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TRANSCRIPT
Annual Report
2018
2
Contents
4.
Financial
Highlights
p. 21
5.
Risk
Management
p. 28
6.
Social
Responsibility
p. 31
7.
Corporate
Governance
p. 33
Letter from
the CEO
p. 3
1.
Company
Overview
p. 6
2.
Key Events
in 2018
p. 10
3.
Operational
Results
p. 12
8.
Financial
Statements
p. 38
9.
Goals and
objectives
p. 88
Contacts
p. 89
ANNUAL REPORT 2018
3
Letter from the General Director (CEO)
ANNUAL REPORT 2018
Dear shareholders, partners and colleagues!
The rail freight market has continued the recovery process, and we observe that
the market rates for rail freight use are on an upward trend in the near term.
Freight turnover of railway transport of the Republic of Kazakhstan in 2018
amounted to 283.3 billion t•km, showing an increase of 6% compared to 2017.
The total inventory of freight railcars in Kazakhstan amounted to 135 thousand
units, where the share of Eastcomtrans reached 9%.
The average age of own rolling stock is 8 years, the Company's rolling stock
includes oil tanks, LPG tanks, gondola cars and covered wagons.
There were over 12,000 wagons under the management of the Company, the
share of the Company's universal fleet is 38%, while income from this type of
rolling stock amounted to 47%.
During 2018 the Company expanded its rolling stock with 227 cars.
The wide geography of transportation covers not only Kazakhstan and Russia, but
also the states of Central Asia and the Baltic countries. The company provides
services to customers in key market segments such as oil and gas, mining, metals
and agriculture, as well as manufacturing industries.
Prices for large castings fluctuated significantly during 2018, and for individual
components there was an increase in price of more than 50%. The shortage of
wheelsets during the year provoked sharp and more than twofold increase in their
prices. All these factors had an impact on the cost of services provided.
Within the framework of the wagon-repair plant (WRP) development strategy in
2018, the services of the current uncoupling repair, as well as the repair of
wheelsets were launched at the Kulsary production site with 1,951 wagons being
repaired during the year.
In May 2018, the Company acquired a base for further development of WRP in
Kostanay, the launch is scheduled for Q4 2019.
The company will continue to develop its own WRP network, which will reduce the
idle time of wagon repairs and reduce dependence on wagon repair service
providers.
4
Letter from the General Director (CEO) (cont.)
ANNUAL REPORT 2018
The company successfully completed 2018 with the following financial indicators:
• Revenues amounted to KZT30,225 million, which is 17% greater compared to
2017.
• Gross profit margin reached 66% in 2018, a year earlier — 60%.
• EBITDA in 2018 increased to KZT22,420 million against KZT17,466 million in
2017.
• Net profit in 2018 amounted to KZT6,994 million.
The Company's loan portfolio at the end of 2018 amounted to USD143 million.
The share of loans in foreign currency is 63%, the work on reducing currency risk
by replacing the funding base towards KZT continues. During 2018 USD35 million
currency loans were refinanced to local currency Tenge , and the average interest
rate on loans in USD fell by an average of 300 basis points. As of the end of 2018,
the Company reached the required levels for virtually all financial covenants under
agreements with creditors.
The Company's credit rating is confirmed by the Moody`s Investors Service
international rating agency at the B3 level with stable outlook.
In order to improve the staff motivation system in 2018, a KPI system was
introduced, based on the assessment of the effectiveness of the personal
contribution of each employee to the achievement of collective targets. The
Company actively supports personal and professional development of personnel,
as well as takes part in social events at the city and republican level. Particular
attention is paid to young professionals — a specially developed mentoring
system provides the transfer of knowledge and experience from employees with
great experience to the newly-hired employees.
The dynamic growth of the Company and strong financial and economic
performance in 2018 — is the merit of the whole Eastcomtrans team. I express my
gratitude to all the employees, and I am sure that we have many interesting and
promising projects ahead of us.
Malakhov Vadim Aleksandrovich
General Director
Eastcomtrans LLP
5
Company Overview
1.
ANNUAL REPORT 2018
6
Eastcomtrans LLP — the largest private rail freight operator
in Kazakhstan and Central Asia
MISSION
To become the largest and one of
the most efficient rail freight
operators on the market, which
offers a wide range of
transportation and logistics
services.
ST RAT EGIC GOALS
• To secure sustainable business development and
enhance long term growth of company’s value
• To provide only high-quality services to our clients at
competitive prices
• To support the development of Kazakhstan’s rail
freight transportation market
ANNUAL REPORT 2018
7
General Information
✓ 18 October, 2018: Moody’s – ‘B3’, with a ‘Stable’ outlook
Eastcomtrans LLP (the “Company” or “ECT” ) was established in the
form of a limited liability partnership in October 2002.
In 2013, International Finance Corporation provided ECT with a
USD 50 mln. financing in the following form:
• USD20 mln. as an equity capital investment
• USD30 mln. as a loan
The Company provides its clients with a wide range of rail transportation
and logistics services:
• Rail freight transportation (incl.
oversized cargo)
• Operating lease and forwarding
services
• Consignor and consignee services
at the Seaport of Aktau
• Railcars repair and maintenance
• Enterprise internal logistics
management
• Railcars pre-loading preparation.
The well-balanced client portfolio of the Company includes about 40 large
consignors, of which 80% are the leading industrial companies of
Kazakhstan. ECT meets the needs of major enterprises in oil and gas,
metals and mining, coal and other industries in transportation services.
The company operates more than 12,000 railcars, of which 96% is owned
by ECT.
The head office of the Company is located in Almaty. The company has a
branch in Astana, as well as regional structural divisions all over the
country.
As of December 31, 2018 the Company’s headcount amounted to 227
people.
Current credit ratings:
ANNUAL REPORT 2018
8
Timeline history
2013
2014
–
2016
2017
2018
2005
–
2012
Foundation of
Eastcomtrans LLP,
fleet expansion, credit and
operational portfolio
diversification,
BP optimization, credit
rating formation
• In 2002, the Company was established by a group of private investors
• In 2002-2009, railcar fleet grew from 700 units to 2,822 units
• In 2002, the first railcar rental contract was signed with Tengizchevroil
• In 2005-2007, client base expanded to include railcar rental and forwarding contracts with major oil and gas
companies
• In 2008, USD25 mln. loan agreement was signed with HSBC Bank Kazakhstan
• In 2008, an ISO audit was successfully performed
• In 2009, the Company became a member FIATA
• In 2010, a 7-year contract was signed with Zhaikmunai
• In 2010, Fitch Ratings assigned a long-term rating at the level of ‘B-’ with a ‘Stable’ outlook
• In 2011, a syndicated loan from BNP Paribas in the amount of USD100 mln. was attracted
• In 2012, Fitch Rating`s upgrade to ‘B’ with ‘Stable’ outlook
Fleet expansion,
new participant,
debut placement
• Railcar fleet reached 10,894 units
• IFC made an equity investment in the Company with a stake of 6.67%
• The Company successfully placed USD100 mln. Eurobonds on LSE
• Moody’s assigned ‘B3’ credit rating with ‘Stable’ outlook
Fleet expansion,
credit portfolio
diversification, contracts
extension, taking
advantage of new financial
instruments, prolongation
of client contracts
• Own railcar fleet reached 12,235 units
• In 2014, Gazprombank provided a 9-year USD50 mln. loan for the acquisition of 853 railcars
• In 2014, the Company raised a USD130 mln. loan from EBRD
• In 2015, DBK-Leasing provided USD36 mln. loan as part of a lease-back agreement
• In 2016, long-term rental contracts with Tengizchevroil were renewed for three years with the right of further
extension for another three years in 2019
• In 2016, KZT1.1 bn. loan was raised from DBK-Leasing under the terms of Islamic “Ijara” leasing
• In 2016, Moody's and Fitch Ratings' credit rating were downgraded to ‘Caa1’ и ‘CCC’ accordingly, outlooks were
changed to ‘Negative’
Optimization of the fleet and
credit portfolio, business
diversification
• Own railcar fleet amounted to 11 646 units: 900 LPG rail tanks were sold and 316 gondolas purchased.
• Reduction of the Company’s debt load and implementing changes to the Eurobonds’ Prospectus.
• Purchase of wagon repair base in Kulsary, Atyrau region
• Moody’s has improved Company’s rating till ‘B3’, the outlook is ‘Stable ’
Business diversification,
reduction of loan portfolio`s
foreign exchange risk
• Entry into the locomotive business - 2 locomotives acquired
• Acquisition of wagon-repair base in Kostanay
• Reducing the share of foreign currency loans in the loan portfolio to 60% due to the conversion of foreign
currency loans in KZT
• Recovery of financial covenants
ANNUAL REPORT 2018
9
Company assets
The wagon fleet under management amounts to more than 12,000 units,
including own park of 11,539 units.
Compared to 2017, the Company's fleet has undergone minor
changes in terms of number and structure, in particular, 333 wagons
were sold (incl. fitting platforms and hoppers) and 227 gondola
wagons were purchased in 2018.
During the period 2003–2018, the compound annual growth rate
(CAGR) of the Company's fleet equaled 46%.
From 2003 to 2018, the total capital investment amounted to
USD736 mln.
In 2018, the Company’s wagon fleet had an average age of about 8
years.
Locomotive traction: 2 electric locomotives
Repair depots:
Kulsary
Kostanay
Wagon fleet structure, as of 31st December 2018
Total amount: 11,539 units
52%
10%
29%
0,02% 6%3%
Oil tank wagons
LPG tank wagons
Gondolas
Platforms
Boxcars
Dumpcars
5,993 1,202 3,342
Oil tank wagons LPG tank wagons Gondolas
2700 300
PlatformsBoxcars Dumpcars
The Company conducts active investment activities aimed at developing its own transport infrastructure, continuously improving customer service and
increasing operational efficiency.
ANNUAL REPORT 2018
10
Key Events in 2018
2.
ANNUAL REPORT 2018
11
Credit
portfolio
Key Events in 2018
Macro environment
Operational
highlights
The base top management team has not changed in 2018Corporate
governance
18 октября 2018 г. Moody’s Investors Service affirmed the Company's corporate credit rating of ‘B3’ on the international
scale and ‘B1.kz’ on the national scale with “Stable” credit outlookCredit
ratings
Recovery of economic growth rates in Kazakhstan, Russia and China
Rating agencies confirm Kazakhstan’s credit rating BBB-/A-3’, improving outlook to ‘Stable’
Oil market stabilization. Oil-producing countries agreed to extend its limits on oil output
Increase in oil production at the Kashagan field
Improved rail market conditions: total cargo loading volume increased by 3%, freight turnover increased by 6%
Increase in tariff rates on the Company’s contracts with customers
Increase of the Company’s fleet utilization ratio
Sale of 333 wagons (platforms and hopper wagons) and purchase of 227 gondolas
Purchase of wagon repair base in Kostanay
Company’s revenue amounted to KZT30.2 bn. (+17% y/y)
Gross margin: 60%
EBITDA amounted to KZT22.4 bn. (+28% y/y) (EBITDA margin: 68%)
Net profit amounted to KZT6.99 bn.
In April 2018, the Company signed the General Agreement Murabaha with Al Hilal Bank in the amount of USD12 mln.
to repurchase its own Eurobonds from the market
In June 2018, the Company signed a new agreement on a credit line opening with Sberbank of Russia in the amount
of KZT9.5 bn. to refinance the Company's debt on a loan to Gazprombank
In September 2018, the Company signed a new loan agreement with the EBRD, under which the loan amount was
increased by USD5 mln. equivalent in KZT for investment purposes
During 2018, the Company repurchased its own Eurobonds in the amount of USD17.7 mln. (in nominal terms) on
market terms using borrowed funds from EBRD and Al Hilal Bank
ANNUAL REPORT 2018
12
Operational Results
3.
ANNUAL REPORT 2018
13
Rail freight transportation market overview
In 2018, the total volume of freight traffic by all types of transport in the
RK amounted to 4,104 mln. tons (+ 4% y/y). During the period 2010–2018
the CAGR of traffic volume equaled 7%. Rail freight traffic in 2018
amounted to 398 mln. tons (+3% y/y versus +14.3% in 2017), CAGR from
2010 to 2018 equals 5%.
At the end of 2018, the share of rail transport in the overall structure of
transportation did not change significantly as compared with 2017.
Automobile transport is the main type of transport in the RK (83% share
in the general structure) due to greater flexibility in the carriage of goods
over short distances. Nevertheless, the rail transport remains more
preferable (greater efficiency and lower costs).
The total cargo turnover in 2018 amounted to 610 bn. tkm (+8.1% y/y
versus +8.7% in 2017). Railway freight turnover amounted to 283 bn. tkm
(+ 6% y/y versus +12% in 2017), which is 47% of the total cargo turnover.
CAGR of this indicator from 2010 to 2018 amounted to 4%.
In 2017–2018, the rail freight sector of the Republic of Kazakhstan
demonstrated a recovery in cargo turnover and traffic volume after a fall in
2015–2016, and, moreover, its performance improved slightly relative to
other types of transport. In 2018, competition from pipeline transportation
had a smaller impact on the oil tanker market due to increased production
at the Kashagan and Tengiz fields and a local shortage in the Russian
market (the expired fleet is not replenished with new wagons, and the cost
of new wagons is rising for the rising cost of gondola wagons, as well as the
rising cost of large-scale casting and repairs). The gondola market reached
its equilibrium due to the introduction of a significant amount of new wagons
instead of retired ones.
Sources: Committee on Statistics of the RK, Company data
Automobile Railway Pipeline
Other (<1%) Growth rate, %
Dynamics of freight traffic in the RK by type of transport,
2010–2018
15%
22%
9% 9%
7%
-0,4% -0,1%
6%4%
0
1000
2000
3000
4000
5000
2010 2011 2012 2013 2014 2015 2016 2017 2018
mln
. ton
s
83%
10%
7%
Structure of freight traffic
in the RK, 2018
Dynamics of freight turnover in the RK by type of
transport, 2010–2018
14%16%
6%
4%
12%
-2%-5%
9%8%
0
100
200
300
400
500
600
700
2010 2011 2012 2013 2014 2015 2016 2017 2018
bn.
tkm
29%
47%
23%
Cargo turnover structure
in the RK, 2018
ANNUAL REPORT 2018
14
Rail freight transportation market overview (cont.)
During the period 2010 –2018, the share of rail transport in the
total freight structure has decreased from 11% to 10%. The share
of automobile transport increased from 81% to 83%. An increase
by 2% was achieved by a decrease in the share of railway and
pipeline transport. Similar trends were also observed in the
structure of freight turnover: the share of automobile transport
increased by 8% (from 21% to 29%) due to a decrease in the
share of railway transport (-8%).
In 2018, the total volume of the freight transportation market in
Kazakhstan was estimated at KZT2,269.6 bn. (≈USD6.58 bn.,
+ 10% y/y), the rail freight sector accounted for KZT772 bn.
(KZT2.2 bn.,+7% y/y). For the period 2010–2018, the share of
railway transport in the total market volume decreased from 54%
to 34%, although in absolute terms it increased by 59% - from
KZT485 bn. To KZT772 bn. Such growth is explained by the
growth of the entire market against the background of a threefold
revenue increase in the pipeline sector - from KZT356 bn. to
KZT1,336 bn., caused by the growth in Russian oil transit revenue
(7 mln. tons per year in 2014 – 2016, 10 mln. tons per year from
2017), as well as the growth in tariffs for transportation through the
Atasu-Alashankou pipeline in direction to the PRC, the growth in
tariffs of KazTransOil in the export and transit direction and the
expansion of the Caspian Pipeline Consortsium pipeline.
In the medium term, we can expect further growth in the freight
traffic market due to the increase in oil exports from Kashagan
and the continuing economic recovery.
Dynamics of freight turnover of rail
transportation in the RK, 2010–2018
15%
5% 6%
-2%
21%
-5%
-11%
12%
6%
0
50
100
150
200
250
300
2010 2011 2012 2013 2014 2015 2016 2017 2018
bn.
tkm
228 248 261 259 242 221 215 240 254
4032
34 34
149120 124
139144
8% 9%5%
-1%
-7% -8%
-3%
12% 6%
0
50
100
150
200
250
300
350
400
2010 2011 2012 2013 2014 2015 2016 2017 2018
mln
. ton
s
Dynamics of freight rail transportation
in the RK, 2010–2018
Main cargo types
Other cargo typesGrowth rate of rail freight of main types of cargo, %
33%
81% 83% 84% 85% 83% 85% 85% 84% 83%
11% 9% 9% 8% 10% 9% 9% 10% 10%8% 7% 7% 6% 6% 6% 6% 6% 7%
2010 2011 2012 2013 2014 2015 2016 2017 2018
Cargo transportation in the RK by type of
transport, 2010–2018
21% 27% 28% 29% 28% 30% 31% 29% 30%
55% 50% 49% 47% 51% 49% 46% 47% 46%
23% 22% 22% 23% 21% 21% 22% 23% 23%
2010 2011 2012 2013 2014 2015 2016 2017 2018
Cargo turnover in the RK by type of
transport, 2010–2018
Automobile Railway Pipeline Other
Sources: Committee on Statistics of the RK, Company data
ANNUAL REPORT 2018
15
The current rail freight transportation market in Kazakhstan is represented by the state-owned Kaztemirtrans JSC, captive railway operators that are
part of large FIGs and holdings, as well as private operators. Large Russian operators also present on the Kazakhstani market. There is a high level of
concentration in the market, the share of the 4 largest companies accounts for ≈58% of the total freight wagon fleet of the Kazakhstan. The share of
ECT is 7%.
As of 31st December 2018, the total fleet of freight wagons in the Republic of Kazakhstan (according to the NC “KTZh”) equaled to ≈135 thousand
wagons. During 2010–2018, total fleet grew by 40% — from 96.4 thousand units up to 135 thousand units. The main growth driver for this period was
the process of expanding the fleet of private operators — by 85%: from 43.3 thousand units up to ≈80 thousand units.
Due to the leading roles of the oil and gas, metals and mining sectors in the country's economy and GDP, freight railcars fleet in Kazakhstan is
primarily composed of gondolas and tank wagons (69%) which are the principal types of railcars for servicing these industries.
Competitive environment
The structure of the owners of the freight wagon fleet in the RK, 2018
Others
Kaztemirtrans
Eastcomtrans
TransCom
TengizTransGroup
Texol Trans
Petroleum
Bogatyr Trans
13
0
5
10
15
20
25
30
35
Uzbekistan Belarussia Kazakhstan Ukraine Russia
year
s
The average age of the freight wagon fleet in the CIS, 2018
Fleet of freight wagons in the RK, 2010–2018
-4%
12%
18%
1%2%
0%-2%
1%3%
0
20000
40000
60000
80000
100000
120000
140000
160000
2010 2011 2012 2013 2014 2015 2016 2017 2018
units
KTZh fleet
Fleets of private
operators
Growth rate, %
Others
The structure of the fleet by type of freight wagons in the RK, 2018
44%
25%
10%
8%
6%3% 4%
Gondolas
Tank wagons
Covered wagons
Platforms
Grain hoppers
Cement hoppers
40%
7%7%
4%3%
2%1%
36%
Sources: Committee on Statistics of the RK, NC “KTZh”, “Rynok podvizhnogo sostava”, Company data
ANNUAL REPORT 2018
16
In 2018, manufacturers of large-scale rail steel casting from the post-soviet countries produced 271.6 thousand tons of large-scale rail casting
(221 thousand tons in 2017). In total, from January to December 2018, 378.3 thousand tons of small, medium and large-scale castings were produced
(compared to 307.2 thousand tons in 2017). The increase in total production compared with 2017 amounted to about 23%. It is also worth noting that
the trend towards higher prices for railway casting continues. The rise in prices for individual components was up to 50% compared with 2017 prices.
This rise in prices was caused by a prolonged rise in metal prices and increased demand for repairs from manufacturers and operators.
The deficit of wheelsets, which began in 2017, intensified throughout the year. The average cost of wheelsets in Russia has increased almost
threefold since 2017 and reached RUB200 thousand at the end of 2018. Increased demand arose as a result of a reduction in the rate of write-offs of
retired wagons, wheelsets of which are suitable for further use. As a result, the rush demand for wheelsets led to a large-scale deficit. In addition, the
deficit was also caused by a ban on the use of RU1 model axles on the territory of the Russian Federation.
Large-scale casting and spare parts
19,473 21,149 22,366
20,624 20,451 22,665 23,633 24,019
22,013
25,531 25,043 24,673
26,584 28,368
31,329 28,871 28,888
31,811 32,697 33,656 31,218
35,570 35,225 34,045
0
5000
10000
15000
20000
25000
30000
35000
40000
45000
50000
tons
Production of large-scale railway steel casting in 2018
Large-scale casting Total casting
1,2 1,2 1,2 1,1 1,1 1,1 1,1 1,1 1,0 1,1 1,1 1,1
2,8 2,8 2,82,6 2,6 2,5 2,5 2,4 2,4
2,6 2,6 2,6
2,8 2,93,1
3,6 3,63,9 3,9 3,8 3,8
3,0 3,03,3
$-
$1
$2
$3
$4
$5
$/da
y
Dynamics of costs for repairs and spare parts in 2018 (excl. VAT)
Expenses for maintenance with uncoupling
Expenses for scheduled repairs
Cost of expensive parts
Sources: “Rynok podvizhnogo sostava”, Argus, RZD-Partner
ANNUAL REPORT 2018
17
Since Kazakhstan’s accession to the WTO, as well as the development of international law to ensure access to railway transport services, the
transportation market has expanded its borders outside the Republic of Kazakhstan. As part of the initiative to revive the Silk Road, the governments
of neighboring countries are studying a project to build a high-speed cargo-passenger corridor "Eurasia" based on a narrow gauge format.
In the current conditions of the development of the transportations market, the government has launched initiatives to implement IT technologies and
the transition to electronic format. Considering the deepening integration of Kazakhstan into the international transport system, the railway transport
and logistics market is beginning to gradually shift to digitalization of relations between participants in the transportation process.
In general, the market continues to experience positive growth due to an increase in the volume of trade between China, Russia and European
countries. Thus, according to experts, the trade turnover between China and Europe exceeded USD1 trillion in 2018. Experts predict further growth in
the field of transport logistics and the growth of trade turnover supported by the development of the Silk Road. In turn, the Government of the Republic
of Kazakhstan is aimed at optimizing the process of financing projects under the Silk Road program by attracting investments through capital markets.
Development trends and rental rates
273
335 332
379 398
0
10000
20000
30000
40000
50000
60000
70000
0
50
100
150
200
250
300
350
400
450
2014 2015 2016 2017 2018
KZ
T bn.
mln
. ton
s
Dynamics of freight traffic by rail transport in 2014-2018
Freight traffic by rail transport GDP in current prices
Rental rates for freight cars 2015-2018 (excl. VAT)
Russia 2015 2016 2017 2018
Gondolas $/day 8.5 14.5 29.0 29.7
Oil tank wagons $/day 8.6 8.9 12.1 13.8
LPG tank wagons (84 м3) $/day 24.4 23.4 24.8 23.8
Kazakhstan 2015 2016 2017 2018
Gondolas $/day 10.7 17.4 33.5 31.3
Oil tank wagons $/day 9.8 6.7 10.7 10.7
LPG tank wagons (84 м3) $/day 20.5 22.3 23.7 25.4
Sources: Committee on Statistics of the RK, EIU, “Rynok poluvagonov”
ANNUAL REPORT 2018
18
Operational Highlights
ANNUAL REPORT 2018
Currently, the core business segments of ECT include railcar rental services and operating services, which, in 2018, generated 63% and 34% of the total
revenue respectively; the remaining portion of the revenue was related to freight forwarding and other services. The Company operates all over the “1520-
gauge area”.
In 2018 the overall freight volume operated by the Company totaled 10.9 mln. tones (-16% y/y).
Improving conditions of the rail freight market as a result of oil market recovery and revival of the economic growth of both Kazakhstan and its trade
partners during the year resulted in increase of yearly average rental and operating rates.
In 2018 the Company sold 333 wagons and purchased 227 gondolas and 2 locomotives.
The Company acquired the Kostanay Locomotive Repair Depot in Kostanay in May 2018, which will be further reconstructed to the wagon-repair
plant (WRP).
In general, the Company maintained its market position and increased the loading of its own wagon fleet to 98%.
19
Wagon repair plants
Wagon-repair plant in Kulsary
In October 2017, the Company acquired production base and land
(an area of 7.5 hectares), adjacent to the Kulsary railway station.
WRP Kulsary is a company that provides services for the current
uncoupling repair of freight wagons, loading and unloading works,
services for the storage of spare parts, current and middle repair of
wheelsets.
1,951 wagons and 1,900 wheelsets were repaired in 2018.
Current staff: 22 people
New railway tracks were commissioned with the total length of 5 km.
The following activities are planned in 2019–2020:
Commissioning of an equipment for the provision of services for
the middle repair of wheelsets
The development of the second wheel lathe
Strengthening of current uncoupling repair (creation of 16 repair
positions)
Washing and steaming stations construction
Paint-drying plant construction
Sandblasting plant construction
Expansion of storage areas for the organization of a spare parts
trading platform
Administrative complex and dormitory construction
Wagon-repair plant in Kostanay
In May 2018, the Company acquired production base and land
(an area of 3.2 hectares), adjacent to the Kostanay railway
station previously owned by “Kamkor Locomotive”.
WRP Kostanay is a company that provides services for the
current uncoupling and depot repair of freight wagons, loading
and unloading works, services for the storage of spare parts,
current and overhaul repair of wheelsets.
Current staff: 15 people
The following activities are planned in 2019–2020:
Current repair workshop construction
Wheel-roller and wagon-wheel workshops construction
Expansion of storage areas for the organization of a spare
parts trading platform
Wagon repair depot construction (2500 wagons per year)
Locomotive maintenance workshop construction
ANNUAL REPORT 2018
20
Environmental protection
The environmental activities of the Company are carried out in accordance with the requirements of the Environmental Code of the Republic of
Kazakhstan, advanced international standards (ISO 14001) in the field of environmental protection, internal documents and Company`s plans.
In 2018, the Company carried out an assessment of environmental aspects, including procedures for identifying environmental risks, determining their
materiality and creating a register, as well as developing measures aimed at reducing their materiality.
Based on the results of the activities carried out, the Company has developed goals and objectives in the field of environmental management for 2019–
2020.
In 2018, the Company entered into contracts for the development of an emission standards project, environmental monitoring at facilities (air
monitoring), removal and disposal of production and consumption waste, pumping out and export of wastewater.
The contribution of the WRP Kulsary production activities to the environmental pollution of the district is not significant:
• Impact on atmospheric air - concentration of pollutants do not exceed 0.8 MPC (maximum permissible concentration).
• Waste generation - The company complies with established environmental and sanitary-epidemiological requirements in terms of recycling and safe
waste management. Production and consumption waste as it is formed is exported by specialized contractors for further disposal, processing or
disposal at specialized landfills.
• In 2017, the Company was certified according to the international standard in the field of safety and labor protection ST RK OHSAS 18001-2016.
The Company also has its internal policy in the field of occupational safety and health and environmental protection. In 2018, the Company
conducted a comprehensive risk assessment in the field of occupational safety and health. All types of labor protection briefings are held on an
ongoing basis. The Company's employees are provided with the necessary specialized clothing and footwear and other personal protective
equipment. The Company recorded no accidents related to production that occurred with employees during 2018.
• Industrial and fire safety. The company implements measures aimed at ensuring the failure-free production, regularly carries out diagnostics of
buildings, structures and equipment, and further carry out repairs and reconstruction. Employees engaged in the operation of hazardous production
facilities are trained in specialized training centers, retrained and certified in accordance with the requirements of the legislation of the Republic of
Kazakhstan. In order to ensure fire safety, 68 employees were trained on the fire-technical required minimum and 211 briefings on fire safety
measures were conducted during 2018. Checks on the serviceability of existing fire-fighting equipment are carried out on a regular basis. Automatic
fire alarm systems were installed in administrative and industrial buildings of the WRP Kulsary in 2018. In order to acquire practical and theoretical
skills in case of possible fires, the Company conducted 4 fire and tactical exercises during the year. No cases of fire were recorded in 2018.
In 2018, no emergencies were recorded that caused a halt in production or environmental damage to production facilities. In general, the production
activities of the Company's repair enterprises do not have a significant environmental impact.
ANNUAL REPORT 2018
21
Financial Highlights
4.
ANNUAL REPORT 2018
22
Key financial indicators
Company`s key financial indicators, 2016 – 2018
KZT/USD (NBRK), average
KZT/USD (NBRK), e-o-p
344.93
384.20
342.16
333.29
326.00
332.33
Indicator2016 2017 2018 2016* 2017* 2018*
KZT mln. KZT mln. KZT mln. USD mln. USD mln. USD mln.
Revenue 24,984 25,766 30,225 73 79 88
Gross profit 14,718 15,465 19,884 43 47 58
EBITDA 17,719 17,466 22,420 52 54 65
Net profit / (loss) 3,959 11,231 6,994 12 34 20
Cash (incl. S-T bank deposits) 8,952 3,159 2,431 27 10 6
Accounts receivable 4,330 4,170 3,852 13 13 11
Current assets 18,026 10,985 16,289 54 33 42
Fixed assets 91,057 98,291 96,883 276 296 252
Total assets 109,918 110,847 116,044 330 334 302
Total financial liabilities 81,517 56,953 55,496 245 171 144
Equity 22,511 42,348 49,329 68 127 128
Cash Flows from Operating activities
(incl. Financial expenses)7,827 12,201 12,160 23 37 35
Cash Flows from Investing activities 3,938 9,871 (3,681) 12 30 (11)
Cash Flows from Financing activities (13,591) (22,277) (7,164) (40) (68) (21)
Gross profit margin 59% 60% 66% 59% 60% 66%
Net debt / EBITDA 4.10 3.08 2.37 4.20 3.02 2.12
Debt / Equity 3.62 1.34 1.13 3.62 1.34 1.13
FX gain / (loss) 683 (82) (3,482) 2 (0.3) (10.1)
Note: * The P&L and CFS calculations are based on the average KZT/USD rate (NBRK) for the period, while the Balance Sheet is based on the rate at the end of the period
In 2018, the Company's operations remained profitable and able to generate positive cash flows from operating activities.
In 2018 Equity has recovered, leverage has recovered to the level of 2014 (before the KZT sharp depreciation in 2015–2016).
ANNUAL REPORT 2018
23
Revenue
The total revenue of the Company in 2018 amounted to KZT30,225 mln. (USD88 mln. in terms of an average annual rate of 344.9 KZT/USD), which is
17% more than in 2017 in KZT and 11% in USD terms.
The revenue structure by type of services has slightly changed in recent years: the share of rental revenue in 2018 was 67% (-11% y/y), revenue from
operating was 29% (+8% y/y) , from other services — 4% (+3% y/y).
Total revenue dynamics, 2014–2018
31,897 26,537 24,984 25,766 30,225
176
120
73 79 88
2014 2015 2016 2017 2018
Revenue, KZT mln. Revenue, USD mln.
Structure of revenue from services, 2014–2018
73% 73% 78%67% 63%
23% 25% 20%29% 34%
4% 2% 1% 4% 1%
2014 2015 2016 2017 2018
Rent Operations Forwarding services./Transshipment
The revenue from wagons` operating amounted to KZT10,227 mln. (+ 35% y/y, 34% of total revenues).
The revenue from freight forwarding equaled KZT340 mln. (-27% y/y, 1% of total revenue).
The revenue from other services amounted to KZT486 mln. (-14% y/y, 2% of total revenues).
The revenue from rental services for freight wagons in 2018 amounted to KZT19,173 mln. (+ 12% y/y, 63% of the total revenue).
ANNUAL REPORT 2018
24
Production costs
Cost of Goods Sold (COGS) in 2018 totaled to KZT10,341 mln. (USD30 mln.), which is slightly higher than compared to the previous year (+0.4% y/y).
Dynamics of production costs (COGS), 2014–2018
10,931 10,834 10,267 10,301 10,341
60,3
48,9
30,0 31,6 30,0
2014 2015 2016 2017 2018
COGS, KZT mln. COGS, USD mln.
The general structure of production costs underwent a number of changes in 2018: depreciation expenses increased (+27% y/y) due to changes in
accounting policies; expenses for repairs and maintenance of wagons decreased (-53% y/y) due to changes in accounting policies and a decrease in
the number of scheduled repairs; the costs of wagon insurance decreased (-21% y/y); salary expenses increased (+36% y/y) due to the increase in
the number of personnel and the introduction of KPI.
The gross profit margin was at the level of 66%, which is 6% higher than in 2017 (60%).
Item2018
KZT mln.
2017
KZT mln.
Growth rate
%
Share in 2018
%
Share in 2017
%
Change
y/y
Depreciation 4,748 3,747 +27% 46% 36% +10%
Repairs and
maintenance1,118 2,363 -53% 11% 23% -12%
Railway costs 737 1,424 -48% 7% 14% -7%
Insurance 248 313 -21% 2% 3% -1%
Service costs 243 317 -23% 2% 3% -1%
Payroll 780 575 +36% 8% 6% +2%
Other 2,467 1,562 +58% 24% 15% +9%
Total 10,341 10,301 0.4% 100% 100% –
36%
23%
14%
3%
3%6%
15%
COGS Structure, 2017–2018
Depreciation
Repair costs
Railway costs
Insurance
Service costs
Payroll
Other
46%
11%7%2%
2%
8%
24%
2017 2018
ANNUAL REPORT 2018
25
General and administrative expenses
In 2018, G&A expenses amounted to KZT2,234 mln. (USD6.5 mln.), which is higher than the previous year's level by + 29% y/y or KZT504 mln.
Dynamics of general administrative expenses (G&A), 2010–2018
2,794 2,249 1,985 1,730 2,234
15,4
10,1
5,8 5,3 6,5
2014 2015 2016 2017 2018
G&A, KZT mln. G&A, USD bn.
Insurance
Bank commission
8% 1%
37% 52%
19%14%
8% 7%
28% 26%
2017 2018
Structure of general administrative expenses (G&A), 2017–2018
0,4% Payroll
Taxes, excl. CT
Consulting services
Other
The growth of general administrative expenses in 2018 was caused by an increase of labor costs (+ 82% y/y due to an increase in the number of
employees and the introduction of KPI) and other expenses (+19% y/y, including an increase in the cost of office space renting (+13% y/y).
Item2018
KZT mln.
2017
KZT mln.
Growth rate
%
Share in 2018
%
Share in 2017
%
Change
y/y
Insurance 24 139 -83% 1% 8% −7%
Payroll 1,153 633 +82% 52% 37% +15%
Taxes (excl. CT) 321 324 -1% 14% 19% -5%
Consulting services 150 142 +5% 7% 8% -1%
Bank commission 10 7 +45% 0,5% 0,4% +0.1%
Other 575 485 +19% 26% 28% -2%
Total 2,234 1,730 +29% 100% 100% –
1%
ANNUAL REPORT 2018
26
EBITDA
The Company’s 2018 EBITDA increased by + 28% in KZT terms and amounted to KZT22,420 mln. against KZT17,466 mln. in 2017. In USD
terms, this indicator increased by +20% from USD54 mln. in 2017 up to USD65 mln. in 2018 because of the growth in KZT average exchange
rate in 2018.
2018 EBITDA margin equaled 74%, which is 6% higher than the 2017 figure.
KZ
T m
ln.
Revenue COGS G&AOther
operating incomeOther
operating exp.EBITDAD&A
EBITDA Formation, 2018 г.
30,225 (10,341)
(2,234)174 (204)
4,780 22,420
EBITDA Dynamics, 2014–2018 гг.
23,876 19,393 17,719 17,466 22,420
132
87
52 5465
2014 2015 2016 2017 2018
EBITDA, KZT mln. EBITDA, USD mln.
75%
73%
71%
68%
74%
2014 2015 2016 2017 2018
EBITDA Margin Dynamics, 2014–2018 гг.
ANNUAL REPORT 2018
27
Financial income in 2018 amounted to KZT802 mln. against KZT297 mln. in 2017.
Total financial expenses (taking into account FX differences) amounted to KZT9,552 mln. (USD28 mln.), an increase of + 33% y/y due to the
depreciation of the KZT in 2018.
As of 31st December 31, the share of foreign currency loans (including liabilities indexed for changes in the KZT/USD exchange rate) in the total
structure of the Company's loan portfolio was 62.6%.
Financial income and expenses
Source: National Bank of the RK
In 2018, loans were fully serviced in accordance with the payment schedule. In addition, the Company made early repayments of existing loans
through the sale of assets and the signing of new loan agreements.
Dynamics of loan portfolio size and financial expenses, 2017–2018
57,0
171,0
7,1 22,0
55,5
144
6,117,6
Loan Portfolio, KZT bn.(e-o-p)
Loan Portfolio, USD mln.(e-o-p)
Financial expenses,KZT bn.
Financial expenses,USD mln.
2017 2018
ItemAmount (KZT mln.)
2018
Amount (KZT mln.)
2017
Growth rate
%
Remuneration expenses 6,070 7,121 -15%
(Positive) / Negative FX differences 3,482 82 +42.6х
Total 9,552 7 ,03 +33%
0
100
200
300
400
184.50
13 Feb. 2014
255.26
21 Aug. 2015
383.91 (local max.)
22 Jan. 2016
KZT/USD Dynamics, 2014–2018
384.2 (historical max.)
30 Dec. 2018
ANNUAL REPORT 2018
28
Risk Management
5.
ANNUAL REPORT 2018
29
Risk Management System
The Risk Management Policy (the “Policy”) was approved by the Supervisory Board in May 2015. It defines the following areas: 1) risk identification
procedure; 2) risk assessment; 3) risk management; 4) exchange of information and risk monitoring; 5) confidentiality and information disclosure
requirements.
The Policy is targeted to define potential risks negatively affecting operations, reputation, financial standing of the Company and diminishing the
probability of its occurrence.
Policy goals:
• Develop and implement consistent approach to risk
determination and management;
• Determine and rapid response on emerging risk
events;
• Make targeted risk management actions aimed at
bringing risks to acceptable level;
• Determine risk reporting minimum requirements;
• Determine minimum requirements on risk
assessment procedures.
Main objectives for the Policy:
• Forecast an occurrence of negative events;
• Develop action plans in case of negative event occurrence to
minimize potential harm;
• Ability to react fast on unexpected events and make managerial
decisions to take control on the situation;
• Deliver timely information on reaction options to parties involved;
• Disseminate information to all employees and interested parties
concerning their responsibilities on identification, monitoring and
reaction on risks.
Risk management system is a two-level system: 1st level — Supervisory Board (approves Policy, levels of responsibility, risk register, rules and
procedures on monitoring, risk reports and internal audit plans); 2nd level — General Director (responsible for organization of effective risk
management system and development of risk control system). The Company is considering to establish a risk management unit in the future.
The Company defines seven type of risk groups:
• Operational risk
• Financial risk
• Market risk
• Risk of fraud
• Reputational and confidential information disclosure risk
• Concentration risk
• Sole decision making risks
It is important to note that the Company enters into insurance contracts on a regular basis against the following cases:
• Damage or loss of rolling stock
• Infliction of life harm, personal injury and/or damage to property of third
parties
• Environmental damage
ANNUAL REPORT 2018
30ANNUAL REPORT 2018
Register of Key Risks
O P E R A T I O N A L
R I S K S
F I N A N C I A L
R I S K S
M A R K E T R I S K S R I S K S O F F R A U D
R E P U T A T I O N A L
R I S K S
C O N C E N T R A T I O N
R I S K S
S O L E D E C I S I O N
M A K I N G R I S K S
• Rolling stock availability to meet
contractual obligations
• Fail to deliver or late delivery of
railcars to consumers
• Sending railcars to the wrong route
• Accidents, derailment
• Untimely repair
• Signing contracts with insolvent
clients
• Noncompliance with financial
terms set by creditors
• Interest rates increase risk
• Devaluation and imbalanced
credit portfolio risk
• Risk of financial and tax reports
late delivery
• Falling market prices in oil & gas
and mining sectors
• Decline of production volumes in
oil & gas and mining sectors
• Export restrictions
• Increase in Kazakhstan Temir
Zholy’s tariffs
• Rental rates decline
• Oil pipelines capacity expansion
• Signing contracts for the purchase
of goods and services at higher
than market prices
• Signing contracts for the delivery
of services at lower than market
prices
• Theft of goods and materials from
the office or warehouses
• Raiding
• Negative information influence
on reputation due to breach of
contractual obligations (financial,
operating)
• Unauthorized disclosure of
rental rates and tariffs
• Disclosure of commercial
secrets
• Law violation risks
• Dependence on a single financial
institution
• Dependence on a single supplier
in the delivery of spare parts
and/or repair works
• Customer concentration risk
• Key person risk
• Sole decision making when signing
contracts
• Sole decision making on strategy
31
Social Responsibility
6.
ANNUAL REPORT 2018
32
HR Policy and Social Responsibility
The Company actively supports a healthy lifestyle among employees, and in 2018 it participated in the Almaty Marathon for the fifth time.
As of the end of 2018, the Company`s personnel included 227 people, including the WRP Kulsary branch (24 people), WRP Kostanay branch (15 people). It
should be noted that 15% of employees have been working for the Company for more than 3 years and 23% of employees joined the Company more than
5 years ago.
The average age of employees is 36 years.
The share of employees, excluding WRPs, with higher education — 98%, MBA degree holders — 2%. The Company is dominated by employees with a total
work experience of 6 to 15 years; 10% of all employees have over 20 years of work experience.
As of the end of 2018, there were 95 women and 132 men employees with 21 women holding leading positions in the structural units (departments/units) of the
Company.
The Company is interested in competent and professional workers; therefore, it constantly strives to enhance the level of training of its personnel. In 2018,
26.6% of employee took external training courses.
ECT is the General Sponsor of the Zhakiya Charity Fund PF. The Fund provides educational grants, as well as charitable and medical assistance to children and
youth from low-income families and orphanages in Kazakhstan.
In 2018, the Fund carried out the following initiatives:
1) The Educational Scholarships Programme named after Zhakia Sarsenov (21 scholarship recipients, 8 graduates, the
total scholarship amount — KZT9.98 mln.);
2) The Dental help Program called “Give a smile” (installation of dental braces for 60 orphans totaled KZT8.3 mln., dental
aid — 1086 children, dental treatment of “Mother`s house” pupils and “Zhastar yii” youth house pupils — 35 children in
the amount of KZT1.8 mln.).
3) In 2018, the Company allocated KZT16 mln. for the Educational Institutions Support Program. In particular, charitable
assistance was provided to the Zhakia Sarsenov secondary school in Araltobe (Aktobe region) in the form of building a
sports and children's playgrounds, construction of stands, installing video surveillance and the Internet throughout the
school, purchasing Christmas gifts and toys for elementary grades and Bolashak kindergarten. Support was also
provided to children's social institutions of Almaty (purchasing music, lighting and sound equipment for the Center for
Adaptation and Support of Graduates of Social Institutions "Zhastar үii", Independence Day congratulations of 110 pupils
of Almaty regional orphanage №1, payment for swimming section for children from Almaty regional orphanage №1 and
Children's Village, payment for Internet facilities for SOS Children's Village).
4) The ECT team takes part in the purchase of gifts for the New Year for children from orphanages in order to fulfill the
wishes of the children, organizing trips with treats and presents to the cinema, to the rink, to the theater on an annual
basis.
5) Children's drawings contest — 4 winners received smartphones, 24 participants received consolation prizes: silver
nominal pendants for girls, wireless headphones for boys.
ANNUAL REPORT 2018
33
Corporate Governance
7.
ANNUAL REPORT 2018
34
Corporate Governance Overview
The Company takes corporate governance issues seriously and responsibly, which implies not only adopting a formal approach but primarily
implementing the fundamental principles of corporate governance.
The company adheres to a simple and clear corporate governance structure shown below:
Corporate governance structure of the Company
1 level G E N E R A L M E E T I N G
O F P A R T I C I P A N T S
Supreme body consisting of Participants or their
representatives
2 level S U P E R V I S O R Y
B O A R D
Strategic management and
control body
3 level G E N E R A L
D I R E C T O R
Sole executive body
Decisions are being made by responsible bodies within their competence, which
is stated in founding documents.
• Accountability: the Code states that the Company should report to all shareholders. The Code secures guiding principles in respect of the
Supervisory Board’s competencies in regard to strategy development, ways of business development, top management team monitoring and control.
• Fairness: the Company ensures compliance of rights and equality of rights of all shareholders (including minority shareholders). All shareholders in
case of their rights’ violation have equal access to rights protection procedures with the participation of the Supervisory Board.
The Company developed and approved the Corporate Governance Code, which is based on the following principles:
• Transparency: the Company ensures timely, reliable and affordable disclosure of corporate information regarding all significant issues of the
Company’s business including information about shareholders composition, management structure and financial results.
• Responsibility: the Company accepts rights of the shareholders and other interested parties, which is aimed at ensuring compliance with social and
ecological standards. This in turn leads to continuous solid growth and financial stability of the Company.
ANNUAL REPORT 2018
35
Corporate Structure
G E N E R A L D I R E C T O R
First Deputy of the
General Director
T E C H N I C A L
D E P A R T M E N T
C O M M E R C I A L
D E P A R T M E N T
D I R E C T O R O F T H E
D E P A R T M E N T O F
R O L L I N G S T O C K
T R A C T I O N A N D
O P E R A T I O N
L E G A L
D E P A R T M E N T
F I N A N C I A L
D E P A R T M E N T
I T D E P A R T M E N T
A D M I N I S T R A T I V E
D E P A R T M E N T
H R D E P A R T M E N T
As of December 31, 2018
Deputy General Director for
Commercial Affairs and
Operations
Deputy General Director for
Strategic Development
Deputy General Director for
Corporate Development
Deputy General Director for
Repairs and rolling stock
exploitation
Director for Security Service
ANNUAL REPORT 2018
36
Supervisory Board
The Supervisory Board (“SB”) is the body that implements overall strategic management of the Company’, controls its financial and business
activities, including the control over the activities of the General Director. The number of SB members is determined by the General Meeting of
Participants and shall consist of no more than five people.
In 2018, the Supervisory Board consisted of four members:
Mr. Marat SarsenovChairman of SB
Mr. Yuri Lavrinenko
Independent member of SB
Ms. Ekaterina
Benjamin
Independent member of SB
Mr. Mikhail Kuznetsov
Independent member of SB
Mr. Marat Sarsenov was again elected a Chairman of SB of the Company on 23.05.2016. Mr. Sarsenov,
born on 06.06.1967, earlier, during the period from 01.01.2012 to 01.06.2015, already held the position of
the Chairman of SB of the Company. He is a participant of the Company who owns a participatory interest
in the ECT’s charter capital of 55,998%.
Mr. Yuri Lavrinenko was elected as an Independent Director of SB in 2013. Mr. Lavrinenko is a Candidate of
Economic Sciences. Starting 2010, acted as an advisor to the President of NC Kazakhstan Temir Zholy JSC.
In 2007–2008, Mr. Lavrinenko was a General Director of Kamkor Repair Corporation LLP; in 2006–2007:
Managing Director, Director of NC KTZh JSC’s Branch – Direction of Magistral Routes; in 2002–2006: First
Vice-Minister, Vice-Minister of Transport and Communications; in 1999–2002: Deputy of Mazhilis of the
Parliament of RK.
Ms. Ekaterina Benjamin was elected as an Independent Director of SB in December 2014. Ms. Benjamin
holds a solid experience in financial institutions, among them are Citibank Kazakhstan, Bank Petrocommerce,
KazInvestBank, HSBC Bank Kazakhstan, Altyn Bank. In 2005–2011, Ms. Benjamin acted as Independent
Director of Visor Capital, Kazakhmys Pension Fund and Altaipolymetall.
Mr. Mikhail Kuznetsov was elected as an Independent Director of SB in May 2015. Mr. Kuznetsov is a
Candidate of Economic Sciences, he is a Chartered Director (UK Institute of Directors) and Executive MBA by
the IE Business School (Madrid, Spain). Mr. Kuznetsov held managing positions in Aviacor, LUKOIL-Volga,
Promsvyaz, and IFC. At present, Mr Kuznetsov acts as an Independent Director of the Board of Directors of
Energosetproject OJSC, EHO JSC (Roscosmos), Credit Bank of Moscow OJSC. He is also a General Director
and Managing Partner of the Center for Corporate Development and Acting Director of the Association of
Corporate Directors.
ANNUAL REPORT 2018
37
Corporate Governance
The sole executive body of the Company is presented by the General Director. The position of the General Director of the Company is held by Mr.
V. Malakhov since 23 May 2016, born on 28 August 1960, who is not a participant of the Company and/or its subsidiaries and affiliates.
Executive body
On 4 March 2016, the Audit Committee comprising independent members of the Supervisory Board of the Company – Mr. M. Kuznetsov and
Ms. E. Benjamin – has been established by the resolution of SB.
Supervisory Board committees and their functions
The Company is in the process of implementing selected internal control and risk management practices. In particular, internal control rules
concerning the use and dissemination of insider information have been adopted. In 2018, the Company provided reports to the Kazakhstan
Stock Exchange (KASE) and Central Securities Depository on persons having access to the Company's insider information.
The Company is implementing IT related incidents management system in order to assess efficiency and formalize processing of requests in IT
Department and measure efficiency of IT departments services.
The Company adopted an internal Insurance policy in order to defend its property interests as it operates in a complicated and risky industry.
The Company’s risk management policy has been approved by the SB’s resolution dated 29 May 2015.
Internal control and audit
The Company's net income for 2017 was not distributed as dividends due to covenants under the Company's loan agreements in 2018. For
2018, the amount of remuneration to members of the Supervisory Board and the executive body amounted to KZT470 mln., while the share of
members of the Supervisory Board accounted for 4.7% of this amount.
Dividends and remuneration
The Company fully and timely discloses information affecting interests of current and potential investors. The Information Policy, defining
the process of information disclosure about the Company and its financial and operational results, was approved by the Supervisory Board
on 6 November 2015.
The Corporate Governance Code was adopted on 25 August 2015 by the resolution of SB; it was developed in accordance with the
recommendations from consultants and IFC as part of the activity plan on a modernization of the Company’s corporate governance.
Existing and potential investors policy, corporate governance principles
ANNUAL REPORT 2018
38
Financial Statements
8.
ANNUAL REPORT 2018
39
Independent Auditor’s Report
ANNUAL REPORT 2018
40
Independent Auditor’s Report (cont.)
ANNUAL REPORT 2018
41
Independent Auditor’s Report (cont.)
ANNUAL REPORT 2018
42
Independent Auditor’s Report (cont.)
ANNUAL REPORT 2018
43
Statement of Financial Positionas of 31st December 2018
ANNUAL REPORT 2018
44
Statement of profit or loss and other comprehensive incomeas of 31st December 2018
ANNUAL REPORT 2018
45
Statement of changes in Equityas of 31st December 2018
ANNUAL REPORT 2018
46
Statement of cash flowas of 31st December 2018
ANNUAL REPORT 2018
47
Statement of cash flow (cont.)as of 31st December 2018
ANNUAL REPORT 2018
48
Statement of cash flow (cont.)as of 31st December 2018
ANNUAL REPORT 2018
Approved by the Company’s management on 19 April 2019 and signed on its behalf by:
V.А. Malakhov
General Director
А.М. Yelgeldiyeva
Deputy CFO
X.V. Goncharova
Chief Accountant
49
Notes to the Financial Statements
ANNUAL REPORT 2018
1. REPORTING ENTITY
(а) Organization and operations
Eastcomtrans LLP (the “Company”) is a limited liability partnership
established under the laws of the Republic of Kazakhstan on 4 October 2002.
The principal activity of the Company is rendering of services in the field of
freight transportation of oil and gas, as well as mining and metallurgical
products by railway transport within the Republic of Kazakhstan and the
Russian Federation.
The Company’s registered address is: office 11a, 77/7 Al-Farabi Avenue,
Almaty, 050040, Republic of Kazakhstan.
The Company is owned by Mr. M.Zh. Sarsenov (55.998%), a citizen of the
Republic of Kazakhstan, and Steinhardt Holding N.V. (37.332%), a company
established under the laws of the Kingdom of the Netherlands, and the
International Finance Corporation (6.67%). Steinhardt Holding N.V. is
ultimately controlled by Mr. M.Zh. Sarsenov. The ultimate controlling party of
the Company is Mr. M.Zh. Sarsenov.
On 7 November 2017, the Company obtained a perpetual State License for
cargo transportation by railway transport issued by Almaty Transport Control
Inspection of Transport Committee of the Ministry for Investments and
Development of RK.
On 26 June 2018, the Company’s branch “Car-Repair Enterprise-Kostanay”
was registered in Kostanay city.
On 29 June 2018, the Company’s branch “Car-Repair Enterprise Kulsary”
was registered in Kulsary city, Atyrau oblast.
The area of the activities of two branches is repair of railway rolling stock.
On 11 October 2017, the international rating agency Moody’s upgraded the
corporate credit rating of the Company to the level of “B3” under the
international scale and “В1.kz” under the national scale. The outlook on the
ratings is “Stable”.
On 18 October 2018, the international rating agency Moody's confirmed the
Company’s corporate credit rating at the level of “B3”, and the outlook is
“Stable”.
(b) Kazakhstan business environment
In general, the economy of the Republic of Kazakhstan continues to display
characteristics of an emerging market. Its economy is particularly sensitive to
prices on oil and gas prices and other commodities, which constitute major
part of the country’s export. These characteristics include, but are not limited
to, the existence of national currency that is not freely convertible outside of
the country and a low level of liquidity of debt and equity securities in the
markets. Ongoing political tension in the region, volatility of exchange rate
have caused and may continue to cause negative impact on the economy of
the Republic of Kazakhstan, including decrease in liquidity and creation of
difficulties in attracting of international financing.
On 20 August 2015, the National Bank and the Government of the Republic
of Kazakhstan made a resolution discontinuing the exchange rate support
and implementing a new monetary policy, which is based on inflation
targeting regime, cancelling exchange rate trading band and implementing a
free-floating exchange rate. At the same time, the National Bank’s exchange
rate policy permits interventions to prevent sharp fluctuations in the Tenge
exchange rate to ensure financial stability.
As at the date of this report the official exchange rate of the National Bank of
the Republic Kazakhstan was Tenge 379.19 per US Dollar 1, compared to
Tenge 384.20 per US Dollar 1 as at 31 December 2018 (31 December 2017:
Tenge 332.33 per US Dollar 1). Therefore, uncertainty remains in relation to
exchange rate of Tenge and future action of National Bank and the
Government of the Republic of Kazakhstan and the impact of these factors
on the economy of the Republic of Kazakhstan.
In September 2018 Standard & Poor’s, international rating agency affirmed
the long-term foreign and local currency sovereign credit ratings of
Kazakhstan - “ВВВ-” and short-term foreign and local currency sovereign
credit ratings - "A-3", and the Kazakhstan national scale - "kzAAA". The
outlook is stable (long-term ratings). The stable outlook is supported by the
government's strong balance sheet, built on past budgetary surpluses
accumulated in the National Fund of the Republic of Kazakhstan and also by
liquid external assets exceeding relatively low government debt over the next
two years.
Increase in oil production and firm oil prices, low unemployment and rising
wages supported a modest growth of the economy in 2018.
50
Notes to the Financial Statements
ANNUAL REPORT 2018
1. REPORTING ENTITY (CONTINUED)
This operating environment has a significant impact on the Company’s
operations and financial position. Management is taking necessary measures
to ensure sustainability of the Company’s operations. However, the future
effects of the current economic situation are difficult to predict and
management’s current expectations and estimates could differ from actual
results.
Additionally, railway sector in the Republic of Kazakhstan is still impacted by
political, legislative, fiscal and regulatory developments. The prospects for
future economic stability in the Republic of Kazakhstan are largely dependent
upon the effectiveness of economic measures undertaken by the
Government, together with legal, controlling and political developments,
which are beyond the Company’s control.
Management is unable to predict the extent and duration of changes in the
Kazakhstani economy, nor quantify their impact, if any, on the Group’s
financial position in future. Management believes it is taking all the necessary
measures to support the sustainability and growth of the Company’s business
in the current circumstances.
For the purpose of measurement of expected credit losses (“ECL”) the
Company uses supportable forward-looking information, including forecasts
of macroeconomic variables. As with any economic forecast, however, the
projections and likelihoods of their occurrence are subject to a high degree of
inherent uncertainty and therefore the actual outcomes may be significantly
different from those projected. Note 28 provides more information of how the
Group incorporated forward-looking information in the ECL models.
2. BASIS OF PREPARATION
(а) Statement of compliance with IFRS
These financial statements have been prepared in accordance with
International Financial Reporting Standards (“IFRS”) for the year ended 31
December 2018 for Eastcomtrans LLP.
(b) Basis of measurement
These financial statements have been prepared under the historical cost
convention, as modified by the initial recognition of financial instruments
based on fair value, machinery and equipment recorded at fair value, and
financial instruments categorized at fair value through profit or loss.
3. FUNCTIONAL AND PRESENTATION CURRENCY
The national currency of the Republic of Kazakhstan is the Kazakhstani
Tenge (“Tenge”), which is the Company’s functional currency and the
currency in which these financial statements are presented. All financial
information presented in Tenge, unless otherwise specified, has been
rounded to the nearest thousand.
4. USE OF ESTIMATES AND JUDGMENTS
The preparation of financial statements in conformity with IFRS requires
management to make judgments, assumptions and estimates that affect the
application of accounting policies and the reported amounts of assets,
liabilities, income and expenses. Actual results may differ from those
estimates.
Estimates and underlying assumptions are reviewed on an ongoing basis as
to the need to revise them. Revisions to accounting estimates are recognized
in the period in which the estimates are revised and in any future periods
affected.
Judgements that have the most significant effect on the amounts recognized
in the financial statements and estimates that can cause a significant
adjustment to the carrying amount of assets and liabilities within the next
financial year include:
(a) DBK-Leasing
As stated in Note 18, in December 2015, the Company signed an agreement
to sell railway cars included to machinery and equipment to DBK-Leasing
JSC (“DBK-Leasing”) and further receive back these assets under the finance
lease agreement between the Company and DBK-Leasing. These railway
cars were placed as a collateral for the initial financing received from other
banks and these railcars effectively were used by the Company before and
after the transaction with DBK-Leasing.
The Company regarded this transaction not as a sale and lease-back
transaction, but as refinancing of its initial borrowings, since the transaction
was conducted to refinance initial borrowings of the Company. Accordingly,
as a result of this transaction, the Company did not derecognize the assets
from property, plant and equipment, since the Company believed that it never
lost control over these assets and retained risks and rewards related to these
assets. The cash received as a result of this transaction was used for the
51
Notes to the Financial Statements
ANNUAL REPORT 2018
4. USE OF ESTIMATES AND JUDGMENTS (CONTINUED)
repurchase of own Eurobonds on market terms in accordance with
prospectus of Eurobonds.
Received cash was placed on special accounts (Note 12) for the purpose of
payment for the Eurobonds purchase. Despite the fact that legally this
transaction was arranged as finance lease, the Company regarded this
transaction as refinancing of the initial borrowings with collateral in the form
of railcars.
The finance lease contract with DBK-Leasing contains a condition of
indexation of Tenge lease payments in case US Dollar exchange rate
strengthens against Tenge. If the US Dollar weakens against Tenge the
amount of lease payments will be equal to the initial amounts set in the
contract. This condition indicated the existence of an embedded derivative
which require separate accounting as of 31 December 2015. As at the date of
initial recognition, the Company recorded the financial lease liability at the fair
value of lease payments and subsequently at the amortised value, and its
derivative financial instrument at its fair value.
As disclosed in Note 18, on 20 December 2016 the Company signed an
additional agreement, where the interest rate under the finance lease
agreement was changed from fixed to floating and calculated based on 6-
month LIBOR + 6,15%. In addition, the terms to maturity were prolonged for 2
years. The Company considered this change as a significant modification of
contract terms and as a result financial liability and embedded derivate was
derecognized as of that date. The LIBOR element of interest rate was
considered by the Company an embedded derivative which require separate
accounting as lease payments were indexed to a variable interest rate of an
economic environment that is different from the economic environment in
which the Company operates. Therefore, the related embedded derivative
was regarded as not closely related.
Due to the fact that this loan contains two not closely related embedded
derivatives, the Company made a decision to designate the entire newly
recognised hybrid financial instrument (loan and embedded derivatives) at
fair value through profit or loss, as single financial instrument.
As at 31 December 2018 and 2017, the Company performed an assessment
of the fair value of the hybrid financial instrument and it was valued at Tenge
9,089,572 thousand and Tenge 10,068,409 thousand, respectively (Note 16).
The fair value was calculated on the basis of the Black-Scholes option pricing
model. In the calculations, the exchange rate of US Dollar to Tenge, provided
for by the financial lease agreement, and the 6-month LIBOR level, effective
as of the reporting date, were applied.
(b) Bonds
On 22 April 2013, the Company placed bonds at the London Stock Exchange
with nominal value of US Dollar 100,000 thousand, with 7.75% coupon per
year paid each half year, with the circulation period of 5 years and maturity in
April 2018 (Note 17).
The Company offered new terms to the holders in 2017, and as a result of
the meeting held on 20 April 2017, the holders accepted the following
changes proposed by the Company to the terms of Eurobonds:
1. Extension of the maturity of Eurobonds until 22 April 2022, with an equal
repayment of principal during the last 2 (two) years of the Eurobonds’
maturity period;
2. Suspension of the application of Clause 4.1 of Eurobonds, including the
financial terms of compliance with the Consolidated share of borrowed funds,
the Consolidated share of the coverage contained therein up to and including
the end of 2017;
3. Increase of the current coupon rate on Eurobonds from 7.75% per annum
to 8.00% per annum.
The Company paid the Eurobond holders a fee with respect to the consent of
the holders in the amount of up to 1.75%. This payment was considered by
the Company as transaction cost, and, accordingly, it was taken into account
as part of the bonds.
According to the bond issue prospectus, the Company can repurchase bonds
in full, at its discretion, at any time, having notified the bond holders, at the
price which represents their principal and compensation for lost profits due to
calling of the bonds. The compensation for lost profits is calculated as the
greater of: а) 1% of the par value of all bonds outstanding or b) future coupon
payments until maturity from the date of calling, discounted at the rate
stipulated in the bond prospectus.
The Company believes that this condition indicates the presence of a
separate financial instrument, which is recorded at the fair value. Taking into
account the terms of the bond issue prospectus, and the current market
situation, the Company’s management believes that the fair value of the
52
Notes to the Financial Statements
ANNUAL REPORT 2018
4. USE OF ESTIMATES AND JUDGMENTS (CONTINUED)
embedded financial instrument was close to zero at the time of recognition as
this instrument was considered as out-of-the-money. As at 31 December
2018, the fair value of this embedded financial instrument was estimated by
the Company at nil Tenge (31 December 2017: nil).
(c) Financial guarantees received
Gazprombank
During 2015, following significant reduction of value of railcars, the collateral
coverage ratio on loan from Gazprombank OJSC (“Gazprombank”) has
reduced from required 130% to 80%. Accordingly, the bank has requested
additional collateral and guarantee. Upon negotiations with Gazprombank the
parties agreed that the Company will provide additional collateral with value
of US Dollar 4 million and a guarantee from the Company’s shareholder.
On 21 May 2015, the Company concluded an agreement with its shareholder
whereby the shareholder would provide a guarantee to Gazprombank, and
the Company agreed to pay a guarantee fee of 4% per annum of the original
face value of the loan (including the amount covered by a collateral).
On 2 October 2017, the Company and the shareholder signed an additional
agreement to the agreement on the provision of this guarantee, effective from
1 October 2017, according to which the amount of remuneration paid to the
shareholder was fixed in Tenge on the date of this additional agreement and
from the date of this additional agreement does not depend on the exchange
rate fluctuations of the US dollar to Tenge.
As at the date of issue of these financial statements, this agreement was
terminated ahead of schedule due to pre-term termination of Company’s
obligations towards Gazprombank at the expense of funds received from
Sberbank JSC SB.
Al Hilal
In 2014, due to certain refinancing agreements the Company and Al Hilal
Islamic Bank JSC (“Al Hilal”) signed an additional agreement which resulted
in requirement of additional security of the loan. Accordingly, the bank has
requested additional collateral and a guarantee. Upon negotiations the
parties agreed that the Company provides collateral covering 125% of the
loan.
On 12 December 2014, the Company concluded an agreement with its
shareholder whereby the shareholder would provide a guarantee to Al Hilal,
and the Company agreed to pay a guarantee fee of 4% per annum. from the
original face value of the loan (including the amount covered by a collateral).
The financial guarantee issued to Al Hilal was fully redeemed at 31
December 2016. On 19 January 2018, the Company and shareholder signed
termination contract for this guarantee agreement due to early repayment of
the Company’s obligations to Al Hilal.
On 9 April 2018, the Company and Al Hilal Islamic Bank JSC entered into a
new Murabaha Master Agreement for the acquisition and sale of commodities
No.4/2018-СММ, under which the Bank demanded additional collateral for
Company’s liabilities in the form of shareholder’s guarantee. On 1 June 2018,
the Company entered into respective guarantee agreement with its
shareholder. Under this agreement, the Company pays 4% of the amount
owed by the Company to Islamic Bank Al Hilal.
Sberbank
Since the Company and Sberbank of Russia JSC SB signed loan agreement
in November 2017, under which the shareholder provided performance
guarantee to the bank for the Company, in the beginning of 2018 the
Company entered into an agreement with its shareholder and for the
provision of such guarantee the Company agreed to pay to the shareholder
guarantee payments in the amount of 3% per annum of outstanding loan.
After a new loan agreement was signed between the Company and
Sberbank dated 19 June 2018, under which shareholder’s guarantee was
increased accordingly, the Company and its shareholder signed additional
guarantee agreement with the increase of amount, and interest rate on such
guarantee was changed to 4% per annum due to increased foreign currency
risks.
Accounting for Gazprombank, Sberbank and Al Hilal
The management also considered whether the guarantee payments of 4%
under the new terms are still at the market level and concluded that in view of
the elevated risk profile of the Company and what the Company could obtain
on the market, annual payments of 4% do not exceed market rates for such
guarantees. Accordingly, the management concluded that it is acceptable to
recognize the costs of this guarantee in profit and loss, rather than in equity,
despite the fact that it was a transaction with the shareholder. The
management also believes that such a judgment is also supported by the fact
53
Notes to the Financial Statements
ANNUAL REPORT 2018
4. USE OF ESTIMATES AND JUDGMENTS (CONTINUED)
that this will ensure a more suitable representation of the cost of the
Company’s borrowed funds.
The guarantee expenses are recognized on an accrual basis for the
respective reporting periods within the finance expenses as interest expense
on guarantee agreements. Refer to Note 25.
(d) Covenants
As at 31 December 2018 the Company had significant amount of loans and
borrowings payable. The loan agreements of the Company has a number of
financial and non-financial covenants. Also, loan agreements contain a cross-
default clause, under which, if the Company fails to fulfil a covenant under
one agreement, it may result in non-performance under other agreements.
The company on an ongoing basis conducts an assessment of the
compliance of its financial and non-financial covenants with the requirements
of loan agreements. The company concluded that there might be some
covenants not in compliance under one loan agreement. The company
received a timely waivers for these covenants for the period, which also
covers 2018.
Accordingly, the Management concluded that on 31 December 2018, the
Company complied with all covenant requirements. Management believes
that, based on the waivers and agreements received from banks and other
lenders, and the negotiations held, the Company will continue to repay its
loans in accordance with the contractual terms, and the lenders will not
require immediate early repayment of loans.
(e) Fair value measurement model
In accordance with the Company’s policy choice on measurement, the
Company performed revaluation of its railway fleet as of 31 December 2017
based on the report of independent appraisers - American Appraisal LLP
(previous revaluation was conducted as of 31 December 2015). Railway fleet
have active secondary market, therefore to obtain market (fair) value market
approach was used. Net book value of property, plant and equipment has
increased by Tenge 16,807,028 thousand as of 31 December 2017 (Note 8).
Accumulated depreciation as of the date of revaluation was recalculated
proportionally to the change of the net book value of the asset. Increase in
net book value was recognised in profit or loss in the reporting period up to
the impairment loss reversed on a certain asset, recorded as of 31 December
2015, and in the equity within the “Revaluation reserve”. Decrease in net
book value of the wagons was deducted from the revaluation reserve on a
particular asset and recorded in profit or loss in excess of the revaluation
reserve. As of 31 December 2018, the Company concluded that the
revaluation of property, plant and equipment on this date is not required,
since the book value of the wagons is close to their fair value.
(f) Change of useful lives of wheel pairs
In 2017 the Company reconsidered useful lives of the wheel pairs and of the
certain wagons and changed its useful lives starting from 1 January 2017.
The Company believes that based on the general practice and based on the
Company’s experience, revised useful lives more accurately reflect term of
receipt of economic benefits from these assets.
5. ADOPTION OF NEW OR REVISED STANDARDS AND
INTERPRETATIONS
IFRS 9 “Financial Instruments”. The Company adopted IFRS 9, Financial
Instruments, from 1 January 2018. The Company elected the modified
retrospective method without restatement of comparative figures and
recognised adjustments to the carrying amounts of financial assets and
liabilities as of the date of initial application of the standards, 1 January 2018,
within retained earnings as of the beginning of current period. Consequently,
the revised requirements of IFRS 7 “Financial Instruments: Disclosures” were
applied only to the current period. The information disclosed for the
compared period repeats the disclosure for the previous year.
The following table reconciles the carrying amounts of each class of financial
assets as previously measured in accordance with IAS 39 and the new
54
Notes to the Financial Statements
ANNUAL REPORT 2018
5. ADOPTION OF NEW OR REVISED STANDARDS AND
INTERPRETATIONS (CONTINUED)
amounts determined upon adoption of IFRS 9 on 1 January 2018.
Reconciliation of provision for impairment at 31 December 2017 and
credit loss allowance at 1 January 2018. The following table reconciles the
prior period's closing provision for impairment measured in accordance with
incurred loss model under IAS 39 to the new credit loss allowance measured
in accordance with expected loss model under IFRS 9 at 1 January 2018:
The effect of the estimated loss model instead of the incurred loss model on
1 January 2018 was reflected through retained earnings on 1 January 2018.
At 31 December 2017, all financial liabilities of the Company, except for
derivative financial instruments, were recorded at amortized cost. Derivatives
were categorized at fair value through profit or loss in accordance with IAS
39. There were no changes that affect the classification and measurement of
financial liabilities.
Adoption of IFRS 15 “Revenue from Contracts with Customers”. The
Company applied simplified method of transition to IFRS 15, and elected to
apply the practical expedient available for simplified transition method. The
Group applies IFRS 15 retrospectively only to contracts that were not
completed at the date of initial application (1 January 2018).
Management made the following adjustments to the amounts recognized in
the statement of financial position as at 1 January 2018, IAS 15 did not affect
retained earnings on 1 January 2018.
6. OPERATING SEGMENTS
Operating segments are components involved in business activities that may
earn revenues or incur expenses, whose operating results are regularly
reviewed by the chief operating decision maker (“CODM”) and for which
discrete financial information is available. The CODM is the person or group
of persons who allocates resources and assesses the performance for the
entity. The CODM has been identified as the General Director of the
Company.
The CODM considers the Company as one segment, which includes rent of
railcars and provision of services of operating maintenance and freight
forwarding. CODM uses operating income as a measure of profit for its
decision-making process.
(а) Measurement of operating segment profit or loss, assets and
liabilities
The CODM reviews financial information prepared based on IFRS adjusted to
meet the requirements of internal reporting. Such financial information differs
in certain aspects from IFRS in terms of a difference in the time of revenue
recognition.
55
Notes to the Financial Statements
ANNUAL REPORT 2018
6. OPERATING SEGMENTS (CONTINUED)
(b) Information on the reporting segments of profit or loss, assets and
liabilities
Information in the reporting segments for the year ended 31 December 2018
measured by the Company’s management as part of the review of the
operating reporting is set out below:
Adjustment
Revenue from principal activity
There is a time difference between revenue indicated in management
reporting and revenue indicated in the IFRS financial statement.
(c) Geographic information
Revenue on each specific country is as follows:
In 2018, approximately 34% and 6% of the total revenue were derived from
the services rendered to Tengizchevroil LLP and Zhaikmunai LLP,
respectively (2017: 35% and 9%, respectively).
7. NON-CURRENT RECEIVABLES
Long-term debt from Railcar Service Center – Eskene LLP is denominated in
Tenge and neither past due, nor impaired (Note 30). Long-term debt includes
advances given to TD RM Rail LLC for the delivery of cars for the amount of
Tenge 1,591,958 thousand. As of the approval date of these financial
statements, TD RM Rail LLC performed car delivery liabilities.
Non-current guarantees from the related party represent advances paid
under financial guarantee agreements with Mr. M.Zh. Sarsenov (Note 4).
8. PROPERTY, PLANT AND EQUIPMENT
56
Notes to the Financial Statements
ANNUAL REPORT 2018
8. PROPERTY, PLANT AND EQUIPMENT (CONTINUED)
Depreciation expense of Tenge 4,747,928 thousand (2017: Tenge 3,747,273
thousand) has been charged to cost of sales and Tenge 45,445 thousand to
administrative expenses (2017: Tenge 28,481 thousand).
On 8 September 2017, the Company entered into a contract for the sale of
133 container platforms with Firma Transgarant LLC. As at 31 December
2017, freight rail container platforms used by the Company were reclassified
to assets held for sale; container platforms were sold in January 2018 for the
amount of Tenge 1,008,713 thousand.
On 4 October 2017, the Company entered into a contract for the purchase of
a repair shop in Kulsary, Atyrau region; the transaction amount was Tenge
568,400 thousand (including VAT).
On 11 October 2017, the ownership of the property was registered to the
Company under a contract for the purchase of immovable property dated 4
October 2017. On 25 October 2017, the Company entered into a lease
agreement for a land plot with an area of 7,2429 hectares on which the repair
shop is located.
On 21 February 2018, the Company purchased a land plot of 0.2056 hectare
for the repairing site in Kulsary city and increased the area of leased land plot
to 7.4888 hectare through re-signing leasing agreement on 22 February
2018.
On 6 March 2018, the Company signed car sales contract for the total
amount of Tenge 246,400 thousand. As at 31 December 2018, all cars were
delivered.
On 24 May 2018, the Company purchased Property Complex “Kostanay
Locomotive Repair Depot” located in the Republic of Kazakhstan, Kostanay
Oblast, Kostanay city, Western Industrial Zone.
On 7 June 2018, the Company purchased locomotives (traction and motor
driven rolling stock) for the total amount of Tenge 1,827,840 thousand. As at
31 December 2018, the Company recorded these assets with a book value of
Tenge 1,632,000 thousand as asset held for sale as it planned to recover
their carrying amount through sale rather than continuing use. It is expected
that the cost of the sale of these assets held for sale will not be lower than
their book value.
On 15 June 2018, the Company entered into a sale contract of wagons and
made full payment during 2018 in the amount of Tenge 182,160 thousand.
On 31 December 2018 the wagons were delivered.
In August 2018, the Company sold wagons for the total amount of Tenge
1,980,000 thousand with a book value cost of Tenge 1,800,136 thousand.
On 19 June 2018, the Company signed sales contract for wagons in the total
amount of
RUR 459,000 thousand (Tenge 2,522,970 thousand), including cars for the
amount of
RUR 167,750 thousand (Tenge 931,013 thousand) delivered at 31 December
2018.
(a) Revaluation of machinery and equipment
Machinery and equipment are mainly represented by the railway cars.
Machinery and equipment were revalued at fair value as at 31 December
2018 in the amount of Tenge 93,716,022 thousand and
96,335,570 thousand as at 31 December 2017. The revaluation was
performed as at 31 December 2017 based on the report of an independent
appraiser, American Appraisal LLP, which has the necessary qualifications
and sufficient expertise in the valuation of assets of this class. The fair value
of the Company’s rail cars was determined based on the analysis of the CIS
secondary market, which was classified by appraisers as an active secondary
57
Notes to the Financial Statements
ANNUAL REPORT 2018
8. PROPERTY, PLANT AND EQUIPMENT (CONTINUED)
market (Level 2 of the fair value hierarchy). As at 31 December 2017, the net
effect of revaluation was an increase of the net book value of property, plant
and equipment by Tenge 16,807,028 thousand with an increase of Tenge
6,050,512 thousand recognized in profit or loss as a reversal of impairment
loss, and a difference in the amount of Tenge 10,756,516 thousand reflected
in other comprehensive income, which also increased the revaluation reserve
in equity.
The increase in the fair value of property, plant and equipment occurred
based on the analysis of prices for various types of railway cars on the
secondary market, as well as observed increased demand for gondola cars,
boxcars, cement hoppers and platforms seen in 2017, which, in turn, was due
to the growth of rail transportation of coal, industrial raw materials, timber and
other goods.
As at 31 December 2018, no revaluation was performed as according to the
results of the analysis of current prices for railway cars in secondary market,
the Company’s management believes that fair value of assets carried at fair
value at 31 December 2018 has not significantly changed.
(b) Pledged assets
As at 31 December 2018, machinery and equipment with a book value of
Tenge 71,904,775 thousand (2017: Tenge 75,305,510 thousand) were
pledged to secure loans and borrowings (Note 16); machinery and equipment
with a book value of Tenge 11,727,326 thousand (2017: Tenge 12,270,616
thousand) were pledged to secure the Company’s bonds (Note 17).
Moreover, as at 31 December 2018, machinery and equipment with a book
value of Tenge 4,593,059 thousand (2017: Tenge 4,760,316 thousand) were
pledged to secure the loans and borrowings received by Railcar Service
Center – Eskene LLP, an enterprise under common control of the ultimate
controlling party of the Company (Note 30).
(c) Leased property, plant and equipment
Machinery and equipment are mainly represented by the railway cars and
gondola cars. Machinery and equipment include railcars acquired under
finance lease contracts signed with banks. As at 31 December 2017, the
carrying value of machinery and equipment leased under these agreements
amounted to Tenge 3,968,768 thousand. On 31 December 2018, this leasing
was fully repaid, and the wagons were released from collateral.
9. TRADE AND OTHER RECEIVABLES
The Company applies the IFRS 9 simplified approach to measuring expected
credit losses which uses a lifetime expected loss allowance for contract
assets. To measure the expected credit losses, contract assets have been
grouped based on shared credit risk characteristics and the days past due.
The contract assets relate to unbilled work in progress and have substantially
the same risk characteristics as the trade receivables for the same types of
contracts. The Company has therefore concluded that the expected loss
rates for trade receivables are a reasonable approximation of the loss rates
for the contract assets.
At 31 December 2018, the trade receivables of the Company’s major
customer – Tengizchevroil LLP (S&P Global Ratings approved corporate
rating - “BBB”), accounted for 48% of the total amount of trade receivables
(2017: 42%).
On 1 January 2018, the Company entered into agreement with
Tengizchevroil LLP for making available for use 200 railway oil cars.
The carrying value of the trade and other receivables approximates its fair
value due to the short-term maturity.
On 31 December 2018, the credit loss allowance for trade and other
receivables is determined according to provision matrix presented in the table
below. The provision matrix is based the number of days that an asset is past
due.
58
Notes to the Financial Statements
ANNUAL REPORT 2018
9. TRADE AND OTHER RECEIVABLES (CONTINUED)
On 31 December 2018, the credit loss allowance for contract assets is
determined according to provision matrix presented in the table below. The
provision matrix is based the number of days that an asset is past due.
The following table explains the changes in the credit loss allowance for
contract assets under simplified ECL model between the beginning and the
end of the annual period:
The changes in the provision for doubtful accounts during the years 2017
were as follows:
The Company enters into transactions only with companies with a positive
credit history and high credit rating, if available. The Company’s policy is that
all customers willing to make purchases on credit must undergo a credit
quality check procedure.
The credit quality analysis of the trade and other receivables based on the
rating of Standard and Poor’s and Moody’s at 31 December is as follows:
As at 31 December 2018, an impairment provision in the amount of Tenge
183,667 thousand (31 December 2017: Tenge 168,420 thousand) was
created for individually impaired receivables.
At 31 December, the Company’s trade receivables were denominated in the
following currencies:
59
Notes to the Financial Statements
ANNUAL REPORT 2018
10. ADVANCES PAID AND OTHER CURRENT ASSETS
On 31 December 2018, the credit loss allowance for contract assets is
determined according to provision matrix presented in the table below. The
provision matrix is based the number of days that an asset is past due.
Financial other current assets are neither past due nor impaired and
denominated in Tenge. The carrying value of other financial current assets
approximates its fair value due to the short-term maturity.
Movements in the impairment provision for the years ended 31 December are
as follows:
Advances paid to third parties represent advances to Provera AG for railway
services in the amount of Tenge 1,749,914 thousand (2017: Tenge 1,657,536
thousand) and to KTZh JSC for the services of the technological center for
processing of shipping documents in the amount of Tenge 285,249 thousand
(2017: Tenge 349,868 thousand) and to other third parties in the amount of
Tenge 581,148 thousand (2017: Tenge 343,796 thousand). Advances for
prepaid railway services include advances for railway tariff, which will be
billed to the customers and is shown on a net basis in the Company’s
financial statements, as the Company is acting as an agent with respect to
those services.
Advances to related parties represent advances to Steinhardt Holding N.V.
for Company’s bonds purchase in the amount of Tenge 3,761,398 thousand
(2017: 0 Tenge).
*Provision for impairment in the amount of Tenge 129,775 thousand includes
the created provision for settlements with the related party Railcar Service
Center – Eskene LLP in the amount of Tenge 115,523 thousand (2017:
Tenge 41,632 thousand).
11. SHORT-TERM BANK DEPOSITS
On 18 May 2017, the Company placed a deposit in US Dollars with Altyn
Bank JSC Halyk Bank of Kazakhstan JSC SB (Fitch’s long-term IDR in
foreign and national currency – “BВВ-”, outlook – “Stable”) maturing on 18
May 2018 and bearing an interest rate of 0.95% per annum. As at 31
December 2018, this short-term bank deposit was closed (31 December
2017: Tenge 2,069,352 thousand).
On 13 September 2018, the Company placed Tenge deposit with Sberbank
JSC SB (Fitch’s long-term IDR in foreign and national currency ВВ+, outlook
“Positive”, Moody`s foreign currency deposit rating Ba3, outlook “Negative”)
for the period of 6 months at the interest rate of 8.0% per annum.
As at 31 December 2018, this short-term bank deposit amounted to Tenge 1
million.
On 30 November 2018, the Company placed Tenge deposit with Sberbank
JSC SB for the period of 6 months at the interest rate of 8.2% per annum. As
at 31 December 2018, this short-term bank deposit amounted to Tenge 2
million.
On 4 July 2018, the Company placed Tenge deposit with Sberbank JSC SB
for the period of 3 months at the interest rate of 7.7% per annum. The deposit
was prolonged for the same term in October 2018. As at 31 December 2018,
this short-term bank deposit amounted to Tenge 2,400 thousand.
As at 31 December 2018 created expected loss allowance for the 12-month
period in the amount of 0 Tenge (at 1 January, 2018 on adopting of IFRS 9:
Tenge 4,139 thousand disclosed in Note 5).
The Company's exposure to credit risks, interest rate risks, as well as a
sensitivity analysis of financial assets and liabilities are disclosed in Note 28.
The fair value of the short-term deposits is approximately equal to their
carrying amount due to the short-term maturity.
60
Notes to the Financial Statements
ANNUAL REPORT 2018
12. DEPOSITS ON SPECIAL ACCOUNTS
As at 31 December 2018, the total cash placed with Altyn Bank JSC (China
Citic Bank Corporation Ltd SB) on special accounts, in US Dollar, amounted
to Tenge 148,335 thousand (in 2017, on special accounts at Altyn Bank JSC:
Tenge 128,566 thousand). Altyn Bank JSC has a right to impose restrictions
on these funds, in case of the Company’s failure to comply with the schedule
of repayment of the principal or interest on the loan of the International
Finance Corporation and on finance lease agreement with DBK-Leasing
(finance lease agreement dated 22 December 2010 and finance lease
agreement dated 30 December 2015). As at 31 December 2018, the
Company created expected credit loss allowance for the 12-month period in
the amount of Tenge 297 thousand (at 1 January 2018 on adoption of IFRS
9: Tenge 257 thousand disclosed in Note 5).
The Company’s exposure to credit risk and a sensitivity analysis for financial
assets and liabilities are disclosed in Note 28.
13. CASH AND CASH EQUIVALENTS
As at 31 December 2018, the Company created expected credit loss
allowance for the 12-month period in the amount of Tenge 4,572 thousand
(at 1 January 2018 on adoption of IFRS 9: Tenge 1,915 thousand disclosed
in Note 4).
The credit quality analysis of cash and cash equivalents based on the rating
of Standard and Poor’s and Moody’s as at 31 December is as follows:
14. CHARTER CAPITAL AND RESERVES
(a) Charter capital
On 28 December 2012, the Company entered into an agreement with the
International Finance Corporation (“IFC”), whereby the IFC contributes Tenge
3,005,400 thousand to the charter capital and receives 6.67% of interest in
the charter capital of the Company. On 11 July 2013, the IFC made a
contribution to the charter capital in full.
(b) Dividends
The owners are entitled to receive dividends as declared from time to time
and are entitled to vote at meetings of the Company prorated to their
ownership interests in the charter capital.
According to the legislation of the Republic of Kazakhstan, reserves
accessible to distributions are limited by retained earnings reported in the
financial statements of the Company, prepared in accordance with IFRS. As
at 31 December 2018, the Company had retained earnings, including income
for the current year, in the amount of Tenge 26,414,247 thousand (2017:
Tenge 18,321,551 thousand).
In 2018, dividends to the owners were neither declared nor paid (2017: nil).
61
Notes to the Financial Statements
ANNUAL REPORT 2018
14. CHARTER CAPITAL AND RESERVES (CONTINUED)
(c) Surplus from revaluation of property, plant and equipment
The revaluation reserve is intended to reflect the results of property, plant
and equipment revaluation, net of deferred tax. As at 31 December 2018, the
revaluation reserve amounted to Tenge 19,069,415 thousand (31 December
2017: Tenge 20,181,027 thousand), where a decrease in the amount of
Tenge 1,111,612 thousand was due to depreciation of the revaluation
reserve.
15. CAPITAL MANAGEMENT
The Company has no formal policy for capital management, but the
management seeks to maintain a sufficient capital base for meeting the
Company’s operational needs, and to maintain confidence of market
participants and investors, creditors and to ensure future business
development. This is achieved with efficient cash management, constant
monitoring of Company’s revenues and profit, and long-term investment
plans. With these measures the Company aims for steady profits growth.
The management of the Company monitors the return on (investment)
capital, which the Company defines as net operating income divided by total
shareholders’ equity.
The management seeks to maintain a balance between the higher returns
that might be possible with higher levels of borrowings and the advantages
and security provided by a stable capital position. During the reporting year,
there were no changes in the Company’s approach to capital management.
The Company is not subject to external regulatory capital requirements,
except for requirements from the loans agreements described below.
The Company has a number of capital requirements under loan agreements,
such as to maintain a certain ratio of net debt to earnings before interest,
taxes, depreciation and amortization (EBITDA), and to maintain a certain
ratio of liabilities to capital. The amount of capital managed by the Company
as at 31 December 2018 amounted to Tenge 49,329,062 thousand (2017:
Tenge 42,347,978 thousand), which represented the total equity as shown in
the statement of financial position.
16. LOANS AND BORROWINGS
This note provides information on the terms of the Company’s loan
agreements. For more information on the Company’s exposure to interest
rate risk and foreign currency risk see Note 28.
* All-in-cost, under the loan agreement with the EBRD, means the cost of borrowings (expressed as
the rate of annual interest) in favour of the EBRD on funding or servicing of the loan from any
sources, which the EBRD can reasonably choose.
** The contract contain an indexation clause in relation to the depreciation of the tenge exchange
rate against the US dollar
(Note 4).
*** The loan is drawn up by Murabaha's 6-month contracts in accordance with the requirements of
Islamic finance and is prolonged every 6 months until maturity. There is signed bilateral document
with the bank confirming financing period of 5 years from the date of Murabaha Master Agreement
for the purchase and sale of commodities No.4/2018-СММ dated 9 April 2018.
62
Notes to the Financial Statements
ANNUAL REPORT 2018
16. LOANS AND BORROWINGS (CONTINUED)
(a) Brief overview of loans
Al-Hilal
On 3 July 2014, the Company signed the general agreement of Murabaha
with Islamic Bank Al Hilal JSC (“Al Hilal”) in the amount of Tenge 2,700,000
thousand with a rate of 1Y LIBOR + 5% per annum (a minimum of 6.5% per
annum) and US dollar 19,700 thousand with a rate of 1Y LIBOR + 7% per
annum (a minimum of 8.25% per annum) maturing in July 2018, for the
purpose of refinancing loans of Altyn Bank JSC.
On 17 and 18 January 2018, the Company made full pre-term repayment of
liabilities under Al Hilal loan in the amount of Tenge 810,000 thousand and
US Dollar 5,938 thousand (Tenge 1,942,297 thousand) using funds received
within loan agreement executed with Sberbank of Russia JSC SB.
On 9 April 2018, the Company signed Murabaha Master Agreement for the
purchase and sale of commodities with Al Hilal Islamic Bank JSC. This
agreement has been signed for the total amount of US Dollar 12,000
thousand maturing in April 2023 for purposes of financing the Company’s
Eurobond indebtedness.
The expected profit Murabaha on this loan is 6-month Libor+2.75%, at least
5.25% per annum. Collateral for the Master Agreement represents railcars
and guarantee of Mr. Sarsenov M.Zh.
The European Bank for Reconstruction and Development
From August 2017 to December 2017, the Company made partial
prepayment of obligations under the EBRD loan Tranches A and B dated 30
December 2014 in the amount of US dollar 19,000 thousand (Tenge
6,353,022 thousand) with funds received from the sale of gas tank cars that
are part of the collateral for this loan (Note 8).
On 16 November 2017, the Company partially refinanced its obligations
under this loan Tranches A and B in the amount of US dollar 21,000
thousand (Tenge 6,987,120 thousand) with funds received under the loan
agreement with SB Sberbank JSC.
On 23 August 2017, the Company signed a loan agreement with the
European Bank for Reconstruction and Development (“EBRD”) Tranche D in
the amount of US dollar 25,000 thousand (Tenge 8,327,000 thousand at the
rate on 23 August 2017) with a term of 7 years and an interest rate of
3-month LIBOR + 5.8% per annum for investment purposes.
On 16 January 2018, the Company made partial pre-term settlement of
liabilities under EBRD loan on Tranches А and В dated 30 December 2014 in
the amount of US Dollar 3,750 thousand (Tenge 1,235,287 thousand) using
funds received from sales of gas cars forming a part of collateral under this
loan.
On 26 January 2018, outstanding debt on Tranche В of EBRD loan in the
amount of US Dollar 2,361 thousand (Tenge 755,203 thousand) was repaid
in full by the Company using funds received from sales of 133 platforms
forming a part of collateral under this loan (Note 8).
On 14 September 2018, the Company signed Amendment and Consolidation
Contract with respect to Tranche С and Tranche D. In accordance with this
Amendment, the term of Tranche С was extended until 23 August 2024, and
a possibility of conversion and further drawdown of Tranche D in Tenge
equivalent was added. Besides, Tranche Е was added in the amount of US
Dollar 5,000 thousand (with a possibility of drawdown in Tenge equivalent)
maturing on 23 August 2025 and with the rate of 3m LIBOR + bank margin
for investment purposes. Floating part of interest rate on Tranche С, D and Е
was linked to the level of performance by the Company of financial
covenants.
During the 3rd and 4th quarters of 2018, outstanding debt on EBRD loan was
converted in full from US Dollar into Tenge at market rate pursuant to the
terms of Loan Agreement.
As at 31 December 2018, outstanding debt to EBRD on Tranche С and D of
Loan Agreement was Tenge 6,216,688 and 2,660,114 respectively. As at 31
December 2018, Tranche Е was not disbursed and remains available for
drawdown.
Gazprombank
On 29 June 2018, the Company repaid in full ahead of schedule its liabilities
towards Gazprombank in the amount of US Dollar 19,781 thousand and RUR
508,875 thousand using funds received within loan provided by Sberbank
JSC.
On 2 July 2018, the Company and shareholder signed termination agreement
for guarantee provision contract due to pre-term settlement of Company’s
liabilities towards Gazprombank.
63
Notes to the Financial Statements
ANNUAL REPORT 2018
16. LOANS AND BORROWINGS (CONTINUED)
SB Sberbank JSC
On 3 November 2017, the Company signed an agreement to establish a
credit line with SB Sberbank JSC to provide the Company with a loan of
Tenge 10,200,000 thousand (with the option of disbursement in
US dollars of up to US dollar 10,000 thousand) to refinance the Company's
medium-term debt. As at 31 December 2017, the Company used Tenge
6,970,000 thousand, which were used for the partial prepayment of the
Company's debt under the EBRD loan in the amount of US Dollar 21,000
thousand (Tenge 6,987,120 thousand).
On 2 March 2018, under this agreement the Company disbursed Tenge
460,189 thousand for the full pre-term repayment of debts towards DBK-
Leasing JSC under financial leasing contract No.52/ФЛ dated
22 December 2010.
On 19 June 2018, the Company signed an agreement to establish a credit
line with SB Sberbank JSC to provide the Company with a loan of Tenge
9,512,000 thousand (with the option of partial disbursement in US dollars) to
refinance Gazprombank’s loan.
On 28 June 2018, the Company disbursed US Dollar 14,000 thousand and
Tenge 4,745,840 thousand for the purposes of refinancing Gazprombank’s
loan.
The International Finance Corporation
On 14 September 2017, the Company made a partial early repayment of
obligations under the loan of the International Financial Corporation in the
amount of US Dollar 5,640 thousand (Tenge 1,917,545 thousand) with funds
received from the sale of gas tank cars that are part of the collateral for this
loan (Note 8).
Financial guarantees of the shareholder
In 2015 and 2018, Mr. M.Zh. Sarsenov provided guarantees in relation to
financial liabilities of the Company with respect to loans and borrowings from
Al Hilal JSC in the amount of Tenge 4,011,137 thousand (2017: Tenge
2,948,748 thousand), Sberbank of Russia JSC SB in the amount of Tenge
17,991,493 thousand (2017: 0 Tenge), and Gazprombank in the amount of 0
Tenge (2017: Tenge 10,575,902 thousand) respectively (Notes 4 and 30).
On 19 January 2018, the guarantee provision contract signed between the
Company and shareholder for the provision by the shareholder of
performance guarantee in favour of Al Hilal for the Company’s loan
obligations was terminated ahead of schedule due to full pre-term settlement
by the Company of its liabilities towards Al Hilal through refinancing using
funds received within loan agreement with Sberbank of Russia JSC SB.
The amount of prepaid financial guarantees of the shareholder on pre-termly
settled financial liabilities of Gazprombank and Al Hilal JSC of Tenge 825,000
thousand was reimbursed by the shareholder, and remaining part was
accounted for within Sberbank guarantees in the amount of Tenge 132,354
thousand (Note 4).
On 24 January 2018, the Company entered into guarantee provision contract
with the Company’s shareholder, Mr. Sarsenov M.Zh., for the provision by
him of performance guarantee in favour of Sberbank of Russia JSC SB for
the Company’s loan obligations under agreement dated 3 November 2017.
On 1 July 2018, after execution of a new loan agreement between the
Company and Sberbank dated 19 June 2018, under which shareholder’s
guarantee was increased accordingly, the Company and its shareholder
signed the additional guarantee agreement with the increase of amount, and
interest rate on such guarantee was changed to 4% per annum due to
increased foreign currency risks.
On 1 June 2018, the Company signed a new agreement with its shareholder,
under which he will provide guarantee to Al Hilal Islamic Bank JSC for
Company’s liabilities under Murabaha Master Agreement for the purchase
and sale of commodities No.4/2018-СММ dated 9 April 2018.
DBK-Leasing
Finance lease agreement No. 77
On 30 December 2015, the Company signed an agreement with DBK-
Leasing (Note 4) for the purpose of a sale and leaseback of railcars. The fair
value of these assets at the date of sale was Tenge 12,278,588 thousand.
This operation was reflected by the Company as refinancing of existing loans
with the provision of collateral. The Company included this financial
instrument to loans and borrowings.
On 20 December 2016, the parties signed an additional agreement to the
finance lease agreement. In accordance with the terms of the additional
agreement, the term of the finance lease was extended to 11 years, and the
64
Notes to the Financial Statements
ANNUAL REPORT 2018
16. LOANS AND BORROWINGS (CONTINUED)
interest rate was changed from 9.7% per annum to 6-month LIBOR + 6.15%
per annum. The Company considered this as a significant change, and as a
result derecognized initial loan from DBK-Leasing and recognized a new
instrument at fair value. As the carrying amount of the previous financial
instrument was equal to the fair value of the new instrument, the Company
did not reflect the effect on profit or loss in 2017.
As it is described in the Note 4 the Company considered this instrument as
“accounted at fair value in profit or loss”. As at 31 December 2018, the
Company estimated the fair value of the loan in the amount of Tenge
9,089,572 thousand (in 2017: Tenge 10,068,409 thousand).
The liquidity table of undiscounted payments, including this lease, is shown in
Note 28.
Finance lease agreement No. 1
On 16 February 2016, the Company signed a finance lease agreement (Ijara
Muntahiya Bittamilik) with DBK-Leasing in the amount of Tenge 1,143,811
thousand with an annual interest rate of 11.34%. The fair value of the assets
under this lease agreement amounted to Tenge 1,143,811 thousand. This
transaction was recognized by the Company as refinancing of existing loans
with collateral. Accordingly, the Company did not consider this transaction
under IAS 17. Therefore, the Company included this liability in loans and
borrowings and did not provide a disclosure on minimum lease payments.
This financial liability was initially recognized at fair value and subsequently
recorded at amortized cost. Liquidity table of undiscounted payments,
including this lease, is presented in Note 28. The funds were fully disbursed
in February 2016 and used for full early repayment of a debt in the amount of
Tenge 611,542 thousand under finance lease agreements concluded in 2010
between the Company and Raiffeisen Leasing Kazakhstan LLP, and part of
the funds were used for the repurchase of own Eurobonds on the market,
which were cancelled according to the Prospectus.
(b) Covenants
During 2017, the Company was able to obtain waivers from banks and other
creditors, under loan agreements with which no required levels of financial
covenants have been achieved as at 31 December 2017. During 2018,
breach on most financial covenants were eliminated.
As at 31 December 2018, the Company was not in compliance with the
required level of certain financial covenants, while waivers provided earlier
cover period till the end of loan term inclusively.
(c) Net Debt Reconciliation
The table below sets out an analysis of net debt and the movements in the
Company’s liabilities from financing activities for each of the periods
presented. The items of these liabilities are reported in the statement of cash
flows in the cash flow from financing activities:
(d) Fair value of loans and borrowings
Fair values analysed by level 2 and 3 in the fair value hierarchy and the
carrying value of assets and liabilities not measured at fair value are as
follows:
65
Notes to the Financial Statements
ANNUAL REPORT 2018
17. BONDS
Eurobonds
On 22 April 2013, the Company placed bonds at the London Stock Exchange
for the total amount of Tenge 14,782,727 thousand with par value of US
Dollar 100,000 thousand, with the coupon of 7.75% per annum payable once
every six months and maturity of 5 years, expiring in April 2018.
As at reporting date, the Company carried out the repurchase of Eurobonds,
under the terms of the prospectus, in the total amount of US Dollar 67,973
thousand (in nominal terms).
During 2018, the Company made a repurchase in the amount of US Dollar
17,673 thousand (Tenge 6,004,594 thousand) on Eurobonds.
The repurchase was made at market prices, with a discount and a
recognition of income in the amount of Tenge 396,472 thousand in 2018 (in
2017: Tenge 224,175 thousand) (Note 25). Under the terms of the
prospectus, Eurobonds repurchased by the Company must be cancelled.
Thus, as at 31 December 2018, the amount of Eurobonds outstanding was
Tenge 12,366,772 thousand (in 2017: Tenge 16,548,792 thousand).
The bond liabilities are secured by the pledge of rolling stock with the net
book value at 31 December 2018 of Tenge 11,727,326 thousand (in 2017:
Tenge 12,270,616 thousand), and of cash on the account at Altyn Bank JSC,
in the event of a lack of collateral in the form of the rolling stock (Note 8).
On 20 April 2017, the Company received from the Eurobond holders the
irrevocable consent to waive any breach of the condition of financial
covenants during the period from 31 December 2016 to 1 January 2018 by
making amendments to the existing prospectus of Eurobonds. According to
this consent, the maturity of Eurobonds was prolonged until 2022, and the
interest rate was increased to 8% per annum.
Based on the results of fair value measurement the Company did not
recognize the new financial instrument as the present value of cash flows
under the new terms, including commission fees paid net of commission fees
received, discounted at the original effective interest rate, differs by less than
10% from the discounted present value of the remaining cash flows under the
original financial liability.
Fair value of these bonds as at 31 December 2018 is Tenge 13,309,440
thousand, which was estimated using level 2 of the fair value hierarchy.
(a) Embedded financial instrument - option of early repayment of the
remaining debt
In accordance with terms of the prospectus of the bond issue the Company
may at any time, at its own discretion, having sent the notification to the
bondholders, redeem the bonds in full amount at the price, which represents
the principal amount and compensation of loss of profit due to bond calling.
Compensation for the loss of profit is estimated as the greater of (a) 1% of
the nominal value of all outstanding bonds, or (b) future coupon payments till
maturity from the calling date discounted at the rate stipulated in the
prospectus for bond issue. Given the terms and conditions of the prospectus
of the bond issue and the current market situation, the Company’s
management believes that the fair value of the embedded financial
instrument is close to zero as at 31 December 2018 (as at 31 December
2017: nil) (Note 4). The Company’s exposure to liquidity risk related to the
bonds is disclosed in Note 28.
(b) Bonds Reconciliation
The table below sets out an analysis of net debt and the movements in the
Company’s bond liabilities from financing activities for each of the periods
presented. The items of these liabilities are those that are reported as
financing in the statement of cash flows.
18. FINANCE LEASE LIABILITIES
The Company entered into agreements to purchase property, plant and
equipment, primarily railway cars and gondola cars on deferred payment
terms. Under these agreements, the ownership over the leased assets is
transferred to the Company.
At 31 December, the finance lease liabilities comprised the following:
66
Notes to the Financial Statements
ANNUAL REPORT 2018
18. FINANCE LEASE LIABILITIES (CONTINUED)
The future minimum lease payments and their discounted value are as
follows:
DBK-Leasing
On 22 December 2010, the Company signed a finance lease agreement No.
52/FL with DBK-Leasing for the lease of 150 gondola cars and 300 oil tank
cars, with a finance lease term of 96 months. Lease payments include
payments of principal and interest at an interest rate of 8.1% per annum.
On 2 March 2018, the Company made full early repayment of DBK Leasing
liabilities under finance leasing agreement No.52/ФЛ dated 22 December
2010 in the amount of Tenge 460,188 thousand using funds received within
loan agreement signed with Sberbank of Russia JSC SB.
The table below sets out an analysis of net debt and the movements in the
Company’s finance lease liabilities from financing activities for each of the
periods presented. The items of these liabilities are those that are reported as
financing in the statement of cash flows.
19. TRADE PAYABLES
The Company’s exposure to liquidity risk related to trade payables is
disclosed in Note 28. The fair value of trade payables approximates its
carrying amount due to short-term maturity.
20. OTHER CURRENT LIABILITIES
67
Notes to the Financial Statements
ANNUAL REPORT 2018
21. REVENUE
22. COST OF SALES
23. ADMINISTRATIVE EXPENSES
24. PERSONNEL COSTS
Personnel costs for the year are recorded in cost of sales in the amount of
Tenge 779,863 thousand (in 2017: Tenge 574,640 thousand), in
administrative expenses in the amount of Tenge 1,153,183 thousand (in
2017: Tenge 632,603 thousand).
25. FINANCE INCOME/(EXPENSE)
26. FOREIGN EXCHANGE GAINS/(LOSSES), NET
68
Notes to the Financial Statements
ANNUAL REPORT 2018
27. INCOME TAX EXPENSE
For the years ended 31 December the reconciliation of income tax expense
related to profit before income tax estimated using the official tax rate of 20%
(in 2017: 20%) with the current income tax expense was as follows:
Differences between IFRS and statutory taxation regulations in the Republic
of Kazakhstan give rise to temporary differences between the carrying
amount of assets and liabilities for financial reporting purposes and their tax
bases. The tax effect of the movements in these temporary differences,
which is calculated at tax rates applicable to the period of realization of an
asset or repayment of a liability, is detailed below. According to the current
tax legislation of the Republic of Kazakhstan, the income tax rate is 20%.
On 25 December 2017, a new Tax Code was adopted. The New Tax Code
effective from 1 January 2018 had no significant impact on the financial
statements.
At 31 December, the components of the deferred tax assets and liabilities
include the following:
The management believes that deferred tax assets of Tenge 610,076
thousand will be recovered during the following 12 months after the end of
the reporting period.
On 11 September 2017, the Company received a Notification on the initiation
of the comprehensive tax audit for the period from 1 January 2012 to 30 June
2017, conducted by the Department of State Revenues of Almaty. Tax audit
was completed in May 2018, and upon the results of tax review the total
amount of additional accruals was Tenge 14.3 million including fine.
Recognition of a deferred tax asset
Recognized deferred tax assets represent the income tax which can be offset
against future income taxes and are recorded in the statement of financial
position. The deferred tax assets are recognized only if the use of a
respective tax deduction is highly probable. It assumes presence of
temporary differences whose recovery is expected in the future, and the
presence of sufficient future taxable profit to make deductions.
The Company’s management expects that it is highly probable that the tax
loss carry forwards will be realized in the subsequent periods based on the
Company’s estimates regarding the amount of future taxable profit. In
determining the estimated amount of the future taxable profit, against which
deductible differences can be realized, management took into account the
presence of temporary differences, which would be realized in the same
period as deductible differences and took into account tax planning. As per
management’s estimates, tax losses will be offset in 2019 against 2015
losses. Based on the results of 2018, the taxable income of the Company
amounted to Tenge 8,753,503 thousand, which partly offset existing tax
losses of 2015 in the amount of Tenge 11,432,240 thousand. Accordingly,
the balance of the tax loss carry forward amounted to Tenge 2,678,737
thousand, as at 31 December 2018.
69
Notes to the Financial Statements
ANNUAL REPORT 2018
28. FAIR VALUE AND FINANCIAL RISK MANAGEMENT
(а) Financial risk management
The Company has exposure to the following risks from its use of financial
instruments:
• credit risk;
• liquidity risk;
• market risk.
(i) Risk management framework
Management of the Company has overall responsibility for the establishment
and oversight of the Company’s risk management framework. Management
is responsible for developing and monitoring the Company’s risk
management policies.
The Company’s risk management policy has been designed, based on the
specifics of its operations. The Company is building a risk management
system by integrating the principles of risk management with the business
processes of its structural units, thus creating a risk management culture, in
which the Company’s structural units and personnel are involved at the
Company’s level.
(ii) Credit risk
Credit risk is the risk of financial loss to the Company if a customer or
counterparty to a financial instrument fails to meet its contractual obligations.
The Company deals only with companies with positive credit history and high
credit rating, if available. It is the Company's policy that all customers who
wish to trade on credit terms are subject to the credit verification procedure,
as disclosed in Note 9.
The carrying amount of financial assets represents the maximum amount
exposed to credit risk of the Company. The maximum exposure to credit risk
at the reporting date was as follows:
Expected credit loss (ECL) measurement. ECL is a probability-weighted
estimate of the present value of future cash shortfalls (i.e., the weighted
average of credit losses, with the respective risks of default occurring in a
given time period used as weights). An ECL measurement is unbiased and is
determined by evaluating a range of possible outcomes. ECL measurement
is based on four components used by the Group: Probability of Default
(“PD”), Exposure at Default (“EAD”), Loss Given Default (“LGD”) and
Discount Rate.
(iii) Liquidity risk
Liquidity risk is the risk that the Company will encounter difficulty in raising
funds to meet commitments associated with financial instruments. Liquidity
requirements are monitored on a regular basis and management ensures
that sufficient funds are available to meet any commitments as they arise.
The Company aims to maintain the minimum level of cash and cash
equivalents and other highly marketable instruments at an amount in excess
of expected cash outflows on financial liabilities over the next 30 days.
As at 31 December 2018, the current assets of the Company exceeded its
current liabilities by Tenge 7,117,889 thousand (in 2017: current liabilities of
the Company exceeded its current assets by Tenge 1,085,092 thousand)
(Note 4).
The Company’s management is undertaking the following measures to
control the liquidity risk:
• Entering into long-term agreements with customers to ensure sufficient
cash flows from operating activities.
• Entering into agreements with financial institutions.
The tables below shows general information on undiscounted contractual
payments on financial liabilities of the Company as at 31 December by the
maturity period of these liabilities:
70
Notes to the Financial Statements
ANNUAL REPORT 2018
28. FAIR VALUE AND FINANCIAL RISK MANAGEMENT (CONTINUED)
(iv) Market risk
Market risk is the risk that changes in market prices, such as foreign
exchange rates and interest rates, will have a negative effect on the
Company’s income or the value of its holdings of financial instruments.
The objective of market risk management is to control market risk exposure
and hold it within acceptable parameters, while optimising the investment
yield.
The market risk management operations are carried out within the guidelines
set by the Supervisory Board. As a rule, the Company does not apply special
rules of hedge accounting in order to manage volatility in profit or loss for the
period.
(v) Currency risk
The Company is exposed to currency risk on sales, purchases and
borrowings that are denominated in a currency other than Tenge. These
transactions are primarily denominated is US Dollars. Generally, borrowings
are denominated in currencies that match the cash flows generated by the
underlying operations of the Company, primarily US Dollar.
In respect of other monetary assets and liabilities denominated in foreign
currencies, the Company’s policy is to ensure that its net exposure is kept to
an acceptable level by buying or selling foreign currencies at spot rates when
necessary to address short-term imbalances.
The table below summarises the Company’s exposure to foreign currency
exchange rate risk at the end of the reporting period:
The following table presents sensitivities of profit and loss and equity to
reasonably possible changes in exchange rates applied at the end of the
reporting period, after tax, relative to the functional currency of the Company,
with all other variables held constant:
(vi) Interest rate risk
Changes in interest rates impact primarily loans and borrowings by changing
either their fair value (fixed rate debt) or their future cash flows (variable rate
debt). Management of the Company, when managing interest risks, reviews
the changes of the rates on financial instruments, which may significantly
affect the positions with respect to this risk. For that the Company performs
the analysis of the scenarios, including potential effects of the changes in the
interactions between the types of interest risks and the general level of the
exposure to interest risk, in particular, the ratio of allocation of the interest
risks of the Company between the loans with the fixed and variable interest
rates. However, at the time of raising new loans or borrowings management
uses its judgment to decide whether it believes that a fixed or variable rate
would be more favorable to the Company over the expected period until
maturity.
At the reporting date, the interest rate profile of the Company, grouped by the
type of interest rates, was as follows:
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Notes to the Financial Statements
ANNUAL REPORT 2018
28. FAIR VALUE AND FINANCIAL RISK MANAGEMENT (CONTINUED)
Fair value sensitivity analysis for fixed rate instruments
The Company does not account for any fixed-rate financial instruments as
fair value through profit or loss or as available-for-sale. Therefore, any
change in interest rates at the reporting date would not have an effect on
profit or loss for the period or on equity.
Sensitivity analysis for variable rate financial instruments
A reasonably possible change of 100 basis points in interest rates at the
reporting date would have increased (decreased) equity and profit or loss for
the period, net of taxes, by the amounts shown below. This analysis assumes
that all other variables, in particular foreign currency rates, remain constant.
Fair value
Fair value measurements are analysed by level in the fair value hierarchy as
follows:
(i) level one are measurements at quoted prices (unadjusted) in active
markets for identical assets or liabilities,
(ii) level two measurements are valuations techniques with all material
inputs observable for the asset or liability, either directly (that is, as prices) or
indirectly (that is, derived from prices), and
(iii) level three measurements are valuations not based on observable
market data (that is, unobservable inputs). Management applies judgement in
categorizing financial instruments using the fair value hierarchy. If a fair value
measurement uses observable inputs that require significant adjustment,
then that measurement is a Level 3 measurement. The significance of a
valuation input is assessed against the fair value measurement in its entirety.
Recurring fair value measurements
Recurring fair value measurements are those that the accounting standards
require or permit in the statement of financial position at the end of each
reporting period. Embedded individual financial instruments are carried in the
statement of financial position at the fair value. Embedded individual financial
instruments are classed in the second level of the fair value hierarchy.
Financial assets carried at amortized value
The fair value of floating rate instruments is normally their carrying amount.
The estimated fair value of fixed interest rate instruments is based on
estimated future cash flows expected to be received discounted at current
interest rates for new instruments with similar credit risk and remaining
maturity. Discount rates used depend on credit risk of the counterparty.
Liabilities carried at amortized cost
The fair value of Eurobonds is based on quoted market prices. Fair values of
other liabilities were determined using valuation techniques. The estimated
fair value of fixed interest rate instruments with stated maturities were
estimated based on expected cash flows discounted at current interest rates
for new instruments with similar credit risks and remaining maturities. The fair
value of liabilities repayable on demand or after a notice period (“demandable
liabilities”) is estimated as the amount payable on demand, discounted from
the first date on which the amount could be required to be paid (Notes 16, 17,
18).
29. CONTINGENT ASSETS AND LIABILITIES
(а) Insurance
The insurance industry in the Republic of Kazakhstan is in a developing state
and many forms of insurance protection common in other parts of the world
are not yet generally available. The Company has an insurance coverage in
respect of its property, plant and equipment and its third-party liabilities due
to damage to health or property arising from accidents and acts of terror or
the Company’s operations. The Company also has coverage for
environmental damage arising from the operations accompanying its
professional activity.
(b) Tax contingencies in Kazakhstan
The tax environment in the Republic of Kazakhstan is subject to change and
inconsistent application and interpretations. Non-compliance with
Kazakhstani law and regulations as interpreted by the Kazakhstani
authorities may lead to the assessment of additional taxes, penalties and
interest.
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Notes to the Financial Statements
ANNUAL REPORT 2018
29. CONTINGENT ASSETS AND LIABILITIES (CONTINUED)
Kazakhstani tax legislation and practice is in a state of continuous
development, and therefore is subject to varying interpretations and frequent
changes, which may be retroactive. In certain situations, to determine a tax
base, the tax legislation refers to IFRS provisions. In such cases,
interpretation of IFRS provisions by the Kazakhstani tax authorities may differ
from accounting policies, judgments and estimates used by management for
preparation of these financial statements, and this may result in additional tax
liabilities for the Company. Tax periods remain open to retroactive review by
the Kazakhstan tax authorities for five years.
The Company’s management believes that its interpretation of the relevant
legislation is appropriate and the Company’s tax positions will be sustained.
In the opinion of the Company management, no material losses will be
incurred in respect of existing and potential tax claims in excess of provision
that have been made in these consolidated financial statements.
On 25 December 2017, the President of the Republic of Kazakhstan signed a
law on introducing amendments and additions to the Tax Code effective from
1 January 2018. These amendments and additions did not cause significant
impact on the Company.
(c) Transfer pricing
According to the transfer pricing law, the international business transactions
are subject to the government control. This law prescribes Kazakhstani
companies to maintain and, if required, to provide economic rationale and
method of the determination of prices used in international business
transactions, including the existence of the documentation supporting the
prices and price differentials applied. Additionally, price differentials cannot
be applied to the international business transactions with companies
registered in offshore countries. In case of deviation of transaction price from
market price, tax authorities have the right to adjust taxable base and to
impose additional taxes, fines and interest penalties.
The transfer pricing law in some areas lacks detailed clear-cut guidance as to
how its rules should be applied in practice (for example, the form and content
of documentation supporting the discounts), and determination of the
Company's tax liabilities within the context of the transfer pricing regulations
requires an interpretation of transfer pricing law.
The Company conducts cross-border transactions subject to the state
transfer pricing control. The Company’s cross-border transactions are set at
the market price based on the arms-length principle.
(d) Operating lease liabilities – the Company as a lessee
In December 2017, the Company entered into leasing agreement for office
premises. Validity period for this agreement is five years.
The executed agreement does not provide for any limitations with respect to
the Company.
The future minimum lease payments under the above operating lease were
as follows:
(e) Loan covenants
In accordance with the terms of loan agreements signed between the
Company and its creditors, the Company shall comply with certain financial
and non-financial covenants. Penalties may be charged for the breach of
such covenants, or the banks may demand early repayment of financial
liabilities. In order to control such risks, the Company monitors the
compliance with such financial and non-financial covenants.
Some covenants were breached as at 31 December 2018 (Note 4 and 16).
As at the reporting date and the time of issue of the financial statements, all
banks, whose requirements on levels of covenants were breached, provided
waivers of claims before 31 December 2018.
(f) Legal proceedings
The management does not have information on any significant actual or
pending legal proceedings, as well as on potential claims that may be filed
against the Company.
In the ordinary course of business, claims may periodically be received by the
Company. Based on their own assessment, as well as consultations of in-
house lawyers, management predicts estimates possible potential claims in
the amount of Tenge 230 million. As of 31 December 2018, these provisions
were not accrued in these financial statements due to the fact that the cash
outflows as a result of this obligation are unlikely and the amount of the
obligation cannot be reliably estimated.
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Notes to the Financial Statements
ANNUAL REPORT 2018
30. RELATED PARTIES
(a) Ultimate controlling party
Mr. M.Zh. Sarsenov is the main shareholder and ultimate controlling party of
the Company.
(b) Transactions with key management personnel
Key management remuneration
In 2018, the compensation to key management personnel included salary
and short-term payments in the amount of Tenge 470,484 thousand (2017:
Tenge 150,260 thousand), which are charged to personnel costs
(Note 24).
Other related party transactions
Below is the information on the transactions of the Company with other
related parties.
Related party transactions were made on terms agreed between the parties
that may not necessarily be at market rates.
Transactions with Mr. M.Zh. Sarsenov
On 1 June 2018, the Company entered into guarantee provision contract with
its shareholder, under which the shareholder provided guarantee to Al Hilal
Islamic Bank JSC for the Company’s liabilities under Murabaha Master
Agreement for the purchase and sale of commodities No.4/2018-СММ dated
9 April 2018.
According to loan agreement signed between the Company and Sberbank of
Russia JSC SB in November 2017, under which the shareholder provided to
the bank performance guarantee for the Company, in the beginning of 2018
the Company executed agreement with its shareholder and agreed to pay for
the provision of such guarantee to the shareholder guarantee fees in the
amount of 3% per annum on loan balance. After a new loan agreement was
signed between the Company and Sberbank dated 19 June 2018, under
which shareholder’s guarantee was increased accordingly, the Company and
its shareholder signed an additional guarantee agreement with the increase
of amount, and interest rate on such guarantee was changed to 4% per
annum due to increased foreign currency risks.
The sale and purchase transactions with related parties and transaction
balances with related parties for 2018 and 2017 are as follows:
During 2017-2018, the Company carried out transactions for the buyback of
its Eurobonds through the parent company Steinhardt Holding N.V. on arm's
length basis pursuant to the Prospectus – the turnover amount was US dollar
12,223 thousand in nominal value (Tenge 3,988,120 thousand) (in 2017:
US dollar 21,023 thousand (Tenge 2,802,184 thousand). The repurchased
volume of Eurobonds was cancelled.
Receivable from Eskene on provided collateral
On 17 July 2012, the Company provided 440 items of property, plant and
equipment with total carrying amount of Tenge 3,107,736 thousand to the
Eurasian Development Bank as a collateral under a loan agreement
concluded between Eurasian Development Bank and Railcar Service Center
– Eskene LLP, an entity under the common control of the Company’s ultimate
controlling party. On 15 November 2013, the Company and Railcar Service
Center – Eskene LLP signed an agreement on the terms of provision of this
collateral. Under the terms of the agreement, for the provision of the
74
Notes to the Financial Statements
ANNUAL REPORT 2018
30. RELATED PARTIES (CONTINUED)
collateral, Railcar Service Center – Eskene LLP pays the Company a one-off
fee in the amount of Tenge 262,000 thousand payable at the time of
repayment of the debt of Railcar Service Center – Eskene LLP owed to the
Eurasian Development Bank, that is expected in 2023. As at 31 December
2018, the discounted fee amount was equal to Tenge 156,126 thousand (in
2017: 138,386 thousand) (Note 7). The Company expects this debt to be
repaid in 2023.
In December 2013, the Company additionally provided 500 items of
machinery and equipment to the Eurasian Development Bank as a collateral
for the loan agreement. As at 31 December 2018, 940 items of the machinery
and equipment with a total carrying amount of Tenge 4,593,059 thousand
(2017: Tenge 4,760,316 thousand) were provided as a collateral for loans
and borrowings received by Railcar Service Center – Eskene LLP. Total
indebtedness of Railcar Service Center – Eskene LLP due to the Company
on advances paid as at 31 December 2018 amounts to Tenge 419,816
thousand including amount for the construction of railcar service centre of
Tenge 73,166 thousand.
Receivable from Eskene on construction of the railcar service center
In addition, according to the tripartite agreement on project support
concluded on 16 July 2012 between the Company, Railcar Service Center –
Eskene LLP, and the Eurasian Development Bank, the Company commits to
provide technical personnel and technical support for the project of Railcar
Service Center – Eskene LLP on the construction of the railcar service center
in Atyrau region.
As at 31 December 2018, the advance amount, including provisions, was
equal to Tenge 73,166 thousand (in 2017: Tenge 130,117 thousand). The
Company expects to receive this advance payment in the form of a lease of
the railcar service center.
31. SUBSEQUENT EVENTS
On 1 January 2019, there was rolling stock derailment at midpoint
Khramtsovskaya-Maramzino of Sverdlovsk Railway in the amount of 15
railcars including 8 railcars to the removal level, 7 railcars subject to depot
and capital repair. According to technical report, an immediate cause of
rolling stock derailment was rail breakage, therefore it is expected that
Russian Railways OJSC insurance company will reimburse all repairing
expenses and market cost of lost railcars.
In January 2019, Trade House RM Rail LLC fulfilled its obligation on delivery
of railcars for the total amount of Tenge 1,591,958 thousand (Note 7).
On 8 February 2019, the Company withdrew Tenge 2,051,826 thousand
within Tranche D of EBRD loan agreement for the purchase of gondola cars
and own Eurobonds.
In February 2019, the Company and Sberbank signed additional agreements
to loan agreements dated 3 November 2017 and 19 June 2018, according to
which financial period was extended until December 2025, and interest rates
were decreased to 12.5% per annum in Tenge and 4.5% per annum in US
Dollar.
On March 2019 the Company paid an advance payment to its shareholder
under the existing agreements on the shareholder`s performance guarantee
in amount of Tenge 756,000 thousand.
In April 2019, the Company purchased own Eurobonds in the amount of US
Dollar 1 million (in nominal value) on arm’s length basis in accordance with
the terms of Issue Prospectus, and purchased volume is subject to
cancellation.
32. SIGNIFICANT ACCOUNTING POLICIES
Current financial statements has been prepared in compliance with
International Financial Reporting Standards (IFRS) on the basis of
accounting rules at historical cost, excluding financial instruments, which are
initially recognized based on the fair value, and revaluation of property, plant
and equipment, financial instruments, evaluated at fair value, changes of fair
value are reflected in gains and losses. The significant statements of
accounting policy applied during the preparation of these financial statements
are presented below. Besides the changes caused due to application of IFRS
9 and IFRS 15 from 1 January 2018, unless otherwise specified, mentioned
principles consistently were applied to all periods, represented in current
report. The significant statements of accounting policy in relation to financial
investments and recognition of revenue that had been applied before 31
December 2017 are presented in Note 34.
Preparation of financial statements in accordance with IFRS requires
application of certain critical accounting estimates. In addition, management
of the Company should rely on its professional judgement in course of
application of Company’s accounting policy. Accounting areas, which imply a
higher level of judgement or complexity, as well as areas in which
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Notes to the Financial Statements
ANNUAL REPORT 2018
32. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
assumptions and estimates are material to the consolidated financial
statements, are specified in the Note 4.
(a) Foreign currency translation
The financial statements are presented in Kazakhstani Tenge, which is the
Company’s functional and presentation currency.
Transactions in foreign currencies are initially recorded in a respective
functional currency at the official rate at the date when a transaction meets
the recognition criteria.
Monetary assets and liabilities denominated in foreign currencies are
translated to the functional currency at the official rate of exchange ruling at
the reporting date. Any exchange gains and losses arising from translation of
assets and liabilities denominated in foreign currencies subsequent to the
date of the underlying transaction are credited or charged to profit or loss.
Non-monetary items that are measured in terms of historical cost in a foreign
currency are recognized using the exchange rates as at the dates of the
initial transactions.
Weighted average currency exchange rates established by the Kazakhstan
Stock Exchange (“KASE”) are used as official currency exchange rates in the
Republic of Kazakhstan.
The currency exchange rate of KASE at 31 December 2018 was Tenge
384.20 per 1 US Dollar, 5.52 per 1 Russian Rouble and 439.37 per 1 Euro.
These rates were used to translate monetary assets and liabilities
denominated in US Dollars, Russian Rouble and Euro at 31 December 2018
(2017: 332.33 per 1 US Dollar, 5.77 per 1 Russian Rouble and 398.23 per 1
Euro).
(b) Property, plant and equipment
Property, plant and equipment, except for machinery and equipment, are
recorded at initial cost, net of accumulated depreciation and accumulated
impairment losses, if any.
Subsequent to recognition at initial cost, machinery and equipment are
measured at revalued amounts, being their fair value at the date of
revaluation and subsequently less any subsequent accumulated depreciation
and impairment losses. Valuations are performed with sufficient frequency to
ensure that the fair value of a revalued asset does not differ materially from
its carrying amount.
A revaluation surplus is recorded in other comprehensive income and
credited to the asset revaluation reserve in equity. However, to the extent that
it reverses a revaluation deficit of the same asset previously recognized in
profit or loss, the increase is recognized in profit and loss. A revaluation
deficit is recognized in profit or loss, except to the extent that it offsets an
existing surplus on the same asset recognized in the asset revaluation
reserve.
An annual transfer from the asset revaluation reserve to retained earnings is
made for the difference between depreciation based on the revalued carrying
amount of the asset and depreciation based on the asset’s initial cost. As at
the revaluation date the accumulated depreciation is restated proportionately
with the change in the gross carrying amount of the asset so that the carrying
amount of the asset after revaluation equals its revalued amount. Upon
disposal, any revaluation reserve relating to the particular asset is transferred
to retained earnings.
The cost of property, plant and equipment includes the replacement cost of
parts of the property, plant and equipment and borrowing costs for long-term
construction projects if the recognition criteria are met. When major overhaul
inspection is performed, the expenses associated with it are recognized in
the carrying amount of property, plant and equipment as a replacement of
equipment if all recognition criteria are met. All other repair and maintenance
costs are recognized in profit or loss as incurred.
Depreciation is calculated on a straight-line basis over the estimated useful
lives of the assets as follows:
An item of property, plant and equipment and any significant part initially
recognized is derecognized upon disposal or when no future economic
benefits are expected from its use or disposal. Any gain or loss arising on
derecognition of the asset (calculated as the difference between the net
disposal proceeds and the carrying amount of the asset) is included in profit
or loss in the reporting period when the asset is derecognized. The residual
values, useful lives and methods of depreciation of property, plant and
equipment are reviewed at each financial year end and adjusted
prospectively, if appropriate.
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ANNUAL REPORT 2018
32. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(c) Impairment
At the end of each reporting period management assesses whether there is
any indication of impairment of property, plant and equipment. If any such
indication exists for property, plant and equipment carried at historic cost,
management estimates the recoverable amount, which is determined as the
higher of an asset’s fair value less costs to sell and its value in use. For
property, plant and equipment carried at fair value if indicators of impairment
exist, revaluation at fair value is performed. Recoverable amount is
determined for an individual asset, unless the asset does not generate cash
inflows that are largely independent of those from other assets or groups of
assets. When the carrying amount of an asset or CGU exceeds its
recoverable amount, the asset is considered impaired and is written down to
its recoverable amount.
(d) Financial instruments – key measurement terms
Fair value is the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at the
measurement date. The best evidence of fair value is the price in an active
market. An active market is one in which transactions for the asset or liability
take place with sufficient frequency and volume to provide pricing information
on an ongoing basis.
Fair value of financial instruments traded in an active market is measured as
the product of the quoted price for the individual asset or liability and the
number of instruments held by the entity. This is the case even if a market’s
normal daily trading volume is not sufficient to absorb the quantity held and
placing orders to sell the position in a single transaction might affect the
quoted price.
Valuation techniques such as discounted cash flow models or models based
on recent arm’s length transactions or consideration of financial data of the
investees are used to measure fair value of certain financial instruments for
which external market pricing information is not available. Fair value
measurements are analysed by level in the fair value hierarchy as follows: (i)
level one are measurements at quoted prices (unadjusted) in active markets
for identical assets or liabilities, (ii) level two measurements are valuations
techniques with all material inputs observable for the asset or liability, either
directly (that is, as prices) or indirectly (that is, derived from prices), and (iii)
level three measurements are valuations not based on solely observable
market data (that is, the measurement requires significant unobservable
inputs).
Transaction costs are incremental costs that are directly attributable to the
acquisition, issue or disposal of a financial instrument. An incremental cost is
one that would not have been incurred if the transaction had not taken place.
Transaction costs include fees and commissions paid to agents (including
employees acting as selling agents), advisors, brokers and dealers, levies by
regulatory agencies and securities exchanges, and transfer taxes and duties.
Transaction costs do not include debt premiums or discounts, financing costs
or internal administrative or holding costs.
Amortised cost (“AC”) is the amount at which the financial instrument was
recognised at initial recognition less any principal repayments, plus accrued
interest, and for financial assets less any allowance for expected credit
losses (“ECL”). Accrued interest includes amortisation of transaction costs
deferred at initial recognition and of any premium or discount to the maturity
amount using the effective interest method. Accrued interest income and
accrued interest expense, including both accrued coupon and amortised
discount or premium (including fees deferred at origination, if any), are not
presented separately and are included in the carrying values of the related
items in the statement of financial position.
The effective interest method is a method of allocating interest income or
interest expense over the relevant period, so as to achieve a constant
periodic rate of interest (effective interest rate) on the carrying amount. The
effective interest rate is the rate that exactly discounts estimated future cash
payments or receipts (excluding future credit losses) through the expected
life of the financial instrument or a shorter period, if appropriate, to the gross
carrying amount of the financial instrument. The effective interest rate
discounts cash flows of variable interest instruments to the next interest
repricing date, except for the premium or discount which reflects the credit
spread over the floating rate specified in the instrument, or other variables
that are not reset to market rates. Such premiums or discounts are amortised
over the whole expected life of the instrument. The present value calculation
includes all fees paid or received between parties to the contract that are an
integral part of the effective interest rate. For assets that are purchased or
originated credit impaired (“POCI”) at initial recognition, the effective interest
rate is adjusted for credit risk, i.e. it is calculated based on the expected cash
flows on initial recognition instead of contractual payments.
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Notes to the Financial Statements
ANNUAL REPORT 2018
32. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(e) Financial instruments – initial recognition.
Financial instruments at FVTPL are initially recorded at fair value. All other
financial instruments are initially recorded at fair value adjusted for
transaction costs. Fair value at initial recognition is best evidenced by the
transaction price. A gain or loss on initial recognition is only recorded if there
is a difference between fair value and transaction price which can be
evidenced by other observable current market transactions in the same
instrument or by a valuation technique whose inputs include only data from
observable markets. After the initial recognition, an ECL allowance is
recognised for financial assets measured at AC and investments in debt
instruments measured at FVOCI, resulting in an immediate accounting loss.
All purchases and sales of financial assets that require delivery within the
time frame established by regulation or market convention (“regular way”
purchases and sales) are recorded at trade date, which is the date on which
the Group commits to deliver a financial asset. All other purchases are
recognised when the entity becomes a party to the contractual provisions of
the instrument.
(f) Financial assets
Classification and subsequent measurement – measurement categories.
The Group classifies financial assets in the following measurement
categories: FVTPL, FVOCI and AC. The classification and subsequent
measurement of debt financial assets depends on: (i) the Group’s business
model for managing the related assets portfolio and (ii) the cash flow
characteristics of the asset.
Classification and subsequent measurement – business model.
The business model reflects how the Group manages the assets in order to
generate cash flows – whether the Group’s objective is: (i) solely to collect
the contractual cash flows from the assets (“hold to collect contractual cash
flows”,) or (ii) to collect both the contractual cash flows and the cash flows
arising from the sale of assets (“hold to collect contractual cash flows and
sell”) or, if neither of (i) and (ii) is applicable, the financial assets are classified
as part of “other” business model and measured at FVTPL.
Business model is determined for a group of assets (on a portfolio level)
based on all relevant evidence about the activities that the Company
undertakes to achieve the objective set out for the portfolio available at the
date of the assessment. Factors considered by the Company in determining
the business model include the purpose and composition of a portfolio, past
experience on how the cash flows for the respective assets were collected,
how risks are assessed and managed, how the assets’ performance is
assessed.
Classification and subsequent measurement – cash flow characteristics.
Where the business model is to hold assets to collect contractual cash flows
or to hold contractual cash flows and sell, the Group assesses whether the
cash flows represent solely payments of principal and interest (“SPPI”).
Financial assets with embedded derivatives are considered in their entirety
when determining whether their cash flows are consistent with the SPPI
feature. In making this assessment, the Group considers whether the
contractual cash flows are consistent with a basic lending arrangement, i.e.
interest includes only consideration for credit risk, time value of money, other
basic lending risks and profit margin.
Where the contractual terms introduce exposure to risk or volatility that is
inconsistent with a basic lending arrangement, the financial asset is classified
and measured at FVTPL. The SPPI assessment is performed on initial
recognition of an asset and it is not subsequently reassessed.
(g) Impairment of financial assets
In accordance with IFRS 9, new impairment model requires the recognition of
impairment provisions based on expected credit loss (ECL), and not only
incurred credit loss as it was required by IAS 39. This will require significant
judgments regarding impact from economic factors on expected credit loss,
which will be determined based on probability-weighted assessment.
New impairment model is applied to financial assets classified to the category
of carried at amortised cost, debt instruments at FVOCI, contract assets
arising from the application of IFRS 15 “Revenue from Contracts with
Customers”, leasing receivables, credit commitments and certain financial
guarantee contracts.
The measurement of ECL reflects: (i) an unbiased and probability weighted
amount that is determined by evaluating a range of possible outcomes, (ii)
time value of money and (iii) all reasonable and supportable information that
is available without undue cost and effort at the end of each reporting period
about past events, current conditions and forecasts of future conditions.
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ANNUAL REPORT 2018
32. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In accordance with IFRS 9, loss provisions will be estimated as follows:
• 12-months ECL: a portion of lifetime ECLs that result from default events
on a financial instrument that are possible within 12 months after the
reporting period; or
• Lifetime ECL: ECLs that result from all possible default events over the
remaining lifetime period of the financial instrument.
The Company decided to apply a simplified approach with respect to
accounting for ECL under IFRS 9, which enables using lifetime ECL on trade
and other receivables. For the purposes of measuring ECLs, trade and other
receivables were grouped based on credit risk characteristics and overdue
days.
For bank deposits, loans to related parties and other financial assets carried
at amortised cost, the Company will apply general approach. The Company
determined that its short-term bank deposits and cash and cash equivalents
have low credit risk considering external credit ratings of banking and
financial institutions.
For financial assets carried at amortized cost, the Company first assesses
whether objective evidence of impairment exists individually for financial
assets that are individually significant, or collectively for financial assets that
are not individually significant. If the Company determines that no objective
evidence of impairment exists for an individually assessed financial asset,
whether significant or not, it includes the asset in a group of financial assets
with similar credit risk characteristics and collectively assesses them for
impairment. Assets that are individually assessed for impairment and for
which an impairment loss is, or continues to be, recognized are not included
in a collective assessment of impairment.
If there is objective evidence that an impairment loss has incurred, the
amount of the loss is measured as the difference between the asset’s
carrying amount and the present value of estimated future cash flows
(excluding future expected credit losses that have not yet been incurred). The
present value of the estimated future cash flows are discounted at the
financial asset’s original effective interest rate. If a loan has a variable interest
rate, the discount rate for measuring any impairment loss is the current EIR.
The interest income is recorded as finance income in the statement of
comprehensive income. Loans together with the associated allowance are
written off when there is no realistic prospect of future recovery and all
collateral has been realized or has been transferred to the Company.
If, in a subsequent year, the amount of the estimated impairment losses
increases or decreases because of an event occurring after the impairment
was recognized, the previously recognized impairment loss is increased or
reduced by adjusting the allowance account. If a prior write-off is later
recovered, the recovery is credited to finance costs in the statement of profit
or loss and other comprehensive income.
(h) Financial assets – write-off
Financial assets are written-off, in whole or in part, when the Company
exhausted all practical recovery efforts and has concluded that there is no
reasonable expectation of recovery. The write-off represents a derecognition
event. The Company may write-off financial assets that are still subject to
enforcement activity when the Company seeks to recover amounts that are
contractually due, however, there is no reasonable expectation of recovery.
(i) Financial assets - derecognition
The Company derecognises financial assets when (a) the assets are
redeemed or the rights to cash flows from the assets otherwise expire or (b)
the Company has transferred the rights to the cash flows from the financial
assets or entered into a qualifying pass-through arrangement whilst (i) also
transferring substantially all the risks and rewards of ownership of the assets
or (ii) neither transferring nor retaining substantially all the risks and rewards
of ownership but not retaining control. Control is retained if the counterparty
does not have the practical ability to sell the asset in its entirety to an
unrelated third party without needing to impose additional restrictions on the
sale.
(j) Financial guarantees received
Financial guarantees received from the shareholder are accounted for as an
executory contract and fees are accrued on an annual basis as incurred. The
Company assesses whether the fees paid are in accordance with market
terms at a date of initiation. If the transactions are performed at market rate,
then fees are charged to profit or loss for the year. Judgements made with
respect to the financial guarantees received are disclosed in the Note 4.
Advances paid for the financial guarantees received are classified as current
or non-current assets based on the years covered by the prepaid amount.
Advances paid in prior years are amortized in profit or loss on a straight-line
basis at the rate when these advances were paid. Additional costs are
recorded based on the rates prevailing at the dates of the transactions.
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Notes to the Financial Statements
ANNUAL REPORT 2018
32. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(k) Financial liabilities
Initial recognition and measurement
Financial liabilities are classified as financial liabilities revaluated at fair value
through profit or losses, and other financial liabilities. The Company
determines the classification of its financial liabilities at initial recognition.
All financial liabilities are recognized initially at fair value and, in the case of
loans and borrowings, net of directly attributable transaction costs.
The Company’s financial liabilities include trade and other payables, finance
lease liabilities and borrowings, which are classified in the category “Other
financial liabilities” and “financial liabilities carried at fair value through profit
or loss”. Modifications to financial liabilities carried at amortised cost that do
not result in derecognition are recorded through profit and loss.
Subsequent measurement
The measurement of financial liabilities depends on their classification as
described below:
Loans and borrowings
After initial recognition, loans and borrowings are subsequently measured at
amortized cost using the EIR method excluding loans and borrowings
evaluated at fair value though profit or loss (Note 4). The Company
determines the method of measurement at the date of initial recognition.
Amortized cost is calculated by taking into account any discount or premium
on acquisition and fees or costs that are an integral part of the EIR. The EIR
amortisation is included in finance costs in the statement of profit or loss and
other comprehensive income.
Trade and other payables
Trade payables are accrued when the counterparty performs its obligations
under the contract and are recognized initially at fair value and subsequently
carried at amortized cost using the effective interest rate method.
(l) Embedded derivative financial instruments
An embedded derivative is separated from the host contract and is accounted
for as a derivative if, and only if the economic characteristics and risks of the
embedded derivative are not closely related to the economic characteristics
and risks of the host contract, a separate instrument with the same terms as
the embedded derivative would meet the definition of a derivative; and the
combined instrument is not measured at fair value with changes in fair value
recognized in profit or loss for the period.
Derivatives are initially recognized at fair value on the date on which a
derivative contract is entered into and are subsequently remeasured at fair
value. All derivatives are carried as assets when their fair value is positive
and as liabilities when their fair value is negative.
Changes in the fair value of derivatives are recognized immediately in profit
or loss.
Although the Company trades in derivative instruments for risk hedging
purposes, these instruments do not qualify criteria for application of hedge
accounting.
The Company did not have hedging transactions, and therefore application of
hedging requirements under IFRS 9 will not cause impact on the Company’s
financial statements.
The Company adopted fair value accounting to the complex financial
instrument, which contain several not closely related embedded derivatives.
In this case the Company valued the whole hybrid instrument at fair value
and did not recognise each component of this instrument separately (Note 4).
(m) Derecognition of financial instruments
Financial liabilities
The Company removes a financial liability (or a part of a financial liability)
from its statement of financial position when, it is extinguished - i.e. when the
obligation specified in the contract is discharged or cancelled or expires. A
substantial modification of the terms of an existing financial liability
(qualitative and quantitative) or a part of it (whether or not attributable to the
financial difficulty of the debtor) is accounted for as an extinguishment of the
original financial liability and the recognition of a new financial liability. The
difference between the carrying amount of an initial financial liability and the
new financial liability is recognized in profit or loss.
Non-current assets classified as held for sale (or disposal group)
Non-current assets and disposal groups (which may include both non-current
and current assets) are classified in the statement of financial position as
‘non-current assets held for sale’ if their carrying amount will be recovered
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Notes to the Financial Statements
ANNUAL REPORT 2018
32. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
principally through a sale transaction (including loss of control of a subsidiary
holding the assets) within twelve months after the reporting period. Assets
are reclassified when all of the following conditions are met: (a) the assets
are available for immediate sale in their present condition; (b) the Company’s
management approved and initiated an active programme to locate a buyer;
(c) the assets are actively marketed for sale at a reasonable price; (d)
the sale is expected within one year; and (e) it is unlikely that significant
changes to the plan to sell will be made or that the plan will be withdrawn.
Non-current assets or disposal groups classified as held for sale in the
current period’s statement of financial position are not reclassified or re-
presented in the comparative statement of financial position to reflect the
classification at the end of the current period.
A disposal group is a group of assets (current or non-current) to be disposed
of, by sale or otherwise, together as a group in a single transaction, and
liabilities directly associated with those assets that will be transferred in the
transaction. Goodwill is included if the disposal group includes an operation
within a cash-generating unit to which goodwill has been allocated on
acquisition. Non-current assets are assets that include amounts expected to
be recovered or collected more than twelve months after the reporting period.
If reclassification is required, both the current and non-current portions of an
asset are reclassified.
(n) Offsetting financial instruments
Financial assets and financial liabilities are offset, and the net amount is
reported in the statement of financial position if there is a currently
enforceable legal right to offset the recognized amounts and there is an
intention to settle on a net basis, to realize the asset and settle the liability
simultaneously.
(o) Inventories
Inventories are valued at the lower of cost or net realisable value. Costs
include charges incurred in bringing inventory to its present location and
condition. Net realisable value is the estimated selling price in the ordinary
course of business, less the estimated costs of completion and estimated
costs necessary to make the sale. The same cost formula is used for all
inventories having a similar nature and use. All inventories are valued using
the average cost method.
(p) Leases
The determination of whether an arrangement is, or contains, a lease is
based on the substance of the arrangement at inception date. The
arrangement is assessed for whether the fulfilment of the arrangement is
dependent on the use of a specific asset or assets or the arrangement
conveys a right to use the asset, even if that right is not explicitly specified in
an arrangement.
Company as a lessee – finance lease
Finance leases that transfer substantially all the risks and benefits incidental
to ownership of the leased item to the Company, are capitalised at the
commencement of the lease at the fair value of the leased property or, if
lower, at the present value of the minimum lease payments. Lease payments
are apportioned between finance charges and reduction of the lease liability
so as to achieve a constant rate of interest on the remaining balance of the
liability. Finance charges are recognized in finance costs in the statement of
comprehensive income.
A leased asset is depreciated over the useful life of the asset. However, if
there is no reasonable certainty that the Company will obtain ownership by
the end of the lease term, the asset is depreciated over the shorter of the
estimated useful life of the asset and the lease term.
Company as a lessee – operating lease
Operating lease payments are recognized as an operating expense in the
statement of comprehensive income on a straight-line basis over the lease
term.
Company as a lessor – operating lease
Leases in which the Company does not transfer substantially all the risks and
benefits of ownership of an asset are classified as operating leases.
(q) Provisions
General
Provisions are recognized when the Company has a present obligation (legal
or constructive) as a result of a past event, it is probable that an outflow of
resources embodying economic benefits will be required to settle the
obligation and a reliable estimate can be made of the amount of the
obligation. Where the Company expects some or all of a provision to be
reimbursed, for example under an insurance contract, the reimbursement is
recognized as a separate asset but only when the reimbursement is virtually
certain.
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Notes to the Financial Statements
ANNUAL REPORT 2018
32. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The expense relating to any provision is presented in profit or loss net of any
reimbursement.
(r) Employee benefits
The Company does not have any additional pension arrangements separate
from the state pension system of the Republic of Kazakhstan, which requires
current contributions by the employer calculated as a percentage of current
gross salary payments; such expense is charged in the period the related
salaries are earned. The Company pays social tax according to the current
statutory requirements of the Republic of Kazakhstan. Social tax is expensed
as incurred.
The Company does not incur any expenses related to payment of pension
benefits to its employees. According to the legislation of the Republic of
Kazakhstan, the Company withholds pension deductions from wages of
employees and transfers them to a Unified Government Pension Fund. Upon
retirement of employees, all the payments are administered by the pension
fund.
(s) Equity
The partnership interest in the Company is classified as equity since the
Company has an irrevocable right to refuse the repurchase the partnership
interest according to the Company’s charter and local legislation. The assets
contributed to the charter capital are recognized at fair value at the time of
contribution. Any excess of the fair value of contributed assets over the
nominal value of contribution to the charter capital after its legal registration is
allocated directly to other reserves within equity.
Dividends are recognized as a liability and deducted from equity at the
reporting date only if they are approved before or on the reporting date.
Dividends are disclosed when they are proposed before the reporting date or
proposed or declared after the reporting date but before the financial
statements are authorised for issue.
(t) Revenue recognition
Revenue is income arising in the course of the Company ordinary activities.
Revenue is recognised in the amount of transaction price. Transaction price
is the amount of consideration to which the Company expects to be entitled in
exchange for transferring control over promised goods or services to a
customer, excluding the amounts collected on behalf of third parties.
Revenue is recognised net of value added taxes.
The Company adopted IFRS 15 “Revenue from Contracts with Customers”,
which is effective for reporting periods beginning on or after 1 January 2018.
When recognising revenue, the Company takes the following actions:
• Identification of contract with a customer;
• Identification performance obligation under the contract;
• Determination of transaction price;
• Allocation of transaction price between individual performance obligations
under the contract;
• Recognition of revenue at the moment of execution of performance
obligation (or as executed) under the contract.
The principal type of activity of the Company is provision of operating and
transportation/forwarding and provision of railcars services for rent. The
Company assesses its revenue arrangements required for the delivery of
cargo, stipulating for the receipt of revenue against specific criteria in order to
determine if it is acting as a principal or an agent.
Railcar rental income
Rental income arising from the operating lease of rolling stock is accounted
for on a straight-line basis over the lease term and is included in profit or loss
for the year.
Operating and transportation/forwarding services
The Company recognizes revenue from transportation/forwarding services
over time i.e. period, when services are rendered.
For fixed-price contracts, revenue is recognised based on the actual service
provided to the end of the reporting period as a proportion of the total
services to be provided because the customer receives and uses the benefits
simultaneously.
Where the contracts include multiple performance obligations, the transaction
price is allocated to each separate performance obligation based on the
stand-alone selling prices. Where these are not directly observable, they are
estimated based on expected cost plus margin.
In case of fixed-price contracts, the customer pays the fixed amount based
on a payment schedule. If the services rendered by the Group exceed the
payment, a contract asset is recognised. If the payments exceed the services
rendered, a contract liability is recognised.
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Notes to the Financial Statements
ANNUAL REPORT 2018
32. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
If the contract includes variable consideration, revenue is recognised only to
the extent that it is highly probable that there will be no significant reversal of
such consideration
The Company recognizes within revenue from transportation/forwarding
services only with respect to commission fee. When rendering operating
services, the Company acts as a Principal, except for rail tariff of KTZH
rechargeable to the clients.
Rendering of other services
In respect of other services revenue is recognized by a reference to the stage
of completion at the reporting date provided that the stage of completion and
the amount of revenue can be measured reliably.
According to Company’s assessment, effect from adoption of IFRS 15 on
revenue from railcar rental and provision of transportation/forwarding services
for the current reporting period is insignificant.
(u) Expense recognition
Expenses are accounted for at the time the actual flow of the related goods
or services occur, regardless of when cash or its equivalent is paid, and is
reported in the financial statements in the period which they relate to.
(v) Finance income and costs
The Company’s finance income and finance costs include:
• interest income;
• income from subsidies;
• discounting and amortisation of discount on financial instruments;
• interest expense.
• Interest income and expense shall be recognized by the effective interest
rate method.
(w) Borrowing costs
Borrowing costs are directly attributable to the acquisition, construction or
production of an asset that necessarily takes a substantial period of time to
get ready for its intended use or sale are capitalized as part of the cost of the
respective assets. All other borrowing costs are expensed in the period they
occur. Borrowing costs consist of interest and other costs that an entity incurs
in connection with the borrowing of funds.
(x) Income tax expense
Current income tax
Current income tax assets and liabilities for the current period are measured
at the amount expected to be recovered from or paid to the tax authorities.
The tax rates and tax laws used to compute the amount are those that are
enacted or substantively enacted, at the reporting date in the countries where
the Company operates and generates taxable income.
Current income tax relating to items recognized directly in equity is
recognized in equity and not in profit or loss. Management periodically
evaluates positions recorded in the tax returns with respect to situations in
which applicable tax regulations are subject to interpretation and establishes
provisions where appropriate.
Deferred income tax
Deferred tax is provided using the liability method on temporary differences
between the tax bases of assets and liabilities and their carrying amounts for
financial reporting purposes at the reporting date.
Deferred income tax liabilities are recognized for all taxable temporary
differences, except when the deferred income tax liability arises from the
initial recognition of goodwill or of an asset or liability in a transaction that is
not a business combination and, at the time of the transaction, affects neither
the accounting profit nor taxable profit or loss.
Deferred tax assets are recognized for all deductible temporary differences,
the carry forward of unused tax credits and any unused tax losses. Deferred
tax assets are recognized to the extent that it is probable that taxable profit
will be available against which the deductible temporary differences, and the
carry forward of unused tax credits and unused tax losses can be utilised,
except when the deferred income tax asset relating to the deductible
temporary difference arises from the initial recognition of an asset or liability
in a transaction that is not a business acquisition and, at the time of the
transaction, affects neither the accounting profit nor taxable profit or loss.
The carrying amount of deferred income tax assets is reviewed at each
balance sheet date and reduced to the extent that it is no longer probable
that sufficient taxable profit will be available to allow all or part of the deferred
income tax asset to be utilised. Unrecognized deferred income tax assets are
reassessed at each balance sheet date and are recognized to the extent that
it has become probable that future taxable profit will allow the deferred tax
asset to be recovered.
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Notes to the Financial Statements
ANNUAL REPORT 2018
32. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Deferred income tax assets and liabilities are measured at the tax rates that
are expected to apply to the year when the asset is realized or the liability is
settled, based on tax rates (and tax laws) that have been enacted or
substantively enacted at the reporting date.
Deferred tax relating to items recognized outside profit or loss is recognized
outside profit or loss. Deferred tax items are recognized in correlation to the
underlying transaction either in other comprehensive income or directly in
equity.
Deferred income tax assets and deferred income tax liabilities are offset if a
legally enforceable right exists to set off current tax assets against current
income tax liabilities and the deferred taxes relate to the same taxable entity
and the same taxation authority.
33. PRESENTATION OF FINANCIAL INSTRUMENTS BY MEASUREMENT
CATEGORY
For the purposes of measurement under IAS 9 “Financial Instruments”, the
Company classifies financial assets into the following categories:
а) amortised cost,
b) fair value through other comprehensive income; or,
c) fair value through profit or loss.
The following table provides a reconciliation of financial assets with the
abovementioned measurement categories “Carried at amortised cost” as at
31 December 2018 and “Loans and Receivables” of 2017:
As at 31 December 2018 and 31 December 2017, all financial liabilities of the
Company except for financial lease acquired from DBK-Lease (Note 4) were
carried at amortised cost.
The following table provides a reconciliation of financial liabilities with the
abovementioned measurement categories as of 31 December 2018 and
2017:
34. NEW STANDARDS AND INTERPRETATIONS NOT YET ADOPTED
Certain new standards and interpretations have been issued that are
mandatory for the annual periods beginning on or after 1 January 2019 or
later, and which the Company has not early adopted.
• Sale or Contribution of Assets between an Investor and its Associate or
Joint Venture – Amendments to IFRS 10 and IAS 28 (issued on 11
September 2014 and effective for annual periods beginning on or after a
date to be determined by the IASB).
• IFRS 16, Leases (issued on 13 January 2016 and effective for annual
periods beginning on or after 1 January 2019). The new standard sets out
the principles for the recognition, measurement, presentation and
disclosure of leases. All leases result in the lessee obtaining the right to
use an asset at the start of the lease and, if lease payments are made
over time, also obtaining financing. Accordingly, IFRS 16 eliminates the
classification of leases as either operating leases or finance leases as is
required by IAS 17 and, instead, introduces a single lessee accounting
model. Lessees will be required to recognise: (a) assets and liabilities for
all leases with a term of more than 12 months, unless the underlying
asset is of low value; and (b) depreciation of lease assets separately from
interest on lease liabilities in the statement of profit or loss and other
comprehensive income. IFRS 16 substantially carries forward the lessor
accounting requirements in IAS 17. Accordingly, a lessor continues to
classify its leases as operating leases or finance leases, and to account
for those two types of leases differently.
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Notes to the Financial Statements
ANNUAL REPORT 2018
34. NEW STANDARDS AND INTERPRETATIONS NOT YET ADOPTED
(CONTINUED)
The Company decided that it will apply the standard from its mandatory
adoption date of 1 January 2019 using the modified retrospective method,
without restatement of comparatives. Right-of-use assets for property
leases are measured on transition as if the new rules had always applied.
All other right-of-use assets are measured at the amount of the lease
liability on adoption (adjusted for any prepaid or accrued expenses).
The Company’s management expects that application of this standard
may have impact on financial statements. The Company is currently
assessing the effect of the application of this standard on its performance.
The Company reviewed information according to new interpretations and
plans to develop and implement relevant controls. Preliminary
assessment shows that the Company recognises a right-of-use asset in
the amount of Tenge 745,009 thousand and respective leasing liability in
the amount of Tenge 766,612 thousand. Impact on retained earnings as
of
1 January 2019 amounts to Tenge 21,602 thousand.
IFRS 17 "Insurance Contracts"(issued on 18 May 2017 and effective for
annual periods beginning on or after 1 January 2021).
• IFRS 17 "Insurance Contracts"(issued on 18 May 2017 and effective for
annual periods beginning on or after 1 January 2021).
• IFRIC 23 "Uncertainty over Income Tax Treatments" (issued on 7 June
2017 and effective for annual periods beginning on or after 1 January
2019). IAS 12 specifies how to account for current and deferred tax, but
not how to reflect the effects of uncertainty. The interpretation clarifies
how to apply the recognition and measurement requirements in IAS 12
when there is uncertainty over income tax treatments. An entity should
determine whether to consider each uncertain tax treatment separately or
together with one or more other uncertain tax treatments based on which
approach better predicts the resolution of the uncertainty. An entity should
assume that a tax authority will examine amounts it has a right to examine
and have full knowledge of all related information when making those
examinations. If an entity concludes it is not probable that the tax authority
will accept an uncertain tax treatment, the effect of uncertainty will be
reflected in determining the related taxable profit or loss, tax bases,
unused tax losses, unused tax credits or tax rates, by using either the
most likely amount or the expected value, depending on which method
the entity expects to better predict the resolution of the uncertainty. An
entity will reflect the effect of a change in facts and circumstances or of
new information that affects the judgments or estimates required by the
interpretation as a change in accounting estimate. Examples of changes
in facts and circumstances or new information that can result in the
reassessment of a judgment or estimate include, but are not limited to,
examinations or actions by a tax authority, changes in rules established
by a tax authority or the expiry of a tax authority's right to examine or re-
examine a tax treatment. The absence of agreement or disagreement by
a tax authority with a tax treatment, in isolation, is unlikely to constitute a
change in facts and circumstances or new information that affects the
judgments and estimates required by the Interpretation. The Company is
currently assessing the implications of these amendments to financial
statements.
• Prepayment Features with Negative Compensation – Amendments to
IFRS 9 (issued on 12 October 2017 and effective for annual periods
beginning on or after 1 January 2019). The amendments enable
measurement at amortised cost of certain loans and debt securities that
can be prepaid at an amount below amortised cost, for example at fair
value or at an amount that includes a reasonable compensation payable
to the borrower equal to present value of an effect of increase in market
interest rate over the remaining life of the instrument. In addition, the text
added to the standard's basis for conclusion reconfirms existing guidance
in IFRS 9 that modifications or exchanges of certain financial liabilities
measured at amortised cost that do not result in the derecognition will
result in an gain or loss in profit or loss. Reporting entities will thus in most
cases not be able to revise effective interest rate for the remaining life of
the loan in order to avoid an impact on profit or loss upon a loan
modification. The Company is currently assessing the implications of
these amendments to financial statements.
• Amendments to IAS 28 “Long-term Interests in Associates and Joint
Ventures” (issued on 12 October 2017 and effective for annual periods
beginning on or after 1 January 2019).
• Annual Improvements to IFRSs 2015-2017 cycle ‒ amendments to IFRS
3, IFRS 11, IAS 12 and IAS 23 (issued on 12 December 2017 and
effective for annual periods beginning on or after 1 January 2019).
• Amendments to IAS 19 “Plan Amendment, Curtailment or Settlement”
(issued on 7 February 2018 and effective for annual periods beginning on
or after 1 January 2019).
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Notes to the Financial Statements
ANNUAL REPORT 2018
34. NEW STANDARDS AND INTERPRETATIONS NOT YET ADOPTED
(CONTINUED)
• Amendments to the Conceptual Framework for Financial Reporting
(issued on 29 March 2018 and effective for annual periods beginning on
or after 1 January 2020).The revised Conceptual Framework includes a
new chapter on measurement; guidance on reporting financial
performance; improved definitions and guidance ‒ in particular the
definition of a liability; and clarifications in important areas, such as the
roles of stewardship, prudence and measurement uncertainty in financial
reporting.
• Definition of a business – Amendments to IFRS 3 (issued on 22 October
2018 and effective for acquisitions from the beginning of annual reporting
period that starts on or after 1 January 2020).
• Definition of materiality – Amendments to IAS 1 and IAS 8 (issued on 31
October 2018 and effective for annual periods beginning on or after 1
January 2020).The amendments clarify the definition of material and how
it should be applied by including in the definition guidance that until now
has featured elsewhere in IFRS. In addition, the explanations
accompanying the definition have been improved. Finally, the
amendments ensure that the definition of material is consistent across all
IFRS Standards. Information is material if omitting, misstating or
obscuring it could reasonably be expected to influence the decisions that
the primary users of general purpose financial statements make on the
basis of those financial statements, which provide financial information
about a specific reporting entity.
Unless otherwise described above, the new standards and interpretations are
not expected to affect significantly the Company’s financial statements.
35. ACCOUNTING POLICIES BEFORE 1 JANUARY 2018
Accounting policies applicable to the comparative period ended 31 December
2017 that were amended by IFRS 9 and IFRS 15, are as follows.
Financial instruments – key measurement terms.
Depending on their classification financial instruments are carried at fair value
or amortised cost as described below.
Fair value is the amount of cash or cash equivalents paid or the fair value of
the other consideration given to acquire an asset at the time of its acquisition
and includes transaction costs. Measurement at cost is only applicable to
investments in equity instruments that do not have a quoted market price and
whose fair value cannot be reliably measured and derivatives that are linked
to, and must be settled by, delivery of such unquoted equity instruments.
Financial assets
Initial recognition
Financial assets of the Company are classified as loans and receivables.
Loans and receivables are unquoted non-derivative financial assets with fixed
or determinable payments other than those that the Company intends to sell
in the near term. Loans and receivables comprise of ‘trade and other
receivables’ and ‘cash and cash equivalents’ in the statement of financial
position.
Loans and receivables
After initial recognition, financial assets of this kind are evaluated at
amortized cost using the effective interest rate method. Amortized cost is
calculated based on discounts or premiums on acquisitions, as well as
commissions or costs, which are an integral part of the effective interest rate.
Amortization using the effective interest rate is included in finance income in
the statement of comprehensive income.
Cash and cash equivalents
Cash and cash equivalents included in the statement of financial position
include cash in banks and cash on hand. For the purpose of cash flows
statement, cash and cash equivalents includes cash and short-term deposits
with a maturity of less than 3 months, as defined above, minus outstanding
bank overdrafts.
Impairment of financial assets
At each reporting date, the Company assesses whether there is objective
evidence that a financial asset or group of financial assets are impaired. A
financial asset or group of financial assets are considered impaired when
there is objective evidence of impairment as a result of one or more events
that occurred since the initial recognition of the asset (the “loss event”
occurrence) that had a reliably measurable effect on the expected future cash
flows of the financial asset or a group of financial assets. Evidence of
impairment may include indications that the debtor or a group of debtors are
experiencing significant financial difficulties, cannot service their debts, or fail
to pay interest or the principal amount of the debt, as well as the likelihood
that they will be bankrupt or financially reorganized. In addition, such
evidence includes observable data indicating a measurable decrease in
expected future cash flows for a financial instrument, in particular, such as
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Notes to the Financial Statements
ANNUAL REPORT 2018
35. ACCOUNTING POLICIES BEFORE 1 JANUARY 2018 (CONTINUED)
changes in overdue debt or economic conditions that are in a certain
relationship with the waivers of debt repayment obligations.
Financial assets carried at amortized cost
For financial assets carried at amortized cost, the Company first assesses
whether objective evidence of impairment exists for individually significant
financial assets, or collectively for financial assets that are not individually
significant. If the Company determines that there are no objective indications
of impairment of an individually assessed financial asset, regardless of its
significance, it includes this asset in a group of financial assets with similar
credit risk characteristics, and then considers these assets for impairment on
an aggregate basis. Assets that are assessed for impairment on an individual
basis, for which impairment losses are recognized, should not be evaluated
for impairment on an aggregate basis.
If there is an objective indication that an impairment loss has been incurred,
the amount of the loss is estimated as the difference between the carrying
amount of the asset and the present value of expected future cash flows
(excluding future expected credit losses that have not yet been incurred). The
present value of estimated future cash flows is discounted at the original
effective interest rate of the financial asset. If the interest rate on a loan is
variable, the discount rate for measuring impairment loss is the current
effective interest rate.
Interest income is recorded as part of financial income in the statement of
profit or loss and other comprehensive income. Loans issued together with
the relevant reserves are written off when there is no real prospect of
reimbursement and all collateral has been sold or transferred to the
Company. If, in the following year, the amount of the estimated impairment
loss increases or decreases due to an event that occurred after the
impairment loss was recognized, the previously recognized amount of
impairment loss is increased or decreased by adjusting the allowance
account. If the previous write-off is subsequently restored, the amount of the
recovery is reflected in the statement of profit or loss and other
comprehensive income as a decrease in financing costs.
Financial liabilities
Initial recognition and evaluation
Financial liabilities are classified as financial liabilities at fair value through
profit or loss, or other financial liabilities. The Company classifies its financial
liabilities upon their initial recognition.
All financial liabilities are initially recognized at fair value. For loans and
borrowings financial liabilities are adjusted for transaction costs directly
related to them.
The Company's financial liabilities include trade and other payables, finance
lease liabilities, loans and borrowings that are classified as “Other financial
liabilities” and “financial liabilities evaluated at fair value through profit or
loss”.
Subsequent evaluation
The evaluation of financial liabilities depends on their classification as follows:
Loans and borrowings
After initial recognition, loans and borrowings are subsequently evaluated at
amortized cost using the effective interest rate method. The Company
determines the evaluation method at the date of recognition.
Amortized cost is calculated taking into account discounts or premiums for
acquiring a loan, as well as commissions or costs, which are included in
measurement of the effective interest rate. Amortization of the effective
interest rate is included in finance costs in the statement of profit or loss and
other comprehensive income.
Trade and other payables
Trade payables are accrued when the counterparty of the Company fulfills its
contractual obligations and are initially recorded at fair value and then at
amortized cost using the effective interest rate method.
Derecognition of financial instruments
Financial assets
The Company derecognises financial assets, (a) when these assets are
redeemed or the rights to cash flows associated with these assets have
expired, or (b) the Company transferred the rights for financial assets cash
flows or entered into a agreement for the transfer of the rights, and (i) also
transferred almost all the risks and rewards associated with the ownership of
these assets, or (ii) did not transfer and kept rights for the risks and rewards
associated with owning these assets, but lost control over these assets.
Control is retained if the counterparty does not have the practical ability to
sell to unrelated third party the entire asset without the need to impose
additional restrictions on such a sale.
87
Notes to the Financial Statements
ANNUAL REPORT 2018
35. ACCOUNTING POLICIES BEFORE 1 JANUARY 2018 (CONTINUED)
Financial liabilities
The Company excludes a financial liability (or part of a financial liability) from
the statement of financial position when it was expired, i.e. when the
obligation indicated in the contract is fulfilled, canceled or expired. A
significant change in the conditions of an existing financial liability (qualitative
and quantitative) or part of it (regardless of whether the debtor is in financial
difficulty) is taken into account as the settlement of the initial financial liability
and the recognition of a new financial obligation. The difference between the
carrying amount of a financial liability and a new financial liability is
recognized in profit or loss.
Revenue recognition
Revenue is recognized in case if the probability of gaining of economic
benefits by the Company is probable, and if the revenue can be measured
reliably, regardless of when the payment was made. Revenue is measured at
fair value of the received or receivable reward, taking into account the terms
of payment specified in the contract excluding taxes or duties. The main
business activity of the Company is the provision of operating services and
freight forwarding services. At the same time, the Company analyzes
concluded contracts, which are necessary for the delivery of goods,
stipulating the receipt of revenue, in accordance with certain criteria in order
to determine whether the Company acts as a principal or agent. The
Company concluded that it acts as an agent in relation to the railway tariff,
therefore payments settled between the railway and the Company's
customers are accounted by the Company on a net basis. Accordingly, the
Company recognizes revenue only in respect of commission from operating
and freight forwarding services.
Revenue from the provision of railcars for use
Income from rolling stock operating leases is evenly accounted over the
lease term and is included in profit or loss and other comprehensive income.
Provision of services
Revenue from the provision of services is recognized based on the degree of
completeness of the services at the reporting date, provided that the degree
of completeness and revenue can be reliably measured.
88
Main goals and objectives for the next year
Goals
1.
3.
2.
Expansion of the range of services provided in the field of rail freight transport, business diversification,
launch of container and multimodal services.
Development of human capital with the implementation of motivation and incentive programs.
Implementation and development of digital technologies using advanced systems in the field of automation.
Objectives
1. Organization of wagon-repair plants on the territory of the Republic Kazakhstan:
- obtaining additional income from the provision of repair services to third-party companies;
- reduction of repair idle time by conducting repair works on own plants;
2. Entry into the locomotive haulage market with provision of carrier services.
3.Building efficient operational processes, including the increase of IT penetration level and
automating business processes.
4.Implementation of human capital development programs aimed at developing a managerial
culture and increasing the professional competence of employees.
ANNUAL REPORT 2018
5. Continue the work on loan portfolio optimization, mitigation of currency and interest rate risks.
Eastcomtrans LLP
050040, Republic of Kazakhstan, Almaty,
77/7 Al-Farabi Ave., Esentai Tower BC, 11th floor
Phone: +7 (727) 3-555-111
E-mail: [email protected]
www.ect.kz
COMPANY
The Integrated Securities Registrar JSC
050040, Republic of Kazakhstan, Almaty,
30А/3 Satpayev Str., Tengiz Towers RC
Phone: +7 (727) 272-47-60
E-mail: [email protected]
www.tisr.kz
REGISTRAR
PricewaterhouseCoopers LLP
050059, Republic of Kazakhstan, Almaty,
34 Al-Farabi Ave., AFD BC, Building A, 4th floor
Phone: +7 (727) 330-32-00
www.pwc.kz
AUDITOR