RNS Number : 8034A
IG Seismic Services PLC
30 September 2015
IG Seismic Services Plc
Interim condensed consolidated
financial statements (unaudited)
for the 6 month period ended 30 June 2015
Contents
Report on review of interim condensed consolidated financial statements.................................................... 1
Interim condensed consolidated financial statements (unaudited)
Interim condensed consolidated statement of financial position (unaudited).................................................. 2
Interim condensed consolidated statement of comprehensive income (unaudited)....................................... 3
Interim condensed consolidated statement of cash flows (unaudited)............................................................ 4
Interim condensed consolidated statement of changes in equity (unaudited)................................................. 5
Notes to the interim condensed consolidated financial statements (unaudited)............................................. 6
Report on review of interim condensed consolidated financial statements
To the Shareholders and Board of Directors of IG Seismic Services Plc
Introduction
We have reviewed the accompanying interim condensed consolidated financial statements of IGSS Plc and its subsidiaries ("the Group"), comprising the interim consolidated statement of financial position as at 30 June 2015 and the related interim consolidated statements of comprehensive income, changes in equity and cash flows for the six month period then ended and explanatory notes. Management is responsible for the preparation and presentation of these interim condensed consolidated financial statements in accordance with International Financial Reporting Standard IAS 34 Interim Financial Reporting ("IAS 34"). Our responsibility is to express a conclusion on these interim condensed consolidated financial statements based on our review.
Scope of review
We conducted our review in accordance with the International Standard on Review Engagements2410 Review of Interim Financial Information Performed by the Independent Auditor of the Entity. A review of interim financial statements consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.
Conclusion
Based on our review, nothing has come to our attention that causes us to believe that the accompanying interim condensed consolidated financial statements are not prepared, in all material respects, in accordance with IAS 34.
Gabriel Onisiforou
Certified Public Accountant and Registered Auditor
for and on behalf of
Ernst & Young Cyprus Limited
Certified Public Accountants and Registered Auditors
Nicosia
29 September 2015
Interim condensed consolidated statement of financial position (unaudited)
(amounts in thousands of Russian rubles)
Note
At 30 June 2015 (unaudited)
At 31 December 2014
Assets
Non-current assets
Property, plant and equipment
5
13,231,159
14,647,197
Goodwill
3,760,082
3,760,082
Intangible assets other than goodwill
383,467
429,783
Investments in associates
3
957,709
901,072
Exploration and evaluation assets
216,841
216,624
Other non-current assets
6
401,343
325,861
Deferred tax assets
300,191
309,511
Total non-current assets
19,250,792
20,590,130
Current assets
Inventories
7
2,945,115
2,550,461
Accounts receivable and prepayments
8
9,459,742
10,201,249
Other financial assets
9
342,579
321,173
VAT receivable
162,387
580,124
Prepayments for income tax
131,162
127,928
Other current assets
30,641
55,754
Cash and cash equivalents
10
950,697
1,206,691
Total current assets
14,022,323
15,043,380
Total assets
33,273,115
35,633,510
Equity and liabilities
Equity
Share capital
6,513
6,513
Share premium
13,837,978
13,837,978
Reverse acquisition reserve
(5,805,259)
(5,805,259)
Other non-distributable reserves
2,233,488
2,233,488
Foreign currency translations reserve
588,008
663,593
Accumulated losses
(3,297,397)
(2,790,036)
Total shareholders' equity
7,563,331
8,146,277
Non-controlling interest
590,871
668,482
Total equity
8,154,202
8,814,759
Non-current liabilities
Loans and borrowings
11
6,127,390
7,939,643
Finance lease liabilities
3,615
4,589
Other long-term liabilities
12
493,765
626,878
Deferred tax liabilities
1,472,322
1,554,844
Total non-current liabilities
8,097,092
10,125,954
Current liabilities
Loans and borrowings
11
7,138,013
7,482,974
Promissory notes payable
12
695,120
961,864
Accounts payable
12
5,852,000
6,012,765
Income tax payable
49,646
3,824
Other taxes payable
13
3,167,072
2,071,439
Provisions
13
118,146
157,448
Finance lease liabilities
1,824
2,483
Total current liabilities
17,021,821
16,692,797
Total liabilities
25,118,913
26,818,751
Total liabilities and equity
33,273,115
35,633,510
These interim condensed consolidated financial statements were approved and signed bytheDirector on 29 September 2015
Nikolay Levitskiy
Director
The accompanying notes are an integral part of these interim condensed
consolidated financial statements.
Interimcondensedconsolidated statement ofcomprehensiveincome (unaudited)
(amounts in thousands of Russian rubles)
For six months ended
Note
30 June 2015 (unaudited)
30 June 2014 (unaudited)
Revenue
15
10,035,360
10,398,232
Cost of sales
16
(8,424,604)
(8,404,831)
Gross profit
1,610,756
1,993,401
General and administrative expenses
17
(1,024,991)
(1,204,321)
Other operating income
71,691
69,315
Other operating expenses
18
(546,697)
(307,548)
Operating profit
110,759
550,847
Finance income
19
35,041
43,646
Finance expense
19
(1,004,448)
(803,225)
Net foreign exchange gain/(loss)
20
259,215
(10,512)
Share of profit/(loss) of an associates
3,466
(35,759)
Loss before tax
(595,967)
(255,003)
Current income tax expense
(10,289)
(5,463)
Deferred income tax benefit/(expense)
50,717
(74,359)
Loss for the period
(555,539)
(334,825)
Other comprehensive expense to be reclassified to profit/loss in subsequent periods
Translation difference
(79,611)
(276,256)
Total comprehensive expense
(635,150)
(611,081)
Loss for the period attributable to:
Shareholders of IG Seismic Services Plc
(481,966)
(294,000)
Non-controlling interest
(73,573)
(40,825)
Total comprehensive expense attributable to:
Shareholders of IG Seismic Services Plc
(557,551)
(555,862)
Non-controlling interest
(77,599)
(55,219)
Loss per share:
Basic loss for the period attributable to shareholders of IGSeismic Services Plc
21
(23.13) .
(14.11) .
The accompanying notes are an integral part of these interim condensed
consolidated financial statements.
Interim condensedconsolidated statement of cash flows (unaudited)
(amounts in thousands of Russian rubles)
For six months ended
Note
30 June 2015 (unaudited)
30 June 2014 (unaudited)
Cash flows from operating activities
Loss before tax
(595,967)
(255,003)
Adjustments for:
Depreciation and amortization
16,17
1,349,085
1,359,927
Provisions for bad debt and obsolete inventory
107,326
39,346
Loss on disposal of property, plant and equipment and non-current assets
18
231,349
99,179
Net finance expense
19
969,407
759,579
Net foreign exchange (gain)/loss
20
(259,215)
10,512
Share of (profit)/loss of an associate
(3,466)
35,759
Cash flow from operating activities before changes in working capital
1,798,519
2,049,299
Working capital adjustments net of acquisitions
Change in accounts receivable
744,680
203,341
Change in inventories
(278,359)
(175,252)
Change in prepayments and other current assets
438,944
366,283
Change in accounts payable
(319,732)
497,895
Change in taxes payable other than income tax
1,200,847
591,629
Change in provisions
53,260
(4,931)
Cash flows before income tax
3,638,159
3,528,264
Income tax paid
(19,736)
(15,753)
Net cash from operating activities
3,618,423
3,512,511
Investing activities
Purchases of property, plant and equipment
(551,274)
(1,226,867)
Proceeds from the sale of property, plant and equipment
18,375
2,017
Cash back received as discount on purchases of PPE
151,545
-
Short-term borrowings issued
-
(22,304)
Purchase of bank promissory notes
-
(239,926)
Net cash used in investing activities
(381,354)
(1,487,080)
Financing activities
Proceeds from loans and borrowings
92,429
19,121,327
Repayment of loans and borrowings
(2,160,777)
(20,422,851)
Repayment of finance lease obligations
(2,165)
(2,227)
Interest paid
(770,024)
(733,303)
Payment to acquire additional interest in associate
3
(53,350)
-
Payment to acquire non-controlling interest
(212,372)
(283,242)
Redemption of promissory notes
(424,931)
(238,279)
Net cash received used in financing activities
(3,531,190)
(2,558,575)
Net decrease in cash and cash equivalents
(294,121)
(533,144)
Cash and cash equivalents at the beginning of the reporting period
10
1,206,691
711,396
Effect of foreign exchange on cash and cash equivalents
38,127
(5,261)
Cash and cash equivalents at the end of the reporting period
10
950,697
172,991
The accompanying notes are an integral part of these interim condensed
consolidated financial statements.
Interim condensedconsolidated statement of changes in equity (unaudited)
(amounts in thousands of Russian rubles)
Attributable to shareholders of IG Seismic Services Plc
Share capital
Share premium
Reverse acquisition reserve
Other non-distributable reserves
Foreign currency translation reserve
Accumulated (losses) / retained earnings
Total
Non-controlling interests
Total equity
Balance as at 1 January 2014
6,513
13,837,978
(5,805,259)
2,233,488
270
(1,099,123)
9,173,867
1,806,717
10,980,584
Loss for the period
-
-
-
-
-
(294,000)
(294,000)
(40,825)
(334,825)
Other comprehensive expense
-
-
-
-
(261,862)
-
(261,862)
(14,394)
(276,256)
Total comprehensive expense
-
-
-
-
(261,862)
(294,000)
(555,862)
(55,219)
(611,081)
Change in non-controlling interest
-
-
-
-
-
437,013
437,013
(864,799)
(427,786)
Balance as at 30 June 2014 (unaudited)
6,513
13,837,978
(5,805,259)
2,233,488
(261,592)
(956,110)
9,055,018
886,699
9,941,717
Balance as at 1 January 2015
6,513
13,837,978
(5,805,259)
2,233,488
663,593
(2,790,036)
8,146,277
668,482
8,814,759
Loss for the period
-
-
-
-
-
(481,966)
(481,966)
(73,573)
(555,539)
Other comprehensive expense
-
-
-
-
(75,585)
-
(75,585)
(4,026)
(79,611)
Total comprehensive expense
-
-
-
-
(75,585)
(481,966)
(557,551)
(77,599)
(635,150)
Acquisition of non-controlling interest
-
-
-
-
-
(25,395)
(25,395)
(12)
(25,407)
Balance as at 30 June 2015 (unaudited)
6,513
13,837,978
(5,805,259)
2,233,488
588,008
(3,297,397)
7,563,331
590,871
8,154,202
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
Notes to the interim condensed consolidated financial statements (unaudited)
for the 6 months period ended 30 June 2015
1. Corporate information
Organizational structure and operations
These are the interim condensed consolidated financial statements of IG Seismic ServicesPlc (the "Company" or "IGSS") and its subsidiaries (together referred to as the "Group") which is engaged in provision of land and transition zone seismic data acquisition and data processing and interpretation to the petroleum industry in the Russian Federation, the Commonwealth of Independent States ("CIS") and other countries outside of the CIS.
The Company was incorporated in Cyprus as a private limited liability company in accordance with the provisions of the Companies Law, Cap. 113. Its registered office is located
at 2-4 Arch.Makariou III Avenue, Capital Center, 9th floor, P.C. 1065, Nicosia, Cyprus. On10October 2012 the Company changed its legal form from private limited company into public limited company.
On 11 December 2012 the Company's GDRs were admitted to the Official List maintained by theUK Listing Authority and started trading on the London Stock Exchange's main market on 12December 2012. Global Depositary Receipts (GDRs) of the Companyrepresenting twoordinary shares each are listed and traded on the Main Market of the London Stock Exchange under the ticker IGSS (Bloomberg: IGSS LI, Reuters: IGSSq.L). As of 30 June 2015, the free float of the Company amounted to approximately 24.4%of the issued share capital. TheJPMorgan Chase Bank is the depositary bank for the GDR programme of the Company.
Shareholder structure as of 30 June 2015:
Mr. Nikolay Levitskiy 55.82%
Schlumberger12.00%
Industrial Investors Group7.78%
Other institutional and private shareholders24.40%
The Group did not pursue any business acquisitions throughout the first six months of 2015 and to the date of the issuance of these interim condensed consolidated financial statements, except for the acquisition of additional interest in associate (Note 3).
2. Basis of preparation
Statement of compliance
The interim condensed consolidated financial statements for the six months ended 30 June 2015 have been prepared in compliance with IAS 34 Interim Financial Reporting as issued by the International Accounting Standards Board and adopted by the European Union.
The Group entities registered in the territory of the Russian Federation ("RF") maintain accounting records and prepare financial reports in accordance with Federal Law No. 402-FZ Concerning Accounting, the Statute Concerning Accounting and Reporting in the RF and Accounting Statementsas approved by relevant orders of the RF Ministry of Finance. The Group entities registered in the territory of the Kazakhstan ("KZ") maintain accounting records and prepare financial reports in accordance with Law of the Republic of Kazakhstan No. 234-III Concerning Accounting.
2. Basis of preparation (continued)
Statement of compliance (continued)
These consolidated financial statements have been prepared based on the Russian and Kazakh statutory accounting data adjusted for the purposes of presentation in accordance with IFRS.
The Group has elected to present statement of comprehensive income, statement of financial position, statement of changes in equity and statement of cash flows in the same format as the annual financial statements.
The interim condensed consolidated financial statements do not include all the information and disclosures required to be included in the annual financial statements, and should be read in conjunction with the Group's annual financial statements as at and for the year ended 31December 2014.
Basis of measurement
These interim condensed consolidated financial statements have been prepared on a historical cost basis, except for certain items that have been measured at fair value as for disclosure purposes as stated in accounting policies. The interim condensed consolidated financial statements are presented in Russian rubles ("RUR") and all values are rounded to the nearest thousand except when otherwise indicated.
Going concern
These interim condensed consolidated financial statements have been prepared on the going concern basis which contemplates the realization of assets and satisfaction of liabilities and commitments in the normal course of business. These accompanying financial statements do not include any adjustments that may be necessary if the Group is unable to continue as a going concern. The Group's interim results and financial position are affected by seasonal factors and are not necessarily indicative of the results that may be expected for the year ending 31December 2015. Management expects that the Group will be in compliance with its financial obligations and has adequate resources to continue in operational existence in the foreseeable future.
For six months ended 30 June 2015 the Group reported net loss of 555,539 (net loss for sixmonths ended 30 June 2014 of 334,825) which was significantly affected by one-off expenses discussed in Note 4.
The Group's current liabilities as at 30 June 2015 of 17,021,821 exceeded its current assets by 2,999,498 (the Group's current liabilities as at 31 December 2014 of 16,692,797 exceeded its current assets by 1,649,417).The net current liability position as at 30 June 2015 primarily relates to short-terms loans and borrowings of 7,138,013 and trade and other payables of 5,852,000.
For a number of years, the Group has been able to successfully refinance its short-term debt, obtain new equity capital from existing and new investors and generate sufficient operating cash flow as well as sufficient undrawn facilities under revocable credit lines to ensure that it does not face a liquidity shortfall or default on its debt obligations, please also refer to Note 25.
2. Basis of preparation (continued)
Going concern (continued)
Having considered the above, the Group's management believe that it is appropriate to prepare these interim consolidated financial statements on a going concern basis as the Group has undertaken certain actions aimed at improving performance and liquidity, including control and optimization of operating expenses, and refinancing of the current liabilities.
As a result, the Group's management considers that the application of the going concern assumption for the preparation of these consolidated financial statements is appropriate.
Seasonality
There is a limited season for providing seismic services in certain Siberian regions of the Russian Federation which remain in flood-like, or swampy conditions, in warm weather. Such conditions generally restrict the provision of seismic services in Siberia to a period from December to April.
Reclassifications
A number of items presented in the Group's 2014 consolidated financial statements have been reclassified to ensure the comparability of information in the interim condensed consolidated financial statements for the six months ended 30 June 2015. This primarily included classification of Bad receivables write-offs and provisions within other operating expense.
New standards, interpretations and amendments adopted by the Group
The accounting policies adopted in the preparation of the interim condensed consolidated financial statements are consistent with those followed in the preparation of the Group's annual consolidated financial statements for the year ended 31 December 2014 except for the adoption of new standards and interpretations effective 1 January 2015. The Group has not early adopted any other standard, interpretation or amendment that has been issued but is not yet effective.
The nature and the effect of these changes are disclosed below. Although these new standards and amendments apply for the first time in 2015, they do not have a material impact on the annual consolidated financial statements of the Group or the interim condensed consolidated financial statements of the Group.
The nature and the impact of each new standard or amendment is described below:
Amendments to IAS 19 Defined Benefit Plans: Employee Contributions
IAS 19 requires an entity to consider contributions from employees or third parties when accounting for defined benefit plans. Where the contributions are linked to service, they should be attributed to periods of service as a negative benefit. These amendments clarify that, if the amount of the contributions is independent of the number of years of service, an entity is permitted to recognise such contributions as a reduction in the service cost in the period in which the service is rendered, instead of allocating the contributions to the periods of service. This amendment is effective for annual periods beginning on or after 1 July 2014. This amendment is not relevant to the Group, since none of the entities within the Group has defined benefit plans with contributions from employees or third parties.
2. Basis of preparation (continued)
New standards, interpretations and amendments adopted by the Group (continued)
Annual improvements 2010-2012 Cycle
IFRS 2 Share-based Payment
This improvement is applied prospectively and clarifies various issues relating to the definitions of performance and service conditions which are vesting conditions, including:
A performance condition must contain a service condition.
A performance target must be met while the counterparty is rendering service.
A performance target may relate to the operations or activities of an entity, or to those of another entity in the same group.
A performance condition may be a market or non-market condition.
If the counterparty, regardless of the reason, ceases to provide service during the vesting period, the service condition is not satisfied.
This amendment is not relevant to the Group, since no sharebased payment programme was established in the Group.
IFRS 3 Business Combinations
The amendment is applied prospectively and clarifies that all contingent consideration arrangements classified as liabilities (or assets) arising from a business combination should be subsequently measured at fair value through profit or loss whether or not they fall within the scope of IFRS 9 (or IAS 39, as applicable). This is consistent with the Group's current accounting policy, and thus this amendment does not impact the Group's accounting policy.
IFRS 8 Operating Segments
The amendments are applied retrospectively and clarify that:
An entity must disclose the judgements made by management in applying the aggregation criteria in paragraph 12 of IFRS 8, including a brief description of operating segments that have been aggregated and the economic characteristics (e.g., sales and gross margins) used to assess whether the segments are 'similar'.
The reconciliation of segment assets to total assets is only required to be disclosed if the reconciliation is reported to the chief operating decision maker, similar to the required disclosure for segment liabilities.
The Group has not applied the aggregation criteria in IFRS 8.12. The Group has not presented the reconciliation of segment assets to total assets as this reconciliation is not reported to the chief operating decision maker for the purpose of her decision making.
2. Basis of preparation (continued)
New standards, interpretations and amendments adopted by the Group (continued)
IAS 16 Property, Plant and Equipment and IAS 38 Intangible Assets
The amendment is applied retrospectively and clarifies in IAS 16 and IAS 38 that the asset may be revalued by reference to observable data by either adjusting the gross carrying amount of the asset to market value or by determining the market value of the carrying value and adjusting the gross carrying amount proportionately so that the resulting carrying amount equals the market value. In addition, the accumulated depreciation or amortisation is the difference between the gross and carrying amounts of the asset. The Group did not record any revaluation adjustments during the current interim period.
IAS 24 Related Party Disclosures
The amendment is applied retrospectively and clarifies that a management entity (an entity that provides key management personnel services) is a related party subject to the related party disclosures. In addition, an entity that uses a management entity is required to disclose the expenses incurred for management services. This amendment is not relevant for the Group as it does not receive any management services from external parties.
Annual improvements 2011-2013 Cycle
IFRS 3 Business Combinations
The amendment is applied prospectively and clarifies for the scope exceptions within IFRS 3 that:
Joint arrangements, not just joint ventures, are outside the scope of IFRS 3.
This scope exception applies only to the accounting in the financial statements of the joint arrangement itself.
The Group is not a joint arrangement, and thus this amendment is not relevant for the Group and its subsidiaries.
IFRS 13 Fair Value Measurement
The amendment is applied prospectively and clarifies that the portfolio exception in IFRS 13 can be applied not only to financial assets and financial liabilities, but also to other contracts within the scope of IFRS 9 (or IAS 39, as applicable). The Group does not apply the portfolio exception in IFRS 13.
IAS 40 Investment Property
The description of ancillary services in IAS 40 differentiates between investment property and owner-occupied property (i.e., property, plant and equipment). The amendment is applied prospectively and clarifies that IFRS 3, and not the description of ancillary services in IAS 40, is used to determine if the transaction is the purchase of an asset or a business combination. In previous periods, the Group has relied on IFRS 3, not IAS 40, in determining whether an acquisition is of an asset or is a business acquisition. Thus, this amendment does not impact the accounting policy of the Group.
3. Acquisition of additional interest in associate
In March-April 2015, the Group acquired an additional 6.97% interest in one of its associate, JSCSibneftegeofizika, increasing its ownership interest to 46.44%. Consideration comprised 53,350 and was settled in full in the first half of 2015 to the unrelated party.
The total investment in the associate is still accounted for using the equity method, since control was not obtained under requirements of IFRS 10 Consolidated Financial Statements.
4. Segment information
For management purposes, the Company is organized into business units based on their products and services, and has two reportable operating segments which are Seismic segment and Data processing and interpretation (DPI) segment. Seismic segment includes conducting seismic works for the purpose of search and exploration of oil and gas fields, comprising oilfield seismic works in two or three dimensions, field seismic works in a land-sea transit zone. DPIsegment includes processing of seismic and geophysical data, structural interpretation of results of processing, dynamic processing and interpretation of results of processing.
Information on transactions of the holding and managerial companies which conduct managerial services and financial and investment activities was included into the Corporate block, that is not separate operating segment. Information on transactions of the small non-core companies (subsidiaries) was included into the Other block, that is not separate operating segment.
Transfer prices between Seismic segment, DPI segment and Corporate block are on an arm's length basis in a manner similar to transactions with third parties. Internal revenues and expenses primarily pertain to management services rendered by Corporate block to Seismic segment and DPI segment. In the periods presented below, the Group operated primarily in theRussian Federation and Kazakhstan.
The following tables present revenue and profit information regarding the Group's segments for the six months ended 30 June 2015 and 2014, respectively. Intersegment revenues and intersegment costs are presented for reference only and are not taken into account in calculating gross profit.
For six months ended 30June 2015 (unaudited)
Seismic segment
DPI segment
Others
Corporate block
Adjustments and eliminations
Total
Revenue - external
9,861,734
166,608
5,650
1,368
-
10,035,360
Revenue to other segments
21,102
59,652
8,498
151,076
(240,328)
-
Cost of sales
(8,203,270)
(198,383)
(21,957)
(994)
-
(8,424,604)
Intersegment expenses
(215,949)
(24,180)
(199)
-
240,328
-
Gross profit/(loss)
1,658,464
(31,775)
(16,307)
374
-
1,610,756
General and administrative expenses
(744,025)
(93,129)
(9,567)
(178,270)
-
(1,024,991)
Other operating income
60,644
7,287
752
3,008
-
71,691
Other operating expense
(508,472)
(8,393)
(5,334)
(24,498)
-
(546,697)
Operating profit/(loss)
466,611
(126,010)
(30,456)
(199,386)
-
110,759
4. Segment information (continued)
For six months ended 30June 2014 (unaudited)
Seismic segment
DPI segment
Others
Corporate block
Adjustments and eliminations
Total
Revenue - external
10,295,926
96,168
3,530
2,608
-
10,398,232
Revenue to other segments
63,471
66,585
13,584
491,742
(635,382)
-
Cost of sales
(8,213,099)
(164,993)
(25,859)
(880)
-
(8,404,831)
Intersegment expenses
(545,695)
(76,538)
-
(13,149)
635,382
-
Gross profit/(loss)
2,082,827
(68,825)
(22,329)
1,728
-
1,993,401
General and administrative expenses
(640,846)
(97,082)
(10,759)
(455,634)
-
(1,204,321)
Other operating income
63,418
822
1,249
3,826
-
69,315
Other operating expense
(293,278)
(4,092)
(7,742)
(2,436)
-
(307,548)
Operating profit/(loss)
1,212,121
(169,177)
(39,581)
(452,516)
-
550,847
Calculation of the adjusted EBIT and adjusted EBITDA from operating profit/(loss):
For six months ended 30June 2015 (unaudited)
Seismic segment
DPI segment
Others
Corporate block
Adjustments and eliminations
Total
Operating profit/(loss)
466,611
(126,010)
(30,456)
(199,386)
-
110,759
Restructuring and redundancy costs
113,445
-
5,377
25,061
-
143,883
Prior year taxes and related provisions
68,530
-
-
-
-
68,530
Distribution of Corporate overheads
(170,613)
(2,882)
-
173,495
-
-
Adjusted EBIT
477,973
(128,892)
(25,079)
(830)
-
323,172
Depreciation of property, plant and equipment
1,246,175
34,483
7,724
2,444
-
1,290,826
Amortization of intangible assets
10,414
45,508
6
2,331
-
58,259
Loss on disposals of property, plant and equipment and other assets
147,450
4,260
635
-
-
152,345
Adjusted EBITDA
1,882,012
(44,641)
(16,714)
3,945
-
1,824,602
4. Segment information (continued)
For six months ended 30June 2014 (unaudited)
Seismic segment
DPI segment
Others
Corporate block
Adjustments and eliminations
Total
Operating profit/(loss)
1,212,121
(169,177)
(39,581)
(452,516)
-
550,847
Restructuring and redundancy costs
96,797
-
-
47,748
-
144,545
Distribution of Corporate overheads
(397,637)
(3,714)
-
401,351
-
-
Adjusted EBIT
911,281
(172,891)
(39,581)
(3,417)
-
695,392
Depreciation of property, plant and equipment
1,281,345
30,040
12,829
4,105
-
1,328,319
Amortization of intangible assets
8,190
20,988
-
2,430
-
31,608
Loss/(gain) on disposals of property, plant and equipment and other assets
98,355
(1,852)
2,676
-
-
99,179
Adjusted EBITDA
2,299,171
(123,715)
(24,076)
3,118
-
2,154,498
Restructuring and redundancy costs incurred during first half of 2015 primarily relates to the reduction of staff and disposal of certain equipment, warehouses and bases in connection with the optimization of the Company's corporate structure and business units management structure and certain restructuring of several operating subsidiaries.
In the 2014 the Group has decided to liquidate three small non-core subsidiaries to eliminate unfeasible maintenance costs. Two subsidiaries Seysmos LLC and Khantymansiyskgeofizika LLC service are incorporated in Russian Federation and one, Ishimgeofizika LLC, is domiciled in Kazakhstan. The liquidation is expected to be finalized by the end of 2015. Loss before tax incurred by these subsidiaries and is included within Restructuring and redundancy costs of other subsidiaries for the six months ended 30 June 2015.
During the 6 month period ended 30 June 2015 and 2014, the Group earned its external revenue by its geographical areas as follows:
For six months ended
30 June 2015
30 June 2014
Russia
9,429,691
9,874,406
Kazakhstan and international projects
605,669
523,826
Total external sales
10,035,360
10,398,232
As of 30 June 2015 and 31 December 2014, the Group had its goodwill and intangible assets, property, plant and equipment and investments in associates by their geographical areas as follows:
As at 30 June 2015
As at 31December 2014
Russia
17,377,681
18,646,043
Kazakhstan and international projects
954,736
1,092,091
Total goodwill and intangible assets, property, plant and equipment and investments in associates
18,332,417
19,738,134
5. Property, plant and equipment
Property, plant and equipment as at 30 June 2015 comprised the following:
Buildings and structures
Machinery and equipment
Vehicles
Other
Construction in progress
Total
Gross book value
Balance as at 31December 2014
4,327,441
15,035,278
3,795,392
347,500
1,811
23,507,422
Additions
41,252
219,804
19,911
7,852
-
288,819
Transfers
1,811
-
-
-
(1,811)
-
Disposals
(59,664)
(605,273)
(93,699)
(26,375)
-
(785,011)
Translation difference
(13,338)
(43,103)
(10,808)
(1,230)
-
(68,479)
Balance as at 30June 2015
4,297,502
14,606,706
3,710,796
327,747
-
22,942,751
Accumulated depreciation and impairment
Balance as at 31December 2014
(1,243,620)
(5,740,795)
(1,710,464)
(165,346)
-
(8,860,225)
Depreciation
(149,335)
(1,017,236)
(214,398)
(30,375)
-
(1,411,344)
Disposals
30,082
410,719
69,885
14,376
-
525,062
Translation difference
4,747
24,277
5,517
374
-
34,915
Balance as at 30 June 2015
(1,358,126)
(6,323,035)
(1,849,460)
(180,971)
-
(9,711,592)
Net book value
Balance as at 31December 2014
3,083,821
9,294,483
2,084,928
182,154
1,811
14,647,197
Balance as at 30 June 2015
2,939,376
8,283,671
1,861,336
146,776
-
13,231,159
The above amounts include vehicles under finance lease agreements. Net book value of these vehicles comprised 8,009 as of 30 June 2015 (31 December 2014: 13,913).
Collateral
Properties with a carrying amount of 1,607,311 are subject to a registered debenture to secure bank loans (31 December 2014: 1,865,065) (Note 23).
6. Other non-current assets
Other non-current assets comprised the following:
As at 30 June 2015
As at 31December 2014
Long-term borrowings issued
274,443
274,443
Advances issued for CAPEX
122,588
47,106
Other
4,312
4,312
Total
401,343
325,861
The borrowing in the amount of 274,443 is denominated in Russian rubles issued to unrelated party, matures on 31 December 2016 and bear interest rate of 10% p.a.
7. Inventories
Inventories comprised the following:
As at 30 June 2015
As at 31December 2014
Raw materials, fuel and spare parts (net of provision for obsolete and slow-moving items)
1,570,562
2,209,506
Work-in-progress
1,298,338
241,108
Finished goods and goods for resale
76,215
99,847
Total
2,945,115
2,550,461
The amount of inventories recognized in cost of sales for six months ended 30 June 2015 and 30 June 2014 was 1,932,136 and 2,012,217 respectively. The amount of provision for inventory obsolescence was 39,705 as at 30 June 2015 (31December 2014: 35,982).
8. Accounts receivable and prepayments
Trade and other receivables comprised the following:
As at 30 June 2015
As at 31December 2014
Financial receivables
Trade receivables (net of bad debt provision)
3,237,161
2,599,043
Other receivables
388,424
358,509
Non-financial receivables
Amounts due from customers for construction works
5,388,760
6,726,845
Advances issued
445,397
516,852
Total
9,459,742
10,201,249
Trade receivables are non-interest bearing and are normally settled within 12 months from the origination date.
Receivables and advances issued are presented net of provision for impairment of 179,459 and 140,101 as at 30 June 2015 and 31 December 2014, respectively.
9. Other financial assets
Other financial assets comprised the following:
As at 30 June 2015
As at 31December 2014
Loans issued
238,143
239,848
Interest receivable on loans issued
104,436
81,325
Total
342,579
321,173
Loans issued to third parties are unsecured, denominated in RUR, mature within one year and bear interest rate between 12% and 14%.
10. Cash and cash equivalents
Cash and cash equivalents comprised the following:
As at 30 June 2015
As at 31December 2014
Cash in hand
902
1,934
Cash denominated in RUR
924,114
420,418
Cash denominated in USD
3,330
199
Cash denominated in EUR
4,481
1,798
Cash denominated in other currencies
17,842
11,494
Short-term deposits in RUR
28
770,848
Total
950,697
1,206,691
Cash represents current bank accounts that carry no interest and demand deposits maturing in less than 3 months.
11. Loans and borrowings
Long-term and short-term borrowings comprised the following:
Security
Effective interest rate
As at 30 June 2015
As at 31December 2014
Current liabilities
Short-term bank loans
secured
9.9%-16.2%
3,365,651
4,386,155
Current portion of long-term bank loans
secured
2.3%-17.8%
3,772,362
3,096,819
Total short-term loans and borrowings
7,138,013
7,482,974
Non-current liabilities
Long-term bank loans
secured
2.3%-17.8%
3,152,274
4,958,489
Bonds
10.5%
2,975,116
2,971,379
Long-term borrowings
-
9,775
Total long-term loans and borrowings
6,127,390
7,939,643
Total loans and borrowings
13,265,403
15,422,617
At the beginning of 2013 the Group entered into non-revolving credit line agreement with Sberbank denominated in euro at interest rate calculated as EURIBOR plus 2.15%. Amount of raised financing amounts to 14,900,000 euro (599,522) and matures in December 2017. The liability over this credit line in the amount of 274,838 and 274,838 is reported within Long-term bank loans and Current portion of long-term bank loans, respectively as of 30 June 2015.
All other loans and borrowings presented in the table above are at fixed rates and are denominated in Russian rubles.
In October 2013, the Group placed issue of documentary interest-bearing non-convertible bearer stock bonds (registration number 4-01-55378-E) with a total nominal value of RUB 3 billion and the term of 5 years at Moscow Exchange. Coupon payments are made on semi-annual basis of fixed rate of 10.5% p.a. for the first six coupon periods. According to the Bank of Russia Board of Directors Resolution as of 29 November 2013, bonds were included into the Lombard List.
11. Loans and borrowings (continued)
Long-term loans and borrowings are payable in the following periods:
As at 30 June 2015
As at 31December 2014
1 to 2 years
1,004,072
1,897,392
3 to 5 years
5,123,318
6,042,251
Total
6,127,390
7,939,643
Pledge obligations and description of security are disclosed in Note 23.
12. Accounts payable and promissory notes payable
Trade and other payables comprised the following:
As at 30 June 2015
As at 31December 2014
Trade payables
4,661,934
4,281,596
Payables to employees
791,435
991,684
Advances received
6,755
293,516
Interest payable
193,932
195,857
Amounts due to customers under construction contracts
10,716
151,768
Other payables
187,228
98,344
Total
5,852,000
6,012,765
Trade payables are non-interest bearing and are normally settled on 60-day terms. Other payables are non-interest bearing and have an average term of six month.
Notes issued comprised the following:
Interest rate
As at 30 June 2015
As at 31December 2014
Short-term promissory notes payable:
Notes issued to third parties for equipment (Sercel)
7%
144,043
287,656
Notes issued to third parties for equipment (UniQ)
4%
436,846
674,208
Notes issued to third parties for services and supplies
0%
114,231
-
Total
695,120
961,864
Effective interest rate for promissory notes issued by the Group to finance the purchase of Uniqequipment in 2013 was 7% while contractual interest rate comprised 4%.
Effective interest rate accrual in the amount of 18,208 and 12,404 was recognized within finance expense for the six months ended 30 June 2015 and 2014 respectively.
12. Accounts payable and promissory notes payable (continued)
In August 2014 the Group entered into supply agreement with Sercel for acquisition of new seismic equipment in the amount of 11,465,720 euro (596,089). The purchase was made on deferred payments terms through ten equal installments by September 2019 at EURIBOR6m+2.8% p.a.
As of 30 June 2015 current portion of this liability in the amount of 141,075 is recorded within trade payables and amounts of 493,765 due beyond 2015 are presented within Other long-term liabilities (31 December 2014: 156,720 and 626,878, respectively).
13. Other taxes payable and provisions
Other taxes and charges payable comprised the following:
As at 30 June 2015
As at 31December 2014
Value-added tax payable
1,896,148
1,470,947
Social taxes payable
785,129
403,613
Personal income tax payable
419,439
135,231
Property tax payable
34,073
23,186
Other taxes and charges
32,283
38,462
Total
3,167,072
2,071,439
As of 30 June 2015 provisions amounted to 118,146 (31 December 2014: 157,448) and related to probable tax exposures which were revealed based on on-site tax audits for several previous years.
14. Construction type contracts
The Group sales include revenues from seismic contracts of 9,757,009 and 10,109,912 for the six months ended 30 June 2015 and 2014, respectively.
As at 30 June 2015
As at 30 June 2014
Accumulated costs under contracts in progress from inception at thereporting date
9,039,093
9,120,174
Accumulated recognized profits less recognized losses under contracts in progress from inception at the reporting date
1,132,151
2,729,971
Balance of advances received
-
37,532
The recognition of the revenue from construction type contracts uncompleted as of 30 June 2015 is primarily based on an assumption of profit margins expected to be earned from inception to completion of each contract. If such expected profit margin reduced by one percent, the revenue from such contracts would reduce by 144,572 (30 June 2014: 120,110).
15. Revenue
Revenue comprised the following:
For the six months ended
30 June 2015
30 June 2014
Field seismic operations
9,757,009
10,109,912
Data processing and interpretation
191,097
145,768
Other revenue
87,254
142,552
Total
10,035,360
10,398,232
16. Cost of sales
Cost of sales comprised the following:
For the six months ended
30 June 2015
30 June 2014
Labor and wages, including mandatory social contribution
3,522,229
3,329,230
Materials and supplies
1,932,136
2,012,217
Depreciation of property, plant and equipment and amortization of intangible assets
1,312,868
1,314,146
Oilfield services
552,646
686,243
Operating lease payments
420,651
288,581
Transportation services
306,150
382,084
Other third parties services
301,046
296,956
Other
76,878
95,374
Total
8,424,604
8,404,831
17. General and administrative expenses
General and administrative expenses for the years ended 31 December comprised the following:
For the six months ended
30 June 2015
30 June 2014
Labor and wages, including mandatory social contribution
682,034
773,328
Third party services
137,476
180,282
Taxes, other than income tax
61,481
52,785
Operating lease
47,878
46,021
Depreciation of property, plant and equipment and amortization of intangible assets
36,217
45,781
Bank charges
17,372
32,440
Other
42,533
73,684
Total
1,024,991
1,204,321
18. Other operating expenses
Other operating expenses comprised the following:
For the six months ended
30 June 2015
30 June 2014
Loss on disposals of property, plant and equipment and other assets
231,349
99,179
Bad receivables write-offs and provisions
104,473
22,174
Penalties and fines paid
89,485
50,538
Provision for probable claims from tax authorities
25,959
7,049
VAT not recoverable
30,299
12,141
Net loss from service plants and facilities
24,913
17,255
Welfare assistance
8,949
7,827
Free-of-charge transfer of assets and charity
4,761
6,222
Administrative charges and state duties
2,242
3,452
Other expenses
24,267
81,711
Total
546,697
307,548
Penalties and fines relate to additional charges for breach in contractual obligations with counterparties in a normal course of business and additional non-income tax charges.
19. Finance income and expenses
Finance income and expenses comprised the following:
For the six months ended
30 June 2015
30 June 2014
Interest expense on loans and borrowings
971,622
782,810
Bank guarantee
31,524
14,127
Interest expense on finance lease
861
600
Bank charges on loans and loan accounts
441
4,356
Other finance expenses
-
1,332
Total finance expenses
1,004,448
803,225
Total finance income
35,041
43,646
Net finance income and expenses
969,407
759,579
20. Foreign exchange
Transactions in foreign currencies are translated to the respective functional currency, which is Russian Ruble for the subsidiary companies located in the Russian Federation and Kazakh Tenge for subsidiary companies located in the Kazakhstan at exchange rates ruling at the dates of the transactions.
Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated to the functional currency at the exchange rate at that date.
Foreign currency differences arising in translation are recognized in the statement of comprehensive income. Net foreign exchange gain for the six month period ended 30 June 2015 recognized in profit or loss amounted to 259,215 (loss for the six month period ended 30 June 2014 amounted to 10,512).
21. Earnings per share
The information on the earnings and number of shares used for determining basic and diluted earnings per share is presented below:
For the six months ended
30 June 2015
30 June 2014
Net loss attributable to ordinary equity holders of the parent
(481,966)
(294,000)
Effect of dilution
-
-
Net loss attributable to ordinary equity holders of the parent adjusted to the effect of dilution
(481,966)
(294,000)
Weighted average number of ordinary shares for basic earnings pershare
20,833,400
20,833,400
Effect of dilution
-
-
Weighted average number of ordinary shares adjusted to theeffect of dilution
20,833,400
20,833,400
Loss per share (in rubles)
(23.13)
(14.11)
No other transactions with ordinary shares or potential ordinary shares were performed between the reporting date and the date of these financial statements.
22. Financial instruments
The Group's financial instruments comprise accounts receivable and payable, loans receivable, loans payable, and cash, which arise directly from its operations. During the reporting period, the Group did not undertake trading in financial instruments.
Credit risk
Financial assets, which potentially subject Group entities to credit risk, consist principally of trade receivables (Note 8).
The Group has policies in place to ensure that sales of services are made to customers with an appropriate credit history. The carrying amount of accounts receivable, net of provision for impairment of receivables, represents the maximum amount exposed to credit risk.
The Group has no significant concentrations of credit risk. Although collection of receivables could be influenced by economic factors, management believes that there is no significant risk of loss to the Group beyond the allowance already recorded.
The aging of accounts receivable at the reporting date was:
30 June 2015
31 December 2014
Gross
Impairment
Gross
Impairment
Current
3,625,585
-
2,957,552
-
Past due and impaired
104,820
104,820
72,492
72,492
22. Financial instruments (continued)
Interest rate risk
At the beginning of 2013 the Group entered into non-revolving credit line agreement with Sberbank denominated in euro at interest rate calculated as EURIBOR plus 2.15% p.a. (Note 11). The following demonstrates the sensitivity of the Group's profit before tax to a reasonably possible change in EURIBOR rate, with all other variables held constant.
Effect on income/(loss) before tax for the six months ended
Change of EURIBOR rate, %
30 June 2015
30 June 2014
'+0.1%
(550)
(304)
'-0.1%
550
304
In August 2014 the Group entered into supply agreement with Sercel for acquisition of new seismic equipment in the amount of 11,465,720 euro (634,840 as of 30 June 2015, Note 12). The purchase was made on deferred payments terms through ten equal installments by September 2019 at EURIBOR 6m + 2.8% p.a. The following demonstrates the sensitivity of the Group's profit before tax to a reasonably possible change in EURIBOR rate, with all other variables held constant.
Effect on income/(loss) before tax for the six months ended
Changeof EURIBOR rate, %
30 June 2015
30 June 2014
'+0.1%
635
-
'-0.1%
(635)
-
The interest rates on other long-term loans of the Group are fixed and therefore do not result in susceptibility of upward interest rate risk through market value fluctuations of interest-bearing loans payable. As at 30 June 2015 the Group did not hedge its interest rate risk.
Market risk
Market risk is the risk that the value of a financial instrument will fluctuate as a result of changes in market prices. The Group manages market risk through periodic estimation of potential losses that could arise from adverse changes in market conditions.
Liquidity risk
Liquidity risk is the risk that the Group will encounter difficulty in raising funds to meet commitments associated with its financial liabilities. Liquidity requirements are monitored on a regular basis and management ensures that sufficient funds are available to meet any commitments as they arise.
22. Financial instruments (continued)
Liquidity risk (continued)
The following table shows the undiscounted contractual maturities of liabilities as at 30 June 2015:
0-6 months
7-12 months
2 to 5 years
Over 5 years
Total
Bank loans
3,179,595
3,958,418
3,152,274
-
10,290,287
Bonds
-
-
3,000,000
-
3,000,000
Interest payable
902,623
616,743
1,038,660
-
2,558,026
Notes payable
637,092
114,231
-
-
751,323
Lease liabilities
849
975
3,615
-
5,439
Trade accounts payable
4,591,396
70,538
493,765
-
5,155,699
Payables to employees
791,435
-
-
-
791,435
Other payables
187,228
-
-
-
187,228
Total
10,290,218
4,760,905
7,688,314
-
22,739,437
The following table shows the undiscounted contractual maturities of liabilities as at 31December 2014:
0-6months
7-12months
2 to 5 years
Over 5 years
Total
Bank loans
4,057,479
3,425,495
4,968,264
-
12,451,238
Bonds
-
-
3,000,000
-
3,000,000
Interest payable
966,151
750,003
2,404,398
-
4,120,552
Notes payable
395,788
645,518
-
-
1,041,306
Lease liabilities
1,634
849
4,589
-
7,072
Trade accounts payable
4,203,236
78,360
626,878
-
4,908,474
Payables to employees
991,684
-
-
-
991,684
Other payables
98,344
-
-
-
98,344
Total
10,714,316
4,900,225
11,004,129
-
26,618,670
Foreign currency risk
The Group is not engaged in hedging activity to mitigate its foreign currency risk. The Group limits foreign currency risk by monitoring changes in exchange rates in the currencies in which its loans and borrowings are denominated.
The Group has the following USD-denominated financial assets and liabilities:
As at 30 June 2015
As at 31December 2014
(in thousands of US dollars)
Assets
Accounts receivable
83
37
Cash and cash equivalents
60
4,712
Liabilities
Promissory notes
(9,026)
(13,426)
Accounts payable
(6,376)
(6,799)
22. Financial instruments (continued)
Foreign currency risk (continued)
The Group has the following EUR-denominated financial assets and liabilities:
As at 30 June 2015
As at 31December 2014
(in thousands of EUR)
Accounts receivable
11
2,006
Cash and cash equivalents
73
26
Loans and borrowings
(8,939)
(8,941)
Accounts payable
(10,408)
(11,602)
Sensitivity analysis
The following demonstrates the sensitivity to a reasonably possible change in the US dollar exchange rate, with all other variables held constant, of the Group's profit before tax (due to changes in the fair value of monetary assets and liabilities).
As at 30 June 2015, it is estimated that a 28.54% strengthening of RUR against USD, with all other variables held constant, would increase the Group's profit for the six months ended 30June 2015 by 241,803 (30 June 2014: 10.21% increase by 88,744). This analysis has been determined assuming that the change in foreign exchange rates had occurred at the reporting date and had been applied to the foreign currency balances to which the Group has significant exposure as stated above, and that all other variables, in particular interest rates, remain constant.
Respective 28.54% and 20.00% weakening of the RUR against USD at 30 June 2015 and 2014 would have had the opposite effect on the amounts shown above in the amount of 241,803 and 173,838 respectively, on the basis that all other variables remain constant.
Change of RUR to USD exchange rate, %
Effect on income/ (loss) before tax
6 months 2015
'+28.54%
(241,803)
-28.54%
241,803
6 months 2014
'+20.00%
(173,838)
-10.21%
88,744
The following demonstrates the sensitivity to a reasonably possible change in the EUR exchange rate, with all other variables held constant, of the Group's profit before tax (due to changes in the fair value of monetary assets and liabilities).
As at 30 June 2015, it is estimated that a 29.58% strengthening of RUR against EUR, with all other variables held constant, would increase the Group's profit for the six months ended 30June 2015 by 350,544 (30 June 2014: 8.63% increase by 41,315). This analysis has been determined assuming that the change in foreign exchange rates had occurred at the reporting date and had been applied to the foreign currency balances to which the Group has significant exposure as stated above, and that all other variables, in particular interest rates, remain constant.
22. Financial instruments (continued)
Sensitivity analysis (continued)
Respective 29.58% and 20.00% weakening of the RUR against EUR at 30 June 2015 and 2014 would have had the opposite effect on the amounts shown above in the amount of 350,544 and 95,748 respectively, on the basis that all other variables remain constant.
Change of RUR to EUR exchange rate, %
Effect on income/ (loss) before tax
6 months 2015
'+29.58%
(350,544)
-29.58%
350,544
6 months 2014
'+20.00%
(95,748)
-8.63%
41,315
Fair value of financial instruments
The management believes that the fair value of the Group's financial assets and liabilities approximates their carrying amounts except for bonds. The difference between fair value and carrying value of Group's rouble-denominated bonds issued at 10.5% p.a. arises due to higher cost of capital, increased inflation and uncertainty regarding economic growth discussed in Note23. Carrying value of bonds as of 30 June 2015 comprises 2,975,116 while their fair value comprises 2,641,241.
Capital management
The primary objective of the Group's capital management is to ensure that it maintains a strong credit rating and healthy capital ratios in order to maintain an optimal capital structure to reduce cost of capital and to support its business and maximize shareholder value.
The Group manages its capital structure and makes adjustments to it, in light of changes in economic conditions. To maintain or adjust the capital structure, the Group may adjust the dividend payment to shareholders, return capital to shareholders or issue new shares.
The Group's current policy is not to pay any dividends.
The Group monitors capital using a range of ratios, including gearing ratio, which is net debt divided by total capital plus net debt. The Group includes the following within net debt: loans payable, finance lease obligations, less cash and cash equivalents and other financial instruments easily convertible to cash.
As at 30 June 2015
As at 31December 2014
Loans and borrowings payable
13,265,403
15,422,617
Notes issued for CAPEX
580,889
961,864
Finance lease obligations
5,439
7,072
Less: cash and cash equivalents
(950,697)
(1,206,691)
Net debt
12,901,034
15,184,862
Equity
8,154,202
8,814,759
Capital and net debt
21,055,236
23,999,621
Gearing ratio
0.61
0.63
23. Risks, commitments and contingencies
Operating environment of the Group
Russia continues economic reforms and the development of its legal, tax and regulatory frameworks as required by a market economy. The future stability of the Russian economy is largely dependent upon these reforms and developments and the effectiveness of the economic, financial and monetary measures taken by the government. Management believes it is taking the appropriate measures to support the sustainability of the Company's business in the current circumstances.
In 2014 and 2015 Russian economy was negatively impacted by a significant drop in crude oil prices and a significant devaluation of the Russian Rouble, as well as sanctions imposed on Russia by several countries. In December 2014, the Rouble interest rates have increased significantly after the Central Bank of Russia raised its key rate to 17 percent. The combination of the above resulted in reduced access to capital, a higher cost of capital, increased inflation and uncertainty regarding economic growth, which could negatively affect the Group's future financial position, results of operations and business prospects. As of the date of the issuance of these consolidated financial statements the key rate of the Central Bank of Russia reduced to 11percent.
The combination of the above resulted in a higher cost of capital, increased inflation and uncertainty regarding further economic growth, which could negatively affect the Company's future financial position, results of operations and business prospects.
Management believes it is taking the appropriate measures to support the sustainability of the Company's business in the current circumstances.
Liquidity
The Russian economy is vulnerable to market downturns and economic slowdowns elsewhere in the world. The global financial crisis has resulted in capital markets instability, significant deterioration of liquidity in the banking sector, and tighter credit conditions within Russia. While the Russian Government has introduced a range of stabilization measures aimed at providing liquidity and supporting debt refinancing for Russian banks and companies, there continues to be uncertainty regarding the access to capital and cost of capital for the Group and its counterparties, which could affect the Group's financial position, results of operations and business prospects (please also refer to Note 25).
While management believes it is taking appropriate measures to support the sustainability of the Group's business in the current circumstances, unexpected further deterioration in the areas described above could negatively affect the Group's results and financial position in a manner not currently determinable.
Taxation
Legislation and regulations regarding taxation in Russia continue to evolve. The various legislation and regulations are not always clearly written and their interpretation is subject to the opinions of the local, regional and national tax authorities. Instances of inconsistent opinions are not unusual.
23. Risks, commitments and contingencies (continued)
Taxation (continued)
The current regime of penalties and interest related to reported and discovered violations of Russia's laws, decrees and related regulations is severe. Interest and penalties are levied when an understatement of a tax liability is discovered. As a result, the amounts of penalties and interest can be significant in relation to the amounts of unreported taxes.
In Russia tax returns remain open and subject to inspection for a period of up to three years. The fact that a year has been reviewed does not close that year, or any tax return applicable to that year, from further review during the three-year period.
Russian transfer pricing legislation, which came into force on 1 January 2012, allows the Russian tax authority to apply transfer pricing adjustments and impose additional profits tax liabilities in respect of all "controlled" transactions if the transaction price differs from the market price. The list of "controlled" transactions includes transactions performed with related parties and foreign trade transactions. The adopted Russian transfer pricing rules have considerably increased the compliance burden for the taxpayer compared to the transfer pricing rules which were in effect before 2012 due to, inter alia, shifting the burden of proof from the Russian tax authorities to the taxpayers. Pursuant to the new rules, the taxpayer shall justify the prices applied for such transactions. These rules are applicable not only to the transactions taking place in 2012 but also to the prior transactions with related parties if related income and expenses were recognized in 2012. The new provisions apply for both foreign trade and domestic transactions. For domestic transactions the transfer pricing rules apply only if the amount of all transaction with related party exceeds RUR 3 billion in 2012, RUR 2 billion in 2013 and RUR 1 billion in 2014 and further. In cases where the domestic transaction resulted in an accrual of additional tax liabilities for one party, another party could correspondingly adjust its profit tax liabilities. Special transfer pricing rules apply to transactions with securities and derivatives.
On 24 November 2014 Federal Law No. 376-FZ of the Russian Federation, effective 1 January 2015, concerning the introduction of amendments to part one and two of the Tax Code of the Russian Federation (regarding the taxation of profit of Controlled Foreign Companies and tax residence of Foreign Companies in Russia) was enacted. The Company management does not expect the above amendments would have a material impact on the Company's financial position or results of operations.
The Group determined its tax liabilities arising from these "controlled" transactions using actual transaction prices under such loan agreements. As for other controlled transactions, control procedures to ensure consistency between the prices used in the controlled transaction prices and the level of market prices for the purposes of taxation have been developed and approved. The activities performed focus on minimizing tax risks.
Overall, management believes that the Group has paid or accrued all taxes that are applicable. For taxes where uncertainty exists, the Company has accrued tax liabilities based on management's best estimate of the probable outflow of resources embodying economic benefits, which will be required to settle these liabilities. Possible liabilities which were identified by management at the reporting date as those that can be subject to different interpretations of the tax laws and regulations and are not accrued in the consolidated financial statements as of the reporting date could be up to 1,506,562 (1,641,700 as of 31 December 2014).
23. Risks, commitments and contingencies (continued)
Compliance with covenants
The Group is obliged to comply with a number of restrictive financial and other covenants contained in its loan agreements. Such covenants include maintaining certain financial ratios. Asof 30 June 2015 and as of 31 December 2014, the Group was in compliance with all restrictive financial and other covenants contained in its loan agreements.
Insurance
The insurance industry in the Russian Federation is in a developing state and many forms of insurance protection common in other parts of the world are not yet generally available. The Group does not have full coverage for its plant facilities, business interruption, or third party liability in respect of property or environmental damage arising from accidents on Group property or relating to Group operations. Until the Group obtains adequate insurance coverage, there is a risk that the loss or destruction of certain assets could have a material adverse effect on the Group's operations and financial position.
Litigation
Group companies remain as a defendant in legal actions filed through 2013-2015 against them by a number of third parties. Management believes that there are no current claims outstanding, which could have a material effect on the consolidated results of operations or consolidated financial position of the Group and which have not been accrued or disclosed in these consolidated financial statements.
Pledge obligations
Pledged property, plant and equipment
As at 30 June 2015, the Group entered into a number of loan agreements and revolving credit line agreements, which were secured by the Group's property, plant and equipment. The carrying value of the property, plant and equipment pledged at the reporting date amounts to 1,607,311 (31 December 2014: 1,865,065).
Pledged rights to claim cash
As at 30 June 2015, the Group entered into a number of loan agreements and revolving credit line agreements, which were secured by the pledge of property rights representing rights to claim cash under the customer agreements for conducting seismic works. The pledged rights to claim cash at the reporting date amounted to 3,497,472 (31 December 2014: 3,836,179).
24. Related party transactions
The following table provides the total amount of transactions that have been entered into with related parties during the six month periods ended 30 June 2015 and 30 June 2014, as well as balances with related parties as of 30 June 2015 and 31 December 2014:
Revenue
Associated company for the six months ended
30 June 2015
30 June 2014
Revenue
Field seismic operations
-
31,789
Other services
69
135
Total
69
31,924
Outstanding balances
Associated company
30 June 2015
31 December 2014
Accounts receivable
9,785
7,800
Advances issued
600
600
Accounts payable
(3,194)
(3,194)
Advances received
(1,611)
(1,611)
Total
5,580
3,595
All outstanding balances with related parties are to be settled in cash or through services rendered in case of advances within six months after the reporting date. None of the balances is secured.
Pricing policy
Related party transactions are based on market prices and are effected on an arm's length basis in a manner similar to transactions with third parties.
Key management personnel
The Company enters into transactions with its directors and other key management personnel in the normal course of business. Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the entity, directly or indirectly and includes Chief Executive Officer, Executive Directors, members of the Board of Directors, Chief Financial Officer and Vice-Presidents of the Company.
For the six month period ended 30 June 2015, the remuneration paid to key management personnel amounted to 36,180 (six month period ended 30 June 2014: 52,596).
25. Events subsequent to the reporting date
In August 2015 PJSC Bank "Otkritie Financial Corporation" provided a new credit line facility to PJSC "GEOTECH Seismic Services" in the amount of 6.5 billion rubles maturing 29 July 2022 at 15% p.a. Following the receipt of funds from Bank "Otkritie FC" the Group's total debt amount will remain unchanged as credit line will be used to refinance existing obligations.
This information is provided by RNS
The company news service from the London Stock Exchange
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IR SDMFISFISESU
