costs, and the development of the administration and management of the meetings in advance. company’s own logistics and sales company. networks. Production safety issues remained a top priority for the Board. Safety performance, causes of incidents, production stoppages and accidents were reviewed in detail, as
SUEK ANNUAL REPORT 2016 – 84 – CORPORATE GOVERNANCE OVERVIEW / CONTINUED
Board remuneration Participation of Directors in Board meetings in 2016 The remuneration paid to Board members Nomination and Board Audit Compensation Strategy is based on how they perform their general Director meetings Committee Committee Committee functions, and their membership and Total number of meetings 91 6 7 6 chairmanship of the Board Committees. They also receive reimbursement of all Klaus-Dieter Beck 9 - 7 6 reasonable expenses they incur in relation Natalia Izosimova 74 55 - to their work as Directors. Stefan Judisch 9 - - 6 On-site Board meetings Alexander Landia 9 - 7 6 Board members visit the company’s Iain Macdonald 9 6 - - production units to understand better the Kuzma Marchuk 46 27 - - challenges these units face and the Andrey Melnichenko 9 - - 6 progress being made in introducing new Nicholas Page 48 29 - - production methods and safety standards. Kent Potter 310 211 - - In September 2016, Directors visited Vladimir Rashevsky 812 - - 6 SUEK’s mining and service units in the Christakis Santis 513 - - - Krasnoyarsk region, and held a Board Olga Vysotskaya 72 43 - - meeting at the site. They saw how the unit’s development strategy was being 1 Including six in-person meetings, two in-absentia 7 Kuzma Marchuk joined the Audit Committee implemented and visited the Berezovsky meetings and one conference call. on 19 October 2016. 2 Olga Vysotskaya joined the Board of Directors 8 Nicholas Page left the Board of Directors and Nazarovsky open pits among on 12 April 2016. on 11 August 2016. other facilities. 3 Olga Vysotskaya joined the Audit Committee 9 Nicholas Page joined the Audit Committee on 16 April 2016. on 05 March 2016. During the on-site meeting, members of 4 Natalia Izosimova joined the Board of Directors 10 Kent Potter left the Board of Directors on 18 April the Board spoke with regional managers. on 12 April 2016. 2016. They heard first-hand about operational 5 Natalia Izosimova joined the Nomination and 11 Kent Potter left the Audit Committee on 18 April 2016. Compensation Committee on 16 April 2016. 12 Vladimir Rashevsky did not attend the conference call issues affecting the production unit and 6 Kuzma Marchuk joined the Board of Directors meeting on 12 February 2016. congratulated the managers on their record on 12 October 2016. 13 Christakis Santis left the Board of Directors production achievements. They discussed on 12 October 2016. plans for developing the production The primary responsibilities of the CEO During the year, nine of our non- facilities and infrastructure, paying and the Management Board are to ensure Management Board senior managers particular attention to safety aspects, development of production, commercial regularly attended Management Board working conditions and the environment. and other operational plans and meetings. They also considered the HR policy and improvement programmes, as well as their Meetings of the Management Board assessed measures for the development implementation. They are also responsible of local communities. Such trips help the for the timely and effective coordination of In 2016, there were 16 meetings of SUEK’s Board assess opportunities to implement the executive bodies’ resolutions. Management Board: 12 in-person and four advanced international technologies and in-absentia. Composition of the understand the issues arising from the The main areas of the Management Board regulatory environment and specific Management Board activities in 2016 were: characteristics of the Russian coal As of 31 December 2016, the Management industry. Board was comprised of the following four • Development and implementation of members: SUEK’s joint and segmented strategies, Management Board and functional strategies (sales strategy, The activities of SUEK are managed by • Vladimir Rashevsky logistics strategy, HR strategy, and IT executive bodies – the Chief Executive – Chief Executive Officer; strategy); Officer and the Management Board. • Vladimir Artemiev • Fulfilment of approved budget and The CEO is elected for an indefinite period. – Chief Operations Officer; production targets in adverse market Vladimir Rashevsky has been the CEO • Igor Gribanovsky conditions and against the persistent of SUEK since 2004, and Chairman of the – Chief Commercial Officer; weakening of coal prices; Management Board since 2005. • Nikolay Pilipenko • Systematic monitoring of major risk The Management Board reports to the – Chief Financial Officer. management actions; Board of Directors and the General Meeting of Shareholders. According to SUEK’s corporate Charter, committees and panels may be established under the Management Board. SUEK ANNUAL REPORT 2016 – 85 –
STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS
• Support of activities aimed at reducing industrial injury rates and developing a Compliance system • Approval of local acts and policies in strong safety culture; development each area of compliance; • Integrated optimisation of all production • Identification of dedicated units in charge In June 2016, the Board of Directors and business processes developed by of satisfying applicable requirements in reviewed and approved Management’s the company, its subsidiaries and each area of compliance. proposals to develop a company-wide associates, with a focus on improving compliance system. Our main compliance • After completion of training, labour productivity in all areas; objective is to ensure our business employees’ responsibilities to observe • Improvement of the company’s processes correspond to external and the compliance standards are fixed in managerial, operational and legal internal regulations and to a clearly labour contracts, internal labour structures; defined list of risks. To achieve this goal, regulations and job descriptions; we are introducing compliance procedures • As part of the development of • Implementation of our investment and implementing measures to control compliance at company-wide level, the programme, including major investment their performance. Compliance Officer position in SUEK projects, investment process Following the approval of the Board of AG filled, as well as the Compliance improvement, and the introduction of Directors and SUEK’s Management, the Code, the SUEK’s Code of Corporate effective project management standards; company implemented the following basic Ethics were approved, the Contracts • Improvement of the company’s HR measures aimed at creating a single Security Policy and the Standard for strategy and social policy. compliance system: working with IT infrastructure and information were updated. The Some items relating to operational • Creation of a vertically integrated employees’ awareness with the basics management and current activity were Compliance Officer service (within the of compliance was carried out in an reviewed at meetings of specialised Legal function); interactive mode through software committees, which were established in line • The preparation, approval and called ‘Compliance Shield’. with the company’s Charter. There are six introduction of a Compliance Policy, special-purpose committees under the covering all SUEK’s companies. This Across the company, SUEK personnel Management Board: the Industrial Safety document determines the company’s have studied necessary compliance Committee, Risk Management Committee, compliance principles and objectives documents. Over 90% of our employees Investment Committee, Procurement and identifies 12 major compliance have received training in the fundamentals Committee, Information Technology areas: of compliance through face-to-face Committee, and Budget Committee. seminars and sessions at our headquarter 1. SUEK’s Code of Corporate Ethics; Management Board remuneration and regional offices. We have also 2. Anti-corruption compliance; The remuneration of members of the launched a compliance portal and made 3. Compliance in the field of Management Board and the CEO of SUEK other communication tools available. covenants/limits on facility consists of a fixed basic salary and bonus Within the compliance procedures, we agreements and international elements, as well as long-term incentives have singled out three lines of interaction: sanctions; for the completion of specific strategic dedicated unit; Compliance Officer; and projects. The fixed element is based on the 4. Anti-monopoly compliance; the Internal Control and Audit Service. The official duties of the relevant manager, 5. Tax compliance; Compliance Officer is responsible for the while the variable part provides an 6. Compliance in the field of licensed interaction of these three lines. incentive to accomplish SUEK’s strategic activities and natural-resource In some areas, the necessary level of objectives and helps to attract and retain management; compliance has already been achieved. In key managers. The amount of annual other areas, we need to develop, organise bonus paid is based on the achievement of 7. Compliance in the field of land and and introduce control measures to enable KPIs, which are set annually for each property matters; first-line employees to comply with the member of the Management Board and the 8. Counterparties’ compliance; relevant requirements. Irrespective of the CEO on an individual basis. The KPIs are 9. Corporate management compliance; current situation in particular areas, the based on a detailed analysis of SUEK’s 10. Fraud-prevention compliance; primary task of the Compliance Officer is strategic objectives. In 2016, the total to ensure system coherence by remuneration paid out to the members of 11. Health and safety compliance; introducing uniform policies, standards the Management Board and the CEO of 12. Exchange regulation compliance. and procedures in all of the above areas. SUEK, based on their performance during the year, was $5.6m. We plan to have completed the introduction of these compliance system procedures in all areas by June 2017.
SUEK ANNUAL REPORT 2016 – 86 – BOARD OF DIRECTORS
BOARD OF DIRECTORS (as at 31 December 2016) SUEK’s Board of Directors is balanced and experienced. It provides leadership to the company and guidance for its long-term success.
N S S S N S N
ALEXANDER LANDIA, 54 ANDREY MELNICHENKO, 45 VLADIMIR RASHEVSKY, 43 KLAUS-DIETER BECK, 62 NATALIA IZOSIMOVA, 59 CHAIRMAN NON-EXECUTIVE DIRECTOR CHIEF EXECUTIVE OFFICER INDEPENDENT INDEPENDENT NON-EXECUTIVE DIRECTOR NON-EXECUTIVE DIRECTOR NON-EXECUTIVE DIRECTOR
Education and Education and Education and Education and Education and qualifications qualifications qualifications qualifications qualifications Alexander graduated from Andrey studied physics at Vladimir graduated from the Klaus-Dieter holds a PhD Natalia graduated from Tbilisi State University, and the Lomonosov Moscow Finance Academy under the and an MSc in Mining Moscow State Pedagogical has a Candidate’s Degree State University and Government of the Russian Engineering from Rheinisch- University, and holds a (PhD) in Mathematics from graduated from the Federation, majoring in Westfälische Technische Master’s degree in English the Institute of Mathematics Plekhanov Russian Global Economics. He holds Hochschule in Aachen, and German. Natalia also of the National Academy of Academy of Economics, a Candidate’s Degree in Germany. holds an Advanced Diploma Sciences of Belarus. majoring in Finance and Economic Science. from the Oxford School for Career Credit. Coaching and Mentoring Career Career Klaus-Dieter joined RAG and is a member of the Career Alexander has extensive Vladimir began his career in (Germany) in 1981 and European Mentoring and management experience, Over the past 20 years, 1992, holding various worked in a variety of Coaching Council. leading and advising various Andrey has co-founded a positions in banking, technical and operational organisations. Between 1993 number of successful including Vice-Chairman of roles. He became Chief Career and 2001 he worked at Russian corporations the Management Board of Engineer of the company’s Natalia joined McKinsey in Dresdner Bank in Frankfurt as including one of Russia’s Avtobank. In 2000, he joined subsidiary RAG Niederrhein 1994, where her roles First Vice President, Oil & Gas largest private banks, MDM MDM Bank, where he was in Germany, and between included Head of Global Debt. Until 2004, he Bank, EuroChem, SUEK, appointed Deputy Chairman 1996 and 1998 was General Professional Development was General Director of Siberian Generating of the Management Board Manager of Friedrich/ in Eastern Europe. In 2005, Accenture Russia and was Company (SGK) and TMK. and then, in December Rheinland mine. He then she joined System Capital subsequently appointed as Andrey was Chairman of the 2001, Chairman of the joined RAG’s Riverton Coal Management in Ukraine as Global Gas Lead Partner. Board of SUEK from 2004 Management Board. subsidiary in the US, and Head of HR, becoming In 2006, Alexander joined to 2006 and from 2011 to In 2004, Vladimir became between 2004 and 2007 Director for Corporate SUEK’s Board of Directors, 2016. President of SUEK, and was served as Senior Vice Restructuring later that year. President, Planning, Between 2007 and 2013, which he chaired between From 2007 to 2015, he was appointed CEO of the 2006 and 2010. In October company at the end of that Engineering & General she served as Managing Chairman of the Board of Equipment Management, at Director of the Foundation 2016, he was reappointed Directors of JSC EuroChem. year. Chairman of the Board. Foundation Coal Holdings for Effective Governance in Since April 2015, he has Vladimir is a member of the (formerly RAG’s American Ukraine. From 2013 to 2015, Alexander been a member of the Board of Directors of coal business). was a Board member of JSC Board and Chairman of the Interregional Distribution Natalia launched her own EuroChem. Since April 2015, Strategy Committee of Grid Company of Siberia. Klaus-Dieter was Chairman consultancy business in he has been Chairman of the EuroChem Group AG. and CEO of the Czech coal January 2014, working with Appointment to the Board Board and a member of the producer OKD between companies to implement Andrey is the main June 2011. 2007 and 2012, during and develop corporate Strategy Committee of beneficiary of EuroChem, EuroChem Group AG. He is which period he was also an governance systems and SUEK and SGK. He also sits Executive Director of NWR improve their managerial Chairman of the Board of on the Board of the Russian Directors of Siberian NV. He was a Non- processes, HR and Union of Industrialists and Executive Director of NWR communications strategies. Generating Company LLC Entrepreneurs. (Russia) and a member of the until March 2013, and has Between 2007 and 2013, Board of Lambert Energy Appointment to the Board served as a member of the Natalia was an Independent Advisory Ltd (UK) and March 2004. Supervisory Board of Director of DTEK and Barloworld (South Africa). TUEV-Nord/Hannover in Metinvest, where she Alexander is a co-founder and Germany since 2008. chaired the Remuneration Managing Director of Bernotat Appointment to the Board Committee. She was also & Cie (Germany), and is a June 2012. Head of the Remuneration Director of The Mobility House Committee at FESCO AG (Switzerland). between 2014 and 2016. Appointment to the Board Appointment to the Board December 2006. April 2016.
SUEK ANNUAL REPORT 2016 – 87 –
STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS
S A A A
STEFAN JUDISCH, 58 IAIN MACDONALD, 59 KUZMA MARCHUK, 43 OLGA VYSOTSKAYA, 56 INDEPENDENT INDEPENDENT NON-EXECUTIVE DIRECTOR INDEPENDENT NON- NON-EXECUTIVE DIRECTOR NON-EXECUTIVE DIRECTOR EXECUTIVE DIRECTOR Key to committee Education and Education and Education and Education and qualifications qualifications qualifications qualifications membership Stefan holds a degree in Iain holds a BSc (Eng) from Kuzma graduated in 1995 Olga graduated with S Strategy Committee Business Administration University College London. from Plekhanov Russian Honours in Economics and from Frankfurt. He also attended the Academy of Economics. Mathematics from St. Nomination and Programme for The following year he Petersburg State University. N Career Compensation Committee Management Development graduated from Lomonosov She also holds a degree in Throughout his professional at Harvard Business School. Moscow State University’s Mathematical Cybernetics A Audit Committee life, Stefan has been Department of Physics. and has completed MBA Career involved in commodity- programmes in Bristol and Career Committee’s Chairman trading and risk- Iain joined BP in 1979 as a Paris. She is a Certified management activities, chemical engineer. Over a Between 1995 and 1997, Public Accountant (USA) predominantly focused on 30-year career there, he Kuzma held several financial and holds a Diploma in energy-related commodities progressed through a positions at Deloitte & Directorship from the Board composition as and non-ferrous metals. variety of technical, Touche, Rosexpertiza and Institute of Directors in the of 31 December 2016 Stefan began his career in operational, marketing and Norilsk Nickel. UK. 1981 at Metallgesellschaft’s business-management roles In 1997, he joined the Career 1 central controlling before moving into finance Protek Group and in 1998 department in Frankfurt. management during his last he was appointed Vice Olga was a Partner, and has 2 While with ten years with the company. President for Finance and a held prominent roles, with Metallgesellschaft, he He was Head of Planning member of the Management KPMG, PwC and Deloitte. worked in London, New for the Group, then Group Board. The experience gained York and Hamburg where Controller, finally becoming there, and in companies Deputy Group Chief Between 2004 and 2010, including YUKOS, KIT he served as CEO of the Kuzma was Chief Financial 3 company’s non-ferrous Financial Officer in charge Finance, EMAliance and the of the integrated finance Officer at Uralkali, where he Baltika Brewery PLC, has metal trading and brokerage was a member of the Board subsidiary. In 1992, he was function. He was a member given her significant of the Board of TNK-BP, of Directors from 2007. He expertise in corporate hired by the Swiss bank oversaw Uralkali’s IPO on and a BP Pension Trustee. governance, strategy 1. Chairman 11% UBS to develop their the London Stock Exchange planning, finance, 2. Independent Directors 56% commodity-trading Iain retired from BP in 2010 in 2007, and led the sale of operations, internal and 3. Non-Independent business. and took up a position as the company’s strategic Chief Financial Officer of external auditing, risk Directors 33% Following the deregulation stake to a group of investors management and internal of Germany’s electricity Fairfield Energy Ltd, an in 2010. independent North Sea oil control. market in 1999, he moved From 2011 to 2016, Kuzma to German utility RWE. He and gas producer. He Olga has been a member of Board members remained in charge of was Deputy CEO and Chief the Russian Federation helped to build RWE’s Financial Officer of SUEK. experience global energy and finance at Fairfield until the Independent Directors’ commodity-trading and end of 2014. Appointment to the Board Association since 2002. 9 9 wholesale-supply business Iain is currently a Non- October 2016. Between 2013 and 2015, over a period of 16 years. Executive Director of she was an Independent 8 He retired as the company’s Premier Oil plc, where he is Non-Executive Director and 7 CEO in February 2015. the Audit and Risk Audit Committee Chair at NefteTransService. She has Stefan is a Non-Executive Committee Chairman designate, and a Non- held the same positions at Director of Trimet SE – the INK-Capital since 2014. largest aluminium producer Executive Director of Skills in Germany. for Health Ltd. In 2016, Olga was included in the ‘50 best independent Appointment to the Board Appointment to the Board directors – 2016’ list. June 2015. April 2015. Appointment to the Board April 2016. Mining Energy Finance operations International
SUEK ANNUAL REPORT 2016 – 88 – BOARD COMMITTEES
BOARD COMMITTEES
STRATEGY COMMITTEE
Activities in 2016 Members of the Committee • Responded to difficult market conditions and the urgent nature as at 31 December 2016 of environmental issues by reviewing the SUEK’s strategy for the next ten years and addressing specific strategic objectives by segment and area. Adjusted key priorities of the following strategies: logistics, the Kuzbass and Khakasia mines, the development of the Tugnuisky open pit and the Urgal mines. ANDREY MELNICHENKO, Areas of responsibility: Updated the consolidated sales strategy, taking into account CHAIRMAN The Strategy Committee is the optimal distribution of products across target markets responsible for reviewing based on effective supply chain management; management’s proposals, KLAUS-DIETER BECK assessing associated risks • Analysed investment initiatives that remain attractive despite and developing current macroeconomic conditions. Adjusted key investment STEFAN JUDISCH recommendations to projects for expanding capacity at the Kotinskaya and support the Board’s Yalevskogo mines; ALEXANDER LANDIA decision-making in the • Considered strategic initiatives offered by management to following key areas: expand the resource base, taking into account long-term VLADIMIR RASHEVSKY • Defining the operating market recovery forecasts, and evaluated investment priorities of the company; opportunities in international markets. • Developing the • Specified market parameters and operating performance company’s overall targets for strategic and budgetary planning in order to improve strategy, strategic plans the planning function; supervised budgeting, accounting, for business segments reporting and investment processes; and strategies by • Monitored the implementation of the Management functional area; Development Programme and measures aimed at improving • Developing the business processes. Set tasks to further develop sales, logistics company’s strategies and and procurement processes; goals in target markets; • Coordinated a comparative analysis of the operating • Implementing major performance of SUEK’s units against the leading coal investment projects; producers. • Defining the company’s • Proposed a number of measures aimed at improving operating priorities and productivity and considered measures to enhance operational evaluating the operational efficiency and, in particular, made decisions regarding the efficiency of management of coal warehouses and the quality of transported management; coal. Approved the programme for improving the efficiency of drilling and blasting operations; • Carrying out investment planning, project • Together with the Nomination and Compensation Committee, management and capital reviewed key approaches to SUEK’s communication, activities management; and analysed their main elements, given the importance of communications in a changing economic and political situation. • Improving key business processes.
6 IN-PERSON MEETINGS IN 2016
SUEK ANNUAL REPORT 2016 – 89 –
STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS
NOMINATION AND COMPENSATION COMMITTEE Activities in 2016 Members of the Committee • Reviewed the management of human resources in 2015-2016. as at 31 December 2016 Appreciated the fulfilment of tasks and supported management’s resourcing initiatives at production facilities. Throughout the year, monitored the reorganisation of human resources management as part of the company’s transition to a divisional model; ALEXANDER LANDIA, Areas of responsibility: CHAIRMAN • Making recommendations • Monitored the measures for improving industrial safety and the to the Board of Directors occupational health and safety system, including those relating regarding HR strategy, to the development of existing and new automated safety KLAUS-DIETER BECK nominations and systems at our facilities. Analysed the causes of accidents in compensation, corporate other companies in the industry in order to avoid similar NATALIA IZOSIMOVA governance and social occurrences at SUEK’s mines. Approved new management policy; initiatives for the prevention of accidents at the production units; • Ensuring the continuity of senior management and • Assessed the current state of human resource capacity. developing a succession Developed measures to support management continuity at pool and talent pipeline; various levels; designing and assessing • Reviewed employee motivation programmes in relation to programmes for important tasks and projects. Adjusted and refined a developing managers; methodology for calculating the incentive system parameters • Ensuring compliance with for the programme to develop international trading. Assessed industrial and the payment schemes that are linked to our current motivation environmental safety programmes; standards at our • Assessed the performance of managers in 2016 and approved enterprises; monitoring new performance targets for 2017. Agreed the method of our system of key calculating adjustments to production plans, according to performance indicators in external factors; this area; • Supervised an annual assessment of the Board’s performance, • Assessing the compliance identifying areas that require further attention. Reviewed the of our industrial safety possibilities for Directors’ professional development. Confirmed system with regulatory the status of the company’s Independent Directors. Improved and corporate the policy for introducing new Directors into the business; requirements; assessing • Defined the foundations of the company’s communications the efficiency of controls activities and developed SUEK’s communications strategy in in this area; close cooperation with the Strategy Committee; • Analysing the causes and • Prepared the Corporate Social Responsibility Report in consequences of conjunction with the Audit Committee. emergencies and 6 developing IN-PERSON recommendations on MEETINGS their future prevention. IN 2016 1 CONFERENCE CALL IN 2016
SUEK ANNUAL REPORT 2016 – 90 – BOARD COMMITTEES / CONTINUED
AUDIT COMMITTEE
Activities in 2016 Members of the Committee • Addressed the scheduled tasks of preparing reports, controlled as at 31 December 2016 the quality of IFRS financial statements. Assessed audit risks and the scope of information disclosure. Considered regular issues relating to the evaluation of the external auditor’s effectiveness, remuneration and independence;
IAIN MACDONALD, Areas of responsibility: • Held meetings with the auditor’s representatives, without the CHAIRMAN • Ensuring the management team being present, to freely discuss issues that completeness and arose during the audit; accuracy of the published • Having evaluated the effectiveness of the external auditor, the KUZMA MARCHUK financial statements; Committee noted general satisfaction with the audit process • Guiding the development and the absence of significant differences and remarks. The OLGA VYSOTSKAYA of management reporting auditor, in turn, noted constructive cooperation with SUEK with regular reviews of managers, which was largely due to the rules agreed to define performance reports; the interaction process and when information was provided; • Overseeing the • Paid particular attention to valuation of the rights for subsoil use implementation of in order to ensure the sufficiency of management approaches budget-planning policies to modelling the revaluation process and methodology and evaluating the documentation; effectiveness of • Supervised the specification of measures for development of budgeting systems; the company’s compliance system. Approved the Compliance • Evaluating the Policy as a fundamental document setting forth the key performance of the principles and main areas of development; external auditor and the • Monitored the information campaign promoting the SUEK’s effectiveness of the Code of Corporate Ethics, aiming to make it more attractive in external audit process; the eyes of the company’s employees and explain its basic • Assessing the ideas and corporate values; effectiveness of internal • Further improved the company’s Annual and Corporate Social control and risk Responsibility reports, in cooperation with the Nomination and management; Compensation Committee; • Supervising the work of • Analysed the main mitigation measures for the risks defined as the Internal Control and key in 2016, as part of the efforts to improve SUEK’s risk Audit Servise (ICAS), management system. Together with management, identified including the quarterly target approaches to minimise the company’s key risks and to analysis of audit findings evaluate how effectively they are managed; and annual analysis of • Ensured the implementation of activities planned for 2016 to audit effectiveness. automate business processes as part of the IT strategy. Considered alternative options for the implementation of 6 SAP-based systems. Analysed the company’s information systems to identify opportunities for their gradual integration IN-PERSON with SAP; MEETINGS • Reviewed the internal procedure for checking customers’ IN 2016 trustworthiness. Assessed existing procedures designed to ensure necessary and sufficient level of diligence and prudence in choosing counterparties in accordance with applicable law; • Analysed on a regular basis our fraud and corruption 2 investigations; CONFERENCE • Reviewed reports of the Internal Control and Audit Service (ICAS) on a quarterly basis. Approved internal audit plans and CALLS IN 2016 the ICAS budget. Held regular meetings with the head of ICAS without management.
SUEK ANNUAL REPORT 2016 – 91 –
STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS MANAGEMENT BOARD (as at 31 December 2016)
VLADIMIR VLADIMIR ARTEMIEV, 51 IGOR GRIBANOVSKY, 44 NIKOLAY PILIPENKO, 51 RASHEVSKY, 43 CHIEF OPERATIONS CHIEF COMMERCIAL CHIEF FINANCIAL CHIEF EXECUTIVE OFFICER OFFICER OFFICER OFFICER MEMBER OF THE MEMBER OF THE MEMBER OF THE CHAIRMAN OF THE MANAGEMENT BOARD MANAGEMENT BOARD MANAGEMENT BOARD MANAGEMENT BOARD Education and Education and Education and qualifications qualifications qualifications Vladimir graduated from Igor graduated from the Nikolay graduated from Novocherkassk Polytechnic Moscow State Institute of Moscow State University Institute as a Mining Steel and Alloys, where he in 1989, where he studied Engineer and has a PhD in studied Metal Forming. His Political Economy. He also Engineering Science. postgraduate studies were holds a PhD in Economics. at the Faculty of Economics Career Career of Lomonosov Moscow From 2006 to 2008, Nikolay Vladimir worked for State University, where he was Chief Financial Officer Gukovugol Industrial majored in Public Sector of EuroChem. Before joining Association for over 15 Economics. years, beginning his career EuroChem, he held several as an Overman at the Career management positions at Zapadnaya underground Between 1996 and 2001, ABB Group in Russia, Spain mine. In 1998, he was Igor worked at the Moscow and Switzerland. appointed General Director office of the Japanese Between 2009 and 2015, of Gukovugol, a position Nichimen Corporation in its Nikolay was a member which he held for four years. Department of Coal and of the Board of Directors, He was appointed Head of Metals. From 2001 to 2005, Audit Committee and the Coal Industry he headed the export Nomination and Department at the Russian divisions of Vostsibugol, Remuneration Committee of Ministry of Energy in 2002, Rosuglesbyt and SUEK. JSC EuroChem. From 2015 and Head of the Mines In 2005, Igor was appointed to 2016, he was a member Inspectorate for the Federal Managing Director of SUEK of the Board of Directors, Administration of AG, and has been SUEK’s Audit Committee and Environmental, Chief Commercial Officer Nomination and Technological and Nuclear since 2007. Remuneration Committee Supervision of EuroChem Group AG. (Rostekhnadzor) in 2004. Since 2012, Nikolay has In 2006, Vladimir became been a member of the Chief Operations Officer of Board of Directors of the SUEK and in 2007 he was Siberian Generating appointed to the company’s Company, where he chairs Management Board. He has the Audit Committee. been awarded the Order of He was appointed Chief Courage for a mine rescue Financial Officer of SUEK operation, and holds all in October 2016. three degrees of the Miner’s Glory medal.
SUEK ANNUAL REPORT 2016 – 92 – EXECUTIVE MANAGEMENT / CONTINUED
EXECUTIVES (as at 31 December 2016)
ALEXANDER SERGEI GRIGORIEV, 60 DENIS ILATOVSKY, 45 ANDREY MIRONOV, 51 DOLGOPOLOV, 37 PUBLIC RELATIONS DIRECTOR OF LOGISTICS GENERAL AFFAIRS CHIEF AUDIT EXECUTIVE AND COMMUNICATIONS DIRECTOR DIRECTOR
Education and Education and qualifications Education and Education and qualifications Sergei is a graduate of the qualifications qualifications Alexander is a graduate of Institute of Asian and African Denis graduated from the Andrey is a graduate of the the Moscow State Institute Countries at Lomonosov Moscow State Institute of Leningrad Higher Military of International Relations Moscow State University. Steel and Alloys in 1994. Commanders’ Training (MGIMO), where he studied He holds a Master of Public He also obtained an School, the Academy International Economic Administration degree from Executive MBA from of Federal Security Service Relations. He is also a Harvard’s John F. Kennedy Antwerp Management and the Academy of member of the Institute of School of Government. School, Belgium, and from National Economy. Internal Auditors (IIA, US). the Institute of Business Career Career Studies in 2011. Career Sergei’s early career was Andrey spent the early part From 2000 to 2005, spent with the Soviet Union Career of his career in the Federal Alexander worked as Association of Friendship In 1994, Denis began Security Service. In 2007, Assistant Manager in the Societies. From 1984 to 1990, working for the MAIR he began working in the oil Energy and Mining he worked for the International Industrial Group and in 1996 industry as a Security Department at PwC. Department of the Central was appointed Export Director. Committee of the Communist In 2005, he joined SUEK Director. In 2000, he worked He joined SUEK in 2011 Party, subsequently joining as Head of Audit Unit as General Director of as General Affairs Deputy the USSR President’s Press and was subsequently Saratov Metalware factory. Director, and was promoted Office. He was later a political appointed Head of Internal In 2002, he was appointed to General Affairs Director in consultant and commentator. Control and Audit Service Vice President of the Group, July 2012. His roles also included adviser in May 2011. where he was responsible to the Chairman of the for investments, IT and All-Russian State Television logistics. and Broadcasting Company From 2008, he worked and, in 2001, Chief of Staff of for United Metallurgical the Department of Presidential Company (OMK), where he Affairs of the Russian was simultaneously Director Federation. of Logistics and General Between 2004 and 2006, Director of the Baltic Sergei was Vice President Metallurgical Terminal of the National Reserve Bank. (Ust-Luga). He was then appointed In 2012, Denis joined SUEK Deputy General Director of the as Director of Logistics. National Reserve Corporation. Sergei was appointed Public Relations and Communications Director at SUEK in February 2007. In 2014, he was elected to the Civic Chamber of the Russian Federation. He was also appointed Chairman of the Commission on Development of the Real Sector of the Economy of the Civic Chamber of the Russian Federation.
SUEK ANNUAL REPORT 2016 – 93 –
STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS
ALEXANDER DMITRY VLADIMIR TUZOV, 40 IRINA ZAYTSEVA, 40 REDKIN, 55 SYROMYATNIKOV, 50 CHIEF STRATEGY PROCUREMENT GENERAL COUNSEL DIRECTOR OF HR AND OFFICER DIRECTOR ADMINISTRATION
Education and Education and Education and Education and qualifications qualifications qualifications qualifications Alexander graduated from Dmitry is a graduate of Saint Vladimir graduated from Irina graduated from Perm the Saratov Law Institute Petersburg State Paediatric Bauman Moscow State State University, Faculty in 1986. Medical University. In 2005, Technical University, of Law, in 1998 and from he attended a Human majoring in Biomedical the National Research Career Resources Management Engineering. He holds a University Higher School Between 1986 and 2001, course at the Management Master’s degree in Industrial of Economics, Moscow, Alexander worked in the Centre Europe (MCE) in Management from Ecole in 2001. Public Prosecution Belgium. Centrale Paris and an MBA Department. He Career from Wharton Business subsequently joined Career Between 2002 and 2011, School (University of SIDANCO – TNK-BP In his early career, Dmitry Irina worked at Uralkali, Pennsylvania). Management, where he spent more than six years a potash mining company, held several positions working as a doctor. Career where she held a number including General Counsel Between 1997 and 2004, Vladimir began his career of senior positions including of SIDANCO’s branch in he worked for Bristol-Myers in 2001 as a Production Director of Inventory and Saratov and Head of Squibb, a US Planning Engineer for Logistics. Legal Department. pharmaceutical company, Pechiney, an aluminium Irina was appointed Alexander joined SUEK where he started as a company in France. Over Procurement Director in 2005, initially as Deputy Medical Representative and the next five years he held at SUEK in May 2011. General Counsel, and then then held the positions of various managerial roles in was appointed General Regional Manager, Training production, marketing and Counsel in January 2008. Manager and Sales supply chain management Efficiency Manager. for non-ferrous and ferrous In 2004, Dmitry joined the metallurgical companies in Russian Aluminium and France, Russia, Guinea and Magnesium Institute as HR Ukraine. Director. In 2005, he Between 2007 and 2013, transferred to the RUSAL Vladimir worked for The Management Company, Boston Consulting Group where he worked in a (BCG) in Russia and the US. number of roles including At BCG, he provided Head of Recruitment and consultancy services to Director of Compensations. financial institutions, heavy From 2007 to 2008 and industry, mining, automotive 2012 to 2014, he was HR and processing companies. and PR Director at Kirovsky From 2013 until 2015, Zavod. Vladimir worked at pulp and From April 2008 to February paper company Ilim Group 2012, Dmitry was Director as Deputy CEO for Strategy of HR and Administration at and Product Management, SUEK, a role he returned to and served on the Board of in September 2014. Directors of Ilim Gofra. Vladimir has been SUEK’s Chief Strategy Officer since August 2015.
SUEK ANNUAL REPORT 2016 – 94 – FINANCIAL STATEMENTS
INDEPENDENT AUDITORS’ REPORT TO THE SHAREHOLDERS OF JSC SUEK
Opinion Responsibilities of management and those We have audited the consolidated financial statements of JSC charged with governance for the consolidated SUEK (the “Company”) and its subsidiaries (the “Group”), which financial statements comprise the consolidated statement of financial position as at Management is responsible for the preparation and fair presentation 31 December 2016, the consolidated statements of profit or loss of the consolidated financial statements in accordance with IFRS, and other comprehensive income, changes in equity and cash and for such internal control as management determines is flows for the year then ended, and notes, comprising significant necessary to enable the preparation of consolidated financial accounting policies and other explanatory information. statements that are free from material misstatement, whether due to In our opinion, the accompanying consolidated financial statements fraud or error. present fairly, in all material respects, the consolidated financial In preparing the consolidated financial statements, management is position of the Group as at 31 December 2016, and its consolidated responsible for assessing the Group’s ability to continue as a going financial performance and its consolidated cash flows for the year concern, disclosing, as applicable, matters related to going concern then ended in accordance with International Financial Reporting and using the going concern basis of accounting unless Standards (IFRS). management either intends to liquidate the Group or to cease Basis for opinion operations, or has no realistic alternative but to do so. We conducted our audit in accordance with International Standards Those charged with governance are responsible for overseeing the on Auditing (ISAs). Our responsibilities under those standards are Group’s financial reporting process. further described in the Auditors’ Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are Auditors’ responsibilities for the audit of the independent of the Group in accordance with the independence consolidated financial statements requirements that are relevant to our audit of the consolidated Our objectives are to obtain reasonable assurance about whether financial statements in the Russian Federation and with the the consolidated financial statements as a whole are free from International Ethics Standards Board for Accountants’ Code of material misstatement, whether due to fraud or error, and to issue Ethics for Professional Accountants (IESBA Code), and we have an auditors’ report that includes our opinion. Reasonable assurance fulfilled our other ethical responsibilities in accordance with the is a high level of assurance, but is not a guarantee that an audit requirements in the Russian Federation and the IESBA Code. We conducted in accordance with ISAs will always detect a material believe that the audit evidence we have obtained is sufficient and misstatement when it exists. Misstatements can arise from fraud or appropriate to provide a basis for our opinion. error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.
SUEK ANNUAL REPORT 2016 – 95 –
STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS
As part of an audit in accordance with ISAs, we exercise • Evaluate the overall presentation, structure and content of the professional judgement and maintain professional scepticism consolidated financial statements, including the disclosures, and throughout the audit. We also: whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair • Identify and assess the risks of material misstatement of the presentation. consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, • Obtain sufficient appropriate audit evidence regarding the and obtain audit evidence that is sufficient and appropriate to financial information of the entities or business activities within provide a basis for our opinion. The risk of not detecting a the Group to express an opinion on the consolidated financial material misstatement resulting from fraud is higher than for one statements. We are responsible for the direction, supervision and resulting from error, as fraud may involve collusion, forgery, performance of the group audit. We remain solely responsible for intentional omissions, misrepresentations, or the override of our audit opinion. internal control. We communicate with those charged with governance regarding, • Obtain an understanding of internal control relevant to the audit in among other matters, the planned scope and timing of the audit order to design audit procedures that are appropriate in the and significant audit findings, cludingin any significant deficiencies circumstances, but not for the purpose of expressing an opinion in internal control that we identify during our audit. on the effectiveness of the Group’s internal control. The engagement partner on the audit resulting in this independent • Evaluate the appropriateness of accounting policies used and the auditors’ report is Ilya O. Belyatskiy. reasonableness of accounting estimates and related disclosures made by management. JSC KPMG • Conclude on the appropriateness of management’s use of the MOSCOW, RUSSIA going concern basis of accounting and, based on the audit 25 JANUARY 2017 evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Audited entity: JSC SUEK Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw Registration No. in the Unified State Register of Legal Entities 1027700151380.
attention in our auditors’ report to the related disclosures in the Moscow, Russia consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on Independent auditor: JSC “KPMG”, a company incorporated under the Laws of the Russian Federation, a member firm of the KPMG network of independent the audit evidence obtained up to the date of our auditors’ report. member firms affiliated with KPMG International Cooperative (“KPMG However, future events or conditions may cause the Group to International”), a Swiss entity. cease to continue as a going concern. Registration No. in the Unified State Register of Legal Entities 1027700125628.
Member of the Self-regulated organisation of auditors “Russian Union of auditors” (Association). The Principal Registration Number of the Entry in the Register of Auditors and Audit Organisations: No. 11603053203.
SUEK ANNUAL REPORT 2016 – 96 – FINANCIAL STATEMENTS / CONTINUED
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME for the year ended 31 December 2016
Millions of US Dollars
Notes 2016 2015 Revenue 6 4,002 4,132 Cost of sales 7 (1,831) (2,148) Distribution costs 8 (1,483) (1,428) General and administrative expenses 9 (114) (102) Other expense, net (4) (15) Operating profit 570 439 Finance costs, net 10 (144) (127) Foreign exchange loss (38) (31) Profit before tax 388 281 Income tax expense 24 (85) (81) Net profit for the year 303 200 Net profit attributable to: Ordinary shareholders of the parent 240 159 Non-controlling interests 63 41 Net profit for the year 303 200 Basic and diluted earnings per share (in US Dollars) 19 1.03 0.69 Other comprehensive income/(loss) Items which may be reclassified to profit or loss in the future: Translation difference 163 (838) Revaluation of intra-group debt denominated in foreign currency 3.2 128 (447) Transfer of changes in fair value of cash flow hedges to profit or loss, net of deferred tax 16 (66) 19 Effective portion of changes in fair value of cash flow hedges, net of deferred tax 16 (13) (63) Total items which may be reclassified to profit or loss in the future 212 (1,329) Items which may not be reclassified to profit or loss in the future: Revaluation surplus 4 547 226 Tax effect of revaluation surplus 4 (110) (45) Actuarial losses (2) (14) Total items which may not be reclassified to profit or loss in the future 435 167 Total other comprehensive income/(loss) for the year 647 (1,162) Total other comprehensive income/(loss) attributable to: Ordinary shareholders of the parent 659 (1,099) Non-controlling interests (12) (63) Total other comprehensive income/(loss) for the year 647 (1,162) Total comprehensive income/(loss) attributable to: Ordinary shareholders of the parent 897 (944) Non-controlling interests 53 (18) Total comprehensive income/(loss) for the year 950 (962)
The accompanying notes on pages 100 to 123 are an integral part of these consolidated financial statements.
SUEK ANNUAL REPORT 2016 – 97 –
STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF FINANCIAL POSITION as at 31 December 2016
Millions of US Dollars
Notes 2016 2015 ASSETS Non-current assets 6,621 5,583 Property, plant and equipment 11 6,364 5,382 Deferred tax assets 24 128 99 Goodwill 12 78 78 Other assets 51 24 Current assets 1,534 1,025 Trade accounts and other receivables 13 591 551 Inventories 14 433 287 Prepaid and recoverable taxes 15 122 78 Derivative financial assets 16 58 5 Cash and cash equivalents 17 330 104 Total assets 8,155 6,608 EQUITY AND LIABILITIES Equity 2,782 2,061 Share capital 18 — — Share premium 1, 2 — 6,251 Other equity 1, 2 — (8,145) Revaluation reserve 3,880 3,509 Hedging reserve (112) (33) Translation reserve (1,494) (1,773) Retained earnings 341 2,072 Attributable to ordinary shareholders of the parent 2,615 1,881 Non-controlling interests 167 180 Non-current liabilities 3,323 2,406 Long-term borrowings 20 2,332 1,634 Deferred tax liabilities 24 858 667 Other liabilities 21 133 105 Current liabilities 2,050 2,141 Short-term borrowings 20 976 1,256 Trade accounts and other payables 22 809 607 Derivative financial liabilities 16 206 237 Taxes payable 23 59 41 Total shareholders’ equity and liabilities 8,155 6,608
The accompanying notes on pages 100 to 123 are an integral part of these consolidated financial statements.
VLADIMIR RASHEVSKY NIKOLAY PILIPENKO CHIEF EXECUTIVE OFFICER CHIEF FINANCIAL OFFICER
25 January 2017
SUEK ANNUAL REPORT 2016 – 98 – FINANCIAL STATEMENTS / CONTINUED
CONSOLIDATED STATEMENT OF CASH FLOWS for the year ended 31 December 2016
Millions of US Dollars
Notes 2016 2015 Profit before tax 388 281 Adjustments to profit before tax: Depreciation and amortisation 7, 8 395 448 Finance costs, net 10 144 127 Bad debt expense 8 9 Foreign exchange loss 38 31 Other, net 1 17 Changes in working capital items: Increase in inventories (126) (2) Increase in trade accounts and other receivables (98) (47) Increase in prepaid and recoverable taxes (other than income tax) (36) (2) (Decrease)/increase in trade accounts and other payables (78) 145 Increase/(decrease) in taxes payable (other than income tax) 12 (6) Net cash inflow from operations 648 1,001 Income tax paid (96) (96) Net cash inflow from operating activities 552 905 Investing activities Purchase of property, plant and equipment (483) (342) Repayment of receivable relating to power business 25 79 221 Interest received 8 23 Other non-current investments, net (11) — Acquisition of subsidiary — (49) Advances issued for non-current investments — (23) Net cash outflow used in investing activities (407) (170) Financing activities Proceeds from long-term borrowings 1,459 198 Repayments of long-term borrowings (1,293) (945) Proceeds from/(repayments of) short-term borrowings, net 246 (87) Settlement of cross-currency interest rate swap 16 (146) — Interest and commissions paid (140) (123) Dividends paid to non-controlling interests (9) (7) Acquisition of non-controlling interests — (20) Net cash inflow from/(outflow used in) financing activities 117 (984) Foreign exchange effect on cash and cash equivalents (36) 2 Net increase/(decrease) in cash and cash equivalents 226 (247) Cash and cash equivalents at the beginning of the year 17 104 351 Cash and cash equivalents at the end of the year 17 330 104
The accompanying notes on pages 100 to 123 are an integral part of these consolidated financial statements.
SUEK ANNUAL REPORT 2016 – 99 –
STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY for the year ended 31 December 2016
Millions of US Dollars
Attributable to ordinary Non- Share Share Other Revaluation Hedging Translation Retained shareholders controlling capital premium equity reserve reserve reserve earnings of the parent interests Total Balance at 1 January 2015 — 6,251 (8,145) 3,453 11 (544) 1,801 2,827 218 3,045 Net profit for the year — — — — — — 159 159 41 200 Other comprehensive loss — — — 188 (44) (1,229) (14) (1,099) (63) (1,162) Transfer to retained earnings — — — (132) — — 128 (4) 4 — Total comprehensive loss for the year — — — 56 (44) (1,229) 273 (944) (18) (962) Transactions with owners: Dividends to non- controlling interests — — — — — — — — (7) (7) Acquisition of non-controlling interests — — — — — — (2) (2) (13) (15) Total transactions with owners — — — — — — (2) (2) (20) (22) Balance at 31 December 2015 — 6,251 (8,145) 3,509 (33) (1,773) 2,072 1,881 180 2,061 Net profit for the year — — — — — — 240 240 63 303 Other comprehensive income — — — 459 (79) 279 — 659 (12) 647 Transfer to retained earnings — — — (88) — — 86 (2) 2 — Total comprehensive income for the year — — — 371 (79) 279 326 897 53 950 Transactions with owners: Capital reorganisation (see note 1) — (6,251) 8,145 — — — (1,990) (96) — (96) Dividends to non- controlling interests — — — — — — — — (9) (9) Acquisition of a non-controlling interest (see note 30) — — — — — — (64) (64) (80) (144) Other non-current investments, net — — — — — — (3) (3) 23 20 Total transactions with owners — (6,251) 8,145 — — — (2,057) (163) (66) (229) Balance at 31 December 2016 — — — 3,880 (112) (1,494) 341 2,615 167 2,782
The accompanying notes on pages 100 to 123 are an integral part of these consolidated financial statements.
SUEK ANNUAL REPORT 2016 – 100 – FINANCIAL STATEMENTS / CONTINUED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the year ended 31 December 2016
Millions of US Dollars, unless otherwise stated
1. GENERAL INFORMATION substantial growth of their USD-denominated transactions. Organisation and principal activities. Joint Stock Company The change in functional currency reflects the result of constant (“JSC”) “Siberian Coal Energy Company” (“SUEK” or the monitoring of internal and external information and relevant “Company”) was founded on 1 December 1999. The Company and management assessment. In this assessment, management its subsidiaries are collectively referred to as the Group. The considers key circumstances, factors and events, including address of the registered office is Dubininskaya st. 53, bld. 7, accumulation of their impact over time, which are the main Moscow, Russian Federation. The principal activity of the Group is determinants of entities’ functional currency. Having considered the extraction and sale of coal. the aggregate effect of all such factors, the Group concluded that by the end of 2015 the influence of key factors and events became JSC SUEK became the parent company of the Group in September sufficiently evident to justify the transition. The key factors are 2016 after the reorganisation of SUEK LTD that included the described below: spin-off of a holding company SUEK HOLDINGS LTD owning 100% shares in JSC SUEK and purchase of 100% shares of SUEK LTD by • management adopted a long-term strategy for export-oriented JSC SUEK. Russian subsidiaries with the purpose of maximising export sales vs domestic sales; SUEK HOLDINGS LTD is the immediate parent company of pricing on the international coal market is commonly based JSC SUEK. • in USD; A company that holds business interests beneficially for Mr. Andrey • the external financing necessary for the subsidiaries is Melnichenko owns 100% of Lineа Ltd registered in Bermuda, which predominantly attracted in USD. in turn owns 100% of Madake Enterprises Company Limited, registered in the Republic of Cyprus, which in its turn owns 92.2% Management believes that this change will give readers of the of SUEK Holdings Ltd, registered in the Republic of Cyprus. consolidated financial statements a clearer understanding of the Group’s performance over time as the foreign currency exposure to 2. BASIS OF PRESENTATION USD is expected to be reduced significantly following the transition, These consolidated financial statements have been prepared in thus reducing the impact of USD/RUB volatility on the Group accordance with International Financial Reporting Standards (IFRS) performance. as issued by the International Accounting Standards Board. The functional currency of Russian subsidiaries that are not These consolidated financial statements should be read in predominantly export-oriented is the Russian Rouble. conjunction with the consolidated financial statements of the Group Presentation currency. The presentation currency is the USD. issued by its former parent SUEK LTD prior to the change in the The translation of the consolidated financial statements into the corporate structure which resulted in JSC SUEK becoming the top presentation currency was performed in accordance with the company in the SUEK group of companies. requirements of IAS 21 “The Effects of Changes in Foreign The consolidated financial statements of the Group have been Exchange Rates”. prepared on the historical cost basis, except for: The following RUB/USD exchange rates were applied at 31 • valuation of property, plant and equipment at the date of December and during the years then ended: adoption of IFRS 1 “First Time Adoption of International Financial 2016 2015 Reporting Standards” (“IFRS 1”) which provides for entities to Year end 60.66 72.88 elect to measure items of property, plant and equipment at fair Average rate 67.03 60.96 value and use that value as deemed cost in the future. The Group elected to measure property, plant and equipment, including Capital reorganisation. Under the 2016 capital reorganisation of mineral rights, at fair value as of 1 January 2005, which forms the the Group (see note 1) the consolidated financial statements of the deemed cost of these assets; Company reflect the predecessor carrying amounts of SUEK LTD • mineral rights carried at fair value starting from 1 January 2013; and its subsidiaries. Comparative information of these consolidated and financial statements is presented as if the transfer had occurred at • derivative financial instruments and available for sale financial the beginning of the reporting period as there was no substantive assets which are stated at fair value. economic change. Functional currency. The functional currency of the Company Adoption of new and revised standards and interpretations and its subsidiaries is the currency of the primary economic The following amendments to standards became effective for the environment where these entities operate. Group from 1 January 2016: The functional currency of foreign trading subsidiaries and • Amended IFRS 10 “Consolidated financial statements” and IAS predominantly export-oriented Russian subsidiaries is the US Dollar 28 “Investments in associates and joint ventures” address an (“USD”). acknowledged inconsistency between the requirements in IFRS 10 and those in IAS 28 (2011), in dealing with the loss of control As at 1 January 2016, the Group changed the functional currency of a subsidiary that is contributed to an associate or a joint from the Russian Rouble (“RUB”) to USD with prospective effect for venture. predominantly export-oriented Russian subsidiaries, reflecting the
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STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS
• Amended IAS 16 “Property, plant and equipment” and IAS 38 The financial statements of subsidiaries are included in the “Intangible assets” clarify the use of a revenue-based consolidated financial statements from the date that control depreciation or amortisation method. commences until the date that control ceases. The accounting • Annual improvements to International Financial Reporting policies of subsidiaries have been changed when necessary to Standards 2012-2014, which consist of improvements to a align them with the policies adopted by the Group. number of standards. The acquisition of subsidiaries from third parties is accounted for • Amendments to IAS 1 “Presentation of Financial Statements” using the purchase method of accounting. The identifiable assets, provide additional explanation of materiality and clarify liabilities and contingent liabilities of a subsidiary are measured at amendments to statement of financial position and statement of their fair values as at the date of acquisition. Non-controlling profit or loss and other comprehensive income. (minority) interest is measured at its proportionate interest in the The adoption of the amendments to existing standards did not have identifiable assets and liabilities of the acquiree. Losses applicable significant impact on these consolidated financial statements. to the non-controlling interests in a subsidiary are allocated to the non-controlling interests even if doing so causes the non-controlling A number of new standards and amendments to standards are not interests to have a deficit balance. yet effective at 31 December 2016, and have not been early adopted: Intra-group balances and transactions, and any unrealised gains arising from intra-group transactions, are eliminated in preparing the • IFRS 9 “Financial Instruments” (effective for annual periods consolidated financial statements. beginning after 1 January 2018 with earlier application permitted) supersedes IAS 39 “Financial Instruments: Recognition and Changes in ownership interests by the Group in a subsidiary, while Measurement” and introduces new classification and maintaining control, are recognised as an equity transaction. measurement requirements, a single, forward-looking “expected Upon a loss of control, the Group derecognises the assets and loss” impairment model and a substantially-reformed approach liabilities of the subsidiary, any non-controlling interests and the to hedge accounting. other components of equity related to the subsidiary. Any surplus • IFRS 15 “Revenue from contracts with customers” (effective for or deficit arising on the loss of control is recognised in profit or loss. annual periods beginning after 1 January 2018 with earlier If the Group retains any interest in the previous subsidiary, then application permitted) outlines a single comprehensive model for such interest is measured at fair value at the date that control is lost. entities to use in accounting for revenue from contracts with Subsequently it is accounted for as an equity-accounted investee customers. or as an available-for-sale financial asset depending on the level of • IFRS 16 “Leases” (effective for annual periods beginning after influence retained. 1 January 2019 with earlier application permitted, if IFRS 15 is 3.2. Foreign currency transactions also adopted) supersedes IAS 17 “Leases” and provides a new approach to lease accounting that eliminates the classification of Transactions in foreign currencies are recorded at the exchange rate leases as either operating leases or finance leases for a lessee at the date of the transaction. Monetary assets and liabilities and requires a lessee to recognise assets and liabilities for the denominated in foreign currencies are converted to the respective rights and obligations created by leases. functional currency at the exchange rate ruling at the balance sheet date. Exchange differences arising from changes in exchange rates • Amendments to IAS 12 “Income Taxes” (effective for annual are recognised in profit or loss. periods beginning on or after 1 January 2017 with earlier application permitted) clarify the accounting for deferred tax The translation of the financial statements from functional currency assets for unrealised losses on debt instruments measured at into presentation currency is performed in accordance with the fair value. requirements of IAS 21 “The Effects of Changes in Foreign • Amendments to IAS 7 “Statement of Cash Flows” (effective for Exchange Rates” as follows: annual periods beginning on or after 1 January 2017 with earlier • all assets and liabilities, both monetary and non-monetary, are application permitted) requires entities to provide disclosures that translated at closing exchange rates at the dates of each enable investors to evaluate changes in liabilities arising from consolidated statement of financial position presented; financing activities, including changes arising from cash flows • all income and expenses in the consolidated statement of profit and non-cash changes. or loss are translated at the average exchange rates for the years The Group is currently assessing the impact of these new standards presented; and amendments on the consolidated financial statements. • resulting exchange differences are included in equity and presented separately; and 3. SIGNIFICANT ACCOUNTING POLICIES in the consolidated statement of cash flows, cash balances at the 3.1. Basis of consolidation • beginning and end of each year presented are translated at Subsidiaries. Subsidiaries are entities controlled by the Group. exchange rates at the respective dates. All cash flows are The Group controls an entity when it is exposed to, or has rights translated at the annual average exchange rates for the years to, variable returns from its involvement with the entity and has presented. Resulting exchange differences are presented as the ability to affect those returns through its power over the entity. foreign exchange effect on cash and cash equivalents.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the year ended 31 December 2016 (continued)
3. SIGNIFICANT ACCOUNTING POLICIES Any accumulated depreciation at the date of revaluation is (continued) eliminated against the gross carrying amount of the mineral rights 3.2. Foreign currency transactions (continued) asset and the net amount is restated to the revalued amount of the asset. Revaluations are performed on an annual basis. Exchange differences arising from the revaluation of the intra-group debt accounted for as a part of net investments in foreign entities A revaluation increase is recognised in other comprehensive income are recognised in other comprehensive income in the consolidated and accumulated in equity except to the extent it reverses a financial statements. Certain intra-group debt to Russian previous revaluation decrease recognised in profit or loss, in which subsidiaries is classified as part of net investments. case it is recognised in profit or loss. A revaluation decrease is recognised in profit or loss except to the extent that it reverses a 3.3. Property, plant and equipment revaluation increase recognised directly in equity, in which case it is Basis of carrying value of property, plant and equipment. recognised directly in equity. Assets in existence at 1 January 2005. Property, plant and equipment in existence at 1 January 2005 were valued by an At the year end a portion of the revaluation reserve, which is equal independent firm of professionally qualified valuers. The basis of the to the difference between depreciation based on the revalued valuation was fair value, which is defined as the amount for which carrying amount of the mineral rights asset and depreciation based an asset could be exchanged between knowledgeable willing on the asset’s historical cost, is transferred from the revaluation parties in an arm’s length transaction. The fair value of marketable reserve to retained earnings. assets was determined as their market value. Depreciation. Mining assets are depreciated using the unit-of- However, a significant part of property, plant and equipment, being production method, based on the estimated proven and probable of a specialised nature, was valued on the depreciated replacement coal reserves to which they relate, or are written off if the mine is cost basis. For each item of property, plant and equipment, the new abandoned or where there is an impairment in value. The replacement cost was estimated as the current cost to replace the impairment loss is recognised in profit or loss for the year to the asset with a functionally equivalent asset. The new replacement extent it exceeds the previous revaluation surplus in equity. cost was then adjusted for accumulated depreciation, including Estimated proven and probable coal reserves determined in both physical depreciation and functional and economic accordance with internationally recognised standards for reporting obsolescence, to arrive at the fair value of the asset. coal reserves reflect the economically recoverable coal reserves which can be legally recovered in the future from coal deposits. Fair value amounts have subsequently been treated as deemed cost in accordance with the requirements of IFRS 1. Tangible assets, other than mining assets, are depreciated using the straight-line method based on estimated useful lives. For each item Assets acquired after 1 January 2005. Property, plant and the estimated useful life has due regard to both its own physical life equipment acquired after 1 January 2005 is stated at cost less limitations and, if applicable, the present assessment of the accumulated depreciation and impairment losses. The cost of economically recoverable reserves of the mine property at which self-constructed assets includes the cost of materials, direct labour the item is located, and to possible future variations in those and an appropriate proportion of production overheads, and the assessments. Estimates of remaining useful lives are made on a corresponding capitalised borrowing costs. Where an item of regular basis for all tangible assets, with annual reassessments for property, plant and equipment comprises major components major items. having different useful lives, they are accounted for as separate items of property, plant and equipment. The estimated useful lives of property, plant and equipment, including mineral rights, are as follows: Expenditure incurred to replace a component of an item of property, • mineral rights average of 52 years plant and equipment that is accounted for separately is capitalised • buildings, structures and utilities 15 – 44 years with the carrying amount of the component that has been replaced. Subsequent expenditure is capitalised if future economic benefits • machinery, equipment and transport 4 – 15 years will arise from the expenditure. All other expenditure, including Leased assets. Leases under which the Group assumes repairs and maintenance expenditure, is recognised in profit or loss substantially all the risks and rewards of ownership are classified as as an expense as incurred. finance leases. Assets subject to finance leases are capitalised as Mineral rights. Mineral rights include expenditures incurred in property, plant and equipment at the lower of fair value or the acquiring mineral and development rights. Mineral rights are present value of future minimum lease payments at the date of classified as property, plant and equipment and carried at fair value acquisition, with the related financial lease liability recognised at the starting from 1 January 2013. same value. Capitalised leased assets are depreciated over their estimated useful lives or the term of the lease, if shorter. The fair value is determined by discounting future cash flows which can be obtained from operations of the mines based on the life-of-mine plans and deducting the fair value of the operating tangible fixed assets.
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STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS
Finance lease payments are allocated using the effective interest commercial viability of the project. The technical feasibility and rate method, between: commercial viability of extracting coal is considered to be determinable when proven coal reserves are determined to exist. • the lease finance cost, which is included in finance costs; and Expenditure deemed to be unsuccessful is recognised immediately the capital repayment, which reduces the related lease obligation • in profit or loss. to the lessor. 3.7. Inventories 3.4. Capital construction-in-progress Coal. Coal is measured at the lower of production cost or net Capital construction-in-progress comprises costs directly related to realisable value. Net realisable value is the estimated selling price in mine development, construction of buildings, infrastructure, the ordinary course of business, less the estimated selling processing plant, machinery and equipment. Amortisation or expenses. Production costs include on-mine and processing costs, depreciation of these assets commences when the assets are put as well as transportation costs to the point of sale. in the location and condition necessary for them to be capable of operating in the manner intended by management. Capital Consumable stores and materials. The cost of inventories is construction-in-progress is reviewed regularly to determine whether based on the weighted average principle and includes expenditure its carrying value is recoverable. incurred in acquiring the inventories and bringing them to their existing location and condition. 3.5. Impairment The Group reviews the carrying amounts of its tangible and 3.8. Financial instruments intangible assets regularly to determine whether there are indicators Non-derivative financial instruments. Non-derivative financial of impairment. If any such indicators exist, the recoverable amount instruments comprise investments in equity and debt securities, of the asset is estimated in order to determine the extent of the trade and other receivables, cash and cash equivalents, loans and impairment loss (if any). Where it is not possible to estimate the borrowings, and trade and other payables. recoverable amount of an individual asset, the Group estimates the The Group initially recognises loans and receivables and deposits recoverable amount of the cash-generating unit (CGU) to which the on the date that they are originated. All other financial assets asset belongs. (including assets designated at fair value through profit or loss) are A recoverable amount is the higher of fair value less costs to sell recognised initially on the trade date at which the Group becomes a and value in use. In assessing value in use, the estimated future party to the contractual provisions of the instrument. cash flows are discounted to their present value using a pre-tax The Group derecognises a financial asset when the contractual discount rate that reflects current market assessments of the time rights to the cash flows from the asset expire, or it transfers the value of money and the risks specific to the asset. rights to receive the contractual cash flows on the financial asset in If the recoverable amount of an asset or CGU is estimated to be a transaction in which substantially all the risks and rewards of less than the carrying amount, the carrying amount is reduced to ownership of the financial asset are transferred. Any interest in the recoverable amount and the impairment losses are recognised transferred financial assets that is created or retained by the Group in profit or loss for the year. Impairment losses are allocated first to is recognised as a separate asset or liability. reduce the carrying amount of any goodwill allocated to CGU, and The Group has the following categories of non-derivative financial then to reduce the carrying amounts of the other assets in CGU on assets: financial assets at fair value through profit or loss, held-to- a pro-rata basis. maturity financial assets, loans and receivables and available-for- An impairment loss in respect of goodwill is not reversed. For other sale financial assets. assets, an impairment loss is reversed only to the extent that the Financial assets at fair value through profit or loss. A financial asset’s carrying amount does not exceed the carrying amount that asset is classified at fair value through profit or loss if it is classified would have been determined, net of depreciation or amortisation, if as held for trading or is designated as such upon initial recognition. no impairment loss had been recognised. Financial assets are designated at fair value through profit or loss if 3.6. Research and exploration expenditure the Group manages such investments and makes purchase and Pre-exploration costs are recognised in profit or loss as incurred. sale decisions based on their fair value in accordance with the Group’s documented risk management or investment strategy. Exploration and evaluation costs (including geophysical, Upon initial recognition attributable transaction costs are topographical, geological and similar types of expenditure) are recognised in profit or loss as incurred. Financial assets at fair value capitalised as exploration and evaluation assets on a project-by- through profit or loss are measured at fair value, and changes project basis pending determination of the technical feasibility and therein are recognised in profit or loss.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the year ended 31 December 2016 (continued)
3. SIGNIFICANT ACCOUNTING POLICIES through profit or loss) are recognised initially on the trade date at (continued) which the Group becomes a party to the contractual provisions of 3.8. Financial instruments (continued) the instrument. The Group derecognises a financial liability when its contractual obligations are discharged or cancelled or expire. Held-to-maturity financial assets. If the Group has the positive intent and ability to hold to maturity debt securities, then such The Group has the following non-derivative financial liabilities: loans financial assets are classified as held to maturity. Held-to-maturity and borrowings, bank overdrafts, and trade and other payables. financial assets are recognised initially at fair value plus any directly Such financial liabilities are recognised initially at fair value plus any attributable transaction costs. Subsequent to initial recognition directly attributable transaction costs. Subsequent to initial held-to-maturity financial assets are measured at amortised cost recognition these financial liabilities are measured at amortised cost using the effective interest method, less any impairment losses. Any using the effective interest method. sale or reclassification of a more than insignificant amount of Derivative financial instruments. The Group may enter into a held-to-maturity investments not close to their maturity would result variety of derivative financial instruments to manage its exposure to in the reclassification of all held-to-maturity investments as commodity price risk, foreign currency risk, interest rate risk and available-for-sale, and prevent the Group from classifying risk of changes in the price of freight. investment securities as held to maturity for the current and the following two financial years. Derivatives are initially recognised at fair value; any directly attributable transaction costs are recognised in profit or loss as they Loans and receivables. Loans and receivables are financial assets are incurred. Subsequent to initial recognition, derivatives are with fixed or determinable payments that are not quoted in an measured at fair value, and changes therein are generally active market. Such assets are recognised initially at fair value plus recognised in profit or loss. any directly attributable transaction costs. Subsequent to initial recognition loans and receivables are measured at amortised cost The Group designates certain derivatives as hedges of a highly using the effective interest method, less any impairment losses. probable forecast transaction (cash flow hedge). When a derivative Loans and receivables comprise trade and other receivables. is designated as a cash flow hedging instrument, the effective portion of changes in the fair value of the derivative is recognised in Cash and cash equivalents. Cash and cash equivalents comprise other comprehensive income. Any ineffective portion of changes in cash balances and call deposits with original maturities of three the fair value of the derivative is recognised immediately in profit or months or less. Bank overdrafts that are repayable on demand and loss. The amount accumulated in equity is retained in other form an integral part of the Group’s cash management are included comprehensive income and reclassified to profit or loss in the same as a component of cash and cash equivalents for the purpose of period in which the hedged item affects profit or loss. the statement of cash flows. When a hedging instrument no longer meets the criteria for hedge Available-for-sale financial assets. Available-for-sale financial accounting, expires or is sold, or the designation is revoked, then assets are non-derivative financial assets that are designated as hedge accounting is discontinued prospectively. When a forecast available for sale and that are not classified in any of the previous transaction is no longer expected to occur, the cumulative gain or categories. The Group’s investments in equity securities and certain loss that was recognised in equity is reclassified to profit or loss. debt securities are classified as available-for-sale financial assets. Such assets are recognised initially at fair value plus any directly Changes in the fair value of derivatives not designated as cash flow attributable transaction costs. Subsequent to initial recognition, they hedges are recognised in profit or loss. are measured at fair value and changes therein, other than Impairment of non-derivative financial assets. A financial impairment losses and foreign currency differences on available-for- asset not carried at fair value through profit or loss is assessed at sale debt instruments, are recognised in other comprehensive each reporting date to determine whether there is any objective income and presented within equity in the fair value reserve. When evidence that it is impaired. A financial asset is impaired if objective an investment is derecognised or impaired, the cumulative gain or evidence indicates that a loss event has occurred after the initial loss in other comprehensive income is transferred to profit or loss. recognition of the asset, and that the loss event had a negative Other non-derivative financial instruments. Other non-derivative effect on the estimated future cash flows of that asset that can be financial instruments are measured at amortised cost using the estimated reliably. effective interest method, less any impairment losses. Investments Objective evidence that financial assets (including equity securities) in equity securities that are not quoted on a stock exchange are are impaired can include default or delinquency by a debtor, principally valued using valuation techniques such as discounted restructuring of an amount due to the Group on terms that the cash flow analysis, option pricing models and comparisons to other Group would not consider otherwise, indications that a debtor or transactions and instruments that are substantially the same. Where issuer will enter bankruptcy, adverse changes in the payment status fair value cannot be reliably measured, investments are stated at of borrowers or issuers in the Group, economic conditions that cost less impairment losses. correlate with defaults or the disappearance of an active market for Non-derivative financial liabilities. The Group initially recognises a security. In addition, for an investment in an equity security, a debt securities issued on the date that they are originated. All other significant or prolonged decline in its fair value below its cost is financial liabilities (including liabilities designated at fair value objective evidence of impairment.
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Financial assets measured at amortised cost. The Group 3.10. Employee benefit obligations considers evidence of impairment for these assets at both a Remuneration to employees in respect of services rendered during specific asset and collective level. All individually significant a reporting year is recognised as an expense in that reporting year. assets are assessed for specific impairment. Those found not Defined contribution plan. The Group contributes to the Pension to be specifically impaired are then collectively assessed for any Fund of the Russian Federation, a defined contribution pension impairment that has been incurred but not yet identified. Assets plan. The only obligation of the Group is to make the specified that are not individually significant are collectively assessed contributions in the year in which they arise and these contributions for impairment by grouping together assets with similar are expensed as incurred. risk characteristics. Defined benefit plans. In accordance with current legislation and In assessing collective impairment, the Group uses historical trends internal documentation the Group operates defined benefit plans of the probability of default, timing of recoveries and the amount of whereby field workers of its coal-producing subsidiaries are entitled loss incurred, adjusted for management’s judgement as to whether to a lump sum payment. The amount of benefits depends on age, current economic and credit conditions are such that the actual years of service, compensation and other factors. losses are likely to be greater or less than suggested by historical trends. The liability recognised in the balance sheet in respect of defined benefit pension plans is the present value of the defined benefit An impairment loss in respect of a financial asset measured at obligation at the balance sheet date. Actuarial gains and losses are amortised cost is calculated as the difference between its carrying recognised directly in other comprehensive income. amount, and the present value of the estimated future cash flows discounted at the asset’s original effective interest rate. Losses are The defined benefit obligation is calculated annually by the Group. recognised in profit or loss and reflected in an allowance account. The Projected Unit Credit Method is used to determine the present Interest on the impaired asset continues to be recognised through value of defined benefit obligations and the related current service the unwinding of the discount. When a subsequent event causes cost. The present value of the defined benefit obligation is the amount of impairment loss to decrease, the decrease in determined by discounting the estimated future cash outflows using impairment loss is reversed through profit or loss. interest rates of government bonds that are denominated in the currency in which the benefits will be paid and that have terms to Available-for-sale financial assets. Impairment losses on maturity approximating the terms of the related pension liability. available-for-sale financial assets are recognised by reclassifying the losses accumulated in the fair value reserve in equity, to profit 3.11. Income tax or loss. The cumulative loss that is reclassified from equity to profit Income tax expense comprises current and deferred taxation. or loss is the difference between the acquisition cost, net of any Current tax is the tax payable on the taxable income for the year, principal repayment and amortisation, and the current fair value, using tax rates enacted at the balance sheet date, and includes any less any impairment loss previously recognised in profit or loss. If adjustment to tax payable in respect of previous years. the fair value of an impaired available-for-sale debt security subsequently increases and the increase can be related objectively Deferred tax is recognised in respect of temporary differences to an event occurring after the impairment loss was recognised in between the carrying amounts of the assets and liabilities for profit or loss, then the impairment loss is reversed through profit or financial reporting purposes and the amounts used for taxation loss; otherwise, it is reversed though other comprehensive income. purposes. 3.9. Provisions Deferred tax is not recognised for the temporary differences on the Provisions are recognised when the Group has legal or constructive initial recognition of assets or liabilities in a transaction that is not a obligations, as a result of a past event, for which it is probable that an business combination and that affects neither accounting nor outflow of economic benefits will be required to settle the obligation, taxable profit or loss. In addition, deferred tax is not recognised for and the amount of the obligation can be reliably estimated. temporary differences arising on the initial recognition of goodwill and temporary differences associated with investments in The amount recognised as a provision is the best estimate of the subsidiaries and associates, except where the Group is able to consideration required to settle the present obligation at the control the timing of the reversal of the temporary difference, and it balance sheet date, taking into account the risks and uncertainties is probable that the temporary difference will not reverse in the surrounding the obligation. If the effect is material, provisions are foreseeable future. determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time Deferred tax is measured at the tax rates that are expected to be value of money and, where appropriate, the risks specific to applied to the temporary differences when they reverse, based on the liability. the laws that have been enacted or substantively enacted by the reporting date.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the year ended 31 December 2016 (continued)
3. SIGNIFICANT ACCOUNTING POLICIES 3.15. Overburden removal expenditure (continued) In open-pit-coal mining operations, it is necessary to remove the 3.11. Income tax (continued) overburden and other waste in order to access the economically The measurement of deferred tax reflects the tax consequences that recoverable coal. would follow the manner in which the Group expects, at the end of the Stripping costs incurred during the pre-production phase of the reporting period, to recover or settle the carrying amount of its assets open-pit mine are capitalised as the cost of the development of the and liabilities. Deferred tax assets and liabilities are offset if there is a mining property and amortised over the life of the mine. legally enforceable right to offset current tax assets and liabilities, and Due to the specifics of the geology of the Group’s mining assets, they relate to income taxes levied by the same tax authority on the the period required to gain access to a coal seam is short, and the same taxable entity, or on different tax entities, but they intend to stripping ratio (volume of overburden removed over the volume of settle current tax liabilities and assets on a net basis or their tax assets coal extracted) is relatively constant over the periods. Therefore, and liabilities will be realised simultaneously. stripping costs incurred during the production phase of the open-pit In accordance with the tax legislation of the Russian Federation, tax mine are recognised in the profit or loss as incurred. losses and current tax assets of a company in the Group may not 3.16. Environmental obligation be set off against taxable profits and current tax liabilities of other Environmental obligation includes provision for decommissioning Group companies. In addition, the tax base is determined and site restoration costs. separately for each of the Group’s main activities and, therefore, tax losses and taxable profits related to different activities cannot Environmental provision is recognised when the Group has a be offset. present legal or constructive obligation as a result of past events that existed at the balance sheet date: 3.12. Revenue recognition Revenue represents the invoiced value for coal supplied to • to dismantle and remove its items of property, plant and customers, excluding value-added tax, and is recognised when all equipment (decommissioning); and the following conditions are satisfied: • to restore site damage after the commencement of coal production to bring the land into a condition suitable for its further • the Group has transferred to the buyer the significant risks and use (site restoration). rewards of ownership; • the Group retains neither continuing managerial involvement to Estimated future costs are provided for at the present value of the degree usually associated with ownership nor effective estimated future expenditures expected to be incurred to settle the control over goods; obligation, using estimated cash flows, based on current prices • the amount of revenue can be measured reliably; adjusted for inflation. • it is probable that the economic benefits associated with the The increase in the provision through unwinding of the obligation transaction will flow to the entity; and over the life of the mine, due to the passage of time, is recognised • the costs incurred or to be incurred in respect of the transaction as a finance cost in profit or loss. can be measured reliably. Changes in the obligation, reassessed regularly, related to new 3.13. Operating lease payments circumstances or changes in law or technology, or in the estimated Leases of assets under which all the risks and benefits of ownership amount of the obligation, or in the pre-tax discount rates, are are retained by the lessor are classified as operating leases. recognised as an increase or decrease of the cost of the relevant Payments made under operating leases are recognised in profit or asset to the extent of the carrying amount of the asset; the excess loss in the year in which they are due in accordance with is recognised immediately in profit or loss. lease terms. Gains from the expected disposal of mining assets at the end of the 3.14. Dividends declared life of the mine are not taken into account when determining Dividends and related taxation thereon are recognised as a liability the provision. in the year in which they have been declared and become 3.17. Borrowing costs legally payable. Borrowing costs directly attributable to the acquisition, construction Retained earnings legally distributable by the Group are based on or production of qualifying assets, which are assets that necessarily the amounts available for distribution in accordance with the take a substantial period of time to get ready for their intended use, applicable legislation and as reflected in the statutory financial are added to the cost of those assets, until such time as the assets statements of the individual Group entities. These amounts may are substantially ready for their intended use. All other borrowing differ significantly from the amounts recognised in the Group’s costs are recognised in profit or loss for the year in which they consolidated IFRS financial statements. are incurred.
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3.18. Goodwill Valuation of mineral rights. Mineral rights for coal extraction are Goodwill arises on acquisitions and is recognised as an asset stated at their fair value based on reports prepared by internal initially measured at cost, being the excess of the cost of the specialists of the Group at each year end. business combination over the Group’s share of the net fair value Since there is no active market for mineral rights, the fair value is of acquiree’s identifiable assets, liabilities and contingent liabilities determined by discounting future cash flows, which can be recognised at the date of acquisition. If the Group’s share of the net obtained from the operations of the mines based on the life-of-mine fair value of the acquiree’s identifiable assets, liabilities and plans, and deducting the fair value of the operating tangible fixed contingent liabilities, after reassessment, exceeds the cost of the assets. The Group did not identify any material intangible assets business combination, the excess is recognised immediately in which could be deducted in arriving at the fair value of the profit or loss. mineral rights. Goodwill is measured at cost less accumulated impairment losses. Since the operating tangible fixed assets are carried at historical In respect of equity-accounted investees, the carrying amount of cost, for the purposes of regular revaluation of mineral rights their goodwill is included in the carrying amount of the investment. fair value is determined either based on market prices for similar Transaction costs incurred in a business combination are expensed. items of machinery and equipment recently acquired by the Group The Group elected not to restate past business combinations at the or, if no such purchases were made, by applying a price index for date of adoption of IFRS. the relevant year of acquisition for mining equipment to the residual value of items. 4. CRITICAL ACCOUNTING JUDGEMENTS AND At 31 December 2016 the fair value of mineral rights was ESTIMATES determined based on the following key assumptions: In the process of applying the Group’s accounting policies management has made the following principal judgements and • the cash flows were projected based on actual operating results estimates that have a significant effect on the amounts recognised and life-of-mine models constructed for each cash-generating in the consolidated financial statements. Actual results may differ mining unit and based on an assessment of proven and probable from these estimates. reserves. Management opts to involve professional appraisers to perform estimation of reserves as appropriate; Coal reserve estimates. Coal reserve estimates are used as the • export coal sales volumes were estimated to remain stable in basis for future cash flows, which enter into the valuation of mineral 2017-2022, based on projected production volumes of export- rights, the determination of provision for environmental obligations, grade coal and the available capacity of the transport calculations of amortisation and depreciation of mining assets, the infrastructure, and decline gradually thereafter; unwinding of discount on environmental obligations and the related deferred taxes. • export coal prices for Asian and European markets were projected to grow at an average of 18% in 2017 and to grow at The coal reserve estimates represent the quantity of coal expected an average of 2% in 2018-2022 based on the forward rates and a to be mined, processed and sold at prices at least sufficient to consensus forecast of investment banks and thereafter in line recover the estimated total costs, the carrying value of the with expected long-term USD inflation; investment and anticipated additional expenditures (“proven and • domestic coal sales volumes were estimated to grow at an probable coal reserves” in international mining terminology). The average rate of 3% per annum in 2017-2022 and remain stable estimates are based on several assumptions about the physical thereafter; existence of coal reserves, future mining and recovery factors, • domestic coal prices from 2018 were projected to grow in line production costs and coal prices and have been calculated using with RUB inflation; the assessment of available exploration and other data. The Group undertakes revisions of the coal reserve estimates as appropriate, • regulated railroad tariffs for 2017-2021 were estimated to grow at which are confirmed by independent consulting mining engineers. an average rate of 7% for domestic and export shipments and at 5% per annum from 2022 in line with expected long-term RUB Although management’s long-term mine plans exceed the inflation; remaining useful life of some of the mining licences of the Group, • the RUB/USD exchange rate was estimated in 2017 at the level the Group has a legal right to apply for the extension of the licences of 65.67 RUB/USD based on the RUB/USD forward rate and a for its existing mining resources and therefore management is consensus forecast of investment banks; and was indexed by the confident that the licences will be extended provided that it is the ratio between the expected RUB inflation of the corresponding same coal resource within the original mining licence and that year and the long-term USD inflation thereafter; certain other conditions are met. Extensions to new seams or • cash flow forecasts were discounted to their present value at the adjacent areas are subject to open auctions. Delay or failure in nominal weighted average cost of capital of 15.1% for mining securing relevant government approvals or licences, as well as any units, in Russian Rouble terms. adverse change in government policies, may cause a significant adjustment to development and acquisition plans, which may have a material adverse effect on the Group’s financial position and performance.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the year ended 31 December 2016 (continued)
4. CRITICAL ACCOUNTING JUDGEMENTS AND of property, plant and equipment in the process of operating ESTIMATES (continued) activities up to its ultimate disposal to determine the recoverable Valuation of mineral rights (continued) amount of the assets. At 31 December 2016 the total effect of the revaluation of the The following key assumptions were used in determining the mineral rights was an increase of 547 million USD recoverable amounts of each of the cash-generating units: (31 December 2015 – an increase of 226 million USD); the after-tax • cash flow projections were based on the business model for effect on equity was an increase of 437 million USD 2017-2021; (31 December 2015 – an increase of 181 million USD). • coal transshipment volumes were projected to accommodate Example changes in key assumptions would have the following primarily own sales requirements; effect on the fair value of the mineral rights: • port tariffs were projected to decrease at an average rate of 2% (Decrease)/increase in 2017 and to grow at an average rate of 2% per annum of the fair value thereafter in line with expected long-term USD inflation; Increase in weighted average cost of capital of 1% (542) • cash flow projections were discounted to their present value at Increase in export coal prices of 1% 212 the nominal weighted average cost of capital of 13.3% for port Increase in RUB/USD exchange rate of 1% 199 units in RUB terms. Increase in export coal sales volumes of 1% 108 As a result of the testing no impairment loss was recognised. Increase in regulated railroad tariffs growth of 1% (89) The model applied for impairment testing is not sensitive to Increase in domestic coal prices of 1% 65 assumptions used by management because value in use is Increase in domestic coal sales volumes of 1% 60 significantly greater than carrying values of cash-generating units’ assets. Determination of recoverable amount of property, plant and equipment of the coal segment (other than mineral rights). 5. SEGMENTAL INFORMATION The recoverable amount of the property, plant and equipment of the The Group evaluates performance and makes investment and coal segment (other than mineral rights) as at 31 December 2016 strategic decisions based on a review of the profitability of the was determined either based on market prices for similar items of Group as a whole, and based on operating segments. An operating machinery and equipment recently acquired by the Group or, if no segment is a component of the Group that engages in business such purchases were made, by applying a price index for the activities from which it may earn revenues and incur expenses and relevant year of acquisition for mining equipment to the residual whose operating results are regularly reviewed by management. value of items. As a result of the testing no impairment loss Operating segments identified by management are coal mining, was recognised. ports and logistics, sales and distribution and corporate segments. Determination of recoverable amount of property, plant The coal-mining segment represents the operations of the coal-mining and equipment and goodwill of ports and logistics assets. companies including extraction and washing; the ports and logistics The recoverable amount was determined based on value-in-use segment includes railroad transportation assets and ports; the sales calculations using projected cash flows. This method considers the and distribution segment represents sales and distribution future net cash flows expected to be generated through the usage companies; and the corporate segment includes holding companies.
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Operating segment information for the Group at 31 December 2016 and for the year then ended is as follows: Inter- Coal Ports and Sales and segment mining logistics distribution Corporate elimination Total Segment revenue and profitability Segment external revenues 921 74 3,007 — — 4,002 Inter-segment revenues 2,247 1,260 — 49 (3,556) — Segment expenses (2,633) (1,184) (3,121) (50) 3,556 (3,432) Operating profit/(loss) 535 150 (114) (1) — 570 Depreciation and amortisation (360) (31) (1) (3) — (395) Interest expense (88) (11) (4) (120) 95 (128) Interest income 2 11 — 92 (95) 10 Profit/(loss) before tax 396 166 (137) (37) — 388 Income tax (expense)/benefit (79) (28) 20 2 — (85) Net profit/(loss) for the year 317 138 (117) (35) — 303 Capital expenditures incurred during the year 379 112 — 1 — 492 Segment assets and liabilities Total segment assets 8,335 767 1,086 723 (2,756) 8,155 Total segment liabilities 3,071 136 637 4,285 (2,756) 5,373
Operating segment information for the Group at 31 December 2015 and for the year then ended is as follows: Inter- Coal Ports and Sales and segment mining logistics distribution Corporate elimination Total Segment revenue and profitability Segment external revenues 1,021 57 3,054 — — 4,132 Inter-segment revenues 1,707 1,176 — 67 (2,950) — Segment expenses (2,538) (1,067) (2,955) (83) 2,950 (3,693) Operating profit/(loss) 190 166 99 (16) — 439 Depreciation and amortisation (411) (32) (1) (4) — (448) Interest expense (85) (15) (2) (124) 101 (125) Interest income 6 8 — 110 (101) 23 Profit before tax 26 163 83 9 — 281 Income tax benefit/(expense) 17 (33) (17) (48) — (81) Net profit/(loss) for the year 43 130 66 (39) — 200 Capital expenditures incurred during the year 307 48 — — — 355 Segment assets and liabilities Total segment assets 7,728 563 602 411 (2,696) 6,608 Total segment liabilities 3,281 180 391 3,391 (2,696) 4,547
6. REVENUE 2016 2015 Coal sales 3,880 4,016 Pacific region 1,789 1,702 Atlantic region 1,176 1,321 Russian Federation 915 993 Other 122 116 Total 4,002 4,132
SUEK ANNUAL REPORT 2016 – 110 – FINANCIAL STATEMENTS / CONTINUED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the year ended 31 December 2016 (continued)
7. COST OF SALES 2016 2015 Coal purchased from third parties 410 521 Depreciation and amortisation 369 420 Labour 359 385 Consumables and spares 331 342 Repairs and maintenance services 87 101 Purchased power 55 55 Transportation services 35 50 Drilling and blasting services 34 36 Tax on mining 27 32 Personnel transportation services 25 25 Fire and rescue brigade expenses 18 20 Property and other taxes 17 17 Land rent 13 16 Other 51 128 Total 1,831 2,148
8. DISTRIBUTION COSTS 2016 2015 Railway services 913 821 Freight 225 261 Stevedoring from third parties 141 131 Rent of rail cars 90 98 Labour 36 35 Depreciation and amortisation 26 28 Repair and maintenance services 21 20 Consumables and spares 13 17 Property and other taxes 2 3 Other 16 14 Total 1,483 1,428
9. GENERAL AND ADMINISTRATIVE EXPENSES 2016 2015 Salaries 64 61 Consulting, legal, audit and other professional services 19 14 Charitable donations 15 13 Office rent 4 4 Customs duties 2 1 Other 10 9 Total 114 102
10. FINANCE COSTS, NET 2016 2015 Interest expense 128 125 Bank commissions and charges 22 21 Unwinding of discount on environmental obligation 4 4 Interest income (10) (23) Total 144 127
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STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS
11. PROPERTY, PLANT AND EQUIPMENT Machinery, Buildings, equipment, structures and transport and Construction-in- Mineral rights utilities other progress Total Cost Balance at 1 January 2015 5,316 880 1,867 179 8,242 Acquisition of subsidiary — 53 — — 53 Revaluation of mineral rights 226 — — — 226 Additions 6 13 — 336 355 Transfers — 76 234 (310) — Disposals — (5) (33) (5) (43) Effect of translation to presentation currency (1,215) (231) (463) (43) (1,952) Balance at 31 December 2015 4,333 786 1,605 157 6,881 Revaluation of mineral rights 547 — — — 547 Additions 3 2 32 455 492 Transfers — 105 305 (410) — Disposals (2) (2) (21) (5) (30) Effect of translation to presentation currency 335 17 62 11 425 Balance at 31 December 2016 5,216 908 1,983 208 8,315 Accumulated depreciation and amortisation Balance at 1 January 2015 290 224 995 2 1,511 Depreciation and amortisation 178 63 198 — 439 Disposals — (4) (33) — (37) Effect of translation to presentation currency (95) (60) (258) (1) (414) Balance at 31 December 2015 373 223 902 1 1,499 Depreciation and amortisation 139 71 198 — 408 Disposals — (3) (17) (1) (21) Effect of translation to presentation currency 29 6 30 — 65 Balance at 31 December 2016 541 297 1,113 — 1,951 Net book value at 31 December 2015 3,960 563 703 156 5,382 Net book value at 31 December 2016 4,675 611 870 208 6,364
Group assets include advances issued for capital expenditures of 62 million USD (31 December 2015 – 28 million USD). If mineral rights had been carried at the historical cost, the net book value of property, plant and equipment at 31 December 2016 would have been 2,157 million USD (31 December 2015 – 1,852 million USD).
SUEK ANNUAL REPORT 2016 – 112 – FINANCIAL STATEMENTS / CONTINUED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the year ended 31 December 2016 (continued)
12. GOODWILL Movements in goodwill arising on the acquisition of subsidiaries as follows: 2016 2015 Opening balance 78 83 Acquisition of a subsidiary — 20 Effect of translation to presentation currency — (25) Closing balance 78 78
13. TRADE ACCOUNTS AND OTHER RECEIVABLES 2016 2015 Trade accounts receivable 460 334 Advances issued 116 107 Receivable relating to power business — 79 Other receivables 36 44 Subtotal 612 564 Less: Allowance for doubtful debts 21 13 Total 591 551
14. INVENTORIES 2016 2015 Coal stock 273 175 Consumable stores and materials 175 123 Less: Allowance for obsolescence 15 11 Net consumable stores and materials 160 112 Total 433 287
15. PREPAID AND RECOVERABLE TAXES 2016 2015 Value-added tax recoverable 88 42 Income tax receivable 28 32 Prepaid other taxes 6 4 Total 122 78
16. DERIVATIVE FINANCIAL INSTRUMENTS
2016 2015 Derivative Derivative Derivative Derivative assets liabilities assets liabilities Coal forward contracts – cash flow hedges 54 173 1 39 Cross-currency interest rate swap – cash flow hedges — 33 — 198 Other derivatives 4 — 4 — Total 58 206 5 237
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Derivative financial instruments were valued using observable inputs, which correspond to Level 2 of the hierarchy of the fair value measurements (see note 28). Details of the effective portion of changes in fair value of cash flow hedges were as follows: 2016 2015 Gain recycled Loss recycled Loss from Loss from recognised in comprehensive recognised in comprehensive comprehensive income to the comprehensive income to the income profit or loss income profit or loss Effective portion of changes in fair value of cash flow hedges (24) (62) (64) 18 Deferred tax 11 (4) 1 1 Total (13) (66) (63) 19
Coal forward contracts. The Group uses coal forwards to hedge the coal price index used in index price coal sales and purchase contracts. Details of the coal forwards designated as cash flow hedges were as follows: 2016 2015 Volume (‘000 Volume (‘000 tonne) Derivative tonne) Derivative Derivative assets 0 – 3 months 1,095 18 480 1 3 – 6 months 705 11 — — 6 – 9 months 510 8 — — 9 – 12 months 510 8 — — More than 12 months 516 9 — — Total 3,336 54 480 1 Derivative liabilities 0 – 3 months 4,341 52 634 4 3 – 6 months 3,411 41 587 5 6 – 9 months 3,366 40 641 7 9 – 12 months 3,351 40 641 7 More than 12 months — — 1,380 16 Total 14,469 173 3,883 39
At 31 December 2016 the average coal sales price under the coal forwards was 61 USD per tonne (31 December 2015 – 53 USD per tonne) and the average coal purchase price under the coal forwards was 55 USD per tonne (31 December 2015 – 55 USD per tonne). Cross-currency interest rate swap. The Group uses RUB/USD cross currency interest rate swaps to manage interest and foreign currency risks associated with RUB-denominated bonds. At 31 December 2016, the outstanding principle amount of RUB-denominated bonds amounted to 33 million USD (31 December 2015 – 165 million USD). In 2016 the Group settled a cross-currency interest rate swap on RUB-denominated bonds with total cash outflow amounted to 146 million USD. 17. CASH AND CASH EQUIVALENTS 2016 2015 Current accounts — foreign currency 98 48 — RUB 43 27 Margin accounts — foreign currency 128 7 Other cash and cash equivalents — RUB 56 13 — foreign currency 5 9 Total 330 104
Margin accounts represent margin deposits in respect of open coal forward contracts.
SUEK ANNUAL REPORT 2016 – 114 – FINANCIAL STATEMENTS / CONTINUED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the year ended 31 December 2016 (continued)
18. SHARE CAPITAL AND RESERVES Number of shares, in thousands 2016 2015 Authorised share capital Ordinary shares 232,060 550,000 Issued share capital Ordinary shares 232,060 410,000 Total 232,060 410,000
Ordinary shares of the Company have a par value of 0.005 RUB. All issued shares were fully paid. The comparative information represents ordinary shares of SUEK LTD at a par value of 0.0005 USD (see note 1). 19. EARNINGS PER SHARE Basic earnings per share are calculated based on the weighted average number of ordinary shares outstanding during the year. Basic and diluted earnings per share are the same, as there is no dilution effect. 2016 2015 Weighted average number of ordinary shares in issue (in thousands) 232,060 232,060 Profit for the year attributable to ordinary shareholders of the parent 240 159 Basic and diluted earnings per share (in USD) 1.03 0.69
The comparative information related to earnings per share for 2015 has been adjusted retrospectively in accordance with the capital reorganisation of the Group (see note 1). 20. BORROWINGS Effective interest rate 2016 2015 Long-term borrowings Variable rate borrowings 2,642 2,491 USD-denominated borrowings 3M LIBOR + 1.3% to 1M LIBOR + 4.2% 2,528 2,314 EUR-denominated borrowings 6M EURIBOR + 0.7% to 6M EURIBOR + 2.25% 114 177 Fixed rate borrowings 442 399 USD-denominated borrowings 3.0% 192 192 RUB-denominated bonds 8.25% to 10.5% 173 166 RUB-denominated borrowings 9.9% to 14% 77 41 Subtotal 3,084 2,890 Less: Current portion of long-term borrowings 752 1,256 Total long-term borrowings 2,332 1,634 Short-term borrowings Variable rate borrowings 70 — USD-denominated borrowings 3M LIBOR + 3.5% 70 — Fixed rate borrowings 154 — EUR-denominated borrowings 0.38% to 0.58% 150 — Other borrowings 4 — Subtotal 224 — Current portion of long-term borrowings 752 1,256 Total short-term borrowings 976 1,256
The Group’s long-term borrowings have restrictive covenants including, but not limited to, the requirement to maintain minimum ratios associated with: • consolidated net indebtedness to earnings before interest, tax, depreciation and amortisation (“EBITDA”); and • EBITDA to consolidated interest expense. The covenants are calculated based on the IFRS financial statements of the Group on a semi-annual basis. The Group was in compliance with all such covenants.
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21. OTHER LONG-TERM LIABILITIES 2016 2015 Provision for defined benefit obligation 51 40 Provision for environmental obligation 38 32 Other long-term liabilities 44 33 Total 133 105
Provision for defined benefit obligation. Actuarial assumptions used for the calculation of the defined benefit obligation were as follows:
Discount rate 9% 10% Inflation rate 5% 7% Future increases in salaries 5% 7%
Provision for environmental obligation. The extent and cost of future site restoration programmes are inherently difficult to estimate and depend on the estimated lives of the mines, the scale of any possible disturbance and contamination as well as the timing and extent of corrective actions. The following is a summary of the key assumptions on which the discounted carrying amounts of the obligations are based:
Discount rate 9% 10% Inflation rate 5% 6%
22. TRADE ACCOUNTS AND OTHER PAYABLES 2016 2015 Advances from customers 201 201 Trade accounts payable and accruals 147 128 Payables for acquisition of a non-controlling interest (see note 30) 144 — Payables for shares of SUEK LTD (see note 1) 96 — Promissory notes payable 75 124 Accrual for vacation payments 42 32 Wages and salaries 38 32 Other creditors 66 90 Total 809 607
23. TAXES PAYABLE 2016 2015 Value-added tax 23 17 Social security contributions 15 8 Income tax 10 11 Other 11 5 Total 59 41
24. TAXATION 2016 2015 Current income tax expense 88 95 Deferred income tax benefit (3) (14) Income tax expense 85 81
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the year ended 31 December 2016 (continued)
24. TAXATION (continued) The reconciliation of theoretical income tax, calculated at the rate effective in the Russian Federation, where the company is domiciled, to the amount of actual income tax expense recorded in the consolidated statement of profit or loss and other comprehensive income is as follows: 2016 2015 Profit before tax 388 281 Theoretical income tax expense at 20% (2015 – 12.5%) 78 35 Impact of specific tax rates in Russian Federation (5) 4 Impact of specific tax rates in Switzerland 6 (7) Tax effect of sale of power companies’ shares — 33 Tax effect of non-deductible expenses 6 16 Total income tax expense 85 81
The comparative information was calculated at the rate effective in the Republic of Cyprus (see note 1). The tax effects of temporary differences that give rise to deferred taxation are presented below: Effect of Recognised in translation to Opening Recognised in the statement presentation Closing balance equity of profit or loss currency balance 2016 Deferred tax assets 286 (22) (67) 23 220 Tax losses carried forward 262 (33) (70) 24 183 Derivative financial liabilities 2 11 (4) — 9 Prepaid expenses and accruals 2 — 7 (3) 6 Employee benefit obligations 9 — — 1 10 Environmental and other provisions 10 — (2) 1 9 Trade accounts and other receivables 1 — 2 — 3 Deferred tax liabilities (854) (110) 70 (56) (950) Property, plant and equipment (838) (110) 62 (55) (941) Inventory (1) — (7) 1 (7) Other (15) — 15 (2) (2) Net deferred tax liabilities (568) (132) 3 (33) (730)
Effect of Recognised in translation to Opening Recognised in the statement presentation Closing balance equity of profit or loss currency balance 2015 Deferred tax assets 255 113 (7) (75) 286 Tax losses carried forward 232 112 (13) (69) 262 Derivative financial liabilities 2 1 (1) — 2 Prepaid expenses and accruals 6 — (3) (1) 2 Employee benefit obligations 9 — 3 (3) 9 Environmental and other provisions 6 — 6 (2) 10 Trade accounts and other receivables — — 1 — 1 Deferred tax liabilities (1,061) (55) 21 241 (854) Property, plant and equipment (1,052) (55) 30 239 (838) Inventory (1) — (1) 1 (1) Other (8) — (8) 1 (15) Net deferred tax liabilities (806) 58 14 166 (568)
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STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS
Unrecognised temporary differences, related to investments in subsidiaries where the Group is able to control the timing of the reversal and distribution of dividends on a tax-free basis when certain conditions are met and it is probable that the temporary difference will not reverse in the foreseeable future, amounted to 2,617 million USD (31 December 2015 – 2,124 million USD). Due to recent amendments to Russian tax legislation, starting from 1 January 2017, tax losses for Russian tax purposes carried forward existing as at 31 December 2016 do not expire. Management believes that sufficient taxable profits will be available, against which the unused tax losses can be utilised by the Group in the future. For disclosure purposes certain deferred tax assets and liabilities are offset in accordance with the accounting policy. 2016 2015 Deferred tax assets 128 99 Deferred tax liabilities (858) (667) Net deferred tax liabilities (730) (568) 25. RELATED PARTY TRANSACTIONS Related parties are considered to include the ultimate beneficiaries, affiliates and entities under common ownership and control within the Group as well as entities with the same principal ultimate beneficiaries. The company and its subsidiaries, in the ordinary course of their business, enter into various sales, purchases and service transactions with related parties. Transactions with related parties are not always performed under conditions that would be available for parties not related to the Group. Transactions with related parties not dealt with elsewhere in the consolidated financial statements are as follows: 2016 2015 Coal sales to Siberian Generating Company (“SGC”) Group 435 459 Coal sales to DEC Group, an associate of a company with the same principal ultimate beneficiary 100 149 Other revenue from EuroChem Group 12 — Interest income 2 15 Other coal sales 27 — Rent of railcars from a company with the same principal ultimate beneficiary 24 18 Other purchases 27 30 Remuneration of the Board of Directors and the Management Board members 7 8
The outstanding balances with related parties are as follows: 2016 2015 Payables for acquisition of a non-controlling interest to EuroChem Group (see note 30) 144 — Payables for shares of SUEK LTD to a company with the same principal ultimate beneficiary (see note 1) 96 — Trade accounts and other receivables from DEC Group 20 12 Trade accounts and other receivables from SGC Group 6 40 Receivable relating to power business, including accrued interest — 79 26. COMMITMENTS Capital commitments. The following capital expenditures were approved: 2016 2015 Contracted 353 125 Not yet contracted 110 161 Total 463 286
Social commitments. The Group contributes to mandatory and voluntary social programmes and maintains social sphere assets in the locations where it has its main operating facilities. The Group’s social sphere assets, as well as local social programmes, benefit the community at large and are not normally restricted to the Group’s employees. Contributions are expensed in the year during which they are incurred.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the year ended 31 December 2016 (continued)
26. COMMITMENTS (continued) Operating lease commitments. The Group has a number of non-cancellable lease commitments. Future minimum lease payments due under non-cancellable operating leases are as follows: 2016 2015 Land and Land and Railcars premises Vessels Total Railcars premises Vessels Total Due in one year 25 15 13 53 26 10 20 56 Due from two to five years 99 25 16 140 104 18 23 145 Due thereafter 50 39 — 89 78 25 — 103 Total 174 79 29 282 208 53 43 304
Lease of railcars. The Group has long-term operating lease contracts for railcars from a company with the same principal ultimate beneficiary. The operating lease agreements expire through to 2023. Land and premises leases. The Group has long-term operating lease contracts for land and office premises. The land in the Russian Federation on which the Group’s production facilities are located is largely owned by the State. The Group leases land through operating lease agreements with the State. Payments by the Group are based on the total area and location of the land occupied. Operating lease agreements expire in various years through to 2065 for land leases and to 2029 for office premises leases. Lease of vessels. The Group has long-term operating lease contracts for five ice-class vessels. The operating lease agreements expire in various years through to 2021. 27. CONTINGENCIES Insurance. The insurance industry in the Russian Federation is in the process of development, and some forms of insurance protection common in developed markets are not yet generally available at commercially acceptable terms. The Group has limited coverage for its mining, processing, transportation and power generating facilities for business interruption or for third-party liabilities in respect of property or environmental damage arising from accidents on the Group’s property or relating to the Group’s operations. Management understands that until the Group obtains adequate insurance coverage there is a risk that the loss or destruction of certain operating assets could have a material adverse effect on the Group’s operations and financial position. Litigation. The Group has a number of small claims and litigation relating to regular business activities and small fiscal claims. Management believes that none of these claims, individually or in aggregate, will have a material adverse impact on the Group. Taxation contingencies in the Russian Federation. Russian tax, currency and customs legislation is subject to varying interpretations, and changes, which can occur frequently. Management’s interpretation of such legislation as applied to the transactions and activities of the Group may be challenged by the relevant regional and federal authorities. Recent events within the Russian Federation suggest that the tax authorities are taking a more assertive position in their interpretation of the legislation and assessments and, as a result, it is possible that transactions and activities that have not been challenged in the past may be challenged. It is therefore possible that significant additional taxes, penalties and interest may be assessed. Fiscal periods remain open to review by the authorities in respect of taxes for three calendar years preceding the year of review. Under certain circumstances reviews may cover longer periods. Management believes that it has paid or accrued all taxes that are applicable. Where uncertainty exists, the Group has accrued tax liabilities based on management’s best estimate of the probable outflow of resources embodying economic benefits which will be required to settle such liabilities. Management believes that it has provided adequately for all tax liabilities based on its interpretation of the tax legislation. However, the relevant authorities may have differing interpretations, and the effect could be significant. Environmental matters. The Group is subject to extensive federal, state and local environmental controls and regulations in the regions in which it operates. The Group’s operations involve disturbance of land, discharge of materials and contaminants into the environment and other environmental concerns. The Group’s management believes that it is in compliance with all current existing health, safety and environmental laws and regulations in the regions in which it operates. However, changes in environmental regulations are currently under consideration in the Russian Federation. The Group is continually evaluating its obligations relating to new and changing legislation. The Group is unable to predict the timing or extent to which environmental laws and regulations may change. Such change, if it occurs, may require the Group to modernise technology and incur future additional material costs to meet more stringent standards.
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Russian Federation risk. The Group’s operations are primarily 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 to develop, 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. 28. FAIR VALUE MEASUREMENT The fair value of assets and liabilities is determined with reference to various market information and other valuation methods as considered appropriate. Fair values are categorised into different levels in a fair value hierarchy based on the inputs used in valuation techniques, as follows: Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices). Level 3: Inputs for the asset or liability that are not based on observable market data. Financial instruments carried at amortised cost. At 31 December 2016, the fair values of financial instruments carried at amortised cost, which are mainly loans and receivables, did not materially differ from the carrying values. Financial instruments carried at fair value. Fair values of derivative financial assets and liabilities were determined using inputs from observable market data, which correspond to Level 2 of the hierarchy of fair values. Mineral rights carried at fair value. The fair value of mineral rights was determined using discounted cash flow method corresponding to Level 3 of the hierarchy of fair values (see note 4). 29. FINANCIAL RISK MANAGEMENT In the normal course of its operations, the Group is exposed to market (including foreign currency and interest rate), credit and liquidity risks. The Group’s overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Group’s financial performance. The Group uses derivative financial instruments to hedge certain risk exposures. Risk management is carried out through regular meetings of a risk management committee of operational management and by the central treasury department. The Board of Directors approves principles for overall risk management. In addition, operational management have developed policies covering specific areas, such as foreign currency risk, interest rate risk and the use of derivative and non-derivative financial instruments. 29.1. Market risk Market risk is the risk that changes in market prices, such as coal prices, foreign exchange rates and interest rates will negatively impact the Group’s results 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 on risk. Market risk management includes the analysis of foreign currency and interest rate risks. Foreign currency risk Foreign currency risk is the risk that the financial results of the Group will be adversely impacted by changes in exchange rates to which the Group is exposed. A significant portion of the Group’s revenues are denominated in USD, whereas the majority of the Group’s expenditures are denominated in RUB. Accordingly, operating profits may be adversely impacted by the appreciation of the RUB against the USD. The risk of negative fluctuations in the USD/RUB exchange rate for future revenue streams is naturally hedged by the USD borrowings.
SUEK ANNUAL REPORT 2016 – 120 – FINANCIAL STATEMENTS / CONTINUED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the year ended 31 December 2016 (continued)
29. FINANCIAL RISK MANAGEMENT (continued) 29.1. Market risk (continued) The Group had the following monetary assets and liabilities denominated in currencies other than the functional currency of the respective Group entity: 2016 2015 RUB USD EUR Total USD EUR Total Balances with third parties (65) (127) (318) (510) (125) (81) (206) Cash and cash equivalents 58 — 5 63 5 — 5 Prepaid and recoverable taxes 69 — — 69 — — — Trade accounts receivable 44 3 (4) 43 — — — Other receivables 3 — — 3 15 — 15 Borrowings (33) — (271) (304) — (18) (18) Other long-term liabilities (82) — (10) (92) — — — Payables for shares of SUEK LTD — (96) — (96) — — — Trade accounts payable and accruals (39) (1) (28) (68) (10) (26) (36) Other creditors (15) — (10) (25) (16) (37) (53) Derivative financial liabilities — (33) — (33) (198) — (198) Accrual for vacation payments (29) — — (29) — — — Taxes payable (22) — — (22) — — — Wages and salaries (19) — — (19) — — — Receivable relating to power business — — — — 79 — 79 Intra-group balances (343) (688) — (1,031) (1,691) (132) (1,823) Intra-group receivables 87 28 1 116 150 — 150 Intra-group borrowings (181) (628) (1) (810) (1,841) (132) (1,973) Intra-group payables (249) (88) — (337) — — — Total net liabilities (408) (815) (318) (1,541) (1,816) (213) (2,029)
A 10% devaluation of functional currencies against foreign currencies at the reporting date would have the following effect on the equity and profit or loss for the year: 2016 RUB USD Other Total Decrease in equity 31 59 24 114 Decrease in profit or loss for the year 31 11 24 66
Interest rate risk Interest rate risk is the risk that changes in interest rates will adversely impact the financial results of the Group. The total net unhedged liability which exposes the Group to interest rate risk amounts to 3,340 million USD (31 December 2015 – 2,772 million USD). The Group’s interest rate risk arises primarily from long-term borrowings. The Group’s borrowings at variable interest rates are primarily denominated in USD. Borrowings at variable interest rates expose the Group to a cash flow interest rate risk. The Group monitors the risk and, if necessary, manages its exposure by entering into variable-to-fixed interest rate swaps. Such interest rate swaps have the economic effect of converting borrowings from variable interest rates to fixed interest rates. An increase or decrease in the floating interest rate by 1%, provided that the amount of outstanding balance remained constant for the whole year, would have decreased or increased profit for the year by 27 million USD (2015 – 25 million USD). 29.2. Credit risk Credit risk is the risk that a counterparty may default or not meet its obligations to the Group on a timely basis, leading to a financial loss to the Group. The Group minimises its exposure to this risk by ensuring that credit risk is spread across a number of counterparties. Trade receivables comprise international companies and large Russian companies, and credit is only extended to these customers after rigid credit approval procedures. The maximum exposure to credit risk is represented by the carrying amount of each financial asset in the balance sheet. At 31 December 2016, 7% of total trade receivables were due from the Group’s largest customer and 56% of the total trade receivables were due from the Group’s next 19 largest customers (31 December 2015 – 14% and 43%, respectively).
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The table below analyses the Group’s trade receivables into relevant groupings based on the year of them being considered past due. 2016 2015 Allowance Allowance for doubtful for doubtful Gross debts Gross debts Not past due 440 — 324 — Past due for less than 12 months 16 12 6 4 Past due for more than one year 4 4 4 4 Total 460 16 334 8
The movement in the allowance for doubtful debts in respect of trade receivables during the year was as follows: 2016 2015 Opening balance 8 5 Additional doubtful debts 14 7 Bad debt written-off (impairment loss recognised) (2) — Bad debt recovered (6) (2) Effect of translation to presentation currency 2 (2) Closing balance 16 8
29.3. Liquidity risk Liquidity risk is the risk that the Group will not be able to settle all liabilities as they fall due. Recently, global and Russian capital markets have experienced significant volatility, including a lack of available sources of financing and significant fluctuation of the Russian Rouble against the USD and the Euro. Despite stabilisation measures undertaken by various governments, markets remain volatile. Prudent liquidity risk management includes maintaining sufficient cash, the availability of funding from an adequate amount of committed credit facilities and the ability to close out market positions. The Group expects that cash generated from operations will be the major source of the Group’s liquidity in 2017 and will be sufficient to cover the capital expenditures programme of the Group. In addition, management believes that the Company will be able to attract additional sources of financing in order to refinance existing short- term facilities. The central treasury department of the Group maintains flexibility in funding by ensuring the availability of credit line facilities. The unused portion of these lines at 31 December 2016 totalled 1,502 million USD (31 December 2015 – 1,560 million USD). The table below analyses the Group’s financial liabilities and net-settled derivative financial liabilities into relevant maturity groupings based on the contractual undiscounted cash flows to maturity, including interest payments. Carrying Contractual Due in the Due in the Due amount cash flows first year second year thereafter Balance at 31 December 2016 Long-term borrowings 2,332 2,623 107 1,051 1,465 Short-term borrowings 976 976 976 — — Net-settled derivative liabilities 206 206 173 33 — Payables for acquisition of a non-controlling interest 144 144 144 — — Trade accounts payable and accruals 147 147 147 — — Payables for shares of SUEK LTD 96 96 96 — — Promissory notes payable 75 75 75 — — Other creditors 66 66 66 — — Total 4,042 4,333 1,784 1,084 1,465 Balance at 31 December 2015 Long-term borrowings 1,634 1,813 79 784 950 Short-term borrowings 1,256 1,256 1,256 — — Net-settled derivative liabilities 237 237 188 16 33 Trade accounts payable and accruals 128 128 128 — — Promissory notes payable 124 124 124 — — Other creditors 90 90 90 — — Total 3,469 3,648 1,865 800 983
SUEK ANNUAL REPORT 2016 – 122 – FINANCIAL STATEMENTS / CONTINUED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the year ended 31 December 2016 (continued)
29. FINANCIAL RISK MANAGEMENT (continued) 29.4. Capital risk management The Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern in order to provide returns to equity holders and benefits for other stakeholders. The Group defines capital as shareholders’ equity. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to equity holders, return capital to equity holders or issue new shares. This strategy remains unchanged from prior years. 30. INVESTMENTS IN SIGNIFICANT SUBSIDIARIES Subsidiaries by country of incorporation Principal activity 2016 2015 Russian Federation Murmansk PJSC “Murmanskiy Morskoi Torgovyi Port” Port facilities 75.5% 39.3% Kemerovo JSC “SUEK-Kuzbass” Hard coal extraction 100% 100% Krasnoyarsk JSC “SUEK-Krasnoyarsk” Brown coal extraction 100% 100% JSC “Razrez Berezovskiy” Brown coal extraction 100% 100% JSC “Razrez Nazarovskiy” Brown coal extraction 100% 100% Khakasia LLC “SUEK-Khakasia” Hard coal extraction 100% 100% LLC “Vostochno-Beyskiy razrez” Hard coal extraction 50% 50% JSC “Razrez Izykhskiy” Hard coal extraction 100% 100% Buryatia JSC “Razrez Tugnuiskiy” Hard coal extraction 100% 100% Zabaikalye JSC “Razrez Kharanorskiy” Brown coal extraction 100% 100% LLC “Chitaugol” Brown coal extraction 100% 100% LLC “Arcticheskie razrabotki” Coking coal extraction 100% 100% Khabarovsk JSC “Urgalugol” Hard coal extraction 100% 100% JSC “Daltransugol” Port facilities 100% 100% Primorye JSC “Primorskugol” Brown coal extraction 100% 100% JSC “ShU Vostochnoe” Hard coal extraction 100% 100% LLC “Stividornaya kompaniya “Maly port” Port facilities 49.9% 49.9% Switzerland SUEK AG Export sales of coal 100% 100% Republiс of Cyprus SUEK LTD (see note 1) Debt holding company 100% —
Transactions with non-controlling interest. In December 2016, SUEK acquired 36.2% of PJSC “Murmanskiy Morskoi Torgovyi Port” (“MMTP”) for 144 million USD from EuroChem Group. The consideration is denominated in RUB and payable within the first quarter of 2017. The transaction resulted in a decrease in non-controlling interest of 80 million USD and a decrease in retained earnings of 64 million USD.
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Non-controlling interests. Information on the Group’s subsidiaries that have significant non-controlling interests is as follows: 2016 2015 LLC LLC “Vostochno- “Vostochno- Beyskiy razrez” MMTP Beyskiy razrez” MMTP Non-current assets 192 140 197 87 Current assets 46 103 39 72 Non-current liabilities (50) (32) (38) (24) Current liabilities (13) (7) (14) (6) Net assets 175 204 184 129 Accumulated non-controlling interests 88 50 92 78 Revenue 100 105 98 114 Net profit for the year 13 79 9 51 Profit allocated to non-controlling interests 6 48 5 31 Revaluation of mineral rights (44) — (14) — Cash flows from operating activities 18 40 15 51 Cash flows used in investment activities (4) (2) (2) (57) Cash flows used in financing activities (14) — (13) (3) Dividends to non-controlling interests 7 — 7 —
SUEK ANNUAL REPORT 2016 – 124 –
GRI TABLES 2016
G4 Indicator and General standard disclosures SUEK’s response
STRATEGY AND ANALYSIS G4-1 Statement from the most senior decision-maker of the organisation SUEK’s sustainability approach is reflected in both the Chairman’s about the relevance of sustainability to the organisation and the statement and CEO’s statement of the Report. organisation’s strategy for addressing sustainability Chairman’s statement, pp.22-23 CEO’s statement, pp.24-25
G4-2 Description of key impacts, risks, and opportunities What impacts SUEK’s ability to create value, its sustainability and its stakeholders, is presented in the following sections: Year highlights, pp.2-3 SUEK at a glance, pp.4-13 Global trends and SUEK, pp.16-17 Chairman’s and CEO’s statements, pp.22-25 Materiality, pp.26-29 Strategy implementation, pp.34-41 Risk management, pp.42-49 Health and safety, pp.64-68 Environment, pp.69-72
ORGANISATIONAL PROFILE G4-3 Name of the organisation JSC SUEK (JSC Siberian Coal Energy Company)
G4-4 Primary brands, products, and services SUEK is the largest producer of coal in Russia. Its main products are brown coal, hard coal and coking coal. SUEK at a glance, pp.4-13 Market review, pp.18-21 Business model, pp.32-33 Our assets, pp.50-53 Operating review, pp.54-58
G4-5 Location of the company’s headquarters Contacts, p.128 53/7 Dubininskaya str., Moscow, Russia, 115054
G4-6 Сountries where the organisation operates, and names of countries SUEK has coal mining assets in Russia and well developed sales and where either the company has significant operations or that are specifically distribution network in nine other countries. relevant to the sustainability topics covered in the report Where we operate, pp.14-15 Our assets, pp.50-53
G4-7 Nature of ownership and legal form About this Report, p.1 Corporate governance, pp.81-93 Information on the company, p.126
G4-8 Markets served SUEK’s products are sold in domestic and international markets. SUEK at a glance, pp.4-5 Operating review, pp.54-55
G4-9 Scale of the company SUEK at a glance, pp.4-13 Where we operate, pp.14-15 Operating review, pp.54-58 Financial review, pp.59-63 Financial statements, pp.94-123
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G4 Indicator and General standard disclosures SUEK’s response
G4-10 Number of employees SUEK at a glance, pp.4-5 Our people, pp.73-76
G4-11 Percentage of employees covered by collective agreements Collective agreements cover 94% of our employees. Benefits provided under the terms of collective agreements apply to all employees of SUEK. Our people, pp.73-76
G4-12 Organisation’s supply chain Operating review, p.57
G4-13 Significant changes during the reporting period regarding the Materiality, pp.26-29 company’s size, structure, ownership, or supply chain Strategy implementation, pp.34-41 Corporate governance, pp.81-90 Financial statements, pp.94-123 Information on the company, p.126 Additional information is available on our corporate website: www.suek.com/en/media/news/suek-completes-intragroup-reorganisation/
G4-14 Whether and how the precautionary approach or principle is SUEK subscribes to the precautionary approach particularly as regards our addressed by the company control of occupational health and safety, and our impact on the environment. This is implemented through our risk management process. Materiality, pp.26-29 Risk management, pp.42-49 Health and safety, pp.64-68 Environment, pp.69-72 Additional information on our Policies is available on our corporate website: www.suek.com/about-us/corporate-governance/by-laws/
G4-15 Externally developed economic, environmental and social charters, When implementing its Corporate Social Policy, SUEK follows relevant principles, or other initiatives to which the organisation subscribes or which international principles and standards, including the United Nations Global it endorses Compact, the Social Charter of Russian Business, ISO 2600 (Guidance on Social Responsibility), and the Global Reporting Initiative (GRI) Guidelines. Global trends and SUEK, pp.16-17 Environment, pp.69-72 Communities, pp.77-80 SUEK’s position on climate change is available on our corporate website: www.suek.com/en/sustainability/environment/
G4-16 Membership of associations (such as industry associations) and SUEK’s key memberships include: national or international advocacy organisations in which the organisation: • Russian Union of Industrialists and Entrepreneurs. • Holds a position on the governance body. • RAND corporation. • Participates in projects or committees. • Clean Coal Association. • Provides substantive funding beyond routine membership dues. • All-Russia Industrial Association of Employers of the Coal Industry. • Views membership as strategic. • The Russian Managers Association. • German-Russia Chamber of Сommerce.
SUEK ANNUAL REPORT 2016 – 126 – GRI TABLES 2016 / CONTINUED
G4 Indicator and General standard disclosures SUEK’s response
IDENTIFIED MATERIAL ASPECTS AND BOUNDARIES G4-17 Entities included in the organisation’s consolidated financial Notes to the consolidated financial statements, pp.100-123 statements or equivalent documents and coverage in the GRI Report
G4-18 Process for defining the Report’s content and boundaries About this Report, p.1 Materiality, pp.26-29
G4-19 Material aspects identified in the process for defining Report content About this Report, p.1 Materiality, pp.26-29 Stakeholder engagement, pp.30-31
G4-20 Aspect boundaries within the organisation Materiality, pp.26-29
G4-21 Aspect boundaries outside the organisation Materiality, pp.26-29
G4-22 Restatements of information provided in previous reports There has been no restatement of information provided in previous reports.
G4-23 Significant changes in the Report’s scope and boundaries About this Report, p.1
STAKEHOLDER ENGAGEMENT G4-24 List of stakeholders engaged by the organisation Stakeholder engagement, pp.30-31
G4-25 Basis for identification and selection of stakeholders Stakeholder engagement, pp.30-31
G4-26 Approach to stakeholder engagement, including frequency of Stakeholder engagement, pp.30-31 engagement by type and by stakeholder group
G4-27 Key topics and concerns raised through stakeholder engagement, CEO's statement, pp.24-25 and how the organisation has responded Materiality, pp.26-29 Stakeholder engagement, pp.30-31
REPORT PROFILE G4-28 Reporting period for information provided Financial year from 1 January 2016 to 31 December 2016.
G4-29 Date of most recent report (if any) 2015
G4-30 Reporting cycle Annual
G4-31 Contact person for questions regarding the report Olga Ilina, Head of Investor Relations E-mail: [email protected]
GRI CONTENT INDEX G4-32 GRI G4, Core a. Report ‘in accordance’ option the organisation has chosen About this Report, p.1 b. Report GRI content index for the chosen option c. Report reference to external assurance for the Report
ASSURANCE G4-33 The Report was prepared under the supervision of SUEK’s Chief Financial a. Report organisation’s policy and current practice on seeking external Officer, with the Audit Committee of the Board of Directors also collectively assurance for the Report contributing to its preparation and ensuring its overall integrity. b. If not included in the assurance report accompanying the sustainability The consolidated financial statements included in this Report were audited report, report the scope and basis of any external assurance provided by JSC ‘KPMG’. For more information please visit our corporate website: c. Report the relationship between the organisation and the assurance www.suek.com providers d. Report whether the highest governance body or senior executives are involved in seeking assurance for the Report
SUEK ANNUAL REPORT 2016 – 127 –
STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS
G4 Indicator and General standard disclosures SUEK’s response
GOVERNANCE G4-34 Governance structure of the organisation, including committees of Corporate governance, pp.82-90 the highest governance body
G4-35 Process for delegating authority for economic, environmental and Corporate governance, pp.82-93 social topics from the highest governance body to senior executives and For more information, see section 15 and 16 of the Charter of JSC SUEK on other employees our corporate website: www.suek.com/about-us/corporate-governance/by-laws/
G4-36 Whether the organisation has appointed any executive‑level position Sustainability is an executive responsibility of the Chief Operations Officer, or positions with responsibility for economic, environmental or social topics, with direct reporting to the CEO and the Board. and whether post holders report directly to the highest governance body Corporate governance, pp.81-90
G4-37 Processes for consultation between stakeholders and the highest Materiality, pp.26-29 governance body on economic, environmental and social topics Stakeholder engagement, pp.30-31
G4-38 Composition of the highest corporate body and its Committees Corporate governance, pp.82-93 More information is available on our corporate website: www.suek.com/en/about-us/corporate-governance/board-of-directors
G4-39 Whether the Chair of the highest governance body is also an The Chairman of the Board of Directors, the highest governance body, executive officer is not an executive officer. Corporate governance, pp.81-93
G4-40 Nomination and selection processes for the highest governance Corporate governance, pp.82-93 body and its Committees, and the criteria used for nominating and selecting governance body members
G4-41 Processes for the highest governance body to ensure conflicts of Corporate governance, pp.82-93 interests are avoided and managed, and whether conflicts of interest are All related-party transactions are reported in disclosed to stakeholders Financial statements, pp.94-123
G4-42 The role of the highest governance body and senior executives in The Board has final approval of SUEK's strategy and goals setting purpose, values and strategy for environmental and social development. Corporate governance, pp.81-93 Chairman’s statement, pp.22-23 CEO’s statement, pp.24-25
G4-43 Measures taken to develop and enhance the highest governance Corporate governance, pp.81-93 body’s collective knowledge of economic, environmental and social topics
G4-44 Evaluation of the activities of the highest body of governance Corporate governance, pp.81-93
G4-45 The role of the Board of Directors in the identification and Chairman’s statement, pp.22-23 management of economic, environmental and social impacts, risks and Corporate governance, pp.81-93 opportunities
G4-46 The role of the Board of Directors in reviewing the risk management Risk management, pp.42-49 processes for economic, environmental and social topics
G4-47 The frequency of the Board of Directors’ review of sustainability Risk management, pp.42-49 impacts, risks, and opportunities Corporate governance, pp.82-90
G4-48 The highest Committee or position to formally approve this Report The Report is approved by the Audit Committee of the Board of Directors. and its materiality review About this Report, p.1
G4-49 Process for communicating critical concerns to the highest Materiality, pp.26-29 governance body Risk management, pp.42-49 Corporate governance, pp.82-90
SUEK ANNUAL REPORT 2016 – 128 – GRI TABLES 2016 / CONTINUED
G4 Indicator and General standard disclosures SUEK’s response
G4-50 The nature and the total number of critical issues that have been Materiality, pp.26-29 brought to the attention of higher authority corporate governance Risk management, pp.42-49 mechanisms for the consideration and resolution Corporate governance, pp.81-90
G4-51 Remuneration policies for the Board of Directors and senior Corporate governance, pp.82-90 executives
G4-52 Process for determining remuneration Corporate governance, pp.82-90
ETHICS AND INTEGRITY G4-56 Values, principles, standards and norms of behaviour, such as codes Strategy implementation, pp.34-41 of conduct and codes of ethics Our people, pp.73-76 Our Code of Ethics is available on our corporate website: www.suek.com/about-us/corporate-governance/by-laws/
G4-57 Internal and external appeal mechanisms for consultation on ethical Stakeholder engagement, pp.30-31 and law-abiding behavior, as well as matters relating to unfair treatment Corporate governance, p.85
G4-58 Internal and external mechanisms for reporting unethical or illegal Stakeholder engagement, pp.30-31 conduct/misconduct Corporate governance, p.85
SUEK ANNUAL REPORT 2016 – 129 –
STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS
Specific standard disclosures
G4 Specific standard disclosures SUEK’s response
CATEGORY: ECONOMIC
ECONOMIC PERFORMANCE G4-DMA Disclosures on Management Approach SUEK at a glance, pp.4-13 Chairman’s statement, pp.22-23 CEO’s statement, pp.24-25 Year highlights, pp.2-3 Financial review, pp.59-63
EC1 Direct economic value generated and distributed Year highlights, pp.2-3 Financial review, pp.59-63 Financial statements, pp.94-123
EC2 Financial implications and other risks and opportunities for the Global trends and SUEK, pp.16-17 company’s activities due to climate change Risk management, pp.42-49 SUEK’s position on climate change is available on our corporate website: www.suek.com/en/sustainability/environment/
EC3 Coverage of defined benefit plan obligation Our people, pp.73-76 Financial statements, pp.94-123
EC4 Financial assistance received from government During the reporting period the company did not receive any subsidies from the government. However, some infrastructural and social projects implemented by the company can be subsidised by the government. Strategy implementation, p.41 (Committed to sustainability)
INDIRECT ECONOMIC IMPACTS G4-DMA Disclosures on Management Approach SUEK at a glance, pp.4-13 Chairman’s statement, pp.22-23 Stakeholder engagement, pp.30-31 Communities, pp.77-80
EC7 Development and impact of infrastructure investments and gratis SUEK at a glance, pp.4-13 services Communities, pp.77-80
EC8 Significant indirect economic impacts, including the extent of impacts Communities, pp.77-80 Operating review, p.57 (Supply chain)
EC9 Proportion of spending on local suppliers at significant locations of Operating review, p.57 (Supply chain) operation
SUEK ANNUAL REPORT 2016 – 130 – GRI TABLES 2016 / CONTINUED
G4 Specific standard disclosures SUEK’s response
CATEGORY: ENVIRONMENTAL
ENERGY G4-DMA Disclosures on Management Approach Environment, pp.69-70
EN3 Energy consumption within the organisation Strategy implementation, pp.34-41 Environment, pp.69-72
EN6 Reduction of energy consumption Environment, pp.69-72
WATER G4-DMA Disclosures on Management Approach Environment, pp.69-70
EN8 Total water withdrawal by source Environment, pp.69-72
Item 2016 2015 2014 2013 2012
Total volume of water withdrawn from sources, including 137.2 120.1 120.1 120.3 165.8 underground reservoirs, surface reservoirs and wastewater from other companies, million m3
Transferred to other consumers (without usage) 121.9 106.6 105.2 107.2 153.8
EN9 Water sources significantly affected by withdrawal of water A small amount of water is used in some of our production processes. Therefore, the company’s water intake has no significant impact on water sources. The company does not take water from sources believed either to be vulnerable and, protected by the state, or especially valuable for local communities and biodiversity. Environment, pp.69-72
EN10 Percentage and total volume of water recycled and reused
Item 2016 2015 2014 2013 2012
Water disposal, million m3 including: 123.0 106.2 103.3 110.1 158.3
Without treatment 43.5 42.5 62.6 40.8 92.0
Partially purified 63.2 50.2 20.1 57.1 54.6
Regulatory clean 3.9 3.8 3.9 3.9 4.1
Regulatory purified 2.8 0.7 8.6 0.6 0.5
Transferred to other consumers (after usege) 1.2 1.1 1.0 1.1 0.6
BIODIVERSITY G4-DMA Disclosures on Management Approach Environment, pp.69-70
EN11 The production sites owned, leased, managed in, or adjacent to, There are no production assets at or on adjacent areas that are specially protected areas and areas of high biodiversity value outside protected areas protected, natural territories of federal and regional value. No rare, endangered species of animals, plants and fungi have been identified at our operational sites. However, while planning economic activity, SUEK carefully evaluates environmental risks and seeks to avoid serious or irreversible environmental disturbances. Environment, pp.69-72
EN12 Description of significant impacts of activities, products, and services Our impact is limited in terms of the indicators required. on biodiversity in protected areas and areas of high biodiversity value Environment, pp.69-72 outside protected areas
SUEK ANNUAL REPORT 2016 – 131 –
STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS
G4 Specific standard disclosures SUEK’s response
MM1 The area of land, owned or leased, used for production activities, Environment, pp.69-72 disturbed and rehabilitated
EN13 Habitats protected or restored Environment, pp.69-72
EN14 The total number of IUCN Red List species and national conservation At SUEK’s production assets, as well as adjacent areas, rare, endangered list species with habitats in areas affected by operations, by level of species of animals, plants and fungi have not been identified. extinction risk Environment, pp.69-72
Item 2016 2015 2014 2013 2012
Lands disturbed, ha
at the beginning of year 18,112 17,522 17,009 16,279 15,652
at the end of year 18,622 18,112 17,522 17,009 16,279
Disturbed during the year 907 805 779 1054 895
Recultivated during the year 397 215 266 324 268
EMISSIONS G4-DMA Disclosures on Management Approach Environment, pp.69-70
EN15 Direct greenhouse gas emissions (Scope 1)
Item 2016 2015 2014 2013 2012
Gross emissions, thousand tonnes 203.9 198.1 197.7 187.0 149.0
EN19 Reducing greenhouse gas emissions Environment, pp.69-72
EN21 Emissions of NOx, SOx and other significant air emissions
Item 2016 2015 2014 2013 2012
Emissions, thousand tonnes including:
solid substance 8.5 7.7 12.6 5.9 5.9
SO2 1.6 1.6 1.8 2.0 3.3 CO 7.5 7.6 8.1 13.5 8.2
NOx 4.0 4.6 4.7 2.7 4.0 Methane 180.6 174.7 168.5 161.8 126.0
Volatile organic compounds 1.4 1.4 1.5 1.0 1.3
Others 0.2 0.3 0.5 0.1 0.3
EFFLUENTS AND WASTE G4-DMA Disclosures on Management Approach Environment, pp.69-70
EN23 Total weight of waste by type and treatment methods SUEK does not transport, import, export or process waste that is hazardous in accordance with Annexes I, II, III and VIII to the Basel Convention.
SUEK ANNUAL REPORT 2016 – 132 – GRI TABLES 2016 / CONTINUED
G4 Specific standard disclosures SUEK’s response
Item 2016 2015 2014 2013 2012
Waste generation, thousand tonnes including: 463,022.7 457,626.1 505,236.1 336,911.0 220,747.5
I class hazard 0.005 0.004 0.005 0.004 0.004
II class hazard 0.02 0.038 0.036 0.031 0.034
III class hazard 1.3 1.8 1.8 2.0 1.4
IV class hazard 7.9 7.2 6.8 8.9 7.2
V class hazard 463,013.5 457,617.0 505,227.5 336,900.0 220,738.8 Collection of waste from other organisations, thousand tonnes 4,836.5 5,454.8 5,713.6 2,809.1 2,126.5 Use of waste, thousand tonnes 384,052.7 337,895.2 349,904.9 235,794.0 161,030.8 I class hazard 0.0 0.0 0.0 0.0 0.0005
II class hazard 0.0 0.0 0.0 0.02 0.02
III class hazard 0.3 0.7 0.7 1.5 1.1
IV class hazard 0.1 0.4 1.1 3.0 1.9
V class hazard 384,052.4 337,894.1 349,903.1 235,789.5 161,027.8 Neutralisation, thousand tonnes 0.08 0.1 2.6 20.2 19.1 I class hazard 0.0 0.0 0.0 0.005 0.004
II class hazard 0.0007 0.008 0.008 0.01 0.02
III class hazard 0.07 0.09 0.08 0.6 0.3
IV class hazard 0.005 0.006 0.01 6.05 4.8
V class hazard 0.007 0.01 2.6 13.4 14.0 Available waste at the year-end, thousand tonnes 1,135,198.5 999,365.9 1,070,379.6 121,733.3 1,077,822.7 I class hazard 0.0005 0.00002 0.0003 0.0 0.002
II class hazard 0.001 0.01 0.009 0.03 0.004
III class hazard 0.2 0.131 0.07 0.08 0.12
IV class hazard 3.07 2.83 2.6 3.3 3.3
V class hazard 1,135,195.3 999,362.8 1,070,376.9 121,729.9 1,077,822.0 Waste transferred to third parties, thousand tonnes 4,872.0 5,492.5 5,746.6 3,001.8 2,632.1 I class hazard 0.0 0.01 0.01 0.0 0.0
II class hazard 0.03 0.03 0.04 0.02 0.02
III class hazard 1.0 1.1 1.1 1.1 0.7
IV class hazard 7.5 6.9 5.6 7.2 5.4 V class hazard 4,863.5 5,484.4 5,739.8 2,993.5 2,625.9
EN26 Identity, size, protected status, and the value in terms of biodiversity SUEK do not significantly affect water bodies and related habitats. of water bodies and related habitats, on which the discharges of the company and runoff from its territory can have a significant impact.
PRODUCTS AND SERVICES G4-DMA Disclosures on Management Approach Strategy implementation, pp.34-41 Operating review, p.57 (Product quality)
EN27 Extent of impact mitigation of environmental impacts of Strategy implementation, p.38 products and services Operating review, p.57 (Product quality)
SUEK ANNUAL REPORT 2016 – 133 –
STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS
G4 Specific standard disclosures SUEK’s response
COMPLIANCE G4-DMA Disclosures on Management Approach Environment, pp.69-70
EN29 Extent of impact mitigation of environmental impacts of products and services
Item 2016 2015 2014 2013 2012
Charges for violation of environmental legislation, including the 32.5 26.9 1.5 10.4 38.8 elimination of damages, $ thousand.
GENERAL INFORMATION G4-DMA Disclosures on Management Approach Environment, pp.69-70
EN31 Total environmental protection expenditures and investments Environment, pp.69-72
Item 2016 2015 2014 2013 2012
Current expenses on environmental protection, $ thousand. 11,215.9 13,686.5 6,318.0 5,985.3 5,200.8 including:
Waste water collection and treatment 2,060.6 2,323.0 2,633.1 2,760.0 2,118.5
Waste management 80.6 47.7 831.0 505.7 349.1
Air cleaning 860.8 544.5 602.7 699.7 905.6
Charges for violation of environmental legislation, including the 32.5 26.9 1.5 10.4 38.8 elimination of damage
Payments for regulatory impact 1,241.2 1,757.4 1,940.9 1,559.0 1,204.0
Capital expenditure for environmental protection 6,940.2 8,987.0 308.8 450.5 584.8
CATEGORY: SOCIAL
SUBCATEGORY: LABOUR PRACTICES AND DECENT WORK
EMPLOYMENT G4-DMA Disclosures on Management Approach Our people, pp.73-74
LA1 Total number and rates of new employee hires and employee Our people, pp.73-76 turnover by age group, gender and region
Item 2016 2015 2014
Average total number of people 33,429 32,124 31,437
Number of people at year-end including: 34,418 32,124 32,322
Men 25,800 24 136 24,799
Women 8,618 7 988 7,523
Total employees left including: 7,330 7,980 9,537
Due to reduction in the number of employees or staff size 2,726 2,739 3,312
Voluntarily 4,258 4,747 5,688
Due to the administration initiative 346 494 537 Staff turnover rate, % 14% 16% 20%
SUEK ANNUAL REPORT 2016 – 134 – GRI TABLES 2016 / CONTINUED
G4 Specific standard disclosures SUEK’s response
LA2 Benefits provided to full-time employees that are not provided to Our people, pp.73-76 temporary or part-time employees, by significant operations
LA3 Return to work and retention rates after parental leave, by gender
LABOUR/MANAGEMENT RELATIONS G4-DMA Disclosures on Management Approach Our people, pp.73-74
LA4 Minimum notice periods regarding operational changes, including The company follows the Labour Code of the Russian Federation, which whether these are specified in collective agreements defines the minimum notice period regarding significant changes in the activities of the company (no later than two months before the start of the relevant activities, and in the case of a decision to reduce the number of workers or staff, that may lead to mass layoffs – no later than three months before the start of the relevant activities).
MM4 Number of strikes and lock-outs exceeding one week’s duration There were no strikes and lock-outs across the company during the reporting period.
OCCUPATIONAL HEALTH AND SAFETY G4-DMA Disclosures on Management Approach Health and safety, pp.64-65
LA5 Percentage of workforce represented in formal joint management Health and safety, pp.64-68 worker health and safety committees Our people, pp.73-76
LA6 Type of injury and rates of injury, occupational diseases, lost days, Health and safety, pp.64-68 and absenteeism, and total number of workrelated fatalities, by region and by gender
LA7 Workers with high injury and high risk of morbidity associated Due to the specifics of the industry, the company has employees engaged with type of training in professional activities that carry a high risk of injury or high incidence of certain diseases.
LA8 Health and safety topics covered in formal agreements Stakeholder engagement, pp.30-31 with trade unions Our people, pp.73-76
TRAINING AND EDUCATION G4-DMA Disclosures on Management Approach Our people, pp.73-74
LA10 Programmes for skills management and lifelong learning that support Our people, pp.73-76 the continued employability of employees and assist them in managing career endings
DIVERSITY AND EQUAL OPPORTUNITY G4-DMA Disclosures on Management Approach Our people, pp.73-74 Corporate governance, pp.81-93
LA12 Composition of governance bodies and breakdown of employees Corporate governance, pp.81-93 per employee category according to gender, age group, minority group membership, and other indicators of diversity
EQUAL REMUNERATION FOR WOMEN AND MEN G4-DMA Disclosures on Management Approach Our people, pp.73-74
LA13 Ratio of basic salary of men to women by category of workers SUEK has set the same base salary for men and women. and at significant locations of activities
SUEK ANNUAL REPORT 2016 – 135 –
STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS
G4 Specific standard disclosures SUEK’s response
SUBCATEGORY: HUMAN RIGHTS
NON-DISCRIMINATION G4-DMA Disclosures on Management Approach Our people, pp.73-74
HR3 Total number of incidents of discrimination and corrective Incidents of discrimination have not been identified during the actions taken reporting year.
CHILD LABOUR G4-DMA Disclosures on Management Approach Our people, pp.73-74
HR5 Operations and suppliers identified as having significant risk for SUEK is against the practice of child labour, and no such incidents incidents of child labour, and measures taken to contribute to the were identified during the reporting year. effective abolition of child labour
INDIGENOUS RIGHTS G4-DMA Disclosures on Management Approach Our people, pp.73-74
HR8 Total number of incidents of violations involving rights of indigenous Incidents of violations involving rights of indigenous peoples people and actions taken have not been identified.
SUBCATEGORY: SOCIETY
LOCAL COMMUNITIES G4-DMA Disclosures on Management Approach Communities, pp.77-78
SO1 Percentage of operations with implemented local community Programmes on interacting with local communities are implemented engagement, impact assessments, and development programmes at all SUEK's key facilities. Stakeholder engagement, pp.30-31 Communities, pp.77-80
ANTI-CORRUPTION G4-DMA Disclosures on Management Approach Risk management, pp.42-49 Corporate governance, pp.81-93
SO3 Total number and percentage of operations assessed for SUEK has a corporate risk management system that covers all divisions risks related to corruption and the significant risks identified and businesses of the company. Risk assessment is carried out on a regular basis. Risk management, pp.42-49
SO4 Communication and training on anticorruption policies and procedures SUEK implemented a comprehensive compliance system. Corporate governance, pp.81-90
SUEK ANNUAL REPORT 2016 – 136 – ADDITIONAL INFORMATION
GLOSSARY
Terms and definitions
API 2 Index The CIF (cost, insurance and freight) price of coal at the Metallurgical Generic term referring to coking coal and its different ports of ARA (Amsterdam, Rotterdam and Antwerp) with coal qualities as well as Pulverised coal injection coal (PCI). coal calorific value of 6,000 kcal/kg. Mid-volatile Coal containing 69-78% fixed carbon, and 20-31% API 8 Index The CFR (cost and freight) price of coal delivered to south coal volatile matter on a dry basis. China with coal calorific value of 5,500 kcal/kg. PCI coal Pulverised coal injection coal is a soft, non-coking coal Calorific Is the amount of potential energy in coal that can be that is finely ground and injected directly into a blast value converted into actual heating ability. furnace and has the effect of reducing the coke rate.
CIF ‘Cost, Insurance and Freight’ means that the seller delivers Semi-hard Coal with coke strength reactivity index falling between the goods on board the vessel or procures the goods coking coal 35-65% and a free swelling index (FSI) of 5 to 7. already so delivered. The risk of loss of or damage to the goods passes when the goods are on board the vessel. Semi-soft Coal with low coke strength reactivity, usually between The seller must contract for and pay the costs and freight coking coal 10-35% and a free swelling index (FSI) around 3 to 5. It is necessary to bring the goods to the named port of blended with hard coking coal to reduce the cost of coke destination. making in the steel-making process.
Coking coal Coal suitable for carbonisation in coke ovens. It must have SGK Siberian Generating Company, SUEK’s related company, good coking properties to produce strong coke for steel is one of the largest energy holdings in Russia, which making, with low sulphur and phosphorus content. includes 17 power plants with generating capacity of 7,820 MWh. DGK Far Eastern Generating Company, the fourth largest generating company in Russia and the largest participant Sized coal Coal which has passed through a screening process and in the Far Eastern energy market. is grouped into ranges according to size of particles. It is used mainly by households for heating purposes. FOB ‘Free On Board’ means that the seller delivers the goods on board the vessel nominated by the buyer at the named SRK SRK Consulting is an independent, international port of shipment or procures the goods already so consulting practice that provides advice and solutions delivered. The risk of loss of or damage to the goods mainly in the earth and water resource industries. passes when the goods are on board the vessel, and the buyer bears all costs from that moment onwards. Steam coal Also known as thermal coal. Burned primarily in boilers, to generate steam for the production of electricity or for globalCOAL Index based on the Free On Board (FOB) delivery of process heating purposes, or used as a direct source of NEWC thermal coal at the Port of Newcastle in Australia with coal process heat. calorific value of 6,000 kcal/kg NAR. TGK-14 Territorial Generating Company No.14, a manufacturer LoM Life-of-mine model is specifically designed for each coal and supplier of electric and thermal energy in the production unit based on well-developed 3D geology, territories of Zabaikalye and Buryatia. using special mining software, and covering the production process for both brownfield and greenfield XPAC-XERAS Is a uniquely versatile budgeting tool, capable of handling operations for the total duration of mining. short-to-medium-budgeting needs, as well as complete life-of-project planning. – 137 –
STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS
Abbreviations and acronyms
bn Billion KPI Key performance indicator
Bt Billion tonnes kW Kilowatt
CAGR Compound Annual Growth Rate kWh Kilowatt hour (1000 watt-hours/ 3.6 megajoules)
CCS Carbon capture and storage LTIFR Lost time injury frequency rate
CH4 Methane m Metre
CO2 Сarbon dioxide m3 Cubic metre
EBITDA Earnings before interest, tax, depreciation and amortisation mln Million
ECA Export credit agencies mm Millimetre
ERP Enterprise Resource Planning Mt Million tonnes
GHG Greenhouse gas NGO Non-governmental organisation
GRI Global Reporting Initiative OHSAS Occupational Health & Safety Assessment Series
GW Gigawatt (one billion watts) PPE Personal protective equipment
ha Hectare PR Public Relations
HiPo High-potential employees Q Quarter
HR Human resources R&D Research & Development
HSE Health, Safety and Environment RMB Chinese Yuan
IAD Internal Audit Department RUB Russian Rouble
IEA International Energy Agency t Tonne
IFRS International Financial Reporting Standards TWh Terawatt hours
ISO International Organisation for Standardisation UNDP United Nations Development Programme
kcal Kilocalorie UNIDO United Nations Industrial Development Organisation kcal/kg Kilocalories per kilogramme WP Washing plant
kg Kilogramme $ US Dollar
km Kilometre $m Million US Dollars – 138 – ADDITIONAL INFORMATION / CONTINUED
INFORMATION ON THE COMPANY
SUEK completed its intragroup reorganisation in September 2016. JSC SUEK is now the holding company of the Group, and its centre of consolidation and corporate governance. The key assets of JSC SUEK are coal-mining and processing facilities, port, transport and service facilities in eight regions of Russia, as well as the international trader SUEK AG and its trading network. SUEK LTD is responsible for the Group’s fundraising. The share capital of JSC SUEK amounts to RUB 1,160,300 (one million, one hundred and sixty thousand, three hundred Russian Roubles) divided into 232,060,000 (two hundred and thirty-two million and sixty thousand) ordinary registered shares with a face value of RUB 0.005 (zero point double zero five Russian Roubles) each. The main beneficiary of SUEK is Andrey Melnichenko. – 139 –
STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS
FORWARD-LOOKING INFORMATION AND STATEMENTS ON COMPETITIVE POSITION
This Annual Report contains certain forward-looking statements. All statements, other than those of historical fact, are forward-looking statements that involve risks and uncertainties. There can be no assurances that such statements will prove accurate, and actual results and future events could differ materially from those anticipated. The information contained herein represents management’s best judgement as at the date of the Report, based on information currently available. SUEK does not assume the obligation to update any forward-looking statements. Any statements referring to the Group’s competitive position are based on our understanding of the prevailing market environment. This derives from a range of sources including investment analysts’ reports, independent market studies and SUEK’s own assessments of market share, based on the publicly-available information regarding the financial results and performance of market participants. – 140 – ADDITIONAL INFORMATION / CONTINUED
CONTACTS
JSC SUEK 53/7, Dubininskaya str, Moscow, Russia, 115054 Tel.: +7 (495) 795 25 38 Fax: +7 (495) 795 25 42 E-mail: [email protected] www.suek.ru
SUEK AG 59 Vadianstrasse, St. Gallen, 9000, Switzerland Tel.: +41 71 22 68500 Fax: +41 71 22 68503 E-mail: [email protected] www.suekag.com
SUEK LTD 3, Georgiou Katsounotou, Kitallides Building, 3rd Floor, Office 3A 3036, Limassol, Cyprus Tel.: +357 25 50 9110 Fax: +357 25 50 9001 E-mail: [email protected] www.suek.com
Auditors JSC KPMG Naberezhnaya Tower Complex, Block C, 10 Presnenskaya Naberezhnaya, Moscow, Russia, 123112 Tel.: +7 (495) 937 44 77 Fax: +7 (495) 927 44 99 E-mail: [email protected]
KPMG AG Bogenstrasse 7, P.O. Box 1142, 9001, St. Gallen, Switzerland Tel.: +41 58 249 2211 Fax: +41 58 249 2212 E-mail: [email protected]
KPMG Limited 11, June 16th 1943 Street, 3022 Limassol, Cyprus P.O.Box 50161 3601 Limassol, Cyprus Tel.: +357 25 869000 Fax: +357 25 363842 E-mail: [email protected] PUBLIC RECOGNITION 2016 Awards for SUEK 2015 Annual and CSR Reports We are delighted that the 2015 SUEK Annual Report received a prestigious European award in the area of corporate financial communications – The Corporate & Financial Awards (London). SUEK received gold for the online version of the Report (Best online report, International/ unlisted) and silver for its printed version (Best printed report, International/unlisted). The 2015 Annual Report also won the ‘Best Annual Report Design And Concept’ category and received a diploma in the ‘Best Interactive Report’ and the ‘Best Presentation Of A Business Model In A Non-Public Company’s Report’ categories at the 19th Annual Reports Contest, held by the Moscow Exchange in partnership with the RCB Media Group. The SUEK 2014-2015 Corporate Social Responsibility Report was awarded in the ‘Corporate Social Responsibility And Sustainable Development Reports’ category at the same Contest. In 2016, our social programmes also received the following awards: • SUEK was ranked 2nd out of 60 Russian • SUEK came first in the Systematic Approach companies in the Donors Forum project, to Social Entrepreneurship category in the supported by PwC and the Vedomosti Impulse of Kindness awards. We also newspaper; achieved top spot in the Social and • Our Youth Entrepreneurship project won best Environmental category at the Russian programme in the Corporate Charity Policy national award MediaTEK, sponsored by the and Social investment category at the Ministry of Energy of the Russian Federation; ‘Corporate Charity Leaders’ competition; • The ‘SUEK’s Work Teams’ project won the • We won a prize at the Russian Union of ENES Russian National Energy Education Industrialists and Entrepreneurs’ competition Initiative and Youth Innovation award, held for our efforts to tackle regional social issues; under the auspices of the Ministry of Energy • Vladimir Rashevsky, SUEK’s CEO, won an and Moscow Government; award as part of the Russian National • At the Foundation of Growth awards, we won Philanthropist of the Year initiative, sponsored Eventful Project of the Year for our Economic by the Ministry for Culture of the Russian Camp initiative for schoolchildren; Federation, for supporting regional tours by • At the Best Social Projects in Russia awards, Russian theatres; we came first in the Support for Gifted Children and Youth category for our Future of the Community – Future of SUEK project; • In the ConTEKst competition, we won Best Corporate Media focused on social relations and talent promotion for our Events and People publication.
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