Annual Report 2014 Engineering Space

ANNUAL REPORT ENGINEERING SPACE 2014

2014 ENGINEERING SPACE ENGINEERING REPORT ANNUAL ANNUAL REPORT 2014 ENGINEERING SPACE

Mostotrest is the largest diversified 2014 KEY FINANCIAL company in the Russian transport AND OPERATING RESULTS Contents infrastructure construction market, BACKLOG, MARKET SHARE, 1 About Us with a presence across all core and RUB BILLION -1% % +3.5 PP 08 Chairman’s and CEO’s Statement related business segments, and 12 2014 Key Events 16 Company History a participant in Russia’s pioneering 2014 352.0 2014 13.4 18 Key Ongoing Projects 2013 355.4 2013 9.9 20 Business Model public-private partnership projects (PPP). 22 Strategy 2012 281.3 2012 9.4

2 2014 Results REVENUE, GROSS PROFIT, RUB BILLION RUB BILLION 26 Market Overview KEY ADVANTAGES: +29% +47% 34 Operating Results 39 Financial Results 2014 150.5 2014 20.6 A success story for 85 years 3 Corporate Governance 2013 116.7 2013 14.0 2012 94.1 2012 13.1 50 Corporate Governance Principles Strong engineering tradition 53 Corporate Governance Structure 70 Internal Control and Audit 73 Information for Investors and Shareholders EBITDA, NET PROFIT, Stable management team RUB BILLION +63% RUB BILLION +2.7х 4 Social Responsibility The only publicly listed company 2014 15.4 2014 6.1 80 Personnel in the sector 85 Occupational Health and Industrial Safety 2013 9.4 2013 2.3 90 Environmental Protection 2012 11.3 2012 4.3 Strong backlog 5 Appendices Participation in all key infrastructure BACKLOG BREAKDOWN, % REVENUE BREAKDOWN, % 96 Auditors’ Report 98 Consolidated Financial Statements development projects RUB274.9 BILLION RUB131.7 BILLION 144 Key Risk Factors CONSTRUCTION OF ROADS AND BRIDGES CONSTRUCTION OF ROADS AND BRIDGES 5 1 3 2 BILLION 7 BILLION Presence in the most attractive 16 RUB56.5 RUB10.7 SERVICES SERVICES 6 Additional Information investment regions RUB18.2 BILLION RUB5.2 BILLION 156 Basis of Presentation CONSTRUCTION OF AERFIELDS AND AIRPORTS CONSTRUCTION OF AERFIELDS AND AIRPORTS 158 Key Terms and Definitions 159 Contacts Leader in the road services segment 78 RUB2.5 BILLION 88 RUB3.0 BILLION CONSTRUCTION OF OTHER FACILITIES CONSTRUCTION OF OTHER FACILITIES AND OTHER REVENUE

03 ANNUAL REPORT ABOUT COMPANY

OWNERSHIP STRUCTURE Mostotrest shares in affilated and subsidiary companies

Construction Services Road concession

TSM UTS NWCC

Construction and reconstruction of Toll road operation Concession holder: construction, roads, airports and airfields, railways operation and toll collection and ports

84% 100% 50%

Mostostroy-11 Mostotrest-Service

Construction and reconstruction of road, Maintenance, repair and overhaul railway and city bridges of roads and bridges

25% 60%

SHAREHOLDERS STRUCTURE % as of 05.05.2015

67.8% AM companies for NPF Blagosostoyaniye 32.2% Free float

OJSC TFK-Finance, an investment company owned by management companies NPF Blagosostoyanie is a non-government pension fund established with the participation of NPF Blagosostoyanie, owns 63.6% of PJSC Mostotrest. of Russian Railways. AM Transfingroup,management company of NPF Blagosostoyanie, owns 4.2% of PJSC Mostotrest.

04 ENGINEERING SPACE

KEY OPERATION ACTIVITIES

Construction Services Road Concession

LEADING PLAYER IN THE RUSSIAN TOLL ROAD OPERATION (UTS), WITH ITS JOINT VENTURE INFRASTRUCTURE CONSTRUCTION ROAD AND BRIDGE REPAIR PARTNER VINCI, MOSTOTREST MARKET. AND MAINTENANCE SERVICES OWNS 100% OF NWCC (MOSTOTREST-SERVICE). ON AN EQUAL BASIS.

What We Do What We Do What We Do

• NWCC is the concession holder for • Construction of roads and bridges; • Toll road operation: the km 15 – km 58 toll section of • Construction of railway infrastructure; – Operation of toll collection systems the M-11 “Moscow – St. Petersburg” and intellectual transport systems • Construction of airfields and airports; Highway, currently under construction, (ITS); in accordance with a concession • Construction and repair of seaports and – Development and implementation agreement with Avtodor; waterway infrastructure; of optimal technological solutions • Type of concession agreement: direct • Construction of other infrastructure and for traffic management. toll collection agreement envisioning non-infrastructure projects; • Maintenance of transport toll segment construction and opera- • Management of complex infrastructure infrastructure: tion based on the co-financing principle, projects as General Contractor; with subsequent transfer to concession – Road marking services; holder for temporary operation and • Reconstruction of transport infrastructure. – Maintenance of electric lighting, traffic return of investment through benefi- light, traffic density monitoring and ciary toll collection. road weather information systems; • Transport infrastructure repair services.

Key 2014 Results Key 2014 Results Key 2014 Results

• Won tenders totaling almost RUB100 • Launch of operational phase of long-term • M-11 “Moscow – St. Petersburg” billion; investment contracts added RUB39.9 concession segment (km 15 – km 58) billion to backlog; opened to traffic before the end • Number of large projects is commissioned of 2014, despite major delays in site ahead of schedule. • Over 3,600 km of roads under preparation and clearance; maintenance agreements. • Test mode operation until the middle of 2015.

Financial Results, RUB billion Financial Results, RUB billion 2013 2014 2013 2014 Revenue 106.9 140.3 Revenue 10.7 10.7 Gross Profit 11.9 18.0 Gross Profit 2.0 2.6 EBITDA 7.5 13.3 EBITDA 1.8 2.5 Net Profit 1.6 5.7 Net Profit 1.0 1.2

05 ANNUAL REPORT ABOUT COMPANY MOSTOTREST

1 About Us

08 Chairman’s and CEO’s Statement 12 2014 Key Events 16 Company History 18 Key Ongoing Projects 20 Business Model 22 Strategy

ENGINEERING SPACE CONNECTING CITIES

Mostotrest is a key contractor on the construction of M-11 «Moscow – St. Petersburg» Highway, that connects Russia’s two biggest metropolitan areas. Two sections of the highway were opened to traffic in 2014, two more are currently under construction.

ZHYVOPISNY BRIDGE IN MOSCOW

OBUKHOVSKI BRIDGE IN SAINT PETERSBURG 06 07 ANNUAL REPORT ABOUT COMPANY

CHAIRMAN’S AND CEO’S STATEMENT

VLADIMIR VLASOV

Chief Executive Officer

“Speaking about the strong results for the for all major road construction projects year, I would like to emphasize that they as well as the manager of a number of are to a large extent attributable to our complex projects as general contractor, has In 2014 the Company delivered subsidiaries, which once again proved the performed especially well, thanks to its strong operating and financial effectiveness of the investment they had highly efficient production process and the benefited from in previous years. In the hard work and professionalism of all its staff. results reporting period, Mostotrest-Service and Largely thanks to TSM, the Group was able UTS, Mostotrest road services subsidiaries, to complete a segment of M-11 Highway increased their net income by 15%. The (Vyshniy Volochek Bypass) as well as open transport infrastructure operations segment the toll-based segment to traffic ahead of is becoming increasingly important within schedule. Additionally, TSM’s performance the Group as several long-term investment contributed significantly to the Group’s contracts are reaching operational phase. strong overall financial results in the These contracts stipulate that Mostotrest construction segment.” is responsible for post-construction maintenance and operation. TSM, which is the main contractor within the Group

08 ENGINEERING SPACE

Growth in a difficult business environment

confirms the strenght of our business and competitive advantages

GEORGY KORYASHKIN

Chairman of the Board

“In the reporting period, the Board of Direc- tion on Information Policy, which establishes tors considered a number of important the scope, timing and methods of public issues such as finance, approval of trans- disclosure and provision of information to actions, strategic development, including shareholders and other interested parties. Taking into account the Com- approval in early 2014 of the key areas оf development of the Group for the next Taking into account the excellent results pany’s excellent performance 5 years. More than half of the items discus- achieved by Mostotrest in 2014, the Board in 2014 the General Shareholders’ sed were related to the development of the decided, at its meeting in April 2015, to corporate governance system. In particular, recommend to the General Shareholders’ Meeting made a decision the Company approved a new version of Meeting an unchanged dividend for the year, the Articles of Incorporation, covering i.e. 36% of IFRS net profit attributable to to approve dividends at the a wider range of shareholder rights and Mostotrest owners. Dividends were appro- level of 36% of IFRS net profit responsibilities. In addition, the Articles of ved by the Annual General Shareholders’ Incorporation are now aligned with the new Meeting on 14 May 2015.” attributable to Mostotrest Corporate Governance Code of the Russian Federation in terms of information disclo- owners sure. The Board also approved the Regula-

09 ANNUAL REPORT ABOUT COMPANY

Dear Shareholders, Partners and Colleagues!

We are pleased to report that 2014 was a successful and highly pro- The projects mentioned above, as well as the projects to build ductive year for the Group. That the Group was able to cope with Segment 6 of M-11 “Moscow – St. Petersburg” Highway and Moscow the deterioration in the macroeconomic environment in Russia in 4th Ring Road, with outstanding volumes of RUB101.2 billion and 2014 was in large part thanks to the professionalism of our staff, RUB18.2 billion, respectively, were the biggest construction projects combined with our business model that emphasizes a balanced in the Group’s backlog at the beginning of 2015. At the same time, approach to development of own production capacity and to parti- the backlog of road maintenance and operation projects in the cipation in new projects. Our results strengthened our well earned reporting period increased almost 3x to RUB56.5 billion, as several reputation as a reliable partner for the key state contracts. Strong long-term-investment contracts reached operational phase. revenue growth, profitability and liquidity confirm the solidity of our business and help an improving competitive position. The opening to traffic of the km 15 – km 58 segment of the M-11 “Moscow – St. Petersburg” Highway was the other significant At the same time, the Company was operating in a weaker market achievement last year. Despite major initial delays caused by con- environment. In the reporting period, sales declined by 4%, including struction site clearance issues, we put in a huge effort to finish the in the sector of roads and bridges construction (-2%). A wave of bank- work and were able to open it up to traffic on time. Over the course ruptcies of construction players resulted in a massive number of of the first half of 2015, we will complete equipping the route, in- unfinished construction projects. Mostotrest’s market share rose cluding with toll stations. We expect our concession company NWCC to 13.4% in 2014, compared to 9.9% in 2013. to begin toll collection, its core activity, in mid-2015. Having tested traffic flows during the first three months after commissioning the A significant achievement for the Company was the early completion toll-based segment, we can confirm that the new highway is proving of a number of large construction projects in 2014, that conferred very popular. tangible benefits both to the Group and its customers. This outcome not only confirms our reputation as one of the industry’s most In 2014, the Group pursued active development of the Skolkovo reliable contractors amid widespread abandonment of construction Infrastructure. As already mentioned in the reporting period we com- sites by other players, but it also creates the conditions for us to use missioned a 2.4 km-long flyover on Mozhaiskoye Avenue (between those freed up resources more efficiently, in turn helping to minimize Ryabinovaya Street and Govorova Street), which was built in record the risk that the actual inflation rate for projects exceeds the nego- time and became the longest flyover in Russia. At the end of the tiated figures contained within the contracts. In 2014, Mostotrest reporting period, the Group had RUB27.1 billion1 of signed contracts completed construction of the Vyshniy Volochek Bypass, the fifth for the infrastructure development within the above mentioned con- segment of M-11 “Moscow – St. Petersburg” Highway in the Tver tract, and we do not rule out further participation in new Moscow region, 7 months ahead of schedule; completed reconstruction projects in 2015. of the Ust-Luga Commercial Seaport access road, a segment of M-11 “Narva” Highway, 2 months ahead of schedule; and completed con- In terms of financial results for 2014, we are pleased to report that struction of the Mozhaisk Flyover, Moscow’s longest exit flyover, we delivered a traditionally strong revenue growth (+29%). And within a record 12 months. With the support of our customers, as was promised in last year’s statement, we succeeded in improv- Mostotrest intends to continue following the practice of delivering ing our profitability, which in the previous period had come under projects ahead of schedule, which creates additional advantages substantial pressure as a result of higher costs and provisions for amid the current crisis. doubtful receivables, mainly under Sochi-based projects. And despite the fact that in the reporting period we made additional provisions We have always emphasized the importance of diversification, for doubtful receivables, including due to the financial difficulties including across various transport infrastructure segments, as it of a number of partner companies, the Group improved its gross provides flexibility to respond to customer needs and enables us margin to 13.7%, an increase of 1.7 pp, and its EBITDA margin to expand the backlog even in a weak market. 2014 saw the Group tender for a number of airport infrastructure development projects. On the back of its competences in the segment, TSM won the right to participate in two such projects with a combined value of RUB16.4 billion1 and has already began construction of airfield infrastructure at Southern Airport in the Rostov region and reconstruction of the Ufa Airport. Together with other new large projects such as Segment 4 of M-11 “Moscow – St. Petersburg” Highway (RUB27.0 billion1) and a bridge across the Volga in the Tver region (RUB6.7 billion1), these projects enabled Mostotrest to maintain its 2014 backlog 13.4 % at 2013 year-end levels even though it was a challenging year. Additionally, it meant that the Group was able to enter 2015 with

a total backlog of RUB352.0 billion. MARKET SHARE IN 2014 AS TO COMPARE WITH 9.9% IN 2013

1 Net of VAT.

10 ENGINEERING SPACE

IMPORTANTLY, MOSTOTREST RETAINED ITS FINANCIAL STABILITY AND ENSURED BILLION ADEQUATE USE AND ALLOCATION RUB2.0 OF APPROVED CREDIT RESOURCES OF DIVIDEND WILL BE PAID AVAILABLE TO THE COMPANY, AVOIDING FOR 2014 ACCORDING SIGNIFICANT FINANCIAL COSTS AMID TO THE GENERAL SHAREHOLDERS’ RISING MEETING DECISION

to 10.2% (+2.1 pp year-on-year). This better level of efficiency was Analyzing the market prospects amid the current crisis, we are achieved through optimal use of resources which led to an increase confident that construction and reconstruction of such key routes in productivity. Net profit of the Group increased 2.7x year-on-year, as M-11 “Moscow – St. Petersburg”, M-4 “Don”, M-1 “Belarus”, to RUB6.1 billion. M-9 “Baltic”, M-7 “Volga” and M-5 “Urals” will not be suspended. We believe that if the government does suspend funding, it is likely Importantly, Mostotrest retained its financial stability and ensured to be from projects that have not yet been started, and in such cases, adequate use and allocation of approved credit resources available it is likely that the government will re-channel investment into the to the Company, avoiding significant financial costs amid rising projects listed above. That’s why despite the fact that we do not interest rates. Thanks to proactive financial management and an expect a large stream of new projects, our current backlog allows impeccable reputation as a reliable borrower, Mostotrest was able us to look with confidence to the future. We believe in the stability to keep the average interest rate on its year-end loan portfolio at ap- of the Company’s business which is supported by the professional- proximately 14%, a rate which will be applicable for most of the first ism and responsibility of its employees, some of whom, incidentally, half of 2015. Advance payments from customers at the year end to- were recognized by the state for their efforts and received high state taled RUB58.4 billion, enabling the Company to recognize negative awards in the reporting year. net debt of RUB21.2 billion at the end of the reporting period. Above all, we would like to thank all of our colleagues, our engineers In 2014, the Group increased capital expenditure by 21% to RUB6.1 and workers across all the different regions in the country, for the billion, mostly to finance technical fleet expansion at TSM for the contribution they made to the excellent 2014 results, and our custo- M-11 “Moscow – St. Petersburg” Segment 6 construction project. mers, for their trust. Investments we made pre-crisis in equipment helped us to avoid extra costs associated with rising prices for foreign-made equipment, and created a strong production platform for operating in 2015.

Taking into account our 2014 results and the confidence in the outlook for the Group in 2015, the Annual General Shareholders’ Meet- ing made a decision to allocate RUB2.0 billion, or 36% of IFRS net profit attributable to Mostotrest owners for dividend payment.

2015 is going to be very difficult for the economy as a whole and for our industry. We are operating against the backdrop of unpredictable inflation levels and rising costs of bank financing, in a situation where all our current contracts are fixed-price. With this in mind, we will make every effort to complete projects ahead of contracted schedules, maximize in-house capacity utilization and continue key costs optimization. At the same time, we will be more selective with regard to new tenders, bidding only for those projects that offer sufficient profit margins and the certainty that project funding is unlikely to be suspended.

11 ANNUAL REPORT ABOUT COMPANY

2014 KEY EVENTS M-11 “MOSCOW – ST. PETERSBURG” HIGHWAY

Commissioning of M-11 “Moscow – St. Petersburg” Commissioning of Festivalnaya Street – Highway head segment Businovskaya Interchange segment of M-11 “Moscow – St. Petersburg” Highway and opening to traffic of Businovskaya Interchange main driveway and four overpasses

At the end of December 2014, concession-based km 15 – km 58 Traffic was launched simultaneously with the opening of the M-11 segment (Moscow Ring Road – Solnechnogorsk) of M-11 “Moscow – “Moscow – St. Petersburg” head segment (km 15 – km 58). The seg- St. Petersburg” Highway was opened to traffic. Following a trial ment between Festivalnaya Street and Businovskaya Interchange is period testing the system, the concession holder NWCC will begin a set of complex engineering structures, including a split-level inter- toll collection in mid-2015. The opening of the highway segment in change on Festivalnaya Street, connecting three densely populated 2014 was a major achievement of Mostotrest employees who stuck districts of Moscow. Businovskaya Interchange, Russia’s first five- to the task despite significant delays on the part of the customer level interchange, will help relieve traffic bottlenecks in Northern with construction site clearance and removal of existing engineering Moscow. The above projects are also of great importance for the networks. The new highest-category (I-A) road plays an important concession business of Mostotrest, as they are the city center-bound role in development of transport infrastructure in Moscow and the extension of the Group’s concession highway segment. Despite the Moscow region, providing an alternative route for the Moscow Ring need that arose for Mostotrest to take on ad hoc non-core work to Road – Sheremetyevo Airport – Solnechnogorsk segment, one of clear the construction site and remove existing engineering net- the region’s most congested, and supplying access to the towns of works, the Company managed to complete construction within the Skhodnya, Dolgoprudny and Zelenograd. shortest possible time.

12 ENGINEERING SPACE

Commissioning of km 258 – km 334 segment Long-Term investment contract for construction, (Vyshniy Volochek Bypass) of M-11 “Moscow – maintenance, repair and toll-based operation St. Petersburg” Highway in Tver region 7 months of M-11 “Moscow – St. Petersburg” Highway ahead of schedule Segment 4 (km 208 – km 258)

Vyshniy Volochek

Vyshniy Volochek Bypass was the first commissioned segment of the M-11 “Moscow – St. Petersburg” Highway (December 2014). Toll collection is scheduled to begin in mid-2015, following a test The winner of the tender was announced in November 2014. The mode operation period. Mostotrest will be acting as the segment’s total construction cost is estimated at RUB27.0 billion1. The project operator and toll collection agent for Avtodor. An effective project is scheduled for completion in 36 months, with a subsequent management system and innovative technologies enabled Mosto- 20-year maintenance and operation period. The segment is adjacent trest to significantly reduce construction time and achieve compli- to the already completed Vyshniy Volochek Bypass, which greatly ance of the new route with the highest international standards. facilitates the Group’s production capacity redeployment.

1 Net of VAT.

13 ANNUAL REPORT ABOUT COMPANY

AIRPORTS

Contract for development of the new Southern Contract for reconstruction of the Ufa airport Airport airfield infrastructure in the Rostov (stage 2) region

Southern Airport Ufa Airport

Contract for development of the new Southern Airport airfield Stage 2 reconstruction of the Ufa airport. Following Stage 2 recon- infrastructure in the Rostov region, to subsequently replace the struction, the airport will be suitable for wide-bodied aircraft, which existing airport. Contract value: RUB13.8 billion1; construction will significantly increase its throughput capacity. Contract value: period: 36 months. RUB2.7 billion1; construction period: 24 months.

1 Net of VAT.

14 ENGINEERING SPACE

SKOLKOVO INFRASTRUCTURE

Skolkovo infrastructure construction: Commissioning of the longest flyover in Russia new supplemental agreements totalling RUB27.1 billion Mozhaisky Overpass Ufa Airport

INCLUDING FOR CONSTRUCTION OF:

Traffic interchange at the intersection of Aminevskoe Avenue and General Dorokhov Street: RUB3.3 billion2

Southern segment of North-West chord: • Leningradskoye Avenue – Marshall Zhukov Avenue segment with access to Mnevniki Street via Narodnogo Opolchenya Street: RUB8.3 billion2; • Skolkovo Avenue – Moscow Ring Road; Mozhaiskoye Avenue – Moscow Ring Road, with access to Ryabinovaya Street, including Vyazemskaya Street and Vitebslkaya Street: RUB6.6 billion2; • General Dorokhov Street between Aminyevskoye Avenue A flyover on Moscow’s Mozhaiskoye Avenue between Ryabinovaya and Moscow Ring Road: RUB2.0 billion2; and Govorova streets. Russia’s longest flyover to date, the 2.4 km • Ryabinovaya, Vyazemskaya and Vitebskaya streets: long project was built in record time, enabling through traffic on one RUB6.9 billion4. of Moscow’s busiest arterial roads.

2 Net of VAT.

15 ANNUAL REPORT ABOUT COMPANY ENGINEERING SPACE

COMPANY HISTORY – 85 YEARS 1992 1945 On December 23, 1992, Mostotrest was transformed 1930 into a joint stock company (JSC). In 1945, Mostotrest was merged into GlavMostStroy, In 1958, Mostotrest was awarded the Order of Lenin. On January 25, 1930, by decision of the USSR Council the bridge construction and reconstruction directorate In the 1960s, the Group built a unique arched bridge of People’s Commissars, the Mostotrest Group was newly established under the People’s Railway Com- across the Oka River in Gorky (now Nizhny Novgorod), established under the People’s Railway Commissariat, missariat. Mostotrest served as the platform for the 1941 bridges across the Volga in Rybinsk and Yaroslavl, IN 1990s-2000s to ensure construction of non-standard and supersized development of regional bridge building groups. across the Klyazma in Vladimir, across the Don in Aksai bridges. Up until 1941, Mostotrest remained the only This period saw development of a regional production in the new economic environment of the 1990s-2000s, and across the Kura in Tbilisi, as well as an overpass specialized bridge building company in the country. During the Second World War, Mostotrest units network. The Kremenchug, Voronezh, Yaroslavl and Mostotrest managed not only to maintain but also on the Samotechnaya Square in Moscow, a three-level accompanied Red Army military units on the frontline Chekhov bridge steel structure plants, and the Dmitrov, to increase its production capacity, by improving its interchange near the Savyolovsky Railway Station in In 1931, Mostotrest commissioned railway bridges from the Volga to the Oder, repairing bridges and Iset, Bataysk, Gorky and Beskudnikovo bridge rein- processes, introducing modern and more effective Moscow, and many others. across the Volga River in Saratov and across the Ob erecting temporary crossings. forced concrete structure plants operated as part materials and technologies, and constantly renewing in Novosibirsk. In 1932, bridges across the Volga of the Mostotrest Group. its fleet of vehicles and construction machinery. in Kostroma and across the Dnieper in Kanev and Mostotrest temporarily restored a total of 516 Dnepropetrovsk (1,600 m, Europe’s longest reinforced bridges with a combined length of 42 kilometers, and 2010 concrete bridge at the time) were opened to traffic. overhauled and built 142 bridges with a total length of During the reconstruction of the Moscow Ring Road, 16 km, including bridges over the Volga, Sozh, Desna, IN 1970s-1980s Mostotrest built 6 railway intersection overpasses, Western Bug, Vistula and others. 13 road interchange structures and 4 bridges. In 2010, Mostotrest acquired a controlling stake IN 1952-1953 Mostotrest built several dozen bridges and overpasses in TSMsignificantly expanding the geography LARGE BRIDGES Among them is the famous bridge across the Dnieper across the country, including a unique bridge over the During the construction of the Third Ring Road in of its business and types of construction projects. 200 MORE THAN 35 KM River in Kiev, built immediately after the liberation of an outstanding achievement of Mostotrest was the Hrazdan Gorge in Armenia with pillars up to 80 meters Moscow, the Group built the Berezhkovski Bridge the city in November 1943. Advancing Soviet troops construction of Europe’s largest arched reinforced and a span length of 272 meters. Also noteworthy was and erected two road bridges and a railway bridge to needed equipment and ammunition to be brought up concrete combined bridge over the New and Old the erection of a bridge over the Moscow Canal near replace the former Andreyevski Bridge, the arched span VALUATION OF THE In the pre-war years, Mostotrest completed approxi- from the rear, but all the bridges across the Dnieper Dnieper in Zaporozhye. the village of Khlebnikovo, which had 150-meter main of which was moved farther along the Moscow River mately 200 large bridges with a total length of more had been destroyed. To solve this, the bridge builders spans, the longest spans in the USSR at the time. and became part of a new pedestrian bridge. 1.8 billion COMPANY BY INVESTORS than 35 km. of Mostorest were set the monumental task of constructing a temporary railway bridge in under In 1954, GlavMostStroy and its constituents, including 20 days. The deadline was beaten by exactly a week: Mostotrest, were transferred to the newly created In November 2010, Mostotrest completed an initial USSR Ministry of Transport Construction. CABLE-STAYED BRIDGES The geography of construction projects was striking: the first train passed over the bridge just 13 days after public offering (IPO). The offering price was $6.25 construction had begun. 1980 ARE COMMISSIONED several bridges across the Dnieper River in Ukraine, 3 per share. The IPO proceeds totaled approximately 1958 saw the commissioning of a two-tier metro bridge a bridge across the Ishim in Petropavlovsk (Kazakh- $405 million, valuing the Company at $1.8 billion. across the Moscow River in Luzhniki, the first ever stan), a bridge across the Kura in Gori (Georgia), bridge built from prefabricated pre-stressed concrete In 1980, the Group was awarded the Order of the At the end of the 2000s, Mostotrest commissioned a bridge across the Angara in Irkutsk, a railway bridge MOSTOTREST structures. Red Banner of Labor. three beautiful cable-stayed bridges: the Zhyvopisny across the Yenisei in Krasnoyarsk, bridges across the in Moscow, the Big Obukhovski across the Neva River Zey River in the Amur region, a bridge across the >700 EMPLOYEES AWARDED In 2012, to diversify into related business segments in St. Petersburg, and the Oka River Bridge near Selenga in Buryatia, across the Akhtuba in Astrakhan, of road operation and road concessions, Mostotrest Murom. across the Neva in Leningrad and across the Don near acquired controlling stakes in Mostotrest-Service and UTS, as well as a 50% stake in the NWCC. the Liski railway station. More than 700 Mostotrest employees awarded 1958-1961 In February 2014, the Sochi Winter Olympic Games In the 1930s, the Group began in-house production Construction in the rear did not halt even during was the period that witnessed the construction were held. The transport infrastructure in and around of specialised bridge-building equipment and steel the war. In 1942 and 1943, respectively, Mostotrest of a bridge across the Moscow River near the ZIL Au- the city had been radically revamped in the run-up structures. In 1933, Mostotrest opened a repair yard completed bridges across the Klyazma in Vladimir and tomobile Plant. The pioneering technology employed to the Games, and Mostotrest played an active part in Tula, to repair and overhaul mechanical equipment, across the Ural in Orsk. in the construction was a world first and consisted of in helping to create a new image for the capital city diesel generators and locomotives (now TF MekhStroy- cantilevering large blocks of prefabricated pre-stressed of the Games. Most, a member of the Mostotrest Group). reinforced concrete superstructures of console-frame and continuous systems. This mounting method was later named “the Russian Method”. In December 2014, two sections of the new M-11 “Moscow – St. Petersburg” Highway built by Mosto- trest (the head Moscow Ring Road-Solnechnogorsk segment and the Vyshniy Volochek Bypass in the Tver region) were opened to traffic.

2010-2014 1930-1941 1941-1945 1945-1992 1945-1992 1992-2010 EVOLUTION INTO MOSTOTREST INCORPORATION AND MOSTOTREST A PERIOD OF GREAT A PERIOD OF GREAT TRANSFORMATION RUSSIA’S BIGGEST INITIAL DEVELOPMENT DURING WWII ACCOMPLISHMENTS ACCOMPLISHMENTS INTO A JOINT-STOCK COMPANY CONSTRUCTION COMPANY

16 17 2014 ANNUAL REPORT ABOUT COMPANY ENGINEERING SPACE

Mostotrest is building priority transport KEY ONGOING PROJECTS infrastructure in those Russian regions TOP PROJECTS that have traditionally been the key added to backlog in 2014: beneficiaries of investment in the sector. 1 RUB27.1 BILLION ROAD Moscow 4th Ring Road Section SECTION Supplemental agreements to framework government 1 contract for Skolkovo

Section of M-11 “Moscow –St. Petersburg” HIGHWAY Highway between Businovskaya Interchange 2 SECTION and Festivalnaya Street in Moscow 2015-2017 COMPLETION DATES St. Petersburg HIGHWAY M-9 “Baltic” Highway Sections 3 SECTIONS 1 HIGHWAY M-11 “Narva“Highway Sections 4 SECTION RUB27.0 BILLION HIGHWAY M-11 “Moscow-St. Petersburg“ Highway Construction, maintenance, repair, overhaul and toll-based Dmitrov Segments: km 15 – km 58, km 208 – km 258, operation of the 4th section (km 208 - km 258) of the M-11 Yaroslavl SECTION km 334 – km 543 5 “Moscow - St. Petersburg” Moscow Serpukhov RIVER Kolomna Volga river bridge on М-10 «Russia» highway Tula 6 BRIDGE Ryazan 2017 COMPLETION DATES Nizhny Novgorod Kirov AIRPORT Sheremetyevo Airport Cheboksary 7 INFRASTRUCTURE Voronezh Kazan 1 HIGHWAY M-8 “Kholmogory“ Highway Section 8 SECTION BILLION Rostov-on-Don RUB13.8 Yekaterinburg Samara Ufa RIVER Volga River bridge in Nizhny Novgorod Construction of the airfield infrastructure at the Southern 9 BRIDGE Airport Complex Sochi Chelyabinsk HIGHWAY M-5 “Ural“ Highway Section 10 SECTION 2017 COMPLETION DATES

TRANSPORT Businovskaya, Molodogvardeiskaya and 11 INTERCHANGES Mozhayskaya Traffic Interchanges 1 Transport facilities providing development ROAD for the Russian capital’s transport infrastruc- 12 SECTION ture, in particular, transport links with the RUB6.7 BILLION Skolkovo Innovation Center Reconstruction of the Volga river bridge on М-10 «Russia» AIRPORT Airfield infrastructure at the Southern highway 13 INFRASTRUCTURE Airport Complex in the Rostov region

RIVER Don River bridge in Rostov-on-Don 2019 COMPLETION DATES 14 BRIDGE

Company divisions including factories in Moscow and Tula HIGHWAY M-4 “Don“ Highway Section (Novaya Usman 15 SECTION and Rogachyovka bypass) 1 Contract value, net of VAT. 18 19 ANNUAL REPORT ABOUT COMPANY ENGINEERING SPACE

The only broadly diversified industry player BUSINESS MODEL with a presence in all core and related business segments, and with experience in managing integrated, technically complex projects.

MAINTENANCE PREPARATION 3 AND OPERATION 1 2 CONSTRUCTION

PROJECT RISK OPTIMIZATION COMPOSITION OF PROJECT ASSESSMENT OF ENGINEERED SOLUTIONS EXECUTION TEAM: FACILITIES MAINTENANCE MAINTAINING TRAFFIC FLOW • Selection of subcontractors • Selection of suppliers • Project management team PLANNING DEVELOPMENT OF OPTIMAL AND ANALYSIS EXECUTION SCHEDULE SCHEDULED REPAIR AND OVERHAULS OF FACILITIES

PRE-PROJECT EXECUTION: INSTALLATION OF TRAFFIC CONTROL OPTIMIZATION INFRASTRUCTURE, ITS REPAIR AND • In-house • Subcontracted MAINTENANCE – Non-core auxiliary work (power and lighting installations, relocation of utility and communication lines) – Non-core construction and assembly work COMMISSIONING TOLL COLLECTION IN FAVOR 1 DEVELOPMENT OF DOCUMENTATION – Core work in remote regions which have no deployed OF GOVERNMENT CUSTOMER in-house capacity FOR COMPETITIVE BIDDING • Use of materials manufactured by own production capacities

1 Related to toll segments.

20 21 ANNUAL REPORT ABOUT COMPANY

STRATEGY

Today, Mostotrest is the largest most diversified player in the trans- contracting expertise are the foundations of the Group’s strong port infrastructure construction sector, with its own production competitive position. Mostotrest’s reputation as a reliable contractor capacities. Over recent years, the Company has succeeded in devel- with an 85 year track record of delivering projects to the required oping a large-scale integrated business platform enabling Mostotrest quality and on time, as well as its partnerships with leading foreign to participate in projects of any complexity across all core and players create distinctive competitive advantages when bidding for related transport infrastructure construction segments. Decades of transport infrastructure construction and public-private partnership experience and a qualified management team support Mostotrest’s projects. ability to consistently improve its business model and achieve its strategic goals. Mostotrest’s strategy has and will always aim to capitalize on the existing business platform and competitive advantages to strength- A wide range of competencies and an impressive backlog of high- en footprint across all flourishing market segments, as well as those priority government projects, a strong engineering component, an expected to vigorously develop going forward. effective combination of own production capacity and the general

STRATEGY IN ACTION

1. BUSINESS EXPANSION AND MARKET SHARE GROWTH

OVERVIEW 2014 ACHIEVEMENTS:

The Group delivers total revenue growth by ensuring a balanced split • As in previous years, the Company made a significant investment between in-house and subcontracted volumes. While development in its fleet of machinery, equipment and vehicles (RUB6.1 billion); of own production capacity is a priority, with in-house construction volumes used in market share calculations, Mostotrest also has • Investment in improving production planning, upgrading the skills unique experience in project management and its relationships with and qualifications of both production and administrative staff, qualified subcontractors. The principles of subcontracting specialized and optimising production processes, led to a 14% increase in types of work and taking advantage of the geographical presence of productivity and a faster rate of construction; third parties enable the Group to optimize the cost of projects and unlock additional opportunities in regions where its own footprint • Revenue increased by 29%, driven by: is limited. – 31% increase in in-house volumes; – 27% increase in subcontracted volumes;

• Amid weaker market dynamics, Mostotrest’s market share rose to 13.4% compared to 9.9% in the previous year;

• Even in a challenging 2014 economy, Mostotrest expanded its backlog with new quality projects. Additionally, a number of long- term investment contracts reached operational phase.

2014 REVENUE AS TO COMPARE WITH 2013 2014 MARKET SHARE RUB150.5 BILLION +29% +3.5 pp

22 ENGINEERING SPACE

2. MERGERS & ACQUISITIONS

OVERVIEW 2014 ACHIEVEMENTS:

In addition to organic growth and cooperation with leading players In November 2014, Mostotrest acquired a further 15.7% interest in in specific business segments, Mostotrest may in future consider ac- its subsidiary UTS, effectively increasing its control to 100%. Since quiring stakes and participation interests in other companies, subject the start of UTS operations in 2012, EBITDA has increased 5x. to efficiency criteria. In line with the Company’s strategy and risk In addition, there is a strong upside potential in the toll road opera- management policy, any potential M&A transaction shall be assessed tion segment, as is evident from the practice in Russia of implement- in terms of its economic benefit as compared with organic developing long-term investment contracts, which account for approximately ment, its strategic impact on the Group’s current operations, the 50% of the backlog of the Group at the end of 2014. The Company possibility for operational control, as well as in terms of the required is also considering a UTS-based joint venture with its concession return on investment. project partner Vinci.

ACQUIRED IN 2014, SHARE IN UTS SINCE 2012 UTS’S EBITDA GROWTH +15.7% +5x

3. DEVELOPMENT IN CORE AND RELATED BUSINESS SEGMENTS

OVERVIEW 2014 ACHIEVEMENTS:

Mostotrest has a diversified business model and a strong presence in Construction: both core and related market segments. In particular, the Group has • Strong growth across all financial indicators, including revenue vast experience in the construction of all types of transport infra- (+31%), EBITDA (+76%) and net profit (3.6x); structure (bridges and other engineered structures, roads, railways, airports and waterworks), and is able to respond flexibly to market • Backlog diversification with new airport infrastructure development demand by channelling investment into those segments that are contracts; priorities for the country in any given period. The Company is also • Delivery of several major projects ahead of contract deadlines, a leader in the road repair, maintenance and operation (including improved productivity and profitability. toll-based) segment, and is the concessionaire for the km 15 – km 58 toll segment of M-11 “Moscow – St. Petersburg” Highway. Mosto- Services: trest expects the bulk of its revenue will be generated in the bridge • Growth across all financial indicators, including EBITDA (+38%) and road construction segment, in view of the preferential financing and net profit (+15%); of this segment at present. At the same time, long-term investment 1 contracts for both construction and follow-on operation have been • Significant backlog expansion by a total of RUB39.9 billion , gaining ground in Russia recently, and Mostotrest has been a pioneer as a number of long-term investment contracts reached opera- in the segment. In the current environment, the Company intends tional phase; to steadily expand its road services business, the key advantages of • 3,600 km of roads in the services portfolio. which are stable cash flow and strong margins. Road Concession: • Km 15 – km 58 segment of M-11 “Moscow – St. Petersburg” Highway commissioned. Piloting toll-free operation until mid-2015.

AS TO COMPARE WITH 2013 AS TO COMPARE WITH 2013 LONG-TERM INVESTMENT CONTRACTS CONSTRUCTION REVENUE GROWTH SERVICES REVENUE GROWTH ADDED TO THE SERVICES BACKLOG +2.6x +15% + RUB39.9 BILLION

1 Contract value, net of VAT.

23 ANNUAL REPORT 2014 RESULTS ENGINEERING SPACE

2 2014 Results

26 Market Overview 34O perating Results 39F inancial Results

ADLER RING TRAFFIC INTERCHANGE IN SOCHI

ENGINEERING SPACE OPENING UP

Mostotrest is the expert in the construction of complex traffic interchanges and is currently building Russia’s first five-level interchange (Businovskaya).

24 25 ANNUAL REPORT 2014 RESULTS

MARKET OVERVIEW

In 2014 transport infrastructure construction’s share of the total construction market was 10%.

Government Customers and Budget Managers: Key Government Programs in Road and Bridge Construction Segment: • Ministry of Transport of the Russian Federation; • Russian Federal Program “Transport System Development”: • Federal Agency for Railway Transport; – Road Infrastructure Sub-Program; • Rosavtodor; – Federal Target Program “Development of Transport System • Federal Agency for Sea and River Transport; of Russia (2010-2020)”, Highways Sub-Program; • Federal Air Transport Agency; • Government Program “Socio-Economic Development of the Far • Federal Transport Supervision Service. East and the Baikal Region”: – Federal Target Program “Socio-Economic Development of the Far East and the Baikal Region for the Period Until 2018”; – Federal Target Program “Socio-Economic Development of the Kuril Islands (Sakhalin Region), 2007-2015”.

KEY OBJECTIVES AND PRIORITIES FOR 2014

OBJECTIVE 1. Acceleration of Movement of Goods and Reduction of Transport Costs in the National Economy

• Develop a network of federal highways; TRANSPORT INFRASTRUCTURE • Develop railway lines; MARKET VOLUME, RUB BILLION • Maintain and support operation of federal highways; (NET OF VAT) • Improve quality of inland waterways.

OBJECTIVE 2. Increase Availability of Transport Services 2014 623.8 to Population 2013 648.8 • Develop regional aviation; • Develop airport network; 2012 654.7 • Create single road network available to population year-round. 2011 660.1

Source: PMR and EMBS Group Reports

26 ENGINEERING SPACE

OBJECTIVE 3. Improve Competitiveness of Russian Transport System in Global Transport Services Market TRANSPORT SERVICES EXPORT • Enable highway development under PPP schemes; DYNAMICS, % VS. 2011 • Increase throughput capacity of Russian seaports; • Improve competitiveness of international transport corridors and enable comprehensive development of major transportation hubs. 2014 123.0

2013 121.7

2012 110.7

2011 100.0 SHARE OF TRANSPORT Source: Mintrans INFRASTRUCTURE CONSTRUCTION IN TOTAL CONSTRUCTION, % TRAVEL BEHAVIOR DYNAMICS, % VS. 2011 10% 2014 2014 108.7 11% 2013 2013 108.2

11% 2012 2012 105.8

13% 2011 2011 100.0

Source: Rosstat Source: Mintrans

IMPLEMENTATION, BY SEGMENT

Roads and Bridges

In 2014, 716.9 km of federal roads, including 135.2 km of highways In the St. Petersburg Transport Hub the Ust-Luga Commercial Sea- were commissioned after construction and reconstruction, around port Access Road and a traffic interchange on the St. Petersburg Ring a 20% increase year-on-year. Road (access to Bronka Seaport, currently under construction) were commissioned. For the first time ever, over half the length of the federal road network met the appropriate regulatory requirements (53% in 2014 against Segments of “Lena”, “Kolyma”, “Ussuri”, “Amur” and “Vilyui” federal 47% in 2013). roads, with a total length of 208.8 km, including 1,622.8 running meters of bridges, were commissioned in the Far Eastern Federal District. Projects Commissioned in 2014 2014 also saw a number of projects completed, including for the Among federal highways commissioned in 2014 were large-scale construction and reconstruction of 18 irreparable bridges. and complex projects such as Sochi Olympic Games infrastructure, several segments of federal roads in the Moscow Transport Hub, 135.2 km of roads were built and renovated in 2014. These include including Stage 2 construction of the Dmitrov Bypass on Moscow’s segments M-1 “Belarus” Highway from Moscow to the border with Greater Ring Road, a segment of M-5 “Urals” Highway between Mos- the Republic of Belarus (Minsk and Brest-bound), M-4 “Don” High- cow’s Smaller Ring Road and Ulyanino, as well as upgraded segments way, M-11 “Moscow – St. Petersburg” Highway and the Businovskaya of M-9 “Baltic” Highway. Traffic Interchange.

27 ANNUAL REPORT 2014 RESULTS

Avtodor commissioned 115.1 km of roads under PPP schemes, The reduction is due both to traditional industry problems, including including: issues like lengthy legal procedures related to land allocation and construction site preparation, poor quality of design documentation, • Km 15 – km 58 concession-based segment of M-11 “Moscow – duration of approval procedures and the state assessment process, St. Petersburg” Highway in the Moscow region: 43.11 km (funded as well as due to the failure by financially troubled contractors to from the Investment Fund); meet their obligations in 2014. • Km 258 – km 334 segment (Vyshniy Volochek Bypass, Segment 5) of M-11 “Moscow – St. Petersburg” Highway in the Tver region, Equally, no large-scale government sponsored projects such as the Stage 1 construction: 71.98 km (long-term investment agreement). Sochi development projects that accounted for a significant share of 2013 volumes were implemented in 2014. Avtodor revenue from toll collection totaled RUB2.4 billion, up from RUB1.6 billion a year earlier.

In absolute terms, total funding for road and bridge construction, the core transport infrastructure development segment, was RUB277.4 billion, a 14% decrease from the previous year. Total expenditure to finance the segment decreased by only 2% due to a substantial increase in spending on road repairs and maintenance (+22%).

COMMISSIONED PUBLIC-PRIVATE PARTNERSHIP TRANSPORT INFRASTRUCTURE ROADS, KM MARKET STRUCTURE, RUB BILLION (NET OF VAT)

Railways 2014 115.1 Sea and River Ports

Airports 2013 18.5 Roads and Bridges

Source: Mintrans 648.8 61.9 88.6 623.8 36.1 SHARE OF PUBLIC FEDERAL ROADS MEETING REGULATORY TECHNICAL AND OPERATING 47.0 57.0 REQUIREMENTS, % 34.6 1 1 468.7 478.6 53% 2014 47% 2013 43% 2012 2013 39% 2011 2014

Source: Mintrans Source: PMR and EMBS Group reports

1 Including expenditure on repair and maintenance of federal highways.

28 ENGINEERING SPACE

Repair and Maintenance Transition to fully funded repair and maintenance of federal high- AVERAGE TENDER SIZE DYNAMICS, ways based on approved cost standards allowed to fully implement road repair and maintenance projects. RUB BILLION (INCLUDING VAT) A total of 10,000 km of federal highway sections (+12% YoY) was commissioned after overhaul in 2014, including:

• Rosavtodor-controlled: 9,500 km; 2014 5.8 • Avtodor-controlled: 500 km. 2013 4.0 In 2014, Rosavtodor repaired 484 bridges and other engineered structures with a total length of 32,600 running meters, a 5% in- 2012 3.5 crease year-on-year. Avtodor repaired 21 bridges with a total length of 3,200 running meters. 2011 3.2

Source: Company estimates based on the information available on the website http://zakupki.gov.ru

EXPENDITURE ON REPAIR AND MAINTENANCE TENDERING STRUCTURE BY CUSTOMER, OF FEDERAL HIGHWAYS, RUB BILLION (INCLUDING VAT) RUB BILLION (NET OF VAT) 88.3 Moscow

Rosavtodor 544.2 Avtodor 208.1 2014 191.3 468.6 54.1 2013 156.6

2012 117.0

2011 84.4 196.8 247.8 Source: Mintrans, Rosavtodor, PMR and EMBS Group reports

Tenders 217.6

In 2014 94 tenders were held (2013: 117) totaling RUB544.2 billion2, a 16% increase year-on-year. Approximately 50%3 of total tenders in absolute terms was held by Avtodor, including ones for the construction of Moscow’s Central Ring Road Start-up Facilities 1 and 5 2013 2014 at a total value of RUB94.6 billion, and Segments 7 and 8 of М-11 “Moscow – St. Petersburg” Highway at a total value of RUB87.4 Source: Company estimates based on the information available on the web- billion. site http://zakupki.gov.ru

2 Including VAT. Customers: Avtodor, Rosavtodor, Moscow City Construction Department. The official Russian Federation public procurement information website http://zakupki.gov.ru. 3 Company estimates based on the information available on the official Russian Federation public procurement information website http://zakupki.gov.ru.

29 ANNUAL REPORT 2014 RESULTS

Railways

In 2014, the railway network accounted for 45% of total national Commissioning of the Tommot – Yakutsk (Nizhni Bestyakh) Start-up freight turnover (87% excluding pipeline transport). Facility on the Berkakit – Tommot – Yakutsk Railway in the Sakha Republic (Yakutia), the largest project in the segment, was originally A total of 100.7 km of additional main lines and new railway lines scheduled for 2014. However, as a result of having to review project was commissioned during the year, including: design, the budget and other documentation, and due to the contractor’s slow pace of construction thanks to harsh climatic con- • 82 km of additional main lines and new railway lines under the ditions in Yakutia in autumn and winter, commissioning has been Russian Federal Program “Transport System Development”; postponed to 2015. • 18.7 km of additional main lines under the Russian Federal Taking this into account and including other factors such as the Program “Socio-Economic Development of the Far East and the reduction in funding triggered by the economic crisis, as well as Baikal Region”. the completion of large-scale construction in Sochi, investment Key Investment Areas in the Segment: in construction of railways in 2014 was 10% (2013: 14%) of total financing of transport infrastructure development. In absolute terms, • Construction of the Tommot – Yakutsk (Nizhni Bestyakh) Start-up investment in the segment totaled RUB61.9 billion, a 30% decrease Facility for the Berkakit – Tommot – Yakutsk Railway in the Sakha year-on-year. Republic (Yakutia); • Full reconstruction of the Mga – Gatchina – Weimarn – Ivan- Airports gorod segment and railway approaches to ports on the southern shore of the Gulf of Finland; In contrast to other modes of transport, 2014 saw a significant in- • Full reconstruction of the Gorky – Kotelnikovo – Tikhoretskaya – crease in air passenger traffic (+7% YoY). Over the past year, Russian Krymskaya segment with Krasnodar Railway Hub Bypass; air carriers transported a record 93.2 million passengers (2013: 84.6 million), and for the first time in many years, growth was essentially • Rolling stock renewal. driven by domestic aviation (18%).

Importantly, in contrast to previous periods, considerable attention The increase in air passenger numbers was made possible thanks in 2014 was focused on rolling stock renewal, with a 14x increase to government support for route network development, ensuring in investment in new freight railcars. Partly due to the correspond- affordability of air transport services to the population, including ing budget reallocations, Russian Railways was less focused on the through subsidized domestic routes, as well as consistent implemen- railway construction segment in the reporting period. tation of airport and airfield construction and upgrade projects.

PUBLIC RAILWAY TRANSPORT FREIGHT AIR PASSENGER TRAFFIC, TURNOVER, BILLION TON-KM MILLION PASS

2014 2,298.3 2014 93.2

2013 2,196.2 2013 84.6

2012 2,222.4 2012 74.0

2011 2,127.8 2011 64.1

Source: Mintrans Source: Mintrans

30 ENGINEERING SPACE

Projects Commissioned in 2014: Following several years of significant growth in investments allocated for seaport and inland waterway infrastructure development • New airport on Iturup Island in the Kurils; (more than 40% in 2012 and 16% in 2013), financing for the seg- • 5 runways at Lipetsk, Vladikavkaz, Makhachkala, ment decreased in 2014 by 23% to RUB36.1 billion. The segment Nikolaevsk-on-Amur and Palan airports. received 6% (2013: 7%) of total investment in the industry.

Reconstruction (construction) of airfield infrastructure at Arkhan- gelsk, Sheremetyevo, Domodedovo, Krasnodar, Yakutsk, Voronezh, Murmansk and Magadan airports is underway.

Design and engineering process for the new Southern Airport in Rostov-on-Don has been completed. RUSSIAN SEAPORT CARGO TRANSSHIPMENT

The airport construction and reconstruction segment received 9% DYNAMICS, MILLION TONS of total financing for the industry in 2014 (2013: 5%). In absolute terms, investment in the segment was RUB57 billion, a 65% increase year-on-year. Airport development is a priority for the state, including in the run-up to large sporting events such as the FIFA World 2014 623.6 Cup 2018. 2013 589.8

Seaports and Inland Waterway Infrastructure 2012 567.1

For the first time since 2011, 2014 saw an improvement in both 2011 535.4 qualitative and quantitative characteristics of Russia’s waterways. The share of navigable infrastructure with suboptimal safety Source: Mintrans decreased from 20% to 18%. The share of hydro infrastructure in dangerous operating condition fell to almost 1% (from 2% in 2013).

At the end of the reporting year, the government decided to move, by 2018, toward financing of maintenance of inland waterways and hydro infrastructure based on approved cost standards.

In 2014, projects were being implemented mainly in the ports of FOR THE FIRST TIME SINCE 2011, Ust-Luga, Vysotsk, Novorossiysk, Murmansk, Kaliningrad, Taman and Temryuk. 2014 SAW AN IMPROVEMENT IN BOTH The low level of investment in seaport development was due a num- QUALITATIVE AND QUANTITATIVE ber of reasons: foreign equipment manufacturing time, termination of contracts with financially troubled contractors, reallocation of financing, lack of documents transferring title to land, and technical CHARACTERISTICS OF RUSSIA’S WATERWAYS re-assessment by the state.

2015 OUTLOOK

Amid economic uncertainty in 2015, the government made be reduced by 18% and 38% (without funding allocated for Kerch a decision to further optimize federal budget spending on govern- Bridge construction), respectively. At the same time, it was decided ment programs. Priority Action Plan To Ensure Sustainable Economic to concentrate on the maintenance of the current road network, so Development and Social Stability in 2015, approved by Russian full funding will be provided for repair and maintenance of existing Government Decree 98-r of 27 January 2015, sets out the task transport infrastructure. to review priorities of government programs and reallocate financing to the highest priorities and additional anti-crisis measures. In addition, due to limited financial resources, priorities have been reviewed under federal target programs and the Federal Target Investment Program. As a result, federal funding for the transport infrastructure construction industry has been reduced by 16%. Government funding for road development through Avtodor and Rosavtodor will

31 ANNUAL REPORT 2014 RESULTS

RUSSIAN MINISTRY OF TRANSPORT 2015 KEY PRIORITIES AND OBJECTIVES

OBJECTIVE 1. Improve quality and accessibility of transport services OBJECTIVE 3. Implement a set of projects aimed at addressing to population infrastructural constraints to economic growth and socio- • Ensure adequate passenger transportation on socially significant economic development of constituents of the Russian Federation routes; • Provide government support to domestic air transport and com- • Develop federal highway network; muter rail; • Enable highway development under PPP schemes; • Develop regional aviation and airport network; • Develop railway network; • Renew vehicle fleet. • Increase throughput capacity of Russian seaports; • Improve competitiveness of international transport corridors and OBJECTIVE 2. Ensure uninterrupted and safe operation support comprehensive development of major transportation hubs. of transport infrastructure • Maintain and support operation of federal highway network; • Improve quality of inland waterways; • Ensure transport safety .

SELECTED TARGETS 2014 2015 %

Roads

Share of public federal roads meeting regulatory technical and operating requirements, % 53 62 17%

Commissioning of federal highways, km 716.9 409.0 – 43%

Including under PPP schemes, km 115.1 0 – 100%

Railways Commissioning of additional main and new railway lines, km 100.7 166.8 66%

Seaports Seaport cargo transshipment, million tons 623.6 635.0 2%

Airports Commissioning of runways 5 3 – 40%

32 ENGINEERING SPACE

2015 PRIORITY TRANSPORT INFRASTRUCTURE ROAD PROJECT TENDERS

DEVELOPMENT PROJECTS: Road construction and reconstruction tenders planned for 2015 are expected to total RUB153.5 billion1 for Avtodor (2014: RUB247.8 • Development of transport infrastructure in preparation for the billion2), RUB68.0 billion3 for the City of Moscow (2014: RUB88.3 World Cup 2018. Construction from scratch of the modern billion2), and RUB128.9 billion4 for Rosavtodor (2014: RUB208.1 Southern Airport in Rostov-on-Don and radical reconstruction billion2). Tenders for public federal road and bridge maintenance of Nizhny Novgorod, Kaliningrad, Saratov, Volgograd and Ufa and repair projects are expected to total RUB219.8 billion4 (2014: airports are underway. Continued development of the Moscow RUB208.9 billion4). Therefore, the total volume of tenders planned Aviation Hub, including construction of a new runway at Domo- for 2015 is 36% below the 2014 level. dedovo and Runway 3 at Sheremetyevo; 2015 Key Expected Tenders: • Construction of the Kerch Bridge and development of transport infrastructure in the Crimean Federal District; Contract Value, • Development of railway lines (modernization of the Baikal-Amur PROJECT RUB billion5 and Trans-Siberian railway infrastructure, development of the Mos- cow Transport Hub, construction of the Prokhorovka – Zhuravka railway line bypassing Ukraine, design and engineering Construction of km 58 – km 149 segment of М-11 “Moscow – St. Petersburg” Highway 69.8 of the Moscow-Kazan high-speed rail); • Development of roads, including highways under PPP schemes (Central Ring Road, M-11 “Moscow – St. Petersburg”); Construction of km 1,091 – km 1,319 segment of M-4 “Don” Highway (Section 4) 54.9 • Development of major seaports (Vostochny-Nakhodka, Murmansk, Taman, Bronka, Olya). Reconstruction of km 20 – km 49 segment of А-101 Moscow – Maloyaroslavets – Roslavl 18.0 road in Moscow region (Kaluzhskoye Avenue) OUTLOOK FOR CONSTRUCTION COMPANIES Construction of Kievskoye Avenue – Kaluzhskoye A key problem for the Russian transport infrastructure construction Avenue segment of Solntsevo – Butovo – 10.0 Vidnoye road market is the inefficiency of the government contracts system, which has become particularly relevant against the backdrop of an extremely unfavorable economic situation in the country, which has led to rising construction costs driven by rising prices for construction materials and equipment, as well as the limited availability of bank financing and its associated high costs. The existing system of public contracts does not envision compensation for increased cost of construction, as government contracts are fixed-price, potentially resulting in a significant reduction in profitability of contractors. As a consequence, 2015 may see a continuation of the wave of insolvencies among construction companies, which began in 2014. This is likely to result in weaker market dynamics, time delays for the customer, due to the need to find new contractors to complete “abandoned” construction sites, a further fall in trust among lending institutions toward the sector and increased provisioning for doubtful receivables among the major players.

In this situation, government support could become the most effective way to overcome the crisis in the industry.

1 Including VAT. Consolidated procurement plan of goods (works and services) for Avtodor for 2015, dated 6 April 2015. 2 Including VAT. Company estimates on the basis of information available on the official Russian Federation public procurement information website http://zakupki.gov.ru. 3 Including VAT. Moscow City Target Investment Program for 2014-2017 dated 13 March 2015. 4 Including VAT. Rosavtodor Report on 2014 Results and Key Areas of Operation for 2015-2017, dated 13 May 2015. 5 Estimated contract value, including VAT. Moscow City Target Investment Program for 2014-2017, dated 13 March 2015 (for 2015), Avtodor 2015 Procurement Plan dated 6 April 2015.

33 ANNUAL REPORT 2014 RESULTS

OPERATING RESULTS

In 2014 Mostotrest early completed a number of large construction projects, started operation of several roads’ segments under long-term investment contracts, invested in new equipment and technology.

KEY COMMISSIONED PROJECTS BACKLOG DYNAMICS

In 2014, Mostotrest delivered a total of 25 projects, mostly in the 2014 Backlog Drivers: bridge construction segment. The total length of built, rebuilt and repaired roads and bridges for these projects in the reporting period • Significant increase in recognized revenue: +29%; was approximately 30 km. • Selective approach to participation in new projects; In 2014, Mostotrest-Service repaired a total of 172.6 km of roads and • Delayed tenders for new large projects the Company intended 2,600 running meters of bridges and other engineered structures. At to bid for. the end of the reporting period, the total length of roads and bridges in Mostotrest repair, maintenance and operation portfolio, including The total volume of tenders for infrastructure projects held by gov- long-term investment contracts, was 3,600 km. 163,800 running ernment customers in 2014 was RUB544.2 billion3. These included meters were bridges and other engineered structures. the construction of Segments 7 and 8 of M-11 “Moscow – St. Peters- burg” Highway and Moscow’s Central Ring Road (Start-up Facilities 1 and 5), where Mostotrest chose not to participate and which had a total value of RUB182.0 billion, which were of no interest to Mostotrest.

2014 KEY COMMISSIONED1 Therefore, Mostotrest’s construction backlog expanded with new Contract Value 2 PROJECTS, RUB billion projects totaling RUB99.8 billion, including supplemental agreements to the framework contract for renovation and construction of Skolkovo infrastructure for a total amount of RUB27.1 billion. Stage 2 and 3 construction of Kurortny Avenue Relief Road in Sochi 50.6 Alongside this, the Group’s road services backlog increased by RUB46.4 billion, including RUB39.9 billion due to several long-term Construction of M-11 “Moscow – St. Peters- investment contracts reached operational phase. burg” Highway segment (Vyshniy Volochek Bypass) 42.1 Total backlog of the Group at the end of the reporting period Stage 1, 2 and 3 reconstruction of km 16 – amounted to RUB352.0 billion, a 1% decrease year-on-year. km 40 segment of M-11 “Narva” Highway in the Leningrad region (approach road 7.9 to the Ust-Luga Commercial Seaport)

Reconstruction, maintenance and repair of the Don river overpass at km 1,061 (left 2.5 side) of M-4 “Don” Highway

1 Commissioned projects are projects delivered to and accepted by customers against the relevant signed documentation. Actual completion dates in accordance with this definition may differ from completion dates as recorded for revenue recognition purposes under IFRS. 2 Net of VAT. 3 IIncluding VAT. Customers: Avtodor, Rosavtodor, Moscow City Construction Department. The official Russian Federation public procurement information website http://zakupki.gov.ru.

34 ENGINEERING SPACE

2014 KEY NEW PROJECT ADDITIONS, RUB billion Contract Value 4

Construction

Construction, maintenance, repair, overhaul and toll-based operation of M-11 “Moscow – St. Petersburg” Highway Segment 4 (km 208 – km 258) 27.0

Southern Airport airfield infrastructure development in Rostov region 13.8

Construction of Aminyevskoye Avenue segment to interchange at General Dorokhov Street (driveway, utilities and engineered structures) (Skolkovo infrastructure) 8.3

Reconstruction of Ryabinovaya Street (Skolkovo infrastructure) 6.9

Reconstruction of Volga river overpass in Tver region at km 176 of M-10 “Russia” Highway 6.7

Services

Maintenance, repair and toll-based operation of km 225 – km 633 segment of M-4 “Don” Highway 29.4

Maintenance, repair, overhaul and toll-based operation of km 258 – km 334 segment (Vyshniy Volochek Bypass) of M-11 “Moscow – St. Petersburg” Highway 10.5

BACKLOG STRUCTURE With a 78%5 share, bridge and road construction projects remain BACKLOG STRUCTURE BY KEY OPERATION the predominant feature contributor to the Group’s backlog. Mean- while, the share of the airfield and airport construction segment 6 in the backlog also expanded from 1% in 2013 to 5% in the repor- ACTIVITIES , % ting period, with the addition of several new airport infrastructure Construction of roads and bridges development projects. Services Construction of airports and airfields

Central and Northwestern Russia are the core regions of Mos- Construction of other facilities totrest’s operations, with an 87% share in the backlog at the end of 2014. At the same time, the share of Central Russia increased 5 1 in the reporting period, mainly driven by construction of Segment 4 (km 208 – km 258) of M-11 “Moscow – St. Petersburg” Highway. 16

Government customers still largely dominate the Group’s overall backlog, with federal agencies, state corporations, regional and municipal administrations accounting for 95% of all contracts. And, the share of federal agencies increased by 5 pp, driven mainly by new airfield infrastructure development projects and the contract for reconstruction of the Volga overpass at km 176 of M-10 “Russia” Highway, added in the reporting period. 78

Source: Company data

4 Net of VAT. 5 Share of road and bridge construction projects is calculated as the value of road and bridge construction projects (except road maintenance, repair and operation projects) divided by total backlog of the Group. 6 Net of intercompany transactions.

35 ANNUAL REPORT 2014 RESULTS

TOP PROJECTS IN THE BACKLOG OF THE GROUP, Contract Value1, Scheduled Backlog Estimate1, Company % Of Completion AS AT 2014 YEAR-END RUB billion Completion RUB billion Role

Construction of Section 6 (km 334 – km 543) General of M-11 “Moscow – St. Petersburg” Highway 122.7 2018 18% 101.2 Contractor

Construction of Section 4 (km 208 – km 258) General of M-11 “Moscow – St. Petersburg” Highway 27.0 2017 1% 26.8 Contractor

Maintenance, repair and toll-based operation 2 General of M-4 “Don” section (km 225 – km 633) 29.4 2021 12% 25.7 Contractor

Construction of the 4th Ring Road section between General Entuziastov Avenue and Izmailovskoye Avenue 56.0 2015 67% 18.2 in Moscow Contractor Airfield infrastructure at the Southern Airport General Complex in the Rostov region 13.8 2017 1% 13.7 Contractor Maintenance, repair and toll-based operation 2 General of Vyshniy Volochek Bypass on M-11 “Moscow – 10.5 2033 0% 10.5 Contractor St. Petersburg” Highway (km 258 - km 334) Construction of km 517 – km 544 section of M-4 General ”Don” Highway (Novaya Usman and Rogachyovka 14.7 2016 30% 10.3 bypasses) Contractor

Construction of a section between Aminyevskoye General Avenue and Generala Dorokhova St. (road, bridges, 8.3 2018 3% 8.1 utilities ) (Skolkovo infrastructure) Contractor General Volga River bridge in Nizhny Novgorod 11.0 2017 33% 7.4 Contractor

Reconstruction of Volga River bridge on M-10 General “Russia” Highway on 176 km (Stage 2) 6.7 2019 0% 6.7 Contractor

Reconstruction of Ryabinovaya St. (Skolkovo infra- General structure) 6.9 2015 17% 5.8 Contractor

Construction of km 15 – km 58 section of M-11 General “Moscow – St. Petersburg” Highway 37.5 2015 88% 4.8 Contractor

Reconstruction of km 50 – km 82 section General of M-9 “Baltic” Highway 7.4 2016 35% 4.6 Contractor

Upgrade, maintenance and repair of Voronezh Bypass 3 4 General on M-4 “Don” Highway (km 492- km 517) 16.3 2029 74% 4.2 Contractor

Construction of km 0 – km 18 section of Vladivostok General – Nakhodka – Vostochny Port Highway in Primorski 6.1 2016 41% 3.6 Krai (Start-up Facilities 2 and 3) Contractor Stage 1-1.2 construction of Leningradski Avenue General in Moscow, with access to Mnevniki Street via Narod- 4.7 2015 27% 3.4 nogo Opolchenya Street (Skolkovo infrastructure) Contractor

Reconstruction of Businovskaya Interchange General in Moscow 17.2 2015 81% 3.4 Contractor

Reconstruction of Don River Voroshilov Bridge General in Rostov-on-Don 5.0 2017 32% 3.3 Contractor

Reconstruction of Bolshaya Akademicheskaya St. General in Moscow 3.3 2015 3% 3.2 Contractor

Construction of a section of M-11 “Moscow – General St. Petersburg” Highway between Businovskaya 19.5 2015 84% 3.2 Interchange and Festivalnaya Street in Moscow Contractor General Other projects Contractor/ 84.0 Subcontractor TOTAL 352.0

1 Net of VAT. 2 Estimated value of operations, calculated according to the computation of the Contract with Avtodor. Due to indexes change, the value is subject to adjustment by sign ing the annual additional agreements. 3 Total contract value including reconstruction, maintenance and repair. 4 Valuation of maintenance and repair. According to Contract the value of works is approximate and could be adjusted in case of deviation of real index comparing with forecasted indexes.

36 ENGINEERING SPACE

BACKLOG STRUCTURE BY GEOGRAPHY, % BACKLOG STRUCTURE BY CUSTOMER, %

Central District State corporations

13 North Western District Federal state 5 agencies Other 9 Мunicipal authorities Regional authorities

Private customers 13

30 57 57 16

Source: Company data Source: Company data

IN-HOUSE PRODUCTION CAPACITY MOSTOTREST 2014 OUTPUT OF MATERIALS Volume

In-house production capacity covers a significant share of the Ready-mix concrete and sand-and cement Group’s material requirements and creates additional competitive mixes, ‘000 t 778 advantages: Precast concrete and reinforced concrete • Control over the cost of materials, particularly important in the products, ‘000 t 54 context of high inflation expectations; Steel structures, ‘000 t 42 • Ensures uninterrupted and prompt delivery of materials to construction sites. Bituminous concrete, ‘000 m3 1,493 Two PJSC Mostotrest industrial sites located in Moscow and Tula produce ready-mix concrete, duct tubes, span structure beams, Stone mastic bituminous steel structures, bearings and expansion joints. Mobile TSM plants concrete 5, ‘000 t 610 deployed directly on construction and assembly sites supply asphalt and cement.

The existing annual in-house production capacity of the Group is approximately 1.5 million tons of concrete and sand-and-cement mix, SHARE OF IN-HOUSE PRODUCTION OF 65,000 tons of precast concrete and concrete products, 2,160 m3 of bituminous concrete and 37,000 tons of steel structures. In 2014, the Group significantly increased its bituminous concrete production MATERIALS IN TOTAL COST OF MATERIALS, % capacity, due to an increase in in-house construction volumes and acquisition of new bituminous concrete plants to support growth. Purchased 32 The cost of raw and construction materials and components in the materials reporting period accounted for 18% of the Group’s total production Own costs. In-house production of concrete, sand-and-concrete mix, production precast concrete and reinforced concrete products and bituminous concrete completely covered corresponding needs of the Group. In-house production of steel structures covered 51% of the Group’s corresponding needs. 68

Source: Company data

5 Produced from bituminous concrete.

37 ANNUAL REPORT 2014 RESULTS

INVESTMENT IN NEW EQUIPMENT AND TECHNOLOGY IN-HOUSE PRODUCTION OF MATERIALS, In 2014, Mostotrest increased investment in its fleet of machinery, equipment and vehicles to support successful implementation RUB BILLION of projects previously added to the Group’s backlog. The total volume of capex contracts concluded in 2014 was RUB6.1 billion, a 21% increase year-on-year. RUB4.6 billion was allocated to acquire Precast concrete and construction equipment, machinery and vehicles, of which 82% reinforced concret products was sophisticated foreign-made equipment. Stone mastic bituminous concrete 1.0 Steel structures

Ready-mix concrete Bituminous

Concrete 1.7 CAPITAL INVESTMENTS, % 1.0 Building equipment 2.3 and transportation facilities 0.9 Real estate

Fixed assets under construction 2.0 2.8 11

2.8 13 3.0

2.5 76 3 4 201 201 Source: Company data Source: Company data

38 ENGINEERING SPACE

FINANCIAL RESULTS In 2014, the Group delivered strong operating and financial results despite the weaker market environment accompanied by sales decline in the sector and a wave of bankruptcies of construction players.

On the back of stronger construction volumes together with a substantial increase in productivity and more efficient deployment of resources Mostotrest managed to “recover” its profitability in addition to delivering traditionally strong revenue growth (+29%). REVENUE, RUB BILLION

Revenue was RUB150.5 billion, up 29% year-on-year, driven 2014 150.5 by increased construction volumes; 2013 116.7

Gross profit grew 47% to RUB20.6 billion, up from RUB14.0 billion in 2013. Gross margin rose to 13.7% from 12.0% in 2013, driven by more efficient deployment of resources; GROSS PROFIT, RUB BILLION

EBITDA increased by 63% year-on-year, to RUB15.4 billion. EBITDA margin rose from 8.1% last year to 10.2% in the report- 2014 20.6 ing period, supported by the decrease in provisions for doubtful receivables; 2013 14.0

Net profit was RUB6.1 billion, a 2.7x increase year-on-year. Net profit attributable to the owners of the Company was EBITDA, RUB BILLION RUB5.6 billion;

2014 15.4 The Group increased capital expenditure by 21% compared to the previous year, including for implementation of major 2013 9.4 projects added at the end of 2013;

Net cash (i.e. cash and cash equivalents1 net of debt) at the end of 2014 amounted to RUB21.2 billion, driven by customer NET INCOME, RUB BILLION advances.

2014 6.1

2013 2.3

Source: Consolidated financial statements under IFRS for 2014 and 2013

1 Including bank deposits with maturities over 3 months.

39 ANNUAL REPORT 2014 RESULTS

KEY OPERATING AND FINANCIAL RESULTS OF THE GROUP 2013 2014 Change FOR 2014 AND 2013, RUB million

Revenue 116,714 150,531 33,817 29%

Cost of sales (102,704) (129,981) (27,277) 27%

Gross profit 14,010 20,550 6,540 47%

Gross margin, % 12.0% 13.7% 1.7%

Other income 394 493 99 25%

Administrative expenses (6,168) (7,631) (1,463) 24%

Other expenses (2,717) (1,982) 735 – 27%

Profit from operating activities 5,519 11,430 5,911 107%

Operating profit margin, % 4.7% 7.6% 2.9%

Finance income 202 1,062 860 n/a

Finance costs, including: (2,409) (3,647) (1,238) 51%

Dividends and non-controlling interest expense (220) (763) (543) n/a

Share of profit/(loss) of equity accounted investees 229 (166) (395) n/a

Profit before income tax 3,541 8,679 5,138 n/a

Profits tax expense (1,288) (2,607) (1,319) 102%

Profit from continuing operations 2,253 6,072 3,819 170%

Profit after tax from discontinued operations 6 0 (6) – 100%

Profit for the period 2,259 6,072 3,813 169%

Profit attributable to: Owners of the parent Company 1,916 5,598 3,682 n/a Non-controlling interests 343 474 131 38%

Profit for the period 2,259 6,072 3,813 169%

Profit margin, % 1.9% 4.0% 2.1%

EBITDA 9,430 15,371 5,941 63%

EBITDA margin, % 8.1% 10.2% 2.1%

40 ENGINEERING SPACE

1 REVENUE • Construction of the km 517 – km 544 segment of М-4 “Don” Highway (Novaya Usman bypass); The bulk of the Group’s revenue is derived from construction • Construction of the km 258 – km 334 segment (Vyshniy Vo- projects, as well as from road repair and operation, and sales of lochek Bypass) of M-11 “Moscow – St. Petersburg” Highway. construction materials. In-house and subcontracted volumes grew 31% and 27%, respec- In the reporting period, the Group’s revenue rose by 29% compared tively. However, the share of subcontracted volumes remained flat to the previous year, driven by an increase in construction and at 44% in the reporting period. assembly volumes and the continued rapid development of the road maintenance and operation segment. Volumes increased mainly as a consequence of the following major Bridges and highways projects: Revenue from construction of roads and bridges increased by 34%, • Construction of km 334 – km 543 (6th Segment) of M-11 “Mos- or RUB33.3 billion from RUB98.4 billion last year to RUB131.7 billion cow – St. Petersburg” Highway; in the reporting period, driven mainly by an increase in construction volumes in current projects: • Construction of the Festivalnaya Street – Businovskaya Inter- change segment of M-11 “Moscow – St. Petersburg” Highway; • Construction of the km 258 – km 334 segment (Vyshniy Volochek • Construction of the km 15 – km 58 segment of M-11 “Moscow – Bypass) of M-11 “Moscow – St. Petersburg” Highway; St. Petersburg” Highway; • Construction of km 334 – km 543 (6th Segment) of M-11 “Mos- • Reconstruction of the Businovskaya Interchange in Moscow; cow – St. Petersburg” Highway; • Construction of a bridge across the Volga on the Nizhny • Construction of the Festivalnaya Street – Businovskaya Inter- Novgorod – Shakhunya –Kirov Highway in the Nizhny Novgorod change segment of M-11 “Moscow – St. Petersburg” Highway; region;

REVENUE BY CONSTRUCTION PROJECT TYPE AND SERVICES, RUB million 2013 2014 Change

Revenue from contracts for construction of:

bridges and highways 98,418 131,747 33,329 34%

airfields and airports 6,394 5,152 (1,242) – 19%

other facilities 1,016 1,998 982 97%

Total revenue from construction contracts 105,828 138,897 33,069 31%

Revenue from maintenance and repair of roads 9,939 10,674 735 7%

Other revenue 947 960 13 1%

TOTAL REVENUE 116,714 150,531 33,817 29%

1 The Group recognizes revenue from long-term construction contracts according to the percentage-of-completion method or only to the extent of recoverable costs incurre when the outcome of a construction contract cannot be estimated reliably. If the revenue under the construction contract is recognized to the extent of recoverable costs incurred, the accumulated profit under this contract is recognized as of the completion date of the facility.

41 ANNUAL REPORT 2014 RESULTS

• Construction of the km 15 – km 58 segment of M-11 “Moscow – A 26% or RUB5.6 billion increase in the cost of materials from St. Petersburg” Highway; RUB21.1 billion last year to RUB26.6 billion in the reporting period was driven by a 31% increase in in-house construction volumes and • Reconstruction of the Businovskaya Interchange in Moscow; the lower materials inputs. • Construction of the km 517 – km 544 segment of М-4 “Don” Highway (Novaya Usman bypass). Personnel costs increased by 26% or RUB3.8 billion, from RUB14.4 billion last year to RUB18.2 billion in the reporting period, driven essentially by the growth in in-house volume triggering a 14% increase in average production staff and by a 10% increase in average wages. Airfields and Airports The 14% improvement in labor productivity was due to a combination of improved construction planning, better qualified personnel, Revenue from airports and airfields construction decreased by 19% and a more efficient production process. This resulted in a much or RUB1.2 billion, from RUB6.4 billion last year to RUB5.2 billion in faster rate of construction which was in turn supported by the sub- the reporting period. The decrease in revenue from the segment was stantial investment made in prior years in vehicles, plant and equip- due to completion of the Vnukovo Airport reconstruction and de- ment. Consequently the Group managed to significantly increase velopment project in 2013, as well as a reduction in volumes in the its speed of construction leading to a number of projects being Petropavlovsk-Kamchatsky Airport upgrade project. New contracts completed ahead of schedule: for the reconstruction of airports in Ufa and the Rostov region were signed in May and December 2014, respectively. • Construction of the km 258 – km 334 segment (Vyshniy Volochek Bypass) of M-11 “Moscow – St. Petersburg” Highway;

1 • Construction of the km 15 – km 58 segment of M-11 “Moscow – Other Facilities St. Petersburg” Highway; Revenue from other infrastructure increased by 97% or RUB1.0 • Construction of the km 517 – km 544 segment of М-4 “Don” billion, from RUB1.0 billion last year to RUB2.0 billion in the period Highway (Novaya Usman bypass); under review, mainly driven by the resiting of utilities and site • Overpasses, a flyover and Relief Road of the Mozhaisky Avenue preparation for construction of the km 15 - km 58 segment of M-11 as part of the reconstruction of the traffic interchange at the “Moscow – St. Petersburg” toll Highway. intersection of Mozhaisky Avenue with the Moscow Ring Road. Cost of third-party services (machinery, equipment, transport and Revenue from Maintenance and Repair of Roads labor services) increased by 53% or RUB1.6 billion, from RUB3.1 billion last year to RUB4.7 billion in the reporting period, driven Revenue in the road repair, maintenance and operation segment by stronger in-house volumes. increased by 7% or RUB0.7 billion, from RUB9.9 billion last year to RUB10.7 billion in the reporting period, mainly driven by service Other costs increased by 33% or RUB1.7 billion, from RUB5.0 billion arrangements on the following routes: last year to RUB6.7 billion in the reporting period, driven by an expansion of the production program, the increased cost of redeployment, • M-4 “Don” Moscow – Novorossiysk; catering and accommodation (redeployment of construction equip- • M-5 “Ural” Moscow – Chelyabinsk; ment post-completions in Sochi and expansion of production staff), the cost of bank guarantees, as well as the reclassification of tax • M-1 “Belarus” Moscow – Belarus border. charges other than income tax, from administrative expenses into cost of sales.

COST OF SALES GROSS PROFIT AND GROSS MARGIN The Group’s cost of sales increased by 27% or RUB27.3 billion from RUB102.7 billion last year to RUB130.0 billion in the reporting pe- Gross profit of the Group increased by 47% or RUB6.5 billion, from riod. Growth in cost of sales associated with in-house2 and subcon- RUB14.0 billion last year to RUB20.6 billion in the reporting period, tracted3 volumes was 26% and 27%, respectively. Cost of in-house driven by stronger construction volumes. volumes2 was mainly driven by an increase in the cost of materials, personnel costs, third-party services, vehicles, machinery and equip- Gross margin rose to 13.7% in the reporting period from 12.0% last ment and other costs. year, driven by the more efficient deployment of resources.

1 Includes construction of railway and hydro infrastructure, as well as other non-core infrastructure, including construction of buildings, sports and culture facilities, metro lines, pedestrian overpasses, etc. 2 Cost of in-house volumes is calculated as the Group’s total cost of sales less cost of subcontractor services. 3 Cost of subcontracted volumes equals the cost of subcontractor services in the Group’s total cost of sales.

42 ENGINEERING SPACE

COST OF SALES, RUB million 2013 2014 Change

Services of subcontractors 51,781 65,717 13,936 27%

Materials 21,063 26,642 5,579 26%

Personnel expenses 14,411 18,190 3,779 26%

Depreciation and amortisation 3,418 3,800 382 11%

Machinery, equipment, transport, and labor services provided by third parties 3,055 4,667 1,612 53%

Design and technology expenses 1,846 2,136 290 16%

Rental expenses 368 592 224 61%

Services of principal contractors 437 233 (204) – 47%

Insurance 1,327 1,345 18 1%

Other 4,998 6,659 1,661 33%

Total cost of sales 102,704 129,981 27,277 27%

ADMINISTRATIVE EXPENSES4

Against the backdrop of a 29% growth in revenue, administrative expenses increased by 24% or RUB1.5 billion, from RUB6.2 billion last year to RUB7.6 billion in the reporting period. The share of administrative expenses as a proportion of revenue remained . unchanged year on year at 5%. 137% Payroll costs increased by 37% or RUB1.4 billion, from RUB3.6 GROSS MARGIN AS TO COMPARE billion last year to RUB5.0 billion in the reporting period, driven by a 6% increase in total headcount. Strong payroll growth was also WITH 12.0% IN 2013 driven by completion and delivery in 2014 of large projects and associated bonus payments.

OTHER EXPENSES EBITDA

Other expenses decreased by 27% or RUB0.7 billion, from RUB2.7 EBITDA increased by 63% or RUB5.9 billion, from RUB9.4 billion last billion last year to RUB2.0 billion in the reporting period, driven by year to RUB15.4 billion in the reporting period, driven by increased a decrease in expense on the provisions for doubtful receivables gross profit and decrease in other expenses. The increase in EBITDA down to RUB1.5 billion (2013: RUB2.1 billion). margin from 8.1% last year to 10.2% in the reporting period was driven by a stronger gross profit margin.

4 Administrative expenses include personnel expenses, expenses for consulting and audit services, social expenses and other administrative expenses..

43 ANNUAL REPORT 2014 RESULTS

ADMINISTRATIVE EXPENSES, RUB million 2013 2014 Change

Personnel expenses 3,606 4,956 1,350 37%

Third party services 652 836 184 28%

Social expenses 396 431 35 9%

Depreciation and amortisation 264 307 43 16%

Taxes other than income tax 359 248 (111) – 31%

Rent expense 170 210 40 24%

Insurance 139 147 8 6%

Materials 143 142 (1) – 1%

Travel expenses 81 82 1 1%

Other administrative expenses 357 272 (85) – 24%

Total administrative expenses 6,168 7,631 1,463 24%

FINANCIAL INCOME AND EXPENSES1

The financial income of the Group increased 5.3x or by RUB0.9 bil- segment (Novaya Usman and Rogachevka bypasses) construction, lion, from RUB0.2 billion last year to RUB1.1 billion in the reporting maintenance, repair and overhaul project. In addition, the Group’s period, driven by the receipt of substantial cash deposits in early financial income benefited from foreign currency gains resulting 2014, following large advance payments from customers at the end from the significant depreciation of the ruble against the euro of 2013, including RUB24.2 billion under the M-11 “Moscow – in 2014. Euro-denominated loans issued to an affiliate were St. Petersburg” Highway segment 6 (km 334 – km 543) construction, converted into rubles at the end of 2014. maintenance, repair, overhaul and toll-base operation project, and RUB4.6 billion under the M-4 “Don” Highway km 517 – km 544 Finance costs increased by 51% or RUB1.2 billion, from RUB2.4 billion last year to RUB3.6 billion in the reporting period, due to an increase in interest expense on loans and finance leases and changes in non- controlling interest in the profit of the subsidiary.

The increase in interest expense on borrowings and finance leases was driven by debt raised in the reporting period to finance working capital and the investment program, as well as by higher interest rates on loans amid deteriorating liquidity in the credit market in the second half of 2014. 10.2% An increase in non-controlling interest in earnings of subsidiaries was driven by increased profits of a subsidiary in the reporting EBITDA MARGIN AS TO COMPARE period. WITH 8.1% IN 2013

1 Financial income and expenses of the Group primarily consist of interest earned on the bank deposits and loans given, finance expense incurred on the borrowings and finance leases and dividends paid to subsidiaries’ minority participants and non-controlling interest.

44 ENGINEERING SPACE

FINANCIAL INCOME AND EXPENSES, RUB million 2013 2014 Change

Finance income: Interest income on bank deposits 107 395 288 n/a

Discounting of financial assets and liabilities 3 164 161 n/a

Interest income on loans given 35 55 20 57%

Foreign exchange gain 50 443 393 n/a

Other finance income 7 5 (2) – 29%

Total finance income 202 1,062 860 n/a

Finance costs: Interest expense on borrowings (1,586) (2,225) (639) 40%

Interest expense on finance leases (603) (659) (56) 9%

Change in non-controlling interest (220) (763) (543) n/a

Total finance costs (2,409) (3,647) (1,238) 51%

Net finance cost (2,207) (2,585) (378) 17%

INCOME TAX EXPENSE PROFITS FOR THE PERIOD

Income tax expense increased 2x or by RUB1.3 billion, from RUB1.3 Profits for the period grew 2.7x, from RUB2.3 billion last year to billion last year to RUB2.6 billion in the reporting period. The effec- RUB6.1 billion in the reporting period. tive income tax rate (excluding changes in the share of non-controlling interest in TSM earnings, recorded as a financial expense) decreased from 34% to 28%, due to a reduction in the share of expenses non deductible for taxation purposes. LIQUIDITY AND CASH POSITION

As of December 31, 2014 and 2013, cash and cash equivalents and bank deposits with maturities of more than three months amounted to RUB61.8 billion and RUB26.6 billion, respectively.

In the reporting period, cash balances at beginning of the period and debt were used to finance working capital, including co-financing BILLION of long-term investment contracts, repay loans raised to finance RUB6.1 acquisitions completed in 2012, and to finance the Group’s investment program. Working capital financing needs were associated with NET PROFIT, 2.7X INCREASE YEAR-ON-YEAR advance and progress payments to subcontractors and suppliers. Cash and cash equivalents include cash at hand and bank current accounts and deposits with original maturities of three months or less.

45 ANNUAL REPORT 2014 RESULTS

NET DEBT, RUB million 31.12.2013 31.12.2014 Change

Loans and borrowings 13 35,584 35,571 n/a

Finance lease liabilities 4,525 4,943 418 9%

4,538 40,527 35,989 n/a

Cash and cash equivalents 26,566 52,067 25,501 96%

Bank deposits with maturities over 3 months 23 9,702 9,679 n/a

Net debt (22,051) (21,242) 809 – 4%

As at the year end the Group had total debt of RUB40.5 billion and Trade and other payables increased by 41% or RUB7.4 billion, from cash of RUB61.8 billion, resulting in negative net debt of RUB21.2 RUB18.0 billion at the end of the previous period to RUB25.4 billion billion. at the end of the reporting period, mainly driven by an increase in advances from customers for road repair and maintenance services, Under the current banking arrangments, the free credit limit avail- and in payables to personnel. able to the Group at the end of the reporting period amounted to RUB35.5 billion (RUB50.3 billion at December 31, 2013). In the reporting period, the Group financed working capital mainly using bank loans and cash flow from operating activities.

NET WORKING CAPITAL CAPITAL EXPENDITURE Negative working capital increased by RUB7.5 billion year-on-year to RUB39.5 billion, driven mainly by an increase in advances received Total amount of capital investment in fixed assets and intangible on construction contracts, including newly signed contracts in 2014. assets recorded on the balance sheet of the Group in the reporting At the same time, a decrease in prepayments of 15% or RUB2.8 period amounted to RUB6.1 billion (2013: RUB5.1 billion), represen- billion, from RUB18.3 billion at the end of the previous period ting mainly the acquisition of construction equipment and vehicles to RUB15.5 billion at the end of the reporting period, was mainly under the fixed assets renewal program (RUB4.6 billion). The in- due to completion in 2014 of projects with a high share of subcon- crease in total capital investments in the reporting period compared tracted volumes. with 2013 was due to an expansion of the production program, including diversification of construction sites as new projects came online in 2014.

46 ENGINEERING SPACE

STRUCTURE OF THE GROUP’S WORKING CAPITAL, RUB million 2013 2014 Change

Inventories 8,075 8,066 (9) 0%

Trade and other receivables 2,670 3,887 1,217 46%

Amounts due from customers on construction contracts 11,451 16,862 5,411 47%

Prepayments 18,321 15,520 (2,801) – 15%

Total 40,517 44,335 3,818 9%

Trade and other payables (17,996) (25,409) (7,413) 41%

Amounts due to customers on construction contracts (54,538) (58,431) (3,893) 7%

Total (72,534) (83,840) (11,306) 16%

Net working capital (32,017) (39,505) (7,488) 23%

47 ANNUAL REPORT CORPORATE GOVERNANCE

3 Corporate Governance

50 Corporate Governance Principles 53 Corporate Governance Structure 70I nternal Control and Audit 73I nformation for Investors and Shareholders

RYABINOVAYA STREET – GOVOROVA STREET FLYOVER ON MOZHAISKOYE AVENUE

ENGINEERING SPACE ACCELERATING TRAFFIC FLOW

Mostotrest actively participates in Moscow City transport infrastructure development projects. Under a contract to upgrade and build transport infrastructure in Western Moscow, in 2014, Mostotrest put into operation the Mozhaiskoye Avenue Flyover, Moscow’s longest. The flyover enables through traffic on one of Moscow’s major arterial roads.

49 ANNUAL REPORT CORPORATE GOVERNANCE

CORPORATE GOVERNANCE PRINCIPLES Improving the quality of corporate governance is a key strategic objective of Mostotrest.

• Articles of Incorporation; Corporate Standards The Company is currently working to improve corporate standards • Rules and Regulations for the General Shareholders’ Meeting; and their application, taking into account the following long-term • Dividend Policy Rules and Regulations; priorities: • Corporate Code of Conduct; • Ensure the rights and interests of shareholders and other • Insider Information Rules and Regulations; interested parties; • Disclosure (Information Policy) Rules and Regulations; • Ensure information transparency; • Rules and Regulations for the Board of Directors; • Maintain an atmosphere of openness, trust and cooperation between the Company, its shareholders, managers, investors, • Board of Directors Remuneration Rules; employees, contractors and other stakeholders. • Rules and Regulations for the Audit Committee of the Board; • Rules and Regulations for the HR and Remuneration Committee Rules and Regulations of the Board; PJSC Mostotrest fully complies with Russian law, including corporate • Rules and Regulations for the Sole Executive Body; law and the securities market law. • Rules and Regulations for the Company Secretary; A key priority of PJSC Mostotrest with regard to further improve- • Internal Control Rules and Regulations; ment of corporate governance is application of and compliance with: • Rules and Regulations for the Audit Commission. • Principles of the Corporate Governance Code of the Russian Fede- ration, as applied by the Bank of Russia to joint-stock companies The corporate documents establish effective mechanisms to protect whose securities are listed (CBR Letter 06-52/2463 of April 10, the rights and legitimate interests of shareholders, to ensure transpar- 2014 On the Corporate Governance Code (hereinafter – the Rus- ency of decision-making, professional and ethical liability of the Board sian Corporate Governance Code); of Directors, the CEO, employees, as well as information transparency of the Company. • Generally accepted international corporate governance standards and practices. These regulations aim to improve corporate governance in Russian companies and expand their responsibilities with regard to shareholder rights, functions of the board of Directors and corporate Documents secretary, management remuneration, risk management and internal The following internal documents underlie corporate governance control systems. system of PJSC Mostotrest:

Most of the corporate documents listed above are available on the Company’s website: www.mostotrest.ru.

50 ENGINEERING SPACE

CODE OF CORPORATE GOVERNANCE

In 2012, PJSC Mostotrest adopted the Code of Corporate Conduct, Upon completion of the employee training, PJSC Mostotrest intends which establishes general principles of corporate governance, guide- to develop approaches for assessment of compliance with the cor- line for relationships with subsidiaries, principles of social respon- porate governance principles, determine the extent of involvement sibility, the General Shareholders’ Meeting procedures, the Board, of the Board of Directors, its committees, the Company Secretary, CEO and Company Secretary procedures, protection of shareholder executive bodies and internal control units in assessment of compli- interests in cases of substantial corporate events and conflicts, the ance with the principles of corporate governance for the purposes shareholder register and profit distribution policy, as well as control, of disclosure of relevant information to shareholders. risk management and information disclosure procedures.

Plans to Improve Corporate Governance

PJSC Mostotrest has been improving its corporate governance by implementing the principles of the Corporate Governance Code APRIL of the Russian Federation, which the Bank of Russia recommends for use by joint-stock companies whose securities are admitted 2014 to organized trading. 10 As part of this strategy, in March 2015, PJSC Mostotrest approved the Regulation on Disclosure of Information (on Information Policy) The Board of Directors of the Bank of Russia and intends to take priority measures to improve corporate governance, in particular, PJSC Mostotrest took the following obligations: approved the new Corporate Governance 1. Disclose information not only about PJSC Mostotrest but also Code recommended for use by Russian joint- its subsidiaries (including information about their key areas of operation, functional relations between the key companies stock companies. The Code incorporates best of the Group and the mechanisms to ensure accountability and international corporate governance practices. subsidiarity within the Group); On March 17, 2015 the new Regulation on In- 2. In addition to disclosures required by law, disclose the following formation Disclosure by Issuers of Securities on the corporate website: approved by the Bank of Russia came into force. a) Mostotrest mission, strategy, goals and policies; b) Exposure to material risks, that may influence Company’s activities;

c) Social and environmental policy;

In April 2014, the Board of Directors of the Bank of Russia approved d) Corporate governance system, in particular: and recommended for use the new Corporate Governance Code of the Russian Federation. i. Corporate governance system and general principles applied by PJSC Mostotrest; Accordingly, PJSC Mostotrest has drafted its Corporate Governance Code, which currently undergoes the corporate approval process. ii. CEO information, including detailed biographical data (age, education, qualifications, experience) and information about management positions the CEO currently Compliance with Corporate Governance Principles holds or held over the last 5 years at other legal entities;

Compliance with the principles of corporate governance at PJSC iii. Composition of the Board of Directors, information about Mostotrest is consistent with the existing legislation and additional the Chairman of the Board and his deputy; biographical obligations assumed by PJSC Mostotrest and set out in its Code data of each member of the Board (age, education, quali- of Corporate Conduct. Improving the quality of corporate gover- fications, experience); time of each director’s first election nance is one of the strategic priorities of PJSC Mostotrest. PJSC Mos- for the Board; membership on the boards of other compa- totrest has worked consistently to improve its corporate standards nies, independence status and information on management and application thereof. In 2015, employees of PJSC Mostotrest have positions they currently hold or held over the last 5 years at been sent for training on implementation of rules and procedures other legal entities; for assessing compliance with corporate governance principles.

51 ANNUAL REPORT CORPORATE GOVERNANCE

iv. Composition of the Board committees, specifying b) Information about corporate governance: the Chairman and independent directors on each committee; i. Report of the Board of Directors of PJSC Mostotrest (including Board committees) for the year, including meet- 3. In addition to disclosures required by law, disclose the ing and attendance statistics, an overview of key issues following in the Annual Report : addressed and important complex problems, iscussed during meetings of the Board of Directors of PJSC Mosto- a) General information: trest and Board committees; about key recommendations given by committees to the Board of Directors; i. General information (including corporate history and business structure of PJSC Mostotrest); ii. Results of evaluation by the Audit Committee of effectiveness of external and internal audits; ii. Messages to shareholders from Chairman of the Board and the CEO, containing the Company’s results for the iii. Overview of procedures to select the external auditor, that year; ensures independence and objectivity, and information on remuneration of the external auditor for audit and iii. Information about PJSC Mostotrest securities, including non-audit services; information about any additional share issues and changes in equity for the year; iv. Information on evaluation (self-evaluation) of the Board performance and, in the case of hiring external consultant iv. Information about treasury shares and the shares of PJSC to evaluate the Board performance, information about such Mostotrest held by subsidiaries; consultant and evaluation results;

v. Key performance indicators; v. Information on PJSC Mostotrest shares owned or benefi- cially owned by members of the Board of Directors and vi. Key financials; senior management;

vii. Actual results vs. targets; vi. Information on any conflict of interest of members of the Board and the CEO (including related to participation viii. Profit distribution and dividend policy; of such persons in management bodies of the Company’s competitors); ix. Investment projects and strategic objectives; vii. Report on implementation by PJSC Mostotrest of the Bank x. Development outlook (sales, productivity, market share, of Russia recommendations on corporate governance, indi- revenue growth, profitability, debt-to-equity ratio); cating recommendations that are not complied with and an explanation of reasons for non-compliance. xi. Overview of material transactions for the year, including information about their implications for PJSC Mostotrest The Company is currently assessing possible further measures and its shareholders; to improve its corporate governance in accordance with the Code of Corporate Governance recommended by the Bank of Russia. xii. Corporate governance overview;

xiii. Risk management and internal control system overview;

xiv. Overview of HR and social policy, social development, employee healthcare, training and work safety;

xv. Information about PJSC Mostotrest environmental policy;

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CORPORATE GOVERNANCE STRUCTURE

MANAGEMENT AND CONTROL BODIES

GENERAL SHAREHOLDERS’ MEETING

The General Shareholders’ Meeting is the supreme governing body of PJSC Mostotrest. By providing its shareholders the opportunity to participate in the General Shareholders’ Meeting, PJSC Mostotrest ensures their legitimate rights and interests are recognized.

CEO Board of Directors Audit Commission

The Board of Directors is re- The Audit Commission The CEO is the sole executive sponsible for general oversight ensures control over financial body in charge of day-to-day of the Company’s operations and economic operations of management of the Compa- and development strategy, and PJSC Mostotrest. The Audit ny’s operations. for monitoring the implemen- Commission reports to the tation of decisions of the Gen- Company’s shareholders. eral Shareholders’ Meeting.

Internal Control Service Audit Committee Company Secretary

The Company Secretary Ensures reliability of financial organizes the processes of the and management information General Shareholders’ Meet- and reporting, prompt detec- ing, meetings of the Board tion, analysis and management HR and Remuneration of Directors and its commit- of operating risks. Committee tees, ensures shareholder

outreach and performs other related functions.

53 ANNUAL REPORT CORPORATE GOVERNANCE

General Shareholders’ Meeting

The General Shareholders’ Meeting is the supreme governing body

of PJSC Mostotrest. In 2014, PJSC Mostotrest held the Annual General

Shareholders’ Meeting, as well as two Extraordinary General Shareholders’ Meetings in-absentia. On May 14, 2015 the Annual General Shareholders’ Meeting on the results of year 2014 took place.

General Shareholders’ Meeting Competences Practice of Preparation and Conduct of General Shareholders’ Responsibilities of the General Shareholders’ Meeting Meeting include: The Company strives to create the most favorable conditions for the protection of shareholder rights. Indeed, the General Shareholders’ • Identify priority areas for the Company’s operations and establish Meeting practice adopted at PJSC Mostotrest surpasses the require- principles of asset formation and use; ments set by applicable law:

• Approve internal corporate documents; • Shareholders are notified of the General Shareholders’ Meeting at least 30 days prior to the meeting, regardless of the agenda • Decide on restructuring or liquidation of PJSC Mostotrest; (unless the law stipulates a longer notice in specific cases);

• Elect the Board and Audit Commission members and decide • The Company offers its shareholders holding not less than 1% on their remuneration and early termination of their powers; of the vote an opportunity to familiarize themselves with the list of persons entitled to attend the General Shareholders’ Meeting, • Approve annual reports, annual financial statements, profit upon submission of such list by the Registrar; distribution and dividends; • Shareholders holding not less than 2% of voting shares are entit- • Approve the Company’s auditors; led to propose items for agenda of the Annual General Share- holders’ Meeting and nominate candidates to the Board of Direc- • Change of the registered capital of PJSC Mostotrest tors and the Audit Commission of PJSC Mostotrest not later than and approve certain types of transactions (except those 60 days after the end of the financial year; within the competence of the Board of Directors). • If the General Shareholders’ Meeting is to consider amendments to the Articles of Incorporation, shareholders are provided with Guidelines and Internal Documents comparative tables containing the relevant extracts of the Articles The key objective of PJSC Mostotrest when holding a General Share- of Incorporation before and after each of the proposed changes, holders’ Meeting is to ensure recognition of rights and legitimate as well as an overview of reasons for the changes; interests of shareholders in connection with their participation in the Meeting. Applicable law and the following internal corporate • Consideration by the General Shareholders’ Meeting of amend- documents govern the General Shareholders’ Meeting: ments to internal documents of PJSC Mostotrest is accompanied by a report from the Company Secretary on the rationale for • Articles of Incorporation; proposed changes;

• Rules and Regulations for the General Shareholders’ Meeting. • PJSC Mostotrest makes minutes of the General Shareholders’ Meeting available on its website as soon as practicable;

• Rationale for proposed allocation of net profit between PJSC Mostotrest needs and dividends in accordance with the dividend policy is provided in the CEO statement during the General Share- holders’ Meeting;

• Voting results and adopted decisions are announced before the end of the General Shareholders’ Meeting.

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Annual General Shareholders’ Meeting Results of June 27, 2014: Extraordinary General Shareholders’ Meetings Results of March 5 and December 15, 2014: • Approved Annual Report and annual financial statements;

• Decided on allocation of profit of previous years, including • Approved a number of related-party transactions; to cover losses of the parent company for 2013, dividends and remuneration of the Board; • Amended the Articles of Incorporation.

• Decided on the amount and payment of the dividends for 2013; Amendments to the Articles of Incorporation approved by the Gene- ral Shareholders’ Meeting on December 15, 2014, include, inter alia, • Decided on remuneration to the members of the Board changes in the rights and responsibilities of shareholders, following of Directors, except for independent directors and member amendments to the applicable law, namely: of the Board of Directors - the CEO; • Clarifications made of certain rights and obligations • Elected the Board of Directors and the Audit Commission; of shareholders to participate in management of PJSC Mostotrest, obtain information on PJSC Mostotrest operations, participate • Approved auditors under Russian Accounting Standards (RAS) in the profits distribution and receive a part of PJSC Mostotrest and International Financial Reporting Standards (IFRS); assets in case of liquidation;

• Approved a number of related-party transactions, that may • Update to secure the shareholders’ right to appeal decisions be committed to in the future in the ordinary course of business; of the management of PJSC Mostotrest and demand compensation for damages caused by the management bodies, • Amended the Articles of Incorporation and Rules and Regulations as well as challenge transactions and participate in the process for the General Shareholders’ Meeting. of conclusion by PJSC Mostotrest of corporate contracts on the grounds and in the manner prescribed by law;

• Update to secure obligations of shareholders: Annual General Shareholders’ Meeting Results of May 14, 2015: – not to disclose confidential information about PJSC • Approved Annual Report and annual financial statements; Mostotrest;

• Decided on allocation of profit for 2014; – participate in adoption of those corporate decisions that are indispensible for ongoing operations in accordance with the • Decided on the amount and payment of the dividends for 2014; law, where such participation is required;

• Decided on remuneration to the members of the Board – not to commit any deliberate acts causing harm to the of Directors, except for independent directors and member Company; of the Board of Directors - the CEO; – to refrain from actions (inaction), which substantially • Elected the Board of Directors and the Audit Commission; complicate or make it impossible for the Company to achieve the goals and objectives for which it was established. • Approved auditors under Russian Accounting Standards (RAS) and International Financial Reporting Standards (IFRS); In addition, the General Shareholders’ Meeting of December 15, 2014, amended the Articles of Incorporation to ensure that PJSC Mostotrest • Approved a number of related-party transactions that may posts minutes of in-praesentia General Shareholders’ Meetings on its be committed to in the future in the ordinary course of business. corporate website as soon as practicable, in accordance with recommendations of the Corporate Governance Code of the Russian Federation, which entered into force in April 2014.

55 ANNUAL REPORT CORPORATE GOVERNANCE

Board of Directors

The Board of Directors is a collegial management body of PJSC Mostotrest and is responsible for general oversight of PJSC Mostotrest, except for matters falling within the competence of the General Shareholders’ Meeting.

Rules and Internal Documents Competences Applicable law and the following internal documents govern The Articles of Incorporation contain a description of the compe- the Board of Directors procedures: tences of the Board of Directors. Amendments to the Articles of Incorporation approved by the General Shareholders’ Meeting • Articles of Incorporation; of December 15, 2014, in particular, include refinements and additions to competences of the Board, introduced in line with • Rules and Regulations for the Board of Directors. the Moscow Stock Exchange Listing Rules (for Level I shares) and in connection with the entry into force of the Code of Corporate Goals and Responsibilities Governance of the Russian Federation: Under the provisions of the internal documents of PJSC Mostotrest, the main goals and responsibilities of the Board of Directors of PJSC • The Board of Directors responsibility for appointment of the Mostotrest are to: CEO and approval of his/her employment contract has been supplemented with a stipulation that the contract terms subject • Define corporate development strategy; to approval by the Board shall among others include the CEO remuneration and other benefits; • Enforce and protect shareholders’ rights and legitimate interests; • The list of internal documents subject to approval by the Board • Engage in resolution of corporate conflicts; of Directors in accordance with the Articles of Incorporation has • Ensure completeness, reliability and objectivity of corporate been extended to include risk management and internal control disclosures to shareholders and other interested parties; policy, as well as internal audit rules. • Establish effective risk management and internal control mechanisms; • Evaluate management performance on a regular basis.

Principles THE BOARD DECISIONS ARE To ensure implementation of the above goals and objectives,

the Board is guided by the following principles: ADOPTED BY A THREE-FOURTHS

• To make decisions based on reliable information about the MAJORITY VOTE OF ITS ELECTED Company’s operations; MEMBERS, EXCEPT IN CERTAIN • To prevent any restriction of the shareholders’ right to participate in managing PJSC Mostotrest, receive dividends and information

about the Company; CASES AS PRESCRIBED BY LAW • To ensure a balance of interests for different groups of share- AND THE ARTICLES OF INCORPORATION holders and adopt the most objective decisions by the Board of Directors in the interests of all shareholders of PJSC Mostotrest.

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BOARD COMPOSITION

Members of the Board shall be the most qualified available experts Сhairman of the Board with a combination of skills and professional expertise that ensure efficient operation and deliver maximum benefit to the Company The Chairman of the Board manages the Board proceedings, spe- and its shareholders. At present, the Board of Directors of PJSC cifically, convenes the Board meetings and establishes the agenda, Mostotrest comprises 11 directors, 8 of whom are non-executive, controls execution of decisions of the General Shareholders’ Meet- including the Chairman, and 2 independent directors, in accordance ing and the Board of Directors, monitors interactions between the with the criteria established by the Moscow Stock Exchange Listing Company and its shareholders, the Board of Directors and manage- Rules and the Corporate Governance Code of the Russian Federa- ment, executive and non-executive directors. tion. Independent directors and a balanced composition of the Board in terms of executive and non-executive directors ensure the most Members of the Board elect the Chairman of the Board by a three- adequate representation of interests of all shareholders. fourths majority vote. According to Rules and Regulations for the Board of Directors, the CEO of PJSC Mostotrest may not simulta- The Rules and Regulations for the Board of Directors require at least neously be its Chairman of the Board or Deputy Chairman of the one, and usually not more than three, independent directors on the Board. Board, that fulfill the criteria’s of independence given in this document. Pursuant to the terms of contracts with independent directors Since January 2011, Georgy Koryashkin has been Chairman of the of PJSC Mostotrest, such directors shall maintain their independent Board of Directors of PJSC Mostotrest. director status for the entire duration of their service on the Board.

The Company’s internal documents require the Board members to refrain from actions that will or may potentially lead to a conflict of interests. To the best of the Company’s knowledge, members of the Board of Directors of PJSC Mostotrest do not hold official positions in competitor companies.

BOARD COMMITTEES

The Board has two committees: the Audit Committee and the HR Goals and Responsibilities and Remuneration Committee. The committees provide consulting The goal of the Audit Committee is to assist the Board in monitoring support on business issues within the competences of the Board the completeness and accuracy of financial and other corporate of Directors, as well as develop recommendations to the Board reports, to prepare and present such reports, to ensure the proper of Directors and management. functioning of the internal control system, internal audit, risk management, legal and internal compliance processes.

Audit Committee Responsibilities of the Audit Committee: • Evaluation of candidate auditors; The Audit Committee of the Board of Directors was established by the Board of Directors to supervise the Company’s financial and • Assessment of auditor opinions; economic operations. • Assessment of effectiveness of internal control and audit procedures, and recommendations for their improvement. Standards and Internal Documents Applicable law and the following internal documents govern the Audit Committee: The Audit Committee within its competence interacts with the Internal Audit Service and representatives of external auditors • Articles of Incorporation; of the Company, and invites them to participate in meetings • Rules and Regulations for the Board of Directors; of the Committee, if necessary. • General Shareholders’ Meeting and Board Resolutions; • Rules and Regulations for the Board Audit Committee.

57 ANNUAL REPORT КОРПОРАТИВНОЕ УПРАВЛЕНИЕ ENGINEERING SPACE

Composition of the Board of Directors of Mostotrest as at the end of 2014

Georgy Maria Leonid Irina Vadim Irina Koryashkin Zhurba Dobrovsky Egorova Korsakov Makanova

Chairman, Non-Executive Director. Deputy Chairman, Non-Executive Non-Executive Director, Deputy CEO. Non-Executive Director. Non-Executive Director. Non-Executive Director. Board member since 2006 Director. Board member since 2008 Board member since 2011 Board member since 2014 Board member since 2012 Board member since 2011

Born in 1969 in Moscow. Born in 1979 in Dubna. Born in 1965 in Moscow. Born in 1970 in Lyubertsy, Moscow Born in 1969 in St. Petersburg. Born in 1976 in Yaroslavl. Degree in Economics and Production Degree in Economics from St. Peters- Physical scientist from Moscow region. Degree in Financial Management from Law degree from Demidov Yaroslavl Management from Ordzhonikidze burg Economics and Finance State Institute of Physics and Technology Degree in Operational Research and St. Petersburg Economics and Finance State University (1998), Ph.D. in Law State Academy of Management (1995). University (2001). (1989). Mathematical Methods from the Academy (1992). MBA (Financial Management) from the Ordzhonikidze State Academy of Man- Degree in Marine Electronics and Au- PROFESSIONAL EXPERIENCE: PROFESSIONAL EXPERIENCE: Higher School of Commerce of Min- PROFESSIONAL EXPERIENCE: agement (1995). tomatics from State Marine Technical istry for Economic Development and Degree in Government Financial, University of St.Petersburg (1994). 2006 – present: NPV Engineering, 2006 – present: NPV Engineering, CEO. Trade of Russian Federation (2006). 2006 – present: PJSC Mostotrest, Credit and Tax Policy from the Russian Head of Legal Department. 2004 – 2006: Russian Railways, First Masters degree (Strategic Manage- Deputy CEO. Academy of Public Administration PROFESSIONAL EXPERIENCE: 2004 – 2006: Russian Railways, Head Deputy Head of Property Management ment) from the Russian Peoples’ 2002 – 2006: Montazhtransstroy-MTK, under the President of the Russian of Corporate Property Use Effective- and Corporate Structure Department. Friendship University (2007). CEO. Federation (2001). 2011 – present: NPF Blagosostoyaniye, ness Analysis Division. Deputy Executive Director. PROFESSIONAL EXPERIENCE: PROFESSIONAL EXPERIENCE: 2007 – 2011: РВМ Capital Managеment Company, CEO. 2007– present: NPV Engineering, Head 2006 – present: NPV Engineering, 2005 – 2007: International Contacts & of Transport Construction and Infra- Head of Corporate Development and Consulting Inc., CFO. structure Department. Joint-Stock Companies Management. 2005 – 2007: Russian Lead Group of 2004 – 2006: Russian Railways, Head Companies, CFO. of Lease Relations at Lease and Asset Management Department.

58 59 ANNUAL REPORT КОРПОРАТИВНОЕ УПРАВЛЕНИЕ ENGINEERING SPACE

Members of the Board of Directors of PJSC Mostotrest do not own, did not own during the reporting period any shares of the Company, and did not conduct any transactions with the Company’s shares.

The General Shareholders’ Meeting of May 14, 2015 elected Alexander Arthur John Williams as a new independed director. Mr. Mikhail Noskov withdrew his membership of the Board of Directors.

Mikhail Yuri Alexander Oleg Vladimir Noskov Novozhilov Shevchyuk Toni Vlasov

Independent Director. Non-Executive Director. Independent Director. Non-executive Director. Executive Director, CEO. Board member since 2011 Board member since 2012 Board member since 2012 Board member since 2008 Board member since 2011

Born in 1963 in Moscow. Born in 1974 in St. Petersburg. Born in 1983 in Moscow. Born in 1964 in Voronezh. Born in 1970 in Kharkov. Degree in International Economic Degree in Theoretical Economics from Degree in Finance and Credit from Degree in Industrial and Civil Con- MBA from the Russian Economics Relations from the Moscow Finance St. Petersburg State University (1996). the RF Government Finance Academy struction from Voronezh Engineering Academy of Business Administration Institution (1986). (2005). and Construction University (1986). (2006). PROFESSIONAL EXPERIENCE: Degree in Public and Municipal PROFESSIONAL EXPERIENCE: PROFESSIONAL EXPERIENCE: Management from North-West Public PROFESSIONAL EXPERIENCE: 2012 – present: NPF Blagosostoyaniye, Service Academy (2003), Ph.D. 2014 – present: T2 Rus Holding, CEO. Executive Director. 2004 – present: Association for in Economics. 2006 – present: PJSC Mostotrest, CEO. 2008 – 2014: SeverGroup, Deputy 2009 – 2012: TransCreditBank, Chair- Protection of Investor Rights, Deputy 2000 – 2005: Kolomna Plant Holding CEO for Economics and Finance. man of the Board. Executive Director, Executive Director. PROFESSIONAL EXPERIENCE: Company, CEO. 2007 – 2008: Severstal, Deputy CEO 2004 – 2009: Russian Railways, First for Economics and Finance. Deputy Head of Corporate Finance. 2010 – present: RZDStroi, CEO. 2006 – present: Russian Railways, Vice-President.

60 61 ANNUAL REPORT CORPORATE GOVERNANCE

Composition of the Audit Committee • Review status report on the Company’s procurement system In accordance with Rules and Regulations for the Board Audit management; Committee, the Audit Committee consists of three members • Consider draft of Internal Control Rules and Regulations; of the Board and is chaired by the Chairman of the Audit Committee. The Chairman of the Audit Committee must meet the independence • Restructure of the Internal Control Service; criteria in accordance with the requirements of the federal securities • Consider draft of Internal Audit Rules and Regulations; market regulator for listing the Company’s securities on Russian stock exchanges at the required level, as well as in accordance with • Review compliance with the Moscow Stock Exchange corporate internal documents. The CEO shall not be a member of the Audit governance requirements; Committee. The Chairman and other members of the Audit Commit- tee are elected by the Board of Directors by a three-fourths majority • Consider an action plan to comply with the Moscow Stock vote of its elected members. Exchange corporate governance requirements established by para. 2.18 appendix 2 to the Listing Rules. Composition of the Committee as at the end of 2014:

• Alexander Shevchuk – Chairman of the Audit Committee, HR and Remuneration Committee independent director; The Board established the HR and Remuneration Committee in • Maria Zhurba – Deputy Chairman of the Audit Committee, 2013. Vice-Chairman of the Board; • Yury Novozhilov – member of the Audit Committee, Key Responsibilities non-executive director. Key Responsibilities of the HR and Remuneration Committee: • Establish the Company’s priorities and strategies in the field Focus Area of HR policy and staff management, development and motiva- In 2014, the Audit Committee held 5 meetings, including tion; 3 in-praesentia and 2 in-absentia, which addressed the following issues: • Establish principles and criteria for the selection of candidates for the CEO, Deputy CEO and head of business unit positions; • Approve the Internal Control Service Action Plan; • Develop CEO’s and senior management performance analysis • Approve the Audit Committee Action Plan; and evaluation methods; • Internal Control Service status report on the internal control • Develop CEO’s remuneration principles and criteria, as well system; as managing authority and manager; • Review IFRS and RAS financial statements; • Approve internal corporate documents in the field of HR policy and staff management, development and motivation. • Review auditor opinions on IFRS and RAS financial statements;

• Draft recommendations to the Board of Directors Composition of the HR and Renumeration Committee on remuneration of the Company’s auditors for the audit The HR and Remuneration Committee as at the end of 2014 of financial statements and review of condensed consolidated consisted of: financial statements; • Mikhail Noskov – Chairman of the HR and Remuneration • Discuss approaches to tenders for the selection of the Company’s Committee, independent director; external auditor; • Vadim Korsakov – Deputy Chairman of the HR and • Recommend the candidate of the Company’s auditor to the Remuneration Committee, non-executive director; Board of Directors; • Irina Makanova – member of the HR and Remuneration • Review management accounts receivable report; Committee, non-executive director.

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BOARD OF DIRECTORS MEETINGS

The Board of Directors convenes at least twice a month. In between regular meetings the Board may convene extraordinary meetings to discuss urgent issues pertaining to the Company’s business operations and adopt relevant decisions. 2014 BOARD MEETINGS,

In 2014, the Board of Directors adopted the following key decisions: NUMBER OF ITEMS CONSIDERED

Approved 2014-2018 Mostotrest Development Strategy; Corporate Governance Approved Business Plan (Budget) of the Group and target KPIs; Finance Approval of Transactions Decisions related to the ordinary course of business: approval HR of the Company’s participation in tenders for construction Strategy contracts; Other Decisions relating to election of Chairman of the Board of Direc- tors, Deputy Chairman of the Board of Directors, committees 5 2 of the Board and the Corporate Secretary; 11 Decisions relating to distribution of profits and General Shareholders’ Meeting preparation and proceedings; 35 Decisions on amendments to the Articles of Incorporation and internal documents, including Dividend Policy Rules;

Decision on remuneration of external auditors; 97 Decisions related to financial and economic policy (credit policy issues);

Decisions on related-party transactions; 36 Decisions relating to operations of subsidiaries;

Decisions on disposal of non-core assets; Source: Company data

Decisions related to HR management.

2012-2014 BOARD MEETING STATISTICS 2012 2013 2014

Total Board Meetings 34 37 41 Scheduled 11 12 14 Extraordinary 23 25 27 In-praesentia – 2 2 In-absentia 34 35 39 Number of Items Considered 139 143 186

63 ANNUAL REPORT CORPORATE GOVERNANCE

2014 BOARD OF DIRECTORS AND AUDIT COMMITTEE Audit Committee Board Meetings MEETINGS ATTENDANCE STATISTICS Meetings

Board Member Held Attended Held Attended

G. Koryashkin 41 41 — — M. Zhurba 41 41 5 5 L. Dobrovsky 41 40 — — I. Egorova1 17 17 — — V. Korsakov 41 41 — — I. Makanova 41 41 — — M. Noskov 41 41 — — Y. Novozhilov 41 40 5 4 A. Shevchyuk 41 39 5 5 O. Toni 41 38 — — V. Vlasov 41 41 — —

COMPENSATION OF THE BOARD

Remuneration Rules and Regulations Board members are compensated in accordance with PJSC Mosto- trest Board Member Remuneration and Compensation Rules as approved by the General Shareholders’ Meeting. The remuneration PJSC MOSTOTREST POLICY ON REMUNERA- part of the document does not apply to independent directors that satisfy the independence criteria set out in the Rules and Regula- TION OF THE BOARD OF DIRECTORS IS BASED tions for the Board of Directors, as separate contracts are concluded with them as provided for in the Board Rules and Regulations. In ON THE PRINCIPLES OF TRANSPARENCY, addition, the CEO is not remunerated for his service on the Board. At the same time, all directors are compensated for expenses related ACCOUNTABILITY AND EVALUATION OF THE to their service on the Board. CONTRIBUTION OF REMUNERATED BOARD PJSC Mostotrest internal documents and agreements with members of the Board of Directors do not provide for any additional benefits MEMBERS TO THE COMPANY’S OPERATIONS, (severance pay) for members of the Board in the event of early termination of their powers. PJSC Mostotrest does not offer long- AS WELL AS MOTIVATION AND RETENTION OF term incentives (option plans) and does not enter into civil law contracts with members of the Board to regulate their activities as members of the Board. QUALIFIED AND COMPETENT INDIVIDUALS

1 Board member since 27 June, 2014.

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THE BOARD MEMBERS’ REMUNERATION CONSISTS OF A FIXED AND BONUS PARTS

FIXED BONUS

Per-meeting attended fee, regardless of meeting format Bonus based on full- year results

Equal to 6x minimum legal wage effective Linked to PJSC Mostotrest net profit as at the date of a Board meeting, for the year and the number in accordance with applicable of meetings attended by director. federal labor law.

The bonus part of the remuneration Fixed and bonus remuneration paid to Chairman of the Board The bonus part of the remuneration is calculated by the following is augmented by 50%. formula: Board Members’ Remuneration in 2014 Compensation = (NI×A)/(100×B×C), The total amount of remuneration paid to members of the Board of Directors in 2014 and 2013 was RUB39.3 million and RUB38.2 where NI – Net Income of the parent company of the Group; million, respectively, including, respectively, RUB23.2 million and А – Number of Board meetings attended by a director; RUB21.5 million for participation in meetings (fixed part). В – Number of directors on the Board; С – Number of Board meetings in the period between the In 2014 and 2013, PJSC Mostotrest did not reimburse any expenses Annual General Shareholders’ Meetings. of the Board members related to their service on the Board.

The bonus part of remuneration paid to members of the Board is subject to attendance of at least 50% of meetings held during their tenure.

COMPANY SECRETARY

To comply with corporate governance rules and procedures, Rules and Regulations applicable law and internal documents, the Board of Directors elects Approved by the Board of Directors, the Rules and Regulations for Company Secretary. the Company Secretary set out:

Rules and Internal Documents • Company Secretary candidacy requirements; Activities of the Company Secretary are governed by law and the • Company Secretary appointment and service termination following internal documents: procedures; • Articles of Incorporation; • Company Secretary subordination and procedure for interaction • Rules and Regulations for the Company Secretary; with management and business units of PJSC Mostotrest; • Rules and Regulations for the Board of Directors. • Company Secretary responsibilities and powers; • Company Secretary remuneration terms and procedure; Amendments to the Articles of Incorporation approved by the Gene- ral Shareholders’ Meeting of December 15, 2014, envision, in par- • Company Secretary liability. ticular, a broader set of responsibilities of the Company Secretary and include requirements for contents of Rules and Regulations for the Company Secretary, in accordance with the Moscow Stock Exchange Listing Rules (for Level I shares).

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Key Responsibilities Currently, key responsibilities of the Corporate Secretary include the following:

• Prepare and facilitate the General Shareholders’ Meeting; • Facilitate proceedings of the Board of Directors and its Committees; • Participate in disclosure policy implementation; • Support shareholder outreach; • Ensure compliance with law and internal documents to protect rights and legitimate interests of shareholders; • Participate in prevention of corporate conflicts; • Store corporate documents.

Corporate Secretary is accountable to Chairman of the Board. The Board of Directors sets the terms of contract with the Corporate Secretary, in accordance with Articles of Incorporation, Rules and Regulations for the Corporate Secretary and other internal documents. In addition to remuneration paid to Corporate Secretary

Gennady in accordance with the contract, Corporate Secretary may receive additional remuneration decided by the Board of Directors or based Bogatyrev on standalone PJSC Mostotrest regulations. At least once a year, the Corporate’s Secretary is subject to compulsory certification.

Deputy CEO for Legal Affairs. The Company’s shareholders may via the Company Secretary submit Company Secretary to Chairman of the Board questions, ideas and suggestions related to competences of the Board. Born in 1972 in Moscow. Graduated from the Moscow State Law Academy. Since 2008, the Company Secretary of PJSC Mostotrest is Gennady PROFESSIONAL EXPERIENCE: Bogatyrev.

2006 – present: PJSC Mostotrest Deputy CEO for Legal Affairs. 2002 – 2006: Deputy Head of Regional Administration of the Moscow Federal Property Management Agency.

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Management

The CEO, the sole executive body of PJSC Mostotrest elected by the Board of Directors, ensures day-to-day management of the Company’s operations. The CEO reports to the General Shareholders’ Meeting and the Board of Directors.

CEO and his Deputies Management Remuneration

The CEO submits to the Board of Directors reports on the financial PJSC Mostotrest management remuneration policy is based on the and economic operations of PJSC Mostotrest and its subsidiaries, principles of adequate motivation of management efficiency, and reports on implementation of resolutions of the General Share- enabling PJSC Mostotrest to attract and retain competent and holders’ Meeting and decisions of the Board during in-praesentia qualified professionals. Remuneration of the CEO and his deputies Board meetings. consists of two parts: a monthly salary (fixed part) set in accordance with the terms of employment contract, and an annual bonus (vari- PJSC Mostotrest CEO has 11 deputies, each responsible for a specific able part) linked to the Company’s overall performance. area of operations. Bonuses payable to the CEO are based on decisions of the Board Internal documents of PJSC Mostotrest (business plan, production of Directors. The CEO’s deputies are also entitled to receive addi- program) contain provisions requiring the CEO to refrain from tional remuneration in accordance with collective agreements. The actions that will or may potentially lead to a conflict of interests. KPI Committee on proposals from the CEO decides on bonuses for PJSC Mostotrest CEO and his deputies do not hold official positions the CEO’s deputies. A monthly bonus amount may not exceed two in competitor companies. monthly salaries.

CEO and his deputies do not own, did not own during the reporting Remuneration paid to senior management, including branch direc- period any shares of the Company, and did not conduct any tors and management of subsidiaries in 2014 and 2013 amounted transactions therewith. to RUB628 million and RUB586 million, respectively.

Currently, apart from KPI-linked bonuses, management is not addi- Management Liability Insurance tionally incentivized through option plans or other long-term programs. PJSC Mostotrest does not issue loans to members of its Members of the Board and the CEO shall perform their duties governing bodies and senior management. reasonably and in good faith in the interests of shareholders of the Company and in accordance with the law, Articles of Incorporation and internal documents of PJSC Mostotrest. At the same time, management is ordinarily exposed to the probability of making misjudged decisions that can lead to negative consequences for the Company, its shareholders or third parties. In order to minimize the risk, PJSC Mostotrest annually concludes liability insurance contracts covering members of the Board, CEO, CFO, Chief Accountant and regional PJSC MOSTOTREST CEO HAS 11 DEPUTIES, division (branch) directors, with a total liability limit of US$50 million. The insurance is intended not only to compensate PJSC Mostotrest, EACH RESPONSIBLE FOR A SPECIFIC AREA its shareholders or third parties in case of potential losses resulting from misjudged management decisions, but also supports the ability OF OPERATIONS of PJSC Mostotrest to employ highly qualified and competent managers, offering them protection from potential material claims.

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CEO and his deputies do not own, did not own during the reporting period any shares of the Company, and did not conduct any transactions therewith.

Vladimir Valery Viktor Vladimir Andrey Oleg Vlasov Dorgan Korotin Monastyrev Struk Tanana

CEO, Deputy CEO Chief Engineering Officer Deputy CEO Deputy CEO CFO Member of the Board for Marketing First Deputy CEO for Development for Production

Born in 1970 in Kharkov. Born in 1952 in Nikolaev. Born in 1937 in Semensk, Stanovlyankiy Born in 1978 in Novostroika, Zagorskiy Born in 1970 in Sverdlovsk. Born in 1966 in Katav-Ivanovsk, Chelyabinsk MBA from Business Administration College Degree in Airfield Construction from region of Lipetsk region. region of Moscow region. Degree in Technical Sciences (Bridge and region. of the Russian Federation Government Moscow Automobile and Highway Ph.D. in Technical Sciences (Bridge and Degree in Economics and Management Tunnel Construction) from Moscow Degree in Social and Economic Development Economics Academy. University, and degrees from Moscow Tunnel Construction) from Novosibirsk from Moscow State University of Railway Automobile and Highway University (1996). from Belarus State Economy Management College and Moscow Railway Engineering University. Engineering. PhD in Economics. University. 2006 – present: CEO of PJSC Mostotrest Ordzhonikidze Management Institution 1996 – present: various management Previously held management positions Ph.D. in economics. 1970 – present: various management 2000 – present: PJSC Mostotrest. positions at PJSC Mostotrest, including 2006 – present: CFO of PJSC Mostotrest. at forwarding companies in seaports positions at PJSC Mostotrest, including Prior to appointment as Deputy CEO Deputy CEO for Production, Head 2000-2005: CFO of Kolomna Plant Holding of Murmansk and St. Petersburg, 2010 – present: PJSC Mostotrest Deputy Chief Engineering Officer since 1990. for Development served as Head of Construction, Deputy CEO for Sochi Company. as well as at Severstaltrans. CEO for Marketing. Superior technical expert of PJSC Mos- of Economic Planning Department. Region, Head of Design and Engineering 2000 – 2005: CEO, Kolomna Plant Holding 35+ years of experience in transport infra- totrest. 40+ years of experience at Mostotryad-18, a PJSC Mostotrest Company. structure construction. Prior to Mostotrest in transport infrastructure construction. division. held various management positions at government agencies in charge of highway network development in Central Russia.

68 69 ANNUAL REPORT CORPORATE GOVERNANCE

INTERNAL CONTROL AND AUDIT PJSC Mostotrest has adopted an internal control system, governed by the Regulations for Internal Control of Financial and Economic Operations.

PJSC Mostotrest internal control system aims to: INTERNAL CONTROL SERVICE (ICS)

Key Responsibilities Key responsibilities of Internal Control Service of PJSC 1 Ensure reliability of financial and management information and Mostotrest include: reporting; • The regular collection and analysis of information on financial and economic operations of PJSC Mostotrest and its subsidiaries;

2 Promptly detect, analyze and manage operating risk; • Assessment of status and effectiveness of internal controls and risk management; • Identification of material risk factors; 3 Achieve current operating targets and ensure implementation of • Internal audits of financial and economic operations target programs within budgets; of PJSC Mostotrest and its subsidiaries; • Corporate investigations, unannounced audits and other activities; 4 Safeguard assets and ensure efficient use of resources; • Regular provision to the CEO and the Audit Committee of information about detected material weaknesses, of relevant recommendations and reports on results of their implementation; 5 Ensure compliance with applicable law and internal regulations • Relations with external auditors; and procedures. • Periodic recertification and rotation of internal control officers of PJSC Mostotrest, its subsidiaries and affiliates; • Organization of seminars on internal control and risk manage- . ment for managers and professionals of PJSC Mostotrest, its subsidiaries and affiliates.

PJSC MOSTOTREST INTERNAL CONTROL Regulations and Documents Internal Control Service of PJSC Mostotrest is governed by the exist- SYSTEM CURRENTLY COMPRISES ing legislation and the following internal documents: THE AUDIT COMMITTEE OF THE BOARD • Articles of Incorporation; • Regulations for Internal Control of Financial and Economic OF DIRECTORS, THE AUDIT COMMISSION Operations; • Rules and Regulations for the Audit Commission; AND THE INTERNAL CONTROL SERVICE • Rules and Regulations for the Board Audit Committee; • Rules and Regulations for the Internal Control Service.

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In addition, ICS relies on the International Standards on Auditing CHANGES IN ICS developed by the International Federation of Accountants, and the Code of Ethics of the Institute of Internal Auditors. Amendments to the Articles of Incorporation approved by the Gene- ral Shareholders’ Meeting of December 15, 2014, in particular, include Head of the Internal Control Service provisions for establishment and functional responsibilities of corpo- Head of the Internal Control Service is appointed and dismissed rate internal control units (para. 19.1 of the Articles of Incorporation) by the CEO following a decision of the Board of Directors, is func- and internal audit units (para. 19.2 of the Articles of Incorporation). tionally subordinated and has direct access to the Audit Committee These amendments have been made in accordance with provisions of the Board of Directors, and is administratively subordinated to of the Moscow Stock Exchange Listing Rules (for Level I shares) and CEO of PJSC Mostotrest. The Audit Committee of the Board of in connection with the entry into force of the Corporate Governance Directors approves ICS work plans. If there is a justifiable need, Code of the Russian Federation. the Head of the Internal Control Service is entitled to make independent decisions about unannounced and unscheduled audits, PJSC Mostotrest is currently establishing an internal control unit including in subsidiaries, with subsequent notification of the Audit in accordance with para. 19.1 of the Articles of Incorporation. The Committee of the Board of Directors about the adopted decisions. unit’s responsibilities include: • General coordination of risk management; Anticorruption Activities To ensure the independence of judgment and minimize the risk • Development of risk management methodology; of conflict of interest, ICS employees do not perform corporate • Training employees in the area of risk management and internal duties other than those stipulated in the Internal Control Rules control; of PJSC Mostotrest. • Analysis of risk portfolio and development of proposals for response strategies and redistribution of resources to address specific risks; • Consolidated risk reporting; • Ongoing oversight of risk management in business units of PJSC Mostotrest and, in accordance with the established procedure, in subsidiaries; • Informing the Board of Directors and the CEO about risk management effectiveness and other matters as stipulated in the risk management and internal control policy.

In addition, work is currently underway to establish an internal audit The Company is actively working to prevent unit (in accordance with para. 19.2 of the Articles of Incorporation), by restructuring the Internal Control Service of PJSC Mostotrest. corruption, fraud and abuse in all areas Rules and Regulations for the Internal Audit Service and the Internal Audit Policy of PJSC Mostotrest have been reviewed by the Audit of operations of PJSC Mostotrest Committee and recommended for approval by the Board of Direc- and its subsidiaries. The corporate website tors. contains a dedicated page, which serves as the “hotline” to report instances of fraud AUDIT COMMISSION committed by entities and individuals associated The Audit Commission is a permanent body of internal control, which ensures regular monitoring of financial and economic with the Company’s operations. The Internal operations of the Company. Control Service of the Company follows The Audit Commission acts in the interests of shareholders and reports to the General Shareholders’ Meeting. up on any alerts and messages, including Key responsibilities of the Audit Commission include monitoring those left anonymously. the Company’s financial and economic operations, ensuring compliance of financial and business operations with the Russian law and PJSC Mostotrest Articles of Incorporation, and independent assessment of information about the Company’s financial health.

71 ANNUAL REPORT CORPORATE GOVERNANCE

EXTERNAL AUDITOR

In accordance with the Russian legislation, the General Shareholders’ Actual fees paid by PJSC Mostotrest to Gross-Audit for independent Meeting annually approves the auditor to conduct an independent audit of 2014 RAS financial statements amounted to RUB8.9 million audit of financial statements of the Company. The Board of Directors (including VAT). by recommendation of the Audit Committee proposes candidate of auditor. Actual fees paid by the Company to KPMG for independent audit of 2014 IFRS financial statements and 1H of 2014 IFRS interim finan- The size and procedure for the payment of remuneration to the cial statements amounted to RUB42.0 million (including VAT). auditor are set out in the contract for audit services. Auditor fees are subject to approval by the Board of Directors.

Mostotrest Auditors in 2014: REGISTRAR • For PJSC Mostotrest RAS financials – Gross-Audit (member Since 1998, RDTs Paritet, a licensed independent registrar, has been of the self-governing non-commercial partnership “Common maintaining Mostotrest shareholder register under a long-term wealth Audit Association”; auditor of PJSC Mostotrest standing agreement. since 2009); • For the Company’s IFRS financials – KPMG (member of the PJSC Mostotrest registrar also participates in the organization self-governing non-commercial partnership “The Audit Chamber of the General Shareholders’ Meeting (in particular, advance of Russia”; auditor of the Company since 2009). newsletter mailings, works in the Counting Commission).

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INFORMATION FOR INVESTORS AND SHAREHOLDERS

Authorized share capital of the Company is RUB39,510,170 and is divided into 282,215,500 ordinary shares with a par value of RUB0.14 each.

SHARE CAPITAL

Authorized share capital of the Company is RUB39,510,170 and SHARE CAPITAL STRUCTURE is divided into 282,215,500 ordinary shares with a par value of RUB0.14 each. The total number of persons included in the list of AS AT MAY 5, 2015, % persons entitled to participate in the Annual General Shareholders’ Meeting in 2015 was 2,518 as at April 13, 2015. AM companies for NPF Blagosostoyanie 67.8% According to the shareholder register as at the given date, Mosto- trest’s shareholder base comprises of 2,257 individuals owning Free float 32.2% 10,572,054 shares (3.7461% of the share capital), 260 legal entities owning 271,636,046 shares (96.2513% of the share capital) and 1 Central Bank account of unidentified persons owning 7,400 shares 32 (0.0026% of the share capital).

SHARE MARKET 68

OJSC TFK-Finance, an investment company owned by management companies of NPF Blagosostoyanie, owns 63.6% of PJSC Mostotrest. AM Transfingroup, management company of NPF Blagosostoyanie, owns 4.2% of PJSC Mostotrest. NPF Blagosostoyanie is a non-government pension fund established with IPO the participation of Russian Railways. There are no other beneficiary shareholders with 5%+ shareholdings In 2010, the Company completed an initial public in the Company. PJSC Mostotrest and its subsidiaries do not hold any Mostotrest shares offering (IPO), which was the first ever on their balance sheets. in the history of the Russian infrastructure At the end of April 2015 OJSC TFK-Finance who owned 25% of the Compa- ny’s shares before that, announces about acquisition of a 38.63% stake in construction market. The IPO created new Mostotrest from Marc O’Polo Investments Ltd. Marc O’Polo Investments Ltd is a holding company whose beneficiaries competitive advantages, including access are senior managers of the N-Trans Group of Companies, a leading private operator in the transport services market in Russia, CIS and the Baltic to capital markets on more favorable terms States: Konstantin Nikolayev, Nikita Mishin and Andrei Filatov (owned a total of 31.55% of the share capital in equal proportions), and Igor Roten- and greater confidence on the part of investors berg (owned 68.45%). OJSC TFK-Finance obtained control over 63.6% of the Company after the and customers. The Company’s new shareholders transaction undertaking.

were mostly major long-term domestic Source: Company data and international investors confident

in the prospects for the development Ordinary registered shares of the Company are on the list of securi- of the Russian infrastructure sector. ties admitted to trading on the A1 of Moscow Stock Exchange (Stock ticker: MSTT), and are included in the calculation base of the MICEX Index.

73 ANNUAL REPORT CORPORATE GOVERNANCE

DIVIDEND POLICY DEBT PORTFOLIO

In April 2014, the Board of Directors approved the Regulation The Mostotrest Group currently raises loans exclusively from on PJSC Mostotrest Dividend Policy, as amended. The main changes Russia’s largest banks, including VTB, Sberbank and Gazprombank. compared with the earlier version: (1) dividend payout period These banks are the Company’s long-term partners and preferred in accordance with amendments to the Federal Law On Joint- credit providers, primarily due to their decision-making efficiency. Stock Companies, and (2) basis for dividend payments (net profit In turn, for the banks, the Group is a borrower with an impeccable for reporting period and retained earnings from previous periods, reputation, and loans are provided on an unsecured basis, with as opposed to net profit for reporting period only under previous interest rates below those available to the broader industry. The dividend policy provisions). The latter change complies with the Company strives to maintain liquidity at a level not higher than existing legislation and better serves the interests of shareholders. 4x Net Debt/EBITDA, which is an average requirement of the PJSC Mostotrest dividend policy is based on a balance the interests lending banks. The Group raises bank loans in rubles and at fixed between the Company and its shareholders when determining the interest rates. Under the existing agreements with the banks, total size of dividend payments, on maximization of the Company’s credit available to the Group as at December 31, 2014, amounted investment attractiveness and capitalization, and ensures respect to RUB35.5 billion (RUB50.3 billion as at December 31, 2013) . and strict observance of shareholders’ rights as stipulated in the existing legislation of the Russian Federation, Articles At year-end, the Company typically receives advances from of Incorporation of PJSC Mostotrest and internal documents. customers, which, inter alia, are used to repay short-term loans, ensuring flexibility and ongoing access to liquidity. If the Board of Directors recommends to the General Shareholders’ Importantly, all credit limits are set at the Group level, Meeting to pay dividends, such dividend may not be less than 30% i.e. subsidiaries enjoy access to debt financing on the same of the Group’s IFRS net profit attributable to shareholders, adjusted terms as the parent. for certain non-cash effects, including consolidation adjustments, as specified in detail in the Dividend Policy Regulation. If the amount In 2014, the Group raised loans mainly for the following purposes: of dividend calculated in this way exceeds net profit for the year and • Working capital financing, including co-financing retained earnings under RAS, the Board is required to reduce the of long-term investment contracts; total by the corresponding amount. The recommended dividend depends on the amount of net profit of the Group for the correspond- • Repayment of loans used to finance acquisitions completed ing financial period and on the Group’s production development and in 2012; investment needs. The amount of dividend recommended by the Board is subject to approval by the General Shareholders’ Meeting. • Investment program.

Dividends are paid in cash. In accordance with the Russian law, As at December 31, 2014, the total debt of the Group amounted the basis for dividend payments is net profit of PJSC Mostotrest, to RUB40.5 billion, a 8.9x increase from December 31, 2013. as per financial statements prepared in accordance with the Russian Negative net debt as at December 31, 2014 was RUB21.2 billion. law. However, dividends may be paid both from net profit for the financial year of PJSC Mostotrest and from retained earnings of previous years.

Based on 2014 results and in accordance with the Group’s Dividend Policy Regulation, the Shareholders’ Meeting approved a total dividend of RUB2,000 million, or RUB7.09 per share.

DIVIDEND HISTORY 2010 2011 2012 2013 2014

Dividend Payment, RUB million 845 2,004 2,201 2,001 2,000

Share of net profit allocated to dividend payment, % 49 54 51 89 33

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NET DEBT STRUCTURE, RUB million 2012 2013 2014

Short-Term Loans and Borrowings: 6,770 2,186 37,929

Secured Bank Loans — — 5,021

Unsecured Bank Loans 5,193 13 30,563

Financial Lease Liabilities 1,577 2,173 2,345

Long-Term Loans and Borrowings: 1,892 2,352 2,598

Financial Lease Liabilities 1,892 2,352 2,598

Total Debt 8,662 4,538 40,527

Cash 8,864 26,567 52,067

Bank deposit with maturities more than 3 month 70 23 9,702

Net Debt (272) (22,051) (21,242)

INFORMATION DISCLOSURE

In accordance with the Code of Corporate Conduct of PJSC Mosto- WEIGHTED AVERAGE INTEREST RATES trest, the Company considers openness and transparency of information about its business operations and financial performance as a mechanism for control by its shareholders, the government and ON BANK LOANS, % society as a whole, as well as an important tool to enhance the confidence of investors and counterparties.

The Company ensures completeness, authenticity and promptness of disclosure and availability of information to all shareholders and other interested parties.

In March 2015, PJSC Mostotrest approved the Regulation on Infor- Source: Company data mation Policy, which establishes the scope, timing and methods of public disclosure and provision of information to shareholders and other interested parties. PJSC Mostotrest has assumed additional disclosure obligations, as compared to existing legal requirements. PJSC Mostotrest discloses information about its subsidiaries, mission and strategy, significant risks, social and environmental policies, Additional forms of disclosure include press conferences for Russian as well as additional information pertaining to corporate governance. and foreign media, conference calls to investors and analysts, and Additional disclosure is made in the Annual Report. presentations to investors in major international financial centers. The corporate website discloses:

• Annual Report; Corporate Website • Annual and interim consolidated financial statements in accordance with IFRS; The main form of disclosure is the publication of information on the website of PJSC Mostotrest at: www.mostotrest.ru. • Presentation of financial results in accordance with IFRS; • Unconsolidated financial statements in accordance with RAS;

75 ANNUAL REPORT CORPORATE GOVERNANCE

• Composition of management bodies; Chief Accountant, CEO deputies and Company Secretary, including brief biographical COMPANY MEETINGS WITH INVESTMENT FUNDS data; IN 2014, % • Information about the Committees of the Board of Directors; During Investment 8 • Information about key decisions of the Board; Conferences Roadshow Meetings • Information about material PJSC Mostotrest shareholdings in Office Meetings other companies;

• Articles of Incorporation, as amended; 42 • Key internal corporate documents governing activities and 50 remuneration of management and control bodies; dividend policy and insider information; • Information about current business operations, including press releases, devoted to Group’s activities; • Other information about PJSC Mostotrest and its subsidiaries and PARTICIPATION OF SENIOR MANAGEMENT IN MEETINGS affiliates. WITH INVESTMENT FUNDS IN 2014, %

10 CEO, Data Protection, and Prevention CFO, of Usage of Insider Information IR-officer 21 CFO, IR-officer The Company ensures the proper storage, restricted access to and 69 protection of commercially and business sensitive information. IR-officer In particular, PJSC Mostotrest adopted the following relevant internal documents:

Source: Company data 1 List of documents which are deemed commercially-secret ;

2 Instructions for trade secret protection; Investor Relations (IR)

To create favorable conditions for analyst and investor outreach, the Company established the Investor Relations Office. 3 Regulations on insider information; The key IR objective is to establish the most effective two-way communication with the investment community, by providing investors, analysts, the financial media and other interested parties with 4 List of insider information; relevant information about the financial and operating activities of the Group, which enhances investor trust and raises the Company’s market valuation.

5 List of persons with authorized access to insider information During the reporting period, the Company significantly improved the (contracts with persons on the list contain provisions for quality of information disclosure. A significant contributing factor non-disclosure and non-use for personal gain of insider was management meetings with representatives of investment information available to them). funds. The meetings were held both in the Company offices and during international investment conferences.

In 2014, the Company held more than 100 meetings with representatives of Russian and international investment funds.

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2014 KEY IR EVENTS

Event Time Place

Attendance of the M-11 Highway Head Segment and the Festivalnaya Street – Businovskaya Interchange (including Businovskaya Interchange) segment opening December 2014 Moscow ceremonies

WOOD’s Winter in Prague, Emerging Europe Conference 2014 December 2014 Prague

London, 1H2014 IFRS Results Announcement and Non-Deal Roadshow October 2014 Moscow

Russia Calling! VTB Capital Investment Forum October 2014 Moscow

Field trips to Mostotrest completed project sites for sell-side analysts August 2014 Sochi

Field trips to Mostotrest construction sites for sell-side analysts August 2014 Moscow

Goldman Sachs Russian Corporate Day June 2014 Moscow

London, Moscow, 2013 IFRS Results Announcement and Non-Deal Roadshow April 2014 Helsinki, Stockholm

Deutsche Bank Investor Conference January 2014 London

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4 Social Responsibility ENGINEERING SPACE

80 Personnel BUILDING ON THE PAST 85O ccupational Health and Industrial Safety (OHS) 90 Environmental Protection

Mostotrest values and preserves the best of the past. In 1999, Mostotrest built Pushkin Bridge incorporating parts of the old St. Andrew’s Bridge, which was built in 1907 and is a monument of architecture and engineering. To preserve the architectural heritage, the arch of the foot- bridge, the main design feature which weighs about 1,500 tons, was moved by three barges along the Moscow River and used to erect the new Pushkin Bridge.

PUSHKIN BRIDGE, 2014

ST. ANDREW'S BRIDGE, 1954

78 79 ANNUAL REPORT SOCIAL RESPONSIBILITY

PERSONNEL

People are the key resource and are critically important for the achievement of the Company’s corporate goals and its existence as a thriving enterprise.

Mostotrest pays due attention to the social dimension, namely: Human resources are critical to the Company. Therefore, provision of professional staff in all operating areas and employee motivation • HR policy, including the incentivization system and opportunities to ensure labor efficiency and productivity are the cornerstones for career growth and professional development; of the Company’s social policy. The principal objectives of Mostotrest HR policy are to: • Occupational health and industrial safety, in particular, employee training and testing, favorable labor conditions and employee • Improve labour productivity; healthcare; • Maintain optimal quantitative and qualitative HR structure; • Environmental protection, including legal compliance, minimiza- tion of negative impact on the environment, as well as hazardous • Develop a sound employee incentivization system; waste collection, utilization, detoxication, transportation and • Create favorable working conditions; disposal. • Ensure continuous professional growth and career development; • Maintain and develop a reserve pool of highly skilled employees; • Organize effective generational change process (participate in training young professionals in specialized educational institutions, organize professional mentorship); • Develop social partnership with public, trade union and professional associations and professional communities; • Maintain corporate team spirit.

Mostotrest consists of a team of highly skilled professionals. The THE SKILLS AND KNOWLEDGE OF EMPLOYEES, combination of our management’s multifaceted expertise, our engineers’ unique technical knowledge, gained from decades of working SUPPORTED BY COMFORTABLE AND SAFE on major national transport infrastructure projects, and the dedica- tion of our workers, means that our team is one of the strongest WORKING CONDITIONS AND SOCIALLY RESPON- in the infrastructure construction market in Russia. The high standards of professionalism of its employees has long been one of the SIBLE BEHAVIOR OF THE EMPLOYER MINDFUL Company’s strongest competitive advantages. Labor relations at Mostotrest are governed by the Russian legislation BOTH OF HIS STAFF AND ENVIRONMENTAL and the Collective Agreement between the employer and the employees represented by the Trade Union Committee, which has been SAFETY ARE KEY DRIVERS OF THE COMPANY’S extended until 2016. The trade union represents almost 10,000 staff members and has been working to enhance and protect workers’ OVERALL PERFORMANCE rights and interests for over 75 years. The Committee on Person- nel and Remuneration is in charge of developing HR strategy and policies.

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STAFF COMPOSITION AND COUNT

The average number of Mostotrest employees in 2014 was 29,343, an increase of 13% year-on-year, driven by substantial increase in construction volumes. Headcount mostly increased at TSM and Mostotrest-Service. At TSM, staff numbers were up 23%, driven 2014 STAFF BY FUNCTION, % by stronger in-house construction volumes and the establishment of new subdivisions, including the Bituminous Concrete Unit and Field based staff the Industrial Staff Training and Retraining Unit. Staff increases Engineers at Mostotrest-Service were associated with the expansion of existing branches and the establishment of the Sheremetyevo Branch Financial and Economic specialists to service the head segment of the M-11 Highway (km 15 – km 58) Others and the Businovskaya Interchange. 2 10 Complex engineering solutions and modern technologies require certain level of competence of employees. We pride ourselves 12 on our highly qualified team of managers, engineers and administrative staff, of which 29 hold a Ph.D. degree, 76% have a University degree, and 17% have completed secondary vocational training.

Group staffing levels remain stable, with low employee turnover. Company’s total staff turnover was 24%, with 27% for workers and 15% for professionals. 86% of employees are men, reflecting 76 the nature of the Company’s operations.

Source: Company data

2014 STAFF BY JOB CATEGORY, %

Field based staff

Professionals MOSTOTREST AVERAGE HEADCOUNT, PERS Managers Office based staff 10 1 +13% 13 2014 29,343

2013 25,871 76 2012 23,204

Source: Company data Source: Company data

81 ANNUAL REPORT SOCIAL RESPONSIBILITY

INCENTIVIZATION SYSTEM

In addition, the Company has a system of intangible benefits. Mostotrest offers a wide range of social benefits, including voluntary health insurance, which totaled more than RUB300 million in 2014; THE COMPANY HAS SET UP AN EFFECTIVE employee and employee family compensation for rehabilitation at health resorts, paid participation in cultural, recreational and sports EMPLOYEE INCENTIVIZATION SYSTEM activities, and provision of additional annual holiday leave, subject to continuous employment with the Company for more than 5 years. THAT EFFECTIVELY COMBINES An equally important driver of the Company’s success is staff cohe- FINANCIAL AND BENEFITS IN-KIND sion and effective teamwork. Mostotrest organizes annual events to celebrate Builder’s Day, the industry’s professional holiday, for anniversaries of the establishment of regional divisions, various INCENTIVES. SALARY CONSISTS competitions, as well as mass cultural, recreational and sports events: the Corporate Winter Games, the Victory Day Tournament OF FIXED AND VARIABLE COMPONENTS, and the Mostotrest Football Cup. To keep staff regularly informed about the Company’s operations, labor conditions, management AS WELL AS SOCIAL BENEFITS decisions and upcoming events, which are critical to maintain operating efficiency and foster the team loyalty, the Company has a monthly corporate newspaper and uses the internal corporate website, which contain both formal (corporate structure, internal corporate library, corporate news, etc.) and informal information The guaranteed (fixed) part of the salary is paid to employees (employee birthdays, photos of corporate events, etc.). Such tools for their service in accordance with labor legislation of the Russian that support interaction between the management and employees Federation (tariff part and compensation payments in the form have a positive effect on the corporate spirit, creating a sense of of bonuses, allowances and other payments). The bonus (variable) involvement in the Company’s operations and adherence to a single part of the salary is paid out of the collective bonus pool, which cause. Team unity and teamwork are critical drivers of the Company’s materially incentivises employees to improve their productivity and business success. performance. In addition, the Company’s incentivization system includes non-recurring bonuses and annual performance-based bonuses, which enhance motivation to achieve specific targets and encourage employee creativity to solve particular problems.

In addition to monthly and one-off bonuses, Mostotrest employees receive payments for public holidays, financial compensation upon AVERAGE SALARY, RUB THOUSAND reaching the retirement age, anniversary bonuses, as well as financial help in hardship situations. Other social benefits include provision of Company housing and hot meals to employees on weekdays.

2014 average salary of the Group was RUB52.8 thousand, a 14% increase year-on-year. +14% 2014 52.8 To provide financial support to its honored retirees, Mostotrest has instituted the title of “Honored Pensioner of Mostotrest”. 2013 46.5 The title is conferred for life to workers receiving an old-age pension, subject to continuous service at Mostotrest of not less than 25 years 42.5 and holding state awards of the USSR, the Russian Federation and 2012 the constituents of the Russian Federation for professional achievements. The title is conferred by the Board of Directors on recom- Source: Company data mendation of heads of regional divisions and chairperson of corresponding trade union committees. Honored Pensioners of Mostotrest receive a lifetime monthly benefit.

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COLLECTIVE AGREEMENT

The Collective Agreement is the core legal document governing Key goals of the Collective agreement: social and labor relations between the employer and employees of the Company. Mostotrest’s Collective Agreement was concluded • Develop a social partnership system in the field of social and between the employer represented by the CEO, and employees rep- labor relations; resented by the Joint Trade Union Committee of the Company at the • Improve efficiency of the Company; employee conference held on March 28, 2013, for a period of three years. The Collective Agreement was registered in the Committee • Stimulate efficient labor; of Public and Interregional Relations of the Government of Moscow • Enhance social responsibility of the parties for the Company’s on April 16, 2013. financial and operating results;

The Collective Agreement is a powerful employee motivation tool • Improve wellbeing and social protection of employees. as it signifies that Mostotrest is a stable and responsible organization that cares about its employees on long-term basis. For construc- The agreement establishes obligations of the parties in the area of tion companies, long-term employee commitment and focus on labor conditions, including wages, employment, retraining, terms of long-term goals are particularly important, as the average time for layoff, length of work and rest time, improvement of labor conditions completion of a project is several years. The Collective Agreement and safety, social security and other issues. For example, the Collec- boosts employee loyalty, strengthens ties to corporate values, and tive Agreement provides for an additional paid annual leave, subject enhances employee commitment to further development of the to continuous service at the Company for over 5 years (1 calendar Company, increased productivity and overall performance. day), 10 years (2 calendar days) and 15 years (3 calendar days).

REWARDS

Employees with diligent performance, increased productivity, For exceptional achievements for the Company and the state, emp- initiative, long and unblemished track-record in the Company loyees are nominated for government, official awards and honorary are rewarded with: titles. In particular, in 2014, representatives of the Mostotrest management team received government awards for their contri- • Official expressions of gratitude; bution to the preparation of the XXII Olympic Winter Games and XI Paralympic Winter Games in Sochi. Including, Mostotrest CEO • Bonuses; Vladimir Vlasov and TSM CEO Boris Sakun were awarded the Order • Valuable gifts; of Friendship and the Medal of Honor, respectively. • Certificates of Merit; A total of 37 employees were acknowledged with awards in 2014: • Mostotrest Honored Employee badges; • Titles awarded: • Mostotrest Honored Pensioner title. – Honored Builder of the Russian Federation: 1; – Honored Builder of Moscow: 3; CORPORATE AWARDS • Order of Friendship: 4; • Badge of Honor: 1; MOSTOTREST HONORED EMPLOYEE – • Certificates of Merit and Official Expressions of Gratitude: 28. 69 FIRST CLASS

MOSTOTREST HONORED EMPLOYEE – 387 SECOND CLASS

CERTIFICATES OF MERIT AND OFFICIAL 476 EXPRESSIONS OF GRATITUDE

83 ANNUAL REPORT SOCIAL RESPONSIBILITY

STAFF TRAINING AND RETRAINING

Creating opportunities for career growth is inextricably linked with The approach is consistent with the Company’s future key employee employee training and development. Mostotrest’s compulsory train- training and development needs, enabling it to provide a comprehen- ing system for workers and engineers complies fully with govern- sive development programme for its key talent pool that provides ex- ment legislation of the Russian Federation and includes vocational posure to learn about both the nuances of managing specific aspects training and retraining, as well as seminars and management and of the business as well as the construction process as a whole. professional staff training. All engineers and technical staff undergo compulsory training at least once every 5 years. Traditionally, such For many years now the Company has been running a program training is conducted on the basis of specialized universities, mainly of cooperation with specialized Moscow-based universities, includ- at the Moscow State University of Railway Engineering (ex Moscow ing the Moscow State University of Railway Engineering (MIIT) and Institution of Transport Engineers), with the participation of key the Moscow Automobile and Highway University. Students from Mostotrest professionals. Key Mostotrest professionals act as lead many universities have undertaken industrial and pre-graduation lecturers instructing alongside university professors in a number internship at Mostotrest. of groups of advanced training. The Company welcomed more than 150 interns in 2014, and hired Mandatory advanced training for non professional workers is usually more than 270 graduates from specialized universities and colleges conducted by industrial training specialists of the Corporate Training between 2012-2014. Young professionals have represented the and Retraining Service under the CEO Administration, with subse- Company in several specialized competitions: in the reporting period, quent mandatory testing at a licensed training center. Mostotrest employees won the Professional Excellence Competition for young professionals, held by the Moscow City Construction In 2015, the Company expects to obtain a license for educational Department among young professionals, in the categories Road and activities, enabling it to conduct most of its industrial training Transport Construction and Best Construction Management. in-house.

Mostotrest continues to work actively to establish a common talent pool for key management positions and has expanded the program in 2014. In addition to covering professionals with management experience, the Company developed procedures for the selection and development of young line managers who have management poten- ALL ENGINEERS AND TECHNICAL tial and are motivated to take on higher-level positions in the future. All participants in the consolidated talent pool receive both general STAFF UNDERGO COMPULSORY TRAINING and specialised training in order to meet the Company’s specific skills and development needs. Each training program includes lectures as AT LEAST ONCE EVERY 5 YEARS well as an interactive component-workplace learning, accompanied by “live dialogue” with Mostotrest experts, visits to peer companies.

TRAINING AND RETRAINING COSTS, TRAINING AND RETRAINING STATISTICS, RUB MILLION PERS

2014 24.4 2014 3,743

2013 18.1 2013 2,415

2012 15.6 2012 1,961

Source: Company data Source: Company data

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OCCUPATIONAL HEALTH AND INDUSTRIAL SAFETY (OHS)

Creating an enabling environment for employees is a key driver of the Company’s success.

Objectives and Principles Relevant Legislation

Acknowledging the importance of industrial safety and the level The following legislation governs occupational health and industrial of responsibility for compliance, Mostotrest management pays due safety: attention to operational health and safety.

Mostotrest aims, the most of all, to substantially reduce and, going Federal Law 197-FZ of December 30, 2001, “The Labor Code forward, completely eliminate occupational injuries, reduce the in- of the Russian Federation”; cidence of occupational diseases, eliminate industrial accidents and improve efficiency of labor protection.

The following quality, health and safety principles guide the Compa- Federal Law 116-FZ of July 21, 1997 “On Industrial Safety ny’s efforts in the area, in accordance with the corporate policy: of Hazardous Production Facilities”; • People are our most valuable asset; • Responsibility for employee life and health; mandatory suspen- sion of any work in the event of a potential threat to safety Russian Government Resolution 263 of March 10, 1999, of employees; “Rules for Industrial Control of Compliance with Industrial Safety Requirements at Hazardous Production Facilities”; • Industrial safety must be an integral component of each Compa- ny’s employee’s operation; • Compliance with relevant national legislation; progressive and consistent improvement of requirements in those areas where Russian Government Resolution 492 of June 10, 2013 international standards set higher requirements; “On Licensing Fire-, Explosion-Prone and Chemically Hazardous Production Facilities of Hazard Class I, II, and III”; • Disclosure of information about both positive and negative results of the Company in the field of occupational health, industrial safety and environmental protection to relevant regulatory and supervisory bodies, as required by applicable law; Building codes and regulations, sanitary rules and norms, all • Encourage employees to contribute to improvement of occupa- Union State Standard labor protection standards, Ministry of tional safety, industrial safety and environmental protection. Labor and Social Protection directives, occupational health regulations, Labor Safety Standards System (LSSS);

KEY PRINCIPLE IN THE FIELD OF LABOUR Other legal documents.

SECURITY AND SAFETY: PERSONNEL IS A SUPREME VALUE

85 ANNUAL REPORT SOCIAL RESPONSIBILITY

OHS MANAGEMENT SYSTEM In 2014, as in 2013, no major accidents were recorded at our high- risk production facilities, defined as those involving major structural Since 2003, Mostotrest has been operating an Occupational Health failures, or non-controlled explosions or hazardous releases. At the and Industrial Safety management system developed on the basis of same time the number of reported incidents, involving breaches of international standards, including OHSAS 18001: 1999. The system operating procedure or technical failure or a near-miss incident, also includes a manual and a set of standards governing OHS manage- decreased, reflecting the beneficial impact of safety and accident ment. prevention measures implemented in 2014.

The Company established dedicated teams to coordinate efforts Working with contractors implies the need to ensure contract execu- in the area of occupational health, industrial safety and environmen- tion in combination with ensuring health and safety of all employees tal protection. Mostotrest OHS Office reports to the Chief Engineer and third parties. Contractors are required to submit OHS permits, of the Company. while contractor employees are briefed on safety. In addition, the Company checks proper operating condition of contractor equip- The CEO Administration OHS Office runs the Occupational Health ment, issues permits for construction and installation work on the Department and the Industrial Safety Department. In addition, Company’s sites and controls labor conditions on those sites. working groups on industrial safety have been established within the CEO Administration and regional divisions. At subsidiary level, OHS is supervised by consolidated occupational health and industrial safety departments. INDUSTRIAL INJURIES

Since 2013, responsibility for OHS at Mostotrest is formally divided The Company’s operations involve work on hazardous sites, creating between the CEO Administration and regional divisions. The multi- the risk of injury. level OHS management and control system allows for more effective policies in the field of occupational health and industrial safety, sup- Analysis of the causes of an increase in total injuries in 2014 reported by a clearer understanding of duties and responsibilities vealed insufficient control of compliance with the OHS requirements by each business unit of the Company. and a lack of production and labor discipline of line engineers and technicians on construction sites, which will be taken into account In 2014, jointly with the primary trade union, the Company devel- in prevention activities in 2015. Accident prevention measures oped and implemented the terms of reference for the Corporate implemented in 2014: Occupational Health Committee and the rules regarding Proce- dures in the Event of Emergencies and Accidents at the Company’s • Unscheduled OHS audits; Facilities, as well as updated the Corporate Order On Assignment • Development of an accident prevention action plan; of Responsibility for Ensuring Occupational Health and Industrial Safety, and standards for free provision of protective clothing and • Unscheduled OHS and industrial discipline briefings; footwear to employees of the Company exposed to hazardous work- • Administrative prosecution of breeches of OHS rules and ing conditions and associated pollution. regulations.

KEY WORKPLACE INJURY STATISTICS, 2012-2014 2012 2013 2014 OHS Average headcount 23,204 25,871 29,343 90 PROFESSIONALS Injuries 53 50 65 Injury Frequency Rate 1 2.28 1.93 2.22 MOSTOTREST OHS SERVICE EMPLOYS Labor losses, man-days 2,592 2,103 2,921 Average Severity rate , man-days 2 48.91 42.06 44.94

1 Injury Frequency Rate: number of injuries per 1,000 employees. 2 Average severity rate: disability days per accident.

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RELEVANT DEPARTMENT RESPONSIBILITIES OCCUPATIONAL HEALTH INDUSTRIAL SAFETY

Protect employees from injury, and assets and facil- Ensure availability of job-specific safety documenta- ities from damage through creation of healthy and tion that determines rules of safety work at industri- safe working conditions, and implement measures al facilities aimed at physical protection of industrial facilities of the Company and prevention of unauthorized access Diagnostics, testing and inspection of production machinery and technical equipment

OHS training and knowledge testing

Timely disclosure to supervisory bodies of reliable information on occupational accidents and environ- Mandatory social insurance against occupational mental accidents, in accordance with applicable law accidents and occupational diseases, and sanitary services to employees, in accordance with applicable law

Internal investigation and record of any accident, incident or occupational injury; analysis of causes and conditions that contributed to their occurrence, Admission of employees to work based on development and implementation of appropriate qualification requirements and subject to absence preventive measures of medical contraindications to the applied job

Provision of special clothing, footwear and other per- Measures to prevent accidents and save lives and sonal protective gear in accordance with established health of employees in the event of accidents, standards and working conditions, and monitoring including first-aid availability and correct use of personal and collective protection

Compliance of designed, built, renovated and main- tained buildings, structures and other infrastructure Reward employees and their representatives for with technical regulations, construction, sanitary, fire active involvement in ensuring health and safety codes, standards and other normative documents

87 ANNUAL REPORT SOCIAL RESPONSIBILITY

MOSTOTREST KEY OHS MEASURES AND EVENTS IN 2014 OCCUPATIONAL HEALTH INDUSTRIAL SAFETY

Regular inspections of working conditions and safety Regular audits of the organization and control at production sites, and sanitary condition of ameni- of production and construction sites; development ties; development of measures to eliminate detected of measures to eliminate detected violations and violations; follow-up monitoring;

Events: Events: – Workshops and seminars for occupational health – Seminars and meetings of experts involved in professionals with participation of the State industrial control of compliance with industrial Labor Inspection representatives in Moscow; safety at hazardous production facilities, with – monthly “Occupational Health and Fire Safety participation of representatives of the Federal Day”; Service for Environmental, Industrial and Nuclear – network meetings of technical managers, with Supervision (Rostekhnadzor); reports on the state of occupational health at the – Network meetings of technical managers, with Company; reports on the state of industrial safety at the Company; Participation in a Moscow City Government charity – Seminars on new regulations; event for families of builders having lost the wage earner as a result of an industrial accident; Identification of the Company’s hazardous production facilities and subsequent re-registration in the Establishment at Mostotrest of a Labor Protection state register of hazardous production facilities Committee on a parity basis with the trade union; in accordance with the law;

Use of insurance contributions for compulsory social Compulsory civil liability insurance in accordance insurance against accidents at work and occupation- with applicable law on compulsory insurance of civil al diseases to finance preventive measures to reduce liability of the owner of the hazardous production fa- workplace injuries and occupational diseases: cility responsible for injury as a result of an accident; – Targeted assessment of working conditions and Development and approval of the Procedure for certification of workplaces; Examination of Industrial Safety and Extension of the – Mandatory periodic medical examinations; Term of Safe Operation of Technical Devices, Equip- – Resort treatment courses for workers employed ment and Structures at the Company’s hazardous in harmful or hazardous jobs ; production facilities; – Acquisition of special clothing, footwear and other personal protective gear for workers employed Periodic and unscheduled testing of OHS knowledge in harmful or hazardous jobs; of staff, training and certification of specialists in the field of industrial safety; Training, certification and testing of OHS knowledge. Registration of technical devices and equipment with Rostekhnadzor State Agency, development and approval of OHS instructions for crane operators and slingers, maintenance and repair of lifting devices, and other measures.

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HEALTHCARE AND HEALTH INSURANCE TRAINING AND CERTIFICATION

A responsible employer considers employee’s healthcare as one At the heart of maintaining a safe working environment and of the key priorities. Efforts in this area support a healthy and ensuring a healthy business process is the employee’s understanding capable team. As part of occupational disease prevention measures of occupational health and safety issues. The Company pays consid- implemented at Mostotrest, all workplaces are subject to mandatory erable attention to training and testing of its personnel in this field. assessment of working conditions, resulting in appropriate remedial The training and certification program for workers, professionals action or immediate shut down of the workplace. and managers is designed in accordance with the applicable law and internal corporate documents, approved in Mostotrest. Initial training The Company offers medical care to its employees, including is conducted at educational institutions. In 2014, the Company mandatory preliminary (at employment) and periodic (throughout developed and approved procedures for the training, certification and employment) medical examinations of workers exposed to harmful knowledge-testing of Mostotrest OHS managers, professionals and and dangerous working conditions. In addition, the Company’s con- workers. OHS training is followed by testing and corporate certifica- struction sites and production facilities have medical stations duly tion of knowledge and requirements for environmental protection and equipped for first aid. labour security and safety. Afterwards the Company signs a protocol and issues a certificate according to a corporate form. Occupational Employees exposed to hazardous working conditions are eligible for health training and certification is organized at least once every three rehabilitation and recreation financed both out of compulsory social years, while training and certification in industrial safety is carried out insurance funds and by the Company. Together with the trade union, as a minimum once every five years. Initial, repeated, unscheduled the Company organizes rehabilitation treatments for affected em- and targeted OHS briefings are organized at production sites. Briefing ployees at health resorts in the Moscow region, the North Caucasus sessions are logged in a dedicated register. and the Black Sea coast of Caucasus. In 2014, Mostotrest occupational health professionals trained 4,329 In addition, all Mostotrest employees are insured with regional divi- employees (1,174 in 2013), while 1,464 employees (1,090 in 2013) sions of the Social Insurance Fund of the Russian Federation, includ- were trained and certified in industrial safety. The significant increase ing under the program of compulsory insurance against accidents in the number of employees undergoing OHS training was due to at work and occupational diseases. Every year, the Company enters a higher in-house training schedule at TSM. into group insurance contracts with RESO-Guarantee, covering all employees against industrial accidents. In addition to the training process per se, to maintain a comfortable and safe working conditions the Company installed dedicated OHS areas and stands with educational posters and other relevant materials. Among other safety measures, lifting equipment operation areas are fitted with safety signs, lists of main types of cargo and weight, as well as graphical instructions for cargo slinging and hooking.

OHS INVESTMENT, RUB MILLION At Mostotrest, we are convinced that employee training is key to the smooth and successful operation of the organization, and the Compa- ny has continued to invest heavily in training which will have a great positive effect on the Company’s economics. Total OHS investment Occupational Health in 2014 was RUB288.5 million, a 63% increase year-on-year.

Industrial Safety 288.5 15.2 11.9 273.3 176.9 8.1 165.0 129.8

121.7 2012 2013 2014

Source: Company data

89 ANNUAL REPORT SOCIAL RESPONSIBILITY

ENVIRONMENTAL PROTECTION

Monitoring and minimisation of impact on ecosystems and human health is one of the key priorities in planning of Mostotrest operations.

The Company works to preserve and restore the environment, Protection Measures prevent negative environmental impact, ensure compliance with the applicable law, including the Constitution of the Russian Feder- The Company is focused on measures to protect the environment ation, federal laws on Environmental Protection, on Industrial and from the effects of harmful factors. In 2014, the Company imple- Consumption Waste, on Air Protection, and the Water Code of the mented a series of effective measures, which could substantially Russian Federation. reduce environmental pollution:

Acknowledging the importance of environmental protection and • Environmental audits of construction and industrial sites, the degree to which the Company is responsible for compliance, the in collaboration with regional divisions and state supervisors; management pays due attention to the environmental issues. • Environmental protection planning, implementation and moni- Corporate policy in the field of quality, occupational health, safety toring; and environmental protection envisions planning of the Company’s production and economic activity so as to reduce the negative • Up-to-date staff training on environment protection; impact of harmful industrial waste on the environment and human health. The Company established environmental protection offices • Distribution to all Mostotrest environmental protection offices both at its headquarters and at branches, subsidiaries and regional of copies of the relevant legislation of the Russian Federation, divisions. specialized textbooks, manuals and magazines;

• Control of:

Mostotrest Key Environmental Protection Focus Area – Corporate compliance with applicable environmental law and regulations; Monitor compliance with the environmental legislation of the Russian Federation; – Availability of environmental protection instructions at regional divisions; Monitor quality and quantity of wastewater, air emissions, and – Timely staff training; condition of waste disposal facilities; – Industrial environmental monitoring; Develop and enforce standards for emissions, discharges, waste generation and disposal limits; – Proper reporting;

Monitor environmental protection within sanitary protection – Environmental monitoring data; zones; – Development and implementation of measures to prevent environmental pollution, ensure environmental compliance Monitor the condition of water bodies; and prevent accidents and disasters at regional divisions;

Reduce waste generation and ensure environmentally safe waste – Compliance with management instructions and orders, govern- storage and disposal; ment supervisor directives and the existing environmental law;

Reduce harmful effects of waste on the environment. • Seminars and meetings on environmental protection.

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POLLUTION STATISTICS, WASTES GROSS EMISSIONS, ‘000 TON ‘000 TON

Air pollution Wastewater Industrial and con- discharge sumption waste

Source: Company data

ENVIRONMENTAL POLICY IMPLEMENTATION: CASE STUDIES • Installation of noise screens; • Construction of local storm-water treatment facilities and hy- М-9 “Baltic” Highway and Airports dro-botanic sites; Environmental protection measures under the M-9 “Baltic” Highway and Vnukovo, Sheremetyevo, Petropavlovsk-Kamchatsky, Saratov and • Installation of 4-6 m protective screens to eliminate traffic light Ufa airports construction projects are examples of successful imple- nuisance in surrounding areas; mentation of the Company’s environmental policy. The measures • Metal fencing along the entire route to prevent animal access implemented included: and ensure traffic safety; • Additional surveys to determine the optimal locations for passage • Land rehabilitation post-construction; routes for large animals and amphibians; • Environmental monitoring based on modern automated and • Construction of passages for amphibians where routes run in the laboratory control methods: vicinity of water bodies; – Automated air pollution and noise monitoring stations; • Construction of underpasses for animals, with approaches to be – Modern environmental pollution lab control methods; protected by special screens to minimize the effects of vehicle – Automated wastewater treatment plant quality control; noise and headlights on animals; – Constant monitoring of weather conditions. • Soundproofing windows in residential housing adjacent to highways under construction, where noise levels exceed the existing limits;

91 ANNUAL REPORT SOCIAL RESPONSIBILITY

М-11 “Moscow – St. Petersburg” Highway: Section 6 ENVIRONMENTAL COSTS The M-11 “Moscow – St. Petersburg” Highway Section 6 (km 334 – km 543) construction project is one of the most successful examples The Company’s investment in environmental protection in 2014 of the Company’s implementation of its environmental policy. was RUB152.3 million, a 64% increase from RUB92.9 million In line with the modern construction requirements, Mostotrest put in 2013. in place comprehensive measures to minimize the environmental impact of the work. The project envisages the erection of noise In 2014, the Company underwent an annual external environmen- screens and soundproofing in all areas subject to acoustic nuisance, tal audit to obtain an objective independent opinion about the the construction of modern local storm-water treatment facilities Company’s activities in the field of environment protection. Impor- to protect the aquatic environment from pollution, the construction tantly, environmental compliance is an important driver of business of passages to ensure animal migration routes, and other environ- reputation. In 2014, the audit was conducted by Stroytehekspertiza mental activities. Certification Office, part of the regional certification organization.

Among others, the following environmental measures were imple- The audit confirmed full environmental compliance of Mostotrest mented on the construction site: and the Company obtained a Certificate of Compliance (№RURS. 002.005.SMK.00133), in accordance with All-Union State standard • Measurements of CO-CH and vehicle and machinery exhaust R ISO 14001-2007 “Environmental Management Systems. Require- smoke opacity; ments with Guidance for Use”, valid until November 7, 2015. • Use of acoustic barriers when operating construction equipment and machinery; deployment of construction machinery and equipment taking into account the availability of natural barriers and fences to reduce noise levels on protected sites; • Use of exhaust duct and diesel power plant silencers; • Strict compliance with rules for operations in protected water zones, including river slope geofabric carpeting to prevent river- bank erosion; ENVIRONMENTAL COSTS, RUB MILLION • Separate collection of waste in special containers on temporary waste accumulation and storage sites; • Elimination of idle runs of vehicles. +64% 2014 152.3 CORPORATE ENVIRONMENTAL POLICY 2013 92.9 A sound environment and sustainable functioning of natural or evolved ecosystems are critically important for humankind, as they 2012 95.3 ensure human health and create conditions for the development of future generations. Consequently, respect for the environment is the Source: Company data basis of the Company’s environmental policy. The Company identifies four closely linked key target areas in its environmental policy.

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CORPORATE ENVIRONMENTAL POLICY

PROTECTION WASTE OF EARTHWORK RECYCLING AND DISPOSAL

AIR PROTECTION PROTECTION OF WATER RESOURCES

93 ANNUAL REPORT APPENDICES MOSTOTREST

5 Appendices

96A uditors’ Report 98 Consolidated Financial Statements • Consolidated Statement of Financial Position • Consolidated Statement of Profit or Loss and Other Comprehensive Income • Consolidated Statement of Changes in Equity • Consolidated Statement of Cash Flows • Notes to the Consolidated Financial Statements 144 Key Risk Factors

ENGINEERING SPACE CONQUERING NEW HEIGHTS

One of the key areas of Mostotrest operations is construction of airport infrastructure, including runways.

94 95 SOCHI AIRPORT ANNUAL REPORT APPENDICES ENGINEERING SPACE

We believe that the audit evidence we have obtained is sufficient and appropriate to express an opinion on the fair presentation of these AUDITORS’ REPORT consolidated financial statements. Opinion

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Group as at 31 December 2014, and its financial performance and its cash flows for 2014 in accordance with International Financial Reporting Standards.

Emphasis of Matter

JSC KPMG Telephone +7 (495) 937 4477 During the year the Group changed its accounting policy with respect to the presentation of value added tax related to advances paid and 10 Presnenskaya Naberezhnaya Fax +7 (495) 937 4400/99 received. The reason for and the effects of this change are described in Note 34 to the consolidated financial statements. We have audited Moscow, Russia 123317 Internet www.kpmg.ru the adjustments described in Note 34 that were applied to restate the 2013 consolidated financial statements and the statement of financial position as at 31 December 2012. In our opinion, such adjustments are appropriate and have been properly applied. Our opinion is not qualified in respect of this matter.

To the Shareholders and Board of Directors PJSC Mostotrest (formerly OJSC Mostotrest)

We have audited the accompanying consolidated financial statements of PJSC Mostotrest (formerly OJSC Mostotrest) (the “Company”) and Samarin M. V. its subsidiaries (the “Group”), which comprise the consolidated statement of financial position as at 31 December 2014, and the consolidated statements of profit or loss and other comprehensive income, changes in equity and cash flows for 2014, and notes, comprising a summary Director, (power оf attorney dated 16 March 2015 No. 23/15) of significant accounting policies and other explanatory information. JSC KPMG Management’s Responsibility for the Consolidated Financial Statements 13 April 2015

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with Interna- Moscow, Russian Federation tional Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ Responsibility

Our responsibility is to express an opinion on the fair presentation of these consolidated financial statements based on our audit. We conducted our audit in accordance with Russian Federal Auditing Standards and International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

Audited entity: PJSC Mostotrest Independent auditor: JSC “KPMG”, a company incorporated under the Laws of the Russian Federation, a member firm of the KPMG network of independent member Registered by the Moscow Registration Chamber on 23.12.1992, firms affiliated with KPMG International Cooperative (“KPMG International”), a Registration No. 14112. Swiss entity. Entered in the Unified State Register of Legal Entities on Registered by the Moscow Registration Chamber on 25 May 1992, Registration 13.03.2015 by the Moscow Inter-Regional Tax Inspectorate No.46 No. 011.585. of the Ministry for Taxes and Duties of the Russian Federation, Registration No.1027739167246, Certificate series 77 No. Entered in the Unified State Register of Legal Entities on 13 August 2002 by the 015967554. Moscow Inter-Regional Tax Inspectorate No.39 of the Ministry for Taxes and Duties of the Russian Federation, Registration No.1027700125628, Certificate 6-5, ulitsa Barklaya, Moscow, 121087 series 77 No. 005721432. Member of the Non-commercial Partnership “Chamber of Auditors of Russia”. The Principal Registration Number of the Entry in the State Register of Auditors and Audit Organisations: No.10301000804.

96 97 ANNUAL REPORT APPENDICES

CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2014

31 December 31 December 31 December RUB million Note 2014 2013 2012

ASSETS

Goodwill 1,272 1,272 1,272 Intangible assets 360 368 518 Property, plant and equipment 13 19,792 17,990 16,680 Trade and other receivables 18 656 658 293 Amounts due from customers on construction contracts 17 5,854 3,238 — Equity-accounted investees 14 8,087 8,233 8,058 Prepayments 628 227 351 Deferred tax assets 12 1,635 132 — Other non-current assets 15 5,099 273 250 Non-current assets 43,383 32,391 27,422

Inventories 16 8,066 8,075 8,121 Current income tax assets 34 558 228 Trade and other receivables 18 3,887 2,670 2,488 Amounts due from customers on construction contracts 17 16,862 11,451 8,688 Prepayments 15,520 18,321 18,675 Cash and cash equivalents 19 52,067 26,566 8,864 Other current assets 15 10,301 760 895 Assets classified as held for sale 6, 20 4,233 — 14,596 Current assets 110,970 68,401 62,555 Total assets 154,353 100,792 89,977 CONSOLIDATED FINANCIAL STATEMENTS

The consolidated statement of financial position is to be read in conjunction with the notes to, and forming part of, the consolidated financial statements set out on pages 106 to 143.

98 ENGINEERING SPACE

31 December 31 December 31 December RUB million Note 2014 2013 2012

EQUITY

Share capital 136 136 136 Additional paid in capital 6,049 6,049 6,049 Reserve 168 137 126 Retained earnings 17,955 14,514 14,888 Equity attributable to owners of the Company 24,308 20,836 21,199 Non-controlling interests 705 461 227 Total equity 21 25,013 21,297 21,426

LIABILITIES

Loans and borrowings 23 2,598 2,352 1,892 Trade and other payables 24 1,309 792 213 Deferred tax liabilities 12 93 13 1,038 Non-current liabilities 4,000 3,157 3,143

Loans and borrowings 23 37,929 2,186 6,770 Non-controlling interests 817 355 1,367 Trade and other payables 24 25,409 17,996 13,005 Amounts due to customers on construction contracts 17 58,431 54,538 30,542 Provisions 440 543 297 Current income tax liabilities 1,933 720 83 Liabilities directly associated with the assets classified as held for sale 6, 20 381 — 13,344 Current liabilities 125,340 76,338 65,408 Total liabilities 129,340 79,495 68,551 Total equity and liabilities 154,353 100,792 89,977

These consolidated financial statements were approved by management on 13 April 2015 and were signed on its behalf by:

V.N. Vlasov O.G. Tanana General Director Deputy General Director for Economics and Finance

The consolidated statement of financial position is to be read in conjunction with the notes to, and forming part of, the consolidated financial statements set out on pages 106 to 143.

99 ANNUAL REPORT APPENDICES

CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR 2014

RUB million Note 2014 2013

Revenue 7 150,531 116,714

Cost of sales 8 (а) (129,981) (102,704)

Gross profit 20,550 14,010

Other income 493 394

Administrative expenses 8 (b) (7,631) (6,168)

Other expenses 8 (с) (1,982) (2,717)

Results from operating activities 11,430 5,519

Finance income 9 1,062 202

Finance costs 9 (3,647) (2,409)

Net finance costs (2,585) (2,207)

Share of (loss)/profit of equity accounted investees, net of income tax (166) 229

Profit before income tax from continuing operations 8,679 3,541

Income tax expense 12 (2,607) (1,288)

Profit from continuing operations 6,072 2,253

DISCONTINUED OPERATIONS

Profit after tax for the year from discontinued operation 6 — 6

Profit 6,072 2,259

The consolidated statement of profit or loss and other comprehensive income is to be read in conjunction with the notes to, and forming part of, the consolidated financial statements set out on pages 106 to 143.

100 ENGINEERING SPACE

RUB million Note 2014 2013

OTHER COMPREHENSIVE INCOME Items that are or may be reclassified to profit or loss

Equity-accounted investees – share of other comprehensive income 95 —

Change in fair value of available-for-sale financial assets (80) 14

Related income tax 16 (3)

Total comprehensive income 31 11

Total comprehensive income for the year 6,103 2,270

PROFIT ATTRIBUTABLE TO:

Owners of the parent Company 5,598 1,916

Non-controlling interests 474 343

Profit 6,072 2,259

TOTAL COMPREHENSIVE INCOME ATTRIBUTABLE TO:

Owners of the parent Company 5,629 1,927

Non-controlling interests 474 343

Total comprehensive income for the year 6,103 2,270

EARNINGS PER SHARE

Basic and diluted earnings per share (RUB) 10 19.84 6.79

101 ANNUAL REPORT APPENDICES ENGINEERING SPACE Total equity Total trolling trolling interests - Non-con Total 1,927 343 2,270 1,916 earnings Retained Retained — 14,514 20,836 461 21,297 — 14,888 21,199 227 21,426 — — — (3) — (3) — (89) (89) — (89) — (2,201) (2,201) (109) (2,310) — — 14 — 14 — 1,916 1,916 343 2,259 — (156) (156) (15) (171) — (2,001) (2,001) (215) (2,216) —— — — (80) 16 — (80) — 16 — 5,598 5,598 474 6,072 95 17,955 24,308 705 25,013 9595 — 5,598 31 5,629 474 — 6,103 31 95 — 95 — 95 Translation reserve reserve Translation 11 14 — — — 16 — — — — 73 (3) 137 126 (64) (64) (80) Reserve for available- for Reserve for-sale financial assets for-sale Attributable to equity holders of the Company holders of to equity Attributable — — — 6,049 6,049 Additional Additional paid-in capital —— —— ———— —— — —— —— —— —— —— —— — — 136 6,049 136 136 Share capitalShare

Balance at 31 December 2013 31 December at Balance CHANGES IN OWNERSHIP INTERESTS IN SUBSIDIARIES INTERESTS IN SUBSIDIARIES CHANGES IN OWNERSHIP subsidiary on disposal of Net result and acquisition 6) (Note interests non-controlling of Total comprehensive income for the period for income comprehensive Total IN EQUITY DIRECTLY RECORDED WITH OWNERS, TRANSACTIONS 21) holders (Note to equity Dividends Net change in fair value of available-for-sale financial available-for-sale value of in fair Net change assets income tax on other comprehensive Income Balance at 1 January 2013 1 January at Balance INCOME COMPREHENSIVE TOTAL Profit Balance at 31 December 2014 31 December at Balance CHANGES IN OWNERSHIP INTERESTS IN SUBSIDIARIES INTERESTS IN SUBSIDIARIES CHANGES IN OWNERSHIP interest non-controlling of on acquisition Net result 27) (Note Total other comprehensive income other comprehensive Total the period for income comprehensive Total IN EQUITY DIRECTLY RECORDED WITH OWNERS, TRANSACTIONS 21) holders (Note to equity Dividends OTHER COMPREHENSIVE INCOME COMPREHENSIVE OTHER - other comprehen of – share investees Equity-accounted income sive financial available-for-sale value of in fair Net change assets income tax on other comprehensive Income TOTAL COMPREHENSIVE INCOME COMPREHENSIVE TOTAL Profit The consolidated statement of changes in equity is to be read in conjunction with the notes to, and forming part of, the consolidated financial statements set out on pages 106 to 143. financial statements set out on pages the consolidated part of, and forming to, in conjunction with the notes is to be read in equity changes of statement The consolidated RUB million RUB CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR 2014 STATEMENT CONSOLIDATED

102 103 ANNUAL REPORT APPENDICES

CONSOLIDATED STATEMENT OF CASH FLOWS FOR 2014

RUB million 2014 2013

CASH FLOWS FROM OPERATING ACTIVITIES

Profit for the year 6,072 2,259

Profit after tax from discontinued operations — (6)

Profit from continuing operations 6,072 2,253

ADJUSTMENTS FOR: Depreciation and amortisation 4,107 3,682

Share of loss/(profit) of equity accounted investees 166 (229)

Non-controlling interests 763 220

Loss on disposal of property, plant and equipment 44 56

Net finance costs 1,823 2,040

Change in allowance for doubtful loans given and other receivables (3) 560

Income tax expense 2,608 1,288 15,580 9,870

CHANGE IN: Inventories (19) 66 Trade and other receivables (1,694) (4,716) Amounts due from customers on construction contracts (11,134) (6,056) Prepayments 2,087 (205) Provisions (103) 246 Trade and other payables 7,723 6,532 Amounts due to customers on construction contracts 3,873 28,273

Assets and liabilities classified as held for sale, net — (6)

Cash flows used in operations before income taxes paid 16,313 34,004

Income tax paid (2,083) (1,813)

Net cash from operating activities 14,230 32,191

The consolidated statement of cash flows is to be read in conjunction with the notes to, and forming part of, the consolidated financial statements set out on pages 106 to 143.

104 ENGINEERING SPACE

RUB million 2014 2013

CASH FLOWS FROM INVESTING ACTIVITIES

Proceeds from sale of property, plant and equipment 62 179

Acquisition of property, plant and equipment (3,373) (1,605)

Acquisition of intangible assets (113) (55)

Placement of funds on bank deposits (9,673) (291)

Withdrawal of bank deposits — 345

Loans given (6,936) (144)

Repayment of the loans given 2,661 271

Interest received 398 136

Dividends received 81 61

Acquisition of equity accounted investee — (159)

Acquisition of subsidiaries, net of cash acquired (Note 27) — (906)

Net cash used in investing activities (16,893) (2,168)

CASH FLOWS FROM FINANCING ACTIVITIES

Proceeds from loans and borrowings 119,146 105,995

Repayment of loans and borrowings (82,955) (111,185)

Payment of finance lease liabilities (2,883) (2,396)

Interest paid (2,829) (2,178)

Dividends paid to equity holders of the Company (Note 21) (2,001) (2,201)

Dividends paid to non-controlling interests (301) (356)

Net cash from/(used in) financing activities 28,177 (12,321)

Net increase in cash and cash equivalents 25,514 17,702

Cash and cash equivalents at 1 January 26,566 8,864

Cash and cash equivalents at 31 December 52,080* 26,566

cash and cash equivalents as at 31 December 2014 in the Consolidated Statement of Cash Flows included cash balances of RUB13 million related to operations classified as held * for sale (Note 20) The consolidated statement of cash flows is to be read in conjunction with the notes to, and forming part of, the consolidated financial statements set out on pages 106 to 143.

105 ANNUAL REPORT APPENDICES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR 2014

1. Reporting entity The Company’s registered office is 6 Barklaya str., bld. 5, Moscow, 121087, Russian Federation. (a) Business environment The Group’s principal activity is the construction of transport infra- The Group’s operations are located in the Russian Federation. structure assets, including railway, highway and city bridges, over- Consequently, the Group is exposed to the economic and financial passes, interchanges, and other engineering structures for the state markets of the Russian Federation which display characteristics municipal entities. The Group’s major customers are government of an emerging market. The legal, tax and regulatory frameworks agencies and other public bodies. The Group primarily operates continue development, but are subject to varying interpretations in the European part of the Russian Federation. and frequent changes which together with other legal and fiscal im- pediments contribute to the challenges faced by entities operating The Company’s shares are traded under MSTT symbol on Moscow in the Russian Federation. Interbank Currency Exchange (MICEX) stock exchange in Russia.

The recent conflict in Ukraine and related events have increased the perceived risks of doing business in the Russian Federation. The imposition of economic sanctions on Russian individuals and 2. Basis of accounting legal entities by the European Union, the United States of America, Japan, Canada, Australia and others, as well as retaliatory sanctions Statement of compliance imposed by the Russian government, has resulted in increased economic uncertainty including more volatile equity markets, These consolidated financial statements have been prepared in ac- a depreciation of the Russian Ruble, a reduction in both local cordance with International Financial Reporting Standards (“IFRSs”). and foreign direct investment inflows and a significant tightening in the availability of credit. In particular, some Russian entities may be experiencing difficulties in accessing international equity and debt markets and may become increasingly dependent on Russian 3. Functional and presentation currency state banks to finance their operations. The longer term effects of recently implemented sanctions, as well as the threat of addition- The national currency of the Russian Federation is the Russian al future sanctions, are difficult to determine. Rouble (“RUB”), which is the Company’s functional currency and the currency in which these consolidated financial statements are pre- The consolidated financial statements reflect management’s assess- sented. All financial information presented in RUB has been rounded ment of the impact of the Russian business environment on the op- to the nearest million. erations and the financial position of the Group. The future business environment may differ from management’s assessment.

(b) Organisation and operations

PJSC Mostotrest (the “Company”) and its subsidiaries (the “Group”) comprise Russian public and closed joint stock companies (ПAO and ЗАО), limited liability companies (OOO) as defined in the Civil Code of the Russian Federation and a company located in Cyprus. The Company was established as a state-owned enterprise in 1930. The Company was privatised as an open joint stock company in December 1992.

106 ENGINEERING SPACE

4. Use of estimates and judgments • Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities. The preparation of consolidated financial statements in conformity • Level 2: inputs other than quoted prices included in Level 1 that with IFRSs requires management to make judgments, estimates and are observable for the asset or liability, either directly (i.e. as assumptions that affect the application of accounting policies and prices) or indirectly (i.e. derived from prices). the reported amounts of assets, liabilities, income and expenses. Actual results may differ from those estimates. • Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs). Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period If the inputs used to measure the fair value of an asset or a liability in which the estimates are revised and in any future periods affected. might be categorised in different levels of the fair value hierarchy, then the fair value measurement is categorised in its entirety in the Information about critical judgments in applying accounting policies same level of the fair value hierarchy as the lowest level input that that have the most significant effect on the amounts recognised in the is significant to the entire measurement. consolidated financial statements is included in the following notes: The Group recognises transfers between levels of the fair value • Note 25(c)(ii) – allowances for trade receivables; hierarchy at the end of the reporting period during which the change has occurred. • Note 35(c)(i) – revenue recognition of сonstruction contracts in progress. Further information about the assumptions made in measuring fair values is included in the following notes: Information about assumptions and estimation uncertainties that have a significant risk of resulting in a material adjustment within • Note 25 – financial instruments. the next financial year is included in the following notes:

• Note 14 – equity-accounted investees; 5. Operating segments • Note 30 – contingencies; • Note 35(c)(i) – revenue recognition of сonstruction contracts Under the current structure, the Group is organized into construc- in progress. tion and services business segments. The construction segment includes Mostotrest and OOO TransStroyMekhanizatsia (TSM), while services segment includes Mostotrest-Service and United Measurement of fair values Toll Systems (UTS).

A number of the Group’s accounting policies and disclosures require The financial information for the segments is prepared in accordance the measurement of fair values, for both financial and non-financial with the same accounting standards as those used to prepare the assets and liabilities. Group’s consolidated financial statements under IFRS. The financial information presented to the Group’s CEO is derived from the When measuring the fair value of an asset or a liability, the Group internal management reports. The Group’s CEO reviews operating uses market observable data as far as possible. Fair values are cat- performance of the segments on at least a quarterly basis and allo- egorised into different levels in a fair value hierarchy based on the cates resources on this basis. inputs used in the valuation techniques as follows:

107 ANNUAL REPORT APPENDICES

Continuing operations

Construction Services

FINANCIAL MEASURE / SEGMENT, RUB million 2014 2013 2014 2013

Revenue 140,327 106,861 10,674 10,700

– external revenue 140,084 106,656 10,444 9,937

– intersegment revenue 243 205 230 763

Cost of sales (122,291) (94,998) (8,110) (8,654)

Gross profit 18,036 11,863 2,564 2,046

Operating profit 9,472 3,982 1,944 1,435

Profit before income tax 7,871 2,508 1,538 1,292

Income tax expense (2,216) (955) (379) (284)

Segment result 5,655 1,553 1,159 1,008

Depreciation and amortisation 3,545 3,302 562 381 Share of (loss)/profit of equity accounted investees, net of income tax 238 262 — — Dividends payable and non-controlling interest, recognised as finance cost (398) 110 — — Capital expenditures 5,248 3,139 878 1,941

AS AT 31 DECEMBER 2014 2013 2014 2013

Non-current assets 45,786 31,751 6,129 3,954

Current assets 107,310 67,880 3,735 1,457

Assets classified as held for sale 57 — — —

Total assets 153,153 99,631 9,864 5,411

Non-current liabilities 4,191 1,941 1,173 2,340

Current liabilities 125,006 77,041 6,903 1,732 Liabilities directly associated with the assets classified as held for sale — — — — Total liabilities 129,197 78,982 8,076 4,072

Non-controlling interests — — — —

108 ENGINEERING SPACE

Discontinuied operation Eliminations and other Consolidated Group ETS

2014 2013 2014 2013 2014 2013

— 1,371 (470) (2,218) 150,531 116,714 — 1,371 3 (1,250) 150,531 116,714 — — (473) (968) — — — (1,263) 420 2,211 (129,981) (102,704) — 108 (50) (7) 20,550 14,010 — 33 14 69 11,430 5,519 — 13 (730) (272) 8,679 3,541 — (7) (12) (42) (2,607) (1,288) — 6 (742) (308) 6,072 2,259

— 9 — (10) 4,107 3,682 — — (404) (33) (166) 229 — (14) (365) (316) (763) (220) — 2 1 (2) 6,127 5,080

2014 2013 2014 2013 2014 2013

— — (8,532) (3,314) 43,383 32,391 — — (4,308) (936) 106,737 68,401 — — 4,176 — 4,233 — — — (8,664) (4,250) 154,353 100,792 — — (1,364) (1,124) 4,000 3,157 — — (6,950) (2,435) 124,959 76,338 — — 381 — 381 — — — (7,933) (3,559) 129,340 79,495 — — 705 461 705 461

109 ANNUAL REPORT APPENDICES

Major customers ACQUISITION OF INTEREST IN TSM

In 2014, revenue from three customers individually exceeded 10% Consideration payable for shares in TSM (681) of the Group’s total revenue. Revenue from one of the customers accounted for RUB61,270 million (41% of the Group’s total revenue) and is included in the construction and service segments. The other Carrying amount of 25.9% interest acquired 677 customer contributed RUB32,560 million (22% of the Group’s total revenue) and is included in the construction and service segments. (4) The third customer contributed RUB16,674 million (11% of the Group’s total revenue) and is included in the construction segments. Net result on transactions recognised in equity (173)

In 2013, revenue from two customers individually exceeded 10% of the Group’s total revenue. Revenue from one of the customers accounted for RUB33,063 million (28% of the Group’s total revenue) RUB million 2014 2013 and is included in the construction and service segments. The other customer contributed RUB17,699 million (15% of the Group’s total revenue) and is included in the construction and service segments. Net cash used in operating activities — (1,448)

Net cash used in investing activities — (3) 6. Discontinued operation Net cash used in financing activities — (7) On 31 January 2013 the Group exchanged its 51% interest in OOO EngTransStroy (ETS) which constituted a separate operating Net cash flows for the period — (1,458) segment for an additional share in OOO TransStroyMekhanizatsia (TSM) through a number of transactions to increase the Group’s ownership interest from 50.1% to 76%. Prior to the transactions, the same counterparty controlled significant minority interests in both TSM and ETS. All the exchange transactions were negotiat- 7. Revenue ed on a combined basis between the Group and above mentioned non-controlling shareholders; therefore the result on the transactions RUB million 2014 2013 was reported on a net basis. Revenue from contracts for construc- The ETS segment was a discontinued operation and classified tion of: as held for sale as at 31 December 2012. Management committed to a plan to sell this segment in late 2012 following a strategic deci- bridges and highways 131,747 98,418 sion to dispose of subsidiaries with general contractor competence without own production facilities. airfields and airports 5,152 6,394

other facilities 1,998 1,016

Total revenue from construction contracts 138,897 105,828

DISPOSAL OF INTEREST IN ETS RUB million Revenue from maintenance and repair of roads 10,674 9,939 Consideration receivable for shares in ETS 560 Other revenue 960 947 Group's share in ETS's net assets derecognised 234 Total revenue 150,531 116,714 Goodwill derecognised (1,291)

Tax effect 328 Below is the information on the geographical allocation of revenues from construction contracts. This allocation is made based on the geographical location of construction sites: (169)

110 ENGINEERING SPACE

RUB million 2014 2013 (b) Administrative expenses

RUB million 2014 2013 Central Federal District 119,740 76,090 Personnel expenses 4,956 3,606 Southern Federal District 5,605 21,206 Services provided by third parties 836 652 Northwestern Federal District 4,793 4,588 Social expenses 431 396 Far Eastern Federal District 3,484 2,132 Depreciation and amortisation 307 264 Volga Federal District 5,259 1,778 Taxes other than income tax 248 359 Siberian Federal District 16 34 Rent expense 210 170

Total revenue from construction con- Insurance tracts 138,897 105,828 147 139 Materials 142 143 As at 31 December 2014 revenue from construction contracts for total amount of RUB16,049 million (2013: RUB19,885 million) Business trip expenses 82 81 were pledged as a security on outstanding bank loans (Note 23) and under guarantees issued to customers by banks on behalf Other 272 358 of the Group. 7,631 6,168 8. Income and expenses (с) Other expenses (a) Cost of sales RUB million 2014 2013 RUB million 2014 2013

Services of subcontractors Allowance for doubtful accounts receiv- 65,717 51,781 able, prepayments and loans given 1,486 2,142 Materials 26,642 21,062 Fines and penalties 92 68 Personnel expenses 18,190 14,412 Provision for claims received 49 52 Machinery, equipment, transport, and labor services provided by third parties 4,667 3,055 Loss on disposal of property, plant and equipment 44 56 Depreciation and amortisation 3,800 3,418 Allowance for obsolete inventories — 180

Design and technological work 2,136 1,846 Other expenses 311 219 Insurance 1,345 1,326 1,982 2,717 Rent expense 592 368

Services of principal contractors 233 437

Other 6,659 4,999 129,981 102,704

111 ANNUAL REPORT APPENDICES

9. Net finance costs 10. Earnings per share

RUB million 2014 2013 The calculation of basic earnings per share at 31 December 2014 was based on the profit attributable to the ordinary shareholders of RUB5,598 million (2013: RUB1,916 million), and a weighted RECOGNISED IN PROFIT OR LOSS: average number of ordinary shares outstanding of 282,215,500 (2013: 282,215,500), calculated as shown below. The Company Foreign exchange gain 443 50 does not have dilutive potential ordinary shares.

Interest income on bank deposits 395 107 2014 2013

Effect of discounting the financial assets and liabilities 164 3 Issued shares at 1 January 282,215,500 282,215,500

Interest income on loans given 55 35 Weighted-average number of shares for the period ended 282,215,500 282,215,500 31 December Other finance income 5 7 Profit attributed to shareholders Total finance income 1,062 202 from continuing operations 5,598 1,910 (RUB million) Interest expense on borrowings (2,225) (1,586) Profit attributed to shareholders Non-controlling interests from discontinued operation — 6 (763) (220) (RUB million) Interest expense on finance leases (659) (603) Profit attributed to shareholders (RUB million) 5,598 1,916 Finance costs (3,647) (2,409) Basic and diluted earnings per Net finance costs recognised in profit share from continuing opera- 19.84 6.77 or loss (2,585) (2,207) tions (RUB) Basic and diluted earnings per share from discontinued opera- — 0.02 tion (RUB)

Basic and diluted earnings per share (RUB) 19.84 6.79

11. Employee benefit expenses

RUB million 2014 2013

Wages and salaries 18,647 14,488

Contributions to State pension fund 4,499 3,530 23,146 18,018

112 ENGINEERING SPACE

12. Income taxes RUB million 2014 2013

The Group’s applicable tax rate is the income tax rate of 20% for Russian companies (2013: 20%). Current tax expense recognised in profit or loss 3,840 2,448

(a) Amounts recognised in profit or loss Current tax expense recognised in equity (Note 6) — (328) RUB million 2014 2013 3,840 2,120 CURRENT TAX EXPENSE Current year 3,878 2,452 Adjustments of prior years tax (38) (4) 3,840 2,448

DEFERRED TAX EXPENSE Origination and reversal of temporary differences (1,233) (1,160)

Total income tax expense recognised in profit or loss 2,607 1,288

Income tax recognised in other comprehensive income 16 (3)

Total income tax expense 2,623 1,285

Reconciliation of effective tax rate: 2014 2013

RUB million % RUB million %

Profit before income tax from continuing operations 8,679 100% 3,541 100%

Income tax at applicable tax rate 1,736 20% 708 20%

Non-deductible expenses 944 11% 606 17%

Non-taxable income (32) — (27) – 1%

Adjustments of prior years tax (38) 0% (4) 0%

Tax on dividends 7 0% 20 1%

Effect of tax rates in foreign jurisdictions (10) — (15) – 1% 2,607 30% 1,288 36%

113 ANNUAL REPORT APPENDICES

(b) Recognised deferred tax assets and liabilities

Deferred tax assets and liabilities are attributable to the following:

Assets Liabilities Net RUB million 2014 2013 2014 2013 2014 2013

Property, plant and equipment 1 — (1,366) (1,241) (1,365) (1,241)

Intangible assets 1 1 (4) (1) (3) —

Investments — — (98) (82) (98) (82)

Inventories 40 34 (1) — 39 34

Trade and other receivables 750 315 (40) (18) 710 297

Construction contracts (including due from and due to customers) 1,419 713 (47) (167) 1,372 546 Loans and borrowings 8 8 — — 8 8

Trade and other payables 465 177 (32) (31) 433 146

Provisions 63 64 (7) (5) 56 59

Other 389 335 (19) — 370 335

Tax loss carry-forwards 20 17 — — 20 17

Net tax assets/liabilities 3,156 1,664 (1,614) (1,545) 1,542 119

Set off of tax (1,521) (1,532) 1,521 1,532 — —

Tax assets/liabilities 1,635 132 (93) (13) 1,542 119

114 ENGINEERING SPACE

(c) Movement in deferred tax balances Recognised in Reclassification 1 January Recognised other compre- to assets as held 31 December RUB million 2014 in profit or loss hensive income for sale 2014

Property, plant and equipment (1,241) (125) — 1 (1,365)

Intangible assets — (2) — (1) (3)

Investments (82) (32) 16 — (98)

Inventories 34 5 — — 39

Trade and other receivables 297 374 — 39 710

Construction contracts (including due from and due to customers) 546 684 — 142 1,372

Trade and other payables 146 268 — 19 433

Loans and borrowings 8 — — — 8

Provisions 59 4 (7) 56

Other 335 54 — (19) 370

Tax loss carry-forwards 17 3 — — 20 119 1,233 16 174 1,542

Recognised Recognised in other RUB million 1 January 2013 in profit or loss comprehensive income 31 December 2013

Property, plant and equipment (1,208) (33) — (1,241)

Intangible assets (29) 29 — —

Investments (38) (41) (3) (82)

Inventories (134) 168 — 34

Trade and other receivables 103 194 — 297

Construction contracts (including due from and due to customers) (10) 556 — 546

Trade and other payables 129 17 — 146

Loans and borrowings 8 — — 8

Provisions 41 18 59

Other 87 248 — 335

Tax loss carry-forwards 13 4 — 17 (1,038) 1,160 (3) 119

115 ANNUAL REPORT APPENDICES

(d) Unrecognised deferred tax liabilities

At 31 December 2014 the temporary differences associated with investments in subsidiaries amounted to RUB221 million (2013: RUB122 million). They are expected to be reversed in the foreseeable future through distribution of dividends to the Company. The deferred tax assets and liabilities were not recognised as at 31 December 2014 since such dividends are taxed at 0% rate.

13. Property, plant and equipment

Buildings and Machinery and Construction in RUB million Land Vehicles Other Total structures equipment progress

COST OR DEEMED COST

Balance at 1 January 2013 338 6,711 10,769 6,212 646 366 25,042

Additions 48 577 2,252 1,799 66 302 5,044

Disposals — (168) (127) (196) (130) (7) (628)

Transfers — 108 99 — 4 (211) —

Balance at 31 December 2013 386 7,228 12,993 7,815 586 450 29,458

Additions 24 765 3,113 1,246 195 667 6,010

Disposals — (215) (173) (388) (131) — (907) Reclassification to assets as held for sale — (47) (92) (60) — — (199) Transfers — 439 102 — — (541) —

Balance at 31 December 2014 410 8,170 15,943 8,613 650 576 34,362

DEPRECIATION AND IMPAIRMENT LOSSES

Balance at 1 January 2013 — 1,114 4,300 2,777 171 — 8,362

Depreciation for the year — 437 1,738 1,100 203 — 3,478

Disposals — (83) (97) (135) (57) — (372)

Balance at 31 December 2013 — 1,468 5,941 3,742 317 — 11,468

Depreciation for the year — 493 1,891 1,410 194 — 3,988

Disposals — (138) (160) (388) (115) — (801) Reclassification to assets as held for sale — (1) (72) (12) — — (85) Balance at 31 December 2014 — 1,822 7,600 4,752 396 — 14,570

116 ENGINEERING SPACE

Buildings and Machinery and Construction in RUB million Land Vehicles Other Total structures equipment progress

CARRYING AMOUNTS

Balance at 1 January 2013 338 5,597 6,469 3,435 475 366 16,680

Balance at 31 December 2013 386 5,760 7,052 4,073 269 450 17,990

Balance at 31 December 2014 410 6,348 8,343 3,861 254 576 19,792

(a) Joint venture

In 2014 depreciation expense of RUB3,798 million (2013: RUB3,273 The following table summarises the financial information of North- million) was charged to cost of sales, RUB190 million (2013: RUB205 West Concession Company (NWCC) as included in its own financial million) to administrative expenses. statements, adjusted for fair value adjustments at acquisition and differences in accounting policies. The table also reconciles the summarised financial information to the carrying amount of the Group’s (a) Security interest in NWCC. OОO “NWCC” No material assets were pledged at 31 December 2014 and 2013 31 December 31 December except for those received under finance lease agreements. RUB million 2014 2013

(b) Leased property, plant, and equipment Percentage ownership interest 50% 50%

The Group leases production equipment under a number of finance Non-current assets 34,200 24,865 lease agreements. Certain leases provide the Group with the option to purchase the asset at a beneficial price at the end of the lease Current assets 10,413 5,167 terms. At 31 December 2014 the net book value of leased property, plant, and equipment was RUB8,971 million (2013: RUB7,731 million). Non-current liabilities The leased property, plant, and equipment secure lease obligations. (20,242) (12,584)

During 2014, the Group acquired equipment under finance lease Current liabilities (14,026) (6,487) of RUB3,249 million (2013: RUB3,278 million). Net assets (100 %) 10,345 10,961

Group’s share of net assets (50 %) 5,173 5,481 14. Equity-accounted investees Goodwill 944 944 31 Decem- 31 Decem- RUB million Note ber 2014 ber 2013 Carrying amount of equity- accounted investment 6,117 6,425 Interest in joint venture (a) 6,117 6,425 RUB million 2014 2013 Interests in associates (c) 1,970 1,808 Revenue 18,671 8,953 Balance at at the end of the 8,087 8,233 Loss and total comprehensive loss period (100 %) (618) (66)

Loss and total comprehensive loss (50 %) (309) (33) None of the Group’s equity accounted investees are publicly listed entities and consequently do not have published price quotations. Group’s share of loss and total comprehensive loss (309) (33)

117 ANNUAL REPORT APPENDICES

The major asset of the equity accounted investee is the concession The cash flow projections included specific estimates for the period agreement, an identifiable amortizable intangible asset with carry- through the end of the concession agreement due to the fact that ing value of RUB33,619 million as at 31 December 2014 (2013: the traffic and revenue projections covered the periods through the RUB24,278 million). The goodwill on acquisition is included in end of the concession agreement. the carrying value of the investment in the joint venture. The estimated recoverable amount of the CGU exceeded its carrying amount by approximately RUB2,736 million. Management has (b) Impairment testing identified that a reasonably possible change in the discount rate could cause the carrying amount to exceed the recoverable amount. At 31 December 2014 the carrying amount of the Group’s invest- Should the discount rate increase to 15.25% the carring value will ment in the joint-venture NWCC amounted to RUB6,117 million, match the recoverable amount. including the related goodwill of RUB944 million. The major asset of NWCC is the concession agreement, an identifiable amortizable The Group carried out an impairment test with respect to its invest- intangible asset with the carrying value of RUB33,619 million ment also at the end of 2013. As at 31 December 2013 the recover- as at the reporting date. NWCC is in the process of constructing able amount of the CGU was estimated to be higher than its carrying the km 15 – km 58 section of the M-11 “Moscow – St. Petersburg” amount and therefore no provision for impairment was recognized motorway (“Project”) in accordance with the construction schedule as at that date either. and therefore is capitalising the costs of the construction of the intangible asset. The intangible asset will be amortized over the life (c) Associate of the concession agreement (till 2041), commencing the date when the construction is completed, expected in 2015. The following table summarises the financial information of associate as included in its own financial statements, adjusted for fair value Due to the substantial changes in the business environment at the adjustments at acquisition and differences in accounting policies. end of 2014 the Group concluded that such changes may represent The table also reconciles the summarised financial information an indication that its investment in the equity accounted investee to the carrying amount of the Group’s interest in this company. might be impaired. Therefore, the Group carried out an impairment OAO Mostostroy-11 test with respect to its investment. 31 December 31 December RUB million The recoverable amount of the investment in the joint venture 2014 2013 (“CGU”) was estimated based on the present value of the future cash flows expected to be derived from the CGU over the life of Percentage ownership interest 25.002% 25.002% the concession agreement (value in use). The recoverable amount of the CGU was estimated to be higher than its carrying amount Non-current assets 6,017 5,955 and no provision for impairment was recognised as at 31 December 2014. The key assumptions used in the estimation of the recoverable Current assets amount are set out below. The values assigned to the key assump- 11,263 10,336 tions represented management’s assessment of future trends in the relevant industries and were based on historical data from Non-current liabilities (4,516) (4,351) both external and internal sources. Current liabilities (5,550) (5,372) Discount rate 13.42% Traffic revenue (average annual) growth rate 16.69% Net assets (100%) 7,214 6,568 Budgeted EBITDA (average annual) growth rate 14.95% Group’s share of net assets (25.002%) 1,804 1,642 The discount rate was a post-tax measure estimated based on the historical industry average weighted-average cost of capital, Goodwill with a possible debt leveraging of 66.5% at a market interest rate 166 166 of 10.89%. Carrying amount of interest in associates 1,970 1,808 The Group engaged an independent traffic advisor specialized in development of transportation models and forecast of traffic to make traffic growth projections and revenue forecast for the Project. The traffic revenue forecast was adjusted to take into account inflation over the period of the concession agreement.

Budgeted EBITDA was estimated taking into account past experience of forecasting the costs of constructing and operating such an asset as well as the projected traffic revenue.

118 ENGINEERING SPACE

OAO Mostostroy-11 16. Inventories RUB million 2014 2013 31 December 31 December RUB million 2014 2013 Revenue 13,308 14,858 Construction materials 7,472 7,513 Profit and total comprehensive income (100%) 949 1,047 Work in progress 138 391 Profit and total comprehensive income Finished goods and goods for 456 171 (25.002%) 238 262 resale Group’s share of profit and total com- 8,066 8,075 prehensive income 238 262

Dividends received by the Group 76 54 No inventories were pledged at 31 December 2014 and 2013.

17. Construction contracts in progress

31 December 31 December 15. Other assets RUB million 2014 2013 31 December 31 December RUB million 2014 2013 Progress billings 274,116 170,438 Loans given 5,537 769 Unbilled revenue 10,477 10,839

Available-for-sale investments 154 234 Contract revenue accumulated to the period end 284,593 181,277 Bank deposits with maturities more than 3 months 9,702 23 Contract costs accumulated to the period end (246,197) (159,028) Other investments 7 7 Net profit recongized 38,396 22,249

15,400 1,033 Including: Recognized profit 40,404 24,005 Non-current 5,099 273 Recognized loss (2,008) (1,756) Current 10,301 760 15,400 1,033 Contract revenue accumulated to the period end 284,593 181,277

As at 31 December 2014 the bank deposits with maturities of more Progress payments and advances than 3 months for total amount of RUB4,877 million (2013: RUB0 mil- received (317,017) (221,126) lion) were pledged as a security under guarantees issued to customers by banks on behalf of the Group. Net receivables to customers of group held for sale (3,291) — The Group’s exposure to credit, currency and interest rate risks related to other assets is disclosed in note 25. Net payables to customers (35,715) (39,849)

119 ANNUAL REPORT APPENDICES

31 December 31 December RUB million 19. Cash and cash equivalents 2014 2013 31 December 31 December RUB million 2014 2013 Due from customers 22,716 14,689 Petty cash 1 2

Due to customers (58,431) (54,538) Cash at banks 3,515 963

Bank deposits with maturities (35,715) (39,849) less than 3 months 48,551 25,601 52,067 26,566 Non-current retentions 5,854 3,238 The Group’s exposure to interest rate risk and a sensitivity analysis Current retentions 1,322 2,957 for financial assets and liabilities are disclosed in note 25. 7,176 6,195 20. Disposal group held for sale

The retentions on construction contracts are amounts of prog- In November 2014 the Group’s management committed to sell ress billings that are not paid until the satisfaction of conditions its 50% interest in UTS, its wholly owned subsidiary, within the Ser- specified in the contract for the payment of such amounts or until vices segment as part of an agreement with Vinci group to establish defects have been rectified. The retentions are measured at the fair a joint venture that will be engaged in operation of toll roads in value of the consideration receivable based on the expected timing Russian Federation. Accordingly, assets and liabilities of UTS are pre- of cash inflows. sented as a disposal group held for sale. Efforts to sell the disposal group have commenced, and a sale is expected in the foreseeable future.

18. Trade and other receivables No impairment loss on the remeasurement of the disposal group to the lower of its carrying amount and its fair value less costs to sell 31 December 31 December RUB million has been recognised. 2014 2013 At 31 December 2014 the disposal group comprised the following Trade receivables 2,724 2,337 assets and liabilities.

Value added tax 872 301 31 December RUB million Security deposits for participation 2014 in tenders 225 343

Taxes other than income tax 12 5 ASSETS CLASSIFIED AS HELD FOR SALE

Other receivables 710 342 Property, plant and equipment 57 Amounts due from customers on construction 4,543 3,328 contracts 3,291

Non-current 656 658 Trade and other receivables 592

Current 3,887 2,670 Other assets 236 4,543 3,328 4,176

The Group’s exposure to credit risk and impairment losses related to trade and other receivables are disclosed in note 25(c)(ii).

120 ENGINEERING SPACE

31 December RUB million Ordinary shares 2014 All shares rank equally with regard to the Company’s residual assets. LIABILITIES CLASSIFIED AS HELD FOR SALE The holders of ordinary shares are entitled to receive dividends Trade and other payables 168 as declared from time to time and are entitled to one vote per share at shareholders’ meetings. In respect of the Company’s shares that are held by the Group, all rights are suspended until those shares Deferred tax liabilities 174 are reissued. Current income tax liabilities 20 (b) Translation reserve Other liabilities 19 The translation reserve comprises all foreign currency differences 381 arising from the translation of the financial statements of foreign operations.

Cumulative income or expense recognised in other comprehen- (c) Dividends sive income In accordance with Russian legislation the Company’s distributable There are no cumulative income or expenses recognised in other reserves are limited to the balance of retained earnings as recorded comprehensive income relating to the disposal group. in the Company’s statutory financial statements prepared in accordance with Russian Accounting Principles.

Measurement of fair values Dividends in the amount of RUB2,001 million, or RUB7.09 per share were accrued and paid during the year ended 31 December 2014 The fair value of 100% participation interest in UTS was determined (2013: RUB2,201 million, or RUB7.8 per share). based on the preliminary sale-purchase agreement concluded with the potential buyer. The fair value substantially exceeded the carry- (d) Fair value reserve ing amount of the asset as at 31 December 2014. The fair value reserve comprises the cumulative net change in the In addition to the assets of UTS disclosed in the table above, fair value of available-for-sale financial assets until the investments the assets classified as held for sale includes property, plant are derecognised or impaired. and equipment with carrying value of RUB57 million that are expected to be sold in the foreseeable future. 22. Capital management

21. Capital and reserves The Group has no formal policy for capital management but management seeks to maintain a sufficient capital base for meeting (a) Share capital the Group’s operational and strategic needs, and to maintain con- Ordinary shares fidence of market participants. This is achieved with efficient cash management, constant monitoring of Group’s revenues and profit, 2014 2013 and long-term investment plans mainly financed by the Group’s operating cash flows. With these measures the Group aims for steady Authorised shares 282,215,500 282,215,500 profits growth.

Par value 0.14 RUB 0.14 RUB

On issue at 1 January 282,215,500 282,215,500

On issue at end of period, fully paid 282,215,500 282,215,500

121 ANNUAL REPORT APPENDICES

23. Loans and borrowings The bank loans are attracted in RUB under fixed interest rates. The weighted-average effective interest rates for the reporting This note provides information about the contractual terms of the period were as follows: Group’s interest-bearing loans and borrowings, which are measured at amortised cost. For more information about the Group’s exposure 2014 2013 to interest rate, foreign currency and liquidity risk, see note 25.

31 December 31 December RUB million 2014 2013 Bank loans 11.9% 8.9%

Current liabilities: Finance lease liabilities 14.3% 14.7% Secured bank loans 5,021 —

Unsecured bank loans 30,563 13 The outstanding bank loans for total amount of RUB5,021 million at 31 December 2014 were secured by revenue from construction Finance lease liabilities 2,345 2,173 contracts (Note 7). Finance lease liabilities are secured by the leased assets (Note 13). 37,929 2,186

Non-current liabilities: 24. Trade and other payables Finance lease liabilities 2,598 2,352 31 December 31 December RUB million Total loans and borrowings 40,527 4,538 2014 2013

Trade payables 11,972 8,162 Finance lease liabilities are payable as follows: Value added taх payable 8,030 7,649

Present value Future min- Payables to personnel imum lease Interest of minimum 3,876 1,971 payments lease pay- RUB million ments Taxes payable other than income tax and value added tax 828 559

31 December 2013 Other payables and accrued expenses 2,012 447 Less than one year 2,642 469 2,173 26,718 18,788 Between 1 and 5 years 2,642 290 2,352 Long-term 1,309 792 5,284 759 4,525 Short-term 25,409 17,996 31 December 2014 26,718 18,788 Less than one year 2,828 483 2,345

Between 1 and 5 years 2,894 296 2,598 The Group’s exposure to currency and liquidity risks related to trade and other payables is disclosed in note 25(c)(iii) 5,722 779 4,943

The carrying amounts of all of the Group’s loans and borrowings 25. Fair values and risk management are denominated in RUB. (a) Accounting classifications and fair values

Financial assets and liabilities are classified by measurement categories as at 31 December 2014 as follows:

122 ENGINEERING SPACE

Available Other Loans and for sale financial RUB million receivables (level 1) liabilities Total

FINANCIAL ASSETS MEASURED AT FAIR VALUE

Other assets — 154 — 154 — 154 — 154

FINANCIAL ASSETS NOT MEASURED AT FAIR VALUE

Other assets 15,246 — — 15,246 Cash and cash equivalents 52,067 — — 52,067

Trade and other receivables 4,543 — — 4,543

Amounts due from customers on construction contracts 12,239 — — 12,239 84,095 — — 84,095

FINANCIAL LIABILITIES NOT MEASURED AT FAIR VALUE

Secured bank loans — — 5,021 5,021 Unsecured bank loans — — 30,563 30,563

Finance lease liabilities — — 4,943 4,943

Trade and other payables — — 26,718 26,718 — — 67,245 67,245

123 ANNUAL REPORT APPENDICES

Financial assets and liabilities are classified by measurement categories as at 31 December 2013 as follows:

Available Other Loans and for sale financial Total receivables RUB million (level 1) liabilities

FINANCIAL ASSETS MEASURED AT FAIR VALUE

Other assets — 234 — 234 — 234 — 234

FINANCIAL ASSETS NOT MEASURED AT FAIR VALUE

Other assets 799 — — 799 Cash and cash equivalents 26,566 — — 26,566

Trade and other receivables 3,328 — — 3,328

Amounts due from customers on construction contracts 3,850 — — 3,850 34,543 — — 34,543

FINANCIAL LIABILITIES NOT MEASURED AT FAIR VALUE

Unsecured bank loans — — 13 13 Finance lease liabilities — — 4,525 4,525

Trade and other payables — — 18,788 18,788 — — 23,326 23,326

(b) Measurement of fair values (i) Risk management framework

The fair values of financial assets and liabilities as at the reporting The Board of Directors has overall responsibility for the establish- dates were not significantly different from their carrying amounts. ment and oversight of the Group’s risk management framework. The basis for determining fair values is disclosed in note 4. Inputs The management is responsible for developing and monitoring for the valuation of the available-for-sale financial assets are primari- the Group’s risk management policies. The management reports ly based on the observable market data (hierarchy level 1). regularly to the Board of Directors on its activities.

The Group’s risk management policies are established to identify (c) Financial risk management and analyse the risks faced by the Group, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. The Group has exposure to the following risks from its use of finan- Risk management policies and systems are reviewed regularly cial instruments: to reflect changes in market conditions and the Group’s activities. The Group, through its training and management standards and • credit risk (see 25(c)(ii)); procedures, aims to develop a disciplined and constructive control environment in which all employees understand their roles and • liquidity risk (see 25(c)(iii)); obligations. • market risk (see 25(c)(iv)).

124 ENGINEERING SPACE

The Group’s Audit Committee oversees how management monitors • Municipal authorities. This category consists of municipal authori- compliance with the Group’s risk management policies and proce- ties, such as the administration of Nizhniy Novgorod. dures and reviews the adequacy of the risk management framework • Private customers, including ‘‘public private partnership’’ conces- in relation to the risks faced by the Group. The Group’s Audit Com- sionaires. This category consists of private construction compa- mittee is assisted in its oversight role by Internal Audit. Internal nies and concessionaires for ‘‘public private partnerships’’ (PPP), Audit undertakes both regular and ad hoc reviews of risk manage- such as OOO North-West Concession Company. ment controls and procedures, the results of which are reported to the Audit Committee. The Group’s contracts usually require an annual advance payment from its customers of up to 30 percent of the anticipated annual (ii) Credit risk work amount. The Group typically uses this amount to finance some of its raw materials, fuel and labour costs. However, the Group Credit risk is the risk of financial loss to the Group if a customer is typically required to provide its customers with a bank guarantee or counterparty to a financial instrument fails to meet its contractual covering the refund of this amount if the Group fails to perform obligations, and arises principally from the Group’s receivables from its contractual obligations. Most of the Group’s construction con- customers and investments in securities. tracts provide for monthly progress payments in arrears based on a schedule of works performed during that month. The carrying amount of financial assets represents the maximum credit risk exposure. The Group issues its invoices to customers in accordance with terms specified in the relevant contract, which generally require payment within one to 30 days after the invoice date. To ensure the timely Trade and other receivables collection of its account receivables and to minimise the incurrence of bad debts, the Group has implemented management controls The Group’s exposure to credit risk is influenced mainly by the indi- and established collection monitoring and investigation procedures vidual characteristics of each customer. The concentration of credit to manage its accounts receivable and work-in-progress. It regularly risk geographically or with respect to sales transactions with a single monitors the status of accounts receivable and work-in-progress and customer is disclosed in Note 5. actively seeks to manage the risk of non-payment or late payment primarily by maintaining close customer contacts. In monitoring customer credit risk, the Group’s ultimate customers are typically divided into the following broad categories: The Group establishes an allowance for impairment that represents its estimate of incurred losses in respect of trade and other receivables and investments. The only component of this allowance is • Federal State agencies. This category consists of agencies of the a specific loss component that relates to individually significant Russian Ministry of Transport, primarily the federal highway agency, exposures. Rosavtodor, the federal railway agency, Roszheldor, and the federal marine and river transport agency, Rosmorrechflot. The two most significant customers of the Group account for RUB16,614 million of the trade receivables’ carrying amount • State, State-owned and State-funded corporations. This category (including amounts due from customers on construction contracts) consists of State-owned corporations, primarily Russian Railways, at 31 December 2014 (in 2013: two customers with the amount as well as Russian Highways. of RUB7,749 million).

• Regional authorities. This category consists of local governments such as the Moscow city government, and local government Impairment losses entities or authorities such as the State authority for highways at the administration of the Nizhniy Novgorod region. The ageing of trade and other receivables and amounts due from customers on construction contracts at the reporting date was as follows:

125 ANNUAL REPORT APPENDICES

Gross Impairment Gross Impairment 31 December 31 December 31 December 31 December RUB million 2014 2014 2013 2013

TRADE AND OTHER RECEIVABLES Not past due 3,186 — 2,800 — Past due 0-183 days 326 (99) 41 (1) Past due more than 183 days 2,919 (2,673) 1,752 (1,570)

AMOUNTS DUE FROM CUSTOMERS ON CONSTRUCTION CONTRACTS Not past due 22,716 — 14,870 (181) 29,147 (2,772) 19,463 (1,752)

As at 31 December 2014 the allowance for doubtful prepayments Based on the Group’s monitoring of customer credit risk, the Group amounted to RUB1,370 million (2013: RUB1,281 million). believes that, except as indicated above, no impairment allowance is necessary in respect of trade receivables and other receivables Subsequent to 31 December 2014 the Group brought a legal action and amounts due from customers on construction contracts not against one of its subcontractors with a view to recover the advanc- past due. es previously given to the subcontractor. The total amount of the advances given to this subcontractor unsettled as at 31 December 2014 is amounted to RUB2,927 million. These advances are fully Investments secured by the financial guarantees of a bank, which is rated BB- by Fitch and Standard & Poors. The management believes that The Group limits its exposure to credit risk by only investing in liquid the Group will succeed in recovering these advances through securities. Management actively monitors credit ratings and given either settlement by the subcontractor or execution of the bank that the Group only has invested in securities with high credit ratings, guarantees. Therefore no provision for doubtful accounts in respect management does not expect any counterparty to fail to meet its of these advances was recorded in these interim condensed unaudit- obligations. ed consolidated financial statements.

Based on historic default rates, the Group believes that, apart from Cash and cash equivalents the above, no impairment allowance is necessary in respect of trade receivables not past due or past due by up to 183 days; the main por- The Group held cash and cash equivalents of RUB52,067 million at tion of the trade receivables balance relates to customers that have 31 December 2014 (2013: RUB26,566 million), which represents its a good track record with the Group. maximum credit exposure on these assets.

The allowance accounts in respect of trade receivables are used to record impairment losses unless the Group is satisfied that Guarantees no recovery of the amount owing is possible; at that point the amounts are considered irrecoverable and are written off against The Group considers that financial guarantee contracts entered the financial asset directly. At 31 December 2014 and 2013 the into by the Group to guarantee the indebtedness of other parties Group did not have any collective impairment on its trade receiv- are insurance arrangements, and accounts for them as such. In this ables. respect, the Group treats the guarantee contract as a contingent liability until such time as it becomes probable that the Group will be In addition, the majority of the balance of construction in progress required to make a payment under the guarantee. due from customers (Note 17) is from government agencies and other public bodies, therefore, there is a concentration of credit The financial guarantees provided to third parties and outstanding risk with such type of customers. as at 31 December 2014 amounted to RUB22 million (2013: RUB22 million).

126 ENGINEERING SPACE

(iii) Liquidity risk facilities at 31 December 2014 amounted to RUB35.5 billion and are available to the Group the term of 1-3 years. Management Liquidity risk is the risk that the Group will encounter difficulty believes that current agreements with banks are sufficient in meeting the obligations associated with its financial liabilities to maintain appropriate liquidity in the foreseeable future. that are settled by delivering cash or another financial asset. The Group’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet Exposure to liquidity risk its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the The following are the contractual maturities of financial liabilities, Group’s reputation. including estimated interest payments and excluding the impact of netting agreements. As at 31 December 2014 the Group’s total current liabilities exceeded total current assets by RUB14.4 billion. The Group maintains a number of credit lines with a number of major Russian banks to meet requirements for short-term finance. The undrawn credit

Contractual Carrying 0-6 6-12 1-2 2-3 over cash amount mth mth yrs yrs 3 yrs RUB million flows

31 December 2014

NON-DERIVATIVE FINANCIAL LIABILITIES

Bank loans 35,584 38,209 22,677 15,532 — — —

Finance lease liabilities 4,943 5,722 1,550 1,278 1,927 835 132

Trade payables 11,972 12,007 10,452 415 119 169 852

Non-controlling interests 817 817 817 — — — — 53,316 56,755 35,496 17,225 2,046 1,004 984

31 December 2013

NON-DERIVATIVE FINANCIAL LIABILITIES

Bank loans 13 13 13 — — — —

Finance lease liabilities 4,525 5,284 1,397 1,245 1,630 836 176

Trade payables 8,162 8,192 7,225 322 28 58 559

Non-controlling interests 355 355 355 — — — — 13,055 13,844 8,990 1,567 1,658 894 735

127 ANNUAL REPORT APPENDICES

(iv) Market risk Fair value sensitivity analysis for fixed rate instruments

Market risk is the risk that changes in market prices, such as foreign The Group does not account for any fixed-rate financial instruments exchange rates, interest rates and equity prices will affect the as fair value through profit or loss or as available-for-sale. Therefore Group’s income or the value of its holdings of financial instruments. a change in interest rates at the reporting date would not have The objective of market risk management is to manage and control an effect in profit or loss or in equity. market risk exposures within acceptable parameters, while optimising the return. Cash flow sensitivity analysis for variable rate instruments

Currency risk A change of 100 basis points in interest rates at the reporting date would have no material impact on equity and profit or loss of the The Group does not have significant exposure to foreign currency Group. risk.

(vi) Other market price risk (v) Interest rate risk Management of the Group monitors the mix of debt and equity Changes in interest rates impact primarily loans and borrowings securities in its investment portfolio based on market indices. Mate- by changing either their fair value (fixed rate debt) or their future rial investments within the portfolio are managed on an individual cash flows (variable rate debt). Management does not have a formal basis and all buy and sell decisions are approved by the manage- policy of determining how much of the Group’s exposure should ment. The primary goal of the Group’s investment strategy be fixed or variable rates. However, at the time of raising new loans is to maximise investment returns. or borrowings management uses its judgment to decide whether it believes that a fixed or variable rate would be more favourable The Group does not enter into commodity contracts other than to the Group over the expected period until maturity. to meet the Group’s expected usage and sale requirements; such contracts are not settled net.

Exposure to interest rate risk Sensitivity analysis – equity price risk At the reporting date the interest rate profile of the Group’s interest-bearing financial instruments was as follows: The majority of the Group’s equity investments are listed on MICEX stock exchanges. For such investments, classified as instruments available-for-sale, an increase of the MICEX index by 5% at the Carrying amount reporting date, would lead to an increase in shareholders’ equity 31 December 31 December of RUB5 million after tax (2013: increase by RUB12 million); similar RUB million 2014 2013 reduction in these indices would lead to a decrease in shareholders’ equity of RUB5 million after tax (2013: decrease of RUB12 million). The determined sensitivity in the fair value reflects each equity FIXED RATE INSTRUMENTS instrument’s sensitivity to the related market index. Financial assets 15,239 213

Financial liabilities (40,527) (4,538) (25,288) (4,325)

VARIABLE RATE INSTRUMENTS Financial assets — 583

128 ENGINEERING SPACE

26. Significant subsidiaries (b) Acquisition of additional non-controlling interests in TSM in 2013 Country Ownership interest of On 31 January 2013 the Group increased it’s ownership interest in incorpo- 31 Decem- 31 Decem- TSM from 50.1% to 76% (see Note 6). ration SUBSIDIARY ber 2014 ber 2013

OOO "Transstroy- Russia 84% 84% On 29 October 2013 the Group acquired an additional 8% interest mechanizatsiya" in TSM for RUB225 million, increasing its ownership interest from 76% to 84%. The carrying value of the TSM’s net assets as at the ООО "Taganka Most" Russia 100% 100% date of the transaction was RUB3,877 million. The Group recognised a decrease in non-controlling interests by RUB310 million. The dif- ООО "United Toll Systems" Russia 100% 84.3% ference between the carrying value of the acquired non-controlling interest and the consideration paid amounting to RUB85 million was recorded in the equity, being transaction with owners. ZАО "Mostotrest-Service" Russia 60% 60%

Plexy Limited Cyprus 100% 100% 28. Operating leases

At 31 December, the future minimum lease payments under non- cancellable leases were payable as follows. 27. Acquisition of non-controlling interest 31 December 31 December RUB million 2014 2013 (a) Acquisition of additional non-controlling interests in UTS in 2014 Less than one year 390 290 On 17 November 2014 the Group acquired an additional 15.7% equity interest in UTS for RUB171 million, increasing its ownership From one to five years 488 414 interest from 84.3% to 100%. The carrying value of the UTS’s net assets as at the date of the transaction was RUB89 million. The Group More than five years 1,244 1,526 recognised a decrease in non-controlling interests by RUB15 million and a decrease in retained earnings of RUB156 million. 2,122 2,230 The following summarises the effect of changes in the Company’s ownership interest in UTS that do not result in a loss of control on the equity attributable to the parent: The Group leases a number of land plots, warehouses and production equipment under operating leases. The leases typically run for an initial period of 5 to 49 years for land plots, one to two years for production equipment and other property, with an option to renew 2014 RUB million the lease after that date. Lease payments are usually increased annually to reflect market rentals. Company’s ownership interest at the beginning of the year 259 Since the title to land plots and other property does not pass to the Effect of increase in Company’s ownership Group, the lease payments are regularly revised based on the market interest 15 rates, and the Group does not have an interest in the residual value of the leased property, all the risks and rewards incidental to Share of comprehensive income 107 ownership of these assets remain with the lessor. As such, the Group classifies these leases as operating leases.

Dividends (239) During the year ended 31 December 2014 the Group recognised RUB802 million operating lease expenses in the profit or loss Company’s ownership interest at the end of (2013: RUB538 million). the year 142

29. Commitments

As at 31 December 2014 and 2013 the Group did not have significant contractual obligations to purchase property, plant and equipment.

129 ANNUAL REPORT APPENDICES

30. Contingencies (d) Taxation contingencies

(a) Insurance The taxation system in the Russian Federation continues to evolve and is characterised by frequent changes in legislation, official The insurance industry in the Russian Federation is in a developing pronouncements and court decisions, which are sometimes con- state and many forms of insurance protection common in other tradictory and subject to varying interpretation by different tax parts of the world are not yet generally available. The Group does authorities. not have full coverage for its plant facilities, business interruption, or third party liability in respect of property or environmental Taxes are subject to review and investigation by a number of authori- damage arising from accidents on Group property or relating ties, which have the authority to impose severe fines, penalties and to Group operations. Until the Group obtains adequate insurance interest charges. A tax year generally remains open for review by the coverage, there is a risk that the loss or destruction of certain assets tax authorities during the three subsequent calendar years; however, could have a material adverse effect on the Group’s operations and under certain circumstances a tax year may remain open longer. financial position. Recent events within the Russian Federation suggest that the tax authorities are taking a more assertive and substance-based position The Group has to comply with the Law on Urban Planning, including in their interpretation and enforcement of tax legislation. for causing injury to life, health or property of third parties as a result of conducting construction works or defects in construction, New transfer pricing legislation enacted in the Russian Federation renovation, overhaul of capital construction assets. The Group will starting from 1 January 2012 provides for major modifications mak- also be held responsible for accidental loss of or damage to property ing local transfer pricing rules closer to OECD guidelines, but creat- being constructed. In order to reduce the risk of losses and obliga- ing additional uncertainty in practical application of tax legislation tions to third parties as a consequence of conducting construction in certain circumstances. works, the Group has obtained full insurance coverage against civil liabilities arising under the construction contracts in accordance The new transfer pricing rules introduce an obligation for the with the terms of these contracts. taxpayers to prepare transfer pricing documentation with respect to controlled transactions and prescribe new basis and mechanisms for accruing additional taxes and interest in case prices (b) Litigation in the controlled transactions differ from the market level. The new transfer pricing rules eliminated the 20-percent price safe harbour As at 31 December 2014 and 2013 the Group was not engaged that existed under the previous transfer pricing rules applicable in litigations, the outcome of which might have material effect to transactions on or prior to 31 December 2011. on the consolidated financial statements. The new transfer pricing rules primarily apply to cross-border transactions between related parties, as well as to certain cross-border (c) Warranties transactions between independent parties, as determined under the Russian Tax Code. In addition, the rules apply to in-country The Group has certain warranty obligations under construction transactions between related parties if the accumulated annual contracts terms which range from one to twenty years. The Group volume of the transactions between the same parties exceeds performed analysis of historical data on actual compensations paid a particular threshold (RUB3 billion in 2012, RUB2 billion in 2013, and defects rectified under these warranties for the past seven years. and RUB1 billion in 2014 and thereon). Based on this analysis, the Group concluded that the probability of the constructions works carried out during the reporting period will not Since there is no practice of applying the new transfer pricing rules satisfy the quality conditions specified in the contract and require by the tax authorities and courts, it is difficult to predict the effect repair, is low. Therefore the Group did not recognize a warranty liabi- of the new transfer pricing rules on these consolidated financial lity on construction contracts as at the reporting date. statements.

The retentions held by customers under the construction contracts These circumstances may create tax risks in the Russian Federation are usually returned in full. that are substantially more significant than in other countries. Man- agement believes that it has provided adequately for tax liabilities based on its interpretations of applicable Russian tax legislation, official pronouncements and court decisions. However, the interpretations of the relevant authorities could differ and the effect on these consolidated financial statements, if the authorities were successful in enforcing their interpretations, could be significant.

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31. Related party transactions During the reporting period there were no other material transactions conducted with key management personnel and their close (a) Control relationships family members.

As at 31 December 2014 the Mostotrest’s shareholders structure was as follows: (c) Transactions with other related parties

38.6% – Marc O’Polo Investments; The Group’s other related party transactions are disclosed below. 25.0% – ОАО TFK Finans; 36.4% – free-float. (i) Sales

(b) Transactions with key management personnel

(i) Management remuneration

During 2014 key management received remuneration in the amount of RUB628 million (2013: RUB586 million) that is included in personnel costs.

Transaction value Outstanding balance

RUB million 2014 2013 31 December 2014 31 December 2013

SALE OF GOODS TO:

Investments in equity accounted investees 4 12 3 —

Other related parties — — 3 11

SERVICES RENDERED TO:

Investments in equity accounted investees 19,846 10,609 4,409 (925)

Other related parties 18 51 9 12

Discontinued operation — 42 — — 19,868 10,714 4,424 (902)

131 ANNUAL REPORT APPENDICES

(ii) Purchases

Transaction value Outstanding balance at

RUB million 2014 2013 31 December 2014 31 December 2013

PURCHASE OF GOODS FROM:

Other related parties 153 102 125 7

SERVICES RECEIVED FROM:

Investments in equity accounted investees 319 628 (209) (1,599)

Other related parties 267 771 (57) 156

Discontinued operation — 346 — — 739 1,847 (141) (1,436)

Purchases of goods and services from related parties mainly consist of purchases from companies related to shareholders of the Group and minority participants of the subsidiaries.

(iii) Loans

Transaction value Outstanding balance

RUB million 2014 2013 31 December 2014 31 December 2013

LOANS GIVEN TO:

Investments in equity accounted investees 4,682 — 5,265 583

4,682 — 5,265 583

During 2014 Plexy Ltd advanced to the equity accounted investee Ltd to equity accounted investee in currencies other than RUB were total amount of RUB4,208 million in addition to the initial loan converted to and denominated in RUB. The subordinated loan bear recognized in 2012 as a result of the acquisition of Plexy Ltd by an interest rate of 9.5% per annum and is expected to be repaid the Group. The funds were provided within the framework of the starting 2018. subordinated loan agreement concluded in December 2014 by Plexy Ltd together with Vinci Concessions SAS and Vinci Concessions Via Interest income on these loans for 2014 amounted to RUB37 mil- Russie SAS with an equity accounted investee. As at the date of the lion (2013: RUB15 million). subordinated loan agreement all the initial loans granted by Plexy

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32. Events subsequent to the reporting date 34. Changes in accounting policies

No significant events occurred after the reporting date. Except for the changes below, the Group has consistently applied the accounting policies set out in Note 35 to all periods presented in these consolidated financial statements.

33. Basis of measurement In 2014 the Group changed its accounting policy related to the presentation of VAT on advances given and received from gross The consolidated financial statements are prepared on the historical to net basis. cost basis except: The Group has applied the change in accounting policy • items of property, plant and equipment are stated at their fair val- retrospectively and modified presentation of the assets and liabilities ues as at the date of the first-time adoption of IFRSs on 1 January in comparative period. 2008; The following tables summarise the impacts on the Group’s • financial investments classified as available-for-sale are stated consolidated financial statements. at fair value; • equity items in existence at 31 December 2002 include adjustments for the effects of hyperinflation, which were calculated using conversion factors derived from the Russian Federation Consumer Price Index published by the Russian Statistics Agency, GosKomStat. Russia ceased to be hyperinflationary for IFRS purposes as at 1 January 2003.

Impact of change in accounting policy

RUB million As previously reported Adjustments As modified

31 DECEMBER 2013

Prepayments (non-current) 275 (48) 227

Trade and other receivables and amounts due from customers on construction contracts (current) 25,723 (11,602) 14,121

Prepayments (current) 20,676 (2,355) 18,321

Other assets 68,123 — 68,123

Total assets 114,797 (14,005) 100,792

Total equity 21,297 — 21,297

Trade and other payables (current) 21,492 (3,496) 17,996

Amounts due to customers on construction contracts (current) 65,047 (10,509) 54,538

Other liabilities 6,961 — 6,961

Total liabilities 93,500 (14,005) 79,495

133 ANNUAL REPORT APPENDICES

Impact of change in accounting policy

RUB million As previously reported Adjustments As modified

31 DECEMBER 2012

Prepayments (non-current) 399 (48) 351

Trade and other receivables and amounts due from customers on construction contracts (current) 18,383 (7,207) 11,176

Prepayments (current) 20,347 (1,672) 18,675

Other assets 59,775 — 59,775

Total assets 98,904 (8,927) 89,977

Total equity 21,426 — 21,426

Trade and other payables (current) 15,700 (2,695) 13,005

Amounts due to customers on construction contracts (current) 36,774 (6,232) 30,542

Other liabilities 25,004 — 25,004

Total liabilities 77,478 (8,927) 68,551

35. Significant accounting policies When the excess is negative, a bargain purchase gain is recognised immediately in profit or loss. The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial state- The consideration transferred does not include amounts related ments, and have been applied consistently by Group entities, except to the settlement of pre-existing relationships. Such amounts as explained in note 34, which addresses changes in accounting are generally recognised in profit or loss. policies. Transaction costs, other than those associated with the issue of debt or equity securities, that the Group incurs in connection (a) Basis of consolidation with a business combination are expensed as incurred.

(i) Business combinations Any contingent consideration payable is recognised at fair value at the acquisition date. If the contingent consideration is classified Business combinations are accounted for using the acquisition as equity, it is not remeasured and settlement is accounted method as at the acquisition date, which is the date on which for within equity. Otherwise, subsequent changes in the fair value control is transferred to the Group (see note 35(a)(iii)). of the contingent consideration are recognised in profit or loss.

The Group measures goodwill at the acquisition date as: (ii) Non-controlling interests • The fair value of the consideration transferred; plus Non-controlling interests are measured at their proportionate share • The recognised amount of any non-controlling interests in the of the acquiree’s identifiable net assets at the acquisition date. acquiree; plus • If the business combination is achieved in stages, the fair value Changes in the Group’s interest in a subsidiary that do not result of the pre-existing equity interest in the acquire; less in a loss of control are accounted for as equity transactions.

• The net recognised amount (generally fair value) of the identifiable assets acquired and liabilities assumed.

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(iii) Subsidiaries (vi) Transactions eliminated on consolidation

Subsidiaries are entities controlled by the Group. The Group controls Intra-group balances and transactions, and any unrealised income an entity when it is exposed to, or has rights to, variable returns from and expenses arising from intra-group transactions, are eliminated. its involvement with the entity and has the ability to affect those Unrealised gains arising from transactions with equity-accounted returns through its power over the entity. The financial statements investees are eliminated against the investment to the extent of subsidiaries are included in the consolidated financial statements of the Group’s interest in the investee. Unrealised losses are elim- from the date that control commences until the date that control inated in the same way as unrealised gains, but only to the extent ceases. The accounting policies of subsidiaries have been changed that there is no evidence of impairment. when necessary to align them with the policies adopted by the Group. Losses applicable to the non-controlling interests in a subsidiary are allocated to the non-controlling interests even if doing (b) Discontinued operations so causes the non-controlling interests to have a deficit balance. A discontinued operation is a component of the Group’s business, the operations and cash flows of which can be clearly distinguished (iv) Loss of control from the rest of the Group and which:

Upon the loss of control, the Group derecognises the assets and • represents a separate major line of business or geographical area liabilities of the subsidiary, any non-controlling interests and the of operations; other components of equity related to the subsidiary. Any surplus • is part of a single co-ordinated plan to dispose of a separate or deficit arising on the loss of control is recognised in profit or loss. major line of business or geographical area of operations; or If the Group retains any interest in the previous subsidiary, then such interest is measured at fair value at the date that control is lost. • is a subsidiary acquired exclusively with a view to resale. Subsequently it is accounted for as an equity-accounted investee or as an available-for-sale financial asset depending on the level Classification as a discontinued operation occurs upon disposal of influence retained. or when the operation meets the criteria to be classified as held for sale, if earlier.

(v) Interests in equity-accounted investees When an operation is classified as a discontinued operation, the comparative statement of comprehensive income is represented The Group’s interests in equity-accounted investees comprise inter- as if the operation had been discontinued from the start of the ests in associates and a joint venture. comparative period.

Associates are those entities in which the Group has significant influence, but not control or joint control, over the financial and (c) Revenue operating policies. Significant influence is presumed to exist when the Group holds between 20% and 50% of the voting power of (i) Construction contracts another entity. A joint venture is an arrangement in which the Group has joint control, whereby the Group has rights to the net assets of Contract revenue includes the initial amount agreed in the contract the arrangement, rather than rights to its assets and obligations for plus any variations in contract work, claims and incentive payments, its liabilities. to the extent that it is probable that they will result in an inflow of economic benefits and can be measured reliably. As soon as the Interests in associates and joint ventures are accounted for using outcome of a construction contract can be estimated reliably, the equity method and are recognised initially at cost. The cost contract revenue is recognised in profit or loss in proportion of the investment includes transaction costs. to the stage of completion of the contract. Contract expenses are recognised as incurred unless they create an asset related to future The consolidated financial statements include the Group’s share of contract activity. the profit or loss and other comprehensive income of equity accounted investees, after adjustments to align the accounting policies with The stage of completion is assessed by reference to the share of the those of the Group, from the date that significant influence or joint costs incurred to date in the total estimated contract costs. control commences until the date that significant influence or joint control ceases. When the outcome of a construction contract cannot be estimated reliably, contract revenue is recognised only to the extent of contract When the Group’s share of losses exceeds its interest in an equity- costs incurred that are likely to be recoverable. An expected loss accounted investee, the carrying amount of that interest including on a contract is recognised immediately in profit or loss. any long-term investments, is reduced to zero, and the recognition of further losses is discontinued, except to the extent that the Group has an obligation or has made payments on behalf of the investee.

135 ANNUAL REPORT APPENDICES

(ii) General contractor services Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated to the functional currency For certain operations the Group undertakes to perform general at the exchange rate at that date. The foreign currency gain contractor services. In this type of contracts being the general or loss on monetary items is the difference between amortised contractor, the Group acts as a principal, and, therefore, recognizes cost in the functional currency at the beginning of the period, revenue from ultimate customer and the related cost incurred from adjusted for effective interest and payments during the period, the subcontractors on gross basis. and the amortised cost in foreign currency translated at the exchange rate at the end of the reporting period.

(iii) Services rendered Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are translated to the functional Revenue from services rendered is recognised in proportion currency at the exchange rate at the date that the fair value was to the stage of completion of the transaction at the reporting determined. Non-monetary items in a foreign currency that are date. The stage of completion is assessed by reference to surveys measured based on historical cost are translated using the exchange of work performed. rate at the date of the transaction.

Foreign currency differences arising in translation are recognised (iv) Commissions in profit or loss, except for differences arising on the translation of available-for-sale equity instruments which are recognised When the Group acts in the capacity of an agent rather than as the in other comprehensive income. principal in a transaction, the revenue recognised is the net amount of commission made by the Group. (ii) Foreign operations

(v) Other revenue The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on acquisition, are translated Revenue from other activities is recognised when significant risks to the presentation currency at the exchange rates at the reporting and rewards of ownership have been transferred to the buyer, reco- date. The income and expenses of foreign operations are translated very of the consideration is probable, the associated costs and pos- to the presentation currency at exchange rates at the dates of the sible return of goods can be estimated reliably, and there is no con- transactions. tinuing management involvement with the goods, and the amount of revenue can be measured reliably. Foreign currency differences are recognised in other comprehensive income, and presented in the foreign currency translation reserve in equity. However, if the operation is a non-wholly owned subsidi- (d) Finance income and costs ary, then the relevant proportionate share of the translation difference is allocated to non-controlling interests. The Group’s finance income and finance costs include: When a foreign operation is disposed of such that control, signifi- • interest income; cant influence or joint control is lost, the cumulative amount in the translation reserve related to that foreign operation is reclassified • interest expense; to profit or loss as part of the gain or loss on disposal. When the • dividend income; Group disposes of only part of its interest in a subsidiary that in- • the net gain or loss on the disposal of available-for-sale financial cludes a foreign operation while retaining control, the relevant pro- assets; portion of the cumulative amount is reattributed to non-controlling interests. When the Group disposes of only part of its investment • the foreign currency gain or loss on financial assets and financial in an associate or joint venture that includes a foreign operation liabilities; while retaining significant influence or joint control, the relevant • impairment losses recognised on financial assets (other than proportion of the cumulative amount is reclassified to profit or loss. trade receivables); and When the settlement of a monetary item receivable from or payable • non-controlling interest clasfied as a debt instrument. to a foreign operation is neither planned nor likely to occur in the foreseeable future, foreign exchange gains and losses arising from Interest income or expense is recognised using the effective interest such item form part of a net investment in a foreign operation and method. Dividend income is recognised in profit or loss on the date are recognised in other comprehensive income, and presented in the that the Group’s right to receive payment is established. translation reserve in equity.

(e) Foreign currency

(i) Foreign currency transactions

Transactions in foreign currencies are translated to the respective functional currencies of Group entities at exchange rates at the dates of the transactions.

136 ENGINEERING SPACE

(f) Employee benefits (ii) Deferred tax

(i) Short-term employee benefits Deferred tax is recognised in respect of temporary differences between the carrying amounts of assets and liabilities for financial Short-term employee benefit obligations are measured on an undis- reporting purposes and the amounts used for taxation purposes. counted basis and are expensed as the related service is provided. Deferred tax is not recognised for: A liability is recognised for the amount expected to be paid under short-term cash bonus or profit-sharing plans if the Group has • temporary differences on the initial recognition of assets or liabil- a present legal or constructive obligation to pay this amount ities in a transaction that is not a business combination and that as a result of past service provided by the employee, and the affects neither accounting nor taxable profit or loss; obligation can be estimated reliably. • temporary differences related to investments in subsidiaries, associates and joint arrangements to the extent that the Group (ii) Defined contribution plans is able to control the timing of the reversal of the temporary differences and it is probable that they will not reverse in the A defined contribution plan is a post-employment benefit plan under foreseeable future; and which an entity pays fixed contributions into a separate entity and will have no legal or constructive obligation to pay further amounts. • taxable temporary differences arising on the initial recognition of goodwill. Obligations for contributions to defined contribution pension plans, including Russia’s State pension fund, are recognised as an employee A deferred tax asset is recognised for unused tax losses, unused benefit expense in profit or loss in the periods during which services tax credits and deductible temporary differences, to the extent that are rendered by employees. Prepaid contributions are recognised it is probable that future taxable profits will be available against as an asset to the extent that a cash refund or a reduction in future which they can be used. Deferred tax assets are reviewed at each payments is available. Contributions to a defined contribution plan reporting date and are reduced to the extent that it is no longer that are due more than 12 months after the end of the period probable that the related tax benefit will be realised. in which the employees render the service are discounted to their present value. Deferred tax is measured at the tax rates that are expected to be applied to the temporary differences when they reverse, based on the laws that have been enacted or substantively (iii) Other long-term employee benefits enacted by the reporting date.

The Group’s net obligation in respect of long-term employee ben- The measurement of deferred tax reflects the tax consequences efits other than pension plans is the amount of future benefit that that would follow the manner in which the Group expects, at the employees have earned in return for their service in the current and end of the reporting period, to recover or settle the carrying amount prior periods; that benefit is discounted to determine its present val- of its assets and liabilities. Deferred tax assets and liabilities are off- ue, and the fair value of any related assets is deducted. The discount set if there is a legally enforceable right to offset current tax assets rate is the yield at the reporting date on government bonds that and liabilities, and they relate to income taxes levied by the same have maturity dates approximating the terms of the Group’s obliga- tax authority on the same taxable entity, or on different tax entities, tions and that are denominated in the same currency in which the but they intend to settle current tax liabilities and assets on a net benefits are expected to be paid. The calculation is performed using basis or their tax assets and liabilities will be realised simultaneously. the projected unit credit method. Remeasurements are recognised in profit or loss in the period in which they arise. In accordance with the tax legislation of the Russian Federation, tax losses and current tax assets of a company in the Group may not be set off against taxable profits and current tax liabilities (g) Income tax of other Group companies. In addition, the tax base is determined separately for each of the Group’s main activities and, therefore, Income tax expense comprises current and deferred tax. tax losses and taxable profits related to different activities cannot It is recognised in profit or loss except to the extent that it relates be offset. to a business combination, or items recognised directly in equity or in other comprehensive income. In determining the amount of current and deferred tax the Group takes into account the impact of uncertain tax positions and whether additional taxes, penalties and late-payment interest may be due. (i) Current tax The Group believes that its accruals for tax liabilities are adequate for all open tax years based on its assessment of many factors, Current tax comprises the expected tax payable or receivable including interpretations of tax law and prior experience. This assess- on the taxable income or loss for the year, using tax rates enacted ment relies on estimates and assumptions and may involve a series or substantively enacted at the reporting date, and any adjustment of judgments about future events. New information may become to tax payable in respect of previous years. Current tax payable also available that causes the Group to change its judgment regarding includes any tax liability arising from dividends. the adequacy of existing tax liabilities; such changes to tax liabilities will impact the tax expense in the period that such a determination is made.

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(h) Inventories If significant parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items (ma- Inventories are measured at the lower of cost and net realisable jor components) of property, plant and equipment. value. The cost of inventories is based on the weighted-average method, and includes expenditure incurred in acquiring the Any gain or loss on disposal of an item of property, plant and inventories, production or conversion costs and other costs incurred equipment is determined by comparing the proceeds from disposal in bringing them to their existing location and condition. In the case with the carrying amount of property, plant and equipment, and of manufactured inventories and work in progress, cost includes is recognised net within other income/other expenses in profit an appropriate share of production overheads based on normal or loss. operating capacity.

Net realisable value is the estimated selling price in the ordinary (ii) Subsequent expenditure course of business, less the estimated costs of completion and selling expenses. The cost of replacing a component of an item of property, plant and equipment is recognised in the carrying amount of the item if it is probable that the future economic benefits embodied within (i) Assets held for sale or distribution the component will flow to the Group, and its cost can be measured reliably. The carrying amount of the replaced component Non-current assets, or disposal groups comprising assets and liabili- is derecognised. The costs of the day-to-day servicing of property, ties, that are expected to be recovered primarily through sale plant and equipment are recognised in profit or loss as incurred. or distribution rather than through continuing use, are classified as held for sale or distribution. (iii) Depreciation Such assets, or disposal group, are generally measured at the lower of their carrying amount and fair value less cost to sell. Any im- Items of property, plant and equipment are depreciated from the pairment loss on a disposal group is allocated first to goodwill, and date when they are installed and are ready for use, or in respect then to the remaining assets and liabilities on pro rata basis, except of internally constructed assets, from the date when the asset that no loss is allocated to inventories, financial assets, deferred tax is completed and ready for use. Depreciation is based on the assets or employee benefit assets, which continue to be measured cost of an asset less its estimated residual value. in accordance with the Group’s other accounting policies. Impair- ment losses on initial classification as held for sale or distribution Depreciation is generally recognised in profit or loss on a straight-line and subsequent gains or losses on remeasurement are recognised basis over the estimated useful lives of each part of an item of pro- in profit or loss. Gains are not recognised in excess of any cumula- perty, plant and equipment, since this most closely reflects the tive impairment loss. expected pattern of consumption of the future economic benefits embodied in the asset. Leased assets are depreciated over the shor- Intangible assets and property, plant and equipment once classified ter of the lease term and their useful lives unless it is reasonably as held for sale or distribution are not amortised or depreciated. certain that the Group will obtain ownership by the end of the lease In addition, equity accounting of equity-accounted investees ceases term. Land is not depreciated. once classified as held for sale or distribution. The estimated useful lives of items of property, plant and equipment for the current and comparative periods are as follows: (j) Property, plant and equipment • buildings and structures 17 years; (i) Recognition and measurement • machinery and equipment 7 years; Items of property, plant and equipment are measured at cost less • vehicles 7 years; accumulated depreciation and any accumulated impairment losses. • other PPE 3 years. The cost of certain items of property, plant and equipment at 1 Janu- ary 2008, the Group’s date of transition to IFRSs, was determined Depreciation methods, useful lives and residual values are reviewed by reference to its fair value at that date. at each reporting date and adjusted if appropriate.

Cost includes expenditure that is directly attributable to the acquisition of the asset. The cost of self-constructed assets includes the (k) Intangible assets cost of materials and direct labour, any other costs directly attributable to bringing the asset to a working condition for their intended (i) Goodwill use, the costs of dismantling and removing the items and restoring the site on which they are located, and capitalised borrowing costs. Goodwill arising on the acquisition of subsidiaries is measured Purchased software that is integral to the functionality of the related at cost less accumulated impairment losses. equipment is capitalised as part of that equipment.

138 ENGINEERING SPACE

(ii) Construction contracts asset If the consideration received for works performed to date exceeds costs incurred plus recognised profits and losses, then the difference The construction contracts asset represents an intangible asset is presented as due to customers on construction contracts in the identified as part of purchase price allocation to assets and liabilities statement of financial position. of the acquiree in a business combination. The construction contracts asset is measured at fair value at the date of acquisition, Construction contracts in progress represent the gross amount ex- and subsequently accounted for at cost less accumulated amortisa- pected to be collected from customers for contract work performed tion and accumulated impairment losses. to date. It is measured at cost plus profit recognised to date (see note 35(c)(i)) less recognised losses. Cost includes all expenditure The construction contracts asset is amortized during the period related directly to specific projects and an allocation of fixed and of execution of the contract. variable overheads incurred in the Group’s contract activities based on normal operating capacity.

(iii) Other intangible assets (m) Financial instruments Other intangible assets that are acquired by the Group, which have finite useful lives, are measured at cost less accumulated amortisa- The Group classifies non-derivative financial assets into the follow- tion and accumulated impairment losses. ing categories: loans and receivables and available-for-sale financial assets.

(iv) Subsequent expenditure The Group classifies non-derivative financial liabilities into the other financial liabilities category. Subsequent expenditure is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure, including expenditure on internally (i) Non-derivative financial assets and financial liabilities – generated goodwill and brands, is recognised in the profit or loss recognition and derecognition as incurred. The Group initially recognises loans and receivables and debt securities issued on the date that they are originated. All other financial as- (v) Amortisation sets and financial liabilities are recognised initially on the trade date at which the Group becomes a party to the contractual provisions Amortisation is based on the cost of the asset less its estimated of the instrument. residual value. The Group derecognises a financial asset when the contractual Amortisation is generally recognised in profit or loss on a straight- rights to the cash flows from the asset expire, or it transfers the line basis over the estimated useful lives of intangible assets, other rights to receive the contractual cash flows on the financial asset than goodwill, from the date that they are available for use since in a transaction in which substantially all the risks and rewards this most closely reflects the expected pattern of consumption of ownership of the financial asset are transferred. Any interest of future economic benefits embodied in the asset. in transferred financial assets that is created or retained by the Group is recognised as a separate asset or liability. The estimated useful lives for the current and comparative periods are as follows: The Group derecognises a financial liability when its contractual obligations are discharged or cancelled or expire. Financial assets and • construction contracts 1.5 years; liabilities are offset and the net amount presented in the statement • software 3-5 years. of financial position when, and only when, the Group has a legal right to offset the amounts and intends either to settle on a net Amortisation methods, useful lives and residual values are reviewed basis or to realise the asset and settle the liability simultaneously. at each financial year end and adjusted if appropriate.

Loans and receivables (l) Amounts due from/ to customers on construction contracts Loans and receivables are a category of financial assets with fixed Amounts due from customers on construction contracts represent or determinable payments that are not quoted in an active market. the amount of construction contracts in progress less consideration Such assets are recognised initially at fair value plus any directly at- received by the Group for works already performed. Amounts due tributable transaction costs. Subsequent to initial recognition loans from customers are presented separately in the statement of finan- and receivables are measured at amortised cost using the effective cial position for all contracts in which costs incurred plus recognised interest method, less any impairment losses (see note 35(n)(i)). profits and losses exceeds consideration received.

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Loans and receivables category comprise the following classes of financial assets: trade and other receivables as presented in Ordinary shares note 18 and cash and cash equivalents as presented in note 19. Ordinary shares are classified as equity. Incremental costs directly attributable to issue of ordinary shares and share options are rec- Cash and cash equivalents ognised as a deduction from equity, net of any tax effects.

Cash and cash equivalents comprise cash balances, call deposits and highly liquid investments with maturities of three months Repurchase, disposal and reissue of share capital (treasury or less from the acquisition date that are subject to insignificant shares) risk of changes in their fair value. When shares recognised as equity are repurchased, the amount In the statement of cash flows, cash and cash equivalents includes of the consideration paid, which includes directly attributable costs, bank overdrafts that are repayable on demand and form an integral net of any tax effects, is recognised as a deduction from equity. Re- part of the Group’s cash management. purchased shares are classified as treasury shares and are presented in the treasury share reserve. When treasury shares are sold or reissued subsequently, the amount received is recognised as an increase Available-for-sale financial assets in equity, and the resulting surplus or deficit on the transaction is presented in additional paid-in capital. Available-for-sale financial assets are non-derivative financial assets that are designated as available-for-sale or are not classified in any of the above categories of financial assets. Such assets are recogni- (n) Impairment sed initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, they are measured at fair (i) Non-derivative financial assets value and changes therein, other than impairment losses (see note 35(n)(i)) and foreign currency differences on available-for-sale debt A financial asset not carried at fair value through profit or loss, instruments (see note 35(e)(i)), are recognised in other comprehen- including an interest in an equity-accounted investee, is assessed sive income and presented within equity in the fair value reserve. at each reporting date to determine whether there is any objective When an investment is derecognised, the cumulative gain or loss in evidence that it is impaired. A financial asset is impaired if objective equity is reclassified to profit or loss. Unquoted equity instruments evidence indicates that a loss event has occurred after the initial rec- whose fair value cannot reliably be measured are carried at cost. ognition of the asset, and that the loss event had a negative effect on the estimated future cash flows of that asset that can Available-for-sale financial assets comprise equity securities and be estimated reliably. debt securities. Objective evidence that financial assets (including equity securities) are impaired can include: (ii) Non-derivative financial liabilities - measurement • default or delinquency by a debtor; The Group classifies non-derivative financial liabilities into the other • restructuring of an amount due to the Group on terms that the financial liabilities category. Such financial liabilities are recognised Group would not consider otherwise; initially at fair value less any directly attributable transaction costs. Subsequent to initial recognition, these financial liabilities are mea- • indications that a debtor or issuer will enter bankruptcy; sured at amortised cost using the effective interest method. • adverse changes in the payment status of borrowers or issuers in the Group; Other financial liabilities comprise loans and borrowings, bank overdrafts, and trade and other payables. • economic conditions that correlate with defaults; • the disappearance of an active market for a security; or Non-controlling interest • observable data indicating that there is measurable decrease in expected cash flows from a group of financial assets. In accordance with the Law on Limited Liability Companies No. 14-FZ dated 8 February 1998, each participant in a Russian limited In addition, for an investment in an equity security, a significant liability company is entitled to withdraw from the company and or prolonged decline in its fair value below its cost is objective evi- receive the book value of its participatory share in the company, dence of impairment. if the company’s charter does not provide for the opposite. Such rights are recognized as a puttable debt instrument and, therefore, profit or loss attributable to minority participants is recognized as finance costs.

(iii) Share capital

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Financial assets measured at amortised cost (ii) Non-financial assets

The Group considers evidence of impairment for these assets The carrying amounts of the Group’s non-financial assets, other than at both an individual asset and a collective level. All individually sig- inventories and deferred tax assets are reviewed at each reporting nificant assets are individually assessed for impairment. Those found date to determine whether there is any indication of impairment. not to be impaired are then collectively assessed for any impairment If any such indication exists, then the asset’s recoverable amount that has been incurred but not yet identified. Assets that are not is estimated. For goodwill and intangible assets that have indefinite individually significant are collectively assessed for impairment lives or that are not yet available for use, the recoverable amount by grouping together assets with similar risk characteristics. is estimated each year at the same time.

In assessing collective impairment the Group uses historical trends For the purpose of impairment testing, assets that cannot be tested of the probability of default, timing of recoveries and the amount individually are grouped together into the smallest group of assets of loss incurred, adjusted for management’s judgement as to wheth- that generates cash inflows from continuing use that are largely er current economic and credit conditions are such that the actual independent of the cash inflows of other assets or CGU. Subject losses are likely to be greater or less than suggested by historical to an operating segment ceiling test, for the purposes of goodwill trends. impairment testing, CGUs to which goodwill has been allocated are aggregated so that the level at which impairment testing An impairment loss is calculated as the difference between an as- is performed reflects the lowest level at which goodwill is monitored set’s carrying amount, and the present value of the estimated future for internal reporting purposes. Goodwill acquired in a business cash flows discounted at the asset’s original effective interest rate. combination is allocated to groups of CGUs that are expected Losses are recognised in profit or loss and reflected in an allowance to benefit from the synergies of the combination. account. When the Group considers that there are no realistic prospects of recovery of the asset, the relevant amounts are written off. The Group’s corporate assets do not generate separate cash inflows Interest on the impaired asset continues to be recognised through and are utilised by more than one CGU. Corporate assets are allo- the unwinding of the discount. When a subsequent event causes cated to CGUs on a reasonable and consistent basis and tested for the amount of impairment loss to decrease and the decrease can impairment as part of the testing of the CGU to which the corporate be related objectively to an event occurring after the impairment asset is allocated. was recognised, the decrease in impairment loss is reversed through profit or loss. The recoverable amount of an asset or CGU is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their pres- Available-for-sale financial assets ent value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the Impairment losses on available-for-sale financial assets are rec- asset or CGU. ognised by reclassifying the losses accumulated in the fair value reserve in equity, to profit or loss. The cumulative loss that An impairment loss is recognised if the carrying amount of an asset is reclassified from equity to profit or loss is the difference between or its related cash-generating unit (CGU) exceeds its estimated the acquisition cost, net of any principal repayment and amortisa- recoverable amount. tion, and the current fair value, less any impairment loss previously recognised in profit or loss. Changes in impairment provisions attrib- Impairment losses are recognised in profit or loss. Impairment losses utable to application of the effective interest method are reflected recognised in respect of CGUs are allocated first to reduce the car- as a component of interest income. If, in a subsequent period, the rying amount of any goodwill allocated to the CGU (group of CGUs), fair value of an impaired available-for-sale debt security increases and then to reduce the carrying amounts of the other assets in the and the increase can be related objectively to an event occurring CGU (group of CGUs) on a pro rata basis. after the impairment loss was recognised in profit or loss, then the impairment loss is reversed, with the amount of the reversal An impairment loss in respect of goodwill is not reversed. In respect recognised in profit or loss. However, any subsequent recovery of other assets, impairment losses recognised in prior periods are in the fair value of an impaired available-for-sale equity security assessed at each reporting date for any indications that the loss has is recognised in other comprehensive income. decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that Equity-accounted investees the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisa- An impairment loss in respect of an equity-accounted investee tion, if no impairment loss had been recognised. is measured by comparing the recoverable amount of the investment with its carrying amount. An impairment loss is recognised in profit or loss, and is reversed if there has been a favourable change in the estimates used to determine the recoverable amount.

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(o) Provisions Other leases are operating leases and the leased assets are not recognised on the Group’s statement of financial position. A provision is recognised if, as a result of a past event, the Group has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will (iii) Lease payments be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that Payments made under operating leases are recognised in profit reflects current market assessments of the time value of money and or loss on a straight-line basis over the term of the lease. Lease in- the risks specific to the liability. The unwinding of the discount centives received are recognised as an integral part of the total lease is recognised as finance cost. expense, over the term of the lease.

Minimum lease payments made under finance leases are appor- (i) Warranties tioned between the finance expense and the reduction of the outstanding liability. The finance expense is allocated to each period A provision for warranties is recognised when the underlying during the lease term so as to produce a constant periodic rate products or services are sold. The provision is based on historical of interest on the remaining balance of the liability. warranty data and a weighting of all possible outcomes against their associated probabilities. (iv) Other expenses

(ii) Onerous contracts To the extent that the Group’s contributions to social programs benefit the community at large and are not restricted to the Group’s A provision for onerous contracts is recognised when the expected employees, they are recognised in profit or loss as incurred. benefits to be derived by the Group from a contract are lower than the unavoidable cost of meeting its obligations under the contract. The provision is measured at the present value of the lower of the (q) Earnings per share expected cost of terminating the contract and the expected net cost of continuing with the contract. Before a provision is established, The Group presents basic and diluted earnings per share (“EPS”) data the Group recognises any impairment loss on the assets associated for its ordinary shares. Basic EPS is calculated by dividing the profit with that contract. or loss attributable to ordinary shareholders of the Company by the weighted average number of ordinary shares outstanding during the period, adjusted for own shares held. Diluted EPS is determined (p) Leases by adjusting the profit or loss attributable to ordinary shareholders and the weighted average number of ordinary shares outstanding, (i) Determining whether an arrangement contains a lease adjusted for own shares held, for the effects of all dilutive potential ordinary shares, which comprise convertible notes and share options At inception of an arrangement, the Group determines whether such granted to employees. an arrangement is or contains a lease. This will be the case if the fulfilment of the arrangement is dependent on the use of a specific asset and the arrangement conveys a right to use the asset. (r) Segment reporting

At inception or upon reassessment of an arrangement, the Group An operating segment is a component of the Group that engages separates payments and other consideration required by such in business activities from which it may earn revenues and incur ex- an arrangement into those for the lease and those for other ele- penses, including revenues and expenses that relate to transactions ments on the basis of their relative fair values. If the Group con- with any of the Group’s other components. All operating segments’ cludes for a finance lease that it is impracticable to separate operating results are reviewed regularly by the Group’s CEO, who the payments reliably, then an asset and a liability are recognised is the Group’s chief operating decision maker, to make decisions at an amount equal to the fair value of the underlying asset. Sub- about resources to be allocated to the segment and assess its per- sequently the liability is reduced as payments are made and an im- formance. puted finance charge on the liability is recognised using the Group’s incremental borrowing rate. Segment results that are reported to the Group’s CEO include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. (ii) Leased assets Segment capital expenditure is the total cost incurred during the Assets held by the Group under leases that transfer to the Group year to acquire property, plant and equipment, and intangible assets substantially all the risks and rewards of ownership are classified other than goodwill. as finance leases. Upon initial recognition the leased asset is measured at an amount equal to the lower of its fair value and the present value of the minimum lease payments. Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that asset.

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36. New standards and interpretations not yet adopted

The following new Standards, amendments to Standards and Interpretations are not yet effective as at 31 December 2014, and have not been applied in preparing these consolidated financial statements. The Group has not yet analysed the likely impact of the new standards and improvements on its financial position or performance. The Group plans to adopt these pronouncements when they become effective.

POSSIBLE NEW OR AMENDED SUMMARY OF THE REQUIREMENTS IMPACT ON CONSOLIDATED STANDARD FINANCIAL STATEMENTS

IFRS 9 Financial IFRS 9, published in July 2014, replaces the existing guidance The Group is assessing the Instruments in IAS 39 Financial Instruments: Recognition and Measurement. potential impact on its con- IFRS 9 includes revised guidance on the classification and measurement solidated financial statements of financial instruments, including a new expected credit loss model resulting from the application for calculating impairment on financial assets, and the new general hedge of IFRS 9. accounting requirements. It also carries forward the guidance on recognition and derecognition of financial instruments from IAS 39. IFRS 9 is effective for annual reporting periods beginning on or after 1 January 2018, with early adoption permitted.

IFRS 15 Revenue IFRS 15 establishes a comprehensive framework for determining whether, The Group is assessing the from Contracts how much and when revenue is recognised. It replaces existing revenue potential impact on its con- with Customers recognition guidance, including IAS 18 Revenue, IAS 11 Construction solidated financial statements Contracts and IFRIC 13 Customer Loyalty Programmes. resulting from the application of IFRS 15. The core principle of the new standard is that an entity recognises revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new standard results in enhanced disclosures about revenue, provides guidance for transactions that were not previously addressed comprehensively and improves guidance for multiple-element arrangements. IFRS 15 is effective for annual reporting periods beginning on or after 1 January 2017, with early adoption permitted.

The following new or amended standards are not expected to have a significant impact of the Group’s consolidated financial statements:

• IFRS 14 Regulatory Deferral Accounts. • Accounting for Acquisitions of Interests in Joint Operations (Amendments to IFRS 11). • Clarification of Acceptable Methods of Depreciation and Amortisation (Amendments to IAS 16 and IAS 38). • Defined Benefit Plans: Employee Contributions (Amendments to IAS 19). • Annual Improvements to IFRSs 2010-2012 Cycle • Annual Improvements to IFRSs 2011-2013 Cycle.

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KEY RISK FACTORS Risk management is a cornerstone of strategic management and internal control.

The Company has an integrated risk management system in place MOSTOTREST KEY RISK that acts to prevent or minimize the impact of negative factors MANAGEMENT METHODS: on its operations.

The risk management process involves: • Rejection of risky investments, unreliable partners and customers; • Insurance; 1 Risk identification and assessment; • Financial planning; • Compliance with relevant standards; 2 Elaboration of risk response measures and risk containment within admissible limits; • Coordination and consistency of management programs and processes supporting the Company’s development.

3 Continuous monitoring of risk factor dynamics; MOSTOTREST ONGOING RISK MANAGEMENT EFFORTS:

4 Ensuring effectiveness of control measures and activities. • Development of corporate risk management culture; • Development of a reliable information and research database to support decision-making; The risk management policy and systems are reviewed regularly to ensure they reflect changes in market conditions and the Group’s • Implementation of international Project Management (EPCM) operations. The Group sets training and management standards standards developed by the Project Management Institute (PMI), and procedures that support the development of a disciplined a leading international project management association; and constructive control environment in which all employees • Risk management planning; understand their roles and responsibilities. • Risk identification and assessment; The Board of Directors’ Audit Committee oversees the manage- • Development of investment risk management programs; ment’s performance with regard to its duty to control compliance with the adopted risk management rules and procedures. • Insurance of contract liabilities; The Company’s Internal Control Service assists the Audit Committee • Ongoing monitoring of competitors, their management methods in controlling and overseeing the system. The Internal Control and business activity; Service carries out scheduled and random audits of risk manage- • Reassignment of risks to subcontractors (“mirror” counter- ment controls and procedures, and submits its reports to the Audit guarantees); Committee. • Ongoing improvement of the budgeting system; • Centralised procurement.

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PROJECT MANAGEMENT AS COMPONENT The project management system enables Mostotrest to generate OF RISK MANAGEMENT SYSTEM realistic production schedules, balance distribution of resources between in-house and subcontracted volumes, evaluate economic benefits of various production solutions, monitor the revenue and The Company operates an integrated information system (IS) util- expenditure sides of the budget, and ultimately manage construc- ising software from leading Russian and foreign vendors. Different tion in the most effective way. IS segments are used for managing Mostotrest subsidiaries and affiliates, monitoring subcontractor operations (including control over financial reporting), creating commercial and financial models, and monitoring operating costs. KEY RISK FACTORS

One of the key components of Mostotrest’s IS is Spider Project, The main risk factors, which are taken into account in planning a cutting-edge professional project management software that the Company’s operations are set out below. allows the Company to generate detailed calendar and resource models for upcoming projects, including assessments of deadlines, budgets and likely financial outcomes. Currently, the calendar and resource planning and reporting system covers the entire backlog of the Company.

RISK SIGNIFI- MOSTOTREST MATERIAL FACTS AND RISK RISK RISK DESCRIPTION CANCE AND APPROACH TO RISK MANAGEMENT IN 2014 PROBABILITY MANAGEMENT

Country Risk

Risk of The share of orders from Significance: Mostotrest is conservative in In recent years Mostotrest has focused government government bodies and High its approach to selecting poten- its attention on key priority infrastructure customers agencies in Mostotrest’s tial projects, giving preference projects such as M-11 “Moscow – St. Pe- backlog exceeds 95%. to high priority state infrastruc- tersburg” and М-4 “Don”. The importance of ture projects. Projects in this these projects to the state means that even Consequently, the demand Probability: category currently include con- if there is a severe economic slowdown, it for the Group’s services High struction of the toll highway is unlikely that funding for these projects depends directly on the M-11 “Moscow – St. Peters- will be frozen. In particular, in 2014 the Com- readiness of the govern- burg”, transport infrastructure pany won another tender for construction of ment to pursue transport development in Moscow and the 4th section (km 208 – km 258) of М-11 infrastructure development other major Russian cities, and highway. projects. the development of the national toll road network and major Throughout 2014, Mostotrest produced very Government revenue, largely international airports. high quality operating results including driven by oil and commodity a number of projects which were completed prices, has a direct impact Focusing on priority projects ahead of time These cases show that the on the level of government for the state reduces the risk Company continues to be a reliable and spending, including on infra- of cessation of funding or high quality contractor, even in the current structure projects. other adverse issues for the difficult circumstances in the construction Company as a result of changes industry. So it is very unlikely that the With respect to ongoing being made to projects by the customer will delay the payments or will sus- projects, the impact customer. pend funding Mostotrest’s projects. By the of adverse macroeconomic end of 2014 Mostotrest was paid RUB58.4 factors on the state budget billion, including 100% advancing of volume may lead to the government for 2015 construction of Segment 6 of M-11 postponing completion “Moscow – St. Petersburg” Highway. or reducing the scope The increase in inflation in 2014 and the of projects, or otherwise general worsening of the economic situation modifying or abandoning did have an impact on the Company’s projects or delaying pay- tendering аctivity. In 2014 the Company de- ments to contractors. clined to participate in a number of tenders, including sections of Central Ring Road, referring to the economic and operational risks, including in relation to the inconsisten- cy inherent in projects and real inflation.

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RISK SIGNIFI- MOSTOTREST MATERIAL FACTS AND RISK RISK RISK DESCRIPTION CANCE AND APPROACH TO RISK MANAGEMENT IN 2014 PROBABILITY MANAGEMENT

Operational and Industry Risks

Risks associated Mostotrest operations are Significance: Historically, Mostotrest has Well-established internal procedures and with Mostotrest exposed to a number of risks High an impeccable reputation effective project management enable Mos- contract inherent in the infrastructure in the field of infrastructure totrest to deliver all its projects on time or, liabilities construction industry construction. Throughout its on occasion, ahead of schedule. as a whole, as well as specific 85-year history, the Company’s risks associated with com- Probability: customers have had no sig- So, the Vyshniy Volochek bypass section plex projects undertaken Low nificant complaints about the of М-11 “Moscow – St. Petersburg” highway by the Company. quality of completed projects. was handed in 7 months ahead of the schedule, reconstruction of M-11 “Narva” A key operational risk is the To ensure effective manage- Highway on approach to Ust-Luga Port was risk of fulfilling the Group’s ment of operational risk, the handed in 2 months ahead, the overpass post-tender contractual Company implemented a num- on the Mozhaisky Avenue was built commitments to customers, ber of procedures, including in a record short time of 12 months. Works namely delivering projects the OSH management system, on construction of the 6th section (km 334 – on time and to the required internal budgeting process, km 543) of М-11 highway are also running standard. as well as project management ahead of schedule. standards and requirements for preparation of project Despite significant delays in site preparation documentation, resource plan- from the customer, on the construction ning, budgeting and internal of the first section of the highway М-11 workflow. (km 15 – km 58) Mostotrest mobilized all its resources enabling it to hand over the The Company’s information section by the required deadline. systems allow it to estimate schedules for completion of construction assignments, determine the required scope of work and analyze costs associated with each phase of the project. Different types of insurance cover a number of risks associated with projects undertaken by Mostotrest. Diversified customer base, dispersed operations and geographic presence further reduce operational risks.

M&A risk The Company’s expansion Significance: Mostotrest policy is to take In 2014 the Group didn’t acquire new through M&A exposes High controlling stakes in acquired companies. it to certain operating companies, in order to facilitate risks. Probability: their integration and promote In accordance with the Company’s strategy, Low the Group’s corporate culture the shareholding in its existing subsidiary Relations with minority across its subsidiaries. UTS increased to 100% (November 2014). shareholders of acquired companies may also poten- Potential transactions are tially carry certain risks. tested for legal compliance and economic feasibility prior to being submitted to the Board of Directors for approval. Important strategic acquisitions are included in the agenda of the General Shareholders’ Meeting.

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RISK SIGNIFI- MOSTOTREST MATERIAL FACTS AND RISK RISK RISK DESCRIPTION CANCE AND APPROACH TO RISK MANAGEMENT IN 2014 PROBABILITY MANAGEMENT

Risks Transport infrastructure Significance: Mostotrest experts scruti- In 2014, Mostotrest projects affected by con- associated projects are often located High nize tender documentation struction site preparation delays included: with customer’s on land belonging to or leased prior to submission of bids contract by third parties with residen- Probability: and prioritise projects where • Km 15 – km 58 section of the М-11 liabilities tial, commercial or industrial High responsibility for construction “Moscow – St. Petersburg” Highway; premises. Project sites may site clearance is clearly defined. also be in areas with phys- In densely populated areas, the • Northern Belt Road between Businov- ical or legal constraints for risk of delays to the release skaya Interchange and Festivalnaya project design (for example, of land is scrutinized very Street; environmental constraints). closely and an assessment Usually, customers bear the is embedded in cost estimates. • Businovskaya Interchange. responsibility for construction site clearance and the Timely completion and delivery Nonetheless, traffic along the head sections relocation of utility and of construction projects of the highway М-11 was open all the way communication lines. is a priority for Mostotrest. through until the end of the year. The delays The Company is flexible even on the other projects listed above, will be the Customers may fail to fulfill in the event of a delay by the focus of the Company’s efforts to overcome or only partially fulfill their customer. Preliminary work can in 2015. be carried out even when the obligations, which may cause In 2014, funding delays were typical in a num- delays in construction and land is not fully cleared or only partially cleared. ber of cases. During the first half of the year increase costs. Mostotrest raised loans to finance working In parallel with the prepara- capital, receivables along with debt rose at the For administrative, political tion of land by the customer, end of the first half- year. However at the end or other reasons, public Mostotrest is able to carry out of the year all monies due from customers authorities may delay formal preparatory construction were closed. Furthermore, some advances acceptance of construction work, deploy its workforce on new and current contracts were received. projects, which may result in essential areas, and deliver in delayed payments for the required machinery and completed work. construction materials. This minimises the negative impact Payment delays and from delayed land release additional costs may have and enables the Company a negative impact on the to start construction as soon Group’s cash flow and lead as practicable. to a significant build-up in receivables. In recent years, large integrated projects have been gaining ground. Contractors under such contracts are involved in site clearance. In addition a growing number of contracts now include long-term maintenance and operating stages. Mostotrest has an excellent reputation among government customers, which helps facilitate dialogue with these customers in the event of challenges, and supports the Company’s efforts to ensure customers meet their own obligations

Risk of Failure to complete and de- Significance: Mostotrest projects are insured In 2014 the Company did not record adverse liver projects in accordance Medium against unforeseen weather any negative effects of weather-related phe- weather or with contract terms, due and climate events. nomena. On the contrary, with the help of natural disaster to long-term adverse weath- favorable weather conditions, the Company er conditions, natural calam- managed to finish all the work on the М-11 ities and disasters may result Probability: “Moscow – St. Petersburg” (km 15 – in project cost overruns. Low km 58) before the end of the year.

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RISK SIGNIFI- MOSTOTREST MATERIAL FACTS AND RISK RISK RISK DESCRIPTION CANCE AND APPROACH TO RISK MANAGEMENT IN 2014 PROBABILITY MANAGEMENT

Risks Hiring construction subcon- Significance: Mostotrest prefers cooperation At the start of 2014 a number of construc- associated with tractors exposes Mostotrest High with reliable partners, who tion companies were in financial difficulties, Mostotrest to risks involved in managing have longstanding relation- including some that were in bankruptcy role as general those operations effectively. ships with the Company. proceedings. Among these were a number contractor of companies that partner with Mostotrest, In addition, there may also Probability: In some cases, provisions are who were unable to repay advances paid be the risk of shortage Medium made to cover subcontractor over to them by the Company. In recogni- of qualified and experienced liabilities. tion of this situation, Mostotrest set aside subcontractors, as well When hiring subcontractors, RUB1.5 billion of provisoins for doubtful as the risk of default Mostotrest usually requires receivables. At the same time, in 2014 the by subcontractors after they submission of counter-guaran- Company recovered RUB350 million from receive advance payments. tees covering subcontractor lia- provisions, made in 2013 . bilities, that mirror Mostotrest’s In 2014, no projects involving a siginifcant own contractual liabilities with portion of non-core work were added to the its respective customers. Company’s portfolio. Mostotrest has an extensive The Company terminated its contract with base of subcontractors (more ОАО “Rosneft” for the construction of the than 200 companies) and aims ESPO pipeline offtake branch, where more to select only the most reliable than 70% of the works were non-core, there- and proven companies. Even by significantly reducing the risks associated so this does not exclude that with subcontracting work. the risks may contribute up to 1% of the subcontracted volumes.

Risks Mostotrest’s role as a sub- Significance: The Company is very thorough In 2014, no risks arose out of contracts associated contractor creates the risk Medium when choosing both subcon- under which Mostotrest acted as a subcon- with of direct dependence tractors and general contrac- tractor. Mostotrest’s on general contractors. tors. role as At the end of 2014, the total amount of the subcontractor Mostotrest depends Probability: Mostotrest has established Group’s backlog related to subcontractor on the general contractor Low solid partnerships with industry works was RUB8.7 billion. who is responsible for overall leaders such as SK MOST, project management, coor- ARKS, Autobahn, and others. dination and other aspects Having a strong reputation of the construction process, in the industry, Mostotrest tries including timely access to choose partners that reflect to the project site, complete- its own corporate culture and ness and quality of technical construction management specifications, access approach. to project engineers, preparation of auxiliary territories A strong backlog that covers in close proximity to con- revenue for several years struction sites, access ahead allows Mostotrest to to utilities and other services, be selective when choosing as well as for addressing new projects, including as a various operational issues subcontractor, and avoid risky to ensure project comple- engagements. tion. Without the general Currently, only 2% of contracts contractor’s cooperation in the Company’s backlog are on these aspects, Mostotrest subcontractor contracts. In line may be unable to complete with its strategy, Mostotrest projects within budget and prefers to act as a general on time. contractor where it can control all aspects of project implementation.

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RISK SIGNIFI- MOSTOTREST MATERIAL FACTS AND RISK RISK RISK DESCRIPTION CANCE AND APPROACH TO RISK MANAGEMENT IN 2014 PROBABILITY MANAGEMENT

Risks The construction industry Significance: Mostotrest pays particular In 2014, to ensure high standards associated is characterized by specific Medium attention to training its em- of health and safety, the Company con- with the use types of operations that in- ployees in health and safety. ducted various activities, including: of heavy crease the risk of accidents. machinery These include construction Probability: The Company believes that its • Audits of health and safety conditions and hazardous site operations, operation Low standards and procedures meet on construction sites, and checks materials of large machinery and industrial safety requirements. of amenity premises and sanitary facil- equipment, and other ities; hazardous operations. • Seminar for the Company’s OSH officers, also involving representatives of the State Labor Inspectorate; • Network meetings of chief engineers, chief machine men, chief power engineers and production and technical service managers, with reports on OHS conditions; • Other events.

Risk Regulatory changes during Significance: Mostotrest lawyers closely In January 2014 a new law in the area of of regulatory the term of a contract may Medium monitor the Russian legisla- state procurement 44-FZ “On the contract changes result in the occurrence tion and promptly respond system” came into effect, effectively of relevant risks. to relevant changes. superseding 94-FZ. In particular, changes in tax- Probability: All projects Mostotrest bids The main changes: ation may directly affect the Low for are thoroughly appraised, economics of the project. including in terms of legal com- • The law now provides for the methodol- pliance and their fit with the ogy for setting the starting (maximum) In addition, the need to com- Group’s tendering strategy. contract price. To prevent predatory ply with a large number pricing, participants in tenders and other of regulations, building Mostotrest gives preference competitive processes are now required codes and standards may to those projects that are most to provide higher security if their bid also potentially generate transparent and intelligible lowers by more than 25% compared risks. from a technical, financial and to the starting price. legal standpoint. • Provided tender prequalification for the supply of goods (works, services) of highly complex, innovative or specialized nature. • Ability to conclude life cycle contracts (for the purchase of the product and its subsequent maintenance, operation, repair, and disposal). • Introduction of banking support contracts. The calculations in the course of the contract, followed by a bank, should be reflected in accounts opened in it. • Regulation of the procedure of contract changes and termination. Procurement monitoring and audit of the performance of contracts are required. • Unified public information system is created to ensure transparency in procurement. Procurement plans, information about their implementation, registers of contracts and unfair suppliers, library of model contracts, catalogs of goods (works, services), the results of monitoring and audit procurement and much more are published in it.

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RISK SIGNIFI- MOSTOTREST MATERIAL FACTS AND RISK RISK RISK DESCRIPTION CANCE AND APPROACH TO RISK MANAGEMENT IN 2014 PROBABILITY MANAGEMENT

Risk of com- Materials price fluctuations Significance: To mitigate the risk, Mostotrest Despite high inflation in the country in 2014, modities and may result in increased Medium embeds inflation projections, the Company did not see substantial fluctua- construction project costs. and other essential factors that tions in the prices of materials. So, prices for materials price Probability: influence project profitability, reinforcements had grown up (+21%), due volatility Medium into its budgets, prior to sub- to the increase in steel prices amid rising mitting bids. US dollar. As for other material categories prices decreased especially for fuels (-8%), For most commodities and cement (-1%), crushed stone (-4%) and steel materials Mostotrest operates structures (-2%). In 2014, share of purchase a centralised procurement cost of steel structures and reinforcements system from its head office (most susceptible to price fluctuations) that closely monitors invento- in total cost of materials was 22% (share ries, enables favorable terms in total cost of sales – 4%). to be negotiated with suppliers and controls the supply It is important to point out that Mostotrest process. has its own production, which covers around 32% of its materials needs, and therefore To manage price inflation risk the Company can partly eliminate the risk after winning a tender, Mos- of price increase for the materials. totrest assesses the volumes of materials required for execu- In 2014, materials costs in the Company’s tion and their current market cost of sales have grown up by 26%. Share value. In the event that there of expenses on the materials stayed at 2013 is a high likelihood of price level at 18% of the revenue. increases, the Company is able to purchase the required In 2014, Mostotrest managed to hand materials in advance. in a number of projects ahead of schedule. For example Vyshniy Volochek bypass One method of minimizing section of М-11 “Moscow – St. Petersburg” the risk of exceeding the level highway was handed in 7 months prior of actual inflation component to deadline. The construction of the overpass of the framework of the project on the Mozhaisky Avenue was built is to finish the construction in 5 months prior the deadline. The recon- works before the contractual struction of highway M-11 “Narva” on deadlines. With the availability an entrance to the commercial seaport of resources and the consent of Ust-Luga was completed 2 months ahead of the customer, Company the contractual deadlines. Works on the con- has always sought and will do struction of the 6th section (km 334 – km so in the future to complete 543) of М-11 highway are also ahead the tasks given before the of schedule. deadlines.

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RISK SIGNIFI- MOSTOTREST MATERIAL FACTS AND RISK RISK RISK DESCRIPTION CANCE AND APPROACH TO RISK MANAGEMENT IN 2014 PROBABILITY MANAGEMENT

Financial Risks

Credit risk Credit risk is the probability Significance: The management has devel- Revenue from the three largest customers of a financial loss to the High oped a credit policy involving was respectively 41%, 22% and 11% of the Group if a customer or coun- assessment of customers’ total revenues of the Company. terparty fails to perform Probability: credit quality. its contractual obligations. Low Trade receivables from the two largest The Group analyses external customers of the Group as at the end In particular, such losses may credit ratings (if any) and, of 2014 were RUB16.6 billion (RUB7.7 billion occur in case of significant in some cases, bank references. for the end of 2013). The volume of overdue amounts of receivables, Transactions with customers receivables as at the end of 2014 came loans issued and investment included in the high-risk cate- out RUB473 million (RUB222 million securities. gory are carried out on a pre- at the end of 2013). payment basis and are subject to management authorization. As of December 31, 2014, cash and cash equivalents (including bank deposits with The Group makes impairment maturities more than 3 month) amounted provisions covering trade and to RUB61.8 billion – which represents the other receivables and invest- maximum level of credit risk on these assets. ments, based on the amount of actual credit losses previ- With a large, stable portfolio of orders, ously incurred. The amount and given the current high level of inflation, is determined based on past Mostotrest will be even more careful when payment statistics for similar considering its participation in new projects financial assets. and will seek to fulfill existing contracts before their deadlines, which facilitates credit 95% of projects in the Group’s risk containment. backlog are for government customers and agencies whose credit risk, as a rule, is assessed as low. Therefore, credit risk is concentrated on a few large customers. The Group invests only in liquid securities and does not expect any counterparty defaults. Cash and cash equivalents are deposited with the largest Russian banks and financial institutions.

Liquidity risk In the event of free cash Significance: Mostotrest approach is to man- Mostotrest fulfill its financial obligations flow shortage, the Group High age the risk by maintaining, on time. may experience difficulties as far as possible, sufficient in fulfilling its financial Probability: liquidity at all times, to meet The total quantity of unused bank credit obligations. Low its liabilities, both under normal limits at the end of 2014 amounted and distressed conditions, without to RUB35.5 billion. Management estimates incurring unacceptable losses that these agreements are enough to keep or compromising the Group’s the Group’s liquidity in the foreseeable reputation. future. For the purposes of short-term Cash and cash equivalents (including bank financing of working capital, deposits with maturities more than 3 month) the Group has credit line at the end of 2014 amounted to RUB61.8 agreements with a number billion against RUB25.6 billion at the of leading Russian banks. beginning of the year. The terms of these agreements extend to subsidiaries During the reporting period cash balances of the Group. and borrowing were used to finance working capital, including repayment of loans raised to finance acquisitions in 2012, and implementation of the Group’s investment program. Therefore with debt of RUB40.5 billion, the negative net debt of the Group amounted to RUB21.2 billion.

151 ANNUAL REPORT APPENDICES

RISK SIGNIFI- MOSTOTREST MATERIAL FACTS AND RISK RISK RISK DESCRIPTION CANCE AND APPROACH TO RISK MANAGEMENT IN 2014 PROBABILITY MANAGEMENT

Market risk Volatility of financial markets Significance: The Group makes efforts The economic crisis in Russia, including could lead to fluctuations Low to control market risk exposure sanctions, which affected Russian banks led in the cost of borrowings, and contain market risk within to financial instability in a number of con- changes in equity prices Probability: acceptable limits, while opti- struction companies in 2014. This situation and foreign exchange rates, Low mizing return on investment. affected Mostotrest in the form of higher which may adversely affect bank financing charges and bank guarantees. the Group’s profits or the Mostotrest management Nevertheless the Company was still able value of its existing financial does not limit itself to the to have access to credit lines with an average instruments. use of either fixed- or float- interest rate of 12%. Repayment term ing-rate loans exclusively. When of principal is due in the middle of the sec- contemplating new loans, the ond quarter of 2015. decision whether to opt for fixed or floating rates, depends The weighted average interest rate of bank on the prevailing environment loans and finance lease liabilities at the end and corresponding benefits. of 2014 amounted to 11.9% and 14.3%, A solid financial position accordingly, an increase of 3.0 pp and а and its reputation as a reliable decrease of 0.4 pp, respectively, compared with borrower among the leading the rates at the end of 2013. Russian and foreign banks sig- The credit portfolio of Mostotrest contains nificantly reduces the risk no borrowings in foreign currency. of fluctuations in the Company’s cost of borrowing. Mostotrest Nevertheless, the Company is exposed subsidiaries benefit from the to risks associated with the acquisition same favorable credit terms of foreign-made equipment and accessories, as the parent company. which it regards as the minimum level to replace less sophisticated Russian-made Almost all payments to equipment. suppliers and contractors are denominated in rubles. There In 2014, substantial amount of funds are no borrowings in foreign (RUB6.1 billion) was invested in equipment, currencies, the value of which including the acquisition of complicated is tied to floating interest rates technical foreign equipment (82% of 2014 in the Company’s loan portfo- CAPEX), which will be enough for 2-3 years lio. This virtually eliminates the ahead in terms of the absence of large-scale risk of foreign exchange rate projects. fluctuations.

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RISK SIGNIFI- MOSTOTREST MATERIAL FACTS AND RISK RISK RISK DESCRIPTION CANCE AND APPROACH TO RISK MANAGEMENT IN 2014 PROBABILITY MANAGEMENT

Personnel risks

Risk of loss Personnel turnover, Significance: To minimize the risk, the In 2014, Mostotrest staffing levels remained of qualified per- in the case of its increase High Group’s personnel policy stable, with a turnover rate below the sonnel or changes in working condi- is aimed at creating favorable industry average. The risk of losing skilled tions, may lead to a shortage Probability: working conditions, motivating professionals did not change significantly. of qualified personnel. Low employees, and creating opportunities for professional de- Against the background of bankruptcies Implementation of techni- velopment and career growth. in the construction industry, the staff cally complex infrastructure The employee compensation of Mostotrest value working for a stable, projects exposes the Group is based on the principle of fair growing company. to a significant risk of economic reward and consists injuries to employees. of fixed and variable components, as well as the provision of social benefits. Specific measures are adopted to reduce the OHS risk in certain types of operations, including compliance with legal and regulatory requirements, and implementation of the OSH Management System.

Technology-Related and Environmental Risks

Risk of negative Mostotrest operations may Significance: Minimizing the negative effects Environmental responsibility is a priority environmental have a potential negative High of the Company’s operations in implementation of many of the Com- impact impact on the environment. on the environment and pany’s projects. Specifically, Mostotrest Probability: on human health is a manage- is paying particular attention to environ- Medium ment priority. mental issues in its project to build the toll section (km 15– km 58) of the M-11 When planning its operations, “Moscow – St. Petersburg” Highway, as well the Company aims to reduce as the 6th section of highway, which passes any negative impact on the through conservation areas. environment. The Company has adopted a corporate policy in the field of OHS and environmental protection. All operations are carried out in accordance with applicable Russian environmental safety legislation.

In addition to the above, Mostotrest is exposed to a number of other risks. More information about the risks associated with the Group’s operations can be found in the international prospectus drafted in connection with the initial public offering of Mostotrest shares, available on our corporate website at (http://mostotrest.ru/investors/disclosing_information/ international-investment-memorandum/, Section “Risk Factors”, pp. 10-41).

153 ANNUAL REPORT MOSTOTREST

6 Additional Information

156 Basis of Presentation 158 Key Terms and Definitions 159 Contacts

ADLER – ALPICA-SERVICE COMBINED ROAD

ALPICA-SERVICE

ENGINEERING SPACE CONNECTING NATURE

Mostotrest was one of key contractors for the Sochi Olympics infrastructure development, delivering a total of 7 large projects.

154 ANNUAL REPORT ADDITIONAL INFORMATION

BASIS OF PRESENTATION

IMPORTANT INFORMATION

Some of the information contained in this report may contain pro- The securities referred to herein have not been and will not jections or other forward-looking statements regarding Mostotrest be registered under the United States Securities Act 1933 (herein- performance. Such projections and statements are indicated with after as amended and supplemented – Securities Act) and may not words and expressions such as “expects”, “anticipates”, “estimates”, be offered or sold in the United States in the absence of registration “plans”, “will”, “may”, “could”, “possibly”, including their negative under the Securities Act or an exemption from registration under the forms and other words and expressions that have similar meaning. Securities Act or in a transaction that is not governed by registra- Mostotrest draws your attention to the fact that such statements tion provisions of the Securities Act. Any failure to comply with this are only predictions and assumptions with respect to future events restriction may result in a violation of US securities laws. and performance, while actual future events and performance may differ materially from those projected. Mostotrest declares that In the United Kingdom, this presentation is being distributed forecasts contained in this report will not be subject to adjustment to and is only directed at (i) persons who are outside the United to reflect occurrence of any projected future events or those events, Kingdom and (ii) persons inside the United Kingdom, who are (a) the occurrence of which was not known in advance. The actual investment professionals falling within Article 19(5) of the Financial future results may differ materially from those projected by Mos- Services and Markets Act 2000 (Financial Promotion) Order 2005 totrest, due to the influence of a number of factors. Such factors (the “Order”) or (b) high net worth companies, and other persons may include general economic conditions, our competitive environ- to whom it may lawfully be communicated, falling within Article ment, risks associated with economic activities in the Russian Feder- 49(2) (a) to (d) of the Order (all such persons in (i) and (ii) above ation, changing conditions in the Russian infrastructure construction together being referred to as “relevant persons”). Any invitation, market, as well as many other risks specifically related to Mostotrest offer or agreement to subscribe, purchase or otherwise acquire and its activities. securities will be engaged in only with, relevant persons. Any person who is not a relevant person should not act or rely on this presenta- Information contained herein is not intended for publication tion or any of its contents. or distribution in whole or in part, directly or indirectly in or into the United States of America. These materials do not contain or con- No other person should be guided by these materials or rely on their stitute an offer for sale or purchase of securities in the United States content. Distribution of information contained herein is limited. or any other jurisdiction. Information contained herein is not intended for distribution in whole or in part in Australia, Canada or Japan.

156 ENGINEERING SPACE

PRESENTATION OF INFORMATION

Financial Information Operational and Market Information

This report contains information on the performance of Public Joint Mostotrest reports certain operational information to illustrate Stock Company Mostotrest (together with its consolidated subsid- the changes in the Group’s operational and financial performance iaries Limited Liability Company Transstroymekhanizatsiya (TSM), during the reporting period. This operational information is derived Limited Liability Company United Toll Systems (UTS), Closed Joint from management accounts. The Group’s selected operational infor- Stock Company Mostotrest-Service (Mostotrest-Service) and Plexy mation is provided on pages 34-38 of this report as well as on pages Limited – Mostotrest, the Company or the Group). 39-47 to explain some financial results dynamics.

All data in this document is provided on the basis of the consolidated For the purposes hereof, the Group obtained certain statistical, results of the Group excluding the results of Limited Liability Compa- market and pricing information relating to the Russian infrastructure ny Engtransstroy Corporation (ETS) which was sold at the beginning market and its specific aspects from the following external sources: of 2013. The impact of the deconsolidation of the discontinued ETS Ministry of Transport of the Russian Federation, Avtodor, Rosavtodor, segment is detailed in the Group financial statements. the Department of Finance of the Government of Moscow, the website http://zakupki.gov.ru and reports prepared by PMR dated 7 April The financial information presented in this announcement is based 2011 and EMBS Group dated 12 April 2012, 18 April 2013, on the audited consolidated financial statements of PJSC Mostotrest 10 April 2014 and 10 April 2015 (the Reports). This information prepared in accordance with International Financial Reporting is reproduced by the Group with precision in its original form and, Standards (“IFRS”) as at and for the years ended 31 December, 2014 as far as the Group can ascertain on the basis of information pub- and 2013. lished by such third-party sources, such information did not omit any facts, so that it could be materially inaccurate or misleading. The consolidated financial information of the Group is presented The Group has not independently verified this or other information in Russian rubles, the Company’s functional currency which, coming from third parties. In addition, official data published by gov- in the opinion of management, is the most comprehensible cur- ernment agencies of the Russian Federation may be significantly less rency to primary users of the financial statements. complete or backed by research, than in more developed countries. PMR and EMBS Group have given and not withdrawn their consent The audited consolidated financial statements of the Group to the inclusion of information from the Reports to this report. as at and for the year ended 31 December 2013 includes the results of TSM (acquired on 13 May 2010); ETS for the period Here and elsewhere, operating and market indicators net of VAT, from 1 January 2013 to its disposal date (acquired on 28 June unless stated otherwise. 2010 and disposed on 31 January 2013), UTS (incorporated on 17 May 2011), Mostotrest-Service (acquired on 5 July 2012) All financial and operational information contained in this and Plexy Ltd. (acquired on 25 December 2012) which owns 50% announcement and that has not been prepared in accordance with stake in the North-West Concession Company (NWCC). IFRS is intended solely for use as analytical material, and investors The analysis of discontinued operations is not the part of this report. should not consider this information separately or in any combination as an alternative to the analysis of consolidated financial state- The audited consolidated financial statements of the Group as at ments of the Group and financial information in accordance with and for the year ended 31 December 2014 includes the results of IFRS, which can be found on the corporate website of Mostotrest: TSM, UTS, Mostotrest-Service and Plexy Ltd. www.mostotrest.ru.

In 2014 the Group changed its accounting policy related to the presentation of VAT on advances given and received from gross to net basis. The Group has applied the change in accounting policy retrospectively Events After the Reporting Period and modified presentation of the assets and liabilities in comparative period (refer to Note 34 of the consolidated financial statements For relevance purposes, important information such as ownership of the Group as at and for the year ended 31 December 2014). structure, dividends and certain other data has been updated in accordance with subsequent events (post 31 December 2014).

157 ANNUAL REPORT ADDITIONAL INFORMATION

KEY TERMS AND DEFINITIONS

Average tender size is calculated on the basis of the total cost Net margin is net profit divided by revenue. and number of tenders published by the official Russian Federation Net working capital is defined as the difference between current public procurement information website http://zakupki.gov.ru. operating assets (net of cash and equivalents, income tax receivable Avtodor (Russian Highways State Company) is a State Company and other non-current assets) and current operating non-interest established to upgrade and develop Russia’s existing road infrastruc- bearing liabilities (net of loans and borrowings, provisions, non- ture network, including the major Russian federal highways. It mana- controlling interest and income tax liabilities). ges the design, construction, repair and maintenance functions of PMR – is an independent industry consultancy which provides mar- the Company’s highway projects, develops the Company’s highways ket information advisory services in respect of Central and Eastern infrastructure and services, and attracts private investment using European countries and other emerging markets. public-private partnership. Public–private partnership (PPP) – describes a government service Backlog - the relevant entity’s backlog represents management’s or private business venture which is funded and operated through estimate of the contract value of its projects that remain to be com- a partnership of government and one or more private companies pleted as at a particular date, excluding VAT. Backlog is not defined with the aim of carrying out long-term investment projects under by IFRS or RAS. mutually agreed conditions. EBITDA is defined as Earnings before interest, tax, depreciation and RAS means Russian Accounting Standards. amortisation. EBITDA is not defined by, or presented in accordance with, IFRS or RAS. EBITDA is presented as a supplemental measure Regional governments include local governments such as Moscow of the entity’s operating performance. EBITDA has limitations as an City government and local authorities, Department of Transporta- analytical tool, and investors should not consider it in isolation, or as tion and Road Facilities of Vladimir Region, etc. a substitute for analysis of the entity’s operating results as reported Roadshow – a series of meetings of the management with investors under IFRS. and shareholders. EBITDA margin is EBITDA divided by revenue. Rosavtodor (the Federal Roads Agency) is a federal executive body Effective tax rate is computed by dividing total income tax expense and part of the Ministry of Transport of the Russian Federation. by the company’s earnings before tax net of changes in non- It is responsible for providing public services and managing govern- controlling interest in TSM’s profit reported as finance cost. ment property in the area of road transport and infrastructure, including managing the federal road network. EMBS Group is an independent industry consultancy which provides, among other services, market information advisory services Rosstat – Federal Service of State Statistics. within a number of business sectors across emerging markets Share of subcontracted volumes is calculated as the ratio of cost and developed markets globally. of subcontractor services to revenue. Federal agencies include Agencies of the Russian Ministry of Trans- Skolkovo infrastructure – transport infrastructure in Western port (Rosavtodor, Roszheldor, Rosaviaciya, Rosmorrechflot). Moscow, in particular, development of transport links with the Gross margin is gross profit divided by revenue. Skolkovo Innovation Center. IFRS means International Financial Reporting Standards. State corporations are State-owned and State-funded corporations (mainly Avtodor and Russian Railways in the report). In-house volumes of works – is the total revenue from construction contracts less cost of services of subcontractors. Subcontracted volumes of works equal cost of subcontractor services in the Group’s total cost of sales. Market share – total share of PJSC Mostotrest, TSM, Mostotrest- Service and UTS calculated as in-house volumes of works less other VAT means value added tax. revenue divided by the total transport infrastructure market accord- Weighted-average interest rate is determined as annual interest ing to PMR and EMBS Group Reports. expense on loans and borrowings outstanding as at the reporting Municipalities include Administrations, Department for motorways date divided by the total amount of loans and borrowings outstan- and management of motorway traffic in cities. ding as at that date. Net cash volumes is the negative value of net debt. Net debt is defined as the difference between the total amount of short-term and long-term loans and borrowings and cash and cash equivalents.

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NOTES

CONTACTS

6 Barklaya Str., Bld. 5, 13 Bolshoy Kislovsky Per., Moscow, Russia, 121087 Moscow, Russia, 125009 phone: +7 (495) 669-79-99 4/7, Vozdvizhenka Str., Bld. 1, fax: +7 (495) 669-77-11 Moscow, Russia, 125009 e-mail: [email protected] phone: +7 (495) 363-32-32 www.mostotrest.ru fax: +7 (495) 705-96-22 www.moex.com

Investor Relations Auditor: KPMG

Olesya Lapina 10 Presnenskaya Naberezhnaya, Head of Investor Relations Moscow, Russia, 123317 phone: +7 (465) 669-79-99 phone: +7 (495) 937-44-77 e-mail: [email protected] fax: +7 (495) 937-44-99 www.kpmg.ru

ANNUAL REPORT ENGINEERING SPACE 2014

2014 ENGINEERING SPACE ENGINEERING REPORT ANNUAL ANNUAL REPORT 2014