REG - IG Seismic Services - FY2015 Financial Report <Origin Href="QuoteRef">IGSSq.L</Origin> - Part 4
28/04/2016 15:30
- Part 4: For the preceding part double click ID:nRSb7126Wc
received - 538,324
The recognition of the revenue from construction type contracts uncompleted as
of 31 December 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 144,693 (31 December 2014: 194,427).
25. Revenue
Revenue for the years ended 31 December comprised the following:
2015 2014
Field seismic operations 18,107,562 18,987,943
Data processing and interpretation 581,474 442,986
Other revenue 115,906 158,318
Total 18,804,942 19,589,247
26. Cost of sales
Cost of sales for the years ended 31 December comprised the following:
2015 2014
Labor and wages, including mandatory social contribution 6,159,254 6,203,070
Materials and supplies 2,900,992 3,190,589
Depreciation of property, plant and equipment and amortization of intangible assets 2,818,273 2,498,584
Oilfield services 1,469,544 1,621,323
Operating lease payments 906,230 487,363
Transportation services 784,577 845,613
Other third parties services 723,049 708,952
Other 208,187 214,070
Total 15,970,106 15,769,564
27. General and administrative expenses
General and administrative expenses for the years ended 31 December comprised
the following:
2015 2014
Labor and wages, including mandatory social contribution 1,257,124 1,409,485
Third party services 237,704 278,342
Operating lease 93,065 95,361
Taxes, other than income tax 79,118 75,527
Depreciation of property, plant and equipment and amortization of intangible assets 50,502 87,642
Auditors' audit fees 36,608 33,120
Bank charges 25,427 25,733
Other 87,410 103,629
Total 1,866,958 2,108,839
28. Other operating income and expenses
Other operating income for the years ended 31 December comprised the
following:
2015 2014
Write-off of accounts payable 88,034 74,927
Penalties and fines received 32,260 6,364
Release of provision for probable claims from tax authorities 31,356 7,092
Other income 23,082 53,385
Total 174,732 141,768
28. Other operating income and expenses (continued)
Other operating expenses for the years ended 31 December comprised the
following:
2015 2014
Loss on disposals of property, plant and equipment and other assets 439,251 232,110
Penalties and fines paid 277,817 202,496
Bad receivables write-offs and provisions 198,039 31,231
Provision for probable claims from tax authorities 96,902 107,108
Losses from cancellation of contracts 71,808 -
VAT not recoverable 58,477 73,009
Net loss from service plants and facilities 40,892 32,811
Welfare assistance 18,769 17,301
Free-of-charge transfer of assets and charity 14,505 11,073
Other expenses 104,205 80,260
Total 1,320,665 787,399
Penalties and fines relate to additional charges for breach of contractual
obligations with counterparties in a normal course of business and additional
non-income tax charges.
Losses from cancellation of contracts constitutes write-off of unbilled
receivables under seismic contract ceased upon an initiative of customer due
to dramatic decline of oil prices and inability to proceed further with
financing of the seismic works contracted.
29. Finance income and expenses
Finance income and expenses for the years ended 31 December comprised the
following:
2015 2014
Interest income 57,608 31,017
Discounting of promissory notes to fair value 1,787 45,679
Total finance income 59,395 76,696
Interest expense on loans and borrowings 2,071,738 1,707,963
Bank guarantee 34,350 44,546
Bank charges on loans and loan accounts 17,168 21,313
Interest expense on finance lease 1,570 1,064
Other finance expenses 142,366 69,740
Total finance expenses 2,267,192 1,844,626
Net finance expenses 2,207,797 1,767,930
During 2015 the Group has written off receivables under borrowings issued to
certain companies which constituted drilling block of the Group prior to 2011.
Upon legal proceedings held in respect of these borrowers it has become
apparent that debt will not be redeemed. The amount of write-off includes
principal amount of 79,372 and interest accrued in the amount of 50,540 and is
recorded within Other finance expenses.
30. 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 year ended 31
December 2015 recognized in profit or loss comprised 145,138 (year ended 31
December 2014: loss in the amount of 1,514,405).
31. Earnings per share
The information on the earnings and number of shares used for determining
basic and dilutive earnings per share is presented below:
2015 2014
Net loss attributable to ordinary equity holders of the parent (1,971,484) (2,272,450)
Effect of dilution - -
Net loss attributable to ordinary equity holders of the parent adjusted to the effect of dilution (1,971,484) (2,272,450)
2015 2014
Weighted average number of ordinary shares for basic earnings per share 20,833,400 20,833,400
Effect of dilution - -
Weighted average number of ordinary shares adjusted to the effect of dilution 20,833,400 20,833,400
2015 2014
Loss per share (in rubles) (94.63) (109.08)
No other transactions with ordinary shares or potential ordinary shares were
performed between the reporting date and the date of these financial
statements.
32. 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 year, 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 17).
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.
32. Financial instruments (continued)
Credit risk (continued)
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:
31 December 2015 31 December 2014
Gross Impairment Gross Impairment
Current 2,861,814 - 2,957,552 -
Past due 74,029 74,029 72,492 72,492
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% (Note 21). The liability under this credit line was repaid
in full as of 31 December 2015.
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.
Change of EURIBOR rate, % Effect on income/(loss) before tax
2015 2014
'+0.1% - (611)
'-0.1% - 611
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 (731,029
as of 31 December 2015, Note 22). 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.
Change of EURIBOR rate, % Effect on income/(loss) before tax
2015 2014
'+0.1% (731) (784)
'-0.1% 731 784
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 31 December
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.
32. Financial instruments (continued)
Competitive environment
The Russian seismic services market is very fragmented and characterized by
intense competition. Most contracts are obtained through a competitive bidding
process, which is standard for the market where the Group operates. The most
important factors in awarding contracts include reputation, service quality,
technological capacity, track record (history of performance), experience of
personnel, customer relations, long-standing relationships and price.
Different large and smaller local companies compete with the Group in the land
and transition zone seismic market and large international players compete
with the Group in the data processing and interpretation market. In addition,
the Group competes with government-sponsored companies and affiliates.
Competitive factors in the market where the Group operates include timing,
price, quality and technical proficiency and product and service delivery.
Ability to enhance existing products and services and technical proficiency,
while controlling costs, is of primary importance to the Group's ability to
compete effectively.
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.
The following table shows the undiscounted contractual maturities of
liabilities as at 31 December 2015:
0-6 months 7-12 months 2 to 5 years Over 5 years Total
Bank loans 2,211,969 6,164,900 4,175,362 2,000,000 14,552,231
Bonds - - 3,000,000 - 3,000,000
Interest payable 1,435,336 1,023,294 1,713,067 331,068 4,502,765
Lease liabilities 975 1,118 2,496 - 4,589
Trade accounts payable 3,319,898 91,379 548,272 - 3,959,549
Payables to employees 876,629 - - - 876,629
Other payables 220,474 - - - 220,474
Total 8,065,281 7,280,691 9,439,197 2,331,068 27,116,237
32. Financial instruments (continued)
Liquidity risk (continued)
The following table shows the undiscounted contractual maturities of
liabilities as at 31 December 2014:
0-6 months 7-12 months 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:
(in thousands of US dollars)
As at 31 December
2015 2014
Accounts receivable 716 37
Cash and cash equivalents 19 4,712
Promissory notes - (13,426)
Accounts payable (8,648) (6,799)
The Group has the following EUR-denominated financial assets and liabilities:
(in thousands of EUR)
As at 31 December
2015 2014
Accounts receivable 6 2,006
Cash and cash equivalents 1 26
Loans and borrowings - (8,941)
Accounts payable (9,272) (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).
32. Financial instruments (continued)
Sensitivity analysis (continued)
As at 31 December 2015, it is estimated that a 13.00% strengthening of RUR
against USD, with all other variables held constant, would increase the
Group's profit for the year ended 31 December 2015 by 74,946 (31 December
2014: 28.54% increase by 248,490). 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 40.00% and 28.54% weakening of the RUR against USD at 31 December
2015 and 2014 would have had the opposite effect on the amounts shown above in
the amount of 230,604 and 248,490 respectively, on the basis that all other
variables remain constant.
Change of Effect on income/(loss)
RUR to USD
2015 +40.00% (230,604)
-13.00% 74,946
2014 +28.54% (248,490)
-28.54% 248,490
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 31 December 2015, it is estimated that a 15.00% strengthening of RUR
against EUR, with all other variables held constant, would increase the
Group's profit for the year ended 31 December 2015 by 110,754 (31 December
2014: 29.58% increase by 374,214). 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 43.00% and 29.58% weakening of the RUR against EUR at 31 December
2015 and 2014 would have had the opposite effect on the amounts shown above in
the amount of 317,495 and 374,214 respectively, on the basis that all other
variables remain constant.
Change of Effect on income/(loss)
RUR to EUR
2015 +43.00% (317,495)
-15.00% 110,754
2014 +29.58% (374,214)
-29.58% 374,214
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 ruble-denominated
bonds issued at 10.5% p.a arises due to higher cost of capital, increased
inflation and uncertainty regarding economic growth discussed in Note 33.
Carrying value of bonds as of 31 December 2015 amounted to 2,978,916 while
their fair value amounted to 2,649,986.
32. Financial instruments (continued)
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 31 December
2015 2014
Loans and borrowings payable 17,531,147 15,422,617
Notes issued - 961,864
Finance lease obligations 4,589 7,072
Less: cash and cash equivalents (317,701) (1,206,691)
Net debt 17,218,035 15,184,862
Equity 5,816,157 8,814,759
Capital and net debt 23,034,192 23,999,621
Gearing ratio 0.75 0.63
33. Risks, commitments and contingencies
Operating environment of the Group
Tax, currency and customs legislation of the Russian Federation is subject to
varying interpretations. The reduced expectations on the county's economic
development, stock market volatility and other risks could have a negative
effect on the Russian financial and corporate sectors.
In 2015, the Russian economy continued to be negatively impacted by a
significant drop in crude oil prices and the significant devaluation of the
Russian Ruble ("RUR"), as well as sanctions imposed on Russia by several
countries including the USA and the EU. The RUR interest rates remained high
after the Central Bank of Russia raised its key rate in December 2014, with
subsequent gradual decreases in 2015. 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. Management believes it is taking appropriate measures to support
the sustainability of the Group's business in the current circumstances.
33. Risks, commitments and contingencies (continued)
Operating environment of the Group (continued)
In March-September 2014, the United States, European Union and other countries
have introduced a series of unilateral restrictive political and economic
actions against the Russian Federation and a number of Russian and Ukrainian
individuals and organizations. These official actions, particularly in the
case of a further escalation, may result in reduction of economic cooperation
between business of before mentioned countries and Russian companies on the
international capital markets, as well as other economic consequences. The
impact of these events on the future results of operations and financial
position of the Group at this time is difficult to determine.
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.
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.
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.
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 1,743,288 (1,641,700 as of 31 December
2014).
33. 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.
As of 31 December 2015 the Group was not in compliance with covenants under
loan agreement with PJSC Rosbank. The liability over this loan agreement in
the amount of 961,968 is recorded within short-term bank loans as of 31
December 2015.
During 2015 and 2016 year there were no calls from the bank for an early
settlement. The Group has repaid 61,968 in March 2016 and plan to settle the
outstanding amount of 900,000 in April and May 2016 in accordance with the
repayment schedule.
As of 31 December 2015 and as of 31 December 2014, the Group was in compliance
with all other 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 2013-2016
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 31 December 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 3,578,544 (31 December 2014: 1,865,065).
As of 31 December 2015 collateral for certain amount of property, plant and
equipment was not yet completed and property with carrying amount of 2,287,421
is subject to a registered debenture to be provided in 2016 to secure existing
bank loans.
33. Risks, commitments and contingencies (continued)
Pledge obligations (continued)
Pledged rights to claim cash
As at 31 December 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 13,586,606 (31 December 2014: 3,836,179).
Pledged shares
During 2015 the Group has entered into loan agreements and revolving credit
line agreements with PJSC Bank "Otkritie Financial Corporation". Shares of all
the subsidiaries of the Group are pledged under these agreements.
34. Related party transactions
The following table provides the total amount of transactions that have been
entered into with related parties during 2015 and 2014, as well as balances
with related parties as of 31 December 2015 and 31 December 2014:
Revenue
For the years ended 31 December
2015 2014
Field seismic operations - 31,789
Other services 69 135
Total 69 31,924
Outstanding balances
As at 31 December
2015 2014
Accounts receivable 26,911 7,800
Advances issued 4,980 600
Accounts payable (1,229) (3,194)
Advances received - (1,611)
Loans issued 460,830 15,584
Interest receivable on borrowings issued 6,276 1,830
Interest payable on bank loans (287,638) -
Total 210,130 21,009
As a part of refinancing transaction held during 2015 certain portion of bank
debt of the Group was assigned to Remwill Trade Limited which upon the
transaction discussed in Note 1 became a related party to the Group effective
as of 31 December 2015.
The amount of liability to Remwill Trade Limited as of 31 December 2015
comprised 287,638 and constituted interest payable under loans assigned. This
indebtedness was repaid in full in March 2016.
34. Related party transactions (continued)
In December 2015 the Group and its related party, Remwill Trade Limited
entered into loan agreement bearing interest at 13.75% p.a. and maturing on
March 2016. Later in December this liability was assigned to another related
party of the Group, JSC Legal Actions. As of 31 December 2015 receivables
under this loan included principal amount of 444,684 and interest receivable
of 2,513.
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. In 2015, remuneration paid to key management personnel amounted to
73,811 (2014: 81,081).
35. Events subsequent to the reporting date
In April 2016 IGSS send a notice to the London Stock Exchange, to the
Financial Conduct Authority and to other UK regulators on termination of the
delisting procedures of its Global Depositary Receipts. IGSS intends to launch
the delisting process once all the preparatory actions are completed. Group
intends to terminate GDR program and cancel the listing and trading of GDRs on
the main market of LSE as it wishes to be listed in Russia.
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