ANNUAL REPORT 2016 · Letter from the General Director Dear shareholders, investors, partners and...

ANNUAL REPORT

2016

2

Contents

4.

Financial

Results

p. 18

5.

Risk

Management

p. 25

6.

Social

Responsibility

p. 28

7.

Corporate

Governance

p. 30

Letter from the

General Director

p. 3

1.

Company

Overview

p. 5

2.

Key Events

of 2016

p. 10

3.

Operational

Results

p. 12

8.

Financial

Statements

p. 35

Contacts

p. 77

ANNUAL REPORT 2016

3

Letter from the General Director

Dear shareholders, investors, partners and colleagues!

The low prices for oil, metals and other export commodities,

exchange rate volatility, and persisting political tensions in the region

still had a negative impact on Kazakhstan's economy in 2016.

Last year, Kazakhstan's rail freight transportation market decline

slowed down, yet its performance deteriorated relative to other modes

of transport. At the same time, growth of transit traffic partially

compensated for reduction in the volumes of loading of the main types

of cargo in such industries as ferrous metallurgy, mining industry and

construction. The increased competition from pipeline transport has led

to the formation of a large surplus of tank cars, while the write-off of old

rolling stock and development of manufacturing industries, in particular

non-ferrous metallurgy, have led to a deficit of gondolas.

Nevertheless, according to the results of 2016, despite the adverse

environment on the rail freight transportation market, the Company

managed to retain its market positions. One of the negative factors

affecting the market was a decrease in the railcar rental rates, however

the effect of this factor was mitigated by an increased utilization of our

railcar fleet.

In 2016, we managed to strengthen our cooperation with one of our

key long-term clients, particularly to renew a number of contracts with

Tengizchevroil until 2019, with a possibility of further extension for

another three years on mutually agreed terms. In addition, over the

course of the year, we brought in new clients, thus ensuring a 90%

loading of our own fleet by the end of the year.

I am pleased to present Eastcomtrans LLP's financial results for

2016: operating cash flow (before income taxes and interest on

financial liabilities) amounted to KZT15.5 bn, gross profit amounted to

KZT14.7 bn, gross margin was equal to 59%, EBITDA was

KZT17.7 bn, and net profit amounted to KZT4 bn.

The Company continues to receive positive cash flows from

operations, but it needs to optimize its debt service payments in the

medium-term. In this regard, we initiated some activities and carried

out the following work:

‒ In February 2016, as part of our currency risk reduction plan, a

KZT1.1 bn, 11.34% loan maturing in 2026 was raised from DBK-

Leasing JSC under the terms of Islamic leasing “Ijara”;

‒ In December 2016, the Company employed a new tool of the

local stock exchange KASE for raising capital – short-term

commercial bonds, thus raising KZT1.2 bn for 6 months;

ANNUAL REPORT 2016

4

Letter from the General Director (Continued)

Vadim A. Malakhov

General Director

Eastcomtrans LLP

‒ In November 2016, the Company initiated a consent solicitation

process to obtain the approval of Eurobond holders to make

amendments to the terms of the Bond prospectus, but

unfortunately the offer was not accepted;

‒ In March 2017, the Company reached out to investors with an

updated offer and obtained their consents to amend the terms of

the Bond prospectus (the maturity of Bonds was extended for

four years until 2022; the principal debt amount to be amortized

by two equal instalments: 50% in 2021 and the rest in 2022; the

coupon rate was set to 8%).

As of the close of the fiscal year 2016, the Company was in breach

of a number of financial covenants imposed by its lenders. However, as

of the date of the issuance of the Company's financial statements, it

received the waivers of claims on such breaches from its lenders.

The Company will continue its efforts on optimizing its credit

portfolio.

We are proud that in 2016 the Company became the winner in the

Capitals category of the HR Brand Central Asia 2016 Award. This is a

great achievement for the Company, since the HR Brand Central Asia

Award represents a recognition of its success in the business

community, among professionals and colleagues, clients and job

candidates.

In 2016, the Company successfully passed a supervisory

management system audit which confirmed its compliance with the

international standard requirements in the field of quality management

systems (ISO 9001: 2008) and the standard requirements in the field of

occupational safety and health management systems (ST RK OHSAS

18001: 2008).

In conclusion, I would like to express my deep gratitude to the

shareholders, investors, partners and, of course, my colleagues for

their support and extraordinary contribution to the development of the

Company. Given the continuing negative trend in the rail transportation

industry, we set ourselves new goals and objectives to achieve, which

require us to quickly adapt to the changing market conditions, enhance

the Company's competitiveness by optimizing its business model,

improve the quality of its services and strengthen its market positions.

ANNUAL REPORT 2016

5

Company Overview

1.

ANNUAL REPORT 2016

6

Eastcomtrans LLP — the largest private rail freight operator

in Kazakhstan and Central Asia

MISSION

To become the largest and one of

the most efficient rail freight

operators on the market, which

offers a wide range of

transportation and logistics

services.

STRATEGIC GOALS

• To secure sustainable development of its business

and long term growth of company’s value

• To provide only high quality services to our clients at

competitive prices

• To support the development of Kazakhstan’s rail

freight transportation market

ANNUAL REPORT 2016

7

The well-balanced client portfolio of the Company includes about 40

large consignors, of which 80% are the leading industrial companies

of Kazakhstan. ECT meets the needs of major enterprises in oil and

gas, metals and mining, coal and other industries in transportation

services.

The company operates more than 13,500 railcars, of which 90% is

owned by ECT.

The Company’s head office is located in Almaty. Also, It has a branch

in Astana and regional structural units in rail stations all over the

country.

As of 31.12.2016, the Company’s headcount amounted to 162 people.

Current credit ratings:

General Information

• US$20 mln as an equity capital investment

• US$30 mln as a loan.

Eastcomtrans LLP (the “Company” or “ECT” ) was established in the

form of a limited liability partnership in October 2002.

In 2013, International Finance Corporation provided ECT with a

US$50 mln financing in the following form:

• Rail freight transportation

• Operating lease and forwarding

services

• Consignor and consignee services

at the Seaport of Aktau

• Transportation of oversize cargoes

• Railcars repair and maintenance

• Enterprise internal logistics

management

• Railcars pre-loading preparation.

The Company provides its clients with a wide range of rail

transportation and logistics services:

• 21.12.2016: Moody’s – ‘Caa1’ with ‘Negative’ outlook

• 27.04.2017: Moody’s – ‘Caa1’ with ‘Stable’ outlook

ANNUAL REPORT 2016

8

History

2010Fleet expansion,

credit rating assignment

• Railcar fleet increased to 5,253 units

• A seven-year contract was signed with Zhaikmunai

• Fitch Ratings assigned a Long-Term IDR at ‘B−’, outlook – ‘Stable’

2011 -

2012

Fleet expansion,

international loan,

new market

• Railcar fleet reached 9,782 units

• Client base diversification — bringing in new customers from mining industry

• US$100 mln were raised as a syndicated loan from BNP Paribas

• Fitch Ratings raised its rating on the Company to ‘B’ with a ‘Stable’ outlook


new participant,

debut placement

• Railcar fleet reached 10,894 units

• IFC made an equity investment in the Company and received 6.67% interest

• The Company successfully placed US$100 mln Eurobonds on LSE

• Moody’s assigned ‘B3’ credit rating with a ‘Stable’ outlook

2014 -


credit portfolio diversification

• Own railcar fleet reached 12,235 units

• In 2014, Gazprombank provided a 9-year US$50 mln loan for the acquisition of 853 railcars

• In 2014, the Company raised a US$130 mln loan from EBRD

• In 2015, DBK-Leasing provided US$36 mln loan as part of a lease-back agreement

• Moody's and Fitch Ratings' credit rating outlooks were changed to ‘Negative’

2016Contracts extension, taking

advantage of new financial

instruments

• Long-term car rental contracts with Tengizchevroil were renewed for three years with the right of further extension for

another three years in 2019

• Amount of Eurobonds outstanding was reduced to US$58.5 mln in terms of face value

• The Company successfully placed KZT1.2 bn short-term commercial bonds on KASE

• KZT1.1 bn loan was raised from DBK-Leasing under the terms of Islamic leasing “Ijara”

2002 -

2009

Foundation of

Eastcomtrans LLP,

fleet expansion, credit and

operational portfolio

diversification,

BP optimization

• In 2002, the Company was established by a group of private investors

• In 2002-2009, railcar fleet grew from 700 units to 2,822 units

• In 2002, the first railcar rental contract was signed with Tengizchevroil

• In 2005-2007, client base expanded to include railcar rental and forwarding contracts

with major oil and gas companies

• In 2008, a $25 million loan agreement was signed with HSBC Bank Kazakhstan

• In 2008, an ISO audit was successfully performed

• In 2009, the Company became a member FIATA

ANNUAL REPORT 2016

9

Railcar Fleet

As of 31.12.2016, the Company's own railcar fleet comprised 12,232 units with approximately half of them being oil tank cars.

Compared to 2015, the Company's fleet changed little if at all as to the number and types of cars.

Between 2003-2016, Compound Annual Growth Rate (CAGR) of the Company's fleet amounted to 55%.

In 2003-2016, the Company’s total capital expenditures amounted to US$716 mln.

In 2016, the Company's fleet had an average age of about 7 years.

Owned Railcar Fleet Structure, as of 31.12.2016

Total number: 12,232 units

49%

17%

23%

1%6%

2% 2%

Oil tank cars

LPG tank cars

Gondolas

Platforms

Boxcars

Dump cars

Cement hoppers0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

20032004200520062007200820092010201120122013201420152016

Owned Railcar Fleet, 2003–2016

Units at year-end

40

12,232

5,993 2,102 2,802 135 700 300 200

Oil tank cars LPG tank cars Gondolas Platforms Boxcars Dump cars Cement hoppers

ANNUAL REPORT 2016

10

Key Events of 2016

2.

ANNUAL REPORT 2016

11

Key Events of 2016

Further economic growth slowdown in Kazakhstan and China, economic recession in Russia

Kazakhstan’s credit rating downgrade to ‘BBB-/A-3’, outlook – ‘Negative’.

Oil market stabilization. Oil-producing countries agreed to limit oil output

Resumption of oil production at the Kashagan field

Overall unfavorable rail market conditions: total cargo loading volume drop by −2%, freight turnover drop by −11%

Macro environment

Company’s revenue amounted to KZT25.0 bn (−6% y/y), gross margin: 59%

EBITDA amounted to KZT17.7 bn (−9% y/y), EBITDA margin: 71%

Net profit amounted to KZT4.0 bn

Financial

highlights

Drop in tariff rates under the Company’s contracts

Increase of the Company’s rolling stock utilization ratio

Prolongation of long-term railcar rental contracts with Tengizchevroil for three years with the right of further extension for

additional three years

Operational

highlights

On 23.05.2016, the following changes to the compositions of the Company’s Supervisory Board and

Management team were introduced: Mr. M. Sarsenov replaced Mr. V. Malakhov as the Chairman of the

Supervisory Board; in his turn, Mr. V. Malakhov replaced Mr. E. Plakhotin as the General Director

Corporate

governance

In 2016, the Company carried out a partial repurchase of its Eurobonds with a par value of US$14.4 mln

In December 2016, KZT1.2 bn short-term commercial bonds were placed on KASE with a six month maturity and

14% coupon rate

In February 2016, a KZT1.1 bn, 11.34% loan maturing in 2026 was raised from DBK-Leasing JSC under the terms

of Islamic leasing “Ijara”

Credit

portfolio

Credit

ratings

ANNUAL REPORT 2016

On 21.12.2016, Moody's Investors Service confirmed the Company's corporate credit rating at 'Caa1' on the

international scale and at 'B3.kz' on the national scale, with a 'Negative’ outlook. On 27.04.2017, the outlook was

improved to 'Stable.'

12

Operational Results

3.

ANNUAL REPORT 2016

13

In 2016, the GDP growth rate was equal to 1.0% y/y, reaching KZT45,732 bn (≈US$134 bn at the average US$/KZT exchange rate for 2016); the

volume index (VI) of the output sector (including manufacturing and construction) changed by +1.3% y/y, the services sector slightly increased

(0.8% y/y). The growth rate of the economy fell by 0.2 pp (1.0% versus 1.2% in 2015).

Based on the 2016 results, the volume of industrial output reached KZT18.6 bn (≈US$54 bn) versus KZT14.6 bn in 2015 (+27% y/y). The highest

growth was seen in sectors such as non-ferrous metal production (8.5% y/y), non-ferrous metal ore mining (7.8%) and ferrous metallurgy (3.3%).

In 2016, the Kazakhstan’s foreign trade turnover amounted to US$48.4 bn versus US$75.9 bn in 2015 (−36% y/y): the annual export volume shrank by

−28% y/y: from US$46 bn in 2015 to US$33 bn in 2016, import fell by −47% y/y: from US$30 bn to US$16 bn. In 2016, the share of fuel and energy

products in the total exports was equal to 66% (US$22 bn), the share of metals and metal products was 16% (US$5 bn). In 2015, these shares

amounted to 68% (US$31 bn) and 13% (US$6 bn), respectively.

Macroeconomic Overview

According to the Forecast of Social and Economic Development of the Republic of Kazakhstan for 2017-2021 published by the Ministry of National

Economy of the Republic of Kazakhstan, as updated in February 2017, on the backdrop of increased oil production at the Kashagan field, gowth of the

manufacturing industry and implementation of infrastructure projects, the Kazakhstan GDP growth forecast for 2017 was improved to 2.5% (assuming

an yearly average oil price of US$50 and US$/KZT exchange rate of 330) with a subsequent acceleration up to 3.1% in 2021.

Given the above mentioned factors, most forecasts of international financial institutions and rating agencies were also improved for 2017-2018. The

forecast for the yearly average GDP growth rate for our sample in 2017 is equal to to 1.9%, while in 2018 – 2.4%.

Kazakhstan GDP Forecasts, 2017–2018.Kazakhstan GDP, 2010–2018F

7.3% 7.2%

4.6%

5.8%

4.1%

1.2% 1.0%

2.5%2.1%

0.0

10.0

20.0

30.0

40.0

50.0

60.0

2010 2012 2014 2016 2018F

GDP, KZT tn GDP growth rate, %

2017F 2018F

MNE of the RoK 2.5% 2.1%

EIU 1.8% 2.0%

World Bank 2.2% 3.7%

EBRD 2.4% –

ADB 1.0% –

Fitch Ratings 2.0% –

S&P 2.5% 2.5%

Moody’s 1.1% 1.8%

Average 1.9% 2.4%

Median 2.1% 2.1%

Kazakhstan GDP Structure, 2016

13%

11%

17%

9%8%6%5%

32%

Mining industry

Manufacturing industry

Trade

Real estate

Transportation and warehousing

Construction

Agriculture

Other

ANNUAL REPORT 2016

Sources: Ministry of National Economy of the RoK, Committee on Statistics of the RoK, State Revenue Committee of the RoK, economic reports of international development banks and rating agencies

14

Rail Freight Transportation Market Overview

In 2016, the total volume of freight transportation by all transport modes in Kazakhstan amounted to 3,723 mln tonnes (−0,3% y/y versus a decline of

−0.4% in 2015). From 2010 to 2016, CAGR of transportation volume was equal to 7%. In 2016, rail freight transportation volume amounted to

332 mln tonnes (−3% y/y versus a decrease of −13% in 2015), CAGR between 2010 and 2016 was 4%.

According to the results of 2016, the share of rail transport in the overall freight transportations remained at the 2015 level and amounted to 9%.

Automobile transport remains the key transport mode in Kazakhstan (share in total volume: 85%) due to a greater flexibility when referring to short

distance hauls. Nevertheless, rail transport mode is more preferred for the transportation of industrial goods (greater efficiency and lower costs).

In 2016, the total freight turnover amounted to 515 bn t-km (−6% y/y versus a decrease of −2% in 2015). Rail freight turnover amounted to 237 bn t-km

(−11% y/y versus a decline of −5% in 2015), which is 46% of the country’s total freight turnover. From 2010 to 2016, CAGR of this indicator amounted

to 2%.

In 2016, Kazakhstan’s rail freight transportation sector witnessed a slowdown in its decline rate, but its performance deteriorated

compared to other transportation modes. However, transit traffic growth partially compensated for the reduction in the volumes of

loading of the main types of cargo (ferrous metallurgy, construction, coal). Increased competition from pipeline transport has led to the

formation of a large surplus of tank cars, while the write-off of old rolling stock and development of manufacturing industries (non-

ferrous metallurgy) have lead to a deficit of gondolas.

Freight Transportation Volume in Kazakhstan

by Mode of Transport, 2010–2016

15%

22%

9% 9%7%

-0.4% -0.3%

0

500

1000

1500

2000

2500

3000

3500

4000

2010 2011 2012 2013 2014 2015 2016

mln tonnes

85%

9%6%

Freight Transportation Volume

Structure in Kazakhstan, 2016

Freight Turnover in Kazakhstan by Mode of Transport,

2010–2016

14%16%

6%4%

12%

-2% -6%

0

100

200

300

400

500

600

2010 2011 2012 2013 2014 2015 2016

bn t-km

31%

46%

22%

Freight Turnover Structure in

Kazakhstan, 2016

Automobile Rail Pipeline Other (share <1%) Growth rate, %

ANNUAL REPORT 2016

Sources: Committee on Statistics of the RoK, Company’s estimate

15

Rail Freight Transportation Market Overview (Continued)

From 2010 to 2016, the share of rail transport in the overall freight transportations shrank from 11% to 9%, while the share of automobile transport

increased from 81% to 85%. Such 4 pp increase was due to the reduction of rail and pipeline transport shares. Similar trends were also observed in

the freight turnover: the share of automobile transport grew by 10 pp (from 21% to 31%) due to a decrease of the rail (−9 pp) and pipeline transport

(−1 pp) shares.

In 2016, the total volume of Kazakhstani freight transportation market was estimated at KZT1,831 bn (≈US$5.4 bn, +24% y/y), where rail freight

transportation sector accounted for KZT643 bn (US$1.9 bn, +9% y/y). Along with this, between 2010 and 2016, the share of rail transport in the total

market volume declined from 54% to 35%, although in absolute terms it grew by 33% from KZT485 bn to KZT643 bn. This fact is explained by the

growth of the entire market on the backdrop of a three-fold increase in revenues of the pipeline sector companies – from KZT356 bn to KZT1,074 bn

— resulting from the growth of revenues from the transit of the Russian oil (7 mln tonnes since 2014) though the Atasu–Alashankou pipeline towards

China and expansion of the CPC pipeline. In the medium term, further growth in the freight transportation market can be expected due to an increase

in the transit of the Russian oil to China by 3 mln tonnes (from 7 mln tonnes to 10 mln tonnes), increase in oil exports from Kashagan and recovery of

the national economy.

Sources: Committee on Statistics of the RoK, Company’s estimate

81% 83% 84% 85% 83% 85% 85%

11% 9% 9% 8% 10% 9% 9%8% 7% 7% 6% 6% 6% 6%

2010 2011 2012 2013 2014 2015 2016

Freight Transportation in Kazakhstan


21% 27% 28% 29% 28% 30% 31%

55% 50% 49% 47% 51% 49% 46%

23% 22% 22% 23% 21% 21% 22%

2010 2011 2012 2013 2014 2015 2016

Freight Turnover in Kazakhstan


Rail Freight Turnover in Kazakhstan, 2010–2016

15%

5% 6%

-2%

21%

-5%

-11%

0

50

100

150

200

250

300

2010 2011 2012 2013 2014 2015 2016

bn t∙km

228 248 261 259 242 221 215

40 32 34 34149

120 117

8% 9%5%

-1%

-7% -8%

-3%

0

50

100

150

200

250

300

350

400

2010 2011 2012 2013 2014 2015 2016

Rail Freight Transportation Volume in Kazakhstan,

2010–2016

Main types of cargoes

Other types of cargoesGrowth rate of rail freight transportation of main types

of cargoes, %

growth rate, %

33%

Automodile Rail Pipeline Other

mln tonnes

ANNUAL REPORT 2016

16

The current rail freight transportation market in Kazakhstan is represented by the state-owned Kaztemirtrans JSC, captive rail operators that are a part

of large financial-industrial groups and holdings, as well as private operator companies. In addition, there are large Russian operators on the market as

well. The market demonstrates a high level of concentration, and four largest companies account for about 70% of the country’s total freight railcar

fleet. The share of ECT is 10%.

As of 31.12.2016, the total fleet of freight railcars in Kazakhstan (according to NC KTZ) amounted to ≈124,000 units. From 2010 to 2016, the total fleet

number grew by 29% — from 96,400 to 124,000 units. Such growth in this period was primarily driven by the 47% fleet expansion of private operators:

from 43,300 units to approx. 63,500 units.

Due to the leading roles of the oil and gas, metals and mining sectors in the country's economy and GDP, freight railcar fleet in Kazakhstan is primarily

composed of boxcars and tank cars (72%) which are the principal types of railcars for servicing these industries.

Competitive Landscape

Structure of Kazakhstani Freight Railcar Fleet Owners, 31.12.16

49%

10%6%4%

3%

3%

3%

3%

19%

Other

Kaztemirtrans

Eastcomtrans

TransCom

TengizTransGroup

GE Logistics

Texol Trans

Petroleum

Bogatyr Trans

13

0

5

10

15

20

25

30

35

Uzbekistan Belarus Kazakhstan Ukraine Russia

Average Age of Freight Railcar Fleet in CIS, 2017

years

Kazakhstani Freight Railcar Fleet , 2010–2016

-4%

12%

18%

1% 2%0%

-2%

0

50,000

100,000

150,000

2010 2012 2014 2016

units

Fleet of NC KTZ

Fleet of private

operators

Growth rate, %

Structure of Kazakhstani Freight Railcar Fleet by Type of Railcar, 31.12.16

44%

28%

11%

7%

6%

3% 2%

Gondolas

Tank cars

Boxcars

Platforms

Grain hoppers

Cement hoppers

Other

ANNUAL REPORT 2016

Sources: Committee on Statistics of the RoK, NC Kazakhstan Temir Zholy, Market of Rolling Stock, Company’s estimate

17

Operational Highlights

Currently, the core business segments of ECT include railcar rental services and operating services, which, in 2016, generated 78% and 21% of

the total revenue, respectively; the remaining portion of the revenue was related to freight forwarding and other services. The Company operates

all over the “1520 area”.

Based on the results of 2016, the overall freight volume operated by the Company totaled 12.5 mln tonnes (-25% y/y).

The deteriorating condition of the rail freight market amid the persisting geopolitical tensions, the economic growth slowdown of both Kazakhstan

and its trade partners, the overall surplus of the freight rolling stock resulted in the decrease of yearly average rental and operating rates.

In 2016, the Company’s client base saw no significant changes. The Company prolonged its cooperation with a key client – Tengizchevroil – until

2019 with the right of further extension for additional three years.

Despite the adverse environment in the rail sector, the Company managed to retain its market positions, as well as to increase the utilization ratio

of its own railcar fleet to 90%.

In 2016, the Company successfully passed a supervisory management system audit which confirmed its compliance with the international

standard requirements in the field of quality management systems (ISO 9001:2008) and the standard requirements in the field of occupational

safety and health management systems (ST RK OHSAS 18001: 2008).

ANNUAL REPORT 2016

18

Financial Results

4.

ANNUAL REPORT 2016

19

Key Financial Indicators

Financial Highlights, 2014–2016

US$/KZT exchange rate (NBRK), average

US$/KZT exchange rate (NBRK), at year-end

179.19

182.35

221.73

339.47

342.16

333.29

Metric2014 2015 2016 2014* 2015* 2016*

KZT mln KZT mln KZT mln US$ mln US$ mln US$ mln

Revenue 31,897 26,537 24,984 178 120 73

Gross profit 20,966 15,703 14,718 117 71 43

EBITDA 23,876 19,393 17,719 133 87 52

Net profit / (loss) 2,749 (26,868) 3,959 15 (121) 12

Cash & cash equivalents 5,437 25,315 8,952 30 75 27

Accounts receivable 6,776 7,327 4,330 37 22 13

Current assets 14,444 36,323 18,026 79 107 54

PP&E 105,243 95,813 91,057 577 282 273

Total assets 119,756 132,196 109,918 657 389 330

Total financial liabilities 63,577 101,186 81,517 349 298 245

Equity 44,830 18,552 22,511 246 55 68

Cash flows from operating activities

(incl. finance costs)15,535 11,030 7,827 87 50 23

Cash flows from investing activities (11,399) (3,507) 3,938 (64) (16) 12

Cash flows from financing activities (3,505) (7,989) (13,591) (20) (36) (40)

Gross margin 66% 59% 59% 66% 59% 59%

EBITDA margin 75% 73% 71% 75% 73% 71%

Net debt / EBITDA 2.44 3.91 4.10 2.39 2.56 4.20

Debt / Equity 1.42 5.45 3.62 1.42 5.45 3.62

Foreign exchange gain / (loss) (8,752) (35,320) 683 (-49) (-159) 2

Note: * For calculations, the average US$/KZT (NBRK) exchange rate for the period was used for items in the Profit and Loss Statement and the Cash Flow Statement, while the end of period exchange rate was used for

items in the Statement of Financial Position

In 2016, the Company’s net profit amounted to KZT3,959 mln versus (26,868) mln of net loss in 2015.

In 2016, the Company’s business remained profitable and capable of generating positive cash flows from its operating activities.

ANNUAL REPORT 2016

20

Revenue

The total revenue of the Company in 2016 amounted to KZT24,984 mln (US$73 mln based on the yearly average US$/KZT exchange rate of 342.16),

which is less than the total revenue n 2015 by 6% in KZT terms and 39% in US$ terms.

The revenue structure by types of services has changed slightly in recent years: share of rental revenue in 2016 was equal to 78% (+5 pp y/y), share of

operating services — 21% (-4 pp y/y), share of other services — 1% (−1 pp y/y).

Total Revenue, 2010–2016

9,807 17,051 22,476 25,513 31,897 26,537 24,984

66.5

114.9

149.1 165.6

175.9

119.7

73.0

2010 2011 2012 2013 2014 2015 2016

Revenue, KZT mln Revenue, US$ mln

Revenue Structure: Services, 2010–2016

86% 85% 81% 79% 73% 73% 78%

12%5% 12% 16% 23% 25% 21%

2%10% 7% 5% 4% 2% 1%

2010 2011 2012 2013 2014 2015 2016

Rent Operating Other

Rental revenue in 2016 amounted to KZT19,562 mln (+1% y/y, 78% of the total revenue).

Revenue from operating services amounted to KZT5,117 mln (−22% y/y, 21% of the total revenue).

Revenue from freight forwarding and transshipment amounted to KZT201 mln (−64% y/y, 0.8% of the total).

Revenue from other services in 2016 amounted to KZT104 mln (+1% y/y) and its share in the total revenue is insignificant (≈0.4%).

ANNUAL REPORT 2016

21

Cost of Sales

In 2016, cost of sales (COGS) amounted to KZT10,267 mln (US$30 mln), which is slightly below the previous year result (−5% y/y or −KZT568 mln).

COGS, 2010–2016

2,037 5,704 8,767 7,710 10,931 10,834 10,267

13.8

38.4

57.0 50.0

60.3

48.9

30.0

2010 2011 2012 2013 2014 2015 2016

COGS, KZT mln COGS, US$ mln

In 2016, a number of changes to the overall structure of the cost of sales occurred: depreciation expenses reduced due to the write-off spare parts for

rolling stock; railway infrastructure costs increased due a rise of oil tank cars in layover and an increase in the railcar repair costs; railcar insurance

costs decreased because of a reduction in voluntary insurance contributions.

Due to the ageing of the railcar fleet, it is possible that overhaul and depot repair costs will rise in the medium term.

Gross profit margin remained at the level of 2015, i.e. 59%.

55% 49%

14%16%

10% 15%

2015 2016

2%

COGS Structure, 2015–2016

5%5%5%4% D&A

Repair and maintenance of railcars

Use of railway infrastructure

Insurance of railcars

Servicing of railcars

Payroll and related expenses

Other

6%

6% 8%

ItemAmount (KZT mln),

2016

Amount (KZT mln),

2015Growth Rate, % Share in 2016, % Share in 2015, % Change, y/y

D&A 5,068 5,936 -15% 49% 55% -6 pp

Repair and maintenance 1,621 1,517 7% 16% 14% +2 pp

Use of railways 1,584 1,067 48% 15% 10% +5 pp

Insurance of railcars 154 689 -78% 2% 6% -4 pp

Servicing of railcars 502 596 -16% 5% 5% –

Payroll 474 397 19% 5% 4% +1 pp

Other 863 633 36% 8% 6% +2 pp

Total 10,267 10,834 -5% 100% 100% –

ANNUAL REPORT 2016

22

General and Administrative Expenses

In 2016, general and administrative expenses amounted to KZT1,985 mln (US$5.8 mln), which is less than the previous year level by −12% y/y or

−KZT264 mln.

General and Administrative Expenses (G&A), 2010–2016

832 980 1,127 1,685 2,794 2,249 1,985

5.6 6.6 7.3

10.9

15.4

10.1

5.8

2010 2011 2012 2013 2014 2015 2016

G&A, KZT mln G&A, US$ mln

Insurance costs

Bank fees

31%22%

21%25%

8%8%

7% 11%

33% 34%

2015 2016

Structure of General and Administrative Expenses (G&A), 2015–2016

1%Payroll

Taxes other than CIT

Consulting services

Other

The reduction of the general and administrative expenses in 2016 was primarily driven by: a decline in insurance costs (−38% y/y on account of a

decrease in voluntary insurance contributions) and a decrease in tax expenses (−12% y/y as a result of a tax loss carry forward in relation to the part

of foreign exchange losses incurred in the previous year).


2016

Amount (KZT mln),

2015Growth Rate, % Share in 2016, % Share in 2015, % Change, y/y

Insurance costs 429 691 -38% 22% 31% −9 pp

Payroll 499 476 5% 25% 21% +4 pp

Taxes other than CIT 157 179 -12% 8% 8% −

Consulting services 213 157 36% 11% 7% +4 pp

Bank fees 12 10 20% 1% 0% +1 pp

Other 674 737 -9% 34% 33% +1 pp

Total 1,985 2,249 -12% 100% 100% –

ANNUAL REPORT 2016

23

EBITDA

The Company’s EBITDA in 2016 decreased by −9% in KZT terms and amounted to KZT17,719 mln versus KZT19,393 mln in 2015. In US$ terms,

this indicator decreased by −41% from US$87 mln in 2015 to US$52 mln in 2016.

EBITDA margin in 2016 amounted to 71%, which is 2 pp lower than the level of 2015.

Revenue COGS G&AOther oper.

income

Other oper.

expensesEBITDAD&A

EBITDA Build-Up, 2016

24 984 (10 267)

(1 985)49 (162)

5 099 17 719

EBITDA, 2010–2016

7,732 13,007 17,361 21,863 23,876 19,393 17,719

52.5

88.7

116.4

143.7 131.6

87.0

52.0

2010 2011 2012 2013 2014 2015 2016

EBITDA, KZT mln EBITDA, US$ mln

79% 76% 77%86%

75% 73% 71%

2010 2011 2012 2013 2014 2015 2016

EBITDA Margin, 2010–2016

KZT mln

ANNUAL REPORT 2016

24

0

100

200

300

400

Finance income in 2016 amounted to KZT618 mln versus KZT688 mln in 2015.

Total finance costs (including exchange rate differences) amounted to KZT8,213 mln (US$24 mln), down by -80% y/y due to the high base effect.

As of 31.12.2016, the share of foreign currency loans (in US$) in the total credit portfolio was equal to 86%.

Finance Income and Costs

Source: National Bank of Kazakhstan

US$/KZT Exchange Rate, 2014–2016

184.50

13 Feb.2014

255.26

21 Aug 2015.

383.91 (historical max.)

22 Jan 2016

In 2016, the loans were serviced in full amounts in compliance with the repayment schedule.

On 20.04.2017 the Company was able to obtain the irrevocable consent on the waiver of any violation of the conditions of financial covenants in the

period from 31.12.2016 to 01.01.2018 with respect to its Eurobonds. Based on this Consent, the maturity of the Eurobonds was extended until 2022,

as well as the coupon rate was raised to 8% per annum.

Credit Portfolio and Finance Costs, 2015–2016

101.2

298

6.228

81.5

245

8.9 26

CP in KZT bn CP in US$ mln Finance costs Finance costs

2015 2016


2016

Amount (KZT mln),

2015Growth Rate, %

Finance costs 8,896 6,189 +44%

Foreign exchange (gain) / loss (683) 35,320 −

Total 8,213 41,510 -80%

ANNUAL REPORT 2016

at year-end at year-end in KZT bn in US$ mln

25

Risk Management

5.

ANNUAL REPORT 2016

27

Register of Key Risks

ANNUAL REPORT 2016

O P E R A T I O N A L

R I S K S

F I N A N C I A L

R I S K S

M A R K E T R I S K S R I S K S O F F R A U D

R E P U T A T I O N A L

R I S K S

C O N C E N T R A T I O N

R I S K S

S O L E D E C I S I O N

M A K I N G R I S K S

• Rolling stock availability to meet

contractual obligations

• Fail to deliver or late delivery of

railcars to consumers

• Sending railcars to the wrong route

• Accidents, derailment

• Untimely repair

• Signing contracts with insolvent

clients

• Noncompliance with financial

terms set by creditors

• Interest rates increase risk

• Devaluation and imbalanced

credit portfolio risk

• Risk of financial and tax reports

late delivery

• Falling market prices in oil & gas

and mining sectors

• Decline of production volumes in

oil & gas and mining sectors

• Export restrictions

• Increase in Kazakhstan Temir

Zholy’s tariffs

• Rental rates decline

• Oil pipelines capacity expansion

• Signing contracts for the purchase

of goods and services at higher

than market prices

• Signing contracts for the delivery

of services at lower than market

prices

• Theft of goods and materials from

the office or warehouses

• Raiding

• Negative information influence

on reputation due to breach of

contractual obligations (financial,

operating)

• Unauthorized disclosure of

rental rates and tariffs

• Disclosure of commercial

secrets

• Law violation risks

• Dependence on a single financial

institution

• Dependence on a single supplier

in the delivery of spare parts

and/or repair works

• Customer concentration risk

• Key person risk

• Sole decision making when signing

contracts

• Sole decision making on strategy

28

Social Responsibility

6.

ANNUAL REPORT 2016

29

HR Policy and Social Responsibility

In 2016, ECT became the winner in the Capitals category of the HR Brand Central Asia Award. This is a great achievement for the Company, since

the HR Brand Central Asia Award is comparable to the Oscar Award in the HR field. It is a recognition of the Company's success in the business

community, among professionals and colleagues, clients and job candidates.

The Company actively supports a healthy lifestyle among employees, and in 2016 it participated in the Almaty Marathon for the third time.

As of the end of 2016, the Company’s personnel included 162 people. It should be noted that 46% of employees have been working for the Company

for more than 3 years and 23% of employees joined the Company more than 5 years ago. The average age of employees is 36 years. The share of

employees with higher education is 97%, and 3% of them are MBA degree holders.

As of the end of 2016, women accounted for 49% of the total personnel of the Company. Five women hold leading positions of the structural units

(departments/offices) of the Company.

In 2016, several business processes have been described and embedded in the Company in accordance with the received QMS certification, ST RK

ISO 9001. In particular, new versions of the “Rules of Internal Labor Regulations” and “Regulations on the Procedure for Granting Leaves” were

issued.

The Company is interested in competent and professional workers; therefore, it constantly strives to enhance the level of training of its personnel. In

2016, 15 key employees of the Commercial Department took a training course called “Large Sales: Buliding Relations with Customers.” As part of

further support of these initiatives, the Company developed an internal training program for employees named “Deep Red University.”

ECT is the General Sponsor of the Zhakiya Charity Fund PF. The Fund provides educational grants, as well as charitable and medical assistance to

children and youth from low-income families and orphanages in Kazakhstan.

In 2016, the Fund carried out the following initiatives: 1) Zhakiya Sarsenov’s Educational Grants Programme (five grantees, four scholarship holders);

2) Dental Care Programme called "Give A Smile"; 3) Educational Institutions Support Programme. Grant recipients from Almaty intern at ECT and

work as volunteers at the Zhakiya Charity Fund PF.

ANNUAL REPORT 2016

30

Corporate Governance

7.

ANNUAL REPORT 2016

31

Corporate Governance Overview

The Company takes corporate governance issues seriously and responsibly which implies not only adopting a formal approach but primarily

implementing the fundamental principles of corporate governance.

The company adheres to a simple and clear corporate governance structure shown below.

Corporate governance structure of the Company

1 level G E N E R A L M E E T I N G

O F P A R T I C I P A N T S

Supreme body consisting of Participants or their

representatives

2 level S U P E R V I S O R Y

B O A R D

Strategic management and

control body

3 level G E N E R A L

D I R E C T O R

Sole executive body

Decisions are being made by responsible bodies within their competence, which

is stated in founding documents.

ANNUAL REPORT 2016

• Accountability: the Code states that the Company should report to all shareholders. The Code secures guiding principles in respect of the

Supervisory Board’s competencies in regard to strategy development, ways of business development, top management team monitoring and control.

• Fairness: the Company ensures compliance of rights and equality of rights of all shareholders (including minority shareholders). All shareholders in

case of their rights’ violation have equal access to rights protection procedures with the participation of the Supervisory Board.

The Company developed and approved the Corporate Governance Code, which is based on the following principles:

• Transparency: the Company ensures timely, reliable and affordable disclosure of corporate information regarding all significant issues of the

Company’s business including information about shareholders composition, management structure and financial results.

• Responsibility: the Company accepts rights of the shareholders and other interested parties, which is aimed at ensuring compliance with social and

ecological standards. This in turn leads to continuous solid growth and financial stability of the Company.

32

Corporate Structure

G E N E R A L D I R E C T O R

First Deputy General Director

T E C H N I C A L

D E P A R T M E N T

C O M M E R C I A L

D E P A R T M E N T

S T R A T E G I C

D E V E L O P M E N T

D E P A R T M E N T

L E G A L D E P A R T M E N T

F I N A N C E

D E P A R T M E N T

I T D E P A R T M E N T

A D M I N I S T R A T I V E

D E P A R T M E N T

H R D E P A R T M E N T

As of 31.12.2016

Deputy General Director for

Commercial Affairs and

Operations

ANNUAL REPORT 2016

33

Supervisory Board

The Supervisory Board (“SB”) is the body that implements overall strategic management of the Company’, controls its financial and business

activities, including the control over the activities of the General Director. The number of SB members is determined by the General Meeting of

Participants and shall consist of no more than five people.

In 2016, the Supervisory Board consisted of four members:

Mr. Marat Sarsenov

Chairman of SB

Mr. Yuri Lavrinenko

Independent member of SB

Ms. Ekaterina Benjamin


Mr. Mikhail Kuznetsov


Mr. Marat Sarsenov was again elected a Chairman of SB of the Company on 23.05.2016. Mr. Sarsenov,

born on 06.06.1967, earlier, during the period from 01.01.2012 to 01.06.2015, already held the position of

the Chairman of SB of the Company. He is a participant of the Company who owns a participatory interest

in the ECT’s charter capital of 55,998%.

Mr. Yuri Lavrinenko was elected as an Independent Director of SB in 2013. Mr. Lavrinenko is a Candidate of

Economic Sciences. Starting 2010, acted as an advisor to the President of NC Kazakhstan Temir Zholy JSC.

In 2007–2008, Mr. Lavrinenko was a General Director of Kamkor Repair Corporation LLP; in 2006–2007:

Managing Director, Director of NC KTZh JSC’s Branch – Direction of Magistral Routes; in 2002–2006: First

Vice-Minister, Vice-Minister of Transport and Communications; in 1999–2002: Deputy of Mazhilis of the

Parliament of RK.

Ms. Ekaterina Benjamin was elected as an Independent Director of SB in December 2014. Ms. Benjamin

holds a solid experience in financial institutions, among them are Citibank Kazakhstan, Bank Petrocommerce,

KazInvestBank, HSBC Bank Kazakhstan, Altyn Bank. In 2005–2011, Ms. Benjamin acted as Independent

Director of Visor Capital, Kazakhmys Pension Fund and Altaipolymetall.

Mr. Mikhail Kuznetsov was elected as an Independent Director of SB in May 2015. Mr. Kuznetsov is a

Candidate of Economic Sciences, he is a Chartered Director (UK Institute of Directors) and Executive MBA by

the IE Business School (Madrid, Spain). Mr. Kuznetsov held managing positions in Aviacor, LUKOIL-Volga,

Promsvyaz, and IFC. At present, Mr Kuznetsov acts as an Independent Director of the Board of Directors of

Energosetproject OJSC, EHO JSC (Roscosmos), Credit Bank of Moscow OJSC. He is also a General Director

and Managing Partner of the Center for Corporate Development and Acting Director of the Association of

Corporate Directors.

ANNUAL REPORT 2016

34

Corporate Governance

The sole executive body of the Company is presented by the General Director. The position of the General Director of the Company was held by

Mr. E. Plakhotin from 01.06.2015 to 23.05.2016. Since 23.05.2016, this position was held by Mr. V. Malakhov, born on 28.08.1960, who is not a

participant of the Company and/or its subsidiaries and affiliates.

Executive body

On 04.03.2016, the Audit Committee comprising independent members of the Supervisory Board of the Company – Mr. M. Kuznetsov and Ms.

E. Benjamin – has been established by the resolution of SB.

Supervisory Board committees and their functions

The Company is in the process of implementing selected internal control and risk management practices. In particular, internal control rules

concerning the use and dissemination of insider information have been adopted.

The Company is implementing IT related incidents management system in order to assess efficiency and formalize processing of requests in IT

Department.

The Company adopted an internal Insurance policy in order to defend its property interests as it operates in a complicated and risky industry.

This policy is considered to be an efficient instrument of risk mitigation.

The Company’s risk management policy has been approved by the SB’s resolution dated 29.05.2015.

Internal control and audit

In 2016, dividends to the participants were neither declared nor paid. The remuneration of the key management personnel, including salaries

and short-term payments, amounted to KZT88 mln (in 2015: KZT106 mln).

Dividends and remuneration

The Company fully and timely discloses information affecting interests of current and potential investors. The Information Policy, defining

the process of information disclosure about the Company and its financial and operational results, was approved by the Supervisory Board

on 06.11.2015.

The Corporate Governance Code was adopted on 25.08.2015 by the resolution of SB; it was developed in accordance with the

recommendations from consultants and IFC as part of the activity plan on a modernization of the Company’s corporate governance.

Existing and potential investors policy, corporate governance principles

ANNUAL REPORT 2016

35

Financial Statements

8.

ANNUAL REPORT 2016

36

Independent Auditor’s Report

ANNUAL REPORT 2016

37

Independent Auditor’s Report (Continued)

ANNUAL REPORT 2016

38ANNUAL REPORT 2016


41

STATEMENT OF FINANCIAL POSITION

A s a t 3 1 D e c ember 2 0 16

ANNUAL REPORT 2016

42

STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME

F o r th e y e ar ended 31 D e cem ber 2 0 16

ANNUAL REPORT 2016

43

STATEMENT OF CHANGES IN EQUITY


ANNUAL REPORT 2016

44

STATEMENT OF CASH FLOWS


ANNUAL REPORT 2016

45

On 30 December 2015 the Company received Tenge 12,278,588 thousand under the finance lease agreement, and the entire amount was entered to

a cash on special account (Note 12). As the money on this account is restricted in use, it is not presented in this statement of cash flows.

The Company paid for repurchase of own bonds and repayment of loans and borrowings in the amount of Tenge 2,894,004 thousand and Tenge

7,690,847 thousand, respectively with the cash placed on the special account in 2015 (Note 4, 12). During the year the Company transferred Tenge

2,206,016 thousand to special account. As the money on this account is restricted in use, it is not presented in this statement of cash flows.

During the year 2016 the Company set-off current income tax for the amount of Tenge 412,159 thousand with other taxes.

Approved by the Company’s management on 3 May 2017 and were signed on its behalf by:

V.A. Malakhov

General Director

V.S. Kuzeyev

Financial Director

Zh.A. Koishibekova

Acting Chief Accountant

ANNUAL REPORT 2016

STATEMENT OF CASH FLOWS (CONTINUED)


46

Notes to the Financial Statements

1. REPORTING ENTITY

(a) Organization and operations

Eastcomtrans LLP (the “Company”) is a limited liability partnership established under

the laws of the Republic of Kazakhstan on 4 October 2002.

The principal activity of the Company is rendering of the services in the sphere of

cargo transportation of oil and gas, as well as mining and metallurgical products by

railway within the Republic of Kazakhstan and the Russian Federation.

The Company’s registered address is: office 11a, 77/7 Al-Farabi Avenue, Almaty,

050040, Republic of Kazakhstan.

The Company is owned by Mr. M.Zh. Sarsenov (55.998%), a citizen of the Republic

of Kazakhstan, and Steinhardt Holding N.V. (37.332%), a company established

under the laws of the Kingdom of the Netherlands, and the International Finance

Corporation (6.67%). Steinhardt Holding N.V. is ultimately controlled by Mr. M.Zh.

Sarsenov. The ultimate controlling party of the Company is Mr. M.Zh. Sarsenov.

On 16 December 2016, Fitch Ratings confirmed long-term ratings of Eastcomtrans

LLP at the level of CCC under the international scale and В-(kaz) under the national

scale. The credit rating outlook is “Negative”.

On 21 December 2016, Moody's Rating Agency confirmed corporate credit rating of

the Company at the level of Caa1 under the international scale and at B3.kz under

the national scale. The credit rating outlook is “Negative”.

(b) Kazakhstan business environment

In general, the economy of the Republic of Kazakhstan continues to display

characteristics of an emerging market. Its economy is particularly sensitive to prices

on oil and gas and other commodities, which constitute major part of the country’s

export. These characteristics include, but are not limited to, the existence of national

currency that is not freely convertible outside of the country and a low level of

liquidity of debt and equity securities in the markets.

Low prices on oil and other commodities, ongoing political tension in the region,

volatility of exchange rate have caused and may continue to cause negative impact

on the economy of the Republic of Kazakhstan, including decrease in liquidity and

creation of difficulties in attracting of international financing.

On 20 August 2015 the National Bank and the Government of the Republic of

Kazakhstan made a resolution discontinuing the exchange rate support and

implementing a new monetary policy, which is based on inflation targeting regime,

cancelling exchange rate trading band and is implementing a free floating exchange

rate. As the result, during the period of August-December 2015 the exchange rate

has varied from Tenge 187 to Tenge 350 per 1 US Dollar. As at the date of this

report the official exchange rate of the National Bank of the Republic of Kazakhstan

was Tenge 315.22 per US Dollar 1, compared to Tenge 333.29 per US Dollar 1 as at

31 December 2016 (31 December 2015: Tenge 340.01 per US Dollar 1). Therefore,

uncertainty exists in relation to exchange rate of and future action of National Bank

and the Government of the Republic of Kazakhstan and the impact of these factors

on the economy of the Republic of Kazakhstan.

In 2016 due to lowered oil price assumptions for the period of 2016-2019 and given

strong dependence of the Kazakhstan's economy on the oil and gas sector, the

international rating agencies started downgrading Kazakhstan’s sovereign credit

ratings, with outlook on the long-term ratings being negative. The negative outlook

reflects agencies’ view of risks to Kazakhstan's external and monetary profiles under

the current weak and volatile global commodity environment.

The financial markets continue to be volatile and are characterised by frequent

significant price movements and increased trading spreads. This operating

environment has a significant impact on the Company’s operations and financial

position. Management is taking necessary measures to ensure sustainability of the

Company’s operations. However, future effects of the current economic situation are

difficult to predict and management’s current expectations and estimates could differ

from actual results.

Additionally, the railway sector in the Republic of Kazakhstan is still impacted by

political, legislative, fiscal and regulatory developments. The prospects for future

economic stability in the Republic of Kazakhstan are largely dependent upon the

effectiveness of economic measures undertaken by the Government, together with

legal, controlling and political developments, which are beyond the Company’s

control.

ANNUAL REPORT 2016

47

1. REPORTING ENTITY (CONTINUED)

(c) Going concern assumption

Management prepared these financial statements on a going concern basis. Refer to

Note 4 for uncertainties relating to events and conditions that may cast a significant

doubt upon the Company’s ability to continue as a going concern.

2. BASIS OF PREPARATION

(a) Statement of compliance with IFRS

These financial statements have been prepared in accordance with International

Financial Reporting Standards (“IFRS”) for the year ended 31 December 2016 for

Eastcomtrans LLP.

(b) Basis of measurement

These financial statements have been prepared under the historical cost convention,

as modified by the initial recognition of financial instruments based on fair value,

machinery and equipment recorded at fair value, and financial instruments

categorised at fair value through profit or loss.

3. FUNCTIONAL AND PRESENTATION CURRENCY

The national currency of the Republic of Kazakhstan is the Kazakhstani Tenge

(“Tenge”), which is the Company’s functional currency and the currency in which

these financial statements are presented. All financial information presented in

Tenge, unless otherwise specified, has been rounded to the nearest thousand.

4. USE OF ESTIMATES AND JUDGMENTS

The preparation of financial statements in conformity with IFRS requires

management to make judgments, assumptions and estimates that affect the

application of accounting policies and the reported amounts of assets, liabilities,

income and expenses. Actual results may differ from those estimates.

Estimates and underlying assumptions are reviewed on an ongoing basis as to the

need to revise them. Revisions to accounting estimates are recognised in the period

in which the estimates are revised and in any future periods affected.

ANNUAL REPORT 2016

Notes to the Financial Statements (Continued)

Judgements that have the most significant effect on the amounts recognised in the

financial statements and estimates that can cause a significant adjustment to the

carrying amount of assets and liabilities within the next financial year include:

(a) DBK-Leasing

As stated in Note 18, in December 2015, the Company signed an agreement to sell

railroad wagons included to machinery and equipment to DBK-Leasing JSC (“DBK-

Leasing”) and further receive back these assets under the finance lease agreement

between the Company and DBK-Leasing. These railroad wagons were placed as a

collateral for the initial financing received from other banks and these wagons

effectively were used by the Company before and after the transaction with DBK-

Leasing.

The Company regarded this transaction not as a sale and lease-back transaction,

but as refinancing of its initial borrowings, since the transaction was conducted to

refinance initial borrowings of the Company. Accordingly, as a result of this

transaction, the Company did not derecognise the assets from property,

plant and equipment, since the Company believed that it never lost control over

these assets and

retained risks and rewards related to these assets. Cash received as a result of this

transaction was used to repay the Company’s loans and borrowings and Bonds in

the amounts of US Dollar 8.7 million and US Dollars 22.3 million that were paid to

ATF Bank JSC and Bond holders.

Received cash was placed on special accounts (Note 12) for the purpose of

repayment of the initial borrowings loans. Despite the fact that legally this transaction

was arranged as finance lease, the Company regarded this transaction as

refinancing of the initial borrowings with collateral in the form of wagons.

The finance lease contract with DBK-Leasing contains a condition of indexation of

Tenge lease payments in case US Dollar exchange rate strengthens against Tenge.

If the US Dollar weakens against Tenge the amount of lease payments will be equal

to the initial amounts set in the contract. This condition indicated the existence of an

embedded derivative which require separate accounting. In 2015 the Company

evaluated the fair value of this embedded derivative allocating changes to profit or

loss for the period.

48

4. USE OF ESTIMATES AND JUDGMENTS (CONTINUED)

As at the date of initial recognition, the Company recorded the financial lease liability

at the fair value of lease payments and subsequently at the amortised value. As at

31 December 2015 the amortized value of finance lease amounted to 8,124,848

thousand and fair value of the derivative was equal to Tenge 4,157,048 thousand.

As disclosed in Note 18, on 20 December 2016 the Company signed additional

agreement, where the interest rate under the finance lease agreement was changed

from fixed to floating and calculated based on the six-month LIBOR + 6,15%. In

addition the terms to maturity were prolonged for 2 years. The Company considered

this change as a significant modification of contract terms and as a result financial

liability and embedded derivate was derecognised as of that date. The LIBOR

element of interest rate was considered by the Company an embedded derivative

which require separate accounting as lease payments were indexed to a variable

interest rate of an economic environment that is different from the economic

environment in which the Company operates. Therefore, the related embedded

derivative was regarded as not closely related. The Company made a decision to

designate the entire newly recognised hybrid financial instrument at fair value

through profit or loss, due to the complexity of the valuation of separate derivative

instruments.

As at 31 December 2016, the fair value of the hybrid financial instrument was valued

at Tenge 11,184,661 thousand (Note 16).

Management uses the following major assumptions in valuation of this financial

instrument:

• Spot and strike Tenge to US Dollar exchange rate;

• Forecasts for exchange rates and 3-months LIBOR rates were used from

official source – Bloomberg;

• Historical relationship between 3-months and 6-months LIBOR rates;

• Discount rate assessed as market interest rate for the Tenge loans with similar

terms, which is equal to 13.6%.

If discount rate was higher/lower for 1% then the fair value of the financial instrument

would be Tenge 401,928 thousand lower / Tenge 425,241 thousand higher.

ANNUAL REPORT 2016


(b) Bonds

On 22 April 2013, the Company placed bonds at the London Stock Exchange with

nominal value of US Dollar 100,000 thousand, with 7.75% coupon per year paid

each half year, with the circulation period of 5 years and maturity in April 2018 (Note

17).

According to the bond issue prospectus, the Company can repurchase bonds in full,

at its discretion, at any time, notifying the bond holders, at the price which represents

their principal and compensation for lost profits due to bond calling. The

compensation for lost profits is calculated at the greater of: а) 1% of the nominal of

all bonds in circulation or b) future coupon payments until maturity from the date of

calling, discounted at the rate stipulated in the bond issue prospectus.

The Company believes that this condition indicates the presence of a separate

financial instrument, which is recorded at the fair value. Taking into account the

terms of the bond issue prospectus, and the current market situation, the Company’s

management believes that the fair value of the embedded financial instrument was

close to zero at the time of recognition as this instrument was considered as out-of-

the-money. As at 31 December 2016, the fair value of this embedded financial

instrument was evaluated by the Company at nil Tenge (31 December 2015: nil).

(c) Financial guarantees received

Gazprombank

During 2015 following significant reduction of value of wagons, the collateral

coverage ratio on loan from Gazprombank OJSC (“Gazprombank”) has reduced

from required 130% to 80%. Accordingly the bank has requested additional collateral

and guarantee. Upon negotiations with Gazprombank the parties agreed that the

Company will provide additional collateral with value of US Dollars 4 million and a

guarantee from the Company’s shareholder.

On 21 May 2015 the Company concluded an agreement with its shareholder

whereby the shareholder would provide a guarantee to Gazprombank, and the

Company agreed to pay a guarantee fee of 4% p.a. from the original nominal value

of the loan (including the amount covered by collateral) capped at the exchange rate

of Tenge to US Dollar of 185.8.

49


Al Hilal

In 2014 due to certain refinancing agreements the Company and Al Hilal signed

additional agreement which resulted in requirement of additional security of the loan.

Accordingly, the bank has requested additional collateral and a guarantee. Upon

negotiations the parties agreed that the Company provides collateral covering 125%

of the loan.

In addition to that on 12 December 2014 the Company concluded an agreement with

its shareholder whereby the shareholder would provide a guarantee to Al Hilal, and

the Company agreed to pay a guarantee fee of 4% p.a. from the original nominal

value of the loans (including the amount covered by collateral) capped at the

exchange rate of Tenge to US Dollar of 181.7.

Management has concluded that indexation clause in the guarantee agreements

constitutes a derivative which should be separately accounted for. As of 31

December 2015 management assessed that fair value of this derivative is close to

zero as after significant devaluation of Tenge in August 2015 it was highly unlikely

the exchange rate to fall in future from 338 spot rate at 31 December 2015 to below

185.8.

Significant reduction of the Company’s equity as result of devaluation and

weakening performance during 2015 and overall uncertainty in the market have

resulted in significant increase of risks for the shareholder in respect of his

guarantee. Accordingly, 1 January 2016 the Company and the shareholder

concluded an amendments to the guarantee agreement with Gazprombank,

according to which the exchange rate cap clause was changed to indexation of

payments in case of changes in exchange rate between Tenge and US Dollar.

As a result of these changes the guarantee agreement became, effectively, US

Dollar denominated instrument. No additional agreement was signed with

shareholder regarding Al Hilal loan, as financial guarantee payments to shareholder

were fully paid by the Company in 2014-2015.

Management has also considered whether 4% guarantee fee under new conditions

is still at market level and concluded that taking into account increased risk profile of

the Company and what the Company could have obtained from the market, the 4%

fee does not exceed market rates for such guarantees. Accordingly, management

has concluded that it is appropriate to recognise expenses on these guarantees in

profit and loss versus equity even though it was transaction with the shareholder.

Management also believes that such judgment is also supported by the fact that this

will ensure appropriate presentation of the Company’s cost of borrowing.

The fees for guarantees paid are recognised on an accrual basis for the respective

reporting periods within the finance expenses as a commission paid for the

guarantees. Refer to Note 25.

The table below represents the reconciliation of the respective balances and

charges:

ANNUAL REPORT 2016


As disclosed in Note 5 the Company reconsidered classification of advances paid to

the shareholder, and changed comparative information as of 31 December 2015

from current to non-current assets.

(d) Going concern

The Company prepared these financial statements on a going concern basis, which

contemplates the realisation of assets and discharge of liabilities in the normal

course of business. As of 31 December 2016 the Company has significant amount

of borrowings and certain covenants on those borrowings were in breach as of that

date. Therefore as of 31 December 2016 such borrowings were classified as current

liabilities, as a result the Company’s current liabilities exceeded its current assets by

Tenge 51,912,290 thousand at the reporting date.

The following factors have been taken into consideration in assessment of the

Company’s ability to continue on a going concern basis:

• The Company completed the year 2016 with a net profit of Tenge 3,959,392

thousand. The fall in prices on the global commodity markets starting from

2014 as well as devaluation of to US Dollar had a negative effect on the

economy of Kazakhstan. Despite the impact of the above factors, the

Company’s operations remained profitable and able to generate positive cash

flows from operating activities.

50


• The Company’s operations are highly affected by the loans and borrowings,

bonds and finance lease liabilities, which amounted to Tenge 81,516,975

thousand as at 31 December 2016 (2015: Tenge 101,185,523 thousand) as

compared to the Company’s equity of Tenge 22,511,453 thousand as at 31

December 2016 (2015: Tenge 18,552,061 thousand). In 2016, the borrowings

were serviced in full amounts in accordance with the schedule of payments.

• On 20 April 2017 the Company was able to obtain Consent Solicitation

regarding its Notes (the “Notes” and “Bonds”) (Note 17). Based on this Consent

Solicitation the payment terms of the Notes were prolonged to year 2022 and

breached covenants were waived.

• During the year 2017 the Company was able to obtain waivers from those

banks where debt covenants were breached and no waivers were obtained as

of 31 December 2016.

• The Company believes that based on the waivers and agreements obtained

from the banks and negotiations performed it will proceed to repay its loans in

accordance with initial contract terms and no immediate repayment will be

requested by the creditors.

• Based on the initial payment terms included in the loan contract agreements

the Company’s current liabilities would exceed its current assets by Tenge

214,657 thousand as of 31 December 2016, which is insignificant. In addition

projected cash flows from operating activities for 2017 of Tenge 17 billion,

which indicates that the Company is able to cover its current debts with existing

current assets and operating cash inflows.

• The Company’s management undertakes measures aimed at optimization of

the credit portfolio.

• The Company’s management believes that it has a sound portfolio of clients,

including export-oriented companies of the Republic of Kazakhstan; and has

long-terms contracts signed with local and international companies; a

significant and diversified fleet of wagons, which allows transporting various

types of cargoes by railroad; and highly qualified staff having experience in

railroad transportation. Therefore, in management’s opinion, currently there is

no material uncertainty concerning the Company’s ability to continue as a going

concern.

The management concluded that the Company’s preparation of these financial

statements on a going concern basis is appropriate, and, respectively, the Company

will be able to realise the assets and repay its liabilities during its usual activity.

These financial statements do not include any adjustments of book value of assets

and obligations, income and expenses, and also classifications of statement of

financial position which would be necessary in case of impossibility to continue

operating activities; such adjustments can be significant.

ANNUAL REPORT 2016


5. RESTATEMENT OF COMPARATIVE DATA

(a) Financial guarantees

Comparatives have been restated as a result of the Company’s revision of the

classification of the advance payment to Mr. M.Zh. Sarsenov, ultimate shareholder,

with respect to financial guarantees provided by Mr. M.Zh. Sarsenov (Note 4). As

described in Note 4, according to the financial guarantee agreement the Company is

obliged to make monthly payments to Mr. M.Zh. Sarsenov for the guarantee services

provided under the loan agreements. In 2014 and 2015 the Company made

prepayments for that services.

Based on the financial guarantees payment schedule under guarantees provided

with respect to Gazprombank loan, as of 31 December 2015, prepayments in the

amount of Tenge 717,322 thousand, include prepayments of Tenge 377,277

thousand for the period from 1 January 2017 to 31 January 2018. Based on the

financial guarantees payment schedule under guarantees provided with respect to Al

Hilal loan, as of 31 December 2015, prepayments in the amount of Tenge 808,656

thousand, include prepayments of Tenge 579,223 thousand for the period from 1

January 2017 to 1 July 2019.

Therefore, the Company reclassified non-current part of the prepayments to non-

current receivables (Note 7). As a result of the changed classification of the financial

guarantees obtained by the Company, comparative data of the financial statements

was restated by the Company. There is no effect of this reclassification on 1 January

2015 and on profit or loss, statement of changes in equity and statement of cash

flows for 2015, therefore the Company did not present balances as of 1 January

2015 and profit and loss, statement of changes in equity and statement of cash flows

effects for 2015. The effects of the restatement on the statement of financial position

as of 31 December 2015 is described in the table below.

51

5. RESTATEMENT OF COMPARATIVE DATA (CONTINUED)

Adjustment

Revenue from principal activity

There is a time difference between revenue indicated in management reporting and

revenue indicated in the IFRS financial statement

(c) Geographic information

Revenue on each specific country is as follows:

ANNUAL REPORT 2016


6. OPERATING SEGMENTS

Operating segments are components involved in business activities that may earn

revenues or incur expenses, whose operating results are regularly reviewed by the

chief operating decision maker (CODM) and for which discrete financial information

is available. The CODM is the person or group of persons who allocates resources

and assesses the performance for the entity. The CODM has been identified as the

General Director of the Company.

The CODM considers the Company as one segment, which includes rent of wagon

and provision of services of operating maintenance and freight forwarding. CODM

uses operating income as a measure of profit for its decision making process.

(a) Measurement of operating segment profit or loss, assets and liabilities

The CODM reviews financial information prepared based on IFRS adjusted to meet

the requirements of internal reporting. Such financial information differs in certain

aspects from IFRS in terms of a difference in the time of revenue recognition.

(b) Information about reportable segment profit or loss, assets and liabilities

Segment information for the reportable segments for the year ended 31 December

2016 measured by the Company’s management as part of the review of the

operating reporting is set out below:



6. OPERATING SEGMENTS (CONTINUED)

In 2016, approximately 46% and 14% of the total revenue were derived from the

services rendered to Tengizchevroil LLP and Zhaikmunai LLP, respectively (2015:

52% and 11%, respectively).

7. NON-CURRENT RECEIVABLES

Long-term debt from “the Center of Wagon Service – Eskene” LLP is denominated

in Tenge and neither past due, nor impaired (Note 30). As this debt was recorded at

fair value in 2016 its fair value approximates its carrying value, due to short time

from origination to 31 December 2016.

Non-current guarantees from related party represent advance paid under financial

guarantee agreements with Mr. M. Zh. Sarsenov (Note 4). Comparative information

as of 31 December 2015 was restated due to the reclassification of the non-current

part from other current assets (Note 5).

8. PROPERTY, PLANT AND EQUIPMENT

Depreciation expense of Tenge 5,068,014 thousand (2015: Tenge 5,935,859

thousand) has been charged to cost of sales and Tenge 26,730 thousand to

administrative expenses (2015: Tenge 48,761 thousand).

(a) Revaluation of machinery and equipment

Machinery and equipment are mainly represented by the railway wagons and

gondola wagons. Machinery and equipment have been revalued to their fair value as

at 31 December 2015. The revaluation has been performed based on the report of

an independent appraiser, American Appraiser LLP, which has a required

qualification and sufficient experience in evaluation of such assets. The fair value of

the Company’s wagons was determined based on the analysis of the CIS secondary

market, which was classified as an active secondary market by the appraiser (Level

2 of fair value hierarchy).

53

8. PROPERTY, PLANT AND EQUIPMENT (CONTINUED)

Net effect from revaluation as at 31 December 2015 decreased the net carrying

amount of property, plant and equipment by Tenge 4,469,508 thousand with a

decrease for Tenge 6,065,371 thousand recognised in profit or loss as an

impairment loss and an increase within the group of machinery and equipment for

Tenge 1,595,864 thousand, which increased the revaluation reserve, through other

comprehensive income.

As at 31 December 2016, the revaluation was not conducted, since based on the

results of the review of current prices for railway wagons in the secondary market,

the Company’s management believes that the carrying value of the wagons does

not differ significantly from their fair value as at 31 December 2016.

(b) Security

As at 31 December 2016, machinery and equipment with a net carrying amount of

Tenge 70,055,092 thousand (2015: Tenge 64,620,539 thousand) were pledged to

secure loans and borrowings (Note 16); machinery and equipment with a net

carrying amount of Tenge 11,633,965 thousand (2015: Tenge 15,664,912

thousand) were pledged to secure the Company’s bonds (Note 17). Moreover, as at

31 December 2016, machinery and equipment with a net carrying amount of Tenge

5,323,710 thousand (2015: Tenge 5,665,161 thousand) were pledged to secure the

loans and borrowings received by the “Center of Wagon Service – Eskene” LLP, an

enterprise under common control of the ultimate controlling party of the Company

(Note 30).

(c) Leased property, plant and equipment

Machinery and equipment are mainly represented by the railway wagons and

gondola wagons. Machinery and equipment include wagons acquired under finance

lease contracts signed with banks, with a net carrying amount of Tenge 3,337,513

thousand (2015: Tenge 8,693,780 thousand) (Note 4). The wagons are pledged as

security of the respective finance lease contracts (Note 18).

ANNUAL REPORT 2016


9. TRADE AND OTHER RECEIVABLES

As at 31 December 2016, the trade receivables of the Company’s major customer -

Tengizchevroil LLP – accounted for 27% of the total amount of trade receivables

(2015: 24%).

The carrying value of the trade and other receivables approximates its fair value due

to the short-term maturity.

The movement in the provision for doubtful debt during the years ended 31

December was as follows:

The Company enters into transactions only with companies with a positive credit

history and high credit rating, if available. The Company’s policy is that all customers

wishing to buy on credit should undergo a creditworthiness check procedure.

The credit quality analysis of the trade and other receivables based on the rating of

Standard and Poor’s and Moody’s at 31 December is as follows:



9. TRADE AND OTHER RECEIVABLES (CONTINUED)

At 31 December 2016, the impairment provision of Tenge 180,021 thousand (31

December 2015: Tenge 256,260 thousand) was created for individually impaired

accounts receivable represented by several customers who are in a difficult

financial position, for which there is a risk that the receivables will not be recovered.

As at 31 December the Company’s trade receivables were denominated in the

following currencies:

The Company’s exposure to credit risk related to trade receivables is disclosed in

Note 28.

Financial other current assets are neither past due nor impaired and denominated

in Tenge. The carrying value of other financial current assets approximates its fair

value due to the short-term maturity.

As at 31 December the advances paid were as follows:

Advances paid represent advances to Provera AG for railway services in the amount

of Tenge 2,751,430 thousand (2015: nil) and to KTZh JSC for the services of the

technological center for processing of shipping documents in the amount of Tenge

352,978 thousand (2015: Tenge 523,978 thousand) and other third parties in the

amount of Tenge 258,249 thousand (2015: Tenge 515,864 thousand). Advances for

prepaid railway services include advances for railway tariff, which will be billed to the

customers and will be shown on a net basis in the Company’s financial statements,

as the Company is acting as an agent with respect to those services.

On 11 May 2016, the Company placed a deposit in US Dollars with SB Sberbank

JSC (Fitch’s long-term IDR in foreign and national currency – “ВВ+”, outlook -

“Stable”) maturing on 13 May 2017 and bearing an interest rate of 3.1% per annum.

At 31 December 2016, this short-term bank deposit amounted to Tenge 3,644,466

thousand (31 December 2015: Tenge 9,777,930 thousand).

The Company's exposure to credit risk, interest rate risks, a sensitivity analysis for

financial assets and liabilities are disclosed in Note 28.

The carrying value of the short-term deposits approximates its fair value due to the

short-term maturity.

12. CASH ON SPECIAL ACCOUNTS

On 30 December 2015, the Company signed the agreement on the special account

with Bank CenterCredit JSC (“BCC”) whereby the Company opens a special account

with BCC to place cash received from DBK-Leasing under a sales contract (Notes 4

and 18). The cash placed on this account can be used by the Company only to

repay loans from existing creditors and to release oil tank cars from pledge on these

loans for subsequent sale to DBK-Leasing under the sales contract.

10. ADVANCES PAID AND OTHER CURRENT ASSETS

11. SHORT-TERM BANK DEPOSITS



12. CASH ON SPECIAL ACCOUNTS (CONTINUED)

At 31 December 2016, the cash placed on special accounts in BCC in US Dollars

amounted to Tenge 3,737,207 thousand (31 December 2015: Tenge 12,360,382

thousand). BCC (Fitch’s long term IDR – “В”, outlook -“Stable”) has a right to set

restrictions on the use of cash placed on special accounts and provides consent to

the Company to conduct operations with this cash under a trilateral agreement

between DBK-Leasing, BCC and the Company (Note 4).

During 2016 the Company used cash from the special account in BCC in the

amount of Tenge 10,622,915 thousand under the financial lease contract with DBK-

Leasing for its intended purpose, i.e. for repayment of existing loans (Note 4). The

balance of unused cash at 31 December 2016 amounted to Tenge 1,737,467

thousand.

At EBRD’s request, on 28 June 2016 the Company placed US Dollar 6,000

thousand on a special escrow account with BCC, at 31 December 2016 it amounts

to Tenge 1,999,740 thousand.

At 31 December 2016, the total cash placed with Altyn Bank JSC (SB Halyk Bank of

Kazakhstan JSC) on special accounts, in US Dollar, amounted to Tenge 404,304

thousand (in 2015, on special accounts with Altyn Bank JSC: Tenge 159,965

thousand) Altyn Bank JSC (Fitch’s long term IDR – “ВВ”, outlook -“Stable”) has a

right to set restrictions with respect to the cash, in case of the Company’s failure to

comply with the schedule of repayment of the principal or interest on the loan to the

International Finance Corporation and on finance lease agreement with DBK-

Leasing (Finance lease contract dated 22 December 2010 and Finance lease

contract dated 30 December 2015).

The Company’s exposure to credit risk and a sensitivity analysis for financial assets

and liabilities are disclosed in Note 28.

At 31 December cash and cash equivalents were denominated in the following

currencies:

The credit quality analysis of cash and cash equivalents based on the rating of

Standard and Poor’s and Moody’s at 31 December is as follows:

14. CHARTER CAPITAL AND RESERVES

(a) Charter capital

On 28 December 2012, the Company entered into an agreement with International

Finance Corporation (“IFC”), whereby IFC contributes Tenge 3,005,400 thousand to

the charter capital and receives 6.67% of interest in the charter capital of the

Company. On 11 July 2013, IFC made a contribution to the charter capital in full.

(b) Dividends

The owners are entitled to receive dividends as declared from time to time and are

entitled to vote at meetings of the Company prorated to their ownership interests in

the charter capital.

13. CASH AND CASH EQUIVALENTS



14. CHARTER CAPITAL AND RESERVES (CONTINUED)

According to the legislation of the Republic of Kazakhstan, reserves accessible to

distributions are limited by retained earnings reported in the financial statements of

the Company, prepared in accordance with IFRS. As at 31 December 2016 the

Company had retained earnings, including income for the current year, of Tenge

6,523,142 thousand (2015: income in the amount of Tenge 1,654,738 thousand).

In 2016, dividends to founders were neither declared nor paid (2015: Tenge

687,158 thousand).

(c) Surplus from revaluation of property, plant and equipment

The revaluation reserve was formed as a results of property, plant and equipment

revaluation less deferred tax.

15. CAPITAL MANAGEMENT

The Company has no formal policy for capital management but management seeks

to maintain a sufficient capital base for meeting the Company’s operational needs,

and to maintain confidence of market participants and investors, creditors and to

ensure future business development. This is achieved with efficient cash

management, constant monitoring of Company’s revenues and profit, and long-term

investment plans which are financed by the Company’s operating cash flows. With

these measures the Company aims for steady profits growth.

The management of the Company monitors the return on (investment) capital,

which the Company defines as net operating income divided by total shareholders’

equity.

The management seeks to maintain a balance between the higher returns that

might be possible with higher levels of borrowings and the advantages and security

provided by a stable capital position. During the reporting year, there were no

changes in the Company’s approach to capital management.

The Company is not subject to external regulatory capital requirements, except for

requirements from the loans agreements described below.

The Company has a number of capital requirements under loan agreements, such

as to maintain a certain ratio of net debt to earnings before interest, taxes,

depreciation and amortization (EBITDA), and to maintain a certain ratio of liabilities

to capital. At 31 December 2016, the Company did not meet these requirements

under loan agreements (Notes 4 and 16).

The amount of capital that the Company managed as of 31 December 2016 was

Tenge 22,511,453 thousand (2015: Tenge 18,552,061 thousand), representing the

total equity as recorded in the statement of financial position.

16. LOANS AND BORROWINGS

This note provides information about the terms of the Company’s loan agreements.

For more information about the Company’s exposure to interest rate risk and foreign

currency risk see Note 28.

*All-in-cost, under the loan agreement with EBRD, means the cost of borrowings

(expressed in the form of the rate of annual interest) in favour of EBRD on funding or

servicing of the loan from any sources, which EBRD reasonably choose.



16. LOANS AND BORROWINGS (CONTINUED)

(a) Brief overview of loans

Gazprombank

On 7 April 2016, the Company converted US Dollars 7,500 thousand of a part of the

loan from Gazprombank (to be repaid in February 2021) from US Dollars to Russian

Rouble at a market rate. As a result of this conversion, the Company derecognised

the previous loan and recognised the new loan at the fair value at the conversion

date.

ATF Bank

On 19 May 2016, the Company made an early repayment of the loan from ATF

Bank JSC using funds received under finance lease contract dated 30 December

2015 signed between the Company and DBK-Leasing.

Financial guarantees of the shareholder

In 2014 and 2015, Mr. M.Zh. Sarsenov provided guarantees on liabilities of the

Company on loans and borrowings from Al Hilal JSC and Gazprombank in the

amount of Tenge 4,820,194 thousand (in 2015: Tenge 6,781,701 thousand) and

Tenge 14,302,688 thousand (2015: Tenge 16,527,751 thousand), respectively

(Notes 4 and 30).

DBK-Leasing

Finance lease liability agreement № 77

As disclosed in Note 18 on 20 December 2016, the parties signed an additional

agreement to the finance lease agreement. The Company considered this as a

significant modification, and as a result derecognised initial loan from DBK-Leasing

and recognised a new instrument at fair value. After the new agreement was

signed, the Company included this financial instrument to loans and borrowings as it

was treated as refinancing of the original loans (Note 4) rather than finance lease.

As of that date the fair value to the new instrument was assessed to be equal to

amortised value of the initial liability, therefore there was no effect on the profit of

loss at the date of de-recognition. Liquidity table for undiscounted payments with

respect to these leases is included to Note 28.

Finance lease liability agreement № 1

On 16 February 2016, the Company signed a finance lease agreement with DBK-

Leasing of Tenge 1,143,811 thousand at annual interest rate of 11.34%. The fair

value of these assets at the date of sale was Tenge 1,143,811 thousand. This

operation was recorded by the Company as refinancing of existing loans with

security. Accordingly, the Company considered that this operation did not fall within

IAS 17. Therefore, the Company included this liability to loans and borrowings and

did not provide a disclosure of minimum lease payments. This financial liability was

initially recorded at fair value and subsequently accounted at amortised cost.

Liquidity table for undiscounted payments with respect to these leases is included to

Note 28. The funds were fully used in February 2016 and directed to repayment of

the full early repayment of Tenge 611,542 thousand under finance lease agreements

concluded in 2010 between the Company and Raiffeisen Leasing Kazakhstan LLP,

and part of funds were used for purchasing of own Eurobonds in the market, which

were annulled according to the issue prospectus.

(b) Covenants

At 31 December 2016, the Company was not in compliance with the required level of

financial covenants set by loan agreements with banks. During the year 2017 all

banks, where covenants were breached provided waivers of claims on condition of

agreement of waivers with other lending banks. As most of waivers were obtained

after 31 December 2016 the Company reclassified the non-current portion of

liabilities to current liabilities for those loans where waivers were not obtained as of

31 December 2016.

The reclassification of loans and borrowings was performed by the Company at

amortised value, as based on the Company’s expectations and negotiations with the

banks, the Company will continue repayment of its loans and borrowings based on

the initial contract terms. The Company believes that no immediate repayment will

be requested by the banks (Note 4).

(c) Fair value of loans and borrowings

Fair values analysed by level 3 in the fair value hierarchy and the carrying value of

assets and liabilities not measured at fair value are as follows:



16. LOANS AND BORROWINGS (CONTINUED) On 20 April 2017, the Company received from the Note holders the irrevocable

consent on the waiver of any violation of the condition on financial covenants in the

period from 31 December 2016 to 1 January 2018 by making amendments to the

effective Note prospectus. Based on this consent the maturity of these Notes was

prolonged till 2022 and interest rate was increased to 8% per annum.

Fair value of these bonds is approximately equal to Tenge 19,497,465 thousand,

which was assessed using level 2 of fair value hierarchy.

Bonds in Tenge

On 9 December 2016, the Company placed coupon bonds for the total of Tenge

1,200,000 thousand by trading at Kazakhstan Stock Exchange JSC with a circulation

period of 6 months and maturity in June 2017 (the financial consultant and

underwriter of the bond issue was Kazcommerts Securities JSC (subsidiary of

Kazkommertsbank JSC). The coupon rate on these bonds is 14% per annum, with

payment of coupon interest at the end of the circulation period simultaneously with

repayment of bonds. The bonds were placed at nominal value in full. Fair value of

these bonds approximates it’s carrying value due to short-term maturity.

(a) Embedded financial instrument - option of early repayment of the

remaining debt

In accordance with terms of the Prospectus for bond issue the Company may at any

time, at its own discretion, having sent the notification to the bondholders, redeem

the bonds in full scope at the price, which represents the principal amount and

compensation of loss of profit due to bond calling. Compensation for the loss of profit

is estimated as the greater of (a) 1% of the nominal value of all outstanding bonds,

or (b) future coupon payments till maturity from the calling date discounted at the

rate stipulated in the Prospectus for bond issue.

Given the terms and conditions of the Prospectus for the bond issue and the current

market situation, the Company’s management believes that the fair value of the

embedded financial instrument is close to zero at 31 December 2016 (31 December

2015: nil) (Note 4). The Company’s exposure to liquidity risk related to the bonds is

disclosed in Note 28.

17. BONDS

Eurobonds

On 22 April 2013, the Company placed bonds at the London Stock Exchange for

the total amount of Tenge 14,782,727 thousand with nominal value of US Dollar

100,000 thousand, with the coupon of 7.75% per annum payable once every six

months and maturity of 5 year, which expire in April 2018.

During 2015 and 2016, the Company repurchased Eurobonds, under the terms of

the prospectus, for the total of US Dollar 41,500 thousand (in nominal terms). The

repurchase was made at market prices, with the discount and recognition of income

of Tenge 334,508 thousand (Note 25). Under the terms of the prospectus,

Eurobonds repurchased by the Company should be annulled. Thus, at 31

December 2016, the value of Eurobonds in circulation amounted to Tenge

19,617,086 thousand (in 2015: Tenge 24,808,137 thousand).

The bonds are rated at “B3, Positive” by Moody’s and “B, Negative” by Fitch. The

bond liabilities are secured by the pledge of rolling stock with the net book value at

31 December 2016 of Tenge 11,633,965 thousand (in 2015: Tenge 15,664,912

thousand), and of cash on the account with Altyn Bank JSC, in case of the lack of

pledge in the form of the rolling stock (Note 13).



DBK-Leasing № 77

On 30 December 2015, the Company signed an agreement with DBK-Leasing (Note

4). The fair value of these assets at the date of sale was Tenge 12,278,587

thousand. This operation was recorded by the Company as refinancing of existing

loans with security.

On 20 December 2016, the parties signed an additional agreement to the finance

lease agreement, whereby the term of the finance lease was increased to 11 years,

the rate was changed from 9.7% per annum to 6-month LIBOR + 6.15% per annum.

The Company considered this as a significant modification, and as a result

derecognised initial loan from DBK-Leasing and recognised a new instrument at fair

value. As derecognised carrying value approximated to the fair value of the new

instrument no effect on profit or loss was recorded by the Company. The Company

classified the new financial instrument as loans and borrowings (Note 16).

18. FINANCE LEASE LIABILITIES

The Company entered into agreements to purchase property, plant and equipment,

primarily railway wagons and open wagons on deferred payment terms. Under

these agreements the ownership over the leased assets is transferred to the

Company.

At 31 December, the finance lease liabilities comprised the following:

The future minimum lease payments and their discounted value are as follows:

Raiffeisen Leasing Kazakhstan LLP

At 31 December 2015, Mr. M.Zh. Sarsenov provided guarantees on the Company’s

finance lease obligations of Tenge 529,643 thousand. The guarantee accruals on

this guarantee agreement in 2015 amounted to Tenge 24,561 thousand (2016: nil).

At 31 December 2016, the agreements on the guarantee from Mr. M.Zh. Sarsenov

on the Company’s finance lease obligations were terminated due to early execution

of obligations under finance lease agreements by Raiffeisen Leasing Kazakhstan

LLP.

19. TRADE PAYABLES

At 31 December the Company’s trade payables were denominated in the following

currencies:

The Company’s exposure to liquidity risk related to trade payables is disclosed in

Note 28. Fair value of trade payables approximates its carrying value due to short-

term maturity.



22. COST OF SALES20. OTHER CURRENT LIABILITIES

Fair value of the financial other current liabilities approximates its carrying value due

to short-term maturity.

The liability for repurchased and annulled bonds of the Company represents a

liability to Steinhardt Holding N.V. under an agreement on sale of securities dated

15 December 2015, whereby on 23 December 2015 Steinhardt Holding N.V.

received Eurobonds of the Company at the nominal value of US Dollar 14,600

thousand. Under the terms of the agreement, the payment for repurchased

Eurobonds was made on 6 January 2016 and on 18 February 2016 of US Dollar

11,754 thousand and US Dollar 2,381, respectively. The repurchased Eurobonds of

the Company were annulled on 24 December 2015 according to the prospectus.

At 31 December other taxes payable included the following:

21. REVENUE

The long-term operating lease contracts on rolling stock expire in 2019 but all of

them are not non-cancellable.

23. ADMINISTRATIVE EXPENSES

24. PERSONNEL COSTS

Personnel costs for the year are recorded in cost of sales of Tenge 473,992

thousand (2015: Tenge 397,415 thousand), in administrative expenses of Tenge

499,181 thousand (2015: Tenge 475,669 thousand).



25. FINANCE INCOME/(EXPENSE)

26. FOREIGN EXCHANGE GAINS/(LOSSES), NET

Discounting of long-term loans issued to employees and related parties includes

finance cost from an operation with the “Center of Wagon Service – Eskene” LLP of

Tenge 139,339 thousand (Note 30) under a pledge agreement.

Differences between IFRS and statutory taxation regulations in the Republic of

Kazakhstan give rise to temporary differences between the carrying amount of

assets and liabilities for financial reporting purposes and their tax bases. The tax

effect of the movements in these temporary differences, which is calculated at tax

rates applicable to the period of realisation of an asset or repayment of a liability, is

detailed below. According to the current tax legislation in the Republic of

Kazakhstan, the income tax is 20%.

As at 31 December the components of the deferred tax assets and liabilities include

the following:

27. INCOME TAX EXPENSE

For the years ended 31 December the reconciliation of income tax expense related

to profit before income tax estimated using the official tax rate of 20% (2015: 20%)

with the current income tax expense was as follows:

Management believes that deferred tax assets of Tenge 818,653 thousand and

deferred tax liabilities of Tenge 329,969 thousand will be recovered during the

following 12 months after the end of the reporting period.



27. INCOME TAX EXPENSE (CONTINUED)

Recognition of a deferred tax asset

Recognised deferred tax assets represent the income tax which can be offset

against future income taxes and are recorded in the statement of financial position.

The deferred tax assets is recognized only if the use of a respective tax deduction is

highly probable. It assumes presence of temporary differences whose recovery is

expected in the future, and the presence of sufficient future taxable profit to make

deductions.

During 2015, as a result of significant weakening of the Tenge to US Dollar

exchange rate the Company recognised a tax loss of Tenge 35,320,445 thousand

(Note 28), which can be used against the future taxable profit during ten years

according to the tax legislation in the Republic of Kazakhstan.

The Company’s management expects that it is highly probable that the tax loss

carry forwards will be realised in the subsequent periods based on the Company’s

estimates regarding the amount of future taxable profit. In determining the

estimated amount of the future taxable profit, against which deductible differences

can be realised, management took into account the presence of temporary

differences, which would be realised in the same period as deductible differences

and took into account tax planning. As per management’s estimates, tax losses

recognised in 2015 will be utilised with taxable income until 2019.

Based on the results of 2016, the taxable income of the Company amounted to

Tenge 4,002,613 thousand, which partly covered present tax losses of the year

2015 of Tenge 21,146,923 thousand. Accordingly, the tax loss carry forward

amounted to Tenge 17,144,310 thousand, at 31 December 2016.

(i) Risk management framework

Management of the Company has overall responsibility for the establishment and

oversight of the Company’s risk management framework. Management is

responsible for developing and monitoring the Company’s risk management policies.

The Company’s risk management policy has been designed, based on the specifics

of its operations. The Company is building a risk management system by integrating

the principles of risk management with the business processes of its structural units,

thus creating a risk management culture, in which the Company’s structural units

and personnel are involved at the Company’s level.

(ii) Credit risk

Credit risk is the risk of financial loss to the Company if a customer or counterparty

to a financial instrument fails to meet its contractual obligations. The Company deals

only with companies with positive credit history and high credit rating, if available. It

is the Company's policy that all customers who wish to trade on credit terms are

subject to the credit verification procedure, as disclosed in Note 9. In addition,

receivable balances are monitored on an ongoing basis, as a result the Company's

exposure to the risk of impairment of receivables is insignificant.

The carrying amount of financial assets represents the maximum amount exposed to

credit risk of the Company. The maximum exposure to credit risk at the reporting

date was as follows:

28. FAIR VALUE AND FINANCIAL RISK MANAGEMENT

(a) Financial risk management

The Company has exposure to the following risks from its use of financial

instruments:

• credit risk;

• liquidity risk;

• market risk.

(iii) Liquidity risk

Liquidity risk is the risk that the Company will encounter difficulty in raising funds to

meet commitments associated with financial instruments. Liquidity requirements are

monitored on a regular basis and management ensures that sufficient funds are

available to meet any commitments as they arise. The Company aims to maintain

the minimum level of cash and cash equivalents and other highly marketable

instruments at an amount in excess of expected cash outflows on financial liabilities

over the next 30 days.




(CONTINUED)

As at 31 December 2016 the current liabilities of the Company exceeded its current

assets by Tenge 51,912,290 thousand (2015: current assets of the Company

exceeded its current liabilities by Tenge 5,033,742 thousand) (Note 4).

The Company’s management is undertaking the following measures to control the

liquidity risk:

• Entering into long-term agreements with customers to ensure sufficient cash

flows from operating activities.

• Entering into agreements with financial institutions.

The tables below shows general information on undiscounted contractual payments

on financial liabilities of the Company as at 31 December by the maturity period of

these liabilities:

(iv) Market risk

Market risk is the risk that changes in market prices, such as foreign exchange rates

and interest rates, will have a negative effect on the Company’s income or the value

of its holdings of financial instruments. The objective of market risk management is

to control market risk exposure and hold it within acceptable parameters, while

optimising the investment yield.

The market risk management operations are carried out within the guidelines set by

the Supervisory Board. As a rule, the Company does not apply special rules of

hedge accounting in order to manage volatility in profit or loss for the period.

Currency risk

The Company is exposed to currency risk on sales, purchases and borrowings that

are denominated in a currency other than Tenge. These transactions are primarily

denominated is US Dollars. Generally, borrowings are denominated in currencies

that match the cash flows generated by the underlying operations of the Company,

primarily US Dollar.

In respect of other monetary assets and liabilities denominated in foreign currencies,

the Company’s policy is to ensure that its net exposure is kept to an acceptable level

by buying or selling foreign currencies at spot rates when necessary to address

short-term imbalances.

The table below summarises the Company’s exposure to foreign currency exchange

rate risk at the end of the reporting period:

At 31 December 2016, loans and borrowings of Tenge 41,042,775 thousand and

bonds of Tenge 19,497,465 thousand are included into the “on demand” category,

since on these liabilities the creditors’ terms were violated (Notes 16 and 17).




(CONTINUED)

The following table presents sensitivities of profit and loss and equity to reasonably

possible changes in exchange rates applied at the end of the reporting period, after

tax, relative to the functional currency of the Company, with all other variables held

constant:

Fair value sensitivity analysis for fixed rate instruments

The Company does not account for any fixed-rate financial instruments as fair value

through profit or loss or as available-for-sale. Therefore, any change in interest rates

at the reporting date would not have an effect on profit or loss for the period or on

equity. The fair value of financial instruments is disclosed in Note 28.

Sensitivity analysis for variable rate financial instruments

A reasonably possible change of 100 basis points in interest rates at the reporting

date would have increased (decreased) equity and profit or loss for the period, net of

taxes, by the amounts shown below. This analysis assumes that all other variables,

in particular foreign currency rates, remain constant.

(v) Interest rate risk

Changes in interest rates impact primarily loans and borrowings by changing either

their fair value

(fixed rate debt) or their future cash flows (variable rate debt). Management of the

Company, when managing interest risks, reviews the changes of the rates on

financial instruments, which may significantly affect the positions with respect to this

risk. For that the Company performs the analysis of the scenarios, including

potential effects of the changes in the interactions between the types of interest

risks and the general level of the exposure to interest risk, in particular, the ratio of

allocation of the interest risks of the Company between the loans with the fixed and

variable interest rates. However, at the time of raising new loans or borrowings

management uses its judgment to decide whether it believes that a fixed or variable

rate would be more favourable to the Company over the expected period until

maturity.

At the reporting date, the interest rate profile of the Company, grouped by the type

of interest rates, was as follows:

(vi) Fair value

Fair value measurements are analysed by level in the fair value hierarchy as follows:

(i) level one are measurements at quoted prices (unadjusted) in active markets for

identical assets or liabilities, (ii) level two measurements are valuations techniques

with all material inputs observable for the asset or liability, either directly (that is, as

prices) or indirectly (that is, derived from prices), and (iii) level three measurements

are valuations not based on observable market data (that is, unobservable inputs).

Management applies judgement in categorising financial instruments using the fair

value hierarchy. If a fair value measurement uses observable inputs that require

significant adjustment, that measurement is a Level 3 measurement.




(CONTINUED)

The significance of a valuation input is assessed against the fair value

measurement in its entirety.

Recurring fair value measurements

Recurring fair value measurements are those that the accounting standards require

or permit in the statement of financial position at the end of each reporting period.

Embedded single financial instruments are carried in the statement of financial

position at the fair value. Embedded single financial instruments are classed in the

second level of the fair value hierarchy.

Financial assets carried at amortised value

The fair value of floating rate instruments is normally their carrying amount. The

estimated fair value of fixed interest rate instruments is based on estimated future

cash flows expected to be received discounted at current interest rates for new

instruments with similar credit risk and remaining maturity. Discount rates used

depend on credit risk of the counterparty. The fair value of investments held to

maturity was determined based on the demand quotations.

Liabilities carried at amortised cost

The fair value of Eurobonds is based on quoted market prices. Fair values of other

liabilities were determined using valuation techniques. The estimated fair value of

fixed interest rate instruments with stated maturities were estimated based on

expected cash flows discounted at current interest rates for new instruments with

similar credit risks and remaining maturities. The fair value of liabilities repayable on

demand or after a notice period (“demandable liabilities”) is estimated as the

amount payable on demand, discounted from the first date on which the amount

could be required to be paid (Notes 16, 17,18).

(b) Tax contingencies in Kazakhstan

The taxation system in Kazakhstan is relatively new and is characterised by frequent

changes in legislation, official pronouncements and court decisions, which are often

unclear, contradictory and subject to varying interpretation by different tax

authorities. Taxes are subject to review and investigation by various levels of

authorities, which have the authority to impose severe fines and penalties. A tax

year generally remains open for review by the tax authorities for five subsequent

calendar years but under certain circumstances a tax year may remain open longer.

As a result, the Company can be charged with additional taxes, penalties and fines.

Management believes that it has provided adequately for tax liabilities based on its

interpretations of applicable tax legislation, official pronouncements and court

decisions.

(c) Transfer pricing

According to the transfer pricing law, the international business transactions are

subject to the government control. This law prescribes Kazakhstani companies to

maintain and, if required, to provide economic rationale and method of the

determination of prices used in international business transactions, including the

existence of the documentation supporting the prices and price differentials applied.

Additionally, price differentials cannot be applied to the international business

transactions with companies registered in offshore countries. In case of deviation of

transaction price from market price, tax authorities have the right to adjust taxable

base and to impose additional taxes, fines and interest penalties.

The transfer pricing law in some areas lacks detailed clear-cut guidance as to how

its rules should be applied in practice (for example, the form and content of

documentation supporting the discounts), and determination of the Company's tax

liabilities within the context of the transfer pricing regulations requires an

interpretation of transfer pricing law.

The Company conducts transactions subject to the state transfer pricing control. The

Company’s cross-border transactions are set at the market price based on the arms-

length principle.

(d) Operating lease liabilities – the Company as a lessee

In January 2012, the Company signed a lease agreement for office premises. The

period of this agreement is five years.

29. CONTINGENT ASSETS AND LIABILITIES

(a) Insurance

The insurance industry in the Republic of Kazakhstan is in a developing state and

many forms of insurance protection common in other parts of the world are not yet

generally available. The Company insurance coverage in respect of its property,

plant and equipment and its third party liabilities due to damage to health or

property arising from accidents and acts of terror or the Company’s operations. The

Company also has coverage for environmental damage arising from the operations

accompanying its professional activity.



29. CONTINGENT ASSETS AND LIABILITIES (CONTINUED)

In February 2016, the Company extended the lease agreement for office premises

for two years. In January 2016, this agreement was terminated and a new

agreement was concluded for 1 year. The agreement does not specify any

limitations with respect to the Company.

The future minimum lease payments under the above operating lease were as

follows:

(c) Other related party transactions

Below is the information on the transactions of the Company with other related

parties.

Related party transactions were made on terms agreed between the parties that

may not necessarily be at market rates.

In 2016 and 2015, the Company did not detect any impairment of trade receivables

of related parties. This assessment is undertaken at the end of the year through

examining the financial position of the related party and the market which the related

party operates in.

Sales and purchases with related parties and the balances with related parties

during 2016 and 2015 were as follows:

(e) Loan covenants

In accordance with the terms of loan agreements signed between the Company and

its creditors, the Company shall observe certain financial and non-financial

covenants. Penalties may be charged for breach of such covenants, or the banks

may demand early repayment of financial liabilities. In order to control such risks,

the Company monitors observance of such financial and non-financial covenants.

Some covenants were violated at 31 December 2016 (Note 4 and 16).

(f) Legal proceedings

Management is unaware of any significant actual or pending legal proceedings or

threatened claims against the Company.

30. RELATED PARTIES

(a) Ultimate controlling party

Mr. M. Zh. Sarsenov is the main shareholder and ultimate controlling party of the

Company.

(b) Transactions with key management personnel

Key management remuneration

In 2016, the compensation to key management personnel included salary and

short-term payments in the amount of 88,096 thousand (2015: Tenge 105,624

thousand), which are charged to personnel costs (Note 24).



30. RELATED PARTIES (CONTINUED)

Transactions with Mr. M.Zh. Sarsenov

On 3 Jule 2014, the Company received a loan facility from Al Hilal in the amount of

US Dollar 34,500,000 with maturity until 2019 (Note 16). In 2014, Al Hilal requested

the guarantee from the shareholder and on 12 December 2014 the Company

signed a guarantee agreement with the Company's shareholder, Mr. M.Zh.

Sarsenov. Under this agreement, the Company should pay a commission calculated

as 4% from the total amount of the loan facility US Dollar 34,500,000 in Tenge

equivalent annually until 2019 (Note 4).

Also, on 25 February 2014, the Company received a loan facility from

Gazprombank in the amount of US Dollar 50,000,000 with maturity until 2021 (Note

16). In 2015 due to the insufficiency of the collateral coverage Gazprombank

requested the guarantee from the shareholder. On 21 May 2015 the Company

signed a financial guarantee agreement with the Company's shareholder, Mr. M.Zh.

Sarsenov. Under the agreement, the Company should pay a commission calculated

as 4% from the total amount of the loan facility US Dollar 50,000,000 in Tenge

equivalent annually until 2023 (Note 4).

Receivable from Eskene on provided collateral

On 17 July 2012, the Company provided 440 items of property, plant and

equipment with total carrying value of Tenge 3,107,736 thousand to Eurasian

Development Bank as a security under a loan agreement concluded between

Eurasian Development Bank and the “Center for Wagon Service – Eskene" LLP, an

entity under common control of the Company’s ultimate controlling party. On 15

November 2013, the Company and the “Center for Wagon Service – Eskene" LLP

signed an agreement on the terms of provision of this security. Under the terms of

the agreement, for provision of the security to the Company, the “Center for Wagon

Service – Eskene" LLP pays a one-off fee of Tenge 262,000 thousand payable at

the time of repayment of the liability of the “Center for Wagon Service – Eskene"

LLP to Eurasian Development Bank. At 31 December 2016, the discounted fee

amounted to Tenge 122,661 thousand (Note 7). The Company expects this liability

to be repaid in 2023.

In December 2013, the Company additionally provided to Eurasian Development

Bank 500 items of machinery and equipment as a security for the loan agreement.

At 31 December 2016, the machinery and equipment with total carrying amount of

Tenge 5,326,339 thousand (2015: Tenge 5,665,161 thousand) in the amount of 940

items were provided as a security on loans and borrowings received by the “Center

for Wagon Service – Eskene" LLP.

Receivable from Eskene on construction of the wagon servicing center

In addition, according to the trilateral agreement on project support concluded

between the Company, the “Center for Wagon Service – Eskene" LLP and Eurasian

Development Bank, on 16 July 2012, the Company is obliged to provide technical

staff and technical support for the project of the “Center for Wagon Service –

Eskene" LLP on construction of the wagon servicing center in Atyrau region. Under

this agreement, the Company provided an advance of Tenge 216,101 thousand to

be repaid in 2017. The Company expects to receive this compensation in the form of

lease of the wagon servicing center.

31. SUBSEQUENT EVENTS

This note provides information about the terms of the Company’s loan agreements.

For more information about the Company’s exposure to interest rate risk and foreign

currency risk see Note 28.

Eurobonds

On 6 March 2017, the Company reinitiated the process of request of consent with

updated offer. Based on the results of the meeting of the Note holders held on 20

April 2017, the following amendments were made to the Note prospectus:

1) Maturity of Notes is extended for 4 years from 22 April 2018 to 22 April 2022;

2) Notes are repayable by partial instalments, and not in one instalment:

(a) 50% of the principal of the liability on Notes outstanding at that time will be

repaid on 22 April 2021 at nominal value;

(b) the remaining principal of the liability on Notes outstanding at that time will

be repaid at nominal value on 22 April 2022.

3) The effect financial covenants will be suspended from 31 December 2016 to 1

January 2018. An irrevocable consent for a waiver with respect to any violation

of the condition, which occurred at the effective date of the amendments, will

be received.

4) From 22 April 2017, the interest rate on the Notes will be increased from 7.75%

per annum to 8.00% per annum.



31. SUBSEQUENT EVENTS (CONTINUED)

Credit rating

On 27 April 2017 Moody's Investors Service, has changed the outlook on the

Company, to stable from negative following the company's announcement that it

has obtained consent from the holders of its $100 million 7.75 % senior secured

notes due 2018 to extend maturity to 2022.

(b) Property, plant and equipment

Property, plant and equipment, except for machinery and equipment, are initially

recorded at cost, net of accumulated depreciation and accumulated impairment

losses, if any.

Subsequent to initial recognition at cost, machinery and equipment are measured at

revalued amounts, being their fair value at the date of revaluation and subsequently

less any subsequent accumulated depreciation and impairment losses. Valuations

are performed with sufficient frequency to ensure that the fair value of a revalued

asset does not differ materially from its carrying amount.

A revaluation surplus is recorded in other comprehensive income and credited to the

asset revaluation reserve in equity. However, to the extent that it reverses a

revaluation deficit of the same asset previously recognised in profit or loss, the

increase is recognised in profit and loss. A revaluation deficit is recognised in profit

or loss, except to the extent that it offsets an existing surplus on the same asset

recognised in the asset revaluation reserve.

An annual transfer from the asset revaluation reserve to retained earnings is made

for the difference between depreciation based on the revalued carrying amount of

the asset and depreciation based on the asset’s original cost. As at the revaluation

date the accumulated depreciation is restated proportionately with the change in the

gross carrying amount of the asset so that the carrying amount of the asset after

revaluation equals its revalued amount. Upon disposal, any revaluation reserve

relating to the particular asset is transferred to retained earnings.

The cost of property, plant and equipment includes the cost of replacing parts of the

property, plant and equipment and borrowing costs for long-term construction

projects if the recognition criteria are met. When significant parts of property, plant

and equipment are required to be replaced at certain intervals, the Company

recognizes such parts as individual assets with specific useful lives and depreciates

them accordingly. Likewise, when a major inspection is performed, its cost is

recognised in the carrying amount of the plant and equipment as a replacement if all

the recognition criteria are satisfied. All other repair and maintenance costs are

recognised in profit or loss as incurred.

Depreciation is calculated on a straight-line basis over the estimated useful lives of

the assets as follows:

32. SIGNIFICANT ACCOUNTING POLICIES

The accounting policies set out below have been applied consistently to all periods

presented in these financial statements.

(а) Foreign currency translation

The financial statements are presented in Kazakhstani Tenge, which is the

Company’s functional and presentation currency.

Transactions in foreign currencies are initially recorded in a respective functional

currency at the official rate at the date when a transaction meets the recognition

criteria.

Monetary assets and liabilities denominated in foreign currencies are translated to

the functional currency at the official rate of exchange ruling at the reporting date.

Any exchange gains and losses arising from translation of assets and liabilities

denominated in foreign currencies subsequent to the date of the underlying

transaction are credited or charged to profit or loss.

Non-monetary items that are measured in terms of historical cost in a foreign

currency are recognized using the exchange rates as at the dates of the initial

transactions.

Weighted average currency exchange rates established by the Kazakhstan Stock

Exchange (“KASE”) are used as official currency exchange rates in the Republic of

Kazakhstan.

The currency exchange rate of KASE at 31 December 2016 was Tenge 333.29 per

1 US Dollar, 5.43 per 1 Russian Rouble and 352.42 per 1 Euro. These rates were

used to translate monetary assets and liabilities denominated in US Dollars,

Russian Rouble and Euro at 31 December 2016 (2015: 340.01 per 1 US Dollar,

4.61 per 1 Russian Rouble and 371.46 per 1 Euro).



32. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

An item of property, plant and equipment and any significant part initially recognised

is derecognised upon disposal or when no future economic benefits are expected

from its use or disposal. Any gain or loss arising on derecognition of the asset

(calculated as the difference between the net disposal proceeds and the carrying

amount of the asset) is included in profit or loss in the reporting period when the

asset is derecognised. The residual values, useful lives and methods of

depreciation of property, plant and equipment are reviewed at each financial year

end and adjusted prospectively, if appropriate.

(c) Impairment

At the end of each reporting period management assesses whether there is any

indication of impairment of property, plant and equipment. If any such indication

exists for property, plant and equipment carried at historic cost, management

estimates the recoverable amount, which is determined as the higher of an asset’s

fair value less costs to sell and its value in use. For property, plant and equipment

carried at fair value if indicators of impairment exist, revaluation at fair value is

performed. The carrying amount is reduced to the recoverable amount and the

impairment loss is recognised in profit or loss for the year to the extent it exceeds

the previous revaluation surplus in equity. An impairment loss recognised for an

asset in prior years is reversed where appropriate if there has been a change in the

estimates used to determine the asset’s value in use or fair value less costs to sell.

(d) Financial assets

Initial recognition and measurement

Financial assets of the Company are classified as loans and receivables.

Loans and receivables are non-derivative financial assets with fixed or determinable

payments that are not quoted in an active market. Loans and receivables are

included into items of the statement of financial position – Non-current receivables

(Note 7), Trade and other receivables (Note 9), Advances paid and other current

assets (Note 10), Cash and cash equivalents (Note 13), Short-term bank deposits

(Note 11) and Cash on special accounts (Note 12). Refer to Note 33.

Loans and receivables

After initial measurement, such financial assets are subsequently measured at

amortised cost using the effective interest rate method (EIR). Amortised cost is

calculated by taking into account any discount or premium on acquisition and fees or

costs that are an integral part of the EIR. The EIR amortisation is included in finance

income in the statement of comprehensive income.

Cash and cash equivalents

Cash and cash equivalents recorded in the statement of financial position comprise

cash at banks and on hand. For the purpose of the statement of cash flows, cash

and cash equivalents consist of cash and short-term deposits with maturities of three

months as defined above, net of outstanding bank overdrafts.

(e) Impairment of financial assets

The Company assesses at each reporting date whether there is any objective

evidence that a financial asset or a group of financial assets is impaired. A financial

asset or a group of financial assets is deemed to be impaired if there is objective

evidence of impairment as a result of one or more events that has occurred since

the initial recognition of the asset (an incurred ‘loss event’) and that loss event has

an impact on the estimated future cash flows of the financial asset or the group of

financial assets that can be reliably estimated. Evidence of impairment may include

indications that the debtors or a group of debtors is experiencing significant financial

difficulty, default or delinquency in interest or principal payments, the probability that

they will enter bankruptcy or other financial reorganisation and observable data

indicating that there is a measurable decrease in the estimated future cash flows on

a financial instrument, such as changes in arrears or economic conditions that

correlate with defaults.

Financial assets carried at amortised cost

For financial assets carried at amortised cost, the Company first assesses whether

objective evidence of impairment exists individually for financial assets that are

individually significant, or collectively for financial assets that are not individually

significant. If the Company determines that no objective evidence of impairment

exists for an individually assessed financial asset, whether significant or not, it

includes the asset in a group of financial assets with similar credit risk characteristics

and collectively assesses them for impairment. Assets that are individually assessed

for impairment and for which an impairment loss is, or continues to be, recognised

are not included in a collective assessment of impairment.



(g) Financial liabilities

Initial recognition and measurement

Financial liabilities are classified as financial liabilities revalued at fair value through

profit or loss, and other financial liabilities, as appropriate. The Company determines

the classification of its financial liabilities at initial recognition.

All financial liabilities are recognised initially at fair value and, in the case of loans

and borrowings, net of directly attributable transaction costs.

The Company’s financial liabilities include trade and other payables, finance lease

liabilities and borrowings, which are classified in the category “Other financial

liabilities”, “Derivative financial instruments” and borrowings containing embedded

derivatives designated as “fair value through profit or loss” (Note 33).

Subsequent measurement

The measurement of financial liabilities depends on their classification as described

below:

Loans and borrowings

After initial recognition, loans and borrowings are subsequently measured either at

amortised cost using the EIR method or at fair value though profit or loss. The

Company determines the method of measurement at the date of initial recognition.

Amortised cost is calculated by taking into account any discount or premium on

acquisition and fees or costs that are an integral part of the EIR. The EIR

amortisation is included in finance costs in the statement of profit or loss and other


Trade and other payables

Trade payables are accrued when the counterparty performs its obligations under

the contract and are recognised initially at fair value and subsequently carried at

amortised cost using the effective interest method.


If there is objective evidence that an impairment loss has incurred, the amount of

the loss is measured as the difference between the asset’s carrying amount and the

present value of estimated future cash flows (excluding future expected credit

losses that have not yet been incurred). The present value of the estimated future

cash flows is discounted at the financial asset’s original effective interest rate. If a

loan has a variable interest rate, the discount rate for measuring any impairment

loss is the current EIR.

The interest income is recorded as finance income in the statement of

comprehensive income. Loans together with the associated allowance are written

off when there is no realistic prospect of future recovery and all collateral has been

realised or has been transferred to the Company. If, in a subsequent year, the

amount of the estimated impairment losses increases or decreases because of an

event occurring after the impairment was recognised, the previously recognised

impairment loss is increased or reduced by adjusting the allowance account. If a

prior write-off is later recovered, the recovery is credited to finance costs in the

statement of profit or loss and other comprehensive income.

(f) Financial guarantees received

Financial guarantees received from the shareholder are accounted for as an

executory contract and fees are accrued on an annual basis as incurred. The

Company assesses whether the fees paid are in accordance with market terms at a

date of initiation. If the transactions are performed at market rate, then fees are

charged to profit or loss for the year. Judgements made with respect to the financial

guarantees received are disclosed in the Note 4.

Advances paid for the financial guarantees received are classified as current or

non-current assets based on the years covered by the prepaid amount. The

Company made a restatement of the comparative information as of 31 December

2015 with respect to the classification of the advances paid (Note 5).

As a result of the changes in the contract with shareholder (Note 4) the financial

guarantee issued to Gazprombank is treated as an US Dollar contract. Advances

paid in prior years are amortised to profit or loss at a straight line basis at the rate

when these advances were paid. Remaining charges are recorded based on the

rates prevailing at the dates of the transactions.

As financial guarantee issued to Al Hilal was fully prepaid, it is amortised to profit or

loss at a straight line basis at the rate when these advances were paid. No

additional charges are recorded by the Company.



recognition of a new financial liability. The difference between the carrying amount of

an initial financial liability and the new financial liability is recognised in profit or loss.

(k) Offsetting financial instruments

Financial assets and financial liabilities are offset and the net amount is reported in

the statement of financial position if there is a currently enforceable legal right to

offset the recognised amounts and there is an intention to settle on a net basis, to

realise the asset and settle the liability simultaneously.

(l) Fair value of financial instruments

The fair value of financial instruments that are traded in active markets at each

reporting date is determined by reference to quoted market prices or dealer price

quotations (bid price for long positions and ask price for short positions), without any

deduction for transaction costs.

For financial instruments not traded in an active market, the fair value is determined

using appropriate valuation techniques. Such techniques may include:

• Using recent arm’s length market transactions;

• Reference to the current fair value of another instrument that is substantially

the same;

• A discounted cash flow analysis or other valuation models.

The analysis of fair value of financial instruments and additional information of the

methods of its measurement are disclosed in Note 28.

(m) Inventories

Inventories are valued at the lower of cost or net realisable value. Costs include

charges incurred in bringing inventory to its present location and condition. Net

realisable value is the estimated selling price in the ordinary course of business, less

the estimated costs of completion and estimated costs necessary to make the sale.

The same cost formula is used for all inventories having a similar nature and use. All

inventories are valued on the FIFO basis.

(n) Leases

The determination of whether an arrangement is, or contains, a lease is based on

the substance of the arrangement at inception date. The arrangement is assessed

for whether the fulfilment of the arrangement is dependent on the use of a specific

asset or assets or the arrangement conveys a right to use the asset, even if that

right is not explicitly specified in an arrangement.


(h) Embedded derivative financial instruments

An embedded derivative is separated from the host contract and is accounted for as

a derivative if, and only if the economic characteristics and risks of the embedded

derivative are not closely related to the economic characteristics and risks of the

host contract, a separate instrument with the same terms as the embedded

derivative would meet the definition of a derivative; and the combined instrument is

not measured at fair value with changes in fair value recognised in profit or loss for

the period.

Derivatives are initially recognised at fair value on the date on which a derivative

contract is entered into and are subsequently remeasured at fair value. All

derivatives are carried as assets when their fair value is positive and as liabilities

when their fair value is negative.

Changes in the fair value of derivatives are recognised immediately in profit or loss.

Although the Company trades in derivative instruments for risk hedging purposes,

these instruments do not qualify for hedge accounting.

(i) Derecognition of financial instruments

Financial assets

The Company derecognises financial assets when (a) the assets are redeemed or

the rights to cash flows from the assets otherwise expire or (b) the Company has

transferred the rights to the cash flows from the financial assets or entered into a

qualifying pass-through arrangement whilst (i) also transferring substantially all the

risks and rewards of ownership of the assets or (ii) neither transferring nor retaining

substantially all the risks and rewards of ownership but not retaining control.

Control is retained if the counterparty does not have the practical ability to sell the

asset in its entirety to an unrelated third party without needing to impose additional

restrictions on the sale.

Financial liabilities

The Company removes a financial liability (or a part of a financial liability) from its

statement of financial position when, it is extinguished - i.e. when the obligation

specified in the contract is discharged or cancelled or expires. A substantial

modification of the terms of an existing financial liability (qualitative and quantitative)

or a part of it (whether or not attributable to the financial difficulty of the debtor) is

accounted for as an extinguishment of the original financial liability and the



The Company pays social tax according to the current statutory requirements of the

Republic of Kazakhstan. Social tax is expensed as incurred.

The Company does not incur any expenses related to payment of pension benefits

to its employees. According to the legislation of the Republic of Kazakhstan, the

Company withholds pension deductions from wages of employees and transfers

them to a pension fund. Upon retirement of employees, all the payments are

administered by the pension fund.

(q) Equity

The partnership interest in the Company is classified as equity since the Company

has an irrevocable right to refuse the repurchase the partnership interest according

to the Company’s charter and local legislation. The assets contributed to the charter

capital are recognized at fair value at the time of contribution. Any excess of the fair

value of contributed assets over the nominal value of contribution to the charter

capital after its legal registration is allocated directly to other reserves within equity.

Dividends are recognised as a liability and deducted from equity at the reporting

date only if they are approved before or on the reporting date. Dividends are

disclosed when they are proposed before the reporting date or proposed or declared

after the reporting date but before the financial statements are authorised for issue.

(r) Revenue recognition

Revenue is recognised to the extent that it is probable that the economic benefits will

flow in to the Company and the revenue can be reliably measured, regardless of

when the payment is being made. Revenue is measured at the fair value of the

consideration received or receivable, taking into account contractually defined terms

of payment and excluding taxes or duties. The principal type of activity of the

Company is provision of operating and transportation/forwarding services. The

Company assesses its revenue arrangements against specific criteria in order to

determine if it is acting as a principal or an agent. The Company has concluded that

it is acting as the agent with regard to the railway tariff, accordingly settlements

between the railway and clients of the Company are accounted for on a net basis.

Accordingly, the Company recognises within revenue only commission from

operating and transportation/forwarding services. In order to recognise revenue, the

following criteria must be met:

Wagon rental income

Rental income arising from the operating lease of rolling stock is accounted for on a

straight line basis over the lease term and is included in profit or loss and other



Company as a lessee – finance lease

Finance leases that transfer substantially all the risks and benefits incidental to

ownership of the leased item to the Company, are capitalised at the

commencement of the lease at the fair value of the leased property or, if lower, at

the present value of the minimum lease payments. Lease payments are

apportioned between finance charges and reduction of the lease liability so as to

achieve a constant rate of interest on the remaining balance of the liability. Finance

charges are recognised in finance costs in the statement of comprehensive income.

A leased asset is depreciated over the useful life of the asset. However, if there is

no reasonable certainty that the Company will obtain ownership by the end of the

lease term, the asset is depreciated over the shorter of the estimated useful life of

the asset and the lease term.

Company as a lessee – operating lease

Operating lease payments are recognised as an operating expense in the

statement of comprehensive income on a straight-line basis over the lease term.

Company as a lessor – operating lease

Leases in which the Company does not transfer substantially all the risks and

benefits of ownership of an asset are classified as operating leases.

(o) Provisions

General

Provisions are recognised when the Company has a present obligation (legal or

constructive) as a result of a past event, it is probable that an outflow of resources

embodying economic benefits will be required to settle the obligation and a reliable

estimate can be made of the amount of the obligation. Where the Company expects

some or all of a provision to be reimbursed, for example under an insurance

contract, the reimbursement is recognised as a separate asset but only when the

reimbursement is virtually certain. The expense relating to any provision is

presented in profit or loss net of any reimbursement.

(p) Employee benefits

The Company does not have any pension arrangements separate from the state

pension system of the Republic of Kazakhstan, which requires current contributions

by the employer calculated as a percentage of current gross salary payments; such

expense is charged in the period the related salaries are earned.



Current income tax relating to items recognised directly in equity is recognised in

equity and not in profit or loss. Management periodically evaluates positions

recorded in the tax returns with respect to situations in which applicable tax

regulations are subject to interpretation and establishes provisions where

appropriate.

Deferred income tax

Deferred tax is provided using the liability method on temporary differences between

the tax bases of assets and liabilities and their carrying amounts for financial

reporting purposes at the reporting date.

Deferred income tax liabilities are recognised for all taxable temporary differences,

except when the deferred income tax liability arises from the initial recognition of

goodwill or of an asset or liability in a transaction that is not a business combination

and, at the time of the transaction, affects neither the accounting profit nor taxable

profit or loss.

Deferred tax assets are recognised for all deductible temporary differences, the

carry forward of unused tax credits and any unused tax losses. Deferred tax assets

are recognised to the extent that it is probable that taxable profit will be available

against which the deductible temporary differences, and the carry forward of unused

tax credits and unused tax losses can be utilised, except when the deferred income

tax asset relating to the deductible temporary difference arises from the initial

recognition of an asset or liability in a transaction that is not a business combination

and, at the time of the transaction, affects neither the accounting profit nor taxable

profit or loss.

The carrying amount of deferred income tax assets is reviewed at each balance

sheet date and reduced to the extent that it is no longer probable that sufficient

taxable profit will be available to allow all or part of the deferred income tax asset to

be utilised. Unrecognised deferred income tax assets are reassessed at each

balance sheet date and are recognised to the extent that it has become probable

that future taxable profit will allow the deferred tax asset to be recovered.

Deferred income tax assets and liabilities are measured at the tax rates that are

expected to apply to the year when the asset is realised or the liability is settled,

based on tax rates (and tax laws) that have been enacted or substantively enacted

at the reporting date.

Deferred tax relating to items recognised outside profit or loss is recognised outside

profit or loss. Deferred tax items are recognised in correlation to the underlying

transaction either in other comprehensive income or directly in equity.


Rendering of services

In respect of services revenue is recognised by a reference to the stage of

completion at the reporting date provided that the stage of completion and the

amount of revenue can be measured reliably.

(s) Expense recognition

Expenses are accounted for at the time the actual flow of the related goods or

services occur, regardless of when cash or its equivalent is paid, and is reported in

the financial statements in the period which they relate to.

(t) Finance income and costs

The Company’s finance income and finance costs include:

• interest income;

• income from subsidies;

• discounting and amortisation of discount on financial instruments;

• interest expense.

Interest income and expense shall be recognised by the effective interest rate

method.

(u) Borrowing costs

Borrowing costs are directly attributable to the acquisition, construction or

production of an asset that necessarily takes a substantial period of time to get

ready for its intended use or sale are capitalised as part of the cost of the respective

assets. All other borrowing costs are expensed in the period they occur. Borrowing

costs consist of interest and other costs that an entity incurs in connection with the

borrowing of funds.

(v) Income tax expense

Current income tax

Current income tax assets and liabilities for the current period are measured at the

amount expected to be recovered from or paid to the tax authorities. The tax rates

and tax laws used to compute the amount are those that are enacted or

substantively enacted, at the reporting date in the countries where the Company

operates and generates taxable income.




Deferred income tax assets and deferred income tax liabilities are offset if a legally

enforceable right exists to set off current tax assets against current income tax

liabilities and the deferred taxes relate to the same taxable entity and the same

taxation authority.

33. PRESENTATION OF FINANCIAL INSTRUMENTS BY

MEASUREMENT CATEGORY

For the purposes of measurement, IAS 39, Financial Instruments: Recognition and

Measurement, classifies financial assets into the following categories: (a) loans and

receivables; (b) available-for-sale financial assets; (c) financial assets held to

maturity and (d) financial assets at fair value through profit or loss (“FVTPL”). The

following table provides a reconciliation of financial assets with these measurement

categories as of 31 December 2016 and 2015:

For the purposes of measurement, IAS 39, Financial Instruments: Recognition and

Measurement, classifies financial assets into the following categories: (a) financial

liabilities at fair value through profit or loss, including financial derivatives; (b) other

financial liabilities. The following table provides a reconciliation of financial assets

with these measurement categories as of 31 December 2016 and 2015:

34. NEW STANDARDS AND INTERPRETATIONS NOT YET ADOPTED

The following amended standards became effective for the Company from 1 January

2016, but did not have any material impact on the Company.

• 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).

• 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).

• 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).

• Annual Improvements to IFRSs 2014 (issued on 25 September 2014 and

effective for annual periods beginning on or after 1 January 2016).

• Disclosure Initiative Amendments to IAS 1 (issued in December 2014 and

effective for annual periods on or after 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).

Certain new standards, amendments to standards and interpretations are not yet

effective at 31 December 2017 and their requirements were not considered in

preparation of these financial statements. The following of the said standards and

interpretations can have a possible impact on the Company’s operations. The

Company intends to adopt these standards and interpretations after their effective

date.

• IFRS 9, published in July 2014, replaces existing IAS 39, Financial Instruments:

Recognition and Measurement. IFRS 9 includes the revised guidance on

classification and evaluation of financial assets, including a new model of

expected credit losses for evaluation of impairment and new general

requirements for hedge accounting.




(CONTINUED)

The new standard also retains in force the guidance on recognition and

derecognition of financial instruments, accepted in IAS 39. IFRS 9 becomes

effective for annual reporting periods starting on or after 1 January 2018. Early

adoption of the standard is allowed.

• IFRS 15 establishes the general system of principles for determining whether

the revenue is to be recognized, in which amount and when. The standard

replaces the existing guidance on revenue recognition, including IAS 11,

Construction Contracts, IAS 18, Revenue, and IFRIC 13, Customer Loyalty

Programmes. The core principle of the new standard is that an entity

recognizes revenue to record the transfer of promised goods or services to

customers in the amount corresponding to the compensation to which the

entity, according to its expectations, will receive the right in exchange for these

goods or services. The new standard provides for detailed disclosures on

revenue, includes the guidance on accounting for operations which were

previously not considered in full, and improves the guidance on accounting for

agreements consisting of multiple elements. IFRS 15 comes into effect for

annual reporting periods starting on or after 1 January 2018. Early adoption of

the standard is allowed.

• Amendments to IFRS 15, Revenue from Contracts with Customers (issued on

12 April 2016 and effective for annual periods beginning on or after 1 January

2018). The amendments do not change the underlying principles of the

Standard but clarify how those principles should be applied. The amendments

clarify how to identify a performance obligation (the promise to transfer a good

or a service to a customer) in a contract; how to determine whether a company

is a principal (the provider of a good or service) or an agent (responsible for

arranging for the good or service to be provided); and how to determine

whether the revenue from granting a licence should be recognised at a point in

time or over time. In addition to the clarifications, the amendments include two

additional reliefs to reduce cost and complexity for a company when it first

applies the new Standard.

• IFRS 16 replaces the existing guidance on accounting for lease, including IAS

17, Lease, IFRIC 4, Determining Whether an Arrangement Contains a Lease,

SIC 15, Operating Leases – Incentives, and SIC 27, Evaluating the Substance

of Transactions in the Legal Form of a Lease. The new standard cancels the

double accounting model applied currently in the lessee’s accounting.

This model requires classification of lease to a finance lease recorded in the

balance sheet and operating lease recorded off the balance sheet. Instead of it,

the single accounting model is introduced, which implies recorded of lease on

the balance sheet and is similar to currently effective accounting for finance

lease.

• For lessors the currently effective accounting rules are generally retained –

lessors will continue to classify lease into finance and operating. IFRS 16

comes into effect for annual reporting periods starting on or after 1 January

2019. Early adoption of the standard is allowed, provided that IFRS 15,

Revenue from Contracts with Customers, is also applied.

• 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.

The Company is currently assessing the impact of the amendment on its financial

statements.

The following other new standards and interpretations are not expected to have any

material impact on the Company’s financial statements when adopted:

• Sale or Contribution of Assets between an Investor and its Associate or Joint

Venture - Amendments to IFRS 10 and IAS 28 (issued on 11 September 2014

and effective for annual periods beginning on or after a date to be determined

by the IASB).

• Recognition of Deferred Tax Assets for Unrealised Losses - Amendments to

IAS 12 (issued on 19 January 2016 and effective for annual periods beginning

on or after 1 January 2017).

• Amendments to IFRS 2, Share-based Payment (issued on 20 June 2016 and

effective for annual periods beginning on or after 1 January 2018).

• Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts -

Amendments to IFRS 4 (issued on 12 September 2016 and effective,

depending on the approach, for annual periods beginning on or after 1 January

2018 for entities that choose to apply temporary exemption option, or when the

entity first applies IFRS 9 for entities that choose to apply the overlay

approach).




(CONTINUED)

• Annual Improvements to IFRSs, 2014-2016 (issued on 8 December 2016 and

effective, in terms of application of amendments to IFRS 12 - for annual

periods beginning on or after 1 January 2017, in terms of application of

amendments to IFRS 1 and IAS 28 - for annual periods beginning on or after 1

January 2018).

• IFRIC 22 - 'Foreign Currency Transactions and Advance Consideration'

(issued on 8 December 2016 and effective for annual periods beginning on or

after 1 January 2018).

• Transfers of Investment Property – Amendments to IAS 40 (issued on 8

December 2016 and effective for annual periods beginning on or after 1

January 2018).

Unless otherwise described above, the new standards and interpretations are not

expected to affect significantly the Company’s financial statements.

The Integrated Securities Registrar JSC

050040, Republic of Kazakhstan, Almaty,

30А/3 Satpayev Str., Tengiz Towers RC

Phone: +7 (727) 272-47-60

E-mail: [email protected]

www.tisr.kz

REGISTRAR

PricewaterhouseCoopers LLP


34 Al-Farabi Ave., AFD BC, Building A, 4th floor

Phone: +7 (727) 330-32-00

www.pwc.kz

AUDITOR

Eastcomtrans LLP


77/7 Al-Farabi Ave., Esentai Tower BC, 11th floor

Phone: +7 (727) 3-555-111

E-mail: [email protected]

www.ect.kz

COMPANY

ANNUAL REPORT 2016 · Letter from the General Director Dear shareholders, investors, partners and...

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