NLMK Group Annual Report 2015

Plain-text annual report

ABOUT NLMK SUSTAINABILITY CORPORATE GOVERNANCE Report 2015 EFFICIENCY LEADERSHIP CONTENT 2015 HIGHLIGHTS ......................................................................................................................................................................................................................................................................................................1 CEO STATEMENT .........................................................................................................................................................................................................................................................................................................3 NLMK PROFILE ..............................................................................................................................................................................................................................................................................................................4 WHERE WE OPERATE ............................................................................................................................................................................................................................................................................................6 PRODUCTS AND BRANDS ...............................................................................................................................................................................................................................................................................8 BUSINESS MODEL ................................................................................................................................................................................................................................................................................................10 INNOVATION ..................................................................................................................................................................................................................................................................................................................12 STRATEGY .......................................................................................................................................................................................................................................................................................................................14 STRATEGY IN ACTION .......................................................................................................................................................................................................................................................................................16 MARKET REVIEW ....................................................................................................................................................................................................................................................................................................18 FINANCIAL AND OPERATING REVIEW 2015 .......................................................................................................................................................................................................................20 5-YEAR HIGHLIGHTS .......................................................................................................................................................................................................................................................................................24 NLMK’S SUSTAINABILITY REVIEW .................................................................................................................................................................................................................................................25 CEO STATEMENT ....................................................................................................................................................................................................................................................................................................27 STAKEHOLDER ENGAGEMENT ............................................................................................................................................................................................................................................................28 OUR EMPLOYEES .................................................................................................................................................................................................................................................................................................30 OCCUPATIONAL HEALTH AND SAFETY ....................................................................................................................................................................................................................................36 ENVIRONMENTAL SAFETY .......................................................................................................................................................................................................................................................................38 ENERGY EFFICIENCY .......................................................................................................................................................................................................................................................................................40 COMMUNITY DEVELOPMENT ...............................................................................................................................................................................................................................................................42 COMMUNICATIONS ............................................................................................................................................................................................................................................................................................46 CORPORATE GOVERNANCE REVIEW ..........................................................................................................................................................................................................................................49 MANAGEMENT COMPOSITION ..............................................................................................................................................................................................................................................................51 CORPORATE GOVERNANCE ...................................................................................................................................................................................................................................................................58 OPERATIONAL CONTROL AND RISK MANAGEMENT................................................................................................................................................................................................72 INFORMATION FOR SHAREHOLDERS .........................................................................................................................................................................................................................................78 FINANCIAL STATEMENTS AND APPENDIX ABOUT US/ REPORT 2015 2015 HIGHLIGHTS Record high sales: 15.9 m t (+5% y-o-y) Largest steel manufacturer in Russia with a share of 22% Revenue: $8 bn (–23% y-o-y) EBITDA*: $1.9 bn (–18% y-o-y) EBITDA margin: 24% (+1 p.p. y-o-y) Net cash ﬂ ow: $1 bn Net Debt: $1.1 bn (–32% y-o-y) Net debt/EBITDA: 0.6x (–0.1 y-o-y) NLMK GROUP SALES 15.9 m tonnes 15.2 14.8 15.1 12.8 2011 2012 2013 2014 2015 REVENUE BY REGION 10% 39% Russia Europe $8.0 bn 20% North America Middle East Asia Other markets REVENUE BY PRODUCT 8% 37% HVA products Standard products Semis to associated companies Semis Other operations $8.0 bn 27% 5% 9% 17% 19% 9% * EBITDA is calculated as operating proﬁ t adjusted to loss from impairment of investments, ﬁ xed assets and intangible assets (including goodwill) and depreciation and amortization. Utilization of production capacities: 93% Our ﬂ exible business model, diversiﬁ ed product mix and sales geography enable us to maintain high capacity utilization rates EBITDA margin: 24% (+1 p.p. y-o-y) Structural increase of business eﬃ ciency, low-cost steel production and vertical integration allowed NLMK to achieve growth of EBITDA margin despite a more challenging situation in the industry Net Debt/EBITDA: 0.6x (–0.1 p. y-o-y) The ratio is below the target envisioned in Strategy 2017. NLMK Group is consistently ﬁ nancially stable due to low debt leverage. The Company’s ﬁ nancial security is based on high liquidity and its ability to operate without raising considerable banking loans $197 million Operational efﬁ ciency gains outstripped target by 100% Total savings between 2014 and 2015 amounted to $364 million. The number of initiatives increased from 29 in 2013 to 1,817 in 2015 ABOUT US/ REPORT 2015 Sustainability performance LABOUR PRODUCTIVITY (TONNES OF STEEL/PERSON) LTIFR (NLMK’S RUSSIAN ASSETS)* SPECIFIC AIR EMISSIONS (KG/TONNE OF STEEL) 463 0.43 406 420 437 329 0.87 0.87 0.86 20.9 27.9 22.6 21.9 21.1 0.55 0,60 ВАТ** 18.9 ВАТ 2011 2012 2013 2014 2015 2011 2012 2013 2014 2015 2011 2012 2013 2014 2015 SPECIFIC ENERGY INTENSITY (LIPETSK SITE, GCAL/T) SHARE OF EMPLOYEES WHO RECEIVED PROFESSIONAL TRAINING (%) ENVIRONMENTAL INVESTMENTS (CUMULATIVE $ M) 5.66 6.10 5.74 5.67 5.72 84 5.10 ВАТ 69 77 68 71 612 505 364 230 153 2011 2012 2013 2014 2015 2011 2012 2013 2014 2015 2011 2012 2013 2014 2015 * Lost-time injury frequency rates. For more information refer to ‘Social Responsibility’ of NLMK report. ** Hereinaﬅ er BAT (best available technologies) refers to the level of best available technologies for integrated steelmakers. KEY EVENTS OF 2015 CAPITAL MARKETS DAY 2015 CHANGES IN THE DIVIDEND POLICY NLMK top managers provided the Strategy 2017 status update along with the changes in the Capex budget. ENHANCEMENT OF INDEPENDENT DIRECTORS’ ROLES IN THE COMPANY’S BODIES The number of independent directors on the NLMK’s Board increased in 2015. Independent Board members now chair the Audit Committee and the HR and Remuneration Committee. The Company updated its dividend policy in 2015 to ensure higher visibility of dividend payments. From 2015 dividends are paid on a quarterly basis subject to meeting the targets on net proﬁ t and free cash ﬂ ow. ACTIVE STAGE IN CONSTRUCTION OF THE PELLETIZING PLANT In 2015, construction of the pelletizing plant at Stoilensky entered an active stage. This is a key investment project in Strategy 2017. The Company expects to launch the plant in the second half of 2016. The capacity of the pelletizing plant is 6 million tonnes of pellets per year; at the current iron ore prices the annual impact will be $180 million. 1 2015 Highlights 3 Ceo statement 4 NLMK proﬁ le 6 Where we operate 8 Products and brands 10 Business model 3 CEO STATEMENT have strengthened the company’s ﬁ nancial stability with net debt/EBITDA of 0.6x at the end of 2015, which is four times below the average for metals companies. DIVIDENDS NLMK’s ﬁ nancial ﬂ exibility was bolstered by the structural increase of business proﬁ tability and the completion of the capital-intensive investment phase of the company’s development. In the last year we updated the Company’s dividend policy in order to provide maximum transparency to shareholders and stakeholders on our corporate strategy for distribution and allocation of NLMK’s net proﬁ t. We began paying dividends on a quarterly basis and changed the basis for the calculation of dividends to include free cash ﬂ ow on top of net proﬁ t. Based on the results of the ﬁ rst three quarters of 2015 and in accordance with the updated dividend policy we have already paid over $400 million to our shareholders, which is equivalent to a dividend yield of 5.5%. CONCLUSION I would like to extend my gratitude to our employees for their commitment; to the management for their astute direction during this diﬃ cult time; and to our shareholders for their belief in the sustainability of our business model. FORECAST The year ahead will be extremely challenging for the company and the metals industry as a whole. The gap between demand and supply in the steel market will remain, and the equitable conditions of international trade will grow more complicated still. These factors are exacerbated by the absence of fundamental drivers of the sustainable increase in the price of raw materials and ﬁ nished products. The key success factors in this challenging environment will include the ﬂ exibility and versatility of the business model, operational eﬃ ciency and ﬁ nancial stability. These facets are the competitive advantages that NLMK Group enjoys, which enables us to look to the future with conﬁ dence. Oleg Bagrin President of NLMK Group, Chairman of the Management Board Dear Colleagues, In 2015 NLMK demonstrated strong performance driven by an ongoing increase in operational efﬁ ciency, and in spite of a signiﬁ cant slow-down of the market for steel. SITUATION IN THE INDUSTRY The market is oversupplied as a result of unprecedented growth in production which has been further aggravated by the global economic downturn. Excess global steelmaking capacity was ten times the total volume of steel produced in Russia. China made almost as much steel in 2015 as all other countries combined, and accounted for the lion’s share of this increased production capacity. More than 100 million metric tons a year of cheap Chinese steel exports led to a collapse in prices, sending them crashing to a twelve-year low. The international trading environment became more complicated as a result. The US and the EU have begun to impose protective import tariﬀ s in a bid to support their steelmakers. Around 20 investigations have been launched into steel companies from various countries, including Russia, since the beginning of 2015. The US re-introduced protective tariﬀ s on hot-rolled steel from Russia. Europe launched an investigation into cold-rolled steel imports and introduced minimum prices for electrical steel, which has impacted upon NLMK Group products. Russian companies were forced to address challenges in international markets, while domestic demand showed a double-digit decline. For example, demand for steel products used in construction fell by 14% in the ﬁ rst nine months of 2015. The slowdown in Russian demand in 2015 was worse than in any other country, and will continue in 2016 in almost all sectors of the Russian economy. NLMK PERFORMANCE Despite this extremely challenging environment, NLMK Group has managed to not only complete all the projects envisioned by Strategy 2017 whilst maintaining almost 100% utilization; but also to increase sales by 5% to a record 15.9 million tonnes and achieve greater proﬁ tability at the same time. Our proﬁ t margin in 2015 displayed 24% growth to reach twice the global industry average. Our strong operational performance and conservative investments have allowed the company to maintain free cash ﬂ ow of $1 billion, which is almost ﬂ at year- on-year, despite a 30% reduction of the global steel prices. Our operating results 4 1 2015 Highlights 3 Ceo statement 4 NLMK proﬁ le 6 Where we operate 8 Products and brands 10 Business model NLMK PROFILE NLMK Group is the largest steelmaker in Russia and one of the most efﬁ cient in the world. NLMK is the only Russian company that is part of TOP 20 leading global steelmakers. NLMK’s production assets are located in Russia, Europe, and the United States. The Company’s liquid steel production capacity is over 17 million tonnes per year, of which about 16 million tonnes are produced in Russia. NLMK has modern production capacities that are on par with leading international manufacturers in terms of technology. NLMK’s metal products are used in various industries, from construction and engineering to the manufacture of power-generating equipment and oﬀ shore wind turbines. NLMK has the most competitive cash cost among global manufacturers; and one of the highest proﬁ tability levels in the sector. The company generated $8 billion in revenue; $1.95 billion in EBITDA; and a net proﬁ t of $967 million in 2015. Net Debt/EBITDA is 0.6x. The company has a BBB- credit rating. NLMK’s ordinary shares are traded on the Moscow Stock Exchange (ticker symbol: NLMK), and its global depositary shares are traded on the London Stock Exchange (ticker symbol: NLMK:LI). 22% Share in Russian steel production ABOUT US/REPORT 2015 12 Innovation 14 Strategy 16 Strategy in action 18 Market review 20 Financial and operating 24 5-Year highlights review 2015 5 WIDELY DIVERSIFIED VERTICALLY INTEGRATED BUSINESS MODEL CAPTIVE COST- EFFICIENT RAW MATERIAL AND ENERGY PRODUCTION COST-EFFICIENT STEEL PRODUCTION ROLLED PRODUCTS MANUFACTURED CLOSE TO END CUSTOMERS Control over key resources Steel production model Product supplies** Iron ore concentrate Coke 70% Scrap в коксе 57% Energy* в металлоломе 100% 100% t / $ , n o i t c u d o r p f o t s o c h s a c b a S l 600 500 400 300 200 100 0 NLMK 35% 65% 15.9 mt 0 0 0 1 0 0 2 0 0 3 0 0 4 0 0 5 0 0 6 0 0 7 0 0 8 Cumulative capacity, mln t To local markets Export to other regions Cost-efﬁ cient steel production Capacity utilization in 2015 Rolling capacity breakdown** 20% 93% 9% 17 mtpa BOF EAF Key highlights 80% 70% 21% 70% NLMK Global average 16 mtpa Steel sheets Plates Long steel Revenue, $ m EBITDA margin 11,729 12,157 10,818 10,396 23% 24% 19% 8,008 16% 14% 70+ 7% 93% 56.7 K 2011 2012 2013 2014 2015 2011 2012 2013 2014 2015 countries of sale people employed by NLMK** Russia Other regions * At the Lipetsk site. ** Including NBH performance. 6 1 2015 Highlights 3 Ceo statement 4 NLMK proﬁ le 6 Where we operate 8 Products and brands 10 Business model WHERE WE OPERATE NLMK Group has assets on three continents. We sell our high-quality products to buyers in more than 70 countries worldwide. Legend Raw materials producing assets BF/BOF steelmaking EAF mini-mill Rolling assets 0 0 0 0 NLMK Divisions NLMK Russia NLMK RUSSIA FLAT PRODUCTS 1 . 2 m t NLMK USA 17 16 18 1 Novolipetsk 2 VIZ-Steel Intragroup supply of slabs NLMK RUSSIA LONG PRODUCTS 3 5 NSMMZ 4 NLMK Metalware NLMK Kaluga NLMK RUSSIA RAW MATERIAL PRODUCTION Novolipetsk to NLMK USA Novolipetsk to NLMK Europe Stagdok 7 Altai-Koks 8 Stoilensky “Domestic” sales of ﬁnished steel 6 9 Dolomit NLMK EU 10 NLMK DanSteel 11 NLMK Coating 12 NLMK La Louviere 14 NLMK Clabecq 13 15 NLMK Strasburg NLMK Verona 16 NLMK USA 16 Sharon Coating 17 NLMK Indiana 18 NLMK Pennsylvania ABOUT US/REPORT 2015 53% NLMK Russia NLMK Europe NLMK USA 92% 100% 12 Innovation 14 Strategy 16 Strategy in action 18 Market review 20 Financial and operating 24 5-Year highlights review 2015 7 13 Over 100% countries where NLMK assets are located run rate of the core assets of NLMK Up to100% of needs in semis covered by supplies from Parent company (Lipetsk) NLMK RUSSIA 3 42 7 10 12 14 13 11 NLMK EU 15 2 . 6 m t 6 1 5 9 8 Revenue by region in 2015 Steel product sales by region in 2015 Russia 21% 11% 39% $8.0 bn 17% 9% 9% 5% 9% 4% 15% 15.9 mt 22% EU 39% North America Central and SE Asia Middle East Other markets 8 1 2015 Highlights 3 Ceo statement 4 NLMK proﬁ le 6 Where we operate 8 Products and brands 10 Business model PRODUCTS AND BRANDS NLMK makes a wide range of steels, from semi-ﬁ nished (slabs and billets) to high-end, high value added products (electrical steels). Our balanced product mix comprises 20% of long products and 80% of ﬂ at products. Long products for construction purposes are produced by NLMK Group’s Russian companies and sold all across Russia. Our wide mix of ﬂ at products includes hot-rolled steel, cold-rolled steel, galvanized steel and pre-painted steel. NLMK is also a global leader in electrical steel and a regional leader in thick plates used in machine building. The company’s balanced product mix encompasses standard and high value added products, including high-end steels. NLMK PRODUCTS IN RUSSIA NLMK is a leading provider of high-quality steel products in key sales markets. Our range of high value added products includes cold-rolled steel, pre-painted steel, electrical steel (transformer and dynamo) and a wide range of long products for the construction sector, including metalware. Our Russian plants oﬀ er a wide range of slabs, a large portion of which is processed into ﬁ nished products at our rolling mills in Europe and the USA. NLMK is one of the largest suppliers of semi-ﬁ nished rolled products (slabs) for large-diameter pipes in the domestic market. We sell up to 100% of our high value added products locally, that is, in the markets where they were produced. NLMK PRODUCTS IN EUROPE Our European plants produce a wide range of plates; most of them are made from Novolipetsk slabs. We make both commercial steel for machine building, pipe manufacturing and shipbuilding, and high-end thick plates used in wind power engineering and supporting structures for corrosive and high-pressure environments. NLMK Clabecq also produces unique abrasion-resistant (Quard) and high- strength (Quend) plates for heavy equipment manufacturing, machine building and other industries. NLMK PRODUCTS IN THE USA NLMK Group’s US companies focus on ﬂ at products made from semi-ﬁ nished steel sourced from the Group’s plants in Russia: hot-rolled steel, cold-rolled steel, galvanized steel and others. NLMK PRODUCTS WORLDWIDE ▪ Transformer steel: NLMK is one of the world’s major suppliers of transformer steel, accounting for 11% of the global market. Electrical steels are supplied to manufacturers of power-driven machines, transformers and instruments. ▪ Semi-ﬁ nished products (slabs): NLMK is the leading supplier to the global slab market, with a market share of nearly 15% (net of intragroup sales). The company’s products are in high demand thanks to their high quality, competitive prices and convenient logistics. QUALITY OF NLMK PRODUCTS Tailored to meet customers’ needs, NLMK products have been certiﬁ ed as compliant with international quality standards. For a complete list of products, please visit our website at http://nlmk.ru/our-business/ products-and-innovations/products/. We are actively working with our customers and R&D centres to expand our range and enhance product quality. ABOUT US/REPORT 2015 s t c u d o r p d e h s i n ﬁ ’ s K M L N NLMK PRODUCTS AND USES ▪ Construction: supporting structures and facing materials, reinforced concrete structures, fences and other proﬁ led sheet structures, roof tiles, air conditioning systems, etc. ▪ Infrastructure projects: guard rails, bridges, light poles, railway infrastructure, etc. ▪ Automotive manufacturing: body panels, power and other components for cars and commercial vehicles. ▪ Pipes: pipelines, large-diameter pipes for the oil and gas industry, water and gas pipes. 12 Innovation 14 Strategy 16 Strategy in action 18 Market review 20 Financial and operating 24 5-Year highlights review 2015 9 NLMK product mix in 2015 NLMK’s share in the Russian market 29% 25% 15.9 mt 13% 33% Semi-ﬁnished products Slabs to subsidiaries Standard grades HVA products 27% 100% 100% 19% 24% 20% 26% 19% 6% 22% 21% 0% 16% 36% 25% 8% 22% 17% HRC CRC HDG Pre-painted steel Rebar Transformer steel Share in consumption Share of import in consumption Share in production ▪ Machine building: mining equipment, agricultural and construction (yellow) machinery, liﬅ ing and transport equipment, railway engineering, shipbuilding, wind power engineering, oﬀ shore drilling platforms. ▪ Electrical equipment and instrument making: transformers, electric motors, generators, bodies of electrical machines and appliances. ▪ White goods: gas and electric ovens, washing machines, refrigerators, dishwashers, extractor fans, household boilers, etc. 10 1 2015 Highlights 3 Ceo statement 4 NLMK proﬁ le 6 Where we operate 8 Products and brands 10 Business model NLMK BUSINESS MODEL Self-sufﬁ ciency in Key Raw Materials 100% 115% 85% 70% 57% Raw Materials Production Iron ore Coke Scrap Energy of mining capacity is located in Russia One of the most cost-efﬁ cient iron ore producers in the world The largest scrap collecting network in Russia NLMK Capacity (mt/y) Steel Production Cost in 2015 ($/t) 4.3 320 206 Steel Production 12.8 BOF operations EAF operations One of the most cost-efﬁ cient steel producers in the world NLMK World average Wide Product Range Rolling capacities (mt/y) 13% 49% 3.2 Russia - Long products Finished steel production 38% Semi-ﬁnished products Flat products Long products and metalware 6.2 Russia - Flat products 3.2 NLMK Europe 2.9 NLMK USA ABOUT US/REPORT 2015 12 Innovation 14 Strategy 16 Strategy in action 18 Market review 20 Financial and operating 24 5-Year highlights review 2015 11 BUSINESS MODEL NLMK’s business model is leveraging grade, NLMK Indiana, NLMK Verona*), and 80% is manufactured using basic oxygen furnaces (Lipetsk site). The Company’s products are used in sec- tors such as construction, pipe manu- facturing, machine building and energy sector, including wind power engineering. The Company supplies rolled products and billets to Russia, EU, North America, the Middle East, Asia and other regions. the geographical location of our assets. Mining and steel production assets (the most material- and resource- intensive part of the integrated process) are located in Russia, a low-cost region. Production of ﬁ nished products is concentrated in the key sales markets in close proximity to our customers in Russia, North America, and the EU. UPSTREAM How we do it NLMK resource base is located in Russia. NLMK raw material assets are among the most eﬃ cient facilities in Russia and globally. Eﬃ cient vertical integration has enabled stable supply of raw materials to further production stages and secured minimum steel production costs. Advantages Stoilensky is one of the most eﬃ cient iron ore producers with a reserve of over six billion tonnes and iron ore concentrate production cost of approximately $10 per tonne. Stoilen- sky is situated 250 km from the main plant in Lipetsk, enabling maximum logistic eﬃ ciency. Stoilensky supplies up to 80% of concentrate produced by the Group. Captive coke production (covering more than 100% of the Group’s demand) enables high quality of coke products, which in turn boosts eﬃ ciency of blast furnaces, the next stage in production. NLMK’s scrap processing division is the lar- gest in Russia, securing stable supply of scrap to the Group’s steelmaking plants. The Lipetsk site is 57% self-suﬃ cient in elec- trical energy generated by plants run mainly on by-product gases from coke and blast furnace operations. Advantages Advantages The capacity utilization rate at the Lipetsk site (accounting for 80% of the Group’s steel- making capacity) is 100% regardless of the production cycle on the back of eﬃ cient verti- cal integration with the raw material assets, technological superiority of equipment, advan- tageous geographical location and a diversi- ﬁ ed product mix. These factors have helped to guarantee the lowest production cost in the global industry. In 2015, steel production cost was $206 per tonne while the global average ﬁ gure was $320 per tonne. NLMK’s rolling facilities are located in the key sales markets, close to end users. This ensures competitive advantages of our product during customer interaction, enhancing stability of quality, just-in-time deliveries and on-top customer service. Approximately 80% of ﬂ at products are sold in the region where they are produced. NLMK Russia slab sales (mt) Production capacity (mt/y) 6.5 6.4 6.5 6.8 17.1 0.8 0.2 16.1 12.3 2.9 3.2 6.2 USA EU Russia 3.2 3.2 Steel production Flat products Long products EAF-based plants (NSMMZ and NLMK Kaluga) produce long products for the con- struction industry, ensuring prompt response to seasonal changes of demand in the Rus- sian market. 2.4 3.0 3.9 3.6 4.1 3.8 2.6 2.8 2012 2013 2014 2015 3rd-party consumers Afﬁliates and associated companies Finished rolled products are made from semi-ﬁ nished products produced in Russia, ensuring consistently high quality of rolled products and expediency in production. The Company’s European and US rolling capacities process 75% of semi-ﬁ nished products exported from the Group’s Rus- sian assets. The Company’s global presence in the major sales markets is supported by a diversiﬁ ed product mix and ﬂ exible sales policy. NLMK is therefore in position to timely channel products to most promising markets maintaining full utilization of the entire supply chain. MIDSTREAM How we do it DOWNSTREAM How we do it The Company’s steelmaking capacities are over 17 million tonnes per year. 95% of the capacities are located in Russia. NLMK has a ﬂ exible production chain. Ap- proximately 20% of our steel is manufactured using electric arc furnace technology (NLMK NLMK’s rolling facilities are located in Russia, Europe, and the USA. The total HVA produc- tion capacity exceeds 15 million tonnes of ﬂ at and long products, which enables processing of up to 90% of steel produced at our own rolling mills. * Inclusive of NBH capacities 12 1 2015 Highlights 3 Ceo statement 4 NLMK proﬁ le 6 Where we operate 8 Products and brands 10 Business model INNOVATION A commitment to innovative ideas lies at the heart of our business culture. NLMK has historically provided a platform where new technologies are developed which may be later adopted by other companies and spread around the world. We work with our customers to design new solutions or adapt existing ones – offering them the best ways to improve their competitiveness. NLMK has a comprehensive approach to innovation. We are consistently developing our product mix, optimizing our production and auxiliary processes to increase operational efﬁ ciency, and mastering new technologies to boost equipment productivity. PROCESS INNOVATION The key goal of Strategy 2017 is to develop NLMK Production System as a single business process aimed at achieving strategic objectives by optimizing the use of the Company’s material and intellectual resources. Developed in-house, the Production System brings together NLMK’s unique technology and knowledge base, leveraging the best elements and advantages of systems used by leading global manufacturers. Our system is based on the principles of continuous improvement and lean manufacturing as well as on incentives which encourage initiatives and best practices from around the world. NLMK Production System covers processes across all NLMK Group operations: production, energy, M&R, logistics, occupational health and safety, and investment. The main elements of the system are already in use at practically all key NLMK Group companies, including international assets. Despite its gradual implementation process, NLMK Production System has already proved to be highly eﬃ cient. For instance, thanks to the active involvement of all NLMK Group companies in the continuous improvement process in 2015, the impact from operational eﬃ ciency programmes (the key element of NLMK Production System) was double the target. For more details, please see Strategy in Action. ABOUT US/REPORT 2015 INNOVATION IN TECHNOLOGY NLMK is implementing new technological solutions either developed internally or by bringing in the expertise of third party R&D contractors. Coke operations: Over the last few years, NLMK has introduced a new technology for producing coke with high CSR without using imported coals or coals that are in short supply in the Russian market. In pig iron manufacturing, NLMK now uses small-sized coke and sinter, thus boosting resource use eﬃ ciency. Fine- tuning of pulverized coal injection modes continued at blast furnaces No. 4 and 5, which helped cut down the consumption of expensive coke, expand the production of pig iron with a silicon content of 0.3–0.5%, and reduce the possibility of deviations from the target chemical composition range. Blast furnace operations: In 2015, innovative technology enabled an increase in pig iron production by 0.7 million tonnes, while improving its quality and reducing speciﬁ c metallurgical coke consumption by 5%. Innovations made our blast furnace No. 7 launched in 2011 one of the most eﬃ cient in the world; its production capacity exceeded 4 million tonnes vs. the base level of 3.4 million tonnes. Steelmaking operations: The use of new process solutions and optimization of steelmaking operations supported a record level of steel production at the Lipetsk site in 2015 (12.9 million tonnes). Innovations brought steel consumption during rolling operations down, and at the same time improving product quality and boosting equipment productivity. Other Russian and international NLMK Group companies are also introducing innovative technologies. e r e i v u o L a L K M L N PRODUCT INNOVATION Strengthening our position in niche and HVA markets is one of NLMK’s Strategy 2017 goals. This explains our focus on expanding the product mix and improving product quality. The two key product innovation projects that stood out in 2015 were ﬁ rstly the adoption of high-permeability transformer steel production technology and the onset of serial production; and secondly the expansion of our high yield strength and abrasion resistant Quard® and Quend® range. High-permeability transformer steel As one of the leading global suppliers of transformer steel, NLMK interacts closely with its key customers, carefully monitoring all new trends in the sector. As demand for powerful, energy eﬃ cient transformers (for which energy losses are a key issue) increased, the market has developed a need for transformer steel with high magnetic permeability and minimal speciﬁ c magnetic losses. To satisfy the demand in this 12 Innovation 14 Strategy 16 Strategy in action 18 Market review 20 Financial and operating 24 5-Year highlights review 2015 13 growing segment, NLMK began developing its own technology for making a new type of product: high-permeability transformer steel. To this end, an ambitious set of initiatives was implemented across all production stages at the Lipetsk site, including the commissioning, reconstruction and upgrading of the existing steelmaking and rolling equipment. In 2015, NLMK technical experts carried out the tests needed to adopt the new production process. Also, the Company developed a technology to produce pig iron and steel which meet stringent chemical composition requirements; tested new hot rolling modes; and performed a wide set of initiatives to develop new process modes and use new materials. At the beginning of 2016, NLMK produced its ﬁ rst series batches with speciﬁ c magnetic losses in line with those of its international peers. The product is in high demand from leading global transformer manufacturers. High strength and abrasion resistant plates In 2015, we continued active promotion of our premium products: abrasion resistant Quard® plates and high strength Quend® plates. Both these products are produced by our European plant NLMK Clabecq from slabs supplied from Novolipetsk. Quard® is a martensitic abrasion resistant steel produced in a variety of hardness options from 400 to 500 HB and available in thickness ranging from 4 to 64 mm. Key advantages of this steel grade include a unique combination of high strength, hardness and ductility achieved through water quenching – a process that ensures the required microstructure throughout the thickness of the plate. For more information about this product, please visit http://quard. eu.nlmk.com/. The high strength Quend® steel is characterized by high yield strength: 700, 960 or 1,100 MPa; and it is also available in thickness from 4 to 64 mm. One of the key advantages of Quend® plates is their guaranteed strength coupled with lower weight. Higher strength means that when ensuring a load bearing capacity similar to standard steel grades, the plates can be thinner. Their reduced weight helps lower speciﬁ c energy consumption, cut operating costs, and leave a smaller environmental footprint, which in turn increases our clients’ competitiveness. For more detailed information on this product, please visit http://quend.eu.nlmk. com/. NLMK supplied 71,000 tonnes of these niche Quard® and Quend® plates in 2015. The Company plans to further expand this product range and introduce new grades of high strength and abrasion resistant steel in a wider variety of dimensions in 2016. 14 1 2015 Highlights 3 Ceo statement 4 NLMK proﬁ le 6 Where we operate 8 Products and brands 10 Business model STRATEGY In February 2014, NLMK Group announced a new phase of development. “Strategy 2017” is focused on unlocking signiﬁ cant internal potential of the Group’s businesses by boosting operational and process efﬁ ciency across the entire production chain, enhancing vertical integration into key raw materials, increasing sales of high value added (HVA) products, and pursuing environmental, safety and human capital development programmes. Strategy 2017 is centred on gaining leadership in operational eﬃ ciency, developing a world-class resource base, and achieving leading positions in strategic markets. Special emphasis is placed on industrial safety, sustainability and human capital development. “Strategy 2017” targets net gains of $1.0 billion per annum and envisions overall development capex of $1.0 billion. ABOUT US/REPORT 2015 12 Innovation 14 Strategy 16 Strategy in action 18 Market review 20 Financial and operating 24 5-Year highlights review 2015 15 STRATEGY 2017: KEY TARGETS Targeted annual net gains in 2018 vs 2013: $1,000 m Leadership in operational efﬁ ciency World-class resource base 80 80 $330 m $480 m 250 How we do it 400 How we do it Maximum use of potential to enhance operational eﬃ ciency through investment programmes and NLMK Production System. Increased self-suﬃ ciency in iron ore with a ﬂ exible charge structure and consequential reduced consumption of expensive resources. Leading positions in strategic markets Leadership in sustainability and safety 40 $190 m 150 How we do it Entering new or expanding presence in attractive product niches, industries, and regions; higher utilization rates at existing capacities; growth in domestic sales; and an increased share of HVA products. Management initiatives Investment projects Note: all numbers include NBH unless otherwise stated. 8 . i o N e n h c a M g n i t s a C s u o u n i t n o C • Minimize environmental footprint • Promote safe operating practices • Develop motivated and engaged workforce How we do it Systematic minimization of our environmental footprint; compliance of production processes with the strictest environmental and OHS standards; leadership in labour productivity for the sector supported by empowered and motivated staﬀ . Creation of the conditions for high labour productivity through provision of opportunities for professional training and through fostering of a strong corporate culture. 16 1 2015 Highlights 3 Ceo statement 4 NLMK proﬁ le 6 Where we operate 8 Products and brands 10 Business model STRATEGY IN ACTION In 2014–2015, structural net gain for NLMK Group as a result of Strategy 2017 totalled $477 million per year (using 2015 prices, vs. 2013 base-level), or 48% of the total Strategy 2017 target the Group plans to achieve by 2018. Over 85% of the savings in 2014–2015 came from operational efﬁ ciency programmes that did not require any capital outlay; whilst the remaining 15% came from investment projects. In 2015, net gains totalled $256 million (from 2014 base-level). LEADERSHIP IN OPERATIONAL EFFICIENCY ▪ As a result of the implementation of this strategy in 2014–2015, the net gain from dedicated projects totalled $280 million per year. ▪ In 2015, NLMK undertook extensive development of the Group’s Production System, with the total number of projects growing by over 500 to exceed 1,800 by the end of the year. Additional structural net gain from operational eﬃ ciency projects exceeded the target eﬀ ect almost two-fold year-on- year, totalling $145 million per year (to 2014 base level). ▪ As a result of these projects, in 2015 the productivity of steelmaking equipment at the Lipetsk site increased by 300,000 tonnes per year; and the production capacity of the hot- strip mill increased from 5.9 million tonnes per year to 6.0 million tonnes per year in 2015, among other improvements. ▪ In the Mining Segment, the productivity of beneﬁ ciation equipment in 2015 increased by 0.8 million tonnes of concentrate per year. Over the entire strategy implementation period in 2014–2015, productivity of Stoilensky’s beneﬁ ciation plant increased by 1.3 million tonnes per year to 15.2 million tonnes per year. In 2016, operational improvements are expected to boost productivity by a further 300,000 tonnes per year. WORLD-CLASS RESOURCE BASE ▪ As a result of the implementation of this strategy in 2014–2015, the net gain from dedicated projects totalled $100 million per year. ▪ Structural gain from operational eﬃ ciency programmes and investment projects in 2015 totalled $61 million from 2014 level. ▪ In 2016, Stoilensky plans to complete the construction of its pelletizing plant, with launch scheduled for H2 2016. This will provide an annual eﬀ ect on the Group’s operating performance in excess of $180 million (to be fully achieved in 2017). ▪ Stoilensky continues to pursue its programme aimed at boosting the productivity of its beneﬁ ciation plant, in order to supply the pelletizing plant with suﬃ cient iron ore concentrate used as a feedstock for pellets manufacturing. The programme includes an entire range of debottlenecking projects. By 2018, output of iron ore concentrate will increase by 1.6 million tonnes per year (from 2015 level), including by 600,000 tonnes per year in 2016. It has been estimated that project investment during the period of 2014 to 2017 will be $120 million. As a result, production capacity will reach 17.3 million tonnes of concentrate by 2018. Note: all ﬁ gures are shown inclusive of NBH, unless speciﬁ ed otherwise. ABOUT US/REPORT 2015 y k s n e l i o t S t a l t n a p g n i z i t e l l e p e h t f o n o i t c u r t s n o C $477 m Net gains of NLMK Group from achievement of strategic objectives in 2014–2015 LEADERSHIP ON STRATEGIC MARKETS ▪ As a result of the implementation of this strategy in 2014–2015, net gains from dedicated projects totalled $97 million per year. 12 Innovation 14 Strategy 16 Strategy in action 18 Market review 20 Financial and operating 24 5-Year highlights review 2015 17 ▪ In 2015, net gain from delivering on this goal totalled $50 million from 2014 level. ▪ In 2015, steel sales increased by 5% year- on-year to 15.9 million tonnes, supported by high utilization rates at the Group’s Russian assets and increased productivity of main equipment. ▪ Sales in the Russian market totalled 6.2 million tonnes, or 39% of total sales (43% in 2014). ▪ Deliveries of slabs to Russian pipe manufacturers increased in 2015 by 27% to 0.9 million tonnes. Over the same period, NLMK DanSteel increased sales of niche plates by 9% to 400,000 tonnes. NLMK Kaluga competed successfully with international suppliers and local long steel manufacturers in Central Russia, ensuring an 83% run rate at its rolling capacities. LEADERSHIP IN SUSTAINABILITY AND SAFETY ▪ LTIFR at NLMK Russian assets declined by 22% year-on-year to 0.43 in 2015 (above target level). ▪ Speciﬁ c air emissions reduced by 1% year- on-year to 20.9 kg/t. ▪ Labor productivity grew 6% year-on-year across the Group. DIVIDEND POLICY High proﬁ tability, and low debt and capex resulted in increased free cash ﬂ ow available to NLMK Group shareholders. In 2015, NLMK adopted a new dividend policy that provided for quarterly dividends in the amount of 50% of net income or free cash ﬂ ow if Net debt/EBITDA is less than or equal to 1.0. ▪ Dividend cash ﬂ ow in 2015 totalled $395 million (vs. $226 million in 2014), including a part of 2014 dividends, and Q1 and Q2 2015 dividends. ▪ 9M 2015 accrued dividends totalled $427 million. ▪ Dividend yield at the end of 2015 exceeded 10%. OLEG BAGRIN, NLMK GROUP CEO, SAID “The key goal of Strategy 2017 is to transform NLMK from a growing steel manufacturer into one of the most eﬃ cient steel companies in the world. “We made substantial progress over the last two years, with long-term ﬁ nancial gains from the implementation of our strategy totalling $477 milllion per year. The bulk of the gains are the result of the success of our operational eﬃ ciency programmes, which are based on consistent application and development of NLMK Group’s Production System and so do not require investment. “In 2016 and 2017, we expect that more of the gains will be created by investment projects and commercial strategy programmes that strengthen NLMK’s market positions in niche value added segments where we have created competitive advantages in technology, quality and cost of production. “Despite the challenging market conditions, we’ve delivered on the objectives we set; increasing steel output to a record high, maintaining high utilization rates and boosting proﬁ tability. NLMK’s debt leverage is four times lower than the sector average. “Substantial cash ﬂ ow from operations and conservative investment have supported a free cash ﬂ ow level of $1 billion in 2015, increasing the Company’s ﬁ nancial stability, ensuring ﬂ exibility and high dividend yields. “The consistent and successful implementation of our strategy ensures a high and stable return for our shareholders.” 18 1 2015 Highlights 3 Ceo statement 4 NLMK proﬁ le 6 Where we operate 8 Products and brands 10 Business model MARKET REVIEW THE GLOBAL MACROECONOMIC SITUATION AND THE WORLD STEEL MARKET Global economic growth slowed down to 2.4% in 2015 from 2.6% a year before due to the weakening emerging economies, a considerable drop in commodity prices, declining world trade and high volatility in the capital markets. Global steel production fell by 2.8% to 1,589 million tonnes, which aﬀ ected all the key producing regions. Capacity utilization was declining throughout the year, dropping to 64.6% as of late 2015, according to estimates by the World Steel Association (a 5 p.p. decrease from the year before). Chinese steel consumption went down 5.4%, to 672 million tonnes (the country accounts for 45% of the world consumption). Steel production fell by 2.1% yoy, to 801 million tonnes. The sharper decline in demand led to an unprecedented increase in exports, which grew by 22% and reached 112 million tonnes. This factor, together with slumping prices for iron ore and excessive mining resulted in lower steel prices and more intense competition. A number of developed countries launched trade investigations to support domestic producers. Global steel production in 2011–2015, mt 1,635 1,635 1,604 1,604 1,589 1,589 1,515 1,515 1,489 1,489 2011 2011 2012 2012 2013 2013 2014 2014 2015 2015 Russia’s share of the global steel production in 2015 remained unchanged from the previous year (4.5%). Russian steel production fell by 0.8%, to 70.9 million tonnes. Global apparent steel consumption fell by 3.2% in 2015, to 1,495 million tonnes (in 2014, it rose by 0.9%). The ﬁ gure for the USA decreased by 10.6% in the same year, to 95.7 million tonnes (in 2014, consumption grew by 11.8%). This was due to the large reserve stock built up earlier coupled with declining demand from the energy sector. t r o p s ’ l e e t S n a D K M L N t a s e t a P l Steel production by region Prices for hot-rolled steel in the domestic markets ($/t, excl. VAT) in 2014–2015 800 700 600 500 400 300 200 2.2% 1.7% 3.1% 2.8% 4.5% 6.9% 1,589 mt 10.4% 68.4% South America Other European countries Middle East Other regions Asia EU-28 North America Russia ABOUT US/REPORT 2015 n a J b e F r a M r p A y a M n u J l u J g u A p e S t c O v o N c e D n a J b e F r a M r p A y a M n u J l u J g u A p e S t c O v o N c e D 2014 2015 USA ЕU China Source: Metal Bulletin. 12 Innovation 14 Strategy 16 Strategy in action 18 Market review 20 Financial and operating 24 5-Year highlights review 2015 19 Domestic prices for hot-rolled steel in Russia, excl. VAT 650 600 550 500 450 400 350 300 250 200 28 26 24 22 20 18 16 14 12 10 n a J b e F r a M r p A y a M n u J l u J g u A p e S t c O v o N c e D n a J b e F r a M r p A y a M n u J l u J g u A p e S t c O v o N c e D n a J b e F r a M 2014 2015 2016 H/r steel ($/t) H/r steel (‘000 RUB/t) The EU countries saw a 1.9% increase in apparent steel consumption, to 151.4 million tonnes, which was driven by growth in the key industries except for pipe manufacturing (–5.6%). The automotive industry grew by 7.8%; construction, by 1.8%; and home appliances, by 3.7%. The decline in global consumption of steel, falling prices for iron ore and increasing exports from China were the key drivers of the 30–40% decrease in steel prices. RUSSIAN MARKET Russia’s economic growth slowed down by 3.7% due to slumping commodity prices, high inﬂ ation and falling consumer purchasing power. Investments in ﬁ xed assets fell by 8.4%: construction levels went down 7%, and production of certain types of construction materials decreased by 19%. A 5.4% decline in manufacturing industries also adversely aﬀ ected the steel market. Apparent ﬁ nished steel consumption fell by 8.3% in 2015, decreasing by 14% in the long steel sector and by 5% in the ﬂ at steel sector. The decline was partially oﬀ set by growing demand for steel used in pipes. this was due to stable steel supply to the domestic market and a rise in steel exports accompanied by a 30% decrease in imports. Russian steel production decreased by only 0.5% in 2015 yoy, to 71 million tonnes; The changes in Russian steel prices in 2015 were driven by the exchange Source: Metal Bulletin. rate volatility. Prices rose signiﬁ cantly in the middle of the second quarter from the previous quarter as the ruble strengthened, but the resumed fall in oil prices and devaluation of the national currency made them go down again in a decline lasting through the year end. 20 1 2015 Highlights 3 Ceo statement 4 NLMK proﬁ le 6 Where we operate 8 Products and brands 10 Business model FINANCIAL AND OPERATING REVIEW 2015 In 2015, NLMK shareholders approved a new dividend policy that presupposes quarterly dividend payments. In 2015, NLMK paid $395 million in dividends. NLMK’s Board of Directors will review management’s dividend recommendations for Q1 2016 in April 2016.” OPERATING REVIEW 2015 operating highlights Production, m t 2015 2014 YoY Crude steel production 15.866 15.921 0% Capacity utilization, % 93% 96% –3 p.p. Consolidated sales Semi-ﬁ nished steel Finished steel Flat Long Total consolidated sales Sales to Russian market Sales to external markets, incl.: Export from Russian companies Slab sales to NBH Foreign subsidiaries sales 6.070 9.793 7.704 2.089 4.903 10.222 7.886 2.336 15.863 15.126 39% 61% 34% 13% 14% 43% 57% 28% 13% 16% 24% –4% –2% –11% 5% –4 p.p. +4 p.p. +6 p.p. 0 p.p. –2 p.p. For information: slab sales to foreign subsidiar- ies and afﬁ liates 3.829 4,051 –5% Segment sales Russian Flat Products 13.165 12,260 6% Russian Long Products 2.375 2,636 –10% Mining Foreign rolled products For information: NBH sales 17.014 16,209 2.199 1.991 2.407 1.807 5% –9% 10% 2015 Group crude steel output remained stable yoy at 15.9 million tonnes; capacities were running at 93%. COMMENT FROM NLMK GROUP CFO GRIGORY FEDORISHIN “In 2015, global steel consumption continued to decline, exacerbating the supply/ demand imbalance in the global market. Key factors behind the slump in steel product prices included an unprecedented spike in steel exports from China on the back of the continuing fall in demand and the dip in raw material prices. The deteriorating economic situation in Russia had a negative impact on steel consumption in the local market where demand dropped by approximately 9%. “NLMK’s competitive advantage in terms of production costs and a presence in key sales markets supported a 5% increase in sales to a record 15.9 m t, while maintaining maximum utilization rates at key facilities. In 2015, NLMK continued to implement its large-scale operational eﬃ ciency programme, rolling it out to all Group sites. 1,800 optimization projects ensured a structural proﬁ t increase of $197 million yoy in 2015, more than double the level that was planned initially. Higher sales volumes and gains from optimization programmes allowed maintaining the EBITDA margin at a high level of 24% (+1 p.p. yoy). In 2015, active construction began of our new pelletizing plant at Stoilensky. Launch is planned for H2 2016. This factor pushed capex up to $595 million. Signiﬁ cant cash ﬂ ow and conservative investment supported a positive free cash ﬂ ow of $1.0 billion, consolidating the company’s ﬁ nancial stability and ensuring the possibility of high dividend payout. 2015 net debt decreased by 32% to $1.1 billion; Net debt to EBITDA was 0.6х, one of the lowest ratios in the sector. We continue to actively manage our debt portfolio: at the end of the year NLMK issued ruble bonds for a total of 10 billion rubles and closed a 4-year $400 million loan facility secured by export revenue. ABOUT US/REPORT 2015 12 Innovation 14 Strategy 16 Strategy in action 18 Market 20 Financial and operating 24 5-Year highlights review review 2015 21 l q c e b a C K M L N t a s e t a p l ) R ( d r a u Q FINANCIAL REVIEW 2015 ﬁ nancial highlights k t/$ million 2015 2014 Sales volumes Revenue EBITDA EBITDA margin Proﬁ t for the period Free cash ﬂ ow Net debt Net debt/EBITDA 15,863 8,008 1,948 24% 967 997 1,091 0.56x 15,126 10,396 2,381 23% 773 1,153 1,598 0.67x YoY 5% –23% –18% +1 p.p. 25% –14% –32% Revenue 2015 revenue declined by 23% to $8,008 million due to the 30–40% yoy reduction in prices that was partially oﬀ set by a 5% yoy increase in sales. Pressured by the price factor, revenue from sales to international markets decreased by 18% yoy to $4.9 billion, with the bulk of deliveries going to the EU (20%), the USA (17%), Middle East and Turkey (9%). The share of revenue from sales to the Russian market fell to 39% (–4 p.p. yoy) due to a 6% yoy decrease in shipments to Russia and the signiﬁ cant devaluation of the Russian ruble. Sales of semi-ﬁ nished products to external consumers accounted for 19% of the revenue (+3 p.p. yoy); sales of semi-ﬁ nished products to related parties accounted for 9% (ﬂ at yoy); sales of HRC and long products accounted for 27% (–4% yoy). The share of revenue from sales of HVA products was 37% (+1% yoy). There was an increase in revenue from sales of premium products, with revenue from transformer steel sales increasing by 22% yoy. Operational efﬁ ciency programmes In 2015, NLMK continued to implement its operational eﬃ ciency programmes. Over 1,800 optimization projects across all NLMK business divisions ensured an economic eﬀ ect of $197 million (vs. the 2014 cost base). 22 1 2015 Highlights 3 Ceo statement 4 NLMK proﬁ le 6 Where we operate 8 Products and brands 10 Business model Operating proﬁ t Russian Flat Products 2015 operating proﬁ t fell by 13% yoy to $1,388 million due to the narrowing of spreads between raw material and ﬁ nished product prices. This factor was partially oﬀ set by the eﬀ ect from operational eﬃ ciency programmes, a 5% yoy increase in sales, as well as the weakening of the ruble against the dollar. The 28% yoy decrease in general and administrative expenses was driven by optimizing management expenses, as well as the fall in the ruble exchange rate. The 13% yoy decrease in commercial expenses was associated mainly with the currency factor that was partially oﬀ set by a 5% yoy increase in sales and an increase in the share of shipments to international markets with higher transportation costs. Net proﬁ t 2015 net proﬁ t was $967 million (+25% yoy), the increase being associated with the low base of 2014 when signiﬁ cant impairment losses were accounted for ($657 million vs. $86 million in 2015). The decrease in NBH losses ($103 million in 2015 vs. $193 million in 2014) also had a positive eﬀ ect on the proﬁ t. Free cash ﬂ ow 2015 free cash ﬂ ow was $997 million (–14% yoy). Debt management Net debt in 2015 declined by 32% yoy to $1.09 billion due to NLMK’s conservative ﬁ nancial policy and signiﬁ cant free cash ﬂ ow. k t/$ million 2015 2014 YoY Steel product sales, incl.: sales to third parties Revenue, incl.: external customers intersegmental operations EBITDA EBITDA margin 13,165 9,324 6,065 4,719 1,346 1,581 26% 12,258 8,180 7,872 5,684 2,188 1,609 20% 7% 14% -23% -17% -38% -2% +6 p.p. was driven mostly by higher semi-ﬁ nished product shipments: +0.7 m t of commercial pig iron (vs. 0.3 m t in 2014) and +3.0 m t of slabs (vs. 2.4 m t in 2014). Total Segment revenue was $6.1 billion (–23% yoy), including $4.7 billion (–17% yoy) from sales to third parties. The 20–30% slump in prices was partially oﬀ set by an increase in the volume of sales. Structural gain from operational eﬃ ciency programmes and the devaluation of the Russian ruble supported an increase in Segment proﬁ tability to 26% (+6 p.p. yoy), at the same time practically oﬀ setting the impact from the narrowing of spreads between steel and raw material prices. While steel prices dipped 20–30%, 2015 EBITDA declined by 2% yoy to $1,581 million. Russian Long Products Segment sales declined by 10% to 2.38 m t, an improvement on the trend seen in the Russian long product market where consumption dipped by 17% yoy. The decrease in demand in Russia was partially oﬀ set by an increase in export sales to 0.28 m t (+37% yoy). Total Segment revenue in the reporting period was $1,152 million (–36% yoy) due to the decrease in sales volumes and a negative pricing trend for long products. 2015 EBITDA was $49 million (–68% yoy) due to the decrease in sales and the narrowing of spreads between long product and scrap prices. EBITDA margin was 4% (–4 p.p. yoy). Net debt/EBITDA stood at 0.6х as at the end of 2015 (vs. 0.7x at the end of 2014). Russian Long Products k t/$ million 2015 2014 YoY Net changes in ﬁ nancial liabilities in 2015 totalled $97 million. NLMK Group’s total debt in 2015 decreased by 3% to $2.68 billion, including 21% of short-term debt comprised mainly of ruble bonds and revolving credit lines for working capital ﬁ nancing. Interest expenses in 2015 totalled $119 million (–34% yoy), including $32 million of capitalized interest expenses accounted for as part of capex. Russian Flat Products Steel product sales, incl.: sales to third parties Revenue, incl.: external customers intersegmental operations Segment sales in 2015 were 13.2 m t (+7% yoy), including 9.3 m t (+14% yoy) shipped to third parties. This increase in sales EBITDA EBITDA margin ABOUT US/REPORT 2015 2,375 2,239 1,152 859 293 49 4% 2,636 2,619 1,815 1,447 368 152 8% –10% –15% –36% –41% –20% –68% –4 p.p. 12 Innovation 14 Strategy 16 Strategy in action 18 Market 20 Financial and operating 24 5-Year highlights review review 2015 23 Mining Segment k t/$ million 2015 2014 Iron ore concentrate and sinter ore sales, incl.: 17,014 sales to Lipetsk plant 12,380 16,209 11,942 1,068 346 722 640 60% 589 184 405 297 50% YoY 5% 4% –45% –47% –44% –54% –10 p.p. Segment revenue was down by 28% yoy to $1,442 million due to the yoy fall in average sales prices and reduced sales volumes. 2015 EBITDA loss was –$96 million. This was associated mainly with the use of expensive slabs accumulated at the end of 2014 and beginning of 2015. Without this factor (assuming slabs were purchased at current market prices) Segment EBITDA would have been +$25 million. NBH (associated company) results Increased demand for steel from key sectors in the European market in 2015 drove NBH sales up by 10% to 2.0 m t. NBH revenue declined by 18% yoy to $1.3 billion due to the fall in prices for ﬁ nished products. Revenue, incl.: external customers intersegmental operations EBITDA EBITDA margin Mining Segment Iron ore concentrate and sinter ore sales in 2015 increased to 17 m t (+5% yoy) on the back of improved equipment productivity and an increase in iron ore shipments to the Lipetsk site (by 4% yoy to 12.4 m t). A two-fold reduction in global iron ore prices determined the Segment’s downward revenue trend: in 2015 it totalled $589 million (–45% yoy). Pressured by the price factor that was partially oﬀ set by the eﬀ ect from operational eﬃ ciency programmes and higher sales volumes, EBITDA was $297 million (–54% yoy); and EBITDA margin was 50% (–10 p.p. yoy). Foreign Rolled Products Segment 2015 segment sales totalled 2.2 m t (–9% yoy) due to intensiﬁ ed competition with import deliveries and a drop in demand from OCTG and machine-building companies in the US market. 2015 EBITDA loss of $92 million (vs. $115 million in 2014) was determined by narrow spreads between prices for semi- ﬁ nished and ﬁ nished products, the latter being partially oﬀ set by the increase in sales volumes and the eﬀ ect from operational eﬃ ciency programmes. Foreign Rolled Products Segment k t/$ million 2015 2014 YoY Steel product sales Revenue, incl.: external customers intersegmental operations EBITDA EBITDA margin 2,199 1,442 1,442 – (96) –7% 2,412 2,015 2,015 – 104 5% –9% –28% –28% 0% –193% –12 p.p. 24 12 Innovation 14 Strategy 16 Strategy in action 18 Market review 20 Financial and operating 24 5-Year highlights review 2015 5-YEAR HIGHLIGHTS Financial indicators, US$ m 2011* 2012* 2013 2014 Revenue Proﬁ t for the period attributable to NLMK shareholders** EBITDA EBITDA margin Cash ﬂ ow from operations Capital expenditures Net debt Dividends per share 11,729 1,315 2,254 19% 1,315 2,048 3,355 12,157 596 1,900 16% 1,825 1,453 3,574 10,818 10,396 145 1,480 14% 1,333 756 2,736 773 2,381 23% 1,806 563 1,598 0,0627 0,0193 0,0243 0,1289 2015 8,008 967 1,948 24% 1,651 595 1,091 n/a Production indicators, ‘000 t 2011 2012 2013 2014 2015 Liquid steel output Total steel product sales Sales of HVA products 11,968 12,840 4,508 14,923 15,184 5,428 15,429 14,831 5,223 15,921 15,126 4,700 15,866 15,863 4,530 Sustainability indicators 2011 2012 2013 2014 2015 Headcount, ‘000 people Labour productivity, t of steel/person (Lipetsk operations) LTIFR at Russian assets of NLMK Group Air emissions, kg/t of steel 60.0 329 0.87 26.1 62.5 406 0.87 22.6 62.1 420 0.86 21.9 60.1 437 0.55 21.1 56.7 463 0.43 20.9 * Financial data in line with IFRS. 2011–2012 data in line with US GAAP. ** For 2011–2012: net proﬁ t attributable to NLMK shareholders. ABOUT US/REPORT 2015 SUSTAINABILITY – REVIEW / REPORT 2015 NLMK’s SUSTAINABILITY REVIEW NLMK Group headcount: 56,700 people Labour productivity at Novolipetsk increased by 6% Cumulative environmental investment since 2001: $1.3 billion Emission rates dropped to 20.9 kg/t Speciﬁ c energy consumption decreased by 1% yoy The number of occupational accidents decreased by 29% yoy Over 50% of employees are involved in training initiatives each year NLMK Group’s investments in the regions of presence: $54 million Active stakeholder engagement: over 370 meetings with shareholders and investors were held EMPLOYEES BY GEOGRAPHY 4% 2% 0.4% 56.7 K Russia Europe USA 93% Other countries VISUALLY COMPELLING AND EFFECTIVE PROMOTION OF OCCUPATIONAL HEALTH AND SAFETY I'm using a safety harness. What about you? I observe traffic rules. What about you? Safety is easy! Safety is easy! STRUCTURE OF INVESTMENT IN SOCIAL PROJECTS 20% 12% 6% 5% 3.3 RUB billion Sports Healthcare Education Culture 14% 43% Work with children and young people Charity 6% yoy increase in productivity; a 41% improvement from 2011 0.43 Lost time injury frequency rate (LTIFR) at NLMK Group’s Russian companies: a yoy decrease of 22% In 2015, NLMK Group increased the investment in social projects by 13% to RUB 3.3 billion SUSTAINABILITY – REVIEW / REPORT 2015 Key sustainability indicators LABOUR PRODUCTIVITY (LIPETSK SITE) TONNES OF STEEL PER PERSON LTIFR (NLMK’S RUSSIAN ASSETS)* SPECIFIC ATMOSPHERIC EMISSIONS (KG/TONNE OF STEEL) 463 0.43 406 420 437 329 0.87 0.87 0.86 20.9 27.9 22.6 21.9 21.1 0.55 0.60 ВАТ** 18.9 ВАТ 2011 2012 2013 2014 2015 2011 2012 2013 2014 2015 2011 2012 2013 2014 2015 SPECIFIC ENERGY INTENSITY (LIPETSK SITE, GCAL/T) SHARE OF EMPLOYEES WHO RECEIVED PROFESSIONAL TRAINING (%) ENVIRONMENTAL INVESTMENT (CUMULATIVE $ M) 5.66 6.10 5.74 5.67 5.72 84 69 77 68 71 5.10 ВАТ 612 505 364 230 153 2011 2012 2013 2014 2015 2011 2012 2013 2014 2015 2011 2012 2013 2014 2015 * Lost-time injury frequency rates. ** Hereinaﬅ er BAT (best available technologies) refers to the level of best available technologies for integrated steelmakers. Corporate sustainability-related events in 2015 CERTIFICATION OF THE ENVIRONMENTAL MANAGEMENT SYSTEM In 2015, the Environmental Management System at NSMMZ and NLMK Metalware was certiﬁ ed as compliant with ISO 14001:2004 by BSI APPROVAL OF NLMK’S HR STRATEGY NLMK Group’s HR strategy was designed based on the Strategy 2017 targets. Development of the talent management system is a key aspect of the HR strategy PRIZE IN THE ENVIRONMENTAL COMPETITION NLMK Group topped the Urban Ecology nomination in the Vernadsky National Environmental Competition for the successful implementation of its environmentally friendly waterless BF slag cooling technology RECOGNITION OF NLMK GROUP’S PLANTS AS REGIONAL LEADERS IN LABOUR PRODUCTIVITY NLMK Kaluga, Novolipetsk and Altai-Koks became winners in the ﬁ rst national «Labour productivity – Industrial Leaders 2015» award and were recognized as leaders in labour productivity in their respective regions 25 NLMK’s sustainability review 27 Ceo statement 28 Stakeholder engagement 30 Our employees 36 Occupational health and safety 27 CEO STATEMENT The Company’s ongoing eﬀ orts to minimize its environmental impact also continue apace. We believe this is a key element serving to improve the quality of life of our employees and the wider community. NLMK Group invested more than $100 million into environmental projects across all production sites in 2015. Implementation of environmental projects has helped us to signiﬁ cantly reduce the environmental impact of our production activities. In 2015 we were able to cut speciﬁ c air emissions and water consumption, even though in terms of the latter NLMK had already surpassed the level of global best practice. NLMK Group will continue to further reduce its environmental footprint, regardless of output growth and the steel market environment. Priority areas of NLMK Group’s social policy over the past year included enhancement of the health and welfare of NLMK’s employees and their family members; organization of sports and cultural events; co-ﬁ nancing of non-state pensions for workers; and support for vulnerable social groups. The Company allocated more than $50 million for these activities. I am certain that the achievement of the sustainability targets envisioned by Strategy 2017 will drive the continued dynamic development of the Group and improve conﬁ dence in the Company yet further; as well as providing a foundation for even closer cooperation with all NLMK Group’s stakeholders. Best regards, Oleg Bagrin President of NLMK Group, Chairman of the Management Board Dear ladies and gentlemen, Our company is a socially responsible business. We understand that our responsibility encompasses not only the output of high-quality products, but also the development of society; protection of the environment; provision of comfortable and safe working conditions; creation of opportunities for career growth for our employees; as well as support for the health and welfare of not only NLMK Group employees but also their families and those in the communities where we operate. As a result, leadership in sustainability and safety is one of the key targets of Strategy 2017. We continued our eﬀ orts towards achieving this target in 2015 by investing in social projects, occupational health and safety and development of the potential of our employees. In 2015, NLMK Group’s Management Board approved our HR Strategy for the next two years. It was devised on the basis of the goals set out in Strategy 2017 and the volatile economic situation. Today, as never before, the company’s success depends on its employees’ personal performance and ability to tackle challenging tasks. Therefore, the development of the talent management system is at the core of our new HR Strategy. Identifying, developing and promoting talented employees has been a priority for NLMK Group for several years now. We train our staﬀ starting from their school years and work to continuously improve their knowledge. Tens of thousands of employees undertake retraining; study for a second qualiﬁ cation; and improve their skills. Approximately 90% attend the Group’s Corporate Training Center. Injury free and zero incident production, achieving best global OHS standards and ensuring leadership in production culture are important elements of Strategy 2017. In the last two years we have implemented our top priority programmes for risk management; and personnel training, involvement, and awareness; which have driven a considerable injury rate reduction. Today, all NLMK Group plants are covered by the integrated occupational health and safety programme and the Lost Time Injury Frequency Rate (LTIFR) has declined by 20% from the 2014 level, bringing it in line with the level of global best practice. 28 25 NLMK’s sustainability review 27 Ceo statement 28 Stakeholder engagement 30 Our employees 36 Occupational health and safety STAKEHOLDER ENGAGEMENT NLMK perceives corporate responsibility as integral, involving the selection and application of the most effective methods of engaging key stakeholders, resulting in decisions which are beneﬁ cial for all parties. In identifying key stakeholders, the Company considered the extent of their inﬂ uence over NLMK Group’s operations This approach generated the following list of stakeholders: Company employees, shareholders and investors, customers and suppliers, government regulators and supervisors, trade unions, public organizations and local communities in the regions where the Company operates, including potential employees. The Company conducts regular research into the opinions of key stakeholders through polls and consultations, engages them in discussions, working group meetings to review speciﬁ c issues, and standing committees, etc. By developing a framework for stakeholder engagement, the Company seeks to improve its current approaches to dialogue with a view to identifying problems and developing optimal solutions more quickly. l i a n a v y s n n e P K M L N t a g n i t e e M Stakeholders’ interests Tools for bilateral dialogue Feedback Company employees Salary, social package and social guarantees, career growth, safety and working conditions Trade unions Opinion polls, Dial 06 counselling service, union meetings, appointments to discuss personal issues, change-of-shift meetings, corporate media, incl. corporate magazines, newspapers Salary indexation, swift response to applications, possibilities for further career development, improvements in working conditions Compliance with sectoral tariff agreement, compliance with collective agreements, observance of employment legislation, awareness of the Company’s operations, employee salary level and social protection, working conditions and occupational safety Meetings and negotiations, discussion and conclusion of collective agreements, labour dispute commissions, Joint Commission involving administration and union, social insurance commission, occupational safety commission, qualiﬁ cation and staff review commissions Strict application of all social beneﬁ ts and guarantees speciﬁ ed in collective agreements, joint implementation of measures, response to applications, following unions’ recommendations Shareholders and investors Operational and ﬁ nancial performance, Company strategy, dividend payments, corporate governance issues, number of ordinary NLMK shares ﬂ oating freely on Russian stock exchanges, number of shares issued by NLMK and traded at the London Stock Exchange of Global Depositary Shares SUSTAINABILITY / REPORT 2015 Meetings with the Company’s senior management, annual reports and ﬁ nancial statements, quarterly performance presentations, teleconferences to discuss quarterly, six-month and annual results, media publications, Company website Dedicated services for shareholder and investor relations, dedicated section for shareholders and investors on the Company website 38 Environmental safety 40 Energy eﬃ ciency 42 Сommunity development 46 Communications 29 Stakeholders’ interests Tools for bilateral dialogue Feedback Consumers Fulﬁ lment of contractual obligations, product quality and price, timely review and settlement of customer complaints and claims, technical upgrades and development, operational and ﬁ nancial performance, ﬁ nancial and nonﬁ nancial risks Annual reports and ﬁ nancial statements, conferences, forums, business meetings, Russian and international professional associations and organizations, media publications, Company website Local communities Use of customer satisfaction monitoring results for future contracts Regional social and economic development, the environment, public health, funding of charity programmes, awareness of Company operations, reliability and transparency of information, job opportunities offered by the Company Media, representatives of public organizations, members of representative and legislative bodies at different levels, career guidance events, conferences, meetings Funding to support sports, healthcare, education and culture, ﬁ nancing child healthcare programmes and projects to promote a healthy lifestyle, charitable aid to disadvantaged social groups Government authorities Compliance with applicable laws, tax liabilities, regional social and economic development, environmental protection Public organizations Compliance with applicable laws, the environment, regional social and economic development, charitable activities Suppliers Participation in the work of state authorities including legislative bodies, participation in international and Russian professional and public organizations, meetings, dialogues, media A dedicated service for communication with representatives of state and local authorities, Company participation in different federal and regional programmes Conferences, clubs, meetings and other events, media, letters, Company website Handling of all issues, participation in the implementation of joint projects Possibility of long-term development, fulﬁ lment of contractual obligations, timely review and settlement of supplier complaints and claims of customers, operational and ﬁ nancial statements of the Company Annual reports and ﬁ nancial statements, conferences, forums, business meetings, Russian and international professional associations and organizations, media publications covering Company activities, Company website Open tenders, contact information for procurement department on the Company website 30 25 NLMK’s sustainability review 27 Ceo statement 28 Stakeholder engagement 30 Our employees 36 Occupational health and safety OUR EMPLOYEES Our team is our greatest asset, and our highly-qualiﬁ ed employees are a key factor in delivering strong performance. Working at NLMK is an opportunity to create a new future with one of the world’s most efﬁ cient steel companies. NLMK is building a team of professionals oﬀ ering comprehensive support to talented and ambitious employees who bring new ideas to life and are focused on result. NLMK’S HR POLICY ▪ Foster an honest and attractive culture that provides equal career opportunities ▪ Improve the organization’s eﬃ ciency by consistently promoting high-potential employees ▪ Build a learning organization Our Motivation project aims to: ▪ Align remuneration principles across the Group The three pillars of our HR strategy and our mission on each of them: ▪ Establish clear rules for setting ﬁ xed salary rates, depending on job attributes (grades) Employee We are striving to ensure that every job position within NLMK Group is ﬁ lled by a properly qualiﬁ ed, motivated and loyal member of staﬀ . Company We are striving to make NLMK Group the preferred employer in the markets where we operate, and to oﬀ er the best career opportunities to employees with high potential for advancement. We regard cost-eﬀ ectiveness as our priority and believe that our personnel costs should not exceed our labour productivity growth. Our aim is to replicate and develop best practices and be able to adapt quickly to the changing environment. HR We are striving to ensure that our HR function uses advanced expertise to become a leader in our Employee and Company mission, while being a reliable business partner and one of the most cost-eﬃ cient functions in the industry. The foundation and four strategic projects aimed at fulﬁ lling the mission Our Talent Management project aims to: ▪ Proactively identify and train qualiﬁ ed staﬀ ▪ Fully unlock employees’ potential and help them achieve job fulﬁ llment SUSTAINABILITY / REPORT 2015 ▪ Make sure that the variable pay is clearly linked to performance ▪ Create a perfect balance between the Company’s competitiveness in the labour market and cost control Our Structure and Process Optimization project aims to: ▪ Align organization principles across the Group ▪ Achieve labour eﬃ ciency with the number of employees clearly linked to the volume of work ▪ Clearly deﬁ ne the responsibilities for each task within processes and functions ▪ Ensure optimal timing of organizational and structural changes through a single point of accountability for project coordination Our Employee Engagement project will lead to: ▪ Positive attitude: our employees always speak positively of the Company when talking to their potential or existing colleagues or clients ▪ Loyalty: our employees want to stay with the Company for a long time and seek to be part of it ▪ Focus on improvement: our employees proactively seek to contribute to the Company’s success a n a d n I i K M L N , s r e b m e m ﬀ a t s , i g n m m e F l . M d n a s i l l i W . M Case study: NLMK Group’s HR policy for the next two years was approved in 2015. The policy is in line with the goals set out in the Group’s Strategy 2017 and adapted to changing economic conditions. Its key aim is to build an effective talent management system, as employees’ individual performance and ability to meet challenges determine the Company’s success or failure. 38 Environmental safety 40 Energy eﬃ ciency 42 Сommunity development 46 Communications 31 The main goal of NLMK’s HR policy is to develop and manage talent eﬀ ectively, building a cohesive team capable of delivering success and consistent growth. To this end, the Company pursues an active policy aimed at attracting and retaining the most talented young employees, providing equitable salary increases, utilizing a range of diﬀ erent incentives, conducting professional training and staﬀ development programmes, ensuring a safe working environment and improving social safeguards for employees. We are striving to make NLMK Group the preferred employer in the markets where we operate, oﬀ ering the best career opportunities and ensuring that all NLMK Group employees are properly qualiﬁ ed, motivated and loyal, as our leadership depends on what each of us contributes to the common cause. HR POLICY KPI Each year NLMK Group sets ambitious personnel and labour productivity targets, measuring KPIs both at the Group and individual company level. Almost all the targets set for 2015 at both levels were met. Below are some typical examples of KPIs. Level Targets for 2015 Unit Target Actual performance Progress 2015 NLMK Group Labour productivity growth Novolipetsk Attrition rate % % 5.0 6.0 6.0 2.6 Achieved Achieved Stoilensky Requests for professional training granted Scrap collection and processing division Development and introduction of Regulations on Young Employees Altai-Koks Senior management talent pool: competence proﬁ les for all candidates at Altai- Koks approved people 1,395 2,177 Achieved – – – – – – Achieved Achieved Aﬅ er the new HR strategy was adopted, we added some employee advancement KPIs. KPI Unit Target for 2016 Share of appointments from within the talent pool Share of key positions to be ﬁ lled with candidates from within the talent pool % % 75 50 32 25 NLMK’s sustainability review 27 Ceo statement 28 Stakeholder engagement 30 Our employees 36 Occupational health and safety OUR EMPLOYEES Average NLMK Group headcount during 2015 was 56,700 people (–6% year- on-year), of which 53,200 people were employed at Russian sites; 2,400 people were employed at NLMK’s European divisions; around 1,000 people were employed at NLMK USA; and around 300 people were employed in other countries where NLMK Group assets are located, including India, China, etc. Over 50% of NLMK Group personnel are directly involved in the mining and steel production process; whilst 23% are involved in repair and maintenances; and approximately 3% are involved in research and innovative development. The remaining 24% are administrative and management personnel, including services. both colleges and universities and among those that have completed their service in the armed forces of Russia. As a result, the Company hires over 1000 young qualiﬁ ed workers each year that later form the Company’s pool of professional talent, future managers and experts. NLMK Group has no gender limitations. NLMK has an active HR policy aimed at attracting prospective young workers from LABOUR PRODUCTIVITY Personnel structure by asset geography Personnel structure by age 4% 2% 0.4% 26% 21% NLMK consistently enhances the eﬃ ciency of its business by increasing the level of motivation and professionalism of its employees; through equipment upgrades; by implementing new technologies; and rationalizing production processes. The Company is currently on par with leading global steel companies in terms of operational eﬃ ciency; and NLMK continues to develop. The strategic target for the next few years is further increases in labour productivity through both process optimization initiatives and equipment productivity increases; with active involvement of personnel in the process. Continuous development has become the cornerstone of NLMK’s corporate culture. 93% Russia Europe 53% STRUCTURE AND FUNCTIONALITY OPTIMIZATION USA Under 30 Over 50 Other countries 30–50 In 2015, NLMK Group continued implementing a programme aimed at improving eﬃ ciency and identifying cost saving opportunities. We launched a set of Personnel structure by function Personnel structure by gender Labour productivity 24% 40% 27% 3% 23% 11% Steelmaking Mining and raw materials Repair and maintenance Research and development Services, management, administration and other functions Men Women SUSTAINABILITY / REPORT 2015 406 420 437 463 239 249 268 283 329 198 73% 2011 2012 2013 2014 2015 Labour productivity, Novolipetsk Labour productivity, NLMK Group y k s n e l i o t S , r e b m e m ﬀ a t s , v e h z o r o t S . V 38 Environmental safety 40 Energy eﬃ ciency 42 Сommunity development 22 Communications 33 initiatives, including a successful pilot project to outsource Novolipetsk’s steelmaking equipment maintenance and repairs to SMS Siemag Services. Some of the service functions, including catering and cleaning services were also outsourced. Large-scale outsourcing enabled NLMK Group to improve service quality, bring down costs and cut personnel by moving support staﬀ to external providers. PERSONNEL MOTIVATION Personnel motivation is one of the topmost priorities stated in NLMK Group’s HR policy. Our motivation system helps us improve the quality of work and achieve more. NLMK Group uses ﬁ nancial motivation, social motivation and psychological motivation. The most eﬀ ective technique currently employed by NLMK Group is result- oriented motivation, in which employee performance is measured with the help of key performance indicators (KPIs). By identifying KPIs for senior management and cascading them throughout the organization we can greatly improve labour eﬃ ciency and productivity across the Group. This principle serves as the basis for management by objectives (MBO), a system actively implemented across all NLMK Group companies in 2015. Seeking to protect our employees from inﬂ ation, we index wages to keep up with the increase in price levels each quarter. The average monthly salary at NLMK Group companies increased by about 8% yoy in 2015, reaching 47,400 rubles at the Russian plants. To attract and retain people, improve job satisfaction and generate internal motivation, we oﬀ er a number of non-ﬁ nancial incentives: badges or certiﬁ cates of appreciation for employees who performed exceptionally well; stories about the best employees in the corporate newspaper; their portraits on the Recognition Board; free rides to work and back for employees from other cities; and management talent pool opportunities for successful and talented employees. 3,000 Novolipetsk employees received awards in 2015, including: ▪ 2,877 corporate awards ▪ 51 regional and city awards ▪ 55 industry awards ▪ 2 state awards 34 25 NLMK’s sustainability review 27 Ceo statement 28 Stakeholder engagement 30 Our employees 36 Occupational health and safety Contests and competitions are important elements of the incentive system. They help increase employee commitment to professional development and provide ample career growth opportunities. Novolipetsk alone held 37 skills competitions with over 2,000 participants in 2015. Case study: The Young Leader contest held by Altai-Koks had 32 participants in 2015 and included corporate training that covered management and leadership skills, as well as a special module titled ‘Mini Project Management’. More than 5,000 young employees participated in similar contests across NLMK Group companies in 2015. NLMK Group companies annually hold Young Leader contests for young employees to stimulate their personal and professional development. SOCIAL PACKAGE As a responsible employer, NLMK continuously supports its employees by providing beneﬁ ts. All NLMK Group employees have access to such social beneﬁ ts as provisions for employee health and welfare, catering and recreation, occupational health and safety, motherhood and childhood support, support for pensioners and veterans and further social incentives for the best workers as well as a variety of social payments. Our female employees enjoy additional beneﬁ ts beyond those required by law: ﬂ exible working hours for women with small children and professional training and development programmes following maternity leave. NLMK Group also implements a comprehensive youth programme to provide additional support to young employees. Graduates of partner colleges and universities are oﬀ ered a guaranteed average salary and kickoﬀ bonuses upon employment. NLMK has another good tradition: we give New Year presents to our employees’ children and oﬀ er discounts on package holidays to children’s summer camps. Case study: Winners of the Housing for Young Steelworkers 2015 programme who work at Novolipetsk received keys to their new apartments in a ceremony that took place in July 2015. The programme is an annual not-for- proﬁ t social project targeted at top-performing employees aged below 35. The 32 young families will all live in the same section of a new apartment block in Lipetsk’s 28th district. Four hundred and one young families of our employees have already been provided with housing since the start of the programme in 2005. HEALTH AND WELFARE The health and welfare of NLMK employees is a priority focus of the company’s social activities. The health and welfare of its employees is a priority for NLMK Group, which focuses close attention on developing a strong corporate health culture, establishing the conditions for a healthier lifestyle and improving mental and physical health. NLMK Group runs 3 medical units and over 25 ﬁ rst aid facilities to provide medical support. NLMK employees have the opportunity to make visits to health resorts and spas, both locally at 10 NLMK health resorts and spas, and in other regions of the country. NLMK allocated 100 million rubles ($2 million) in 2015 towards health resort treatment for employees. Healthy lifestyle programmes are aimed at involving as many employees as possible in sports activities; and at popularizing healthy life choices. Employees have the opportunity to use gyms located at NLMK facilities, to get discounts on memberships to swimming pool and ﬁ tness centres. Case study: More than 3,500 employees participate in the ‘NLMK Olympics’ each year. The Olympics are held throughout the year in 19 different sports. The event also offers a chance to take GTO physical ﬁ tness tests. SUSTAINABILITY / REPORT 2015 38 Environmental safety 40 Energy eﬃ ciency 42 Сommunity development 46 Communications 35 The Company organizes regular sports and cultural events. Summer camps are organized each year for the children of NLMK employees. Employees beneﬁ t from discounted trips to three diﬀ erent children’s camps owned by the Сompany, as well as camps located on the coast of the Black Sea. TALENT DEVELOPMENT NLMK sees investment into personnel development as a prerequisite for the Сompany’s long-term competitiveness, dynamic development, an increased potential of its human capital; and, ultimately, the increased fundamental value of the Сompany as a whole. In line with its Strategy 2017, NLMK Group continues to improve its professional development procedures. Professional training at NLMK Group is a complex project that provides the level of employee qualiﬁ cation necessary for solving professional challenges. It also increases employee loyalty, forms a favourable social and psychological climate in the workplace and has a direct impact on the development of NLMK’s corporate culture. The primary direction of our talent development eﬀ orts focuses on our talent pool – promising employees, performance reviews of managers and line personnel, mandatory knowledge tests for workers (knowledge checks), induction, coaching, leadership initiatives and skills competitions. The year of 2015 marked the beginning of a new process for NLMK Group: we are assessing our managers and line and administrative personnel to determine whether they meet our job requirements. We look at how they perform their job duties and what personal and professional qualities they demonstrate. Following assessment, we devise individual training plans aimed at improving their performance and develop incentives to encourage them to work more eﬃ ciently. Our talent pool is one of the uppermost priorities of the HR policy. We provide training to employees who are able to perform managerial work to get them ready for speciﬁ c job openings. The programme includes theory (seminars and training sessions) and practical training in the prospective position. NLMK places a great emphasis on working with promising young employees. Also, we have an induction programme that aims at supporting newcomers through the onboarding process and preparing them for their new role: they should be able to perform their tasks and meet deadlines, have a good understanding of their duties, be committed to them, and feel personally responsible for their work. Case study: The year of 2015 saw the start of the fourth stage of ‘NLMK Group Leaders 2025’, a strategic talent pool development programme that provides high- quality training to the most promising employees. The training is delivered by world-renowned teachers and executives from global companies. The programme opens up new career and personal development horizons, motivating employees to reach what seemed to be unattainable. More than 50% of participants have been promoted – including to function directors – since the start of the programme. About 90% of employees are trained in- house, enabling them to beneﬁ t from the wealth of knowledge accumulated by NLMK and providing for a more eﬀ ective training process. Highly qualiﬁ ed managers and specialists as well as professors from leading Russian educational institutions are invited to teach employees. Investment into professional development and training ($ m) 5.5 5.5 4.8 4.4 3.3 2011 2012 2013 2014 2015 Investment structure into professional development by area 3% 2% 1% 1% $3.3 m 6% 13% 24% 50% Talent pool training Mandatory occupational health and safety certiﬁcation; special-purpose courses Professional training and skill enhancement New placement trainings IT Tranings Targeted ﬁnancing of education in colleges/universities Participation in conferences Advanced training workshops 36 25 NLMK’s sustainability review 27 Ceo statement 28 Stakeholder engagement 30 Our employees 36 Occupational health and safety OCCUPATIONAL HEALTH AND SAFETY The Company aims to be a world leader in occupational health and safety (OHS) among steel companies through applying best available OHS practices, efﬁ cient risk management, through provision of incentives and by actively involving employees in the occupational safety programme. NLMK’S OCCUPATIONAL HEALTH AND SAFETY POLICY OHS is the cornerstone of efﬁ cient production GOALS PRINCIPLES ACTIONS RESPONSIBILITIES OF MANAGEMENT ▪ Efﬁ cient accident – and incident-free operations; ▪ Achieving global leadership in occupational health and safety. ▪ Employees are NLMK’s key value; their health and wellbeing are key to the success of our operations; ▪ Occupational health and safety is an integral part of our business and the basis for decisions on developing and improving our business processes; ▪ All accidents, incidents and professional illnesses can and must be prevented; ▪ Safe operations are the responsibility of each and every employee. ▪ Efﬁ cient management of potential risks to the health and safety of our employees, contractors and third parties; ▪ Strictly adherence to Russian and international occupational health and safety requirements; ▪ Continuous improvement of employee skills in the area of occupational health and safety; ▪ Ensuring the transparency of OHS indicators. ▪ To ensure safe working conditions in line with OHS norms and standards; ▪ To allocate resources to ensure OHS compliance; ▪ To take measures to prevent accidents, incidents and professional illnesses; ▪ To introduce advanced OHS methods and technologies; ▪ To consult employees and their representatives on OHS issues; to motivate employees to work in a safe and incident-free environment; ▪ To regularly assess the quality of the Сompany’s risk management system and ensure its constant improvement. RESPONSIBILITIES OF EMPLOYEES ▪ To take care of both one’s own safety; and the safety of others; ▪ To strictly adhere to established OHS requirements and use of safe working methods; ▪ To actively participate in OHS programmes. KEY OHS INITIATIVES IN 2015 NLMK Group’s Russian plants carried out a routine assessment of working conditions and used their ﬁ ndings to plan improvements and to reduce the adverse eﬀ ects of working in industrial settings. They also made an earlier planned transition to new corporate protective clothing designs and state-of-the-art high-eﬃ ciency personal protective equipment. Senior executives of Russian and international NLMK Group companies completed training in an NLMK programme aimed at building a safety culture. The Group continued implementing its ‘Risk Management’ and ‘In Search of Safety’ programmes. OHS COSTS NLMK annually ﬁ nances events aimed at the continuous improvement of OHS and working conditions. The Group spent a total of 1.5 billion rubles ($25 million) on OHS initiatives in 2015. Its OHS spending has thus more than doubled since 2010, when measured in US dollars – and increased four- fold when expressed in rubles. Breakdown of Occupational Health and Safety Costs 21% 42% $25 m 2% 18% 5% 12% Personal protection equipment Improvement of working conditions Healthy meals Occupational safety OHS trainings Other SUSTAINABILITY / REPORT 2015 38 Environmental safety 40 Energy eﬃ ciency 42 Сommunity development 46 Communications 37 NLMK GROUP’S OCCUPATIONAL INJURY STATISTICS NLMK Group achieved a signiﬁ cant reduction in occupational injury rates in 2015, as compared with 2014 levels: ▪ The total number of lost time injuries dropped 44 points, or 29% across all NLMK Group plants ▪ The number of work days lost due to work- related accidents fell by 34% ▪ Lost time injury frequency rate (LTIFR per 1,000,000 hours worked) among employees was down: – by 27% for NLMK Group; – by 22% for NLMK’s Russian assets; – by 28% for NLMK’s international assets. TARGET OHS KPI ▪ Lost time injury severity rate (LTISR per 1,000,000 hours worked) among employees was down: – by 33% for NLMK Group; – by 26% for NLMK’s Russian assets; – by 37% for NLMK’s international assets. Ten NLMK Group companies had no lost time injuries at all in 2015. Unlike 2014, when there was not a single work-related fatality, we were regrettably not able to avoid them in 2015. However, their number was smaller than in 2011, 2012 or 2013: four fatalities in Russia and one abroad. Lost Time Injury Frequency Rate (LTIFR) – Russian Assets 0.87 0.87 0.86 0.55 0.60 ВАТ 0.43 2011 2012 2013 2014 2015 The efﬁ ciency of our OHS efforts is measured with the help of KPIs. Here is an overview of some of our OHS targets for 2015. Key corporate social responsibility aspects Occupational health and safety Targets for 2015 Performance in 2015 Progress Targets for 2016 Ensuring that the lost time injury frequency rate (LTIFR) at NLMK Group’s Russian companies remains unchanged from 2014 Reducing lost time injury frequency rate (LTIFR) at NLMK Group’s international companies by 10% from 2014 Lost time injury frequency rate (LTIFR) dropped 22% from 2014 Target exceeded by 22% Target exceeded by 18% The lost time injury frequency rate (LTIFR) at NLMK Group’s international companies decreased by 28% from 2014 Eliminating or reducing no less than 50% of identiﬁ ed unacceptable risks 72% of identiﬁ ed unacceptable risks eliminated or reduced Target exceeded by 22% Ensure that no less than 20% of employees (10,000) are involved in the ‘In Search of Safety’ programme 20,433 employees became involved in the programme Target exceeded by 104% Keeping lost time injury frequency rate (LTIFR) at NLMK Group’s Russian companies below or equal to 0.60 Reducing lost time injury frequency rate (LTIFR) at NLMK Group’s international companies by 10% from 2015 Eliminating or reducing no less than 50% of unacceptable risks identiﬁ ed in 2016 that were also revealed in 2015 Ensure that no less than 20% of employees (10,000) are involved in the ‘In Search of Safety’ programme 38 25 NLMK’s sustainability review 27 Ceo statement 28 Stakeholder engagement 30 Our employees 36 Occupational health and safety ENVIRONMENTAL SAFETY NLMK Group’s environmental efforts are focused on preventing – or where not possible, then minimizing – its negative environmental impacts, providing safe working conditions and creating a good living environment in the regions where it operates. COMPREHENSIVE APPROACH TO ENVIRONMENTAL PROTECTION NLMK undertakes to meet regulatory requirements and set higher environmental standards for its companies, bringing them in line with best environmental practices from around the world. This approach is part of our Strategy 2017, which aims at reducing the Company’s emission rates and achieving best-in-class environmental performance. Approved in 2015, NLMK Group’s Environmental Policy describes the Company’s environmental principles, targets, actions and commitments. NLMK Group consistently adopts the best environmental safety management practices from around the world. Seven of our key plants have achieved international certiﬁ cation, and two more companies – NLMK Kaluga and Altai-Koks – plan to do so in 2016. ENVIRONMENTAL INVESTMENT A reduced negative impact on the environment is the result of NLMK Group’s capex programme alongside planned environmental and technological initiatives outside of the investment process. NLMK Group’s investment into projects to ensure a reduced environmental impact KEY ENVIRONMENTAL TARGETS Targets for 2015 Performance in 2015 Reduce emission rate by 0.2 kg per tonne of steel compared with 2014 levels Emission rate reduced by 0.2 kg per tonne of steel compared with 2014 levels Progress (analysis) Target achieved Reduce water consumption by 0.4 cbm per tonne of steel compared with 2014 levels Water consumption reduced by 0.5 cbm per tonne of steel compared with 2014 levels Target exceeded by 0.1 cbm per tonne of steel Targets for 2016* Reduce emission rate by 0.1 kg per tonne of steel compared with 2015 levels Reduce water consumption by 0.1 cbm per tonne of steel compared with 2015 levels Increase NLMK Group’s overall recycling rate by 15% of the 2011 levels Recycling rate increased by 17% of the 2011 levels * with steel production remaining at the same level in 2016. Target exceeded by 2% Increase recycling rate to 15% and the cost of environmental initiatives in 2015 totaled 6.5 billion rubles ($107 million). 23.1 billion rubles (over $600 million) was spent in total on environmental activities between 2011 and 2015. Examples of environmental initiatives implemented in 2015 NLMK Group ran a number of major environmental initiatives at diﬀ erent stages of completion in 2015. All of them were aimed at reducing the Company’s environmental impact. NLMK’s environmental investments ($ m) 153 134 141 107 77 2011 2012 2013 2014 2015 For instance, an environmentally friendly waterless BG slag cooling technology was successfully implemented at the Lipetsk site, resulting in an 8-fold reduction in hydrogen sulphide content of emissions produced during this process. The refractory shop completed the upgrading of dust collectors for rotary furnaces, which helped reduce dust emissions by about 200 tonnes a year. Other NLMK Group companies also implemented major environmental initiatives, including: ▪ Equipment repairs and upgrades at Altai- Koks’ coke batteries ▪ A new dust suppression system at Stoilensky’s tailings pond (ﬁ rst stage) ▪ Filtering equipment upgrades for improved oﬀ -gas treatment at NLMK Kaluga’s EAF. SUSTAINABILITY / REPORT 2015 38 Environmental safety 40 Energy eﬃ ciency 42 Сommunity development 46 Communications 39 REDUCTION OF ENVIRONMENTAL FOOTPRINT kg per tonne of steel, bringing the total decrease over the past ﬁ ve years to 25%. NLMK’s systematic and consistent approach to environmental protection, alongside the high priority it gives to environmental initiatives guarantees continuous improvement of its environmental performance. Novolipetsk produces 81% of NLMK Group’s steel, and accounts for more than 80% of all emissions. This explains the plant’s heavy investment in environmental initiatives at all stages of the production process. Air In 2015, NLMK Group reduced its emission rate, the key environmental performance indicator – which is now very close to the best available technology levels. While the Company’s steel production was at the same level as in the previous years, emission rates dropped to 20.9 The Lipetsk site is focused on improving its environmental performance and thus minimizing its environmental footprint. Hard work and massive investment enabled the plant to reduce its contribution to air pollution by almost 50% in the past 15 years. According to Rosgidromet (Russian Federal Service for Hydrometeorology and Environmental Monitoring), air pollution in Lipetsk is ﬁ ve times lower than 10 years ago, bringing it in line with cities with no industrial operations. The Group’s mining companies (Stoilensky, Stagdok, and Dolomit) accounted for about 1% of the total emissions. NLMK Group will continue to reduce its emission rate in 2016; the next target is to cut the rate by another 0.1 kg per tonne of steel. Water One of the key indicators which reﬂ ects the impact of production on water bodies is the water consumption per tonne of steel. NLMK Group leads the way in this area, outperforming its global peers. With its unique technologies and eﬃ cient production, the Company was able to reduce water consumption to 4.9 cbm per tonne of steel in 2015 – compared to the best available technologies level at 7.0 cbm per tonne for integrated world producers. This great care for one of the most important natural resources was made possible thanks to a closed loop water system introduced by Novolipetsk, Stoilensky, Altai-Koks, VIZ-Steel and NLMK Speciﬁ c air emissions (kg/t) Speciﬁ c water consumption (m3/t) 27.9 22.6 21.9 21.1 20.9 18.9 18.9 ВАТ* 6.6 7 ВАТ 5.5 5.4 5.4 4.9 2011 2012 2013 2014 2015 Target 2020 * BAT = best available technologies. 2011 2012 2013 2014 2015 Kaluga. The system enabled these facilities to stop polluting discharges into water bodies entirely. NLMK Group will continue taking steps to reduce its water consumption in 2016; the next target is to cut it by another 0.1 cbm per tonne of steel. Waste management NLMK Group produced 63 million tonnes of waste in 2015 (just like the year before); 92% of this was attributed to Stoilensky. Novolipetsk accounted for 7% of the waste produced in 2015. It is worth saying that the Group’s main production site was able to reduce its waste by 11% yoy thanks to a number of resource-saving initiatives. While the other NLMK Group plants accounted for only about 1% of waste, they were also involved in the programme aimed at making more use of recycled materials. The recycling rate at NLMK Group’s steelmaking companies in Russia exceeded 90% in 2015. Novolipetsk increased its recycling rate by 2 p.p., to 96%, and a number of NLMK Group companies managed to make use of accumulated waste. With a recycling rate of 110% and 102%, respectively, NSMMZ and Dolomit were among the most environmentally responsible NLMK Group companies. As part of Strategy 2017, Novolipetsk plans to build a briquetting plant that will recycle accumulated ferrous waste into material used in pig iron manufacturing. With a capacity of 700,000 t briquettes, the new facility will make its contribution to improving the Company’s recycling rate. It is slated for launch in 2018. PUBLIC APPRAISAL OF NLMK GROUP’S ENVIRONMENTAL ACTIVITIES In 2015, NLMK Group received a silver medal at Metal-Expo’2015 international industry awards for the successful implementation of its environmentally friendly waterless BG slag cooling technology at the Lipetsk site that resulted in an 8-fold reduction in emission of hydrogen sulﬁ de. With the same innovation NLMK Group topped the Urban Ecology nomination in the Vernadsky National Environmental Competition. 40 25 NLMK’s sustainability review 27 Ceo statement 28 Stakeholder engagement 30 Our employees 36 Occupational health and safety ENERGY EFFICIENCY NLMK Group continued its efforts to increase operational and energy efﬁ ciency in 2015; the initiatives generated a total impact of 1.3 billion rubles ($21 million). In 2015, NLMK Group signed long- term agreements with NOVATEK for the supply of natural gas to all of NLMK Group’s Russian production facilities. The contracts have been signed for a term of 5 years and will come into effect on January 1st, 2016. The agreements provide for the supply of an annual volume of 2.8 billion cubic meters of natural gas to NLMK Group’s production facilities. This will cover 100% of NLMK Group’s natural gas needs that were previously met by other companies. international standard. Stagdok, Dolomit and NLMK Kaluga also successfully passed their energy management eﬃ ciency audits in 2015. Currently, all of the main NLMK Group Russian facilities have valid certiﬁ cates of compliance with the requirements of the ISO 50001 international standard. This is the result of the Company’s consistent approach to the generation, consumption and use of energy for the production of goods. Speciﬁ c energy intensity of steel production (Gcal/t) 6.1 5.74 5.67 5.72 5.66 5.1 ВАТ 2011 2012 2013 2014 2015 k s t e p i l o v o N t a t n a p l t n e m t a e r t r e t a w e t s a W These were achieved by a reduction in natural gas costs by over 270 million rubles through purchases at an organized trading venue; long-term gas supply contracts with NOVATEK that would meet 100% of the Russian companies’ natural gas needs in 2016–2020; and improved utilization of process equipment to avoid downtime, etc. The improvements helped NLMK Group’s Russian companies achieve a 3% yoy decrease in energy consumption in 2015 despite the fact that production remained at the same level as it was in the previous years. Key energy eﬃ ciency investment projects in 2015 included the launch of a 20 MW top-pressure recovery turbine (TRT) for Blast Furnace No. 7 at the Lipetsk site and air separation unit No. 17. Among other beneﬁ ts, these projects increased Novolipetsk’s self-suﬃ ciency in energy from 54% to 57%. Almost 77% of all in-house energy was generated through the recovery of by-product BF and coke gases. Initiatives to boost energy eﬃ ciency resulted in a 1% year-on-year improvement in the energy intensity of the Lipetsk site during 2015, to reach 5.66 Gcal per tonne of steel. NLMK Group’s target energy eﬃ ciency level is equal to the level of best available technologies (BAT). To achieve this target, we plan to implement a series of low-cost initiatives within the optimization programme, as well as local energy savings programmes at production sites and Strategy 2017 investment projects each year. NLMK Group’s energy management eﬃ ciency during 2015 was endorsed by international specialists. Representatives of the British Standards Institute (BSI) conﬁ rmed the compliance of the energy management system at Altai-Koks, Stoilensky, VIZ-Steel, NSMMZ, NLMK Metalware, and Novolipetsk with the requirements of the ISO 50001 SUSTAINABILITY / REPORT 2015 38 Environmental safety 40 Energy eﬃ ciency 42 Сommunity development 46 Communications 41 Sergey Chebotarev, NLMK Group Vice President for Energy, said: “In order to reach the level of best available technologies, in 2015 NLMK Group implemented a set of investment projects and a signiﬁ cant number of cost-efﬁ cient optimization initiatives. Key projects in the pipeline include the construction of a TRT for blast furnace No. 6; improved reliability of the energy supply to BOF shops; replacement of turbine-driven generator No. 5; completion of upgrades to bell-type furnaces at Novolipetsk rolling operations; and establishing the energy supply for the Stoilensky pelletizing plant currently under construction.” 42 25 NLMK’s sustainability review 27 Ceo statement 28 Stakeholder engagement 30 Our employees 36 Occupational health and safety COMMUNITY DEVELOPMENT SOCIAL RESPONSIBILITY MISSION AND STRATEGIC OBJECTIVES Social mission The Company sees its social mission as achieving sustainability goals, which meet the long-term economic interests of the business, contribute to community welfare, along with conservation of the environment and the observance of human rights within the territories of its operation. Social responsibility and sustainability: NLMK’s strategic goals The combined eﬀ orts of the Company, its employees and communities are aimed at achieving the following strategic goals: ▪ Create a favourable and predictable social and economic environment for its employees and local communities; ▪ Improve corporate governance frameworks for economic, environmental and social activities of the Company; ▪ Comply with international environmental protection standards. Focus on the best state-of-the-art technologies; ▪ Observe business ethics principles, resist corruption and terrorism; ▪ Develop new types of products to meet customer expectations; ▪ Create an environment for the stronger performance by Company employees; ▪ Ensure sustainable improvements in welfare and social safety for Company employees and safe workplace environments. IMPROVING THE SOCIAL ENVIRONMENT Improving the quality of life for people that live in the regions in which the Company operates is one of NLMK’s key social responsibility goals. The Company works with local communities; and the authorities at diﬀ erent levels; to strive to create new opportunities for using cutting-edge mechanisms for development of the regions where NLMK operates and to resolve the most burning social issues. The Company makes a signiﬁ cant contribution to local employment, providing jobs with competitive salaries. Almost all our employees are local residents. l t e e m d e ﬁ - d n a - k c a r t a n i l y a D s ’ r e k a m e e t S e t a r b e e c l Pursuing a policy of regional responsibility produces economic beneﬁ ts for the Company including development of the potential of the labour force; as well as improved engagement with local communities and creation of comfortable living conditions for Company employees. l s e e y o p m e K M L N NLMK creates comfortable and safe working conditions in order to stimulate personnel development; and strives to provide workers with an adequate standard of living. The level of salaries at all Group companies exceeds average The combined efforts of the Company, its employees and communities are aimed at achieving the following strategic goals: Key aspects of corporate responsibility 2015 objectives 2015 results Engagement with local communities Development of regions where NLMK operates To implement initiatives that promote the sustainable development of the regions where the company operates and maintain social and economic stability in local communities. Investment in social needs and the development of the regions where the company operates totaled 3.3 billion rubles ($54 million) in 2015; whilst over 400 million rubles ($7 million) was allocated to charity. NLMK was ranked one of the top ﬁ ve socially responsible companies in a study by the Agency of Political and Economic Communications Achievement of set objectives: analysis 2015 objective achieved NLMK Group actively participated in the development of the regions where its assets operate 2016 objectives To continue implementing measures to promote the sustainable development of the regions where the Company operates SUSTAINABILITY / REPORT 2015 38 Environmental safety 40 Energy eﬃ ciency 42 Сommunity development 46 Communications 43 income levels in the regions in which they operate, which attracts new workers to the Company. NLMK implements several dozen social programmes. NLMK GROUP’S INVESTMENTS IN THE REGIONS IN WHICH IT OPERATES Financing for social programmes is a key prerequisite of their eﬃ ciency. The Company is focused on projects that ensure tangible improvement of the quality of life for people in the regions in which it operates. NLMK consistently ﬁ nances programmes aimed at promoting education, healthcare, and culture. Promotion of sport is an important area for the Company, including for children. NLMK Investment in social projects ($ m) 2015 Investment structure in social projects 73 75 70 20% 12% 43 54 2011 2012 2013 2014 2015 ▪ Work with children and young people $54 m 6% 5% 14% 43% Sport Healthcare Education Culture Key areas of social investment: ▪ Charitable activities. ▪ Promotion of sport and healthcare ▪ Promotion of education and culture NLMK Group’s social investment at its Russian sites totaled 3.3 billion rubles ($54 million) in 2015. Work with children and young people Charitable activities 44 25 NLMK’s sustainability review 27 Ceo statement 28 Stakeholder engagement 30 Our employees 36 Occupational health and safety PROMOTION OF SPORT AND HEALTHCARE The Company sees the promotion of welfare and a healthy lifestyle for its employees and people in regions in which it operates as a priority of its social responsibility. Special focus is placed on involving children and young people in regular sports activities. NLMK provides assistance to sports groups and schools for children and young people, as well as to sports clubs and athletes. Funds are allocated for the maintenance of sports facilities and buildings (stadiums, sports complexes, sports halls), and the purchase of sports equipment. NLMK ﬁ nances the ‘Lipetsk Metallurgist’ sports club that is successfully promoting sport in Lipetsk and creates the conditions for Novolipetsk employees and the members of their families, as well as all other Lipetsk dwellers, to practice sports. One of the most modern shooting clubs in Russia; a shooting range; and the ‘Novolipetsky’ health and welfare centre for summer and winter sports are all located in Lipetsk. The shooting club is equipped with top-notch equipment which means it can host international competitions. The Company has medical centres in Lipetsk, Belgorod and Sverdlovsk Regions; and in the Altai Republic; that provide high- quality medical care for NLMK employees and people living in the regions. PROMOTION OF EDUCATION AND CULTURE NLMK has a comprehensive programme to support the younger generation receiving a quality education by creating its own talent pool of driven and technically qualiﬁ ed personnel. Colleges and universities NLMK supports organize ‘Open Doors’ days for school students. The Company organizes site visits, competitions, contests, and scientiﬁ c conferences. NLMK cooperates with over 30 colleges and universities. Around 4,000 technical college students take internships at NLMK Group companies each year. NLMK runs special scholarship programmes for higher professional education students in order to provide additional social support to giﬅ ed students. NLMK’s career guidance programme involves school students; and is aimed at helping students to make conscious career choices and to satisfy the Company’s personnel requirements in key areas by studying in colleges and universities certiﬁ ed and supported by NLMK, with subsequent employment at the Company. Over 11,000 students from 72 schools in Lipetsk and Lipetsk Region participated in career guidance initiatives in 2015. NLMK provides comprehensive support for its partner colleges and universities, which started introducing a dual education system on the Company’s initiative in 2015. The programme combines education at the college or university with apprenticeships in the Company. Other NLMK Group companies also have many youth programmes. For example, Altai-Koks has partnered with three local schools, and more than 200 school students took part in career guidance events. NLMK provides support to children’s creative clubs, studios, libraries, museums, and art galleries, and also allocates funds for the protection and proper maintenance of cultural and architectural monuments and other objects of cultural and historical value. WORK WITH CHILDREN AND YOUNG PEOPLE NLMK invests a lot of eﬀ ort into organizing healthy recreational activities for children. During the summer vacation the Company arranges trips for children of its employees to summer camps; which are also open to children from low-income families and orphans. Through sponsorship and charitable assistance, NLMK invests in improving the material and technical infrastructure of preschools, schools, colleges, professional schools, children’s creative centres, children’s homes, and boarding schools. Special emphasis is placed on patriotic education. Together with organizations of war veterans and trade unions, NLMK organizes meetings with veterans and visits to war memorials; as well as lessons on bravery in schools and colleges. CHARITABLE ACTIVITIES NLMK contributes to charities through its own charitable organizations as well as through direct contributions to other charities. The ‘Miloserdiye’ (‘Mercy’) social protection fund, founded by Novolipetsk, runs 11 programmes that cover all aspects of social support. Priority areas include support for orphans, low-income households, pensioners and diﬀ erently-able persons; as well as people that have found themselves in challenging life situations Over 30,000 people from Lipetsk Region that require additional social support receive help annually. Funds are allocated to pay for long-term medical treatment, medicine, technical rehab means, trips to resorts and children’s camps and preparation for the beginning of the academic year; as well as other social projects. The ‘Zabota, pomoshch, miloserdiye’ (‘Care, help, mercy’) charity fund in Sverdlovsk SUSTAINABILITY / REPORT 2015 38 Environmental safety 40 Energy eﬃ ciency 42 Сommunity development 46 Communications 45 Region helps promote sports and protect cultural heritage; also supporting veterans and pensioners. NLMK held a series of events to celebrate the 70th anniversary of the end of World War II. Celebrations, meetings and concerts were organized to honour the veterans and home- front workers. All our veterans received medals, letters of appreciation and giﬅ s from employees of NLMK Group companies. NLMK allocated over 400 million rubles ($7 million) to charity programmes in 2015. NLMK employees created the www.Pobeda48.ru internet portal, a regularly updated website that has a database of NLMK and Lipetsk Region veterans who participated in the war. It is based on archive documents about those that participated in the war, home-front workers, survivors of the Leningrad blockade, and concentration camp prisoners. 46 25 NLMK’s sustainability review 27 Ceo statement 28 Stakeholder engagement 30 Our employees 36 Occupational health and safety COMMUNICATIONS TRANSPARENCY AND REPUTATION MANAGEMENT NLMK Group follows best global practice in interacting with stakeholders: employees, local communities, shareholders, investors, customers, business partners, mass media, government authorities and non-proﬁ t organizations. Constructive dialogue is facilitated by transparency, which has been traditionally maintained across the Group. We use all available communication channels to keep the public informed promptly and in detail: websites of NLMK Group and its companies, press releases, comments in mass media, press tours, press conferences, posts on social networks and multimedia websites, our corporate newspapers, portal and magazines, and employee feedback channels. NLMK Group strives to provide the public with more information than it is required by disclosure laws, because we are convinced that openness and transparency strengthen our reputation as a socially responsible, eﬃ cient and sustainable multinational company. EFFECTIVE EXTERNAL COMMUNICATIONS NLMK Group made more extensive use of communication channels targeted at external audience in 2015, publishing about 600 press releases dedicated to its investment, production, ﬁ nancial, social, environmental and other activities. The management of NLMK Group and its companies continued its open communication with journalists and the professional community through press conferences, interviews and participation in industry-related and economic conferences and exhibitions. Seeking to improve the quality of information about the Company and facilitate the process of obtaining and analyzing this data, NLMK Group updated its oﬃ cial website (www.nlmk.com), adding new and advanced functionality, and a wide range of information about its activities. We have had a lot of positive feedback from our customers and partners about our new product catalogues and our ﬁ rst global online website dedicated to NLMK products (products.nlmk.com). VOICE OF EMPLOYEES NLMK Group continues developing an eﬀ ective internal communications system that covers all production sites and encompasses several advanced communication channels: ▪ Extensive feedback network ▪ Corporate-wide intranet ▪ Corporate newspapers issued by NLMK Group’s Russian companies ▪ NLMK Group corporate magazine available in Russian and English ▪ Newsletters at NLMK Europe companies ▪ NLMK-TV with stories streamed on the intranet In 2015, NLMK Group’s corporate mass media published over 1,700 items that helped employees promptly get latest information on the industry and company-related events, operational and social programmes, and development and career growth opportunities. An important corporate communications trend seen in 2015 was the growing share of news items based on employees’ feedback received through telephone hotlines, complaint boxes, and emails to newspapers and the magazine, as well as through new channels such as text messages and a special service on NLMK Group’s corporate portal. The new feedback channels expanded employees’ opportunities for contacting management on urgent issues and doing it anonymously. The Company will continue to develop its feedback channels, which play an important role in improving employee motivation and loyalty. RECOGNITION NLMK Group’s corporate media has always been highly rated on top-lists and by media awards. NLMK Group corporate intranet: ▪ A project to develop NLMK corporate portal’s media centre by a PR specialist won Young People in Media Landscape and was granted 100,000 rubles at an SUSTAINABILITY / REPORT 2015 e n i z a g a M e t a r o p r o C K M L N international corporate youth project awards. ▪ NLMK’s project titled ‘Corporate portal: platform for development of internal communications’ was ranked among the top three in the Best Internal Communications and Corporate Media Project category at the 19th Silver Archer national public relations awards. NLMK Group magazine: ▪ Named Best Corporate Media of the Year 2015. ▪ Recognized as best corporate media at Metal-Expo’2015. 38 Environmental safety 40 Energy eﬃ ciency 42 Сommunity development 46 Communications 47 ▪ Topped the list of the best corporate ▪ Named Best Digital Corporate Media at magazines issued by industrial companies, which was compiled by Production Management magazine in 2015. ▪ Topped the Well-Written Media list in 2015. The Big Ore newspaper (Stoilensky): ▪ Named Best Publication of an Ore Mining Company at Metal-Expo’2015. Metal-Expo’2015. NLMK Group’s corporate videos: ▪ NLMK Group’s Made of Steel video awarded the Grand Prix at the Moscow International Festival of Corporate Videos in 2015. ▪ NLMK Group’s Special Steel video won Best Corporate Video. Corporate Image and Best Infographics at Silver Threads Awards in 2015. ▪ Steel Symphony, a New Year video, won Best Cameraman and Best Musical Score at Best Corporate Video 2016 Awards. NLMK’S DIALOGUE WITH INVESTORS AND ANALYSTS Openness and transparency are at the core of NLMK’s information policy. This approach helps us maintain a high level of trust between NLMK and all its stakeholders. NLMK-TV: ▪ Won Best Directing and Editing, and Best Host at Silver Threads Awards in 2015. ▪ NLMK Group’s Special Steel video won Best Audio Engineering at Metal- Vision’2015. NLMK shares are traded on the Moscow Exchange, while its global depositary shares are listed on the London Stock Exchange. Furthermore, NLMK’s debt 48 38 Environmental safety 40 Energy eﬃ ciency 42 Сommunity development 46 Communications securities – bonds denominated in both rubles and Eurobonds – are traded in the Russian and foreign markets. NLMK Group uses numerous eﬀ ective tools for communicating with investors and analysts. Such tools range from regular disclosure of the Company’s performance data to meetings with partners and potential investors. Capital Markets Day 2015 On 30 March 2015, London hosted Capital Markets Day 2015 where NLMK Group’s key managers spoke about the Company’s progress toward achieving its Strategy 2017 targets. The event was attended by Independent Director Helmut Wieser, who spoke about the eﬃ ciency of NLMK’s corporate governance. The meeting also featured a presentation of NLMK’s updated dividend policy – which was later approved by the Group’s Board of Directors. http://nlmk. com/en/investor-relations/cmd/ Disclosure of operating and ﬁ nancial performance In the interests of keeping its investors continuously informed, NLMK publishes its operating and ﬁ nancial performance data each quarter. Reports on the Company’s operating results include overviews of industry trends, the current situation in the steel and mineral markets, and forecasts for the near future. The Group discloses its consolidated ﬁ nancial results and reports under IFRS. Before the third quarter of 2015, NLMK had reported under US GAAP. http://nlmk.com/en/investor-relations/ reporting-center/ Visits to production sites For those who wish to get deeper insight into our business model and steel production process, we annually organize visits to production sites where guests can see the key production facilities and talk with the management. NLMK Group oﬀ ered tours of its key production sites in 2015 as well. The Group holds between three and six visits to its production sites annually. For the schedule of upcoming tours, please contact our Investor Relations team (st@ nlmk.com). Industry-related and analytical events In 2015, the Company’s key managers attended a number of industry conferences held in Russia, the UK, the USA and continental Europe. These events featured over 370 group and face-to-face meetings with investors where a wide range of issues were discussed – including industry trends, implementation of the strategy and NLMK’s achievements. Recognition The Company’s eﬀ orts to disclose as much information on its activities and prospects as possible are highly appraised by the market. Extel Survey ranked NLMK among the top ten European companies (in the metals and mining sector) for investor relations in 2015. Additionally, NLMK won IR magazine Russia & CIS Awards as one of the best Russian mid-cap companies for investor relations. SUSTAINABILITY / REPORT 2015 CORPORATE GOVERNANCE / REPORT 2015 Corporate governance review 4 out of 9 Board members are independent directors Corporate governance eﬃ ciency assessed as high Independent directors chair 2 out of 3 Board committees 2 out of 3 Remuneration committee members are independent directors 100% of top managers are members of the Company’s governance bodies New dividend policy provides more transparency and visibility, consistent with interests of all stakeholders 5 3 BOARD OF DIRECTORS’ STRUCTURE Independent Board members Board members 4 NLMK BOARD MEMBERS’ LENGTH OF TENURE < 4 years 4-10 years > 10 years 1 5 3 General Shareholders’ Meetings 12 Board meetings PARTICIPATION OF TOP MANAGERS IN MEETINGS OF THE COMPANY’S GOVERNING BODIES 0% 100% Participation in meetings Absence at meetings (all reasons) 44 meetings of the Management Board CORPORATE GOVERNANCE / REPORT 2015 Key 2015 corporate governance events CHANGES IN THE DIVIDEND POLICY In 2015, the Company updated its dividend policy to ensure higher visibility of dividend payments. From 2015, dividends are paid on a quarterly basis subject to meeting the targets on net proﬁ t and free cash ﬂ ow. ENHANCEMENT OF INDEPENDENT DIRECTORS’ ROLES IN THE COMPANY’S GOVERNANCE BODIES The Board of Directors was elected at the Annual General Shareholders’ Meeting in June 2015 and included 4 independent directors (3 independent directors in the previous Board composition). In 2015, independent directors chaired 2 out of 3 Board committees. This enabled NLMK to enhance the roles of independent directors’ in the Company’s governance bodies. ADOPTION OF REVISED CORPORATE DOCUMENTS In 2015, corporate governance bodies approved the revised versions of corporate documents, including the Charter, Corporate Governance Code, Regulations of General Shareholders’ Meeting, Regulations of the Board of Directors, etc. The amendments in the documents mostly reﬂ ect the recommended corporate governance practices, including the OECD principles of corporate governance and recommendations of Bank of Russia. Modular Annuaal Report of NLMK for 22015 Modular Annual Report of NLMK for 2015 or 2 ABOUT NLMK ▪ NLMK Proﬁ le ▪ Business model and value chain ▪ Geography of assets and sales ▪ Strategy in action ▪ Key highlights SUSTAINABILITY ▪ NLMK employees ▪ Health and safety ▪ Environmental protection ▪ Engaging stakeholders CORPORATE GOVERNANCE ▪ Leadership of NLMK ▪ Governance system ▪ Risk management ▪ Information for shareholders You can download report modules here http://nlmk.com/en/investor-relations/reporting-center/annual-reports/?from=ru 49 Corporate governance review 51 Management composition 58 Corporate governance 51 MANAGEMENT COMPOSITION BOARD OF DIRECTORS NLMK Board of Directors was elected on 5 June 2015. There are 4 independent directors on the Board. ▪ To assess risks Related corporate documents: ▪ To approve budgets and business plans ▪ Charter of NLMK ▪ To set target indicators ▪ Corporate Governance Code Main functions of the Board of Directors: ▪ To assess the performance of the ▪ Regulations of the Board of Directors ▪ To develop and implement the corporate strategy ▪ To approve priority business areas for the company company and its bodies ▪ To control large-scale capital expenses; asset acquisition and sale transactions, etc. ▪ Remuneration and compensation to members of the Board of Directors Composition of the Board of Directors of NLMK as at 31 December 2015 Full name Position Years on the Board Independent Participation in Strategic Planning Committee Participation in Audit Committee Participation in Human Resources, Remuneration and Social Policies Committee Vladimir Lisin Oleg Bagrin Chairman of the Board of Directors Member of the Board of Directors Benedict Sciortino Member of the Board of Directors Helmut Wieser Nikolai Gagarin Karl Doering Member of the Board of Directors Member of the Board of Directors Member of the Board of Directors Karen Sarkisov Member of the Board of Directors Franz Struzl Member of the Board of Directors Stanislav Shekshnya Member of the Board of Directors 19 11 4 5 14 9 6 5 1 Chairman (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) Chairman Chairman (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) 52 49 Corporate governance review 51 Management composition 58 Corporate governance Board of Directors as at 31.12.2015 Executive director Independent directors 1 2 4 6 8 3 5 7 9 CORPORATE GOVERNANCE / REPORT 2015 72 Operational control and risk management 78 Information for shareholders 53 1 Vladimir Lisin Year of birth: 1956 Chairman of the Board of Directors Participation in BoD committee meetings Member of the Human Resources, Remuneration and Social Policies Committee; and Chairman of the Strategic Planning Committee. Length of tenure Board member since 1996, Chairman of the Board since 1998. Professional experience Started career in 1975 as electrical ﬁ tter. Worked at Tulachermet, rising through the ranks from assistant steelmaker to deputy shop manager. From 1986 worked in Kazakhstan, ﬁ rst as Deputy Chief Engineer, and later Deputy CEO of the Karaganda Steel Plant. Member of Boards of Directors of several leading Russian steel companies since 1993. Education Graduate of Ordzhonikidze Siberian Metallurgic Institute, majored in Ferrous and Non-Ferrous Foundries. In 1990, graduated from the Higher School of Commerce with the All-Russian Foreign Trade Academy decorated with the order of International Friendship. In 1992, graduated from the Academy of National Economy under the Government of the Russian Federation, majored in Economics and Management. Ph.D., Tech.; Ph.D., Ec.; Professor, Associate Fellow of Russian Academy of Natural Sciences. Winner, USSR Council of Ministers prize for Science and Technology. Honorary Metallurgist of the RF. Knight of the Order of Honor. 2 Oleg Bagrin Year of birth: 1974 Member of the Board of Directors, President (Chairman of the Management Board) Participation in BoD committee meetings Member of the Strategic Planning Committee. Length of tenure Member of NLMK Group Board of Directors (executive director) since 2004, President (Chairman of the Management Board) of NLMK since 2012. Professional experience Board member of a number of NLMK subsidiary and aﬃ liate companies: NLMK International B. V. (Netherlands), NLMK Pennsylvania LLC, NLMK Indiana LLC, Sharon Coating LLC (USA). Chairman of the Board of Directors of investment company Libra Capital, management company Libra Capital, Moscow; Board member of Freight One, a railroad transportation company. Education Holds a graduate degree in Operations Research and a post-graduate degree in Economics from State Management University, Moscow and a degree in Business Administration from the University of Cambridge, UK. 3 Nikolai Gagarin Year of birth: 1950 Member of the Board of Directors Participation in BoD committee meetings Member of the Audit Committee. Length of tenure Board member since 2001. Professional experience In 2003 – being Managing Partner – he was appointed Chairman of the Board at Reznik, Gagarin, and Partners Law Oﬃ ces. Chairman of the Board, Managing Partner at Reznik, Gagarin and Partners Law Oﬃ ces, Moscow, since 2009. Education Graduate of Moscow State University, majored in Law. 4 Karen Sarkisov Year of birth: 1963 Member of the Board of Directors Participation in BoD committee meetings Member of the Strategic Planning Committee and member of the Audit Committee. Length of tenure Board member since 2010. Professional experience He serves as an Aide to the Chairman of the Board of Directors on External Economic Relations. He is also a member of the Board of Directors at NLMK International B.V. From 2006 to 2007 Mr. Sarkisov served as the Chairman of the Board of Directors of VIZ-Steel. From the early 1990’s to 2008 he worked at steel trading companies holding various executive positions at a number of international trading entities. Education Graduated from the Tashkent State University majoring in Oriental Studies. 5 Karl Doering Year of birth: 1937 Member of the Board of Directors Participation in BoD committee meetings Member of the Strategic Planning Committee. Length of tenure Board member since 2006 Professional experience Currently heads Project Consulting, a consulting company. Represented the French USINOR in Central and Eastern Europe. Between 1967 and 2000 held senior positions in metallurgical companies in Eastern Germany. From 1979 to 1985 was Deputy Minister, Mining, Metals and Potassium Industry Ministry, German Democratic Republic, supervised technology development and capital expenditures. Education Graduated from the Moscow Institute of Steel and Alloys. Ph.D., Tech.; Ph.D., Ec. 6 Helmut Wieser Year of birth: 1953 Member of the Board of Directors, Independent director Participation in BoD committee meetings Member of the Strategic Planning Committee and member of the Human Resources, Remuneration and Social Policies Committee. Length of tenure Board member since 2011 (independent director). 54 49 Corporate governance review 51 Management composition 58 Corporate governance Professional experience Helmut Wieser was an Executive Vice President of Alcoa and Group President responsible for Alcoa’s global mill products and rigid packaging businesses till November 2011. He also oversaw Alcoa’s businesses in the Asia Paciﬁ c region, with a focus on China, the Australian rolled products businesses and Alcoa’s operations in Russia. In addition, Helmut Wieser was a member of the Alcoa Executive Council, the senior leadership group that provides strategic direction for the company. He also serves on the board of governors of the International Graduate University in Washington, D.C. on Capitol Hill. Before joining Alcoa, Helmut Wieser worked for Austria Metal Group (AMAG) for 10 years, holding a series of management positions in its rolled products unit, culminating in 1997 as an executive member of the board and chief operating oﬃ cer. Earlier, he held several senior management positions with Voest Alpine in Austria and Venezuela, including President of Voest Alpine Venezuela. Member of the Management Board at AMAG Austria Metall AG since March 2014; and Chief Executive Oﬃ cer since April 2014. Member of the Board of Directors (Independent Director) at Rain Carbon Inc. since 2014. Education Helmut Wieser received a Master’s degree in Mechanical Engineering and Economics in 1981 from the University of Graz. 7 Franz Struzl Year of birth: 1942 Member of the Board of Directors, Independent director Participation in BoD committee meetings Member of the Audit Committee and member of the Strategic Planning Committee. Length of tenure Board member since 2011. Professional experience In 1967 Franz Struzl joined Alpine Steelgroup, later renamed Voestalpine AG, based in Linz, Austria, serving the Company for over four decades. During CORPORATE GOVERNANCE / REPORT 2015 his career at Voestalpine Franz Struzl held various positions in a number of ﬁ elds including strategic planning, commercial and technical areas. In 1981 he was appointed Chief Financial Oﬃ cer before becoming Chief Executive Oﬃ cer of Voestalpine Long Products Group and a member of the Executive Board in 1991. From 1995 until 2001 he served as Vice Chief Executive Oﬃ cer of Group. In 2001 Franz Struzl was appointed as Voestalpine Group Chief Executive Oﬃ cer and Chairman. He held the position until 2004, when he moved to become Chief Executive Oﬃ cer of Voestalpine, Brazil – Villares Metals, remaining there until 2010. From 2011 he is General Director of RHI AG. Education Franz Struzl graduated from the University of Economics, Vienna in 1964. 8 Benedict Sciortino Year of birth: 1950 Member of the Board of Directors, Independent director Participation in BoD committee meetings Chairman of the Audit Committee and member of the Strategic Planning Committee. Length of tenure Board member since 2012 Professional experience From 1977 to 1995 Benedict Sciortino worked as an attorney-at-law and a partner with Baker & McKenzie, New York. He joined Duferco in 1995. Now he serves as a member of the Board of Directors of Duferco S. A. responsible for Duferco Group North American and South African business as well as trading operations, ﬁ nance and legal matters, mergers and acquisitions. Mr. Sciortino serves as a director of several operating companies. Education Mr. Sciortino graduated from Queens College, New York with a BA degree and received JD and LLM degrees from New England School of Law (Boston, MA) and New York University Law School, New York. 9 Stanislav Shekshnya Year of birth: 1964 Member of the Board of Directors, Independent director Participation in BoD committee meetings Chairman of the Human Resources, Remuneration and Social Policies Committee and member of the Audit Committee. Length of tenure Board member since 2015. Professional experience From 1991 to 2002, Dr. Shekshnya held the positions of Director of Human Resources for Otis Elevator in Central and Eastern Europe, President and CEO of Millicom International Cellular in Russia and CIS, Chief Operating Oﬃ cer of VimpelCom, and CEO of Alfa-Telecom. He has served as Chairman of SUEK, Vimpelcom-R and as Director of a number of Russian and Ukrainian companies. Stanislav was an independent director at DTEK BV, Ilim Timber Industry and Ener1. Currently Dr. Shekshnia is an independent director at Dentsu Aegis Network Russia Board of Directors. In 2002, Stanislav Shekshnia co-founded Zest Leadership International Consultancy. Currently Stanislav Shekshnia is a Senior Partner of Howell Zest, Talent Equity Consulting Company, which has oﬃ ces in Moscow, Paris, St. Petersburg, Kiev, Almaty and Riga. He focuses on leadership, leadership development, corporate governance and business in emerging economies. Dr. Shekshnia also provides personal coaching to business owners and corporate executives. Dr. Shekshnia is an Aﬃ liate Professor of Entrepreneurship at INSEAD. He has over 15 years of graduate level teaching experience in Russia, France and United States; and is the author, co-author, or editor of 7 books, and numerous articles, executive commentaries, interviews and case studies on entrepreneurship, leadership, people management, intercultural management and business and management in Russia. Education Stanislav Shekshnia has a Master’s Degree in Economics, a Ph.D. from Moscow State University, and an MBA from Northeastern University in Boston. 72 Operational control and risk management 78 Information for shareholders 55 MANAGEMENT BOARD as at 31.12.2015 President (Chairman of the Management Board) 1 2 4 6 8 3 5 7 9 56 49 Corporate governance review 51 Management composition 58 Corporate governance MANAGEMENT BOARD Composition of the Management Board as at 31 December 2015 The NLMK Group Management Board as at 31 December 2015 consists of 9 members and holds regular meetings. Members of the Management Board are in charge of the Group’s every- day operations. They also monitor subsidiaries and aﬃ liates, and other legal entities Related corporate documents: ▪ Charter of NLMK ▪ Corporate Governance Code Full name Position Oleg Bagrin Brijesh Garg Ilya Gushchin Yuri Larin Member of the Board of Directors President (Chairman of the Management Board) Vice President, Procurement Vice President, Sales Vice President, Technology Development & Operational Efﬁ ciency Sergey Likharev Vice President, Logistics ▪ Regulations on Management Board Alexander Saprykin Vice President, Strategic Raw Materials Division Grigory Fedorishin Vice President, Finance Sergey Filatov Stanislav Tsyrlin Managing Director Vice President, HR & Management System 2 Brijesh Garg Year of birth: 1964 Vice President, Procurement 3 Ilya Gushchin Year of birth: 1976 Vice President, Sales Length of tenure Length of tenure Member of the Management Board since 2012 Member of the Management Board since 2014. Professional experience Professional experience He started his career in 1985 with Tata Steel, India as Industrial Engineer and moved through various positions within the company and worked with other steel plants in New Zealand Steel (BlueScope Steel, Australia) and ArcelorMittal, Kazakhstan & Ukraine. He has about 14 years of experience in supply chain management and business processes re-engineering in steel industry and 13 year of experience in industrial engineering. Education Holds a Bachelor of Engineering degree with a major in Industrial Engineering, has CPIM Certiﬁ cation from American Production and Inventory Control Society (APICS) and is a certiﬁ ed SAP Solution Consultant. From 2009 to 2013 he worked for SIBUR Group, including as head of SIBUR International; the group’s export division. From 2008 to 2009, he served as Financial Director at Skolkovo School of Management, Moscow. From 2002 to 2007, he held various positions at Microsoﬅ . Education Ilya Gushchin holds a Ph.D. in Economics; and is a graduate of the Faculty of Economics, Moscow State University. 1 Oleg Bagrin Year of birth: 1974 Member of the Board of Directors, President (Chairman of the Management Board) Length of tenure Member of NLMK Group Board of Directors (executive director) since 2004, President (Chairman of the Management Board) of NLMK since 2012. Professional experience Board member of a number of NLMK subsidiary and aﬃ liate companies: NLMK International B. V. (Netherlands), NLMK Pennsylvania LLC, NLMK Indiana LLC, Sharon Coating LLC (USA). Chairman of the Board of Directors of investment company Libra Capital, management company Libra Capital, Moscow; Board member of Freight One, a railroad transportation company. Education Holds a graduate degree in Operations Research and a post- graduate degree in Economics from State Management University, Moscow and a degree in Business Administration from the University of Cambridge, UK. CORPORATE GOVERNANCE / REPORT 2015 72 Operational control and risk management 78 Information for shareholders 57 4 Yuri Larin Year of birth: 1952 Vice President, Technology Development & Operational Efﬁ ciency Length of tenure Member of the Management Board since 2006. Professional experience From 2007 to 2013, Mr. Larin was NLMK Vice President for Long-Term Development & Environment. Vice President for Technical Development and Environment, NLMK, from 2006 to 2007. Prior to that he was Director of the NLMK Engineering Centre from 1999 to 2006, and from 1996 to 1999 he worked as Deputy Director of NLMK’s Central Laboratory in charge of technology. Education Graduate of the Voronezh Polytechnic Institute. Ph.D., Tech. Honorary metallurgist of Russia. 6 Alexander Saprykin Year of birth: 1967 Vice President, Strategic Raw Materials Division 8 Sergey Filatov Year of birth: 1959 Managing Director Length of tenure Member of the Management Board since 2006. Professional experience From 2007 to 2013, Mr. Saprykin was NLMK Vice President, Head of Coal Division. From 2006 to 2007, he served as Vice President, Head of Iron Ore Division. From 2002 until 2006, he headed the Raw Materials Market Department at Rumelco and served as General Director of RUDPROM between 1998 and 2001. In 1997 and 1998, Mr. Saprykin was General Director of VIZEL. Prior to that, he worked as chief specialist for Metallurg from 1996 to 1997. Education Graduated from the Moscow State Mining University. Length of tenure Member of the Management Board since 2013. Professional experience On January 25, 2013 Sergey Filatov was appointed to the position of NLMK’s Managing Director. Mr Filatov has been with NLMK since October 2012, serving as Deputy Senior Vice President – General Director for Production and Technology. From 2009 to 2012 he served as Chief Engineer at NTMK. From 2007 to 2009 he was Project Manager at NTMK Project Management Department. Education Mr Filatov graduated from the Moscow Institute of Steel and Alloys. He holds a Ph.D. (Tech.), and is an Honorary Metallurgist of Russia. 5 Sergey Likharev Year of birth: 1964 Vice President, Logistics 7 Grigory Fedorishin Year of birth: 1979 Vice President, Finance 9 Stanislav Tsyrlin Year of birth: 1968 Vice President, HR & Management System Length of tenure Length of tenure Length of tenure Member of the Management Board since 2014. Member of the Management Board since 2012. Member of the Management Board since 2005. Professional experience Professional experience Professional experience Sergey Likharev joined NLMK in October 2013. From 2012 to 2013 he was Aviation Business Director at Russian Machines Group; and Chairman of the Board of Directors of the Aviacor aviation plant. Aﬅ er serving as CEO of Aviacor Aviation Plant in Samara from 2004 to 2007, he became CEO of the Basel Aero airport group from 2008 to 2012. From 1993 to 2004, he held senior positions at Interros, Ostankino Meat Processing Plant, Golden Telecom, Cannon Associates and Coopers & Lybrand. From 1990 to 1993 he worked as a researcher at Moscow State University. Education Sergey Likharev holds a PhD in Physics and Mathematics; and a Masters of Business Administration from Cornell University. From 2011 to 2013, he served as NLMK Director of Strategy and Business Development. From 2009 to 2012 served as an investment manager at Libra Capital, a Moscow- based investment management company. From 2001 to 2009 worked for PricewaterhouseCoopers consulting company where he held positions up to a director of business restructuring practice. Education Graduated from Academy of Finance, Moscow. Holds a master degree in Business Administration from INSEAD business school, France & Singapore. a member of an association of Certiﬁ ed Financial Analysts (CFA). From 2004 to 2006 served as Director for Strategy and Management Systems at NLMK, having previously worked for Rumelco (from 2003 to 2004). Prior to that he worked for the Boston Consulting Group from 1996 to 2003, serving initially as a consultant, then as a project manager before being appointed Deputy Director. Education Graduated from the Moscow Institute of Physics and Technology and from Stanford University. 58 49 Corporate governance review 51 Management composition 58 Corporate governance the existing legislation of the countries where the Company operates. The Corporate Governance Code adopted by the Company in 2015 is the basic document describing all the key corporate governance principles. Key principles lying at the core of our Corporate Governance are to: ▪ Ensure equal and fair treatment of all shareholders when they use their right to be involved in management processes, receive dividends from the Company, participate in meetings, vote on issues on the agenda and get up-to-date information on the Company’s activities and its governing bodies. in hand with the most advanced practices of corporate governance. We are constantly striving to remain aligned with the high standards of corporate governance that are expected of a public company. Vladimir Lisin, Chairman of NLMK’s Board of Directors ▪ Ensure equal treatment of all shareholders, including foreigners and minority shareholders. GENERAL INFORMATION ABOUT NLMK’S CORPORATE GOVERNANCE As a public company, NLMK is constantly improving its corporate governance practices. In its activity, NLMK adheres to best international practices and high standards of corporate governance. NLMK corporate governance system is designed to ensure the Company’s sustainable development and increase return on investment in equity in the long run. The Company maintains a policy of maximum openness and transparency that allows our shareholders and investors to have all the necessary information on the activities of NLMK provided in a timely manner so that they can make a grounded investment decision regarding the Company’s securities. In 2015, the Company continued to improve its corporate governance in a broader eﬀ ort to revise its corporate actions procedures. All corporate documents determining the principles and rules of corporate governance are freely accessible at NLMK Group’s corporate website. ▪ Ensure reliable and eﬀ ective registration of title to shares and guarantee the opportunity to alienate them freely and without encumbrances. ▪ Ensure compliance with the existing laws, principles of the Corporate Governance Code and international corporate governance standards. ▪ Strictly observe the rights of third parties, including their creditors and employees, as required by the law, the Charter and other regulatory documents. ▪ Pursue a common corporate policy in respect of subsidiary companies, aﬃ liates and other legal entities in which NLMK is the founder, a participant or a member. ▪ Maintain a policy of open and transparent communications, including by disclosing full and up-to-date information about the Company to give shareholders and investors an opportunity to make informed decisions, as well as by providing documents (information) related to the Company upon shareholders’ request. ▪ Promote a policy of complying with business ethics in conducting its operations. NLMK CORPORATE GOVERNANCE SYSTEM NLMK corporate governance system is built on the requirements of the existing Russian legislation, principles provided by the Organization for Economic Co-operation and Development and provisions of the Corporate Governance Code approved by the Central Bank of Russia, and fully meets According to acting corporate documents, the governance structure includes: ▪ General Meeting of Shareholders, which is the supreme governing body of the Company that makes decisions on the key business issues. ▪ The Board of Directors, which is responsible for strategic management of NLMK, controls CORPORATE GOVERNANCE CHAIRMAN’S LETTER Dear Shareholders, Over the past twelve months, NLMK has invested a lot of eﬀ ort into enhancing its corporate governance system and practices. The process of improving corporate governance practice included the revision of the Company’s corporate documents to reﬂ ect amendments to corporate governance legislation of the Russian Federation, as well as guidance from the Central Bank of Russia. NLMK’s Board of Directors was a focus of the corporate governance improvement and enhancement initiatives undertaken in 2015. A new independent director, Stanislav Shekshnya, joined the Board. Stanislav is an expert in the areas of leadership and corporate governance and his skills will undoubtedly be a tremendous asset to the Company in the future. The increase in the number of independent directors will ensure even greater eﬀ ectiveness of the Board, including in its duties related to risk management and the protection of shareholders’ interests. We enhanced the role of independent directors in 2015 and they now chair 2 of the 3 Board committees. We also updated the Company’s dividend policy to reﬂ ect the current stage of the Company’s development. Particular attention was paid to the Company’s risk management system, which covers all management levels, from shareholders to line managers across all NLMK Group companies. In its relations with shareholders over the past year, NLMK maintained its commitment to the fundamental corporate governance principles of fairness, accountability, responsibility and transparency. We focus all our eﬀ orts to ensure that NLMK’s leadership in performance goes hand CORPORATE GOVERNANCE / REPORT 2015 72 Operational control and risk management 78 Information for shareholders 59 NLMK Corporate Governance Structure (as at 31 December 2015) Independent Auditor Internal Audit Commission Corporate Secretary General Shareholders’ Meeting Strategic Planning Committee Human Resources, Remuneration and Social Policies Committee Audit Committee Corporate Audit and Control Services Board of Directors President (Chairman of the Management Board) Members of the Management Board Managing Director Vice President, HR and Management System Vice President, Sales Vice President, Procurement Vice President, Finance Vice President, Technology, Development and Operational Effeciency Vice President, Strategic Raw Materials Division Vice President, Logistics executive bodies, determines the principles of and approaches to organization of the Company’s risk management system and internal control, develops NLMK’s executive compensation policy, controls corporate governance practices and plays the key role in the Company’s signiﬁ cant corporate events. ▪ The executive bodies of the Company including the President (Chairman of the Management Board) and the Management Board that manage day-to-day activities of the Company and ensure its eﬃ cient operation, while implementing the objectives set by the Board of Directors. CORPORATE GOVERNANCE EFFICIENCY IN 2015 ▪ The Corporate Secretary, who ensures interaction with shareholders, coordinates the Company’s activities aimed at protection of shareholders’ rights and interests and supports the Board of Directors and the Management Board. ▪ An independent auditor, the Internal Audit Commission, Audit Committee and Internal Audit department oversee ﬁ nancial and economic activities. The Internal Audit Directorate carried out several audits in 2015 to assess the Company’s corporate governance for compliance with all its principles. The audits examined the following areas: shareholders’ rights; the Board of Directors; the compensation system for the Board of Directors, executive bodies and key managers; risk management, internal control and internal audit; Corporate Secretary; disclosure of information about the Company 60 49 Corporate governance review 51 Management composition 58 Corporate governance and the Company’s information policy; signiﬁ cant corporate actions; and corporate social responsibility, business ethics and compliance. The auditors assessed the existing corporate governance practices for compliance with the Corporate Governance Code recommended by the Bank of Russia and mandatory requirements set out in MICEX Stock Exchange Listing Rules, and veriﬁ ed the information given in the Company’s external corporate governance reports. Overall, the corporate governance system was highly rated by the auditors, which means that the Company observes the Russian corporate governance laws and follows the majority of recommendations provided in the Corporate Governance Code. In March 2016, the eﬃ ciency of the Board of Directors was evaluated by means of anonymous online survey. All Members of the Board participated in the survey. The results showed that the Board of Directors owns diverse functional expertise (ﬁ nance, risk management, talent management) and industry experience. The Board bases its work on the Strategy, has an eﬃ cient decision-making process and follows up the implementation of the decisions. The Board of Directors eﬀ ectively interacts with the President and the management in general. The evaluation has identiﬁ ed some areas of improvement, namely, in the work of the Committees. IMPROVEMENT OF CORPORATE GOVERNANCE PRACTICES IN 2015 In 2015, the Company focused on improving the quality of its corporate governance system and practices. Throughout the year, all the components of the Company’s corporate governance system were thoroughly assessed for compliance with the Corporate Governance Code recommended by the Central Bank of Russia, as well as with the Moscow Exchange Listing Rules. By increasing the number of independent directors in its Board of Directors, the Company enhanced the eﬃ ciency of the Board, including with regard to its duties related to risk management and protection of shareholders’ interests. According to the Moscow Exchange Listing Rules and recommendations provided in the Corporate Governance Code, the Audit Committee and the Human Resources, Remuneration and Social Policies Committee shall be headed by independent directors. Aiming to harmonize its internal documents, NLMK approved in 2015 the Company’s internal documents that reﬂ ect recent legislative changes in Russia and follow the Corporate Governance Code recommendations: ▪ In April 2015, the Company’s Board of Directors approved the Dividend Policy ▪ In June 2015, the General Meeting of Shareholders approved an updated version of Regulations on Remuneration of Members of the Board of Directors ▪ In December 2015, the General Meeting of Shareholders approved an updated version of the Charter of NLMK, Regulations on the General Shareholders’ Meeting and Regulations on the Board of Directors ▪ In December 2015, the Company’s Board of Directors approved Regulations on the Board of Directors Audit Committee; Regulations on the Strategic Planning Committee; Regulations on the Human Resources, Remuneration and Social Policies Committee; and the Corporate Governance Code Also, the Company adopted its ﬁ rst time ever Regulations on Corporate Secretary, which govern the activities and detail the procedures of the Corporate Secretary. The Company is taking consistent steps to ensure compliance with other principles and recommendations of the Corporate Governance Code. GENERAL SHAREHOLDERS’ MEETING NLMK corporate governance practices The General Meeting of Shareholders is NLMK’s supreme governing body responsible for substantive issues related to the Company’s activities. NLMK’s shareholders are entitled to make decisions at the General Meeting of Shareholders. Such decisions include election to the Company’s key governing bodies; approval of annual reports; proﬁ t distribution; amendments and additions to the Company’s Charter or approval of a new version of the Company’s Charter; approval of internal documents governing the activities of the Company’s bodies, etc. NLMK strives to ensure equal and fair treatment of all shareholders when they use their right to participate in the Company’s management processes. NLMK has Regulations on the General Shareholders’ Meeting that comply with the recommendations of the Corporate Governance Code and determine the key procedures for organizing, calling and holding the General Meeting of Shareholders (some of the procedures for organizing, calling and holding the General Meeting of Shareholders are also regulated by the Charter of NLMK). The procedure for holding the General Meeting of Shareholders aims to ensure that the rights of shareholders are observed; it is fully compliant with the current legislation and follows global best practices in corporate governance. The Company provides its shareholders with easily accessible communication channels such as a hotline or email so that they can share their opinions and ask questions concerning the agenda during preparation for the General Meeting of Shareholders. We inform our shareholders about an upcoming General Meeting by posting an announcement on NLMK’s website at least 30 days prior to the date of the meeting (unless the Russian legislation requires doing it earlier). NLMK provides access to meeting materials at least 30 days prior to the date of the General Meeting of Shareholders and supplies shareholders with additional information and materials, as recommended by the Corporate Governance Code. In addition, the Company publishes travel information, a sample form for a power of attorney that a shareholder can give to his or her representative for participation in the meeting, and information on the procedure for its attestation. The information (materials) provided to persons entitled to participate in the General Meeting of Shareholders is published on NLMK’s website (www.nlmk. com). The Company also publishes all the information in English to ensure equal treatment of all shareholders, including foreigners. CORPORATE GOVERNANCE / REPORT 2015 72 Operational control and risk management 78 Information for shareholders 61 In the course of preparation for a General Meeting of Shareholders, NLMK Board of Directors approves regulations that determine the procedure for questions on the Company’s activities from the shareholders to members of the governing bodies, the person responsible for the Company’s accounting, the Company’s auditors and candidates for the governing bodies. Participants of the General Meeting of Shareholders are entitled to freely contact and consult each other on issues on the meeting’s agenda without violating the meeting procedure (regulations). NLMK corporate governance system and practices provide a level playing ﬁ eld for all shareholders, including foreigners and minority shareholders, and ensure equal treatment for all of them. NLMK adheres to a policy that prevents unfair redistribution of corporate control, because NLMK does not have preferred shares and there are no quasi-treasury shares on the balance sheets of its subsidiaries and aﬃ liates. According to the corporate documents, a meeting of shareholders is deemed valid (has a quorum) if shareholders owing collectively more than 50% of NLMK’s voting shares have participated in it. Activity in 2015 In 2015, NLMK updated its dividend policy and shiﬅ ed to paying dividends on a quarterly basis, which resulted in more frequent meetings of the company’s shareholders, since the payout is to be approved at the General Meeting of Shareholders, according to NLMK’s corporate procedures. Three General Meetings of Shareholders (one annual and two extraordinary meetings) were held in 2015, including one meeting in person and two meetings in the form of absentee voting. General Meeting of Shareholders by status Number Annual meeting Extraordinary meeting 1 2 NLMK’s Annual General Shareholders’ Meeting for FY2014 was held on 5 June 2015. Shareholders and shareholder representatives holding a total of 89.97% of NLMK’s shareholder capital were present, meeting 62 49 Corporate governance review 51 Management composition 58 Corporate governance the quorum requirements. During the meeting, the following issues were reviewed and decisions taken: On approval of NLMK’s 2014 annual report, annual ﬁ nancial statements, including the 2014 proﬁ t and loss statement and distribution of NLMK’s proﬁ ts (including announcement of dividends) based on the results of the 2014 ﬁ scal year, the following decisions were made: ▪ Approve NLMK’s 2014 annual report, annual ﬁ nancial statements, including the 2014 proﬁ t and loss statement. ▪ Approve distribution of NLMK’s proﬁ ts based on the results of the 2014 ﬁ scal year: – Pay (announce) dividends for FY2014 in the amount of 2.44 rubles per ordinary share. With consideration of the interim dividends paid for H1 2014 in the amount of 0.88 rubles per ordinary share, the amount outstanding for payment is 1.56 rubles per ordinary share. Set the date upon which the shareholders entitled to receive dividends are to be determined as June 16th 2015. – Make the balance of proﬁ ts not paid as dividends available for NLMK. On payment (announcement) of dividends on the basis of Q1 2015 results, a decision was made to pay (announce) dividends for Q1 2015 in the amount of 1.64 rubles per ordinary share. Set the date upon which the shareholders entitled to receive dividends are to be determined as June 16th 2015. On declaring NLMK’s Dividend Policy approved at NLMK’s Annual General Meeting of Shareholders on 6 June 2014 invalid, a decision was made to declare NLMK’s Dividend Policy approved at NLMK’s Annual General Meeting of Shareholders on 6 June 2014 invalid. On election of NLMK’s Board of Directors, a decision was made to elect the following members to the Board of Directors: ▪ Oleg Bagrin ▪ Helmut Wieser* ▪ Nikolai Gagarin ▪ Karl Doering ▪ Vladimir Lisin ▪ Karen Sarkisov ▪ Stanislav Shekshnya* ▪ Benedict Sciortino* ▪ Franz Struzl* On election of NLMK’s President (Chairman of the Management Board), a decision was made to elect Oleg Bagrin President (Chairman of the Management Board). On election of the members of NLMK’s Internal Audit Commission, a decision was made to elect the following members to NLMK’s Internal Audit Commission: ▪ Vladislav Ershov ▪ Natalia Krasnykh ▪ Vladimir Markin ▪ Sergey Nesmeyanov ▪ Galina Shipilova On payment of remuneration to the members of NLMK’s Board of Directors, a decision was made to approve payment of remuneration to the members of NLMK’s Board of Directors. On approval of the revised versions of NLMK’s internal corporate documents, a decision was made to approve the revised version of NLMK’s Regulations on Remuneration of Members of the Board of Directors. On approval of the base remuneration for the members of the Board of Directors, a decision was made to approve the base remuneration paid to each member of NLMK’s Board of Directors in the amount of $160,000 (one hundred and sixty thousand US dollars). On approval of NLMK’s Auditor, a decision was made to approve ZAO PricewaterhouseCoopers Audit as the Auditor of NLMK’s 2015 ﬁ nancial statements prepared in accordance with Russian Accounting Standards (RAS). ZAO PricewaterhouseCoopers Audit was authorized to audit NLMK’s 2015 consolidated ﬁ nancial statements prepared in accordance with International Financial Reporting Standards (IFRS). At NLMK’s Extraordinary General Meeting of Shareholders held on 30 September 2015, a decision was made to pay (announce) dividends on the basis of the Company’s H1 2015 results in the amount of 0.93 rubles per ordinary share. The date upon which the shareholders entitled to receive dividends were to be determined was set as 12 October 2015. At the Extraordinary General Meeting of Shareholders held on 21 December 2015, the following decisions were made: ▪ Pay (announce) dividends based on the results of nine months of 2015 in the amount of 1.95 rubles per ordinary share. The date upon which the shareholders entitled to receive dividends were to be determined was set as 8 January 2016. ▪ Approve the revised version of the Company’s Charter. ▪ Approve Regulations on the General Shareholders’ Meeting and declare Regulations on Holding NLMK’s General Shareholders’ Meeting approved at the Annual General Meeting of Shareholders on 6 June 2014 to be no longer in force. ▪ Approve the revised version of NLMK’s Regulations on the Board of Directors. NLMK’s Extraordinary General Meetings of Shareholders were held in the form of absentee voting: Name Date Percentage of shareholders participating in the meeting NLMK’s Extraordinary General Meeting of Shareholders 30 September 2015 91.75% * These members of NLMK’s Board of Directors were elected as independent directors. NLMK’s Extraordinary General Meeting of Shareholders 21 December 2015 91.63% CORPORATE GOVERNANCE / REPORT 2015 72 Operational control and risk management 78 Information for shareholders 63 ▪ Declare NLMK’s Corporate Governance Code approved at NLMK’s Annual General Meeting of Shareholders on 6 June 2006 to be no longer in force. BOARD OF DIRECTORS NLMK corporate governance in action The Board of Directors is a key element of the Company’s corporate governance system. The Company’s Board of Directors is responsible for strategic management of Public Joint Stock Company “Novolipetsk Steel”, supervises activities of the Company’s executive bodies, determines principles of and approaches to the risk management and internal control system, the Company’s policy on remunerations for members of the executive bodies, controls the corporate governance practice and plays a key part in the Company’s signiﬁ cant corporate events. NLMK’s Board of Directors reports to the Company’s shareholders. NLMK’s Board of Directors is an eﬃ cient and professional governing body able to form independent opinions and make decisions serving the interests of the Company and its shareholders. NLMK’s Regulations on the Board of Directors govern the procedures of the Board of Directors and, in particular, include the procedure for arranging and holding meetings of the Board of Directors, which allows the members of the Board of Directors to prepare for the meetings properly, and stipulates the following: ▪ The period of notice of an upcoming meeting given to the members of the Board of Directors ▪ The deadline for sending out documents (ballots) for voting and receiving the ﬁ lled- in documents (ballots) when meetings are held in the form of absentee voting ▪ A possibility for the members of the Board of Directors who are absent at an in- person meeting to send a written opinion on issues included in the agenda of the meeting of the Board of Directors ▪ A possibility for discussion and voting by means of a conference call or video conference According to the current corporate documents, the Board of Directors, acting within its powers: ▪ Ensures execution of resolutions passed by the General Meeting of Shareholders. ▪ Assesses political, ﬁ nancial and other risks impacting Company’s operations, as well as operations of subsidiaries, associates and other legal entities in which the Company is a founder, participant or member. ▪ Determines approaches to investment and participation in other organizations. ▪ Assesses the performance of the Company and its bodies. ▪ Determines the terms of dividend payment. ▪ Develops remuneration incentive methods and systems for company employees. ▪ Ensures the disclosure of information about the Company. ▪ Supervises activities of the Company’s executive bodies. ▪ Ensures the Company’s compliance with the applicable legislation. ▪ Deﬁ nes materiality criteria for the subsidiaries, associates and other legal entities in which the Company is a founder, participant or member, for decision- making concerning the issues that fall within the powers of the Management Board. ▪ Ensures compliance with corporate governance principles. The Board of Directors operates in the form of meetings held in accordance with the Schedule approved by the Chairman of the Board of Directors. Meetings of the Board of Directors are held on a regular basis at least 6 times a year. The most important issues are resolved at meetings of NLMK’s Board of Directors held in person (convening and holding the Annual General Meeting of Shareholders, including recommendations on the distribution of proﬁ ts and payment of dividends, preliminary approval of the Company’s annual reports, ﬁ nancial statements and budget, etc.). The Board of Directors is guided by the following principles in its decision-making process: ▪ Prevent prejudice of shareholders’ legal right to participate in the management of the Company. ▪ Balance interests of diﬀ erent shareholder groups and make the most impartial decisions in the interests of all shareholders of the Company. ▪ Make informed decisions based on reliable information about the Company’s operations. Chairman of the Board of Directors The Chairman of the Board of Directors organizes the work of this body and contributes to the most eﬃ cient performance of its functions. The Chairman of the Board of Directors ensures a constructive environment at the meetings and free discussion of issues on the agenda, and supervises execution of resolutions passed by the Board of Directors. The Chairman of the Board of Directors is elected by the members of the Board of Directors among themselves by a majority vote of the total number of the members. The Chairman of the Board of Directors has the most extensive experience, professional expertise and authority among the Company’s shareholders, members of governing bodies and employees. Independent board members One of the essential prerequisites for eﬃ cient operation of the Board of Directors is its independent directors who play a crucial part in preventing internal conﬂ icts in the Company and carrying out signiﬁ cant corporate actions by the Company. Independent directors also ensure that the Board forms impartial opinions on the issues under discussion, which, in its turn, helps build up investors’ and shareholders’ conﬁ dence in the Company. The Company’s Board of Directors includes four independent directors who contribute to the implementation of one of the fundamental corporate governance principles developed by the Organisation for Economic Co-operation and Development, according to which the Board of Directors should be able to pass independent impartial judgments on corporate matters. Participation of independent directors in the work of the Board of Directors is a primary way to ensure that such judgments are formed since independent directors view the Company and its management objectively. Independent directors fully meet the independence criteria recommended by the Code. The Company’s Regulations on the Board of Directors include the criteria to determine independence of the members of the Board of Directors which fully comply with the recommendations speciﬁ ed in the Code. NLMK’s independent directors are people with suﬃ cient professional expertise, experience and independence to form their 64 49 Corporate governance review 51 Management composition 58 Corporate governance own attitudes and pass objective and honest judgments, which are not inﬂ uenced by the Company’s executive bodies, individual groups of shareholders or other stakeholders. Composition of the Board of Directors qualiﬁ cation, experience, knowledge and business acumen. The members of the Board of Directors have impeccable business reputation, knowledge, skills and experience in steelmaking, mining, science, economics, business management, and law. The composition of the Company’s Board of Directors is balanced in terms of As at 31 December 2015, the Board of Directors consists of 9 people, including 4 members of the Board of Directors who are independent. The members of NLMK’s Board of Directors conducted no equity transactions in 2015. There was no conﬂ ict of interests between NLMK Board of Directors members in 2015. Composition of the Board of Directors of NLMK as at 31 December 2015 Full name Position Years on the Board Independent Participation in Strategic Planning Committee Participation in Audit Committee Participation in Human Resources, Remuneration and Social Policies Committee Vladimir Lisin Oleg Bagrin Benedict Sciortino Helmut Wieser Nikolai Gagarin Karl Doering Karen Sarkisov Franz Struzl Chairman of the Board of Directors Member of the Board of Directors Member of the Board of Directors Member of the Board of Directors Member of the Board of Directors Member of the Board of Directors Member of the Board of Directors Member of the Board of Directors Stanislav Shekshnya Member of the Board of Directors 19 11 4 5 14 9 6 5 1 (cid:2) (cid:2) (cid:2) (cid:2) Shares owned by members of NLMK Board of Directors* Chairman (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) Chairman Chairman (cid:2) (cid:2) (cid:2) (cid:2) Full name Vladimir Lisin Oleg Bagrin Position Share of the authorized capital stock of NLMK Chairman of the Board of Directors Not an NLMK shareholder Member of the Board of Directors Not an NLMK shareholder Benedict Sciortino Member of the Board of Directors Not an NLMK shareholder Helmut Wieser Nikolai Gagarin Karl Doering Karen Sarkisov Franz Struzl Member of the Board of Directors Not an NLMK shareholder Member of the Board of Directors Not an NLMK shareholder Member of the Board of Directors Not an NLMK shareholder Member of the Board of Directors Not an NLMK shareholder Member of the Board of Directors Not an NLMK shareholder Stanislav Shekshnya Member of the Board of Directors Not an NLMK shareholder * The structure of the share capital with beneﬁ ciary ownership speciﬁ ed is available in the Information for Shareholders section. CORPORATE GOVERNANCE / REPORT 2015 72 Operational control and risk management 78 Information for shareholders 65 Directors’ expertise and professional background Directors’ expertise in the steel sector 9 8 5 Metals and Mining Science Economics and Business Administration 2 Law Directors’ location Directors’ length of tenure 4 5 3 1 5 5 2 2 Up to 15 years Over 30 years 15-30 years Composition of the Board of Directors by director status 4 4 Russia Europe Under 4 years Over 10 years 4-10 years 1 Independent director Executive director Other The Board of Directors’ activity in 2015 In 2015 there were 12 meetings of the Board of Directors of NLMK, 9 of which were held by absentee ballot. The following are the main issues that were examined by the Group’s Board of Directors in 2015: ▪ Reviewing proposals on the agenda of the General Shareholders’ Meeting and proposals on nomination of candidates to NLMK’s governing bodies received from NLMK shareholders statements, including the 2014 proﬁ t and loss statement, as well as the NLMK’s 2014 annual consolidated ﬁ nancial statements prepared in accordance with the US Generally Accepted Accounting Principles (US GAAP) ▪ Providing recommendations to NLMK’s Annual General Meeting of Shareholders regarding the distribution of proﬁ ts ▪ Chairman of the Board of Directors ▪ Formation of Committees under the Board of Directors of NLMK ▪ Approving the plan for holding the meetings of NLMK’s Board of Directors ▪ Approving the consolidated budget of the Group ▪ Providing recommendations to the Annual General Meeting of Shareholders regarding the payment of remuneration to the members of NLMK’s Board of Directors ▪ Restructuring the European assets of NLMK Group ▪ Approving related party transactions ▪ Convening the Annual General ▪ Providing recommendations to the ▪ Approving the amount of payment for Shareholders’ Meeting and approving the date to provide a list of persons entitled to participate in the Annual General Meeting of Shareholders ▪ Approving the Company’s draﬅ annual report for 2014, annual ﬁ nancial Annual General Meeting of Shareholders regarding approval of NLMK’s Auditor ▪ Approving the agenda, draﬅ documents and measures necessary for preparing for and holding the Annual General Shareholders’ meeting NLMK auditor services ▪ Establishing the Company’s priority areas of activity (including signing an addendum to the agreement on creating a consolidated group of taxpayers (including new participants)) 66 49 Corporate governance review 51 Management composition 58 Corporate governance ▪ Approving the composition of the NLMK Management Board ▪ Approving internal corporate documents of NLMK ▪ Approving the Corporate Secretary of the Company ▪ Convening an Extraordinary General Meeting of Shareholders (EGM); approving the agenda, draﬅ documents and events required to prepare for and organize the EGM ▪ The members of NLMK’s Management Board concurrently holding management positions in other companies ▪ The long-term incentive program for NLMK Group’s executives Participation of Members of the Board of Directors in the Meetings of this Body in 2015 Board of Directors’ Member Participation in meetings Vladimir Lisin Oleg Bagrin Benedict Sciortino Helmut Wieser Nikolai Gagarin Karl Doering Karen Sarkisov Franz Struzl Stanislav Shekshnya 12 12 12 12 12 12 12 12 8* * Stanislav Shekshnya was elected to the Board of Directors at the Annual General Shareholders’ Meeting held on 5 June 2015. COMMITTEES OF THE BOARD OF DIRECTORS One of the key instruments of the corporate governance system and a prerequisite for eﬃ cient operation of the Board of Directors is streamlined operation of its committees. Best practices and the Corporate Governance Code adopted in 2014 and recommended by the Central Bank of the Russian Federation provide for establishing a number of committees within the Boards of Directors – the Audit Committee, Human Resources, Remuneration and Social Policies Committee, and Strategic Planning Committee. The committees are advisory bodies of the Board of Directors; they are established primarily for preliminary review and analysis of the most signiﬁ cant issues within the powers CORPORATE GOVERNANCE / REPORT 2015 of the Board of Directors. The composition of the committees is supposed to allow them to hold in-depth discussions of the issues involved taking into consideration various opinions. The members of the committees have professional qualiﬁ cations, knowledge and experience in the committee’s area as well as other speciﬁ c expertise, ability and time required to serve and fulﬁ ll their functions as members of the committee. The status, goals, objectives and functions of the committees as well as their composition, establishment and operation are set out in regulations on committees approved by the Company’s Board of Directors. Strategic Planning Committee Committee’s activities and powers The Strategic Planning Committee draﬅ s and submits recommendations to the Board regarding priority areas for company activities and its development strategy, including long-term actions to improve eﬀ ectiveness, and to promote asset growth, proﬁ tability and a stronger investment case. The main objectives of the Strategic Planning Committee are: 1) To provide consulting support required by the Board of Directors for: ▪ Setting strategic objectives aimed at the long-term development of the Company ▪ Developing initiatives aimed at increasing the Company’s proﬁ tability and its investment appeal ▪ Coordinating the activities of the Company’s structural units and the Board of Directors with regard to strategic planning Directors with regard to determining priority directions for business development and strategic planning; 3) To assess the Company’s investor and shareholder relations policy. The Committee membership had been changed during 2015 The Committee membership before June 2015: ▪ Vladimir Lisin (Chairman of the Committee); ▪ Oleg Bagrin ▪ Benedict Sciortino ▪ Karl Doering ▪ Helmut Wieser ▪ Franz Struzl ▪ Karen Sarkisov ▪ Aleksey Lapshin The Committee membership between June and December 2015: ▪ Vladimir Lisin (Chairman of the Committee); ▪ Oleg Bagrin ▪ Benedict Sciortino ▪ Karl Doering ▪ Helmut Wieser ▪ Franz Struzl ▪ Karen Sarkisov According to Regulations on the Strategic Planning Committee approved in December 2015, the Strategic Planning Committee with the following membership was established at the meeting of the Company’s Board of Directors: ▪ Vladimir Lisin (Chairman of the 2) To exercise control over the execution of resolutions adopted by the Board of Committee) ▪ Oleg Bagrin Participation of committee members in committee meetings in 2015 Full name Position Participation in Committee meetings in 2015 Vladimir Lisin Chairman of the Committee Oleg Bagrin Member of the Committee Karen Sarkisov Member of the Committee Karl Doering Member of the Committee Benedict Sciortino Member of the Committee Franz Struzl Member of the Committee Helmut Wieser Member of the Committee 3 3 3 3 3 3 3 72 Operational control and risk management 78 Information for shareholders 67 ▪ Benedict Sciortino ▪ Karl Doering ▪ Helmut Wieser ▪ Franz Struzl ▪ Karen Sarkisov Secretary of the Committee: Grigory Fedorishin (Vice President, Finance) Results of the Committee’s activity in 2015 In 2015, the Strategic Planning Committee held three meetings, including one meeting in person and two meetings in the form of absentee voting. Resolutions on the following key issues were passed at the meetings of the Committee: ▪ Updating NLMK’s dividend policy ▪ Developing NLMK Belgium Holdings’ assets ▪ Implementing NLMK Group’s investment program, including the development of Stoilensky Audit Committee Activity description, authority The Audit Committee chaired by an independent director was established to contribute to eﬀ ective performance of functions related to supervision of the Company’s ﬁ nancial and business activities by the Board of Directors. The Committee’s main objectives are to improve eﬃ ciency of internal control, risk management and corporate governance systems, verify the accuracy of ﬁ nancial statements, supervise the internal and external audit, and prevent fraud by employees and other parties. The Committee membership before June 2015: ▪ Benedict Sciortino (Chairman of the Committee) ▪ Karen Sarkisov ▪ Nikolai Gagarin ▪ Karl Doering ▪ Franz Struzl The Committee membership between June and December 2015: ▪ Benedict Sciortino (Chairman of the Committee) ▪ Karen Sarkisov ▪ Nikolai Gagarin ▪ Franz Struzl According to Regulations on the Audit Committee approved in December 2015, the Audit Committee with the following membership was established at the meeting of the Company’s Board of Directors: (as at 31.12.2015): ▪ Benedict Sciortino (Chairman of the Committee) ▪ Karen Sarkisov ▪ Nikolai Gagarin ▪ Stanislav Shekshnya ▪ Franz Struzl Secretary of the Committee: Andrei Dozhdikov (Head of Consolidated Financial Statements Department) Results of the Committee’s activity for 2015 In 2015 there were 6 meetings of the Audit Committee held in-person, including 3 held by conference call. The Committee membership had been changed during 2015 The Committee reviewed and passed resolutions on the following key issues: Participation of committee members in committee meetings in 2015 Full name Position Participation in meetings in 2015* Benedict Sciortino Chairman of the Committee Franz Struzl Member of the Committee Stanislav Shekshnya** Member of the Committee Nikolai Gagarin Karen Sarkisov Member of the Committee Member of the Committee 6 (6) 6 (6) – 6 (6) 6 (6) * The number of the Committee’s meetings over the period of the person’s participation as a member of the Committee is speciﬁ ed in brackets. ** Elected to the Committee in December 2015. ▪ Review of the results of the audit of NLMK’s 2014 US GAAP Consolidated Financial Statements ▪ Review of the results of the audit of NLMK’s 2014 IFRS Consolidated Financial Statements ▪ Review of draﬅ interim abridged US GAAP Consolidated Financial Statements for Q1 and H1 2015; and IFRS Consolidated Financial Statements for 9M 2015 ▪ Review of potential auditors for NLMK Group’s RAS and IFRS-based consolidated ﬁ nancial statements for 2015 ▪ Review of the report on the progress of the Risk Management, Internal Control and Internal Audit business process development ▪ Review of the results of risk management activities and the risk matrix for 2015 ▪ Review of the report on the Internal Audit Service performance in 2014, and the audit plan for 2015 ▪ Review of the reports on the interim results of the Group’s Internal Audit Service operation, risk management and internal control activities Human Resources, Remuneration and Social Policies Committee Committee’s activities and powers The Human Resources, Remuneration and Social Policies Committee chaired by an independent director was established for preliminary review of issues related to the development of eﬃ cient and transparent practices of remuneration, human resource planning (succession planning), areas of expertise and performance of the Board of Directors. The main purpose of the Committee is to ensure eﬃ cient decision making by the Company’s Board of Directors on the following issues: ▪ Appointment of members of the Company’s governing bodies and other key executives, and succession planning for management and other key positions in the Company ▪ Assessment of members of the Company’s governing bodies and other key executives ▪ Remuneration of members of the Company’s governing bodies and other key executives ▪ The Company’s social policy 68 49 Corporate governance review 51 Management composition 58 Corporate governance The main objective of the Committee is to review, develop and provide recommendations to the Company’s Board of Directors on the following issues: ▪ The priority areas for appointment, assessment, development and remuneration of members of the Company’s governing bodies and other key executives ▪ Human resource planning, expanding the range of expertise and improving performance of the Company’s Board of Directors ▪ Human resource planning and succession planning for management and other key positions in the Company ▪ Development of eﬃ cient and transparent practices of remuneration for members of the Company’s governing bodies and other key executives ▪ Other issues, including the development of the social policy The Committee membership had been changed during 2015: The Committee membership before June 2015: ▪ Vladimir Lisin (Chairman of the Committee) ▪ Oleg Bagrin ▪ Aleksey Lapshin The Committee membership between June and December 2015: ▪ Stanislav Shekshnya (Chairman of the Committee) ▪ Vladimir Lisin ▪ Oleg Bagrin ▪ Helmut Wieser According to the Regulations on the Human Resources, Remuneration and Social Policies Committee approved in December 2015, the Human Resources, Remuneration and Social Policies Committee with the following membership was established at the meeting of the Company’s Board of Directors: (as at December 31, 2015): ▪ Stanislav Shekshnya (Chairman of the Committee) ▪ Vladimir Lisin ▪ Helmut Wieser Secretary of the Committee: Irina Bevz (Director, Talent Management). Results of the Committee’s activity for 2015 In 2015, there were four meetings of the Human Resources, Remuneration and Social Policies Committee, including one meeting in person and three meetings in the form of absentee voting. The Committee reviewed and passed resolutions on the following key issues: ▪ Approve the objectives, scope and schedule of the Committee’s activities in 2015–2016 and the Secretary of the Committee ▪ Adopt the 2015–2016 HR Strategy approved by the NLMK’s Management Board ▪ Take into consideration the new MICEX requirements related to criteria of independent directors’ connection with the issuer (the maximum length of tenure on the Board of Directors cannot exceed seven years) ▪ Identify the current best practices for assessing a board of directors and develop an assessment procedure on their basis. Use the ideal target vision of the Board of Directors’ performance as a benchmarking criterion when assessing the Board of Directors ▪ Recommend to NLMK’s Board of Directors to approve the proposed methodology and schedule for assessment of the Board of Directors. Conduct the assessment of the Board of Directors in accordance with the proposed methodology and schedule CORPORATE SECRETARY NLMK’s Corporate Secretary ensures eﬀ ective interaction with shareholders, coordinates Participation of committee members in committee meetings in 2015 Full name Position Stanislav Shekshnya Chairman of the Committee Vladimir Lisin Member of the Committee Helmut Wieser Member of the Committee Participation in meetings in 2015 2 (2) 4 (4) 1 (2) CORPORATE GOVERNANCE / REPORT 2015 72 Operational control and risk management 78 Information for shareholders 69 NLMK’s activities aimed at protecting the rights and interests of its shareholders, and supports the operation of the Board of Directors. Functionally reporting to the Board of Directors and administratively reporting to NLMK President (Chairman of the Management Board), the Corporate Secretary is appointed and dismissed by NLMK President (Chairman of the Management Board) on the basis of a decision by the Board of Directors. NLMK’s Corporate Secretary ensures interaction with shareholders, coordinates NLMK’s activities aimed at protecting the rights and interests of its shareholders, supports the operation of the Board of Directors and acts as the Head of the Management Board Secretariat, which helps improve the eﬃ ciency of NLMK’s corporate governance. The duties performed by the Corporate Secretary are in line with recommendations given in the Code, and the Corporate Secretary has suﬃ cient resources to exercise his powers. The Corporate Secretary’s main duties are to: ▪ Contribute to preparing for and organizing of General Meetings of Shareholders ▪ Support the operation of the Board of Directors and its Committees ▪ Contribute to the execution of NLMK’s disclosure policy and oversee the storage of NLMK’s corporate documents ▪ Support the interaction between NLMK and its shareholders ▪ Support the interaction between NLMK and regulators, brokerage ﬁ rms, the registrar and other players in the securities market, as well as NLMK’s aﬃ liates, within the powers assigned to the Corporate Secretary ▪ Secure compliance with the procedures established by the law and NLMK’s internal documents that provide for the enforcement of rights and legitimate interests of shareholders; and control their execution ▪ Contribute to improving NLMK’s corporate governance system and practices The rights and duties of NLMK’s Corporate Secretary are governed by Regulations on the Corporate Secretary (which were approved for the ﬁ rst time in 2015), the Company’s Charter and Regulations on the Board of Directors. Valery Loskutov has been the Company’s Corporate Secretary from 2005. The Corporate Secretary oversees the Corporate Secretary Oﬃ ce. MANAGEMENT BOARD NLMK corporate governance in action According to NLMK’s current corporate documents, the implementation of the approved strategy and speciﬁ c decisions of the Board of Directors is delegated to the President and the Management Board. The main objective of the Management Board is to ensure that the Company is operating eﬃ ciently. In order to reach its objective the Management Board is guided by the following principles: ▪ Eﬃ cient and objective decision-making that favors the interests of the Company and its shareholders ▪ Fair, timely and eﬃ cient execution of the decisions of the General Shareholders’ Meeting and the Board of Directors ▪ Cooperation with trade unions of the Company’s employees with the purpose of taking into account the employees’ interests ▪ Cooperation with government agencies and local authorities on the most important issues. The key issues that the Management Board is responsible for addressing are as follows: ▪ Devising and conceptualizing the developmental steps, long-term plans and core areas of activity for the Company and its subsidiaries and aﬃ liates; and submitting them to the Board of Directors for approval ▪ Developing modes of interaction between the Company and other companies and legal entities in which the Company holds shares or interest or of which the Company is a founder, participant or member ▪ Approving proposals concerning the agenda of the General Meetings of Shareholders/participants as well as the list of candidates to the governing bodies which supervise the subsidiaries, aﬃ liates and other legal entities of which the Company is a founder, participant or member ▪ Approving the Company’s representatives for participation in the General Meetings of Shareholders and participants held at subsidiaries, aﬃ liates and other legal entities of which the Company is a shareholder, founder or member, as well as approving guidelines for voting on agenda items for those representatives ▪ Giving recommendations and opinions on issues concerning approval of budgets, key development trends, governance structure, and other critical issues, which are considered by the governing bodies of subsidiaries, aﬃ liates and other legal entities of which the Company is a founder, participant or member ▪ Advising the Board of Directors on major and/or related party transactions submitted for review by the Board of Directors in accordance with its powers ▪ Approving transactions involving the Company’s assets in cases where the value of the deal or property in question exceeds 10% of the Company’s asset book value ▪ Deciding on Company participation or termination of participation in other organizations in cases where the value of Composition of the Management Board as at 31 December 2015 Full name Position Oleg Bagrin Brijesh Garg Ilya Gushchin Yuri Larin Sergey Likharev Alexander Saprykin Grigory Fedorishin Sergey Filatov Stanislav Tsyrlin Member of the Board of Directors, President (Chairman of the Management Board) Vice President, Procurement Vice President, Sales Vice President, Technology Development & Operational Efﬁ ciency Vice President, Logistics Vice President, Strategic Raw Materials Division Vice President, Finance Managing Director Vice President, HR & Management System There was no conﬂ ict of interests between NLMK Management Board members in 2015. 70 49 Corporate governance review 51 Management composition 58 Corporate governance the acquired (disposed) property is less than 2% of the Company’s asset book value Board) cannot simultaneously be the Chairman of the Board of Directors of the Company. Participation of Members of the Management Board in Meetings of this body in 2015 ▪ Setting up and dissolving Company’s branches and representative oﬃ ces, as well as approving, revising and amending regulations on branches and representative oﬃ ces The make-up and structure of members of the Management Board is approved by the Board of Directors with consideration of the opinion of the President (Chairman of the Management Board). The composition of the Management Board is approved by the Board of Directors based on recommendations from the President (Chairman of the Management Board). President (Chairman of the Management Board) President (Chairman of the Management Board) manages the day-to-day activities of the Company, excluding issues that fall within the exclusive competence of the General Shareholders’ Meeting, the Board of Directors and the Management Board; arranges for the execution of the decisions made by the General Shareholders’ Meeting and the Board of Directors. President (Chairman of the Management Board) acts without any Power of Attorney on behalf of the Company. According to the corporate documents, President (Chairman of the Management The President (Chairman of the Management Board) is elected by the General Shareholders’ Meeting for a period lasting until the next Annual Meeting, unless otherwise stipulated by the General Shareholders’ Meeting. Oleg Bagrin has been the President (Chairman of the Management Board) since 2012 and is also a member of the Board of Directors. He was last elected on 5 June 2015. Full name Oleg Bagrin Brijesh Garg Ilya Gushchin Activity of the Management Board in 2015 Yuri Larin In 2015, there were 44 meetings of the Management Board, including 22 meetings that were held using absentee ballots. The following issues were considered at these meetings: ▪ Meeting Group’s key performance indicators in occupational health & safety Sergey Likharev Alexander Saprykin Grigory Fedorishin Sergey Filatov Stanislav Tsyrlin Participation in meetings 44 44 44 44 44 44 44 44 44 ▪ Group’s consolidated budget execution ▪ Achievement of NLMK Group’s KPIs and implementation of its companies’ optimization programmes ▪ Participation / withdrawing participation of the Group in other companies ▪ Approval of draﬅ decisions on matters within the competence of the General Shareholders’ Meetings of companies in which the Group is the sole participant / shareholder ▪ Execution of the development programmes of NLMK’s divisions (functional areas) ▪ Recommendations to the Company’s Board of Directors (with regard to approval of related party transactions, dividend payments and NLMK’s draﬅ annual report for 2014) ▪ Recommendations to the governing bodies of subsidiaries and aﬃ liates ▪ Approval of transactions ▪ Eﬃ ciency of sales portfolio management ▪ Comprehensive risk management system ▪ Approval of the Management Board’s meeting schedule for 2015 REPORT ON REMUNERATION TO GOVERNING BODIES The levels of remuneration are suﬃ cient to attract, motivate and retain competent and properly qualiﬁ ed executives. Remuneration is paid to members of NLMK’s Board of Directors in accordance with the approved Regulations on Remuneration. The Regulations on Remuneration contain transparent mechanisms for determining the levels of remuneration paid to members of NLMK’s Board of Directors, and govern all types of payments, beneﬁ ts and perks oﬀ ered to them. Remuneration and compensation of members of the Board of Directors The remuneration system for members of the Board of Directors serves to align Shares owned by members of the Management Board Full name Position Oleg Bagrin Member of the Board of Directors, President (Chairman of the Management Board) Share of the authorized capital stock of NLMK Not an NLMK shareholder Brijesh Garg Vice President, Procurement Not an NLMK shareholder Ilya Gushchin Vice President, Sales Not an NLMK shareholder Yuri Larin Vice President, Technology Development & Operational Efﬁ ciency 0.00083 % Sergey Likharev Vice President, Logistics Not an NLMK shareholder Alexander Saprykin Vice President, Strategic Raw Materials Division Not an NLMK shareholder Grigory Fedorishin Vice President, Finance Not an NLMK shareholder Sergey Filatov Managing Director Not an NLMK shareholder Stanislav Tsyrlin Vice President, HR & Management System Not an NLMK shareholder CORPORATE GOVERNANCE / REPORT 2015 72 Operational control and risk management 78 Information for shareholders 71 their ﬁ nancial interests with the long-term ﬁ nancial interests of shareholders. The levels of remuneration and compensation paid to members of NLMK’s Board of Directors are determined on the basis of Regulations on Remuneration of Members of the Board of Directors of Novolipetsk Steel approved by the General Meeting of Shareholders on 5 June 2015 (Minutes of Meeting No. 40). The Regulations outline the terms and conditions and the procedure for payment of remuneration and compensation for expenses to members of NLMK’s Board of Directors related to their performing the functions of members of the Board of Directors during their term / from their election to the Board of Directors till the date of termination of oﬃ ce of the member of the Board of Directors. Remuneration is paid to the members of the Board of Directors for reasonable and faithful exercise of their rights and their duties in the interests of NLMK. Remuneration to members of the Board of Directors consists of base remuneration and a bonus. The amount of base remuneration is determined on the basis of a resolution by the General Meeting of Shareholders. The Annual General Meeting decided to set the base remuneration for 2014 paid to each member of the Board of Directors at $160,000 (one hundred and sixty thousand US dollars). A member of the Board of Directors may receive a bonus that shall not exceed two base remunerations. The amount of the bonus is determined on the basis of the member’s contribution to the work of the Board of Directors and its Committees and recommendations given by the Human Resources, Remuneration and Social Policies Committee. Remuneration is paid following a decision by NLMK’s General Meeting of Shareholders. Regulations on Remuneration of Members of the Board of Directors of Novolipetsk Steel set the rules for reimbursing Board members’ work-related expenses. The following expenses are considered to be reimbursable: ▪ Transportation costs of the members of the Board of Directors incurred while travelling to meetings ▪ Costs for accommodation incurred while attending meetings ▪ Representation expenses ▪ Costs associated with obtaining the professional advice of experts on issues under consideration at the meetings of the Board of Directors ▪ Costs associated with translating materials to be studied by members of the Board of Directors into a foreign language. The maximum amount of a Board member’s expenses reimbursed by NLMK during a settlement period is determined by a decision of the General Meeting of Shareholders and shall not exceed 30% of the base remuneration. The compensation shall be paid only if the member of the Board of Directors participated in more than a half of meetings held by the Board of Directors. Since the Company does not have any stock option programmes, members of the Board of Directors are not provided with an opportunity to participate in them, and their right to sell their NLMK shares is not linked to performance. Remuneration and compensation of members of the Management Board The remuneration system for members of NLMK’s executive bodies and other key executives links the remuneration to NLMK’s performance and their contribution to it. NLMK is consistently implementing a long- term motivation programme for members of NLMK’s executive bodies and other key executives. In accordance with the Regulations on the Management Board, members of the Board shall receive remuneration and compensation for expenses related to the performance of their responsibilities as members of the Board for their period of service. The conditions and procedure for remuneration of Management Board members are governed by an agreement that is concluded with Board members as advised by the Human Resources, Remuneration, and Social Policies Committee. The Management Board shall be compensated in monetary form. The following principles outline the mechanism for determining the amount of compensation that is awarded to NLMK top management: ▪ Honest and eﬃ cient performance of their duties by members of the Management Board ▪ Rational use of the rights that are granted to them ▪ The size of the bonuses awarded to members of the Management Board is dependent on their achievement of key performance indicators (KPIs) and on the Company’s overall results during the reporting period ▪ Active involvement by members of the Management Board in the work of the Group’s executive bodies. Remuneration paid to Board members in 2014–2015 2014 ‘000 rubles 2015 ‘000 rubles 2015 $ million Payments to Board members, incl.: Remuneration Salary Bonuses Commission Beneﬁ ts Refunded expenses Other types of remuneration 125,585 123,605 162,549 160,054 – – – – 1,980 – – – – – 2,495 – 2.67 2.63 – – – – 0.04 – Remuneration paid to Management Board members in 2014–2015 2014 ‘000 rubles 2015 ‘000 rubles 2015 $ million Payments to Board members, incl.: Salary Bonuses Commission Beneﬁ ts Refunded expenses Other types of remuneration 486,545 120,576 362,846 – – 3,123 – 560,604 198,191 359,957 – – 2,440 16 9.20 3.25 5.91 – – 0.04 0.00 72 49 Corporate governance review 51 Management composition 58 Corporate governance OPERATIONAL CONTROL AND RISK MANAGEMENT SUPERVISION OVER THE FINANCIAL AND BUSINESS ACTIVITIES Transition to new consolidated ﬁ nancial reporting standards Keeping up with the recent regulatory changes in Russia, NLMK switched to reporting its consolidated ﬁ nancial results under the International Financial Reporting Standards (IFRS) starting from its report for the ﬁ rst nine months of 2015. The date of the ﬁ rst-time adoption of IFRS is 1 January 2013; the ﬁ rst reporting under IFRS was NLMK’s consolidated ﬁ nancial statement for the year ending on 31 December 2014, with data for 2013 as the benchmark. The timeframe for the transition to IFRS was due to the narrowing gap between US GAAP and IFRS principles in 2012–2014; this made data reported under US GAAP and IFRS more easily comparable and helped improve the transition process. The transition to IFRS had no signiﬁ cant eﬀ ect on the Company’s ﬁ nancial performance data. External Auditor According to the legislation of the Russian Federation, the Group’s General Shareholders’ Meeting selects auditors on an annual basis. The Audit Committee advances candidates for Group auditor who are recognized independent auditors with strong professional reputation for consideration by the Board of Directors. The Audit Committee is guided by the following core principles when making its recommendations: ▪ The qualiﬁ cations of the audit organization and its professional reputation ▪ The quality of its services ▪ Its compliance with auditor independence requirements. AO PricewaterhouseCoopers Audit was selected at the Annual General Shareholders’ Meeting held in June 2015, to conduct an audit of ﬁ nancial statements prepared in accordance with Russian Accounting Standards (RAS), the US Generally Accepted Accounting Principles (US GAAP), and International Financial Reporting Standards (IFRS). Address: 10 Butyrsky Val, Moscow, 125047, Russia. Remuneration The Board of Directors has determined the amount of remuneration for audit services (review) of the US GAAP consolidated ﬁ nancial statements of NLMK for H1 2015, the IFRS consolidated ﬁ nancial statements of NLMK for 9M 2015, 12M 2015 and Q1 2016, and the RAS Statements for 2015 to be US$ 1,000,000 and 32 million rubles (excluding VAT). Independence of external auditors In 2015, AO PricewaterhouseCoopers Audit performed audits of consolidated ﬁ nancial statements prepared in accordance with US GAAP and IFRS; and ﬁ nancial statements of NLMK Group’s major companies in accordance with RAS. AO PricewaterhouseCoopers Audit has several systems to ensure the independence of its auditors, for example, it regularly rotates the key staﬀ in its audit working group (as least once every seven years). The Group has hired AO PricewaterhouseCoopers Audit and other PricewaterhouseCoopers companies (hereaﬅ er PwC) to provide consulting (non- audit) services. The management of NLMK has conducted the necessary procedures, and is sure that these services do not aﬀ ect the independence of the auditor and are not related to ﬁ nancial reporting. The share of consulting (non-audit) services provided CORPORATE GOVERNANCE / REPORT 2015 by ZAO PricewaterhouseCoopers Audit for NLMK in 2015 did no exceed 10 % of the total amount of services performed. Internal Audit Commission Corporate governance in action The Internal Audit Commission is a full- time internal control authority exercising continuous supervision over the ﬁ nancial and business activities of the Company. The Internal Audit Commission operates under the Charter and the Internal Audit Commission Regulations. It audits the ﬁ nancial and business activities of NLMK Group in order to obtain adequate assurance that the activities of NLMK Group comply 72 Operational control and risk management 78 Information for shareholders 73 with applicable Russian Federation laws and do not infringe upon the rights of Company shareholders, and that the Company reports and accounts contain no material misstatements. The Internal Audit Commission acts for the protection of the shareholders’ investments and the Group’s assets and is elected by the General Meeting of Shareholders for a term until the next Annual General Meeting of Shareholders. The Internal Audit Commission report is an essential part of NLMK’s RAS Financial Statements. The members of the Internal Audit Commission were elected on 5 June 2015 at the Annual General Meeting of Shareholders. As of 31 December 2015 the Internal Audit Commission had the following composition: ▪ Vladislav Ershov ▪ Natalia Krasnykh ▪ Vladimir Markin ▪ Sergey Nesmeyanov ▪ Galina Shipilova Activities of the Internal Audit Commission in 2015 The newly elected Internal Audit Commission held one meeting in 2015 to discuss its operation in 2015, elect its chairman and approve an audit plan and programme. The Commission reviewed the Group’s ﬁ nancial and business activities for 2015 in accordance with its powers and on the basis of the approved plan. Remuneration Remuneration to members of the Internal Audit Commission is paid in accordance with the Regulations on NLMK Group’s Internal Audit Commissions approved by NLMK’s President (Chairman of the Management Board) on 25 November 2014. According to the Regulations, the main criterion for determining whether to pay the remuneration is participation in audits of the Company’s Remuneration paid to Internal Audit Commission members in 2014–2015 Payments to Commission members, incl. Salary Bonuses Remuneration for participation in the Commission’s activities Refunded expenses 2014 ‘000 rubles 2015 ‘000 rubles 18,142 6,912 1,445 180 – 6,700 3,670 2,906 – – Other types of remuneration 9 605 124 74 49 Corporate governance review 51 Management composition 58 Corporate governance ﬁ nancial and business operations. The remuneration paid to members of the Internal Audit Commission shall be equal to the amount of base remuneration, which is determined by the Regulations. The total remuneration paid to members of the Internal Audit Commission for audits of NLMK’s operations in 2015 was 220,000 rubles ($4,000). Secretary of the Committee: Andrei Dozhdikov (Head of Consolidated Financial Statements Department). Results of the Committee’s activity for 2015 In 2015 there were 6 meetings of the Audit Committee held in-person, including 3 held by conference call. Audit Committee Committee’s activities and powers The Audit Committee chaired by an independent director was established to contribute to eﬀ ective performance of functions related to supervision of the Company’s ﬁ nancial and business activities by the Board of Directors. The Committee’s main objectives are to improve eﬃ ciency of internal control, risk management and corporate governance systems, verify the accuracy of ﬁ nancial statements, supervise the internal and external audit, and prevent fraud by employees and other parties. According to Regulations on the Audit Committee approved in December 2015, the Audit Committee with the following membership was established at the meeting of the Company’s Board of Directors: ▪ Benedict Sciortino (Chairman) ▪ Karen Sarkisov ▪ Nikolai Gagarin ▪ Stanislav Shekshnya ▪ Franz Struzl The Committee reviewed and passed resolutions on the following key issues: ▪ Review of the results of the audit of NLMK’s 2014 US GAAP Consolidated Financial Statements ▪ Review of the results of the audit of NLMK’s 2014 IFRS Consolidated Financial Statements ▪ Review of the results of the audit of NLMK’s 2014 RAS Financial Statements ▪ Review of draﬅ interim abridged US GAAP Consolidated Financial Statements for Q1 and H1 2015; and IFRS Consolidated Financial Statements for 9M 2015 ▪ Review of potential auditors for NLMK Group’s RAS and IFRS-based consolidated ﬁ nancial statements for 2015 ▪ Review of the report on the progress of the Risk Management, Internal Control and Internal Audit business process development ▪ Review of the report on the Internal Audit Service performance in 2014, and the audit plan for 2015 Participation of committee members in committee meetings in 2015 Full name Position Participation in meetings in 2015* Benedict Sciortino Chairman of the Committee Franz Struzl Member of the Committee Stanislav Shekshnya** Member of the Committee Nikolai Gagarin Member of the Committee Karen Sarkisov Member of the Committee 6 (6) 6 (6) – 6 (6) 6 (6) * The number of the Committee’s meetings over the period of the person’s participation as a member of the Committee is speciﬁ ed in brackets. ** Elected to the Committee in December 2015. CORPORATE GOVERNANCE / REPORT 2015 ▪ Review of the reports on the interim results of the Group’s Internal Audit Service operation, risk management and internal control activities Internal Audit Practices Internal Audit is an integral part of NLMK’s internal control system, exercising continuous supervision over the ﬁ nancial and business activities of the Company. Internal auditing is an activity designed to provide objective and impartial assurance and consulting in order to enhance the organizational activities. The key functions of the Internal Audit Department are as follows: ▪ Assess eﬃ ciency of the internal control system ▪ Assess eﬃ ciency of the risk management system ▪ Assess eﬃ ciency of corporate governance ▪ Consulting Internal auditing activity is performed by the Internal Audit Department and local Internal Audit oﬃ ces of NLMK Group’s companies. Head of Internal Audit interacts with the local Internal Audit oﬃ ces by undertaking: ▪ General functional management of local Internal Audit oﬃ ces ▪ Quality control ▪ Organization of consulting services Internal Audit activities in 2015 In 2015, Internal Audit experts performed the following activities: ▪ Audits of risk management eﬃ ciency in relation to material risks and assessments of eﬃ ciency of the internal control system applicable to business processes. The audits revealed both insigniﬁ cant and signiﬁ cant deﬁ ciencies. It conﬁ rms that the risk management system is in place, yet certain organizational weaknesses and/or control procedure compliance issues exist which could have an impact on achieving process objectives ▪ Assessment of NLMK’s corporate governance eﬃ ciency. The eﬃ ciency was assessed as high and complying with the requirements of Stock exchanges ▪ Audits of Company’s ﬁ nancial and business activities; compliance with ▪ Review of the results of risk management activities and the risk matrix for 2015 ▪ Organization of methodological support for Internal Audit activities 72 Operational control and risk management 78 Information for shareholders 75 ﬁ nancial and tax accounting regulations; and preparation of ﬁ nancial (tax) statements practices in Russia and encouraging fair competition and sustainable economic growth. stakeholders and the Company in general through an eﬃ cient risk management system. ▪ Experts of Internal Audit Department conducted internal audits in NLMK Group’s companies in accordance with the laws on joint-stock companies and charters of limited liability companies. Internal audits were conducted in 17 subsidiaries and aﬃ liates followed by reports on validity of accounting (ﬁ nancial) statements ▪ Consulting services: consulting services were provided to business units of the Lipetsk site and other NLMK Group’s companies on issues related to taxation and ﬁ nancial and business activities; auditors participated in meetings of commissions and work groups and shared their opinions on subject matters ▪ Audits of repair and construction activities Following the audits, auditors provided recommendations on how to improve NLMK Group activities, including improvement of the company’s risk management and internal control system. Internal Audit consistently monitors implementation of its recommendations. In 2015, 95% of auditors’ recommendations were implemented. Anti-corruption efforts NLMK Group is guided by high ethical standards and principles of business transparency. Respect for existing legislation, professionalism and honesty are essential for all NLMK Group employees. NLMK adheres to best corporate governance practices and deems any form of corruption to be unacceptable, including bribery, collusion, corrupt payments, abuse of position, facilitation payments, etc. Direct and indirect involvement of NLMK Group employees in corrupt activities is prohibited without exception. NLMK Group is a member of the Anti- Corruption Charter of the Russian Business, which was established by the Russian Union of Industrialists and Entrepreneurs; this underlines NLMK’s commitment to promoting fair business and corporate governance NLMK Group companies have an extensive internal communications network that enables all employees to report any instances of corruption, past and future. At Novolipetsk, concerns can be reported to a special hotline; at a face-to-face meeting with executives or the person in charge of anti-corruption enforcement, or to Asset Protection. Staﬀ members can also send e-mails to a special address, anticorruption@nlmk.com, or use ‘help boxes’ placed at entrance checkpoints. NLMK Group adopted special practices for operations with the highest risk of fraud: conﬂ icts of interest should be declared, and employees should undergo psychophysiological tests. Their Internal Regulations were amended to include anti- corruption responsibilities. Acknowledgement of and compliance with the principles and practices set out in the Anti-Corruption Charter of the Russian Business is one of the standard qualiﬁ cation criteria our potential counterparties should meet to become NLMK Group’s partners. The Roadmap of the Charter is an integral part of the standard contractual relationship between NLMK Group companies and their partners. Risk mitigation is one of the key prerequisites for achieving our targets and improving key performance indicators. The Group has a number of regulations concerning the risk management system in general and the key risk management methodologies and procedures. The responsibilities within the risk management system are allocated as follows: ▪ The Management Board approves the critical/signiﬁ cant risk matrix and risk management action plan and monitors the performance of the risk management system ▪ The Audit Committee approves the critical/signiﬁ cant risk management programme and monitors the performance of the risk management system ▪ The Risk Management Committee performs day-to-day risk management duties, determines assessment approaches and risk structure and develops risk management and impact mitigation measures The formalization and implementation of processes within our anti-corruption system are expected to be completed in 2016. ▪ Risk owners identify new threats and implement the approved risk management programme RISK MANAGEMENT NLMK risk management system NLMK Group’s business is exposed to various risks. The Group has adopted a risk management system to make optimal decisions in the course of its activities. The system includes risk identiﬁ cation, classiﬁ cation and impact assessment procedures, as well as development of risk management measures and mitigation of the negative impact of external factors. Our risk management policy is aimed at protecting the interests of shareholders, Changes introduced to the risk management system in 2015 The Company continued with integration processes in 2015 to further develop its risk management system. Speciﬁ cally, it appointed risk management and internal control coordinators across NLMK Group operations and functions. Their main task is to communicate the approaches and values of the risk management system to all business units. In 2015, NLMK Group approved its Credit Policy, improved the Maintenance Schedule and developed a draﬅ Anticorruption Policy. 76 49 Corporate governance review 51 Management composition 58 Corporate governance Risks NLMK is exposed to Risk Impact level Description Mitigation measures PRODUCTION RISKS Business continuity risk Critical risk Risks related to downtime caused by equipment failure, human errors, supply of low-quality raw materials, or other sources of risk, including acts of nature Maintenance and repair programmes, a system for controlling incoming raw materials and supplies Equipment productivity reduction risk and low quality product risk Signiﬁ cant risk Risks related to limited equipment availability and lower equipment productivity and quality of end products Operational efﬁ ciency programme COMMERCIAL RISKS Price risk Critical risk Credit risk Critical risk Risk of inefﬁ cient ready inventory management Critical risk FINANCIAL RISKS Currency risk Critical risk INVESTMENT RISKS Investment risk Critical risk REGULATORY RISKS Tax risk Signiﬁ cant risk Risk associated with unfavourable changes in market prices and the government’s position on energy pricing Risk caused by counterparty default on payment or supply of products (accounts receivable and advance payments) or NLMK Group’s bank deposits Risk caused by inefﬁ cient inventory management: non-compliance with (absence of) standards, unlawful actions by inventory keepers or poor logistics chain ▪ Monitoring spreads between steel products and key raw materials ▪ Development of a purchasing strategy by category of material The credit risk is minimized through credit security, accounts receivable insurance, limits on certain types of credit, and concentration risk management Development of raw material and end product stock keeping standards, audit and stock taking Risks associated with ﬂ uctuations in currency rates. The Company receives the majority of its revenues from exports in foreign currency, while the majority of expenditure is established in Russian rubles Control of open foreign exchange position Risk associated with failure to achieve project KPIs, including completion deadlines, project budget and surplus inventory ▪ Application of project management principles ▪ Assessment of risks related to each project ▪ Root cause analysis for key risks. Development of preventive measures When accounting, declaring and paying taxes, the Company seeks to comply with all requirements of the applicable legislation. Nonetheless, changes in tax laws and regulators’ enforcement practices, as well as introduction of new business processes and operations expose the Company to tax risks ▪ Continuous monitoring of tax legislation ▪ Regular diagnostic and strengthening of internal control for tax accounting, declaration and payment processes CORPORATE GOVERNANCE / REPORT 2015 72 Operational control and risk management 78 Information for shareholders 77 Risk Impact level Description Mitigation measures Free trade restriction risks Signiﬁ cant risk The signiﬁ cant volume of exports and imports make the Company vulnerable to tariff and non-tariff measures, as well as other restrictions imposed by foreign regulators on raw and other materials and equipment purchased by the Company, and the products the Company sells ▪ Monitoring of foreign regulators’ activities ▪ Promotion of the Company’s interests through available legal tools, transparency and effective interaction with regulators ▪ Sales channel management to minimize the negative effect of sanction regimes OPERATIONAL RISKS Environmental risk Critical risk Risk of environmental changes or unfavourable long-term consequences of these changes resulting from negative environmental impact Occupational health and safety risks Signiﬁ cant risk Risks associated with the occurrence of accidents and other incidents Fraud, corruption and asset theft risk Signiﬁ cant risk Risk associated with illegal actions (fraud) taken by employees, counterparties and third parties to beneﬁ t themselves to the prejudice (at the expense) of NLMK’s interests IT risks Signiﬁ cant risk ▪ The Company is exposed to IT risks as its processes and data ﬂ ows are heavily dependent on applied IT solutions. There are two key areas of IT risk management: ▪ Protection of information classiﬁ ed as trade secrets, personal data and information intended for internal use ▪ Delivery of business process continuity and high availability of IT systems and infrastructure The Company is implementing a comprehensive investment programme aimed at upgrading pollution prevention equipment, introducing new, more eco-friendly production technologies and ensuring compliance with environmental standards ▪ Development and implementation of a corporate OHS management system with uniﬁ ed standards across all sites ▪ Development of NLMK Group’s preventative ﬁ re safety system ▪ Ensuring employees are supplied with the latest personal protection and hygiene equipment ▪ OHS training for managers and experts. ▪ Promotion of principles stipulated in the Anticorruption Policy and Ethics Code ▪ Declaration of absence of a conﬂ ict of interests by employees in positions that are most vulnerable to the risk ▪ Development of the Company’s hotline as an important and secure channel for informing the Company about corruption and fraud ▪ Qualiﬁ cation of counterparties engaged by the Company with regard to their compliance with anticorruption principles ▪ Regular diagnostic of the Company’s internal control system ▪ Strengthening of NLMK Group’s regulations concerning information security, business continuity procedures and emergency response plans ▪ Implementation of several projects aimed at strengthening the Company’s information security, including introduction of SAP GRC access control tools, comprehensive roll-out of information protection tools and a project to improve the maturity of critical business system change management 78 49 Corporate governance review 51 Management composition 58 Corporate governance INFORMATION FOR SHAREHOLDERS Global Depositary Shares (GDS) The ratio of Global Depositary Shares to ordinary shares is 1:10. The volume of Global Depositary Shares issued by NLMK and traded on the London Stock Exchange amounted to 8.56 % of share capital as of 31 December 2015. The Company’s depositary bank is Deutsche Bank Trust Company Americas. ORDINARY SHARES Share price NLMK Global Depositary Shares on the London Stock Exchange Price of GDS (US$) Maximum Minimum Mean End of year Ordinary NLMK shares on MICEX Share price (RUB) Maximum Minimum Mean End of year 2015 14.80 8.11 12.36 8.51 2015 92.00 58.29 75.21 62.6 2014 16.69 9.80 13.45 11.48 2014 71.02 39.30 51.66 67.41 NLMK GDS price on the London Stock Exchange (LSE) ($/GDS) 18 16 14 12 10 8 6 4 2 0 y r a u n a J y r a u r b e F h c r a M l i r p A y a M e n u J l y u J 2014 t s u g u A r e b m e t p e S r e b o t c O r e b m e v o N r e b m e c e D y r a u n a J y r a u r b e F h c r a M l i r p A y a M e n u J l y u J 2015 t s u g u A r e b m e t p e S r e b o t c O r e b m e v o N r e b m e c e D NLMK GDS price on LSE, lhs MICEX index (indicator of Russian companies’ share prices), rhs 2000 1800 1600 1400 1200 1000 800 600 400 200 0 The Group’s share capital is divided into 5,993,227,240 shares with a nominal value of RUB 1 each. NLMK’s shares are traded on the MICEX and RTS trading platforms of the Moscow Stock Exchange, as well as in the form of Global Depositary Shares (GDS) (1 GDS = 10 ordinary shares) on the London Stock Exchange (LSE). LSE (London) Ticker Code NLMK MICEX (Moscow) Ticker Code NLMK Bloomberg Ticker Code − NLMK LI for GDS traded on the LSE − NLMK RX for shares traded on the MICEX platform of the Moscow Exchange Reuters Ticker Code − NLMKq.L for GDS traded on the LSE − NLMK.MM for shares traded on the MICEX platform of the Moscow Stock Exchange Indices that include NLMK shares ▪ RTS Index (NLMK’s share as at 15.03.16 – 0.76%) ▪ MICEX index (NLMK’s share as at 15.03.16 – 0.76%) ▪ Moscow Stock Exchange Metals & Mining (NLMK’s share as at 15.03.16 – 13.86%) ▪ FTSE Russia IOB index. CORPORATE GOVERNANCE / REPORT 2015 72 Operational control and risk management 78 Information for shareholders 79 consolidated ﬁ nancial statements, if Net debt/ EBITDA is 1.0x or less. ▪ 30% of net proﬁ t and 30% of free cash ﬂ ow calculated on US GAAP/IFRS consolidated ﬁ nancial statements, if Net Debt/EBITDA exceeds 1.0x. ▪ Dividends are paid annually. If conditions for ﬁ nancial stability are maintained, NLMK will strive to pay interim dividends on a quarterly basis. ▪ The amount to be paid as a dividend for a speciﬁ c period is approved by company shareholders in line with recommendations by the Board of Directors. Dividends payable to GDS holders Any dividends paid on shares certiﬁ ed by GDS will be declared and paid to the Depositary in roubles or foreign currency, converted into US dollars by the Depositary (in the case of dividend payment in a currency other than US dollars), and distributed to the holders of GDS, net of fees and Depositary expenses. The Board of Directors recommends that the Annual General Meeting of NLMK Shareholders pay (announce the payment of) 2015 dividends for ordinary shares in the amount of RUB 6.95 in cash per one ordinary share. Taking into account that interim dividends have been paid in the amount of RUB 4.52 per one ordinary share, the remaining balance to be paid per one ordinary share is RUB 2.43. The Board of Directors recommended using the balance of proﬁ ts aﬅ er payment of dividends for funding investment programmes and paying dividends in the future. NLMK share price on MICEX (RUB/share) 100 90 80 70 60 50 40 30 20 10 0 y r a u n a J y r a u r b e F h c r a M l i r p A y a M e n u J l y u J 2014 t s u g u A r e b m e t p e S r e b o t c O r e b m e v o N r e b m e c e D y r a u n a J y r a u r b e F h c r a M l i r p A y a M e n u J l y u J 2015 t s u g u A r e b m e t p e S r e b o t c O r e b m e v o N r e b m e c e D 5000 4000 3000 2000 1000 0 own advisors regarding the tax consequences of investing in the Company’s shares, including Global Depositary Shares (GDS). DIVIDENDS Dividend policy The dividend policy was updated in 2015 to improve the transparency of dividend payouts. According to the current dividend policy, dividends are to be paid with the payout in the range of: ▪ 50% of net income and 50% of free cash ﬂ ow calculated based on US GAAP/ IFRS Dividend history (US$ m) NLMK share price on MICEX, lhs MICEX Metals & Mining Index, rhs Market capitalization NLMK market capitalization in 2015 was largely in line with the general trends seen in capital markets and the global steel market. Average market capitalization of the Company on the London Stock Exchange was US$ 7.4 billion (–8 % year-on-year). At the end of 2015, NLMK share price was US$ 0.85, or US$ 8.51 per GDS, consistent with capitalization of US$ 5.1 billion. Taxation Legal entities Tax treatment of organizations’ revenues received as dividends on shares is governed by Chapter 25 ‘Tax on Organizations’ Proﬁ t’ of the Russian Tax Code. Dividends paid to organizations that are Russian taxpayers are subject to a 0% or 13% income tax (subclauses 1 and 2 of Clause 3 of Article 284 of the Russian Tax Code); foreign organizations are subject to a 15% income tax (subclause 3 of Clause 3 of article 284 of the Russian Tax Code). Individuals The personal income tax rate is 13% for Russian individuals (Clause 1 of Article 224 of the Russian Tax Code) and 15% for foreign individuals (paragraph 2 of Clause 3 of article 224 of the Russian Tax Code). Note: Information on taxation is provided for general information purposes only. Potential and existing investors should consult with their 800 600 400 200 0 738 660 683 60% 651 50% 386 471 379 376 304 125 62 43 116 115 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 draft Declared dividends for the year Dividend payout ratio (dividend/net proﬁt), rhs 40% 30% 20% 10% 0% 0% 80 72 Operational control and risk management 78 Information for shareholders CORPORATE DOCUMENTS The Group’s corporate documents, including the Company Charter, are available at www.nlmk.com. FINANCIAL REPORTING AND DISCLOSURE The Group posts announcements of ﬁ nancial results on the London Stock Exchange website via the regulatory news service (RNS) and then publishes them on the Group website in the form of press releases, and distributes them to the media. The Company publishes its ﬁ nancial results on a quarterly basis. The annual report is published in electronic form on the Group website, www.nlmk.com, on the day of its oﬃ cial publication. The Group shall give notice of this date in a specially issued press release. A hard copy of the annual report is available on request in the oﬃ ce of the Register of Shareholders and NLMK PR Consultants’ oﬃ ce in London. Financial calendar for 2016 Structure of share capital as at 31 December 2015 14.5% 85.5% CONTACTS FOR SHAREHOLDERS Registrar The register of holders of NLMK securities is maintained by the Regional Independent Registrar Agency (RIR Agency). Registered address: 10 B, 9 Maya St., Lipetsk, 398017, Russia Telephone: +7 (4742) 44-30-95 E-mail: info@a-rnr.ru Fletcher Group Holdings Limited* Depositary bank Other free ﬂoating shares** * The company’s beneﬁ ciary is Vladimir Lisin, according to the deﬁ nition of ‘beneﬁ ciary’ in the Russian legislation. ** All other free-ﬂ oating shares, including global depositary shares traded on the London Stock Exchange (Deutsche Bank Trust Company Americas is NLMK’s depositary bank) and shares traded on Moscow Exchange. Date Event 19 5 January 2016 Q4 2015 trading update 24 March 2016 24 March 2016 25 March 2016 14 April 2016 22 April 2016 17 May 2016 3 June 2016 14 July 2016 12M 2015 consolidated ﬁ nancial results NLMK Capital Markets Day 12M 2015 ﬁ nancial results for the Group’s major companies (under Russian Accounting Standards, RAS) Q1 2016 trading update Meeting of the Board of Directors (BoD) Q1 2016 consolidated ﬁ nancial results Annual General Meeting of Shareholders Q2 2016 trading update 25–29 July 2016 H1 2016 consolidated ﬁ nancial results 8–12 August 2016 Meeting of the Board of Directors (BoD) 26–30 September 2016 Extraordinary General Meeting of Shareholders 13 October 2016 Q3 2016 trading update 31 October – 4 November 2016 9M 2016 consolidated ﬁ nancial results 14–18 November 2016 Meeting of the Board of Directors (BoD) 19–21 December 2016 Extraordinary General Meeting of Shareholders CORPORATE GOVERNANCE / REPORT 2015 Deutsche Bank Trust Company Americas New York Headquarters 60 Wall St., New-York, NY, 10005 USA London Ofﬁ ce Winchester House 1 Great Winchester St. London EC2N 2DQ United Kingdom Contacts London: +44 20 7547 6500 New York: +1 212 250 91 00 Moscow: +7 495 642-06-16 E-mail: adr@db.com Valery Loskutov Corporate Secretary Tel.: +7 (4742) 44 49 89 E-mail: loskutov_va@nlmk.com Sergey Takhiev Head of Investor Relations Tel.: +7 (495) 915 15 75 E-mail: tahiev_sa@nlmk.com Financial statements and appendix RESPONSIBILITY STATEMENT Financial statements and appendix NLMK management, having considered the information available regarding the activities of the Company, confirms its responsibility for: 1. Preparation and reliability of the Group’s consolidated financial statements, prepared in accordance with IFRS, as of December 31, 2015, 2014 and 2013, and also for the years ended on those dates, within balance sheets, profit and loss statements, cash flow statements, equity statements and the statements on the total income of shareholders and notes to the consolidated financial statements. Management confirms the reliability of NLMK’s financial status, operational results and cash flow results, as well as its subsidiaries and dependent companies in the consolidated financial statements. 2. The completeness and correctness of the information submitted in the NLMK Group Annual Report for 2015, specifically the information on the operational results of NLMK Group, the results of its strategic development, risks and events which in the near future may have impact on the operations of the Group. The Company management confirms that the operational and financial indices fully reflect the outcome of NLMK Group’s operations in 2015 and main changes regarding the previous periods as well as give a comprehensive representation on the development of NLMK and its subsidiaries and dependent companies. President (Chairman of the Management Board) O. Bagrin O.OOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOO No Company name Activity NLMK subsidiaries and affiliates as of (cid:1007)(cid:1005)(cid:856)(cid:1005)(cid:1006)(cid:856)(cid:1006)(cid:1004)(cid:1005)(cid:1009)(cid:3)(cid:784)(cid:856) Financial statements and appendix Annex 1 Novolipetsk in Charter Capital (%) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 VIZ-Steel, Limited Liability Company Vtorchermet NLMK, Limited Liability Company Zhernovsky-1 Mining and Processing Complex, Limited Liability Company Usinsky-3 Mining and Processing Complex, Limited Liability Company Hotel Metallurg, Limited Liability Company SHANS Lipetsk Insurance Company, Limited Liability Company NLMK Information Technologies, Limited Liability Company NLMK Kaluga, Limited Liability Company NLMK-Metiz, Limited Liability Company NLMK-Svyaz, Limited Liability Company NLMK-Sort (NLMK Long Products), Limited Liability Company NLMK-Uchetniy Tsentr (Accounting Centre), Limited Liability Company NLMK Overseas Holdings, Limited Liability Company Novolipetskaya Metallobaza, Limited Liability Company Novolipetsky Pechatny Dom (Printing House), Limited Liability Company Novolipetsky Metallurg Resort, a subsidiary of Novolipetsk NLMK Construction and Assembly Trust, Limited Liability Company NLMK Trade House, Limited Liability Company Subsidiaries Production and marketing of electrical steel. Collection, processing and sales of ferrous and non-ferrous scrap Entire range of works related to coal mining and processing Entire range of works related to coal mining and processing Hotel services Insurance IT, computing and telecom services. Production of steel, re-rolling stock (billets), hot-rolled and forged flats, unpainted and pre-painted cold-rolled flat steel Production of pig iron, ferrous alloys, steel, hot and cold-rolled flat steel Telecom services Managing company, trading and procurement activities Book-keeping and tax accounting services for NLMK Group businesses Develops the growth strategy for NLMK Group companies, supports relations between the Group’s Russian and international businesses Manufacturing of plastic and steel products Printing services Rest and recreation services, health and rehabilitation facility. Contracting of industrial, housing, utilities, cultural services and road construction works. Construction of health facilities, household natural gas supply lines. Consolidated purchases of raw materials and inputs, sale of NLMK Group by-products 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 Report 2015 ............................................................................................................................................................................................................................................................ 3 Financial statements and appendix 19 20 21 22 23 24 25 Uralvtorchermet, Closely-held Joint-Stock Company Ussuriyskaya Metallobaza, Limited Liability Company Altai-Koks, Open Joint-Stock Company Dolomit, Open Joint-Stock Company Stoilensky Mining and Processing Plant, Open Joint-Stock Company Studenovskaya Joint Stock Mining Company, Open Joint- Stock Company Nizhneserginsky Metizno Metallurgicheskiy Zavod (NSMMZ), Open Joint-Stock Company» Lipetsky Gipromez, Limited Liability Company 26 27 Maxi-Group, Open Joint-Stock Company Consulting services re commercial activities, management, investing in securities, leasing of assets. Acquisition, processing, storage and domestic sale of ferrous and non-ferrous metals. Production and marketing of coke and by-products, generation and marketing of heat and electric power Mining and processing of dolomite Mining and processing of iron ore and other minerals Production of fluxing limestone for steel-making, process limestone for the sugar industry, lime-containing materials and crushed stone for construction and roadwork Production of long steel stock, hot-rolled and forged flat steel Design and survey operations Consulting services, corporate financial management Affiliated companies 28 Neptune, Limited Liability Company Wellness services 100 100 100 100 100 100 92,59 57,57 50,00005 25 Report 2015 ............................................................................................................................................................................................................................................................ 4 NOVOLIPETSK STEEL CONSOLIDATED FINANCIAL STATEMENTS PREPARED IN ACCORDANCE WITH INTERNATIONAL FINANCIAL REPORTING STANDARDS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2015 (WITH INDEPENDENT AUDITOR’S REPORT THEREON) Novolipetsk Steel Consolidated financial statements as at and for the year ended 31 December 2015 CONTENTS Independent auditor’s report Consolidated statement of financial position Consolidated statement of profit or loss Consolidated statement of comprehensive income Consolidated statement of changes in equity Consolidated statement of cash flows Notes to the consolidated financial statements 3 5 6 7 8 9 11 2 Novolipetsk Steel Consolidated statement of financial position as at 31 December 2015 (millions of US dollars) Note As at 31 December 2015 As at 31 December 2014 As at 31 December 2013 Assets Current assets Cash and cash equivalents Short-term financial investments Trade and other accounts receivable Inventories Other current assets Non-current assets Long-term financial investments Investments in associates and other companies accounted for using the equity method of accounting Property, plant and equipment Goodwill Other intangible assets Deferred income tax assets Other non-current assets Total assets Liabilities and equity Current liabilities Trade and other accounts payable Short-term borrowings Current income tax liability Non-current liabilities Long-term borrowings Deferred income tax liability Other long-term liabilities Total liabilities Equity attributable to NLMK shareholders Common stock Additional paid-in capital Accumulated other comprehensive loss Retained earnings Non-controlling interests Total equity Total liabilities and equity 3 5 6 7 5 4 8 9 9 17 10 11 11 17 12(a) 23(f) 343.0 1,242.6 920.9 1,205.3 8.8 3,720.6 219.8 117.7 4,452.3 214.6 112.3 68.2 13.9 5,198.8 8,919.4 726.4 559.8 27.7 1,313.9 2,116.3 339.3 12.2 2,467.8 3,781.7 221.2 9.9 (6,988.4) 11,883.4 5,126.1 11.6 5,137.7 8,919.4 549.2 621.3 1,122.5 1,562.8 5.3 3,861.1 141.3 106.2 5,613.6 285.4 193.9 124.9 23.0 6,488.3 10,349.4 775.9 804.3 47.5 1,627.7 1,964.2 407.4 93.4 2,465.0 4,092.7 221.2 - (5,491.9) 11,512.7 6,242.0 14.7 6,256.7 10,349.4 970.0 485.0 1,459.0 2,123.8 7.6 5,045.4 82.5 419.1 9,892.1 463.4 374.5 136.4 39.6 11,407.6 16,453.0 1,161.8 1,136.7 21.6 2,320.1 3,053.8 641.0 39.6 3,734.4 6,054.5 221.2 - (839.9) 10,989.1 10,370.4 28.1 10,398.5 16,453.0 The consolidated financial statements as set out on pages 5 to 65 were approved on 23 March 2016. The accompanying notes constitute an integral part of these consolidated financial statements. 5 Novolipetsk Steel Consolidated statement of profit or loss for the year ended 31 December 2015 (millions of US dollars, unless otherwise stated) Revenue Cost of sales Gross profit General and administrative expenses Selling expenses Other operating income / (expenses) Taxes, other than income tax Operating profit before equity share in net losses of associates and other companies accounted for using the equity method of accounting, impairment and write-off of assets Loss on disposals of property, plant and equipment Impairment losses and write-off of assets Share in net losses of associates and other companies accounted for using the equity method Result of disposal of subsidiary Income on change of restructuring provision Gains on investments Finance income Finance costs Foreign currency exchange gain, net Other expenses, net Note 14 16 4, 8 4 20 20 18 18 19 For the year ended 31 December 2015 For the year ended 31 December 2014 For the year ended 31 December 2013 8,008.3 (5,495.7) 10,395.7 (7,389.0) 10,818.4 (8,665.9) 2,512.6 3,006.7 2,152.5 (261.1) (801.6) 14.1 (75.7) (364.3) (923.1) 6.1 (137.5) (456.9) (945.6) (6.6) (134.6) 1,388.3 1,587.9 608.8 (7.6) (85.5) (103.0) - - 80.3 51.9 (95.3) 109.5 (17.5) (11.9) (657.2) (193.1) - - 37.4 36.5 (136.8) 488.2 (15.0) (23.0) (21.0) (54.0) (51.4) 7.5 2.3 40.6 (121.9) 85.2 (53.9) Profit before income tax 1,321.1 1,136.0 419.2 Income tax expense 17 (352.9) (362.4) (255.0) Profit for the year 968.2 773.6 164.2 Profit attributable to: NLMK shareholders Non-controlling interests Earnings per share – basic and diluted: 967.4 0.8 772.5 1.1 145.4 18.8 Earnings attributable to NLMK stockholders per share (US dollars) 13 0.1614 0.1289 0.0243 Weighted-average shares outstanding: basic and diluted (in thousands) 12(a) 5,993,227 5,993,227 5,993,227 The accompanying notes constitute an integral part of these consolidated financial statements. 6 Novolipetsk Steel Consolidated statement of comprehensive income for the year ended 31 December 2015 (millions of US dollars) Profit for the year 968.2 773.6 164.2 Note For the year ended 31 December 2015 For the year ended 31 December 2014 For the year ended 31 December 2013 Other comprehensive loss: Items that may be reclassified subsequently to profit or loss: Cumulative translation adjustment 2(b) (1,500.3) (4,666.5) (780.4) Total comprehensive loss for the year attributable to NLMK shareholders Non-controlling interests (532.1) (529.1) (3.0) (3,892.9) (3,879.5) (13.4) (616.2) (634.5) 18.3 The accompanying notes constitute an integral part of these consolidated financial statements. 7 Novolipetsk Steel Consolidated statement of changes in equity for the year ended 31 December 2015 (millions of US dollars) NLMK shareholders Note Common stock Additional paid-in capital Accumulated other comprehensive loss Retained earnings Non-controlling interest Total equity Balance at 1 January 2013 Profit for the year Cumulative translation adjustment 2(b) Change of non-controlling interests in existing subsidiaries Disposal of other comprehensive income as a result of deconsolidation 20 Dividends to shareholders 12(b) Balance at 31 December 2013 Profit for the year Cumulative translation adjustment 2(b) Dividends to shareholders 12(b) Balance at 31 December 2014 Profit for the year Disposal of assets to an entity under common control Cumulative translation adjustment 23(f) 2(b) Dividends to shareholders 12(b) Balance at 31 December 2015 221.2 - - - - - 221.2 - - - 221.2 - - - - - - - - - - - - - - - - 9.9 - - - - 11,008.8 (32.9) 11,197.1 145.4 18.8 164.2 (779.9) - (0.5) (780.4) - (49.5) 42.7 (6.8) (60.0) - - (115.6) - - (60.0) (115.6) (839.9) 10,989.1 28.1 10,398.5 - 772.5 1.1 773.6 (4,652.0) - (14.5) (4,666.5) - (248.9) - (248.9) (5,491.9) 11,512.7 - - (1,496.5) 967.4 - - 14.7 0.8 6,256.7 968.2 (0.1) 9.8 (3.8) (1,500.3) - (596.7) - (596.7) 221.2 9.9 (6,988.4) 11,883.4 11.6 5,137.7 The accompanying notes constitute an integral part of these consolidated financial statements. 8 Novolipetsk Steel Consolidated statement of cash flows for the year ended 31 December 2015 (millions of US dollars) Note For the year ended 31 December 2015 For the year ended 31 December 2014 For the year ended 31 December 2013 Cash flows from operating activities Profit for the year Adjustments to reconcile profit for the year to net cash provided by operating activities: Depreciation and amortization Loss on disposals of property, plant and equipment (Income) / losses on investments Finance income Finance costs Share in net losses of associates and other companies accounted for using the equity method Deferred income tax expense / (benefit) 4 17 Impairment losses Unrealized gains on foreign currency exchange Other adjustments Changes in operating assets and liabilities Decrease / (increase) in trade and other accounts receivable Decrease / (increase) in inventories (Increase) / decrease in other current assets (Decrease) / increase in trade and other accounts payable (Decrease) / increase in current income tax liability Net cash provided by operating activities Cash flows from investing activities Purchases and construction of property, plant and equipment Proceeds from sale of property, plant and equipment Purchases of investments and loans given, net Placement of bank deposits, net Interest received Contribution to share capital of the company accounted for using the equity method 20 Advance VAT payments on imported equipment Disposal of assets to an entity under common control Cash received in course of bankruptcy proceedings Disposal of investment in subsidiary Net cash used in investing activities Cash flows from financing activities Proceeds from borrowings 23(f) 24(b) 20 Repayment of borrowings and capital lease payments Interest paid Dividends to shareholders Acquisition of additional stake in existing subsidiary Net cash used in financing activities Net (decrease) / increase in cash and cash equivalents Effect of exchange rate changes on cash and cash equivalents Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year 3 3 968.2 773.6 164.2 560.0 7.6 (80.3) (51.9) 95.3 103.0 51.8 85.5 (173.4) (8.4) 98.2 82.8 (5.5) (75.5) (6.3) 1,651.1 (594.7) 10.8 (198.8) (641.0) 43.6 (22.0) (23.8) 9.8 16.8 - 793.5 11.9 (37.4) (36.5) 136.8 193.1 (15.9) 657.2 (574.0) 31.5 (49.9) (97.6) (1.8) (28.9) 50.1 1,805.7 (562.6) 15.0 (231.6) (197.1) 30.7 - - - - - (1,399.3) (945.6) 675.6 (578.8) (79.4) (395.2) - (377.8) (126.0) (80.2) 549.2 343.0 110.2 (910.7) (120.6) (225.9) - (1,147.0) (286.9) (133.9) 970.0 549.2 871.1 23.0 49.1 (40.6) 121.9 54.0 87.7 - - 14.2 (321.3) (95.8) 7.4 396.4 2.1 1,333.4 (756.3) 5.8 (87.4) (264.4) 40.4 - - - - 46.2 (1,015.7) 2,000.7 (2,020.2) (81.5) (113.6) (9.6) (224.2) 93.5 (74.7) 951.2 970.0 The accompanying notes constitute an integral part of these consolidated financial statements. 9 Novolipetsk Steel Consolidated statement of cash flows for the year ended 31 December 2015 (millions of US dollars) Supplemental disclosures of cash flow information Cash paid during the year for: Income tax paid Placements of bank deposits Withdrawals of bank deposits Non cash investing activities: Note For the year ended 31 December 2015 For the year ended 31 December 2014 For the year ended 31 December 2013 (320.9) (1,594.7) 953.7 (352.4) (1,997.8) 1,800.7 (143.3) (1,232.0) 967.6 Fair value of assets disposed of in course of partial disposal of investment Conversion of debt to equity 20 20 - 109.5 - 270.4 867.3 - The accompanying notes constitute an integral part of these consolidated financial statements. 10 Novolipetsk Steel Notes to the consolidated financial statements as at and for the year ended 31 December 2015 (millions of US dollars) 1 Background Novolipetsk Steel (the “Parent Company”) and its subsidiaries (together – the “Group”) is one of the world’s leading steelmakers with facilities that allow it to operate an integrated steel production cycle. The Parent Company is a Russian Federation public joint stock company in accordance with the Civil Code of the Russian Federation. The Parent Company was originally established as a State owned enterprise in 1934 and was privatized in the form of an open joint stock company on 28 January 1993. On 12 August 1998 the Parent Company’s name was re-registered as an open joint stock company in accordance with the Law on Joint Stock Companies of the Russian Federation and on 29 December 2015 the name of the Parent Company was changed to public joint stock company due to changes in legislation of the Russian Federation. The Group is vertically integrated steel company and the largest steel producer in Russia. The Group also operates in the mining segment (Note 21). The Group’s main operations are in the Russian Federation, the European Union and the USA and are subject to the legislative requirements of the subsidiaries’ state and regional authorities. The Parent Company’s registered office is located at 2, Metallurgov sq., 398040, Lipetsk, Russian Federation. As at 31 December 2015 the Parent Company’s major shareholder with 85.54% ownership interest is Fletcher Group Holdings Limited which is beneficially owned by Mr. Vladimir Lisin. The major companies of the Group are: Activity Country of incorporation Share at 31 December 2015 Share at 31 December 2014 Share at 31 December 2013 Companies under the Group’s control: Russian flat products LLC VIZ-Stahl OJSC Altai-Koks Novex Trading (Swiss) S.A. Novexco (Cyprus) Ltd. Foreign rolled products NLMK DanSteel A/S NLMK Indiana LLC NLMK Pennsylvania LLC Russian long products OJSC Nizhneserginski Hardware-Metallurgical Plant LLC NLMK-Metalware LLC NLMK-Kaluga LLC Vtorchermet NLMK Mining OJSC Stoilensky GOK Production of steel Production of blast furnace coke Trading Trading Russia Russia Switzerland Cyprus Production of steel Production of steel Production of steel Denmark USA USA 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% Production of steel and long products Production of metalware Production of long products Processing of metal scrap Russia Russia Russia Russia 92.59% 92.59% 92.59% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% Mining and processing of iron-ore raw Russia 100.00% 100.00% 100.00% Among associates and other companies accounted for using the equity method the major is: Activity Country of incorporation Share at 31 December 2015 Share at 31 December 2014 Share at 31 December 2013 NLMK Belgium Holdings S.A. (Note 20) Holding company Belgium 51.00% 79.50% 79.50% 11 Novolipetsk Steel Notes to the consolidated financial statements as at and for the year ended 31 December 2015 (millions of US dollars) 2 Basis of consolidated financial statements preparation (a) Basis of preparation These consolidated financial statements are prepared in accordance with International Financial Reporting Standards (“IFRS”) under the historical cost convention except those, described in the principal accounting policies applied in the preparation of these consolidated financial statements, as set out in Note 25. These policies have been consistently applied to all the periods presented in these consolidated financial statements. Figures for three periods are presented for users’ convenience. (b) Functional and reporting currency Functional currency of all Group’s Russian entities is considered to be the Russian ruble. The functional currency of the majority of the foreign subsidiaries is their local currency. The Group uses US dollars as presentation currency for users’ convenience. The results of operations and financial position of each Group entity are translated into the presentation currency as follows: (cid:131) (cid:131) (cid:131) (cid:131) assets and liabilities in statement of financial position are translated at the closing rate at the end of the respective reporting period; income and expenses are translated at average exchange rates for each quarter (unless this average rate is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions); components of equity are translated at the historical rate; all resulting exchange differences are recognized in other comprehensive income. Items of consolidated statements of cash flow are translated at average exchange rates for each quarter (unless this average rate is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case proceeds and disposals are translated at the dates of the transactions). When control over a foreign operation is lost, the previously recognized exchange differences on translation to a different presentation currency are reclassified from other comprehensive income to profit or loss for the year as part of the gain or loss on disposal. On partial disposal of a subsidiary without loss of control, the related portion of accumulated currency translation differences is reclassified to non-controlling interest within equity. The Central Bank of the Russian Federation’s Russian ruble to US dollar closing rates of exchange as of the reporting dates and the period weighted average exchange rates for corresponding reporting periods are indicated below. As at 1 January For the 1st quarter For the 2nd quarter For the 3rd quarter For the 4th quarter As at 31 December 2015 2014 2013 62.1919 52.6543 62.9784 65.9434 72.8827 34.9591 34.9999 36.1909 47.4243 56.2584 30.3727 30.4142 31.6130 32.7977 32.5334 32.7292 12 Novolipetsk Steel Notes to the consolidated financial statements as at and for the year ended 31 December 2015 (millions of US dollars) 3 Cash and cash equivalents As at 31 December 2015 As at 31 December 2014 As at 31 December 2013 Cash Russian rubles US dollars Euros Other currencies Deposits Russian rubles US dollars Euros Other currencies Other cash equivalents 20.4 99.0 41.2 1.7 29.6 140.3 - 10.7 0.1 343.0 20.3 150.8 54.3 8.0 96.3 158.0 53.6 7.8 0.1 549.2 70.8 194.1 158.6 2.0 204.9 331.8 5.7 1.9 0.2 970.0 4 Investments in associates and other companies accounted for using the equity method of accounting NLMK Belgium Holdings S.A. (Note 20) TBEA & NLMK (Shenyang) Metal Product Co., Ltd. As at 31 December 2015 As at 31 December 2014 As at 31 December 2013 108.8 8.9 117.7 97.3 8.9 106.2 412.8 6.3 419.1 The table below summarizes the movements in the carrying amount of the Group’s investments in associates and other companies accounted for using the equity method of accounting. 2015 2014 2013 As at 1 January Share of net loss of associates and other companies accounted for using the equity method of accounting Conversion of debt to equity Contributions to the share capital by the Group Impairment of investments Disposal of 28.5% shares in NBH Unrealized profit in inventory of associates and other companies accounted for using the equity method of accounting Translation adjustment Reclassification due to loss of control (Note 20) Other adjustments As at 31 December 106.2 (103.0) 109.5 22.0 - (35.6) 30.3 (12.8) - 1.1 117.7 419.1 (193.1) 270.4 - (325.2) (28.0) (29.7) - (7.3) 106.2 8.1 (54.0) - - - (2.3) (0.2) 467.5 - 419.1 13 Novolipetsk Steel Notes to the consolidated financial statements as at and for the year ended 31 December 2015 (millions of US dollars) 4 Investments in associates and other companies accounted for using the equity method of accounting (continued) The Group’s interests in its principal associates and other companies accounted for using the equity method of accounting and their summarized financial information were as follows: Company Year Share Assets Liabilities Revenue Profit / (loss) for the year NLMK Belgium Holdings S.A. (Note 20) (Belgium) including from / (to) the Group including from / (to) the Group including from / (to) the Group TBEA & NLMK (Shenyang) Metal Product Co., Ltd. (China) 2015 51.0% 1,485.4 (1,281.7) 1,277.6 (191.3) 2014 79.5% 2013 79.5% 18.4 1,857.2 24.7 2,094.2 (505.9) (1,542.9) 55.5 1,517.3 (510.5) (1,782.4) 54.9 405.6 - (243.4) - (70.9) 6.1 (479.8) 5.9 - 2015 2014 2013 50.0% 50.0% 50.0% 18.0 18.4 17.4 (0.2) (0.6) (0.1) 9.9 12.3 4.4 0.7 0.9 0.5 Reconciliation of net assets of NBH, calculated in accordance with its consolidated financial statements, to carrying amount of investment is below. 2015 2014 Net assets as at 1 January Net loss for the period (Note 20) Proportional contributions into share capital Conversion of debt to equity Other adjustments Translation adjustment Net assets as at 31 December Share in net assets Share in PP&E valuation difference Share of other investor in conversion of debt to equity (Note 20) Impairment of investments Unrealised profit Cumulative translation adjustment and other adjustments Investments in NBH 28.2 (178.4) 43.2 109.5 1.9 (0.2) 4.2 2.1 205.7 109.1 (239.8) 30.3 1.4 108.8 27.3 (276.1) - 270.4 (8.4) 15.0 28.2 22.4 349.2 55.4 (325.2) (28.0) 23.5 97.3 Net assets of NBH as of the date of disposal, calculated in accordance with its consolidated financial statements, amounted to $88.8. Major adjustments in reconciliation of net assets of NBH to carrying amount of investment were: net loss (Note 20) and share in PP&E valuation difference. 14 Novolipetsk Steel Notes to the consolidated financial statements as at and for the year ended 31 December 2015 (millions of US dollars) 5 Financial investments Short-term financial investments Loans to related parties (Note 23) Bank deposits (Note 22(c)), including: - Russian rubles - US dollars - Euros - other currencies Other short-term financial investments Long-term financial investments Loans to related parties (Note 23) Bank deposits and other long-term financial investments 6 Trade and other accounts receivable Financial assets Trade accounts receivable Allowance for impairment of trade accounts receivable Other accounts receivable Allowance for impairment of other accounts receivable Non-financial assets Advances given to suppliers Allowance for impairment of advances given to suppliers VAT and other taxes receivable Accounts receivable from employees As at As at 31 December 2015 31 December 2014 As at 31 December 2013 65.4 1,171.7 14.8 1,090.7 66.2 - 5.5 1,242.6 219.7 0.1 219.8 1,462.4 68.4 549.4 14.8 425.8 96.5 12.3 3.5 621.3 141.2 0.1 141.3 762.6 107.6 376.9 26.9 350.0 - - 0.5 485.0 78.0 4.5 82.5 567.5 As at As at 31 December 2015 31 December 2014 As at 31 December 2013 613.6 (16.3) 40.3 (15.3) 622.3 54.0 (4.2) 247.3 1.5 298.6 920.9 802.0 (28.6) 38.7 (20.4) 791.7 69.7 (9.6) 269.0 1.7 330.8 901.7 (39.3) 67.5 (25.1) 904.8 81.7 (19.3) 488.5 3.3 554.2 1,122.5 1,459.0 The carrying amounts of trade and other accounts receivable approximate their fair values. As at 31 December 2015, 2014 and 2013 accounts receivable of $74.0, $137.6 and $141.7, respectively, served as collateral for certain borrowings (Note 11). 15 Novolipetsk Steel Notes to the consolidated financial statements as at and for the year ended 31 December 2015 (millions of US dollars) 6 Trade and other accounts receivable (continued) Movements in the Group’s provision for impairment of trade and other accounts receivables are as follows: As at 1 January Provision for impairment during the year Receivables written off during the year as uncollectible Unused amounts reversed Change in scope of consolidation Translation adjustment As at 31 December 2015 2014 2013 (58.6) (22.8) 21.1 13.7 0.1 10.7 (35.8) (83.7) (35.9) 0.3 21.1 4.3 35.3 (58.6) (95.1) (45.1) 2.4 38.6 9.1 6.4 (83.7) The allocation of trade accounts receivable, net of provision for doubtful debt, by geographical area is follows: Russia European Union North America Asia and Oceania Middle East, including Turkey Other regions 7 Inventories Raw materials Work in process Finished goods and goods for resale As at As at 31 December 2015 31 December 2014 As at 31 December 2013 130.5 288.6 58.7 48.8 42.2 28.5 597.3 133.6 399.3 146.9 37.0 21.0 35.6 773.4 167.9 422.6 142.5 95.3 10.6 23.5 862.4 As at As at 31 December 2015 31 December 2014 As at 31 December 2013 522.0 400.3 340.7 623.1 569.7 419.5 980.7 526.6 684.2 1,263.0 1,612.3 2,191.5 Valuation to net realizable value (57.7) (49.5) (67.7) 1,205.3 1,562.8 2,123.8 As at 31 December 2015, 2014 and 2013 inventories of $303.5, $562.0 and $310.5, respectively, served as collateral for certain borrowings (Note 11). Share of raw materials and acquired semi-finished goods in cost of sales for the years ended 31 December 2015, 2014 and 2013 amounted to 63.5%, 61.3% and 61.7%, respectively. Share of fuel and energy resources expenses in cost of sales for the years ended 31 December 2015, 2014 and 2013 amounted to 10.9%, 13.0% and 13.4%, respectively. 16 Novolipetsk Steel Notes to the consolidated financial statements as at and for the year ended 31 December 2015 (millions of US dollars) 8 Property, plant and equipment Land Buildings Land and buildings improvements Machinery and equipment Vehicles Construction in progress Other Total Cost at 1 January 2013 Accumulated depreciation Net book value at 1 January 2013 Additions Disposals Deconsolidation of subsidiaries (Note 20) Available for use Depreciation charge Translation adjustment Cost at 31 December 2013 Accumulated depreciation Net book value at 31 December 2013 Additions Disposals Impairment Available for use Depreciation charge Translation adjustment Cost at 31 December 2014 Accumulated depreciation Net book value at 31 December 2014 270.9 - 270.9 - (0.1) (42.2) 3.9 - (16.7) 215.8 - 215.8 - (6.0) - 9.2 - (88.1) 130.9 - 130.9 2,544.7 (806.4) 2,218.9 (992.7) 10,737.9 (5,485.6) 1,738.3 1,226.2 5,252.3 - (2.2) (174.0) 580.0 (75.6) (117.3) 2,748.0 (798.8) - (2.9) (12.5) 239.1 (74.7) (91.7) 10.4 (11.9) (698.1) 691.2 (655.5) (279.6) 2,267.0 (983.5) 9,804.7 (5,495.9) 437.8 (223.9) 213.9 7.1 (4.1) - 22.3 (37.2) (15.0) 413.8 (226.8) 2,827.3 - 2,827.3 836.2 (15.3) (30.4) (1,554.7) - (161.0) 1,902.1 - 1,949.2 1,283.5 4,308.8 187.0 1,902.1 - (3.0) (122.6) 90.0 (78.6) (773.2) 1,583.7 (521.9) 1,061.8 - (3.2) (41.6) 154.7 (82.8) (554.3) 1,378.7 (622.4) 0.5 (10.8) (139.3) 645.5 (542.5) (1,638.8) 6,231.3 (3,607.9) 756.3 2,623.4 - (2.6) - 13.9 (33.3) (66.5) 235.5 (137.0) 98.5 605.5 (1.5) (4.3) (921.8) - (674.4) 905.6 - 905.6 153.3 (78.9) 74.4 - (0.6) (24.0) 18.2 (20.5) (1.8) 103.2 (57.5) 45.7 - (0.8) - 8.5 (13.6) (2.7) 78.6 (41.5) 37.1 19,190.8 (7,587.5) 11,603.3 853.7 (37.1) (981.2) - (863.5) (683.1) 17,454.6 (7,562.5) 9,892.1 606.0 (27.9) (307.8) - (750.8) (3,798.0) 10,544.3 (4,930.7) 5,613.6 17 Novolipetsk Steel Notes to the consolidated financial statements as at and for the year ended 31 December 2015 (millions of US dollars) 8 Property, plant and equipment (continued) Land Buildings Land and buildings improvements Machinery and equipment Vehicles Construction in progress Other Total Additions Disposals Impairment Available for use Depreciation charge Translation adjustment Cost at 31 December 2014 Accumulated depreciation Net book value at 31 December 2015 - (1.3) - 0.6 - (29.2) 101.0 - 101.0 - (0.6) (13.7) 30.4 (40.0) (218.3) 1,263.3 (443.7) - (4.0) (7.1) 36.2 (45.3) (166.4) 1,088.5 (518.8) - (11.8) (26.8) 220.3 (393.6) (494.9) 5,027.4 (3,110.8) 819.6 569.7 1,916.6 - (1.9) (11.0) 10.3 (18.1) (20.5) 174.5 (117.2) 57.3 639.8 (33.4) - (309.0) - (252.7) 950.3 - 950.3 - (0.2) - 11.2 (7.5) (2.8) 77.4 (39.6) 37.8 639.8 (53.2) (58.6) - (504.5) (1,184.8) 8,682.4 (4,230.1) 4,452.3 18 Novolipetsk Steel Notes to the consolidated financial statements as at and for the year ended 31 December 2015 (millions of US dollars) 8 Property, plant and equipment (continued) As at 31 December 2015, 2014 and 2013 the Group did not have pledged property, plant and equipment. The amount of borrowing costs capitalized is $50.7, $59.0 and $164.0 for the years ended 31 December 2015, 2014 and 2013, respectively. At 31 December 2015, 2014 and 2013 the Group’s management considered that the low level of economic activity combined with a deterioration in the steel market represented a trigger for impairment testing and has performed the tests for impairment of assets using the income approach based on primarily Level 3 inputs. For the purpose of impairment testing for the years ended 31 December 2015, 2014 and 2013, the Group’s management has estimated cash flows for 7 years due to long useful-lives of steel making equipment and normalized cash flows for a post-forecast period. Prices for steel products in this estimate were determined on the basis of forecasts of investment banks’ analysts. The table below summarizes companies and types of assets, also subject to impairment test as of 31 December 2015, major assumptions and their sensitivity used in the impairment models. Prices for steel products in this estimate were determined on the basis of forecasts of investment banks’ analysts. Sensitivity in the table below was determined as a percent of changes of corresponding factors in forecast and post-forecast periods when recoverable values of assets (value in use) become equal to their balance values. As of 31 December 2015 an impairment testing showed that recoverable amount of property, plant and equipment (value in use) of scrap collecting assets in Russian long products segment and OJSC Nizhneserginski Hardware- Metallurgical Plant was below its carrying amount by $23.9 and $34.7, respectively. An impairment testing also showed impairment of goodwill in NLMK Indiana LLC by $14.4. Company Asset type Forecast period, years Discount rate, % Product types Average sale price*, $ per tonne (FCA) Sensitivity, % of change Price Sales volume 7 12-16% Iron ore 44 -43% -56% OJSC Stoilensky GOK OJSC Stoilensky GOK Property, plant and equipment and intangible assets Goodwill NLMK Pennsylvania LLC Property, plant and equipment Property, plant and equipment Goodwill NLMK Indiana LLC NLMK Indiana LLC OJSC Altai-Koks OJSC Altai-Koks Property, plant and equipment Goodwill Scrap collecting assets in Russian long products segment OJSC NSMMZ Property, plant and equipment Property, plant and equipment LLC NLMK-Kaluga LLC NLMK-Metalware NLMK DanSteel A/S Property, plant and equipment Property, plant and equipment Property, plant and equipment 7 7 7 7 7 7 7 7 7 7 7 12-16% Iron ore 44 -36% -47% 8% Flat products 646 -3% -22% 8% Flat products 540 -0.4% 8% Flat products 540 +0.3% -3% +2% 12-16% 12-16% 12-16% Coke, chemical products Coke, chemical products Metal scrap 172 -15% -40% 172 -13% -35% 171 +3% - 12-16% 12-16% 12-16% Long products and semi-finished goods Long-products and semi-finished goods Metalware 8% Plate 344 +1% +2% 353 -0.2% -1% 464 630 -7% -1% -31% -5% 19 * Weighted average prices giving the product mix, averaged for the period from 2016 to 2022 Novolipetsk Steel Notes to the consolidated financial statements as at and for the year ended 31 December 2015 (millions of US dollars) 8 Property, plant and equipment (continued) The table below summarizes companies and types of assets, also subject to impairment test as of 31 December 2014, major assumptions and their sensitivity used in the impairment models. Prices for steel products in this estimate were determined on the basis of forecasts of investment banks’ analysts. Sensitivity in the table below was determined as a percent of changes of corresponding factors in forecast and post-forecast periods when recoverable values of assets (value in use) become equal to their balance values. As of 31 December 2014 an impairment testing showed that recoverable amount of property, plant and equipment (value in use) of OJSC Nizhneserginski Hardware-Metallurgical Plant, LLC NLMK-Kaluga and NLMK DanSteel A/S was below its carrying amount by $113.7, $127.0 and $67.1, respectively. Company Asset type Forecast period, years Discount rate, % Product types Average sale price*, $ per tonne (FCA) Sensitivity, % of change Price Sales volume NLMK OJSC Stoilensky GOK OJSC Stoilensky GOK Property, plant and equipment and intangible assets Property, plant and equipment and intangible assets Goodwill NLMK Pennsylvania LLC Property, plant and equipment Property, plant and equipment Goodwill NLMK Indiana LLC OJSC Altai-Koks Scrap collecting assets in Russian long products segment OJSC NSMMZ Property, plant and equipment Property, plant and equipment LLC NLMK-Kaluga NLMK DanSteel A/S Property, plant and equipment Property, plant and equipment 7 12-16% Flat products 405 -17% -17% 7 12-16% Iron ore 34 -25% -27% 7 7 7 7 7 7 7 6 12-16% Iron ore 34 -7% -8% 9% Flat products 799 -5% -62% 9% Flat products 705 -4% -35% 12-16% 12-16% Coke, chemical products Metal scrap 116 -3% -14% 199 -2% -43% 12-16% 12-16% 9% Long products and semi-finished goods Long-products and semi-finished goods Plate 403 +2% +7% 437 +3% 738 +2% - - * Weighted average prices giving the product mix, averaged for the period from 2015 to 2021 20 Novolipetsk Steel Notes to the consolidated financial statements as at and for the year ended 31 December 2015 (millions of US dollars) 8 Property, plant and equipment (continued) The table below summarizes companies and types of assets, subject to impairment test as of 31 December 2013, major assumptions and their sensitivity used in the impairment models. Prices for steel products in this estimate were determined on the basis of forecasts of investment banks’ analysts. Sensitivity in the table below was determined as a percent of changes of corresponding factors in forecast and post-forecast periods when recoverable values of assets (value in use) become equal to their balance values. Company Asset type Forecast period, years Discount rate, % Product types Average sale price*, $ per tonne (FCA) Sensitivity, % of change Price Sales volume LLC NLMK-Kaluga OJSC Nizhneserginski Hardware-Metallurgical Plant LLC NLMK-Metalware Scrap collecting assets in Russian long products segment NLMK Property, plant and equipment Property, plant and equipment Property, plant and equipment Property, plant and equipment Property, plant and equipment NLMK DanSteel A/S Property, plant and equipment 7 7 7 7 7 7 11% 11% Long products and semi-finished goods Long products 592 -1% -5% 568 -3% -10% 11% Metalware 697 -4% -19% 11% Scrap 268 -1% -5% 11% 8% Flat products and semi-finished goods Plate 631 -6% -24% 895 -4% -24% * Weighted average prices giving the product mix, averaged for the period from 2014 to 2020 21 Novolipetsk Steel Notes to the consolidated financial statements as at and for the year ended 31 December 2015 (millions of US dollars) 9 Intangible assets Goodwill Mineral rights Customer base property Industrial intellectual Beneficial lease interest Total Cost at 1 January 2013 Accumulated amortisation Net book value at 1 January 2013 786.1 - 557.7 (281.7) 196.8 (93.5) 59.5 (29.1) 8.7 (0.4) 1,608.8 (404.7) 786.1 276.0 103.3 30.4 8.3 1,204.1 Additions Disposals (Note 20) Amortisation charge Translation adjustment - (289.7) - (33.0) 15.6 - (12.6) (20.5) - - (15.8) (0.7) 463.4 - 532.1 (273.6) 189.1 (102.3) - (3.0) (4.3) (2.1) 52.2 (31.2) - - (0.1) - 8.7 (0.5) 15.6 (292.7) (32.8) (56.3) 1,245.5 (407.6) Cost at 31 December 2013 Accumulated amortisation Net book value at 31 December 2013 Amortisation charge Translation adjustment Cost at 31 December 2014 Accumulated amortisation Net book value at 31 December 2014 Amortisation charge Impairment Translation adjustment Cost at 31 December 2015 Accumulated amortisation Net book value at 31 December 2015 463.4 258.5 86.8 21.0 8.2 837.9 - (178.0) 285.4 - (11.4) (104.4) 309.6 (166.9) (44.4) (5.1) 147.6 (110.3) (9.4) (5.8) 30.4 (24.6) (0.1) - 8.7 (0.6) (65.3) (293.3) 781.7 (302.4) 285.4 142.7 37.3 5.8 8.1 479.3 - (14.4) (56.4) 214.6 - (7.1) - (31.3) 239.0 (134.7) 214.6 104.3 (36.9) - (0.4) - - - (5.6) - (0.2) - - - (0.1) - - 8.7 (0.7) (49.7) (14.4) (88.3) 462.3 (135.4) 8.0 326.9 The intangible assets were acquired in business combinations and met the criteria for separate recognition. They were recorded at fair values at the date of acquisition, based on their appraised values. Useful lives of the Group’s intangible assets as at 31 December 2015 are shown below. Total useful life, months Company Remaining useful life, months Mineral rights Mineral rights Mineral rights Mineral rights Customer base Customer base Industrial intellectual property Beneficial lease interest LLC Zhernovsky GOK LLC Zhernovsky GOK LLC Usinsky GOK OJSC Stoilensky GOK LLC VIZ-Stahl Novexco (Cyprus) Ltd., Novex Trading (Swiss) S.A. LLC VIZ-Stahl NLMK Indiana LLC 240 240 240 306 125 180 149 974 116 192 181 240 - - - 888 22 Novolipetsk Steel Notes to the consolidated financial statements as at and for the year ended 31 December 2015 (millions of US dollars) 9 Intangible assets (continued) During 2015 the Group revised useful lives of customer base and industrial intellectual property and completed their amortization in the third quarter of 2015. In May 2011, the Group acquired a license for exploration and extraction of coal in the Zhernovsky Glubokiy coal field of the Zhernovsky coal deposit expiring in 2031. The carrying value of this license as at 31 December 2015 is $4.6. In August 2005, the Group acquired a license for exploration and mining of Zhernovsky coal deposit expiring in 2025. The carrying value of this license as at 31 December 2015 is $7.3. In March 2011, the Group acquired a license for exploration and extraction of coal in the mine field area No. 3 of the Usinsky coal deposit expiring in 2031. The carrying value of this license as at 31 December 2015 is $16.8. A license for iron ore and non-metallics mining at Stoilensky iron-ore deposit in Belgorod Region expiring in 2035 was acquired by the Group in 2004 through a business combination. The carrying value of these mineral rights as at 31 December 2015 is $75.7. The Group’s management believes that these licenses will be extended. Goodwill arising on acquisitions was allocated to the appropriate business segment in which each acquisition took place. Goodwill arising from the acquisition in 2011 of a controlling interest in SIF S.A. (Note 20) amounted to $289.7. At the time of acquisition this goodwill was assigned to the steel segment and foreign rolled products segment in the amount of $128.4 and $161.3, respectively, and was disposed as a result of NBH deconsolidation (Note 20). Goodwill allocation to each segment is as follows: Russian flat products Foreign rolled products Russian long products Mining Goodwill impairment testing As at As at 31 December 2015 31 December 2014 As at 31 December 2013 139.2 21.3 2.5 51.6 214.6 179.7 35.7 3.3 66.7 285.4 307.5 35.7 5.7 114.5 463.4 The Group tested goodwill for impairment as at 31 December 2015, 2014 and 2013. The recoverable amount has been determined as values in use of respective assets. For the purpose of this impairment testing the Group used the same estimates as for testing of other assets, as disclosed in Note 8. An impairment testing showed impairment of goodwill in NLMK Indiana LLC by $14.4. 10 Trade and other accounts payable As at As at 31 December 2015 31 December 2014 As at 31 December 2013 Financial liabilities Trade accounts payable Dividends payable Other accounts payable Non-financial liabilities Advances received Taxes payable other than income tax Accounts payable and accrued liabilities to employees 342.3 161.2 16.0 519.5 62.9 39.2 104.8 206.9 726.4 440.9 0.7 23.1 464.7 105.4 77.3 128.5 311.2 775.9 621.9 1.4 89.0 712.3 111.4 134.0 204.1 449.5 1,161.8 23 Novolipetsk Steel Notes to the consolidated financial statements as at and for the year ended 31 December 2015 (millions of US dollars) 11 Borrowings Rates Currency Maturity As at As at 31 December 2015 31 December 2014 As at 31 December 2013 Bonds 8% to 11.5% 4.45% to 4.95% Loans 5% and 10% LIBOR +1.375% to LIBOR +3% and PRIME +0.375% EURIBOR +0.9% to EURIBOR +2% RUR USD RUR USD EUR 2015-2017 2018-2019 2015-2017 2015-2019 2015-2022 350.4 1,195.9 543.9 1,196.1 1,400.7 1,319.6 - 583.4 546.4 23.1 374.9 620.9 38.4 541.0 853.4 Short-term and long-term finance lease liability and other borrowings - 9.6 37.4 2,676.1 2,768.5 4,190.5 Less: short-term loans and current maturities of long-term loans (559.8) (804.3) (1,136.7) Long-term borrowings 2,116.3 1,964.2 3,053.8 The carrying amounts and fair value of long-term bonds are as follows: As at 31 December 2015 Fair value Carrying amount As at 31 December 2014 Fair value Carrying amount As at 31 December 2013 Fair value Carrying amount Bonds 1,315.5 1,300.8 1,444.9 1,278.6 2,216.6 2,215.8 The fair value of short-term borrowings equals their carrying amount. The fair values of long-term borrowings and finance lease liabilities approximate their carrying amount. The fair values of bonds are based on cash flows discounted using an applicable rate and are within level 2 of the fair value hierarchy. The payments scheduled for long-term borrowings are as follows: 1-2 year 2-5 years over 5 years Collateral As at As at 31 December 2015 31 December 2014 As at 31 December 2013 359.6 1,719.3 37.4 580.0 1,347.4 36.8 1,169.2 1,300.6 584.0 2,116.3 1,964.2 3,053.8 As at 31 December 2015, 2014 and 2013, the total amount of collateral was $377.5, $699.6 and $452.2, respectively (Notes 6, 7). 24 Novolipetsk Steel Notes to the consolidated financial statements as at and for the year ended 31 December 2015 (millions of US dollars) 12 (a) Shareholders’ equity Shares As at 31 December 2015, 2014 and 2013, the Parent Company’s share capital consisted of 5,993,227,240 issued common shares, with a par value of 1 Russian ruble each. For each common share held, the stockholder has the right to one vote at the stockholders’ meetings. (b) Dividends Dividends are paid on common shares at the recommendation of the Board of Directors and approval at a General Stockholders’ Meeting, subject to certain limitations as determined by Russian legislation. Profits available for distribution to shareholders in respect of any reporting period are determined by reference to the statutory financial statements of the Parent Company. As at 31 December 2015, 2014 and 2013, the retained earnings of the Parent Company, available for distribution in accordance with the legislative requirements of the Russian Federation, amounted to $4,360.9, $5,409.3 and $8,971.7, converted into US dollars using exchange rates at 31 December 2015, 2014 and 2013, respectively. According to the dividend policy, the Group pays dividends on a quarterly basis as follows: (cid:131) (cid:131) if Net Debt/EBITDA is 1.0x or less: dividends are in range with the boundaries of 50% of net income and 50% of free cash flow calculated based on IFRS consolidated financial statements; if Net Debt/EBITDA exceeds 1.0x: dividends are in range with the boundaries of 30% of net profit and 30% of free cash flow calculated based on IFRS consolidated financial statements. In December 2015, the Parent Company declared dividends for the third quarter of 2015 of 1.95 Russian ruble per share for the total of $163.9 (at the historical rate as of the announcement date). Dividends payable amounted to $161.2 at 31 December 2015 (Note 10). In September 2015, the Parent Company declared dividends for the second quarter of 2015 of 0.93 Russian ruble per share for the total of $84.1 (at the historical rate as of the announcement date). In June 2015, the Parent Company declared dividends for the year ended 31 December 2014 of 2.44 Russian rubles per share for the total of $303.9 (including interim dividends for the six months ended 30 June 2014 of 0.88 Russian ruble per share for the total of $133.9) translated at the historical rate as of the announcement date and for the three months ended 31 March 2015 of 1.64 Russian rubles per share for the total of $178.7 (at the historical rate as of the announcement date). In September 2014 the Parent Company declared interim dividends for the six months ended 30 June 2014 of 0.88 Russian rubles per share for the total of $133.9 (at the historical rate). In June 2014, the Parent Company declared dividends for the year ended 31 December 2013 of 0.67 Russian rubles per share for the total of $115.0 (at the historical rate). In June 2013, the Parent Company declared dividends for the year ended 31 December 2012 of 0.62 Russian rubles per share for the total of $115.6 (at the historical rate). 25 Novolipetsk Steel Notes to the consolidated financial statements as at and for the year ended 31 December 2015 (millions of US dollars) 12 (c) Shareholders’ equity (continued) Capital management The Group’s objectives when managing capital are to safeguard a financial stability and a target return for shareholders, as well as reduction of capital cost and optimization of its structure. To achieve these objectives the Group may revise investing program, borrow new or repay existing loans, offer share of debt instruments on capital markets. When managing capital the Group uses the following indicators: (cid:131) (cid:131) the return on invested capital ratio, which is defined as operating profit for the last twelve months less tax divided by capital employed, should exceed cost of capital; free cash-flow, which is defined as net cash provided by operating activities less net interest paid less capital expenditures less advances given in investing activities, should be positive. There were no changes in the Group’s approach to capital management during the reporting period. 13 Earnings per share For the year ended 31 December 2015 For the year ended 31 December 2014 For the year ended 31 December 2013 Profit for the year attributable to NLMK shareholders (millions of US dollars) Weighted average number of shares Basic and diluted earnings per share attributable to NLMK shareholders (US dollars) 967.4 5,993,227,240 772.5 5,993,227,240 145.4 5,993,227,240 0.1614 0.1289 0.0243 Basic net earnings per share is calculated by dividing profit for the year attributable to NLMK shareholders by the weighted average number of common shares outstanding during the reporting period. The average shares outstanding for the purposes of basic and diluted earnings per share information was 5,993,227,240 for the years ended 31 December 2015, 2014 and 2013. The Parent Company does not have potentially dilutive financial instruments outstanding. 14 (a) Revenue Revenue by product Pig iron, slabs and billets Flat products Long products and metalware Iron-ore and sintering ore Coke and other chemical products Scrap Other products For the year ended 31 December 2015 For the year ended 31 December 2014 For the year ended 31 December 2013 2,207.2 4,366.4 808.9 165.8 228.9 46.9 184.2 2,486.4 5,651.1 1,301.3 311.4 259.8 74.7 311.0 2,202.2 6,367.5 1,240.6 327.0 254.4 66.5 360.2 8,008.3 10,395.7 10,818.4 26 Novolipetsk Steel Notes to the consolidated financial statements as at and for the year ended 31 December 2015 (millions of US dollars) 14 Revenue (continued) (b) Revenue by geographical area The allocation of total revenue by geographical area is based on the location of end customers who purchased the Group’s products. The Group’s total revenue from external customers by geographical area for the years ended 31 December 2015, 2014 and 2013 is as follows: For the year ended 31 December 2015 For the year ended 31 December 2014 For the year ended 31 December 2013 Russia North America European Union Middle East, including Turkey Asia and Oceania Other regions 3,146.0 1,356.8 1,603.0 684.1 374.4 844.0 4,434.3 2,084.9 1,819.6 636.5 319.3 1,101.1 4,373.4 1,558.9 1,982.8 875.4 794.2 1,233.7 8,008.3 10,395.7 10,818.4 The Group does not have customers with a share of more than 10% from revenue. 15 Labour costs Group’s labour costs, including social security costs, which are included in the corresponding lines of the consolidated statement of profit or loss were as indicated below. For the year ended 31 December 2015 For the year ended 31 December 2014 For the year ended 31 December 2013 Cost of sales General and administrative expenses Selling expenses (608.2) (153.8) (31.3) (858.6) (231.4) (40.4) (1,038.4) (295.8) (40.8) (793.3) (1,130.4) (1,375.0) Management remuneration consists of payments to the members of Management Board and Board of Directors of the Parent Company. Compensation comprises annual remuneration and a performance bonus contingent on results. Total management remuneration, including social security costs, amounted to $11.3, $13.6 and $9.3 in 2015, 2014 and 2013, respectively. 16 Taxes, other than income tax Allocation of taxes, other than income tax to the functional items of consolidated statement of profit or loss is indicated below. For the year ended 31 December 2015 For the year ended 31 December 2014 For the year ended 31 December 2013 Cost of sales General and administrative expenses Selling expenses Other operating expenses (65.7) (4.4) (0.4) (5.2) (75.7) (122.4) (7.5) (0.6) (7.0) (122.5) (6.6) (0.7) (4.8) (137.5) (134.6) 27 Novolipetsk Steel Notes to the consolidated financial statements as at and for the year ended 31 December 2015 (millions of US dollars) 17 Income tax Income tax charge comprises the following: For the year ended 31 December 2015 For the year ended 31 December 2014 For the year ended 31 December 2013 Current income tax expense Deferred income tax benefit / (expense) Adjustment of current income tax for the previous periods, recognized in the reporting period (301.1) (51.8) - (378.3) 15.9 - (141.1) (87.7) (26.2) Total income tax expense (352.9) (362.4) (255.0) The corporate income tax rate applicable to the Group entities, located in Russia, is predominantly 20%. The corporate income tax rate applicable to income of foreign subsidiaries ranges from 30% to 35%. Income before income tax is reconciled to the income tax expense as follows: For the year ended 31 December 2015 For the year ended 31 December 2014 For the year ended 31 December 2013 Profit before income tax 1,321.1 1,136.0 Income tax at applicable tax rate 20% (264.2) (227.2) Change in income tax: - tax effect of non-deductible expenses - non-taxable translation adjustments - effect of different tax rates - unrecognized tax loss carry forward for current year - utilization of previously unrecognized tax-losses carry- forward - change in option and in NBH ownership (Note 20) - write-off of previously recognized deferred tax assets - loss on impairment of investment (Note 20) - adjustment of current income tax for the previous periods, recognized in the reporting period - other (63.3) 17.0 31.7 (82.4) - 18.6 (9.8) - - (0.5) (20.5) 39.4 118.3 (99.6) 22.6 (16.3) (53.0) (100.5) - (25.6) 419.2 (83.8) (59.5) 7.2 25.6 (82.3) - - (62.7) - (26.2) 26.7 Total income tax expense (352.9) (362.4) (255.0) The tax effects of temporary differences that give rise to the deferred tax assets and deferred tax liabilities are presented below: As at 31 December 2015 As at 31 December 2014 As at 31 December 2013 Deferred tax assets Trade and other accounts payable Other non-current liabilities Trade and other accounts receivable Inventories Net operating loss and credit carry-forwards Other 74.2 - 3.2 - - 15.7 100.8 - 15.8 24.5 14.6 13.9 170.3 0.1 27.5 - 73.3 6.4 28 Novolipetsk Steel Notes to the consolidated financial statements as at and for the year ended 31 December 2015 (millions of US dollars) 17 Income tax (continued) Deferred tax liabilities Property, plant and equipment Other intangible assets Inventories Other non-current liabilities Total deferred tax liability, net As at 31 December 2015 As at 31 December 2014 As at 31 December 2013 93.1 (341.8) (7.9) (12.9) (1.6) (364.2) (271.1) 169.6 (429.9) (8.5) - (13.7) (452.1) (282.5) 277.6 (728.2) (21.8) (32.2) - (782.2) (504.6) The movements in deferred income tax assets and liabilities are presented below: As at 1 January Recognized in consolidated statement of profit or loss Deconsolidation of subsidiaries (Note 20) Translation adjustment As at 31 December 2015 2014 2013 (282.5) (51.8) - 63.2 (271.1) (504.6) 15.9 - 206.2 (282.5) (501.1) (87.7) 50.1 34.1 (504.6) The amount of net operating losses that can be utilized each year is limited under the Group’s different tax jurisdictions. The Group regularly evaluates assumptions underlying its assessment of the realizability of its deferred tax assets and makes adjustments to the extent necessary. In assessing whether it is probable that future taxable profit against which the Group can utilize the potential benefit of the tax loss carry-forwards will be available, management considers the current situation and the future economic benefits outlined in specific business plans for each subsidiary. The table below summarizes not recognized cumulative tax-loss carry forwards, for which no deferred tax assets were recognised, with a breakdown by the expiry dates. As at 31 December 2015 As at 31 December 2014 As at 31 December 2013 From 1 to 5 years From 5 to 10 years More than 10 years No expiration 294.3 376.3 850.9 976.5 310.9 600.4 680.9 1,084.8 165.4 1,060.9 714.6 1,180.9 2,498.0 2,677.0 3,121.8 Deferred tax assets are recorded only to the extent that it is probable that the temporary difference will reverse in the future and there is sufficient future taxable profit available against which the deductions can be utilized. In the second quarter of 2013 valuation models, previously supported deferred tax assets recoverability in Group’s major European entities, were revised based on the results of analysis of economic condition in Europe. The revised models did not support recoverability of a part of these assets of $62.7, which resulted in write-off of previously recognized deferred tax assets in the second quarter of 2013. As at 31 December 2013 figures of these European entities were eliminated from consolidated statement of financial position of the Group (Note 20). The Group has not recorded a deferred tax liability in respect of temporary differences of $908.2, $1,274.5 and $1,628.9 for the years ended 31 December 2015, 2014 and 2013, respectively, associated with investments in subsidiaries as the Group is able to control the timing of the reversal of those temporary differences and does not intend to reverse them in the foreseeable future. 29 Novolipetsk Steel Notes to the consolidated financial statements as at and for the year ended 31 December 2015 (millions of US dollars) 17 Income tax (continued) In accordance with Russian legislation, the Group’s key Russian entities, including NLMK, were integrated in one consolidated tax group for the purpose of assessment and payment of corporate income tax in line with the comprehensive financial result of business operations. The Group’s entities that do not constitute the consolidated tax group assess their income taxes individually. As at 31 December 2015, 2014 and 2013 the Group analysed its tax positions for uncertainties affecting recognition and measurement thereof. Following the analysis, the Group believes that it is likely that all deductible tax positions stated in the income tax return recognised and valuated in accordance with the tax legislation. 18 Finance income and costs For the year ended 31 December 2015 For the year ended 31 December 2014 For the year ended 31 December 2013 Interest income on bank accounts and bank deposits Other finance income Total finance income Interest expense on borrowings Capitalized interest Other finance costs 44.5 7.4 51.9 (118.9) 32.2 (8.6) 29.5 7.0 36.5 (178.9) 61.6 (19.5) 36.2 4.4 40.6 (221.5) 121.9 (22.3) Total finance costs (95.3) (136.8) (121.9) 19 Foreign currency exchange Foreign exchange gain on cash and cash equivalents Foreign exchange gain on financial investments Foreign exchange gain / (loss) on financial instruments Foreign exchange loss on debt financing Foreign exchange (loss) / gain on other assets and liabilities For the year ended 31 December 2015 For the year ended 31 December 2014 For the year ended 31 December 2013 44.6 542.1 1.8 (415.1) (63.9) 109.5 251.9 1,249.9 (33.1) (898.5) (82.0) 488.2 55.1 180.1 (1.2) (170.0) 21.2 85.2 20 Disposal of companies which are under the Group’s control In September 2013, the Group signed an agreement with Societe Wallonne de Gestion et de Participations S.A. (SOGEPA), a Belgian state-owned company, to sell a 20.5% stake in SIF S.A.’s subsidiary – NLMK Belgium Holdings S.A. (NBH), which comprises NLMK Europe’s operating and trading companies, excluding NLMK DanSteel A/S, for EUR 91.1 million ($122.9). The agreement provides SOGEPA with certain governance rights over NBH and its subsidiaries, and key management decisions will be taken jointly by the Group and SOGEPA by their representation on the Board of Directors of NBH. 30 Novolipetsk Steel Notes to the consolidated financial statements as at and for the year ended 31 December 2015 (millions of US dollars) 20 Disposal of companies which are under the Group’s control (continued) The Group brought in SOGEPA as a strategic investor in the context of the continuing restructuring of its European assets aimed at further enhancing efficiency and optimizing costs. The agreement resulted in the loss of control by the Group over NBH and therefore NBH was deconsolidated from the Group consolidated financial statements with effect from 30 September 2013. The fair value of the Group’s remaining 79.5% interest in NBH was determined based on management’s best estimates of future cash flows, including assumptions regarding the increase in capacity utilization and the implementation of the operational business plan, including the restructuring plan. This stake in the amount of $459.2 was accounted for as a company using the equity method which is treated as a related party. Calculation of the result of disposal also includes cash proceeds of $122.9, release of cumulative translation adjustment of $60.0, written off goodwill of $289.7, written off option of $30.0 and write off of net assets of NBH at date of disposal disclosed below. The Group has recorded a loss on disposal related to the transaction amounting to $51.4, which is included in “Result of disposal of subsidiary” line. The carrying amounts of assets and liabilities of NBH as at the date of disposal were as follows: Current assets, including: Cash and cash equivalents Other current assets Non-current assets Total assets Current liabilities Non-current liabilities Total liabilities Equity 1,029.9 76.7 953.2 1,133.5 2,163.4 (926.9) (862.7) (1,789.6) 373.8 Current assets include trade and other accounts receivable of $329.5, inventories of $609.4. Non-current assets include property, plant and equipment of $980.7 and deferred income tax assets of $149.1. Current liabilities include trade and other accounts payable of $624.7. Non-current liabilities include long-term borrowings of $531.9 and deferred income tax liability of $199.2. Information on NBH’s operations from 1 January 2013 to the date of disposal is as follows: Revenue Cost of sales Income tax expense Net loss for the period 1,047.1 (973.3) (53.0) (276.7) Revenue and net loss of NBH for the fourth quarter of 2013 amounted to $405.6 and $(70.9), respectively. Revenue and loss of NBH before impairment losses for 2014 amounted to $1,517.3 and $(243.4), respectively. Revenue and net loss of NBH for 2015 amounted to $1,277.6 and $(191.3), respectively. Continuous trend of low prices for steel products in Europe and underperformance of NBH holding companies resulted in a necessity of reassessment of impairment testing model for the investments in NBH in 2014, which showed no impairment in 2013. The revised model showed a necessity of further impairment of $325.2 as at 31 December 2014. For the purpose of impairment testing the Group has estimated cash flows for 9 years for different groups of assets and respective cash flows in the post-forecast period. Prices for steel products were determined on the basis of forecasts of investment banks’ analysts. A discount rate of 8% was used. The impairment testing model is sensitive to assumptions used. For example, increase in the discount rate by 1% will result in additional impairment of $117. 31 Novolipetsk Steel Notes to the consolidated financial statements as at and for the year ended 31 December 2015 (millions of US dollars) 20 Disposal of companies which are under the Group’s control (continued) Information about the Group’s operations with NBH is disclosed in Note 23. Summarized financial information for NBH before impairment losses is as follows: Current assets Non-current assets Total assets Current liabilities Non-current liabilities Total liabilities Equity As at As at 31 December 2015 31 December 2014 As at 31 December 2013 734.1 751.3 921.9 935.3 993.0 1,101.2 1,485.4 1,857.2 2,094.2 (657.5) (624.2) (1,054.3) (488.6) (819.4) (963.0) (1,281.7) (1,542.9) (1,782.4) 203.7 314.3 311.8 NBH cash and cash equivalents as at 31 December 2015, 2014 and 2013 amounted to $59.8, $46.1 and $25.1, respectively. The Group’s share in NBH’s net loss for the year ended 31 December 2015, 2014 and from the date of disposal to 31 December 2013 amounted to $(103.4), $(193.5) and $(54.2), respectively, and is included in “Share in net losses of associates and other companies accounted for using the equity method” line in the consolidated statement of profit or loss. Deferred tax assets and deferred tax liabilities of NBH as at the date of disposal refer to the temporary differences originated from the following: Trade and other accounts receivable Inventories Property, plant and equipment Other intangible assets Trade and other accounts payable Non-current liabilities Net operating loss and credit carry-forwards Other Net deferred tax liability Fair value of options 0.2 (8.0) (148.7) 0.3 5.5 2.3 94.7 3.6 (50.1) In September 2013 SOGEPA and the Group also signed an option agreement, which provides call options for the Group and put options for SOGEPA over its 20.5% stake (5.1% of the common shares of NBH in each of 2016, 2017 and 2018, and any remaining stake after 2023). Under the option agreement the exercise price was based on the book value of NBH net assets, subject to a minimum value of 20.5% of the shares of EUR 91.1 million plus fixed interest. The Group has recognized a liability in respect of these options, based on their fair value in the amount of $82.5 and $30.0 as at 31 December 2014 and 2013, respectively, included in “Other long-term liabilities” line of the consolidated statement of financial position. The change in the value of the option resulted in loss amounted to $(52.5) and included in “Gains on investments” line of the consolidated statement of profit or loss. The options have been valued using standard, market-based valuation techniques. The Level 3 significant unobservable inputs used in the fair value measurement of the option agreement are the annualized volatility of the underlying shares and the fair value of the underlying shares. 32 Novolipetsk Steel Notes to the consolidated financial statements as at and for the year ended 31 December 2015 (millions of US dollars) 20 Disposal of companies which are under the Group’s control (continued) Changes to NLMK Belgium Holdings’ ownership structure and governance In March 2015, the Group and SOGEPA signed an agreement to increase SOGEPA’s share in NBH from 20.5% to 49%. Under the agreement the Group’s and SOGEPA’s existing respective put and call options over the SOGEPA shares in NBH were terminated. NBH board of directors is increased to include four representatives of NLMK Group and three representatives of SOGEPA. SOGEPA also received board seats at production subsidiaries of NBH. Disposal of the option resulted in gain amounted to $76.0 and included in “Gains on investments” line of the consolidated statement of profit or loss. Earlier, in December 2014, the Group made a conversion of existing loans given into NBH share capital in the amount of EUR 220 million with a corresponding reflection in the consolidated financial statements for the year ended 31 December 2014. These investments are also a part of the agreement signed in March 2015. In December 2015, the Group made a conversion of existing loans given into NBH share capital in the amount of EUR 100 million with a corresponding reflection in the consolidated financial statements for the year ended 31 December 2015. These contributions did not change Group’s share in NBH. The Group and SOGEPA have agreed to support NBH in obtaining financing of its working capital. In March 2015 the shareholders made additional contributions into NBH share capital proportionally their shares (EUR 20.4 million and EUR 19.6 million, respectively). 21 Segment information The Group has five reportable business segments: Russian flat products, Foreign rolled products, Russian long products, Mining and Investments in associate entity NBH (Note 20). These segments are combinations of subsidiaries, have separate management teams and offer different products and services. The above five segments meet the criteria for reportable segments. Subsidiaries are consolidated by the segment to which they belong based on their products and management. Revenue from segments that does not exceed the quantitative thresholds is primarily attributable to two operating segments of the Group. Those segments include insurance and other services. None of these segments has met any of the quantitative thresholds to be reported separately. Equity in net earnings / (losses) of associates are included in the Russian flat products segment. The Group’s management determines intersegmental sales and transfers, as if the sales or transfers were to third parties. The Group’s management evaluates performance of the segments based on segment revenues, gross profit, operating profit before equity share in net losses of associates and other companies accounted for using the equity method of accounting, impairment and write-off of assets, and profit for the year. Intersegmental operations and balances include elimination of intercompany dividends paid to Russian flat products segment by other segments and presented within line “Profit / (loss) for the year” together with other intercompany elimination adjustments, including elimination of NBH liabilities to the Group companies (Note 23). NBH deconsolidation adjustments include full elimination of sales of NBH with further recognition of the Group’s sales to NBH and elimination of unrealised profits (Notes 4, 23), recognition of investment in associate (Note 4), recognition of impairment and share of loss arising for NBH and other consolidation adjustments. 33 Novolipetsk Steel Notes to the consolidated financial statements as at and for the year ended 31 December 2015 (millions of US dollars) 21 Segment information (continued) Information on segments’ profit or loss for the year ended 31 December 2015 and their assets and liabilities on this date is as follows: Investments in associate entity NBH Inter- segmental operations and balances NBH deconsoli- dation adjust- ments Russian long products 859.0 Revenue from external customers 293.3 Intersegment revenue (1,026.1) Cost of sales 126.2 Gross profit / (loss) (16.8) Operating profit / (loss)* (26.1) Net finance income / (costs) 2.1 Income tax expense (92.7) Profit / (loss) for the year 953.4 Segment assets (565.6) Segment liabilities (65.4) Depreciation and amortization Capital expenditures (24.9) * Operating profit / (loss) before equity share in net losses of associates and other companies accounted for using the equity method of accounting, impairment and write-off of assets Foreign rolled products 1,441.9 - (1,512.5) (70.6) (165.7) (39.9) (0.6) (203.8) 1,036.6 (1,458.9) (69.3) (22.7) Russian flat products 4,718.7 1,345.9 (4,000.1) 2,064.5 1,195.9 4.8 (244.9) 1,290.3 7,509.6 (3,603.2) (384.6) (259.8) Mining 184.2 405.0 (225.9) 363.3 256.8 16.8 (71.2) 279.1 1,476.6 (326.0) (40.6) (281.3) All other 11.7 0.1 (5.0) 6.8 5.2 1.0 (0.8) (5.4) 11.6 (1.0) (0.1) (6.0) 1,212.7 64.9 (1,121.5) 156.2 (172.2) (19.5) 6.5 (191.3) 1,485.4 (1,281.7) (80.2) - - (2,044.3) 2,066.7 22.4 112.9 - (37.5) (195.9) (2,195.6) 2,679.0 - - (419.9) (64.9) 328.7 (156.2) 172.2 19.5 (6.5) 87.9 (1,358.2) 775.7 80.2 - Total 8,008.3 - (5,495.7) 2,512.6 1,388.3 (43.4) (352.9) 968.2 8,919.4 (3,781.7) (560.0) (594.7) 34 Novolipetsk Steel Notes to the consolidated financial statements as at and for the year ended 31 December 2015 (millions of US dollars) 21 Segment information (continued) Information on segments’ profit or loss for the year ended 31 December 2014 and their assets and liabilities on this date is as follows: Investments in associate entity NBH Inter- segmental operations and balances NBH deconsoli- dation adjust- ments Foreign rolled products 2,015.0 - Russian long products 1,446.9 Revenue from external customers 367.7 Intersegment revenue (1,578.4) Cost of sales 236.2 Gross profit / (loss) 242.3 Operating profit / (loss)* (82.9) Net finance income / (costs) (19.0) Income tax expense (96.3) Profit / (loss) for the year 1,367.9 Segment assets (996.3) Segment liabilities (106.6) Depreciation and amortization Capital expenditures (51.2) * Operating profit / (loss) before equity share in net losses of associates and other companies accounted for using the equity method of accounting, impairment and write-off of assets Russian flat products 5,684.1 2,187.9 (5,667.2) 2,204.8 874.2 (9.1) (221.9) 1,426.3 8,902.9 (4,138.9) (538.5) (220.9) Mining 345.9 721.8 (347.5) 720.2 576.3 27.9 (193.6) 763.0 1,948.9 (480.0) (63.6) (253.9) All other 0.1 - (0.1) - (2.2) 1.0 (0.2) 6.4 99.7 (27.6) (2.1) (18.7) (1,896.7) 118.3 21.4 (37.2) 27.2 (154.6) 1,491.9 (1,956.0) (82.7) (17.9) 1,462.4 54.9 (1,375.3) 142.0 (215.9) (21.3) 11.1 (243.4) 1,857.2 (1,542.9) (101.1) - - (3,277.4) 3,004.6 (272.8) (124.1) - 45.1 (652.5) (3,611.8) 4,016.6 - - (558.7) (54.9) 471.6 (142.0) 215.9 21.3 (11.1) (275.3) (1,707.3) 1,032.4 101.1 - Total 10,395.7 - (7,389.0) 3,006.7 1,587.9 (100.3) (362.4) 773.6 10,349.4 (4,092.7) (793.5) (562.6) 35 Novolipetsk Steel Notes to the consolidated financial statements as at and for the year ended 31 December 2015 (millions of US dollars) 21 Segment information (continued) Information on segments’ profit or loss for the year ended 31 December 2013 and their assets and liabilities on this date is as follows: Investments in associate entity NBH Inter- segmental operations and balances NBH deconsoli- dation adjust- ments Russian long products 1,328.2 Revenue from external customers 388.1 Intersegment revenue (1,507.8) Cost of sales 208.5 Gross profit / (loss) 324.8 Operating profit / (loss)* (107.3) Net finance income / (costs) (5.5) Income tax expense 197.3 Profit / (loss) for the year 2,799.6 Segment assets (1,996.5) Segment liabilities (88.0) Depreciation and amortization Capital expenditures (179.8) * Operating profit / (loss) before equity share in net losses of associates and other companies accounted for using the equity method of accounting, impairment and write-off of assets Foreign rolled products 1,693.0 1.7 (1,795.7) (101.0) (42.3) (37.0) 6.0 (61.4) 1,476.3 (1,692.2) (74.8) (48.5) Russian flat products 6,240.6 1,623.8 (6,655.5) 1,208.9 (254.6) 52.1 (85.8) 167.1 13,223.2 (6,021.3) (553.1) (391.5) Mining 372.2 978.8 (423.0) 928.0 787.1 23.3 (118.1) 766.2 2,382.5 (177.0) (71.5) (125.7) 1,446.9 5.8 (1,327.6) 125.1 (244.9) (18.5) (81.7) (347.6) 2,094.2 (1,782.4) (112.6) - All other 0.6 - (0.3) 0.3 (8.1) 1.0 (0.2) 0.8 62.8 (53.1) - (10.8) - (2,992.4) 2,826.3 (166.1) 10.3 - 1.6 (574.9) (3,912.6) 4,366.1 - - (263.1) (5.8) 217.7 (51.2) 36.5 5.1 28.7 16.7 (1,673.0) 1,301.9 28.9 - Geographically, all significant assets, production and administrative facilities of the Group are located in Russia, USA and Europe. Total 10,818.4 - (8,665.9) 2,152.5 608.8 (81.3) (255.0) 164.2 16,453.0 (6,054.5) (871.1) (756.3) 36 Novolipetsk Steel Notes to the consolidated financial statements as at and for the year ended 31 December 2015 (millions of US dollars) 22 (a) Risks and uncertainties Operating environment of the Group The Russian Federation’s economy continues to display some characteristics of an emerging market. These characteristics include, but are not limited to, the existence of a currency that in practice is not freely convertible in most countries outside the Russian Federation and relatively high inflation. The legal, tax and regulatory frameworks continue to develop and are subject to varying interpretations (Note 24(f)). The future economic direction of the Russian Federation is largely dependent upon the effectiveness of economic, financial and monetary measures undertaken by the Government, together with tax, legal, regulatory and political developments. Management believes it is taking all the necessary measures to support the sustainability and growth of the Group’s business. The political and economic turmoil witnessed in the region, including continuing international sanctions against certain Russian companies and individuals have had and may continue to have a negative impact on the Russian economy. The financial markets continue to be volatile and are characterised by frequent significant price movements and increased trading spreads. This operating environment may have a significant impact on the Group’s operations and financial position, the effect of which is difficult to predict, however, Management is taking necessary measures to ensure sustainability of the Group’s operations. The major financial risks inherent to the Group’s operations are those related to market risk, credit risk and liquidity risk. The objectives of the financial risk management function are to establish risk limits, and then ensure that exposure to risks stays within these limits. (b) Market risk Market risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk comprises of three types of risk: interest rate risk, foreign currency risk and commodity price risk. Interest rate risk Interest rate risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The risk of changes in market interest rates relates primarily to the Group’s long-term debt obligations with variable interest rates. To manage this risk the Group analyses interest rate risks on a regular basis. The Group reduces its exposure to this risk by having a balanced portfolio of fixed and variable rate loans. The interest rate risk profile of the Group is follows: As at 31 December 2015 As at 31 December 2014 As at 31 December 2013 Fixed rate instruments Financial assets - cash and cash equivalents (Note 3) - short-term financial investments (Note 5) - trade and other accounts receivable less allowance (Note 6) - long-term financial investments (Note 5) 2,427.7 343.0 1,242.6 622.3 219.8 2,103.5 2,363.9 549.2 621.3 791.7 141.3 970.0 484.6 904.8 4.5 Financial liabilities (2,065.8) (2,366.9) (3,508.3) - trade, other accounts payable and dividends payable (Note 10) - short-term borrowings (Note 11) - long-term borrowings (Note 11) (519.5) (230.8) (1,315.5) (464.7) (302.5) (1,599.7) (712.3) (525.0) (2,271.0) 37 Novolipetsk Steel Notes to the consolidated financial statements as at and for the year ended 31 December 2015 (millions of US dollars) 22 Risks and uncertainties (continued) Variable rate instruments Financial assets - short-term financial investments (Note 5) - long-term financial investments (Note 5) Financial liabilities - short-term borrowings (Note 11) - long-term borrowings (Note 11) As at 31 December 2015 As at 31 December 2014 As at 31 December 2013 - - - (1,129.8) (329.0) (800.8) - - - (866.3) (501.8) (364.5) 78.4 0.4 78.0 (1,394.5) (611.7) (782.8) A change of 100 basis points in interest rates for variable rate instruments would have insignificantly change profit and equity. Foreign currency risk Foreign currency risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. The export-oriented companies of the Group are exposed to foreign currency risks. To minimize foreign currency risks the export program is designed taking into account potential (forecast) major foreign currencies’ exchange fluctuations. The Group diversifies its revenues in different currencies. In its export contracts the Group controls the balance of currency positions: payments in foreign currency are settled with export revenues in the same currency. At the same time standard hedging instruments to manage foreign currency risk might be used. The net foreign currency position presented below is calculated in respect of major currencies by items of consolidated statement of financial position as the difference between assets and liabilities denominated in a currency other than the functional currency of the entity at 31 December 2015. Cash and cash equivalents Trade and other accounts receivable Short-term financial investments Long-term financial investments Trade and other accounts payable Short-term borrowings Long-term borrowings Net foreign currency position US dollar Euro 196.4 2.9 1,079.9 - (42.3) (19.8) (1,578.3) (361.2) 39.6 303.6 129.4 222.1 (95.2) (145.6) (400.8) 53.1 The net foreign currency position presented below is calculated in respect of major currencies by items of consolidated statement of financial position as the difference between assets and liabilities denominated in a currency other than the functional currency of the entity at 31 December 2014. US dollar Euro Cash and cash equivalents Trade and other accounts receivable Short-term financial investments Long-term financial investments Trade and other accounts payable Short-term borrowings Long-term borrowings Net foreign currency position 230.4 7.0 423.0 - (40.7) (117.7) (1,178.3) (676.3) 107.1 402.1 164.8 141.2 (107.2) (126.9) (494.0) 87.1 38 Novolipetsk Steel Notes to the consolidated financial statements as at and for the year ended 31 December 2015 (millions of US dollars) 22 Risks and uncertainties (continued) The net foreign currency position presented below is calculated in respect of major currencies by items of consolidated statement of financial position as the difference between assets and liabilities denominated in a currency other than the functional currency of the entity at 31 December 2013. Cash and cash equivalents Trade and other accounts receivable Short-term financial investments Other non-current assets Trade and other accounts payable Short-term borrowings Long-term borrowings Net foreign currency position Sensitivity analysis US dollar Euro 460.5 3.1 350.3 0.6 (51.2) (169.6) (1,400.0) 161.2 418.4 107.2 - (93.3) (170.6) (682.8) (806.3) (259.9) Sensitivity is calculated by multiplying a net foreign currency position of a corresponding currency by percentage of currency rates changes. A 25 percent strengthening of the following currencies against the functional currency as at 31 December 2015, 2014 and 2013 would have increased / (decreased) equity by the amounts shown below, however effect on profit for the year would be different, and would amount to $87.6, $196.8 and $105.3, respectively, due to foreign exchange gain from intercompany operations (Note 19). US dollar Euro For the year ended 31 December 2015 For the year ended 31 December 2014 For the year ended 31 December 2013 (90.3) 13.3 (169.1) 21.8 (201.6) (65.0) A weakening of these currencies against the functional currency would have had the equal but opposite effect to the amounts shown above, on the basis that all other variables remain constant. Commodity price risk Commodity price risk is a risk arising from possible changes in price of raw materials and metal products, and their impact on the Group’s future performance and the Group’s operational results. The Group minimizes its risks, related to production distribution, by having a wide range of geographical zones for sales, which allows the Group to respond quickly to negative changes in the situation on one or more sales markets on the basis of an analysis of the existing and prospective markets. One of the commodity price risk management instruments is vertical integration. A high degree of vertical integration allows cost control and effective management of the entire process of production: from mining of raw materials and generation of electric and heat energy to production, processing and distribution of metal products. To mitigate the corresponding risks the Group also uses formula pricing tied to price indices for steel products when contracting raw and auxiliary materials. 39 Novolipetsk Steel Notes to the consolidated financial statements as at and for the year ended 31 December 2015 (millions of US dollars) 22 (c) Risks and uncertainties (continued) Credit risk Credit risk is the risk when counterparty will not meet its obligations under a financial instrument or customer contract, leading to a financial loss for the Group. The Group is exposed to credit risk from its operating activities (primarily for trade receivables and advances given to suppliers) and from its financing activities, including deposits with banks and financial institutions, foreign exchange transactions and other financial instruments. Customer credit risk is managed by each business unit subject to the Group’s established policy, procedures and control relating to customer credit risk management. The Group controls the levels of credit risk it undertakes by assessing the degree of risk for each counterparty or groups of parties. Such risks are monitored on a revolving basis and are subject to a quarterly, or more frequent, review. The Group’s management reviews ageing analysis of outstanding trade receivables and follows up on past due balances. The Group’s maximum exposure to credit risk by class of assets reflected in the carrying amounts of financial assets on the consolidated statement of financial position is as follows: As at 31 December 2015 As at 31 December 2014 As at 31 December 2013 Cash and cash equivalents (Note 3) Trade and other accounts receivable (Note 6) Short-term financial investments (Note 5) Long-term financial investments (Note 5) 343.0 622.3 1,242.6 219.8 549.2 791.7 621.3 141.3 970.0 904.8 485.0 82.5 Total on-balance sheet exposure 2,427.7 2,103.5 2,442.3 Financial guarantees issued (Note 23(d)) 273.2 611.6 790.6 Analysis by credit quality, based on international agencies’ credit rating of bank balances and term deposits as well as short-term and long-term bank deposits is as follows: 2,700.9 2,715.1 3,232.9 As at 31 December 2015 As at 31 December 2014 As at 31 December 2013 Bank balances and term deposits AAA-BBB BB-B Unrated and cash on hand Short-term and long-term bank deposits AAA-BBB BB-B Unrated 244.3 95.6 3.1 343.0 756.4 415.3 - 1,171.7 504.9 38.9 5.4 549.2 549.2 0.2 - 549.4 837.6 122.0 10.4 970.0 370.3 10.4 - 380.7 40 Novolipetsk Steel Notes to the consolidated financial statements as at and for the year ended 31 December 2015 (millions of US dollars) 22 Risks and uncertainties (continued) As at 31 December 2015, trade, other receivables and advances given to suppliers were overdue as indicated below with accruals of corresponding allowance after due dates: Undue Overdue, including: - up to 1 month - from 1 to 3 months - from 3 to 12 months - over 12 months Allowance Net of allowance Trade accounts receivable Advances given to suppliers Other accounts receivable 485.8 127.8 84.9 16.0 7.8 19.1 613.6 (16.3) 597.3 43.8 10.2 3.0 0.7 1.3 5.2 54.0 (4.2) 49.8 269.9 19.2 1.0 0.6 9.8 7.8 289.1 (15.3) 273.8 As at 31 December 2014, trade, other receivables and advances given to suppliers were overdue as indicated below with accruals of corresponding allowance after due dates: Trade accounts receivable Advances given to suppliers Other accounts receivable Undue Overdue, including: - up to 1 month - from 1 to 3 months - from 3 to 12 months - over 12 months Allowance Net of allowance 669.3 132.7 60.1 31.2 11.7 29.7 802.0 (28.6) 773.4 49.3 20.4 6.8 3.6 5.3 4.7 69.7 (9.6) 60.1 290.9 18.5 0.9 0.5 4.9 12.2 309.4 (20.4) 289.0 41 Novolipetsk Steel Notes to the consolidated financial statements as at and for the year ended 31 December 2015 (millions of US dollars) 22 Risks and uncertainties (continued) As at 31 December 2013, trade, other receivables and advances given to suppliers were overdue as indicated below with accruals of corresponding allowance after due dates: Undue Overdue, including: - up to 1 month - from 1 to 3 months - from 3 to 12 months - over 12 months Allowance Net of allowance Trade accounts receivable Advances given to suppliers Other accounts receivable 730.7 171.0 67.2 43.8 5.3 54.7 901.7 (39.3) 862.4 55.9 25.8 7.4 4.8 2.5 11.1 81.7 (19.3) 62.4 529.2 30.1 0.9 0.6 2.3 26.3 559.3 (25.1) 534.2 As at 31 December 2015, 2014 and 2013 the Group does not have trade and other accounts receivable which was overdue and not impaired. (d) Liquidity risk Liquidity risk is the risk that an entity will encounter difficulty in meeting obligations associated with financial liabilities. The Group is exposed to daily calls on its available cash resources. The Group monitors its risk to a shortage of funds using a regular cash flow forecast. The Group’s objective is to maintain a balance between continuity of funding and flexibility through the use of bank overdrafts, bank loans, debentures, finance leases. To provide for sufficient cash balances required for settlement of its obligations in time the Group uses detailed budgeting and cash flow forecasting instruments. The table below analyses the Group’s short-term and long-term borrowings by their remaining corresponding contractual maturity. The amounts disclosed in the maturity table are the undiscounted cash outflows. Less than 1 year From 1 to 2 years From 2 to 5 years Over 5 years Total borrowings As at 31 December 2015 As at 31 December 2014 As at 31 December 2013 752.5 473.1 1,799.8 37.6 3,063.0 877.6 719.7 1,442.7 8.7 3,048.7 1,269.1 1,396.0 1,998.0 29.1 4,692.2 Liquidity risk related to financial guarantees issued disclosed in Note 23(d). As at 31 December 2015, 2014 and 2013 the Group does not have significant trade and other accounts payable with maturity over one year and its carrying amount approximates its fair value. (e) Insurance To minimize risks the Group concludes insurance policies which cover property damages and business interruptions, freightage, general liability and vehicles. In respect of legislation requirements, the Group purchases compulsory motor third party liability insurance, insurance of civil liability of organizations operating hazardous facilities. The Group also buys civil liability insurance of the members of self-regulatory organizations, directors and officers liability insurance, voluntary health insurance for employees of the Group. 42 Novolipetsk Steel Notes to the consolidated financial statements as at and for the year ended 31 December 2015 (millions of US dollars) 23 Related party transactions Parties are considered to be related if one party has the ability to control the other party, is under common control, or can exercise significant influence or joint control over the other party in making financial or operational decisions as defined by IAS 24, Related Party Disclosures. In considering each possible related party relationship, attention is directed to the substance of the relationship, not merely the legal form. The Group carries out operations with related parties on arm’s length. (a) Sales to and purchases from related parties Sales NBH group companies Other related parties Purchases Universal Cargo Logistics Holding group companies (companies under the common control of beneficial owner) Other related parties For the year ended 31 December 2015 For the year ended 31 December 2014 For the year ended 31 December 2013 731.8 4.7 324.9 64.4 985.7 7.7 375.9 60.6 227.7 9.1 411.3 16.3 (b) Accounts receivable from and accounts payable to related parties Accounts receivable and advances given NBH group companies Other related parties Accounts payable Universal Cargo Logistics Holding group companies (companies under the common control of beneficial owner) Other related parties (c) Financial transactions As at 31 December 2015 As at 31 December 2014 As at 31 December 2013 220.8 27.3 5.8 18.9 300.9 17.5 2.3 25.2 294.2 36.8 15.2 6.3 Loans, issued to NBH group companies (Note 5) Deposits and current accounts in PJSC Bank ZENIT and PJSC Lipetskcombank (companies under the significant influence of the Group’s controlling shareholder) As at 31 December 2015 As at 31 December 2014 As at 31 December 2013 285.1 209.6 185.6 24.2 36.5 92.4 When issuing loans to the foreign companies of the Group and companies accounted for using the equity method, interest rate is determined using information on similar external deals subject to company’s internal credit rating. Interest income from deposits and current accounts in PJSC Bank ZENIT and PJSC Lipetskcombank for the years ended 31 December 2015, 2014 and 2013 amounted to $2.4, $3.5 and $3.3, respectively. (d) Financial guarantees issued As at 31 December 2015, 2014 and 2013 guarantees issued by the Group for borrowings of NBH group companies’ amounted to $273.2, $611.6 and $790.6, respectively, which is the maximum potential amount of future payments, paid on demand of the guarantee. No amount has been accrued in these consolidated financial statements for the Group’s obligation under these guarantees as the Group assesses probability of cash outflows, related to these guarantees, as low. 43 Novolipetsk Steel Notes to the consolidated financial statements as at and for the year ended 31 December 2015 (millions of US dollars) 23 Related party transactions (continued) The maturity of the guaranteed obligations is as follows: Less than 1 year From 1 to 2 years Over 2 years As at 31 December 2015 As at 31 December 2014 As at 31 December 2013 82.0 14.3 176.9 273.2 528.9 61.8 20.9 611.6 176.8 533.3 80.5 790.6 (e) Contributions to non-governmental pension fund and charity fund Total contributions to a non-governmental pension fund and charity fund in 2015, 2014 and 2013 amounted to $6.5, $9.1 and $6.5, respectively. The Group has no long-term commitments to provide funding, guarantees or other support to the abovementioned funds. (f) Common control transfers In September 2015, the Parent Company completed the sales of its full controlling interest in OJSC North Oil and Gas Company (51.0%) for $10.1 cash consideration from a company under common control. Disposal of OJSC North Oil and Gas Company resulted in deconsolidation of assets amounting to $20.4 and liabilities amounting to $20.1. The difference between transaction price and value of net assets is recorded in line item “Disposal of assets to an entity under common control” of consolidated statement of changes in equity. Revenue and profit of OJSC North Oil and Gas Company for the nine months ended 30 September 2015 are not material. This transaction was carried out in line with the Group’s management of none-core assets portfolio. 24 (a) Commitments and contingencies Anti-dumping investigations The Group’s export trading activities are subject from time to time to compliance reviews of importers’ regulatory authorities. The Group’s export sales were considered within several anti-dumping investigation frameworks. The Group takes steps to address negative effects of the current and potential anti-dumping investigations and participates in the settlement efforts coordinated through the Russian authorities. No provision arising from any possible agreements as a result of anti-dumping investigations has been made in the accompanying consolidated financial statements. (b) Litigation The Group, in the ordinary course of business, is the subject of, or party to, various pending or threatened legal actions. The Group’s management believes that any ultimate liability resulting from these legal actions will not significantly affect its financial position or results of operations, and no amount has been accrued in the accompanying consolidated financial statements. Initiated in January 2010 by the non-controlling shareholder of OJSC Maxi-Group court proceeding at the International Commercial Arbitration Court at the Chamber of Commerce and Industry of the Russian Federation (hereinafter, ICA Court) regarding the enforcement of the additional payment by the Parent Company for the shares of OJSC Maxi-Group ended in January 2012 in favour to the Parent Company. Initiated in December 2012 by the non-controlling shareholder of OJSC Maxi-Group court proceeding at ICA Court regarding the loss of assets in connection with a share-purchase agreement ended in January 2014. Arbitrators stated that ICA Court lacks jurisdiction to adjudicate the claim of Maxi-Group’s non-controlling shareholder against the Parent Company and terminated examinations. No further appeal is possible in these claims. 44 Novolipetsk Steel Notes to the consolidated financial statements as at and for the year ended 31 December 2015 (millions of US dollars) 24 Commitments and contingencies (continued) In the third quarter of 2014 the Group received about $104.0, in November 2015 about $17 and in January 2016 about $11, in course of bankruptcy proceedings which were the result of execution of the decision taken by Russian court in 2012. These amounts are included in “Gains on investments” line in the consolidated statement of profit or loss. Recently there are still certain court proceedings initiated by the non-controlling shareholder of OJSC Maxi-Group going on in European courts and related to the claim filed to ICA Court in January 2010. In 2014 courts in France and England decided to execute a decision of ICA Court (which was cancelled in Russia) on the territory of these states. In December 2014 the Parent Company claimed the appeal on a decision of French court and in November 2015 – the appeal on a decision of English court. The Group’s management considers the probability of unfavorable outcome and cash outflow in connection with these court proceedings is low and accordingly, no accruals in relation to these claims were made in these consolidated financial statements. (c) Environmental matters The enforcement of environmental regulation in the Russian Federation is evolving and the enforcement posture of government authorities is continually being reconsidered. The Group periodically evaluates its obligations under environmental regulations. As obligations are determined, they are recognized immediately. Potential liabilities, which might arise as a result of changes in existing regulations, civil litigation or legislation, cannot be reasonably estimated. In the current enforcement climate under existing legislation, management believes that the Group has met the Government’s federal and regional requirements concerning environmental matters, therefore there are no significant liabilities for environmental damage or remediation. (d) Capital commitments Management estimates the outstanding agreements in connection with equipment supply and construction works amounted to $564.7, $620.8 and $498.6 as at 31 December 2015, 2014 and 2013, respectively. (e) Social commitments The Group makes contributions to mandatory and voluntary social programs. The Group’s social assets, as well as local social programs, benefit the community at large and are not normally restricted to the Group’s employees. The Group has transferred certain social operations and assets to local authorities, however, management expects that the Group will continue to fund certain social programs through the foreseeable future. These costs are recorded in the period they are incurred. (f) Tax contingencies Russian tax, currency and customs legislation is subject to varying interpretations and changes, which can occur frequently. Management’s interpretation of such legislation as applied to the transactions and activity of the Group may be challenged by the relevant regional and federal authorities. Recent events within the Russian Federation suggest that the tax authorities may be taking a more assertive position in their interpretation of the legislation and assessments, and it is possible that transactions and activities, including certain operation of intercompany financing of Russian subsidiaries within the Group, that have not been challenged in the past may be challenged. As a result, significant additional taxes, penalties and interest may be assessed, and certain expenses used for profit tax calculation may be excluded from tax returns. Fiscal periods remain open to review by the authorities in respect of taxes for three calendar years preceding the year of review. Under certain circumstances reviews may cover longer periods. Russian transfer pricing legislation was amended starting from 1 January 2012. The new transfer pricing rules appear to be more technically elaborate and, to a certain extent, better aligned with the international principles. The new legislation provides the possibility for tax authorities to make transfer pricing adjustments and impose additional tax liabilities in respect of controlled transactions (defined by applicable legislation), provided that the transaction price is not arm’s length. Management exercises its judgment about whether or not the transfer pricing documentation that the entity has prepared, as required by the new legislation, provides sufficient evidence to support the Group’s tax positions. Given that the practice of implementation of the new Russian transfer pricing rules has not yet developed, the impact of any challenge of the Group’s transfer prices cannot be reliably estimated, however, it may be significant to the financial position and the results of the Group’s operations. 45 Novolipetsk Steel Notes to the consolidated financial statements as at and for the year ended 31 December 2015 (millions of US dollars) 24 Commitments and contingencies (continued) The Group includes companies incorporated outside of Russia. The tax liabilities of the Group are determined on the certainty that these companies do not have a permanent establishment in Russia and, correspondingly, are not subject to profit tax. This interpretation of relevant legislation may be challenged but the impact of any such challenge cannot be reliably estimated currently. However, it may be significant to the financial position and/or the overall operations of the Group. In 2014, the Controlled Foreign Company (CFC) legislation introduced Russian taxation of profits of foreign companies and non-corporate structures (including trusts) controlled by Russian tax residents (controlling parties). Starting from 2015, CFC income may be a subject to a 20% tax rate. As a result, the Group’s management analyses the impact of new tax provisions on Group’s activity and implements the required actions in order to comply with Russian tax requirements. Based on its own understanding of new provisions of tax legislation and the fact that the practice of implementation of these provisions has not formed, management does not recognised current tax expense as well as deferred taxes for temporary differences related to the relevant Group’s subsidiaries to which the CFC legislation applies to and to the extent that the Group is obliged to settle such taxes. As at 31 December 2015, management believes that its interpretation of the relevant legislation is appropriate and the Group’s tax, currency and customs positions will be sustained. (g) Major terms of loan agreements Certain of the loan agreements contain debt covenants that impose restrictions on the purposes for which the loans may be utilized, covenants with respect to disposal of assets, incurrence of additional liabilities, issuance of loans or guarantees, obligations in respect of any future reorganizations procedures or bankruptcy of borrowers, and also require that borrowers maintain pledged assets to their current value and conditions. In addition, these agreements contain covenants with respect to compliance with certain financial ratios, clauses in relation to performance of the borrowers, including cross default provisions, as well as legal claims in excess of certain amount, where reasonable expectations of a negative outcome exist, and covenants triggered by any failure of the borrower to fulfill contractual obligations. The Group companies are in compliance with all debt covenants as at each reporting date. 25 Significant accounting policies The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These accounting policies have been consistently applied by the Group from one reporting period to another. (a) Basis of consolidation Subsidiaries Subsidiaries are those entities that the Group controls because the Group has (a) power over the investees (that is, it can direct relevant activities of the investees that significantly affect their returns); (b) exposure, or rights, to variable returns from its involvement with the investees; and (c) the ability to use its power over the investees to affect the amount of investor returns. Subsidiaries are consolidated when the Group obtains control over an investee and terminates when the Group ceases to have control over the investee. Non-controlling interest is that part of the net results and of the equity of a subsidiary attributable to interests which are not owned, directly or indirectly, by the Group. Non-controlling interest forms a separate component of the Parent Company’s equity. The acquisition method of accounting is used to account for the acquisition of subsidiaries other than those acquired from parties under common control. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured at their fair values at the acquisition date, irrespective of the extent of any non-controlling interest. 46 Novolipetsk Steel Notes to the consolidated financial statements as at and for the year ended 31 December 2015 (millions of US dollars) 25 Significant accounting policies (continued) The Group measures non-controlling interest that represents present ownership interest and entitles the holder to a proportionate share of net assets in the event of liquidation on a transaction-by-transaction basis, either at: (a) fair value, or (b) the non-controlling interest’s proportionate share of net assets of the acquiree. Goodwill is measured by deducting the net assets of an acquiree from the aggregate of: the consideration transferred for the acquiree, the amount of non-controlling interest in the acquiree, and the fair value of an interest in the acquiree held immediately before the acquisition date. Any negative amount (“negative goodwill”) is recognised in profit or loss, after management reassesses whether it identified all the assets acquired and all liabilities and contingent liabilities assumed, and reviews the appropriateness of their measurement. Consideration transferred for an acquiree is measured at the fair value of the assets given up, equity instruments issued and liabilities incurred or assumed, including the fair value of assets or liabilities from contingent consideration arrangements, but excludes acquisition-related costs such as fees for advisory, legal, valuation and similar professional services. Transaction costs related to an acquisition and incurred for issuing equity instruments are deducted from equity; transaction costs incurred for issuing debt as part of a business combination are deducted from the carrying amount of the debt and all other transaction costs associated with the acquisition are expensed. All intercompany transactions, balances and unrealised gains on transactions between the Group companies are eliminated. Unrealised losses are also eliminated, unless the cost cannot be recovered. The Parent Company and all of its subsidiaries use uniform accounting policies consistent with the Group’s policies. Associates and other companies accounted for using the equity method of accounting Associates and other companies accounted for using the equity method of accounting are entities over which the Group has significant influence, but not control or joint control over financial or operating policies. Investments in associates and other companies accounted for using the equity method of accounting are initially recognised at cost (fair value of the consideration transferred). The Group also uses the equity method of accounting to account for an agreement under which the parties exercising joint control of the arrangement are entitled to the net assets of the company accounted for using the equity method of accounting. Joint control is the contractually agreed sharing of control, which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control. Dividends received from associates and other companies accounted for using the equity method of accounting reduce the carrying value of the investment in associates and other companies accounted for using the equity method of accounting. The Group’s share of profits or losses of associates and other companies accounted for using the equity method of accounting after acquisition is recorded in the consolidated statement of profit or loss for the year as share of financial result of associates and other companies accounted for using the equity method of accounting. The Group’s share in the change of other comprehensive income after the acquisition is recorded within other comprehensive income as a separate line item. All other changes in the Group’s share of the carrying amount of net assets of the associates and other companies accounted for using the equity method of accounting are recognised in profit or loss within the share of financial results of the associates and other companies accounted for using the equity method of accounting, but the treatment could be different depending on the substance of the change. However, when the Group’s share of losses in an associate and other companies accounted for using the equity method of accounting equals or exceeds its interest in the associate or company accounted for using the equity method of accounting, including any other unsecured receivables, the Group does not recognise further losses, unless this is required by law or it has incurred obligations or made payments on behalf of the associate or other companies accounted for using the equity method of accounting. 47 Novolipetsk Steel Notes to the consolidated financial statements as at and for the year ended 31 December 2015 (millions of US dollars) 25 Significant accounting policies (continued) Unrealised gains on transactions between the Group and its associates and other companies accounted for using the equity method of accounting are eliminated to the extent of the Group’s interest in these entities. Unrealised losses arising from transactions between the Group and its associates and other companies accounted for using the equity method of accounting are also eliminated unless the transaction provides evidence of an impairment of the transferred asset. In the consolidated statement of financial position, the Group’s share in the associate or other companies accounted for using the equity method of accounting is presented at the carrying amount inclusive of goodwill at the acquisition date and the Group’s share of post-acquisition profits and losses net of impairment loss. Disposals of subsidiaries, associates or other companies accounted for using the equity method of accounting When the Group ceases to have control or significant influence, any retained interest in the subsidiary, associate or company accounted for using the equity method of accounting is re-measured to its fair value, with the change in the carrying amount recognised in profit or loss. The fair value is the initial carrying amount for the purposes of subsequently accounting for the retained interest as an associate, company accounted for using the equity method of accounting, or financial asset. In addition, any amounts previously recognised in other comprehensive income, in respect of that entity, are accounted for as if the Group had directly disposed of the related assets or liabilities. This may mean that amounts previously recognised in other comprehensive income are recycled to profit or loss. At the date when the Group’s control ceases, it de-recognises the assets and liabilities of the former subsidiary from the consolidated statement of financial position and recognises profit or loss connected with the loss of control attributable to the former controlling stake. If the ownership interest in an associate is reduced but significant influence is retained, only a proportionate share of the amounts previously recognised in other comprehensive income are reclassified to profit or loss where appropriate. (b) Cash and cash equivalents Cash and cash equivalents include cash balances in hand, cash on current accounts with banks, bank deposits and other short-term highly liquid investments with original maturities of three months or less. (c) Restricted cash Restricted cash balances comprise balances of cash and cash equivalents which are legally or contractually restricted from withdrawal. Restricted balances are excluded from cash and cash equivalents for the purposes of the consolidated statement of cash flows. Balances restricted from being exchanged or used to settle a liability for at least twelve months after the reporting period are included in other non-current assets. (d) Value added tax (VAT) Output value added tax arising upon the sale of goods (performance of work, provision of services) is payable to the tax authorities on the earlier of: (a) collection of receivables from customers; or (b) delivery of goods (work, services) or property rights to customers. VAT is excluded from revenue. Input VAT on goods and services purchased (received) is generally recoverable against output VAT upon receipt of the VAT invoice. VAT related to sales / purchases and services provision / receipt payments to the budget which has not been settled with at the balance sheet date (deferred VAT) is recognised in the consolidated statement of financial position on a gross basis and disclosed separately within current assets and current liabilities. Where provision has been made for impairment of receivables, an impairment loss is recorded for the gross amount of the debt, including VAT. 48 Novolipetsk Steel Notes to the consolidated financial statements as at and for the year ended 31 December 2015 (millions of US dollars) 25 (e) Significant accounting policies (continued) Inventories Inventories are recorded at the lower of cost and net realisable value (the estimated selling price in the ordinary course of business, less the estimated cost of completion and selling expenses). Inventories include raw materials designated for use in the production process, finished goods, work in progress and goods for resale. Release to production or any other write-down of inventories is carried at the weighted average cost. The cost of finished goods and work in progress comprises raw materials, direct labour, other direct costs and related production overheads (based on normal operating capacity). Other costs are included in the cost of inventories only to the extent they were incurred to provide for the current location and condition of inventories. When inventories are sold, the carrying amount of those inventories shall be recognised as an expense in the period in which the related revenue is recognised. The amount of any write-down of inventories to net realisable value and all losses of inventories, including obsolete inventories written down, shall be recognised as an expense in the period in which the write-down or loss occurs. The amount of any reversal of any write-down of inventories, arising from an increase in net realisable value, shall be recognised as a reduction in the amount of inventories recognised as an expense in the period in which the reversal occurs. (f) Property, plant and equipment (PP&E) Measurement at recognition Property, plant and equipment are initially stated at cost (historical cost model). The PP&E cost includes: (cid:131) (cid:131) (cid:131) its purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates; any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by the relevant entity’s management; the initial estimate of the cost of subsequent dismantling and removal of a fixed asset, and restoring the site on which it was located, the obligation for which the relevant entity incurs either when the item is acquired or as a consequence of having used the item during a specific period for purposes other than to produce inventories during that period. The value of property, plant and equipment built using an entity’s own resources includes the cost of materials and labour, and the relevant portion of production overhead costs directly attributable to the construction of the PP&E. Borrowing costs directly attributable to the acquisition, construction or production of an asset which takes a substantial period of time to prepare for use or sale are included in the cost of this asset. Recognition of costs in the carrying amount of a property, plant and equipment item ceases when the item is in the location and condition necessary for it to be capable of operating in the manner intended by management of the relevant entity. Subsequent measurement Property, plant and equipment items are carried at cost less accumulated depreciation and recognised impairment losses. 49 Novolipetsk Steel Notes to the consolidated financial statements as at and for the year ended 31 December 2015 (millions of US dollars) 25 Significant accounting policies (continued) Subsequent expenditures The costs of minor repairs are expensed when incurred. The costs of regular replacement of large components of property, plant and equipment items are recognised in the carrying amount of the relevant asset when incurred subject to recognition criteria. The carrying amount of the parts being replaced is de-recognised. When a large-scale technical inspection is conducted, related costs are recognised in the carrying amount of a fixed asset as replacement of previous technical inspection subject to recognition criteria. Any costs related to the previous technical inspection that remain in the carrying value shall be de-recognised. Other subsequent expenditures are capitalised only when they increase the future economic benefits embodied in these assets. All other expenses are treated as costs in the consolidated statement of profit or loss in the reporting period as incurred. Property, plant and equipment line of the consolidated statement of financial position also includes capital construction and machinery, and equipment to be installed. If PP&E items include major units with different useful lives, then each individual unit of the related asset is accounted for separately. Borrowing costs Borrowing costs are capitalised from the date of capitalisation and up to the date when the assets are substantially ready for utilisation or sale. The commencement date for capitalisation is when the Group (a) incurs expenditures for the qualifying asset; (b) incurs borrowing costs; and (c) undertakes activities that are necessary to prepare the asset for its intended use or sale. When funds borrowed for common purposes are used to purchase an asset, capitalised borrowing costs are determined through multiplying the capitalisation rate by expenses related to the asset. Interest payments capitalised under IAS 23 are classified in consolidated statement of cash flows in a manner that is consistent with the classification of the underlying asset on which the interest is capitalised. All other borrowing costs are attributed to expenses in the reporting period when incurred and recorded in the consolidated statement of profit or loss in the “Finance costs” line. Mineral rights Exploration and evaluation assets are carried at original cost and classified consistently within tangible or intangible assets depending on their nature. Mineral rights acquired as a result of a business combination are measured at fair value at the acquisition date. Other mineral rights and licenses are recorded at cost. Mineral rights are amortised using the straight-line basis over the license term given approximately even production output during the license period. 50 Novolipetsk Steel Notes to the consolidated financial statements as at and for the year ended 31 December 2015 (millions of US dollars) 25 Significant accounting policies (continued) Depreciation Depreciation is charged on a straight-line basis over the estimated remaining useful lives of the individual assets through an even write-down of historical cost to their net book value. Property, plant and equipment items under finance leases and subsequent capitalised expenses are depreciated on a straight-line basis over the estimated remaining useful lives of the individual assets. Depreciation commences from the time an asset is available for use, i.e. when the location and condition provide for its operation in line with the Group management’s intentions. Depreciation is not charged on assets to be disposed of and on land. In some cases, the land itself may have a limited useful life, in which case it is depreciated in a manner that reflects the consumption of benefits to be derived from it. The range of estimated useful lives of different asset categories is as follows: Buildings and land and buildings improvements Machinery and equipment Vehicles 1 – 105 years 1 – 87 years 1 – 39 years The residual value of an asset is the estimated amount that the Group would currently obtain from disposal of the asset less the estimated costs of disposal if the asset were already of the age and in the condition expected at the end of its useful life. The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period. If the cost of land includes the costs of site dismantlement, removal of PP&E items and restoration expenses, that portion of the land asset is depreciated over the period of consumption of benefits obtained by incurring those costs. Impairment of PP&E is outlined in section (j) “Impairment of non-current assets”. (g) Leasing Leasing transactions are classified according to the relevant lease agreements, which specify the risks and rewards associated with the leased property and distributed between the lessor and lessee. Lease agreements are classified as financial leases or operating leases. In a financial lease, the Group receives the major portion of economic benefits and risks associated with the ownership of the asset. At the commencement of the lease term, the leased asset is recognised in the consolidated statement of financial position at the lower of fair value or discounted value of future minimum lease payments. The corresponding rental obligations are included in borrowings. Interest expenses within lease payments are charged to profit or loss over the lease term using the effective interest method. Accounting policies for depreciation of leased assets are consistent with the accounting policies applicable to owned depreciable assets. A lease is classified as an operating lease if it does not imply transferring the major portion of risks and rewards associated with the ownership of the asset. Payments made under operating leases are recorded as an expense on a straight-line basis over the lease term. 51 Novolipetsk Steel Notes to the consolidated financial statements as at and for the year ended 31 December 2015 (millions of US dollars) 25 Significant accounting policies (continued) (h) Goodwill and intangible assets Goodwill is the difference between: (cid:131) (cid:131) the comprehensive acquisition date fair value of the consideration transferred and non-controlling interest, and, where the entity is acquired in instalments, the acquisition date fair value of the non- controlling interest previously held by the buyer in the acquired entity; and the share of net fair value of identifiable assets acquired and liabilities assumed. The excess of the share of net fair value of identifiable assets bought and obligations assumed by the Group over the consideration transferred and the fair value of non-controlling interest at the acquisition date previously owned by the buyer in the acquired entity, represents income from a profitable acquisition. Income is recognised in the consolidated statement of profit or loss at the acquisition date. Goodwill on associates and other equity-accounted entities is included in the carrying amount of investments in these entities. When interest in the previously acquired entity increases (within non-controlling interest) goodwill is not recognised. The difference between the acquired share of net assets and consideration transferred is recognised in equity. Goodwill is measured at historical cost and subsequently stated less accumulated impairment losses. Impairment of goodwill The goodwill is not amortised but tested for impairment at least annually and whenever there are indications that goodwill may be impaired. For the purpose of impairment testing, goodwill is allocated to each of the Group’s cash-generating units (“CGUs”) that are expected to benefit from the synergies of the combination. The evaluation of impairment for cash-generating units, among which goodwill was distributed, is performed once a year or more often, when there are indicators of impairment of such CGUs. If the recoverable amount of a cash-generating unit is less than its carrying amount, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the CGU and then to any other assets of the CGU pro-rata to the carrying amount of each asset in the unit. An impairment loss recognised for goodwill is not reversed in subsequent periods. Disposal of goodwill If goodwill is a part of the cash-generating unit, and a part of the unit is disposed of, the goodwill pertaining to that part of disposed operations is included in the carrying amount of that operation when profit or loss on its disposal is determined. In such circumstances, the goodwill disposed of is generally measured on the basis of the relative values of the operation disposed of and the portion of the cash-generating unit which is retained. 52 Novolipetsk Steel Notes to the consolidated financial statements as at and for the year ended 31 December 2015 (millions of US dollars) 25 Significant accounting policies (continued) Intangible assets Intangible assets are initially recognised at cost. The cost of a separately acquired intangible asset comprises: (cid:131) (cid:131) its purchase price, including non-refundable purchase taxes, after deducting trade discounts and rebates; any directly attributable cost of preparing the asset for its intended use. If an intangible asset is acquired as a result of a business combination, the cost of the intangible asset equals its fair value at the acquisition date. If payment for an intangible asset is deferred beyond normal credit terms, its cost is the cash price equivalent. The difference between this amount and the total payments is recognised as interest expense over the entire period of credit unless it is capitalised in accordance with IAS 23, “Borrowing Costs”. If an intangible asset is an integral part of a fixed asset to which it belongs, then it is recorded as part of that asset. After the initial recognition of intangibles, they are carried at cost less any accumulated amortisation and any accumulated impairment loss. If impaired, the carrying amount of intangible assets is written down to the higher of value in use and fair value less costs to sell. Amortisation An intangible asset with an indefinite useful life is not amortised. Intangible assets with a definite useful life are amortised using the straight-line method over the shorter of: the useful life or legal rights thereto. (i) Decommissioning obligation The Group’s obligations related to assets disposal include estimating costs related to restoration of land in accordance with applicable legal requirements and licenses. Decommissioning costs are carried at the present value of expected expenses to settle obligations that is calculated using estimated cash flows and are recognised as a part of the historical cost of the asset. Capitalised costs are amortised over the asset’s useful life. Cash flows are discounted at the current rate before tax, which reflects risks inherent to the asset decommissioning obligations. The effect of discounting is recognised in the consolidated statement of profit or loss as finance costs. The estimated future costs related to decommissioning are reviewed annually and adjusted as necessary. (j) Impairment of non-current assets At each reporting date, the Group determines if there are any objective indications of potential impairment of an individual asset or group of assets. Intangible assets with indefinite useful lives are tested for impairment at least once a year if their carrying amount impairment indicators are identified. 53 Novolipetsk Steel Notes to the consolidated financial statements as at and for the year ended 31 December 2015 (millions of US dollars) 25 Significant accounting policies (continued) Recoverable value measurement If any such impairment indicators exist, then the asset’s recoverable amount is estimated. In the event of impairment, the value of the asset is written down to its recoverable value, which represents the higher of: the fair value less costs to sell or the value in use. Fair value less costs to sell is the amount obtainable from the sale of an asset or payable on the transfer of a liability at the evaluation date, in an arm’s length transaction between knowledgeable, willing parties, less any direct costs related to the sale or transfer. Value in use is the present value of estimated future cash flows from expected continuous use of an asset and its disposal at the end of its useful life. In assessing value-in-use, the anticipated future cash proceeds are discounted to their current value using a pre- tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are largely independent cash inflows (cash-generating units), which in most cases are determined as individual subsidiaries of the Group. Estimated cash flows are adjusted in line with the risk of specific conditions at sites and discounted at the rate based on the weighted average cost of capital. With regard to assets that do not generate cash regardless of cash flows generated by other assets, the recoverable amounts are based on the cash-generating unit to which such assets relate. Impairment loss The asset’s carrying amount is written down to its estimated recoverable value, and loss is included in the consolidated statement of profit or loss for the period. Impairment loss is reversed if there are indications that the assets’ impairment losses (other than goodwill) recognised in previous periods no longer exist or have been reduced, and if any consequent increase in the recoverable value can be objectively linked to the event that took place after the impairment loss recognition. Impairment loss is reversed only to the extent that the carrying amount of an asset does not exceed its carrying amount that would be established (less amortisation) if the asset impairment loss had not been recognised. An impairment loss is reversed for the relevant asset immediately through consolidated statement of profit or loss. (k) Pension and post-retirement benefits other than pensions The Group recognises liabilities for post-employment benefits, including one-off payments made upon retirement. For the nine months ended 30 September 2013, the Group maintained defined benefit pension plans that covered the majority of its employees in Europe (Note 20). The Parent Company and some other Group companies maintain defined contribution plans in accordance with which contributions are made on a monthly basis to a non-government pension fund (the “Fund”), calculated as a certain fixed percentage of the employees’ salaries. These pension contributions are accumulated in the Fund during the employment period and subsequently distributed by the Fund. Accordingly, the Group has no long- term commitments to provide funding, guarantees, or other support to the Fund. The Group complies with the pension and social insurance legislation of the Russian Federation and the other countries where it operates. Contributions to the Russian Federation Pension Fund by the employer are calculated as a percentage of current gross salaries. Such contributions constitute defined contribution plans. Payments under defined contribution plans are expensed as incurred. 54 Novolipetsk Steel Notes to the consolidated financial statements as at and for the year ended 31 December 2015 (millions of US dollars) 25 (l) Significant accounting policies (continued) Provisions for liabilities and charges Provisions for liabilities and charges are accrued when the Group: (cid:131) (cid:131) (cid:131) has present obligations (legal or constructive) as a result of past events; it is probable that an outflow of resources embodying economic benefits will be required to settle such an obligation; a reliable estimate of the amount of the obligation can be made. The amount recognised as a provision shall be the best estimate of the expenses required to settle the present obligation at the end of the reporting period. Where the impact of the time factor on the value of money is significant, the provision should equal the present value of the expected cost of settling the liability using the discount rate before taxes. Any increase in the carrying amount of the provision is recorded in the consolidated statement of profit or loss as finance costs. The nature and estimated value of contingent liabilities and assets (including court proceedings, environmental costs, etc.) are disclosed in notes to the consolidated financial statements where the probability of economic benefits outflow is insignificant. The creation and release of provision for impaired receivables have been included in selling expenses in the consolidated statement of profit or loss. Amounts charged to the allowance account are generally written off, when there is no expectation of recovering additional cash. (m) Call and put options Call and put options are carried at their fair value in the consolidated financial statements. These options are accounted for as assets when their fair value is positive (for call options) and as liabilities when the fair value is negative (for put options). Changes in the fair value of options are reflected in the consolidated statement of profit or loss. (n) Income taxes Income tax expense comprises current and deferred tax. The current and deferred taxes are recognised in profit or loss for the period, except for the portion thereof that arises from a business combination or transactions or events that are recognised directly within equity. Current tax Current tax liabilities are measured in the amount expected to be paid to (recovered from) the tax authorities, applying the tax rates and tax laws that have been enacted or substantively enacted by the end of the reporting period. Deferred tax Deferred tax assets and liabilities are recognised for the differences between the carrying amount of an asset or liability in the consolidated statement of financial position and their tax base. 55 Novolipetsk Steel Notes to the consolidated financial statements as at and for the year ended 31 December 2015 (millions of US dollars) 25 Significant accounting policies (continued) Deferred tax is not recognised if temporary differences: (cid:131) (cid:131) (cid:131) arise at the goodwill initial recognition; arise at the initial recognition (except for business combination) of assets and liabilities that do not impact taxable or accounting profits; are associated with investments in subsidiaries where the Group controls the timing of the reversal of these temporary differences, and it is probable that the temporary differences will not be utilised in the foreseeable future. Deferred tax assets and liabilities shall be measured at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. Estimation of tax assets and liabilities reflects tax implications that would arise depending on the method to be used at the end of the reporting period to recover or settle carrying value of these assets or liabilities. Deferred tax assets are recognised in respect of the carry forward of unused tax losses and unused tax credits to the extent that it is probable that future taxable profit will be available against which the unused tax losses and unused tax credits may be utilised. The carrying amount of deferred tax assets is subject to revision at the end of each reporting period and is decreased to the extent of reduced probability of receiving sufficient taxable income to benefit from utilising the deferred tax assets partially or in full. Deferred tax assets and liabilities are offset if there is a legal right for the offset of current tax assets and liabilities, and when they relate to income taxes levied by the same tax authority or on the same taxpayer; and the Group intends to either settle on a net basis, or to realise the asset and settle the liability simultaneously. Uncertain tax positions The Group’s uncertain tax positions are reassessed by management at the end of each reporting period. Liabilities are recorded for income tax positions that are determined by management as more likely than not to result in additional taxes being levied if the positions were to be challenged by the tax authorities. The assessment is based on the interpretation of tax laws that have been enacted or substantively enacted by the end of the reporting period, and any known court or other rulings on such issues. Liabilities for penalties, interest and taxes other than on income are recognised based on management’s best estimate of the expenditure required to settle the obligations at the end of the reporting period. (o) Dividends payable Dividends are recorded as a liability and deducted from equity in the period in which they are declared and approved. Any dividends declared after the reporting date and before the consolidated financial statements have been authorised for issue are disclosed in the subsequent events note. (p) Revenue recognition Revenue from sales of goods and provision of services Revenue comprises the fair value of the consideration received or receivable for the sale of goods and services in the ordinary course of the Group’s activities. The Group recognises revenue when the amount can be reliably measured, it is probable that future economic benefits will flow to the Group, and the specific criteria stipulated by IAS 18, “Revenue” have been met for each type of Group revenues. Revenue is recorded less of discounts, provisions, value added tax and export duties, and refunds, and after excluding internal Group sales turnover. 56 Novolipetsk Steel Notes to the consolidated financial statements as at and for the year ended 31 December 2015 (millions of US dollars) 25 Significant accounting policies (continued) Revenues from sales of goods are recognised at the point of transfer of risks and rewards of ownership of the goods, normally when the goods are shipped. If the Group agrees to transport goods to a specified location, revenue is recognised when the goods are passed to the customer at the destination point. Revenue from services is recognised in the period in which the services were rendered, by reference to the stage of completion of the specific transaction assessed on the basis of the actual service provided as a proportion of the total services to be rendered under the relevant agreement. Interest income Interest income is recognised on a time-proportion basis using the effective interest method. Dividend income Dividend income on investments is recognised when the Group becomes entitled to receive the payment. (q) Segment information The Group provides separate disclosures on each operating segment that meets the criteria outlined in paragraph 11 of IFRS 8, “Operating Segments”. The Group’s organisation comprises five reportable segments: (cid:131) (cid:131) (cid:131) (cid:131) (cid:131) the Russian flat products segment, comprising production and sales of steel products and coke, primarily pig iron, steel slabs, hot rolled steel, cold rolled steel, galvanised cold rolled sheet and cold rolled sheet with polymeric coatings and also electro-technical steel; the Foreign rolled products segment, comprising production and sales of steel products in the United States and Europe; the Russian long products segment, comprising a number of steel-production facilities combined in a single production system beginning from scrap iron collection and recycling to steel-making, production of long products, reinforcing rebar and metalware; the Mining segment, which comprises mining, processing and sales of iron ore, fluxing limestone and metallurgical dolomite, and supplies raw materials to the steel segment and third parties; Investments in associate entity NBH, comprising production of hot rolled, cold rolled coils and galvanized and pre-pained steel, and also production of a wide range of plates as well as a number of steel service centers located in the European Union. Other activities and operating segments that are not reportable segments are combined and disclosed in “all other segments”. The accounting policies of each segment are similar to the principles outlined in significant accounting policies. (r) Financial instruments Financial assets The Group’s financial assets include cash and short-term deposits, trade and other accounts receivable, loans and other amounts receivable, quoted and non-quoted financial instruments and derivatives. Financial assets have the following categories: (cid:131) (cid:131) loans and receivables; held-to-maturity investments. 57 Novolipetsk Steel Notes to the consolidated financial statements as at and for the year ended 31 December 2015 (millions of US dollars) 25 Significant accounting policies (continued) Loans and receivables Loans and receivables represent non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Subsequent to the initial recognition, such financial assets are measured at amortised cost using the effective interest method less any impairment losses. Held-to-maturity investments Non-derivative financial assets with fixed or determinable payments and fixed maturity are classified as held to maturity investments if the Group intends and is able to hold them to maturity. Subsequent to the initial recognition, held-to-maturity investments are measured at amortised cost using the effective interest method less any impairment losses. Valuation techniques Depending on their classification, financial instruments are carried at fair value or amortised cost. Below are the methods and key definitions. Fair value is the price that would be received from selling an asset or paid when transferring a liability in an orderly transaction between market participants as at the valuation date. The best evidence of fair value is the price quoted in an active market. The fair value of financial instruments traded in active markets at each reporting date is determined based on the market quotes or dealers’ quotes (buy quotes for long positions and sell quotes for short positions) without deducting transaction costs. Valuation techniques, such as discounted cash flow models, or models based on recent arm’s length transactions or consideration of financial data of the investees, are used to measure the fair value of financial instruments for which external market pricing information is unavailable. Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of a financial instrument. An incremental cost is one that would not have been incurred if the transaction had not taken place. Amortised cost is the amount at which the financial instrument was recognised at initial recognition less any principal repayments, plus or minus the cumulative amortisation of any difference between that initial amount and the maturity amount (calculated using the effective interest method), and for financial assets less any impairment loss. The effective interest method is a method of allocating interest income or interest expense over the relevant period, so as to achieve a constant periodic rate of interest (effective interest rate) on the carrying amount. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts (excluding future credit losses) through the expected life of the financial instrument or a shorter period, if appropriate, to the net carrying amount of the financial instrument. Initial recognition of financial assets Financial investments available for sale and financial assets at fair value through profit or loss are initially recorded at fair value. All other financial assets are initially recorded at fair value plus transaction costs. All purchases and sales of financial assets that require delivery within the time frame established by regulation or market convention (“regular way” purchases and sales) are recorded at the trade date, which is the date when the Group commits to buy or sell a financial asset. 58 Novolipetsk Steel Notes to the consolidated financial statements as at and for the year ended 31 December 2015 (millions of US dollars) 25 Significant accounting policies (continued) De-recognition The Group de-recognises financial assets when (a) the assets are redeemed or the rights to cash flows from the assets otherwise expire or (b) the Group has transferred the rights to the cash flows from the financial assets or entered into a qualifying pass-through arrangement while (i) also transferring substantially all risks and rewards of ownership of the assets, or (ii) neither transferring nor retaining substantially all risks and rewards of ownership but not retaining control in respect of these assets. Control of an asset is retained if the counterparty does not have the practical ability to sell the asset in its entirety to an unrelated third party without needing to impose additional restrictions on the sale. If the Group neither transfers nor retains substantially all risks and rewards of ownership of the asset, but retains control over such transferred asset, the Group continues recognition of its share in this asset and the related obligation in the amount of the anticipated consideration. Impairment of financial assets At each reporting date, the Group assesses whether the objective indicators exist that a financial asset or group of financial assets is impaired. A financial asset or group of financial assets are considered to be impaired only when there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset, and that have had an impact on the amount or timing of the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. Evidence of impairment may include indications that the debtor or group of debtors are experiencing significant financial difficulty, cannot service their debt or are demonstrating delinquency in interest or principal payments; or they are likely to undergo bankruptcy procedures or any other financial reorganisation. In addition, such evidence includes observable data testifying to an identifiable decline in estimated future cash flows under a financial instrument, in particular, negative changes in a counterparty’s payment status caused by changes in the national or local business environment that impact the counterparty, or a significant impairment of collateral, if any, as a result of deteriorated market conditions. Impairment of financial assets carried at amortised cost The carrying amount of an asset is reduced by the amount of the allowance for impairment of financial assets. Losses from impairment of financial assets carried at amortised cost are carried through profit or loss as they arise. Accrual of interest income on the reduced carrying value is continued based on the interest rate applied to discounting the future cash flows for impairment loss assessment. If the terms of an impaired financial asset held at amortised cost are renegotiated or otherwise modified because of financial difficulties of the counterparty, impairment is measured using the original effective interest rate before the modification of terms. The renegotiated asset is then de-recognised and a new asset is recognised at its fair value only if the risks and rewards of the asset substantially changed. This is normally evidenced by a substantial difference between the present values of the original cash flows and the new expected cash flows. Impairment of financial investments available for sale For available-for-sale financial investments, the Group assesses at each reporting date whether there is objective evidence that a financial investment or a group of financial investments is impaired. Impairment losses are recognised in profit or loss for the year when incurred as a result of one or more events (“loss events”) that occurred after the initial recognition of available-for-sale investments. A significant or prolonged decline in the fair value of an equity security below its cost is an indicator that it is impaired. The cumulative impairment loss – measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that asset previously recognised in profit or loss – is reclassified from other comprehensive income to finance costs in profit or loss for the year. 59 Novolipetsk Steel Notes to the consolidated financial statements as at and for the year ended 31 December 2015 (millions of US dollars) 25 Significant accounting policies (continued) Impairment losses on equity instruments are not reversed and any subsequent gains are recognised in other comprehensive income. If, in a subsequent period, the fair value of a debt instrument classified as available for sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in profit or loss, the impairment loss is reversed through the current period’s profit or loss. Financial liabilities The Group’s financial liabilities include trade and other payables, bank overdrafts, borrowings, financial guarantee agreements and derivative financial instruments. Financial liabilities are respectively classified as: (cid:131) (cid:131) financial liabilities at fair value through profit or loss; borrowings and loans. Financial liabilities at fair value through profit or loss Financial liabilities at fair value through profit or loss include financial liabilities held for trade and financial liabilities designated initially at fair value through profit or loss. Financial liabilities are classified as held for trade if acquired for the purpose of selling in the short term. Income and expense on liabilities held for trade are recognised in the consolidated statement of profit or loss. Borrowings After initial recognition, interest-bearing borrowings are carried at amortised cost using the effective interest method. Gains and losses on such financial liabilities are recognised in consolidated statements of profit or loss upon their de-recognition and also as amortisation accrued using the effective interest method. Initial recognition of financial liabilities All financial liabilities are initially recorded at fair value less transaction costs incurred (except for financial liabilities at fair value through the consolidated statements of profit or loss). De-recognition A financial liability is de-recognised from the consolidated statement of financial position if it was settled, cancelled or expired. If the existing financial liability is replaced by another liability to the same creditor, on terms that significantly differ from the previous terms, or the terms of the existing liability significantly differ from the previous terms, such replacement or change is recorded as de-recognition of the initial liability and recognition of a new liability, and the difference in their carrying amount is recognised in the consolidated statement of profit or loss. Financial guarantee agreements Financial guarantees issued by the Group are irrevocable agreements requiring a payment to compensate losses incurred by the owner of the agreement due to the inability of the debtor to duly pay under the terms of a debt instrument. Financial guarantee agreements are initially recorded at fair value. Consequently the liability is measured at the higher of the best likelihood estimate of costs necessary to settle the liability at the reporting date, and the amount of the liability less accumulated amortisation. Derivative financial instruments Derivative financial instruments, including foreign exchange contracts, interest rate futures, forward rate agreements, currency and interest rate swaps, and currency and interest rate options, are carried at their fair value. All derivative instruments are carried as assets when fair value is positive and as liabilities when fair value is negative. Changes in the fair value of derivative instruments are included in profit or loss for the year. The Group does not apply hedge accounting. 60 Novolipetsk Steel Notes to the consolidated financial statements as at and for the year ended 31 December 2015 (millions of US dollars) 25 Significant accounting policies (continued) Offsetting financial instruments Financial assets and liabilities are offset and the net amount is reported in the consolidated statement of financial position only when there is a legally enforceable right to offset the recognised amounts, and there is an intention to either settle on a net basis, or to realise the asset and settle the liability simultaneously. (s) Related parties Parties are generally considered to be related if the parties are under common control or if one party has the ability to control the other party or can exercise significant influence over the other party in making financial and operational decisions or exercise a joint control over it. In considering each possible related-party relationship, attention is directed to the substance of the relationship, not merely the legal form. 26 Critical accounting estimates and judgements The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the reported amount of assets and liabilities as well as disclosures. Management also makes certain judgements, in the process of applying the Group’s accounting policies. Estimates and judgements are continually evaluated based on historical experience and other factors, including forecasts and expectations of future events that are believed to be reasonable under the circumstances. Actual results may differ from these estimates, and management’s estimates can be revised in the future, either negatively or positively, based on the facts surrounding each estimate. Judgments that have the most significant effect on the amounts recognised in the consolidated financial statements and estimates that can cause a significant adjustment to the carrying amount of assets and liabilities within the next financial year are reported below. (a) Consolidation of subsidiaries Management judgement is involved in the assessment of control and the consolidation of subsidiaries in the Group’s consolidated financial statements. (b) Tax legislation and potential tax gains and losses The Group’s potential tax gains and losses are reassessed by management at every reporting date. Liabilities which are recorded for income tax positions are determined by management based on the interpretation of current tax laws. Liabilities for penalties, interest and taxes other than on income are recognised based on management’s best estimate of the expenditure required to settle tax liabilities at the reporting date. (c) Estimation of remaining useful lives of property, plant and equipment The estimation of the useful life of an item of property, plant and equipment is a matter of management judgement based upon experience with similar assets. In determining the useful life of an asset, management considers the expected usage based on production volumes, inventories, technical obsolescence rates, physical wear and tear and the physical environment in which the asset is operated. Changes in any of these conditions or estimates may affect future useful lives (Note 8). (d) Fair value estimation for acquisitions In accounting for business combinations, the purchase price paid to acquire a business is allocated to its assets and liabilities based on the estimated fair values of the assets acquired and liabilities assumed as of the date of acquisition. The excess of the purchase price over the fair value of the tangible and identifiable intangible assets acquired, net of liabilities, is recorded as goodwill. A significant amount of judgement is involved in estimating the individual fair values of property, plant and equipment and identifiable intangible assets. 61 Novolipetsk Steel Notes to the consolidated financial statements as at and for the year ended 31 December 2015 (millions of US dollars) 26 Critical accounting estimates and judgements (continued) The estimates used in determining fair values are based on assumptions believed to be reasonable but which are inherently uncertain. Accordingly, actual results may differ from the projected results used to determine fair value. (e) Impairment analysis of property, plant and equipment and goodwill The estimation of forecasted cash flows for the purposes of impairment testing involves the application of a number of significant judgements and estimates to certain variables including volumes of production and extraction, prices on finished goods, operating costs, capital investment, and macroeconomic factors such as inflation and discount rates. In addition, judgement is applied in determining the cash-generating units assessed for impairment (Notes 8, 9). Accounting for provisions Accounting for impairment includes provisions against capital construction projects, financial assets and other non-current assets (at least annually). (f) Accrual of accounts receivable impairment provision The impairment provision for accounts receivable is based on the management’s assessment of the collectability and recoverable amount of specific customer accounts, being the present value of expected cash flows. If there is deterioration in a major customer’s creditworthiness or actual defaults are higher or lower than estimates, the actual results could differ from these estimates. (g) Control and the consolidation or accounting using equity method of accounting of entities in the Group’s consolidated financial statements Management judgement is involved in the assessment of control and the consolidation or accounting using equity method of accounting of certain entities in the Group’s consolidated financial statements. As at 31 December 2015 and 2014 the Group owned 51.0% and 79.5% of shares in NBH, respectively, however, management had concluded that in the light of giving certain governance rights to the party owing the residual interest in this company, the Group does not control this company, thus the Group’s investment in NBH should be accounted for under the equity method starting 30 September 2013 (Note 20). After the partial disposal of NBH as of 30 September 2013, which the Group executed in the context of the continuing restructuring of its European operations aimed at further enhancing efficiency optimizing costs, the Group retained its presence in Europe and in the rolled products line of business. Therefore management believes that this disposal does not meet the definition of a discontinued operations under IFRS 5. 27 New or revised standards and interpretations Certain new standards and interpretations have been issued that are mandatory for the annual periods beginning on or after 1 January 2016 or later, and which the Group has not early adopted: (cid:131) IFRS 9 “Financial Instruments: Classification and Measurement” (amended in July 2014 and effective for annual periods beginning on or after 1 January 2018). Key features of the new standard are: - Financial assets are required to be classified into three measurement categories: those to be measured subsequently at amortised cost, those to be measured subsequently at fair value through other comprehensive income (FVOCI) and those to be measured subsequently at fair value through profit or loss (FVPL). 62 Novolipetsk Steel Notes to the consolidated financial statements as at and for the year ended 31 December 2015 (millions of US dollars) 27 New or revised standards and interpretations (continued) - - Classification for debt instruments is driven by the entity’s business model for managing the financial assets and whether the contractual cash flows represent solely payments of principal and interest (SPPI). If a debt instrument is held to collect, it may be carried at amortised cost if it also meets the SPPI requirement. Debt instruments that meet the SPPI requirement that are held in a portfolio where an entity both holds to collect assets’ cash flows and sells assets may be classified as FVOCI. Financial assets that do not contain cash flows that are SPPI must be measured at FVPL (for example, derivatives). Embedded derivatives are no longer separated from financial assets but will be included in assessing the SPPI condition. Investments in equity instruments are always measured at fair value. However, management can make an irrevocable election to present changes in fair value in other comprehensive income, provided the instrument is not held for trading. If the equity instrument is held for trading, changes in fair value are presented in profit or loss. - Most of the requirements in IAS 39 for classification and measurement of financial liabilities were carried forward unchanged to IFRS 9. The key change is that an entity will be required to present the effects of changes in own credit risk of financial liabilities designated at fair value through profit or loss in other comprehensive income. - IFRS 9 introduces a new model for the recognition of impairment losses – the expected credit losses (ECL) model. There is a “three stage” approach which is based on the change in credit quality of financial assets since initial recognition. In practice, the new rules mean that entities will have to record an immediate loss equal to the 12-month ECL on initial recognition of financial assets that are not credit impaired (or lifetime ECL for trade receivables). Where there has been a significant increase in credit risk, impairment is measured using lifetime ECL rather than 12-month ECL. The model includes operational simplifications for trade and lease receivables. - Hedge accounting requirements were amended to align accounting more closely with risk management. The standard provides entities with an accounting policy choice between applying the hedge accounting requirements of IFRS 9 and continuing to apply IAS 39 to all hedges because the standard currently does not address accounting for macro hedging. (cid:131) (cid:131) (cid:131) Sale or Contribution of Assets between an Investor and its Associate or Joint Venture - Amendments to IFRS 10 and IAS 28 (issued on 11 September 2014 and effective from the uncertain date). These amendments address an inconsistency between the requirements in IFRS 10 and those in IAS 28 in dealing with the sale or contribution of assets between an investor and its associate or joint venture. The main consequence of the amendments is that a full gain or loss is recognised when a transaction involves a business. A partial gain or loss is recognised when a transaction involves assets that do not constitute a business, even if these assets are held by a subsidiary. Clarification of Acceptable Methods of Depreciation and Amortisation - Amendments to IAS 16 and IAS 38 (issued on 12 May 2014 and effective for the periods beginning on or after 1 January 2016). In this amendment, the IASB has clarified that the use of revenue-based methods to calculate the depreciation of an asset is not appropriate because revenue generated by an activity that includes the use of an asset generally reflects factors other than the consumption of the economic benefits embodied in the asset. IFRS 15, Revenue from Contracts with Customers (issued on 28 May 2014 and effective for the periods beginning on or after 1 January 2018). The new standard introduces the core principle that revenue must be recognised when the goods or services are transferred to the customer, at the transaction price. Any bundled goods or services that are distinct must be separately recognised, and any discounts or rebates on the contract price must generally be allocated to the separate elements. When the consideration varies for any reason, minimum amounts must be recognised if they are not at significant risk of reversal. Costs incurred to secure contracts with customers have to be capitalised and amortised over the period when the benefits of the contract are consumed. 63 Novolipetsk Steel Notes to the consolidated financial statements as at and for the year ended 31 December 2015 (millions of US dollars) 27 New or revised standards and interpretations (continued) (cid:131) (cid:131) (cid:131) (cid:131) (cid:131) IFRS 16 "Leases" (issued in January 2016 and effective for annual periods beginning on or after 1 January 2019). The new standard sets out the principles for the recognition, measurement, presentation and disclosure of leases. All leases result in the lessee obtaining the right to use an asset at the start of the lease and, if lease payments are made over time, also obtaining financing. Accordingly, IFRS 16 eliminates the classification of leases as either operating leases or finance leases as is required by IAS 17 and, instead, introduces a single lessee accounting model. Lessees will be required to recognise: (a) assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value; and (b) depreciation of lease assets separately from interest on lease liabilities in the income statement. IFRS 16 substantially carries forward the lessor accounting requirements in IAS 17. Accordingly, a lessor continues to classify its leases as operating leases or finance leases, and to account for those two types of leases differently. Recognition of Deferred Tax Assets for Unrealised Losses - Amendments to IAS 12 (issued in January 2016 and effective for annual periods beginning on or after 1 January 2017). The amendment has clarified the requirements on recognition of deferred tax assets for unrealised losses on debt instruments. The entity will have to recognise deferred tax asset for unrealised losses that arise as a result of discounting cash flows of debt instruments at market interest rates, even if it expects to hold the instrument to maturity and no tax will be payable upon collecting the principal amount. The economic benefit embodied in the deferred tax asset arises from the ability of the holder of the debt instrument to achieve future gains (unwinding of the effects of discounting) without paying taxes on those gains. Annual Improvements to IFRSs 2014 (issued on 25 September 2014 and effective for annual periods beginning on or after 1 January 2016). The amendments impact 4 standards. IFRS 5 was amended to clarify that change in the manner of disposal (reclassification from "held for sale" to "held for distribution" or vice versa) does not constitute a change to a plan of sale or distribution, and does not have to be accounted for as such. The amendment to IFRS 7 adds guidance to help management determine whether the terms of an arrangement to service a financial asset which has been transferred constitute continuing involvement, for the purposes of disclosures required by IFRS 7. The amendment also clarifies that the offsetting disclosures of IFRS 7 are not specifically required for all interim periods, unless required by IAS 34. The amendment to IAS 19 clarifies that for post-employment benefit obligations, the decisions regarding discount rate, existence of deep market in high-quality corporate bonds, or which government bonds to use as a basis, should be based on the currency that the liabilities are denominated in, and not the country where they arise. IAS 34 will require a cross reference from the interim financial statements to the location of "information disclosed elsewhere in the interim financial report". Disclosure Initiative Amendments to IAS 1 (issued in December 2014 and effective for annual periods on or after 1 January 2016). The Standard was amended to clarify the concept of materiality and explains that an entity need not provide a specific disclosure required by an IFRS if the information resulting from that disclosure is not material, even if the IFRS contains a list of specific requirements or describes them as minimum requirements. The Standard also provides new guidance on subtotals in financial statements, in particular, such subtotals (a) should be comprised of line items made up of amounts recognised and measured in accordance with IFRS; (b) be presented and labelled in a manner that makes the line items that constitute the subtotal clear and understandable; (c) be consistent from period to period; and (d) not be displayed with more prominence than the subtotals and totals required by IFRS standards. Disclosure Initiative - Amendments to IAS 7 (issued on 29 January 2016 and effective for annual periods beginning on or after 1 January 2017) The amended IAS 7 will require disclosure of a reconciliation of movements in liabilities arising from financing activities. 64 Novolipetsk Steel Notes to the consolidated financial statements as at and for the year ended 31 December 2015 (millions of US dollars) 27 New or revised standards and interpretations (continued) The Group is currently assessing the impact of the amendments on its financial position and results of operation. The following new standards and interpretations are not expected to affect significantly the Group’s consolidated financial statements once adopted: (cid:131) (cid:131) (cid:131) (cid:131) (cid:131) IFRS 14, Regulatory deferral accounts (issued in January 2014 and effective for annual periods beginning on or after 1 January 2016). Accounting for Acquisitions of Interests in Joint Operations - Amendments to IFRS 11 (issued on 6 May 2014 and effective for the periods beginning on or after 1 January 2016). Agriculture: Bearer plants - Amendments to IAS 16 and IAS 41 (issued on 30 June 2014 and effective for annual periods beginning 1 January 2016). Equity Method in Separate Financial Statements - Amendments to IAS 27 (issued on 12 August 2014 and effective for annual periods beginning 1 January 2016). Investment Entities: Applying the Consolidation Exception Amendment to IFRS 10, IFRS 12 and IAS 28 (issued in December 2014 and effective for annual periods on or after 1 January 2016). 28 Subsequent events The Group’s management has performed an evaluation of subsequent events and did not find any through the period from 1 January 2016 to 23 March 2016, which is the date when these consolidated financial statements are published. 65

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