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Kazan Open Joint Stock Company «ORGANICHESKY SINTEZ» ANNUAL REPORT 2006 The world today is the technocratic world. The concept of progress is connected with the science and technics development process and technology development. And in this world organic chemistry takes the special place of one of the “future sciences”. Today polymeric materials pretend for domination in all fields of the human life, from the large-scale constructions and outer-space exploration to the household field. It becomes obvious in the moment of acquaintance with the number of facts based on the real projects and inventions, which are still considered as the Future technologies, but can be realized at the favorable conditions in the nearest future. One of the basic components of each of the mentioned inventions is use of these or those kinds of polymeric materials. Organic chemistry, start with the direction of modern society development, becomes the original arm of forming not only new technologies but also new science-technical and design thinking. Even the scientists of the 20th years of the XXth century told that such time will come. And we fall to live during the time when these brave forecasts come true! The given report is made by the Economic Analysis Department of OJSC «Kazanorgsintez» on the basis of the data of the structural divisions of the enterprise, independent auditor’s report of the company and the official external sources, with the purpose to display the balanced and proved picture of economic, ecological and social productivity of organization’s activity. The report is intended for a wide range of people, including management of OJSC «Kazanorgsintez», shareholders of the Company, investors and other interested parties. When making up the report, the company was guided by the following principles: openness, completeness and importance; reliability, quality and objectivity; comparability, clearness and timeliness. When making up the report polymeric materials were used only. TABLE OF CONTENT part I ABOUT THE COMPANY ABOUT THE COMPANY 10 MESSAGE FROM GENERAL DIRECTOR 12 MESSAGE FROM DEPUTY GENERAL DIRECTOR - DIRECTOR ON ECONOMY AND FINANCE 13 MISSION AND STRATEGY 14 MAIN PARAMETERS OF ACTIVITY 15 MAJOR FACTORS OF RISK 18 EVENTS OF THE YEAR REVIEW OF ECONOMY OF RUSSIA AND TATARSTAN REPUBLIC 19 26 EXIT part II part III part IV INDUSTRIAL ACTIVITY COMMERCIAL ACTIVITY INVESTMENT ACTIVITY STRUCTURE OF COMMODITY OUTPUT PRODUCTION AND THE COST PRICE OF PRODUCTS INDUSTRIAL STRUCTURE OF OJSC “KAZANORGSINTEZ” ETHYLENE PLANT LDPE PLANT HDPE PLANT ORGANIC PRODUCTS PLANT PLANT FOR PRODUCTION OF NITROGEN, OXIGEN AND COLD (NOC) PLANT FOR PREPARATION AND HOLDING MAJOR OVERHAULS (PHMO) AUXILIARY DIVISIONS 29 part V CORPORATE MANAGEMENT POSITION IN INDUSTRY 61 DEVELOPMENT PROGRAM 75 REVIEW OF THE BASIC PRODUCTS MARKET 62 DEVELOPMENT PROGRAM FINANCING 76 REVIEW OF OUTPUT RESULTS 68 DEVELOPMENT PROGRAM PERFORMANCE 78 RAW MATERIAL SUPPLY 70 30 33 34 35 38 39 part VI CORPORATE MANAGEMENT 86 STRUCTURE OF BOARD OF DIRECTORS 87 CORPORATE MANAGEMENT 88 STRUCTURE OF EXECUTIVE MANAGEMENT 89 AUTHORIZED CAPITAL AND STOCK MARKET 92 ESSENCIAL FACTS AND DEALS 96 LIST OF AFFILIATED PERSONS 97 DATA ABOUT THE COMPANY 98 40 40 41 INDEPENDENT AUDITORS’ REPORT AND CONSOLIDATED FINANCIAL STATEMENTS STATEMENT OF MANAGEMENT RESPONSIBILITIES FOR THE PREPARATION AND APPROVAL OF THE CONSOLIDATED FINANTIAL STATEMENTS 102 INDEPENDENT AUDITORS’ REPORT 103 CONSOLIDATED FINANTIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2006: CONSOLIDATED INCOME STATEMENT 105 CONSOLIDATED BALANCE SHEET 108 CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY 109 DEVELOPMENT OF TECHNOLOGIES AND BRANDED ASSORTMENT 42 QUALITY SYSTEM 42 RESOURCES EFFICIENCY 46 ECOLOGYCAL POLICY 48 NATURE PROTECTION 49 MANAGEMENT OF PERSONNEL 54 SOCIAL FIELD 56 CONSOLIDATED STATEMENT OF CASH FLOWS 110 NOTES TO THE CONSOLIDATED FINANTIAL STATEMENTS 111 PART I ABOUT THE COMPANY part I // ABOUT THE COMPANY // 10 11 ABOUT THE COMPANY Since 1999 activity is carried out according to the world standards ISO 9000. In 2006, Ecological Management System ISO 14001:2004 and Integrated Quality Management System ISO 9001 and ISO 14001 have been certificated in OJSC «Kazanorgsintez». The revenues from product sales according to the results of 2006 have made 15.5 bln.roubles, net profit – 2.2 billion roubles. Number of personnel came to more than 8 ths. employees. Credit ratings according to Standard and Poor’s agency - «В-», Fitch Ratings agency – «B». The outlook on ratings “stable”. Within the framework of the development program realization the capital investments of 10.4 bln.roubles have been financed in 2006. OJSC «Kazanorgsintez» OJSC «Kazanorgsintez» includes six plants and the auxiliary divisions located on one industrial platform with a total in the chemical industry of Russia, located area of 4.2 sq.km., and possessing uniin the capital of Tatarstan Republic, in Kazan. The enterprise is form transport, power and telecommufounded in 1958. In 1963 the first batch of products - phenol nication infrastructure: and acetone was produced. Ethylene plant. The main prodNow the enterprise produces polyethylene, polyethylene pipes, ucts of the plant are ethylene, propylphenol, acetone, ethylene glycol, ethanolamines and other ene, phenol and acetone. All ethylene is products of organic synthesis, the total assortment includes further processed at LDPE plant, HDPE more than 170 denominations with a total production volume plant and organic products plant. over 1 mln. tons. Products correspond to the international qualLDPE plant. Produces various ity standards of GOST R ISO 9001-2001 (ISO 9001:2000) and are grades and compositions of low density exported to many countries of the world. polyethylene. is one of the largest enterprises Plant for production of nitro- At the time, the following plants are gen, oxygen and cold. About 85 % of its getting ready for commissioning: products oxygen and cold consumed by Bisphenol-A plant. other plants and divisions of the enterThe “know-how” of «Idemitsu Kosan Co., prise. Ltd». Capacity of the plant – 70 ths. tons Plant for preparation and makper year. Organic products plant. Pro- ing major overhauls. Carries out the duces ethylene oxide and other prod- preparation & realization of current and Polycarbonates plant ucts on the ethylene oxide basis: ethyl- major overhauls of the industrial equipthe first in Russia, the “know-how” of ene glycol, ethanolamines and others. ment in all divisions of the enterprise. «Asahi Kasei Engineering Corporation» using non-phosgene method and the “know-how” of without waste production. Capacity of the plant – 65 ths. tons per year. Plant for production and processing of high density polyethylene (HDPE plant). Releases various brands and compositions of high density polyethylene, pressure and gas pipes of HDPE. MESSAGE FROM DEPUTY GENERAL DIRECTOR DIRECTOR ON ECONOMY AND FINANCE MESSAGE FROM GENERAL DIRECTOR Dear ladies and gentlemen! Dear ladies and gentlemen! During the last several years we can notice the positive dynamics of our basic financial- Summing up the work done by us, it would be desirable to note first of all, that the leaving year was one of the most important and the most difficult in the history of our enterprise, but the primary goals of 2006 have been solved. In 2006 the revenues from product sales have made more than 15.5 billion roubles, which is by 16.4 % above the level of the last year, the net profit has increased by 10 % and has reached 2.2 bln.roubles. The index of physical volume of commodity output has made 104 % to the level of 2005, thus the part of production units has been stopped for reconstruction. Growth of financial parameters has been influenced by a favorable conjuncture in the markets of basic products and resuming of basic raw material ethane delivery volumes from the Orenburg Helium Plant. Released products correspond to the consumers requirements. OJSC “VNIIS” has confirmed the conformity of Quality Management System and Ecological Management of OJSC «Kazanorgsintez» to the international standards ISO 9001 and 14001. Its worth to note, that financing of the development program is carried out basically out of credits and loans. The great work for reducing the interest rates and using the new financial tools has been made for minimization of charges under the debt service. Solving this problem we entered the international capital market and had successfully issued Eurobonds. The company has kept at the former level the international credit ratings from Fitch and Standard & Poor’s agencies which is important for the further investment program realization. Realizing the principle of social partnership, «Kazanorgsintez» creates new workplaces and pays worthy material compensation. During 2006 more than 1,100 people have been employed, the average salary amount has made 16.7 ths. roubles, and number of personnel by the end of the year has made 8,323 employees. The average salary amount at our enterprise is one of the highest among the enterprises of Tatarstan. In the past year, 21 activities have been carried out with the purpose of increasing the efficiency of using the fuel, energy and other material resources. Expenses for those activities realization in 2006 have increased 1.3 times in comparison with 2005 and have made 5.1 mln. roubles. Economic benefit from the activities realization has made 82.9 million roubles. According to the results of 2006 the enterprise was awarded with the Diploma of Realization of the tasks in view and the growth of finanthe Ministry of Economics and Industry of Tatarstan Republic cial parameters have led to the growth of company capi«For significant, stable results in energy and resources saving». talization which by the end of 2006 has exceeded 1.1 billion dollars, which is 1.5 times above the level of the last year. The year of 2006 was the key year in investment projects realization. We have finished HDPE and phenol pro- Development program realization is the first step to the goal duction units’ modernization. Volumes of HDPE produc- in view – to become one of the leading petrochemical comtion in 2006 are the highest for the all history of the plant. panies of the world. Every person of our enterprise deserves the words of gratitude for the proved work, self-feedback and According to the approved schedule the new plants con- the right attitude to the business. Support of shareholders and struction is being carried out: bisphenol-A and polycar- trust of investors will help us to solve tasks in view in the future. bonates. There is an assembling of the new double cell cracking furnace at ethylene plant which will allow to proGENERAL DIRECTOR cess ethane with productivity of ethylene 18 tons/hour. OJSC «KAZANORGSINTEZ» L.S. Alyokhin economic parameters. The year 2006 is not exception, despite of the part of our production units have been stopped for reconstruction. We achieved the growth of the physical volumes of production by 4% to the level of 2005. Profit from sales proceeds has grown by 13% in comparison with 2005 and reached 3.8 bln. roubles and net profit has increased by 10%. I should note with satisfaction that our partners from Orenburg gas processing plant resumed supplies of ethane that allowed us to load our capacities more completely. 2006 became the turning year in investment projects realization. The modernization of high density polyethylene and phenolacetone production units is finished. And we’ve started to feel efficiency from these projects in the 4th quarter already. The construction of bisphenol-A plant and polycarbonates plant is being continued. In total for 2006 the financing of the investment program made the highest figure for our enterprise – 10.4 bln. roubles. With the commissioning of the two new plants in 2007 those investments will start to bring the effect. Under the supervision of general director of our enterprise, in 2006 financial department solved the problem of optimization of the investment projects financing, for that reason the activities for interest rates reduction and using of the new financial instruments have been carried out. For the first time OJSC «Kazanorgsintez» has entered to the international capital market and issued the five-year unsecured loan participation notes for the amount of 200 mln. US dollars with listing at the London stock exchange. Debut issue of OJSC «Kazanorgsintez» was quite successful: subscription to our notes almost two times exceeded the first volume of placement, and the rate of attraction appeared lower than for issuers with the same rating. One of the most important factors here became the professional organization of the loan and the level of credit rating. Ratings of the two international rating agencies: Standard&Poor’s and Fitch Ratings, received in 2005, are staying at the same level, which is very important for the further investment program realization. The significant part of the borrowed funds we directed to refinancing of the more expensive credits of Sberbank, so we increased the average term of the debt service, released the funds from the securitization, decreased the average interest rate, and thereby increased the financial stability of the company. In 2006 the development of the functional integrated management system of the enterprise SAP R/3 was continued: the module “Project management” at gathering the actual costs, the module “Technical service and repair of the equipment” at the auxiliary shops and the software of the module “Management of the personnel” were installed, filling of the business information storing «BW» is being continued. Nowadays it’s impossible to imagine the effective management of the enterprise financial-economic system without the budgeting system, which has been installed 7 years ago and got widely developed in 2006. The system allows us to plan and control the financial flows, to form the optimal financial strategy, realizing correlation of strategic and operational plans of the company for keeping up the financial stability. As a president of the water-polo team “Sintez”, I express the special gratitude to the trainer’s team and the players for their sports achievements in the current season. Thanks to their efforts and full self-realization, the team became the silver prize-winner of the Championship of Russia for the first time, and also became the finalist of the Euro Cup LEN TROPHY 2005-2006. That is the significant input to the development of the republican sport and to the image of the company. The position of OJSC «Kazanorgsintez» as one of the leading enterprises of the chemical industry of Russia continues to become stronger and we can say with confidence that according to many parameters we are the company of the international level. DEPUTY GENERAL DIRECTOR DIRECTOR ON ECONOMY AND FINANCE OJSC «KAZANORGSINTEZ» M. F. Mukhametshin part I // ABOUT THE COMPANY // 14 15 MAIN PARAMETERS OF ACTIVITY MISSION AND STRATEGY MISSION Our purpose is to be the best in the Russian market of chemical goods, № to meet high world standards in mutual relations Parameters Units 2004 2005 2006 2006/2005 with our business partners, investors, employees, society and environment. 1 Commodity output Cost price Index of physical volume mln.RUR mln.RUR % 11,870.4 8,823.7 100.4 13,597.0 10,367.6 92.2 15,771.2 12,066.5 104.3 116.0% 116.4% 113.1% 2 Revenues from sale Including export Cost price Profit Profitability mln.RUR % 11,787.8 2,928.3 8,743.8 3,044.0 25.8 13,328.6 2,710.1 9,985.1 3,343.5 25.1 15,517.7 2,815.2 11,735.5 3,782.2 24.4 116.4% 103.9% 117.5% 113.1% 97.2% 3 Taxes (calculated) mln.RUR 1,839.2 1,696.0 34.2 2.0% 4 Net profit mln.RUR 1,981.6 2,002.1 2,209.0 110.3% 5 Amortization mln.RUR 308.1 392.9 586.6 149.3% 6 Own capital mln.RUR 7,676.9 9,257.6 11,120.2 120.1% 7 Capital investments mln.RUR 1,437.9 5,169.2 11,467.6 221.8% 8 Financing of capital investments mln.RUR 1,114.7 7,061.2 10,382.0 147.0% 9 Liabilities (total debt) mln.RUR 1,300.3 7,065.2 16,968.5 240.2% We shall achieve performance of the tasks put to us by shareholders due to professionalism and introduction of new technologies. OJSC “Kazanorgsintez” in mutual relations with business partners, consumers, financial and public institutions strictly adheres to the principles of business ethics, considers its reputation as one of our most powerful assets. Constructive partner relations are maintained with suppliers, buyers, authorities and all interested groups of society. The guarantee of successful development of the enterprise and prosperity of business are people, therefore OJSC “Kazanorgsintez” aspires to create a corporate environment in which each employee can realize professional opportunities with the utmost advantage for himself and the company. We provide to our employees good working conditions and worthy material compensation. The main directions of investments are the introduction of up to date “know-how” and our own scientific development. STRATEGY OJSC “Kazanorgsintez” strives so that the highest level of industrial and ecological safety requirements of legislations is adhered to and 10 Accounts receivable mln.RUR 966.4 2,880.4 3,476.1 117.8% makes the best efforts for the maximum reduction of adverse affects • Realization of the Development Program for increasing the capacities of existing products and production of new ones on the environment and human health. 11 Average personnel number employees 7,061 7,607 8,072 106.1% RUR / month 12,181 15,463 16,739 108.3% • Increasing production with the high added value • Increasing efficiency by optimization the parity of internal and export sales • Diversification of the raw-material base • Reduction of expenses under the saving resources program • Diversification of the financing base 12 Average salary CITY UNDER DOME Even in the polar districts of our planet it is possible to establish comprehensible temperature conditions, using the sun light only, if to build something like a hothouse. However the glass is too heavy for this purpose - it is needed to be transferred to the pole. But what if we want to cover with the dome not only one single building but the city? Then the glass construction will be awfully complicated. Arise the application of the polymer films. But it is quite difficult to create the effective construction from them. If the megadome will be built on the skeleton basis, the construc- tion will be heavy and nonresistant to the nature cataclysms (for example wind flows). Alexander Bolonkin, space specialist, and Richard Katkart, geographer, offered to arise nonskeleton “Evergreen polar domes”, supported at the melted condition by the small exuberant pressure inside the settlement. The skin can be made from the transparent film with the width of 0.1 mm, for example. For additional heat insulation, the wall of the dome has cellular structure. More over, dome’s authors provided rectangular grid of the thinnest wires in the depth of the film, warning about the dome’s damage. Certainly, ultrathin (about micrometer and less) polymeric films, possessing the necessary strength for such construction, are considered as the products of high technologies themselves. Their creation and mass production - is the purpose for the nearest years. However, there is nothing fantastic in the plans of Bolonkin and Katkart, just only the assumption about the future application of such domes on moon and on Mars. part I // ABOUT THE COMPANY // 18 MAJOR FACTORS OF RISK 19 MAJOR FACTORS OF RISK Risks listed below can render negative influence on activity of OJSC «Kazanorgsintez». COUNTRY AND The enterprise is registered as the tax bearer and carries out primary activity in Kazan. The REGIONAL economic situation in Russia for the last several years had stabilized and has a predictable RISKS character. There are such positive tendencies as: growth of the gross domestic product (GDP), stabilization of the national currency, growth of the real level of wages, reduction in rates of inflation. The credit rating of Russia in a foreign currency on the international scale in long-term prospect has increased by the end of 2006 up to the investment level, and made by data of: Standard&Poor’s - BBВ +; Fitch - BBB +; Moody’s - Baa2. Increase of Russia credit rating opens additional opportunities for attraction of extra loan facilities both inside of the country, and from foreign capital market. However positive tendencies can change. Economic and political instability in Russia can negatively influence to the activity of OJSC «Kazanorgsintez». The risks connected to geographical features of the country and region in which primary activity is carried out, are insignificant, since the location of the enterprise is characterized by absence of the increased danger of acts of nature, and presence of traffic intersections and ways of communication excludes inaccessibility of the enterprise for suppliers and consumers. INDUSTRY The risks connected with possible change of prices for raw materials, services used by RISKS the company. Raw materials and power have the greatest relative density in the structure of expenses of chemical industry. Prices for basic raw materials are influenced by the world oil prices at different extent. The most influence is experienced by propan-butane and benzene. The decision of questions of raw materials supply of OJSC «Kazanorgsintez» is being promoted by closer cooperation with OJSC “Gazprom”, enterprises of oil-and-gas chemical complex on the territory of Tatarstan Republic on mutually advantageous conditions, and also a policy of the country leaders of Tatarstan Republic, directed to the active state support of whole oil-and-gas chemical complex of Republic. Provision of the enterprise with the electric power is carried out by OJSC “Tatenergo” from two power sources of Kazan Thermal Power Stations-2 and Thermal Power Station-3 which are interconnected and have connections with RAO “UES “. The heat supply is carried out by Kazan Thermal Power Station-3. Provision of the enterprise with power resources is carried out without fail. The enterprise in the activity uses basically local sources of resources, works, and services. The risks connected with possible change of prices for company’s products in the local market. The great demand for OJSC «Kazanorgsintez» products and its competitive advantages allow establishing prices up to the level of world prices without reduction of the sales volumes during many years. For price level definitions are considered: market condition, prices of competitors, and costs of production. However, competitive struggle of the companies and aspiration for increasing the share in the Russian market can influence the change of the market prices. The risks connected with influence of the world prices conjuncture for exported products. The part of OJSC «Kazanorgsintez» products is exported. The policy of export contracts provides the conclusion of contracts till 1 year. The prices for products are established according to the conditions of deliveries and a conjuncture in each concrete country. These prices can feel fluctuations under influence of the factors which are not controllable by OJSC «Kazanorgsintez». RISKS CONNECTED The risks connected with the production process WITH ACTIVITY OF Industrial activity of OJSC «Kazanorgsintez» is interfaced with possibility of adverse factors, including failure of the equipment, carrying out of not planned works for repair and, as conTHE COMPANY sequence, decrease of the industrial parameters below the expected level. Considering it, at the enterprise the automated control system of technological processes is being installed. In full and in time scheduled preventive, current and major overhaul of production assets are carried out. Certificates of conformity are received for: quality management system GOST R ISO 9001-2001 (ISO 9001: 2000); ecological management system ISO 14001: 2004; integrated management system ISO 9001 and ISO 14001. The risks connected with licenses effect For the activity in the field of production and use of natural resources OJSC «Kazanorgsintez» receives the licenses, permitting such activities. In the majority cases the possibility of license withdrawal is provided if requirements of license agreements are not carried out. OJSC «Kazanorgsintez» aspires to fulfill all requirements of license agreements. Environmental risks Activity of OJSC «Kazanorgsintez» is interfaced with the potential danger of pollution of the environment or causing damages to it. The ecological policy of the Company is approved at OJSC «Kazanorgsintez», certificates of ecological management system and integrated system of quality management and ecological management are received. The scheduled nature protection actions are carried out aimed to prevention of the harmful influence of the operating units to the environment. part I // ABOUT THE COMPANY // 20 MAJOR FACTORS OF RISK FINANCIAL The risks connected with inflation in Russia RISKS At increase in the inflation rate the depreciation of national currency and increase of the EVENTS OF THE YEAR JANUARY prices are taking place. The increase in the rates of rise of prices can lead to the growth of expenses of the enterprise (due to the rise in power resources, raw material, and materials prices), growth of costs of loan funds and become the reason of decrease in parameters of profitability. Therefore in case of significant excess of actual parameters of inflation over forecasts of the Government of the Russian Federation, the management of the enterprise plans to take actions on restriction of expenses growth, decrease of debt receivables and reduction of its average terms. The risks connected with changes of currency exchange rates The part of production is sold to the foreign market; therefore the enterprise is the subject of the certain currency risk. The basic costs of the enterprise – roubles, whereas the revenues from products’ sales for export in rouble equivalent increase with increase in a rate and decrease with reduction of a rate. 21 I New development of OJSC «Kazanorg- OJSC «Kazanorgsintez» has hold Scientifisintez» for low density polyethylene cally-practical conference devoted to the 5th production with use of liquid fraction anniversary of funcof low-molecular polyethylene instead of tioning of informaimport catalyst oils is awarded with bronze tion system ERP of medal according to the results of participa- class SAP R/3 where tion in the world Interior of innovations, heads and the main scientific researches and new technologies experts of the lead“Bruxelles-Eureka” which annually takes place ing enterprises of in Belgium. oil-and-gas industry have participated. FEBRUARY The risks connected with changes of interest rates The enterprise has long-term credits and loans denominated in foreign currency and in roubles, with the “floating” and fixed interest rates. In this connection, the increase in “floating” interest rates and the exchange rate can lead to the price rise of the debt service for the enterprise. For reduction of the given risk OJSC «Kazanorgsintez» receives credits in different currencies, aspires to optimize a ratio of received credits with the fixed and “floating” interest rates, and also carries out systematic activity for reduction the interest rates and credits’ margin. II Products of OJSC «Kazanorgsintez» The association of swimming pools of Russia are awarded with two diplomas of the has awarded a complex «Orgsintez» with the All-Russia organization of the quality, 2nd honor place according to the results of testifying the conformity to the highest level traditional review-competition among the established by the program swimming pools of Russia. «Russian quality». Diplomas are given for low density and high density polyethylene and composition of middle density polyethylene for The unit for washing waters return has been commissioned at purification units, which allowed to reduce discharge into r. Volga from 6,100 down to 100 cubic meters a day. pipes and connecting details LEGAL RISKS The risks connected with change of rules of the Customs control and duties for natural gas networks, and In view of purchasing import equipment and delivery of products for export there is a risk of also for pipes from polyeth- change of the state customs regulation that can affect to OJSC «Kazanorgsintez» expenses. ylene for gas pipelines PE 80 GAS. The risks connected with change of the tax laws Consist in increase in cost price of products in case of increase in tax rates or introduction of additional taxation. The risks connected with change of judiciary practice The questions connected with OJSC «Kazanorgsintez» activity and capable to affect the results of the current disputes of OJSC «Kazanorgsintez» with the third parties, are insignificant since proceedings with participation of OJSC «Kazanorgsintez» have changeable character and do not render essential influence on current results of the company. In case of occurrence of one or several risks listed above, OJSC «Kazanorgsintez» will take all possible measures on reduction of developed negative changes at the enterprise. At the moment, definition of the full list of specific actions at any risk is not obviously possible, because elaboration of adequate measures is complicated with uncertainty of situation development in the future. Parameters of held actions will depend on features of the situation in each specific case. OJSC «Kazanorgsintez» cannot guarantee, that the activities directed on overcoming of arisen negative changes, will lead to essential change of a situation. MARCH III The collective agreement of OJSC «Design procedure for estimation of inte«Kazanorgsintez» is recognized grated factor of the worker for observance of as one of the best in nomination requirements, rules and norms of industrial «Enterprises and organizations of the indus- safety, protection and ecology» was came trial sphere» of the into force with the purpose of provision incompetition «The dustrial safety requirements observance and best collective agree- perfection of preventive work system. ments». part I // ABOUT THE COMPANY // 22 EVENTS OF THE YEAR APRIL IV New installation of the pressure 23 EVENTS OF THE YEAR pure hydrogen is commissioned with the VII purpose of HDPE Plant provision with highly it is the best parameter among the enter- purified hydrogen. prises of Tatarstan Republic in all presented The new biogenic station, being the impor- sectors. The rating is made by the Publishing tant part of the system of biological sewage House «Secret of a firm». JULY swing adsorber (PSA) E-100 with OJSC «Kazanorgsintez» has taken the sixth place in the capacity of 240 kg an hour of chemical sector in the rating of “200 the most open companies of Russia», treatment is put into operation. Process of preparation and supply of biogenic solution The expanded board «Competitiveness of commodity producers and results of social and to aeration tanks is completely mechanized economic development of Tatarstan Republic for the 1st half-year 2006» at a level of Govern- and automated. ment with participation of Prime Minister and also representatives of the President Body, the State Council and Cabinet of Ministers of Tatarstan Republic has taken place on the territory MAY V According to the operating sched- The engineering specification for the new- of the enterprise. ule reactors, intended for bisphe- est cable grade of polyethylene 153 KUSR nol-A synthesis have arrived at OJSC release, possessing increased strength and «Kazanorgsintez». resistance to cracking is elaborated and approved. AUGUST The combined team of OJSC «Kazanorgsin- VIII OJSC «Kazanorgsintez» has Test works of the new type of flare head, albecome one of the three lowing reducing volumes of harmful emisleaders of the Russian sions in an atmosphere are completed. tez» has won three bronze medals at sports Federation for introduction of technologies All-Russia Festival among the sport clubs «NORTEL» in Russia and has been recognized of industries which took place under aegis as the indisputable leader for quantity of use of Federal agency of physical training and of technologies “know-how” in this sphere. sports. Orenburg gas processing plant resumed in full supplies of ethane – the main raw material of IX As a result of the scheduled au- OJSC «Kazanorgsintez». SEPTEMBER dit carried out by the experts of the certification body VNIIS, the certificate report is received, confirming JUNE VI The new building of the fire bri- OJSC «Kazanorgsintez» is recognized as a that quality management system, ecological gade depot for protection of the winner of competition «Ecoleader» among management system and integrated man- enterprise and nearby objects is large enterprises of Tatarstan Republic in the agement system of OJSC «Kazanorgsintez» as put into operation at OJSC «Kazanorgsintez». nomination «Introduction of technologies a whole correspond to the requirements of The new depot is equipped with the modern for gathering and processing of secondary GOST R ISO 9001-2001 (ISO 9001:2000), and equipment. also to the requirements of ISO 14001:2004. For the first time the set of polyethylene resources» and is awarded with the Diploma «For effective nature protection activity». Water polo team “Sintez”, the general sponsor grade 276-73 has been shipped in bulk in Fitch Ratings has confirmed a credit rating of which is OJSC «Kazanorgsintez», became the sea containers. of OJSC «Kazanorgsintez» at a level «B» (the the bronze prize-winner in play of the Cup of outlook - “Stable”) and a short-term rating at Russia of the season 2006-2007. a level «B». part I // ABOUT THE COMPANY // 24 EVENTS OF THE YEAR EVENTS OF THE YEAR NOVEMBER Within the framework of the 1st International 25 XI OJSC «Kazanorgsintez» has taken part in the exhibition “Interna- economic forum «Presentation of the economic tional chemical assembly ICA potential of Tatarstan Republic» the Minister of economic development and trade of the Rus- - 2006” devoted to general chemistry, chemi- sian Federation German Gref has visited OJSC cal raw materials, equipment for the chemi- «Kazanorgsintez». cal industry, plastics and processing. According to the results of the exhibition organizers, The project of OJSC «Kazanorgsintez» for return which were JSC «Expocentre» and the Rus- of a part of the purified sewage to water-circulation system of the enterprise has taken the 1st sian Union of chemists, have awarded OJSC place in the competition organized in Krasnoyarsk by the Ministry of Economics and technol- «Kazanorgsintez» with the Diploma for active ogy of Germany among graduates of the target Russian program of administrative staff retrain- participation. ing, past training abroad. Within the framework of the second All-Russia ecological conference «New priorities of According to the results of participation in the 13-th International exhibition «Oil. Gas. Petro- national ecological policy in the real sector chemistry-2006» and the specialized exhibition «Industrial ecology and safety» OJSC «Kaza- of economy» the representative of OJSC norgsintez» is awarded the supreme award - the Diploma of Grand prix «For the organization of «Kazanorgsintez» has been awarded with production and release of low density linear polyethylene» in the nomination «Production with the honorable award «Ecological board of the new or improved characteristics». Russia» for the vigorous activity in the field of the environment protection and rational OJSC «Kazanorgsintez» has participated in the main economical «Russian national exhibition» in the capital of China, Beijing, environmental use. within the framework of carrying out of the Year of Russia in China where the enterprise has been positioned as one of the leading OCTOBER Standard&Poor’s has confirmed a Standard & Poor’s assigned a credit rating enterprises of the industry of the Russian credit rating of OJSC «Kazanorgsin- «В-» for Eurobonds issue of Kazanorgsintez Federation. X tez» at a level «В-». The outlook of S.A. rating is “Stable”. The meeting with a theme «State-corporate 9.25 % through the special purpose vehicle public» with participation of the First deputy XII «Kazanorgsintez S. A.» with repayment in Oc- prime minister, Minister of Education and The basic part of tober, 30th, 2011. Listing of notes is carried sciences, and also heads of the largest enter- reconstruction out by the London stock exchange. prises of Tatarstan Republic has taken place phenol-acetone on the territory of OJSC «Kazanorgsintez». production unit at OJSC «Kazanorgsintez» has carried out the partnership in development of professional debut Eurobonds issue for 200 million USD at technical education system in Tatarstan Re- DECEMBER Fitch Ratings assigned the final rating “B” for Eurobonds issue by emitter Kazanorgsintez S.A. of ethylene plant has been completed; due to this the capacity of production is increased up to 65 thousand tons phenol a year. of THE REVIEW OF ECONOMY OF RUSSIA AND TATARSTAN REPUBLIC Positive financial result for January-Novem- Index of chemical production in 2006 made The investment climate in Russia and Tatarstan Republic has been proved, which is con- ber 2006 by the basic kinds of economic ac- 101.9 % against 2005. Growth of the in- tivities of the large and middle organizations 26.6 trl. roubles in the current prices. is received at rate of 3.5 trl. roubles, or Gold and exchange currency reserves has increased by 3.2 trl.* 130.2 % against the similar period of the dex is provided due to increase in volumes of roubles in 2006, which is 2 times more, than in 2005. For the 1st of last year, including in processing productions January 2007 the volume of gold and exchange currency reserves has – roubles (151.0 %). 1,075 ths. tons, phenol - 221 ths. tons, ethylene – 2,147 ths. tons for 2006 agency - «Ваа2», Fitch Ratings agency - «ВВВ +». – made in the Russian Federation, which in relation of 2006 is determined by Standard & Poor’s agency at the level «ВВ-», Moody `s agency 102%, 91%, - «Ва1». According to the rating of «Expert RА », Tatarstan Republic is stably included in In 2006 rate of growth of GDP has made 6.8 % against 6.4 % in the year earlier. The volume of GDP of Russia, according to preliminary estimation, has made 8.3 trl.* roubles . According to RosBusinessConsulting, Rus- sia is on the 3rd place in the world because of the volume of gold and exchange currency reserves according to the results of 2006. The size of Stabilization fund for the 1st of January 2007 has made 2.3 trl. in 1.4 trl. Investments into fixed capital increased by 13.5 % in comparison with 2005 (2005/2004 – 110.7 %). Thus the total amount of investments into fixed capital according to a rouble equivalent (8.8 % of gross national product). Federal service of the state statistics has made Inflation for 2006 was 9.0 %, against 10.9 % in 2005. The de- 4.5 trl. roubles. In structure of investments crease of inflation rates basically is caused by: growth of the goods into fixed capital according to the sources offer and a competition from import in connection with strengthen- of financing relative share of the own means ing of a rouble exchange rate; growth of money demand in real sector of the organizations used on the investment of economy in the process of proceeding growth of economy and purposes was against its dedollarization; decrease of inflationary expectations which was reflected in growth of savings and investments. foreign investments arrived to the economy The monthly average salary across the Russian Federation was ths. 45.1 % 47.5 % in 2005. In 2006, 930 bln.* roubles of 24.5 % 10.7 of Russia, which is by 31.7 % more, than roubles, which is above the figure of 2005. The in 2005. Direct investments have grown by in comparison with the previous monthly average salary in Tatarstan Republic has made period. In Tatarstan Republic the amount roubles in 2006, which is above the parameter of the previ- 8.9 ths. 55.5 % 25.9 % of investments into fixed capital has made ous period. Export of goods in 2006 has made 8 trl.* roubles, according to data 146 bln. roubles in 2006, which counting upon every person of population makes 25 % more than in 2005. Thus the share of 38.4 ths. roubles, this parameter is above the CIS countries in total amount of export of Russia has increased the average across Russia by 23 %. from 13.8 % up to 14.3 %, the foreign countries has accordingly decreased from 86.2 % to 85.7 %. The gain of export is Index of industrial production for 2006 was received due to the increase of capacities by 12.5 % and increase 103.9 %, in 2005 - 104 %. in contract prices by 87.5 %. Import of goods for 2006 made 4.3 trl.* roubles or by 30.8 % of Bank of Russia, or more, than in 2005. The share of the foreign countries in total amount of import of Russia has grown from 82.6 % the CIS countries has decreased, accordingly, 84.6 %, from 17.4 % to up to 15.4 % . The share of production of the chemical industry in import has decreased from 16.5 % in 2005 to 15.8 %. firmed by the true data of the international rating agencies: The long-term credit rating of the Russian Federation on the international scale by the production of the basic chemical substances. end of 2006 is determined by Standard & Poor’s agency at the level «BBB +», Moody’s There have been produced polyethylene to volumes of 2005 make The long-term credit rating of Tatarstan Republic on the international scale by the end 102 % accordingly. Cost of export of pro- the list of ten Russian regions with the least investment risks. duction of the chemical industry increased by 17.7 %. The long-term credit rating of OJSC «Kazanorgsintez» on the international scale, assigned in On average, prices of producers of industrial 2005, is left without changes by the agencies by the end of 2006 - Standard & Poor’s «В-» and Fitch Ratings «B». The outlook on ratings of the both agencies is “Stable”. goods for 2006 have grown by 10.4 % 13.4 % in 2005. A gain of prices for production has made: 1.6 % - mining of minerals resources (in 2005 - 31%); 13.3% - processing productions (in 2005 – 8.1 %); 14.3 % - chemical productions (in 2005 – 10.8 %). The prices for products against MAIN PARAMETERS OF ECONOMY DEVELOPMENT Parameters (In % to the last year) 2003 2004 2005 2006 GDP 107.3 107.2 106.4 106.8 Consumer price index by December of the last year 112.0 111.7 110.9 109.0 Production of the industry 107.0 108.3 104.0 103.9 Investments into a fixed capital 112.5 110.9 110.5 113.5 Export of goods 126.7 134.8 133.9 125.0 596 bln. roubles and has grown by 7.1% to the level of 2005. According to Import of goods 124.8 128.0 128.5 130.8 the estimation of the federal bodies Tatarstan Parameters Rate for December, 31st RUR/$ 29.45 27.75 28.78 26.33 Rate for December, 31st RUR/Euro 36.82 37.81 34.19 34.70 27.3 34.4 50.6 61.1 of chemical productions were formed under influence of conjuncture of the world markets basically. The gross regional product in Tatarstan Republic (GRP) in 2006 made 620 bln. roubles and became one of the highest figures in Russia. Share of GRP in GDP of Russia makes 2.3 %. The volume of indus- trial output in Tatarstan Republic has made Republic takes the second place (after Moscow) in the general rating of economic development and the third place in the rating of social development (after Moscow and St.Petersburg). The average price for oil grade Urals $/barrel The material is prepared according to the data of the Ministry of economic development and trade and Goskomstat of Russia * According to the exchange rate on 31.12.2006, 1$ = 26.3311 PART II INDUSTRIAL ACTIVITY STRUCTURE OF COMMODITY OUTPUT 2005 13 597 mln. RUR 32% LDPE 31% 6% Processing 5% 7% Glycols 7% 9% PE pipes 9% 12% Other 11% 12% Phenol, Acetone 6% 22% HDPE 31% 2006 15 771 mln. RUR part II // INDUSTRIAL ACTIVITY // 30 PRODUCTION AND THE COST PRICE OF PRODUCTS 31 PRODUCTION AND THE COST PRICE OF PRODUCTS In 2006 commercial output in amount of HDPE production units. Nevertheless, the 15,771 mln. roubles was produced, that is by percent of use of capacities has increased 16 % more than in 2005. The gain is basically by 4 % comparing to 2005 and has made The full cost price of commodity output in Costs per rouble of commodity output have received due to rise in prices by 11.7 %. Pro- 73.2 %. The general capacities increased by duction in physical terms has increased by 1.2 % and have made by the beginning of – 1,699 mln. roubles or 16.4 %. The increase fected by: in the cost of production basically was influ- increase in the prices and volumes of 4.3 %. In the year of 2006 the reconstruction 2006, 1,240 thousand of tons of organic synwas held in the phenol-acetone, LDPE and thesis products. enced by the growth of volumes and rise in purchased raw materials; prices of purchased raw materials (the prices change of structure of consumed raw for ethane + 8 %, ethylene + 4 %, butane + materials; 27 %, benzene +10 %). As a whole expenses increase in the wages fund; for purchase of raw material and materials decrease of the cost of power resources. the reported year made 12,067 mln. rou- decreased by 1.2 % and have made 77 cobles, increase in comparison to the last year pecks. Change of the level of costs has ef- have increased by 25 % in 2006 against the Maximum specific weight in costs took ex- last year. TOTAL VOLUME OF RELEASE OF MAIN KINDS OF PRODUCTS (In tons) penses for raw material – 56.3 %, expenses for work payment – 15.7 % and power – 12.6 %. Name 2004 2005 2006 2006/2005 Ethylene 321,875 263,621 318,304 120.7% Phenol 41,951 41,887 24,491 58.5% Acetone 26,669 26,680 15,355 57.6% LDPE 202,181 167,298 181,836 108.7% HDPE 186,501 166,868 208,250 124.8% Ethylene oxide 55,266 46,831 38,455 82.1% Pipes and polyethylene details 24,501 29,557 27,723 93.8% Ethylene glycols 59,948 53,622 52,117 97.2% Ethanolamines 11,755 12,606 11,963 94.9% COST PRICE OF COMMODITY OUTPUT (in mln. RUR) Name of expenses 2004 2005 2006 2006/2005 Raw material and materials 4,451 5,451 6,793 125% Energy from the third party 1,469 1,619 1,522 94% Salary with deductions 1,300 1,675 1,897 113% Services of industrial character 430 380 323 85% Amortization of fixed capital 308 385 580 151% Other costs 866 858 951 111% 8,824 10,368 12,067 116% General costs for production INDUSTRIAL STRUCTURE OF OJSC «KAZANORGSINTEZ» THE INTEGRATED TECHNOLOGICAL SCHEME OF PRODUCTION Pipes production HDPE PRODUCTION Ethylene plant LDPE PRODUCTION ETHYLENE Organic products plant Kazan Open Joint Stock Company “ORGANICHESKY SINTEZ” PROPANEBUTANE Plant for production of nitrogen, oxygen and cold (NOC) Plant for preparation and holding major overhauls (PHMO) ETHANE BENZENE ETHYLENE PRODUCTION UNIT 1 ETHYLENE PRODUCTION UNIT 2 ETHYLENE PRODUCTION UNIT 3 ETHYLENE PRODUCTION UNIT 4 Side products of ethylene production Propylene Bisphenol-A plant Polycarbonates plant OWN ETHYLENE RAW MATERIAL Plant for production and processing of high density polyethylene (HDPE plant) Liquid products of pyrolysis Other PHENOL AND ACETONE PRODUCTION SALES ETHYLENE OXIDE PRODUCTION PRODUCTION PROCESS AT KAZANORGSINTEZ Low density polyethylene plant (LDPE plant) Production of glycols, textile processing chemicals and modifiers, ethanolamines es part II // INDUSTRIAL ACTIVITY // 34 LDPE PLANT ETHYLENE PLANT Ethylene plant consisting of four units for production of ethylene and phenolic pro- butane fractions for ethylene production, propylene output has decreased to 30.3 ths. tons, which is by 14 % lower than 2005. LDPE plant consists of two units, ethylene In the reported year it was produced 181.8 is used as the basic raw material. The plant ths. tons of low density polyethylene which duction is the first in the technological chain produces various grades and compositions is by 8.7 % more than in 2005. Growth of pro- of conversion of OJSC «Kazanorgsintez». The Phenol is used for caprolactam, diphenylpropane, medical preparamain products of the plant are: ethylene, tions, synthetic resins, softeners, herbicides productions. In 2006 it of low density polyethylene for mold, blown, duction volumes is directly connected with propylene, phenol and acetone. The main was produced 24.5 ths. tons, which is by 41.5 % lower than the level raw materials are : ethane, propane-butane of 2005. Decrease in volumes is caused by reconstruction work at the unique producer of electric-conductive has made 99.7 % (in 2005 г – 84.2 %). From phenol-acetone production units due to which the capacity of pro- duction of special cables and pipes for trans- of one unit with partial stop of productions duction is increased portation of explosives in mining industry, was made. fraction and benzene. Ethylene serves as the initial raw material for production of polyethylene and ethylene up to 65 thousand tons of phenol a year. oxide. All produced ethylene is transferred to LDPE, HDPE and organic products plants for Acetone is used in anhydride, the further processing. Polyethylene produc- acetic tions have the priority in maintenance with acetonecyanhydrine, raw material. In 2006 it was produced 318.3 diphenylpropane proths. tons of ethylene (+20.7 % against 2005). ductions, and as solLoading of production capacities made vent in various indus74.9 %. The increase in production volumes tries. The volume of is connected with resuming of ethane deli- production has made veries from Orenburg helium plant. 15.4 ths.tons, which is also below the level of Propylene is intended for production of polypropylene, phenol, acetone, propylene oxide. As a result of decrease in using of propane- 2005 by 42.4 %. Relative share of ethylene plant in commodity output of OJSC «Kazanorgsintez» comes to 10 %. Number of the personnel by the end of the year made 1,072 employees. extrusive and film productions. The plant is raw materials supplies. Loading of capacities polyethylene compositions in the CIS, for pro- July till November 2006 the reconstruction and composition of polyethylene with high adhesive properties, Relative share of LDPE plant in commodity output of OJSC «Kazanorgsintez» comes to 32.6 %. Number of the personnel by the end of the reported period made 620 employees. allow to increase corrosion resistance of spiral-seam pipes in case of pipe insulation by this kind of polyethylene. 35 PLASTIC AGAINST RADIATION During the long space travels like the human flight to Mars, the main problem for the pilot’s health is radiation. Some of NASA research centers investigate lots of design materials capable to serve as the material for a space ship body, or at least the material for the special protection from radiation. Different researches show that people will need to use plastics more widely in the space ships, and will need to create new kinds of polymeric materials constantly. During the distant, and, that is possibly more important, long-term travels the biggest threat for the people’s health - are galactic space rays (GSR). Fragments, flying almost at the light speed,sent by the explosion of the upnew stars extremely difficult to stop. These cores dive through the the space ships and people’s bodies, killing single cells and destroying DNA molecules even more than gamma rays. Working on near-earth orbit, person is covered by the planet from the fire of galactic rays. It is known that the thin-walled aluminium space ship case, like “Apollo” case, absorb almost half of radiation. Plastics could be used as the alternative for the metals. They are rich with hydrogen - the element, which absorb space rays very good. For example, polyethylene, the same one which is used for the plastic bags, block 20% more of the space rays than aluminium. Strengthened polyethylene, created at the Marshall Space Flight Center, 10 times stronger than aluminium, and at the same time lighter than “the winged metal”. Even if this polymer wouldn’t be used for the whole space ship construction, this new material can be used as the additional antiradiation protection. Probably in the already designing mars piloted ship even the living modules cases will be made from the polymers. part II // INDUSTRIAL ACTIVITY // 38 HDPE PLANT ORGANIC PRODUCTS PLANT The plant for production and processing of high density polyethylene (HDPE) consists of two production units: Organic products plant uses ethylene as the static character, modify its structure, increasbasic raw material. The plant produces ethyl- ing strength characteristics. ene oxide and products on basis of ethylene 1. HDPE PRODUCTION Ethylene is used as the basic raw material. 2. PRODUCTION OF PLASTIC PRODUCTS Plant produces various grades and composi- HDPE is used as the raw material for productions of high density polyethylene, intended tion of polyethylene pipes. for production of mold, extrusion, cable oxide (glycols, ethanolamines, textile-auxiliary substances, and also products for initial preparation of oil – corrosion inhibitors and Glycols are used by the gas-transport and systems of gas supply, water supply, sewage gas enterprises for gas dehydration, being In the reported year it was produced systems, and systems of process piping. The main raw material for production of foam 208.2 ths.tons of polyethylene, which is by volume of polyethylene pipes production in polyurethane, and also are delivered to man- 24.8 % more, than in 2005. Increase in pro- 2006 has made 27.7 ths.tons(-6.2 % concern- ufactures of synthetic fibers. duction volumes is connected with the end ing 2005). Loading of capacities has made of modernization works from 197 up to 510 58.8 % (in 2005 - 62 %). Polyethylene pipes ths. tons in a year. Thus loading of capacities and fittings productions are the largest in has decreased from 84.2 % to 74.7 %. For pro- Russia. cessing of polyethylene into polyethylene pipes and details it was directed 30.8 ths.tons (+1.7 % against 2005), other part of production is marketed. Specific weight of HDPE plant in commodity output of OJSC «Kazanorgsintez» comes to 41.6 %. Number of the personnel 749 employees. Cooling liquids are intended for application in cooling systems of heat exchanging devices and engines of internal combustion. paraffin sediments, proxanols-proxamines, In 2006 it was produced 74.9 ths.tons of commodity output, which is by 6.4 % lower than demulsifiers and cooling liquids). Polyethylene pipes are widely applied in products, and also pressure and gas pipes. 39 the level of the last year. Loading of capacities has made 58 %. The main reason of production volumes reduction was decrease in supply of the basic raw material Ethanolamines are used in gas and oil indus- ethylene. Adverse martry for gas purification from acid and sulfur- ket conditions in 2006 containing organic compounds, and in pro- have led to reduction duction of perfumery products. of prices for produced Oil demulsifiers, corrosion inhibitors and par- products, thus the prices affin sediments are used by oil-extracting en- for the main raw material Relative share of organic products plant in commodity output of OJSC «Kazanorgsintez» makes 11.8 %. Number of the personnel - 717 employees. terprises for oil-water separation, for increase have increased. Profitability of commodity of layers petrofeedback and protection of output has decreased by 6 %. the drilling equipment. Textile-auxiliary substances: stearoxes, oleoxes, oxamines, oxethylene fat acids are used in production of woolen, cotton, silk, artificial fibers, imparting the fiber processability, anti- part II // INDUSTRIAL ACTIVITY // 40 PLANT FOR PRODUCTION OF NITROGEN, OXYGEN AND A COLD (NOC) AUXILIARY DIVISIONS NOC plant was formed in 2005 by integration of auxiliary productions units. It produces com- Provide technological process of the main productions with material and power resources, pressed air, gaseous nitrogen, cold, liquid and gaseous oxygen. More than 85 % of these mobile and rail transport, warehouse facilities, execute maintenance of buildings and equip- power resources are consumed by other plants and divisions of the enterprise. The main kind ment, are engaged in processing of polymeric waste, production of polypropylene bags, of commodity output is liquid oxygen which and also carry out is shipped to consumers in tanks by rail and automobile transport. In 2006 relative share of NOC plant in commodity output of OJSC «Kazanorgsintez» makes 0.4 %, Number of personnel by the end of the year - 302 employees. quality analysis of products and monitoring of the Number of personnel by the end of 2006 made 2,636 employees. environment. PLANT FOR PREPARATION AND HOLDING MAJOR OVERHAULS (PHMO) The plant was formed in 2005 on the basis of two affiliated repair organizations: OJSC «Tatkhimremont» and OJSC «Spetzneftekhimmontazh». The plant carries out preparation and realization of routine and major overhauls of industrial equipment in all divisions of the enterprise. The basic kinds of works: repair of process equipment, pipelines, thermal insulation, buildings and constructions, production of the equipment and metal constructions. In structure of repair fund the amounts of works which are carried out by PHMO plant constitute IN 2007 IT IS PLANNED TO PUT INTO OPERATION TWO NEW PLANTS: BISPHENOL-A PLANT. The “know-how” of «Idemitsu Kosan Co., Ltd» has the following advantages: ecologically clean process; high quality of products. Number of personnel by the end of 2006 made 145 employees. 9 %. Alongside with PHMO plant maintenance works are carried out by the repair departments of main plants, repair workshops and contractors. The amount of works which are carried out by the contractors makes 30 % of repair fund. POLYCARBONATES PLANT. Number of personnel by the end of 2006 made 397 employees. The first in Russia, the “know-how” of «Asahi Kasei Engineering Corporation» using non-phosgene method and the “know-how” of without waste production. Number of personnel by the end of 2006 made 110 employees. 41 part II // INDUSTRIAL ACTIVITY // 42 DEVELOPMENT OF TECHNOLOGIES AND BRANDED ASSORTMENT In 2006 following new kinds of products are developed and produced: RESOURCES EFFICIENCY Within the framework of the federal program «Effective consumption of power resources» and the Tatarstan Republic law «About the approval of the Program «Power and resources AT HDPE PLANT: linear polyethylene grade PE2NT05-5, intended for blow films, and also using in mixtures with LDPE and HDPE has been produced at the first time; savings in Tatarstan Republic for 2006-2010» the RESOURCES SAVINGS PROGRAM FOR 20062010 has been developed and confirmed in OJSC «Kazanorgsintez». This program was logic continuation of the program of energy savings, acted at the enterprise in 2000-2005. AT LDPE PLANT: Following technological cards are developed: THE PURPOSE OF THE PROGRAM: for 153-KUSR compound with the increased cracking resistance; for BGKPG - 01K compound with the lowered combustibility; Increase of efficiency of use of natural-raw, material, labour and administrative - for cable film compound (KPK VC), intended for manufacturing cable cores with film- managerial resources. foamed isolation; TASKS OF THE PROGRAM: for cable film compound (KPK NC), intended for manufacturing cable cores with Introduction of the new advanced high technologies and the equipment, allowing film-foamed isolation; to provide decrease in specific charges for raw material, fuel and energy, and to increase work productivity. AT NOC PLANT: Modernization of existing technological processes and the equipment, optimization gaseous argon. of parameters of technological processes. Creation of the organizational, normative and economic conditions providing an effective utilization of resources. Use of secondary resources. QUALITY SYSTEM «Kazanorgsintez» carries out quality check Bodies in 2006. By results of the inspection and laboratory tests at all stages of produc- control, previous certificates of conformity tion. Since 1986, no essential complaints were confirmed. Repeated certification of have been received to the address of the 8 kinds of products has been carried out as The priority task for OJSC «Kazanorgsintez» in order to actions introduction for power-and- company, concerning quality of the prod- well. 10 kinds of products have been certi- resource efficiency is growth of production volumes at stabilization or decrease in absolute ucts. fied for the first time according to the system consumption of initial kinds of resources. of GOST R. 21 energy saving activities have been carried out in 2006. Expenses for those activities Since 1999 activity is carried out according to the world’s standards of ISO 9000. In 2005 General level of output quality remains sta- realization in 2006 have increased by 1.3 times in comparison with 2005 and have made 5.1 the system of ecological management ISO ble. Production volume accepted by quality mln. roubles. Economic benefit from the actions realization has made 82.9 million roubles. 14001:2004 and integrated system of qual- department at the first check has made: ity management ISO 9001 and ISO 14001 are In 2004 – 99.7 %, certificated at OJSC «Kazanorgsintez». In 2005 – 99.9 %, In 2006 certified products for the amount of 14.5 bln. roubles were produced. The volume In 2006 – 99.9 %. of certified products to the total amount of commodity output made 91.8 % for 2006. The inspection control of 50 kinds of products has been carried out by the Certification 43 TRAVELLING WITH THE SUN Even in 1968 number of soviet scientists offered to the attention of the government the design of the automobile with the solar batteries; however because of the technological imperfection the project hasn’t been realized in the USSR. Since then, vehicles with the working on “the solar fuel” engine appeared in the whole world, but these projects never go further than their project-designs. Nowadays, creation of the “solar” vehicles became the matter of the foreseeable future at last. Canadian company Spheral Solar developed flexible solar batteries - jeansalike material, capable to produce electric energy under the sun rays influence. Such material can be put on the surface of any form - not only flat. So, it can be used for any buildings and constructions covering. Such material is much cheaper than the analogues which are used nowadays: the material is made from thousands of tiny silicon balls, placed between two layers of aluminium foil and sealed in the special polymer shell. Every ball plays the role of the single photo element, at the time when foil is used for the electric contacts. In fact, new material gives the opportunity to transform the covering of any vehicle to the original “fuel factory”, which, at the presence of the reserve accumulator (in case of the cloudy weather) is able to supply the engine with the necessary energy. Why the polymer is the basis of such new material, can be easily explained. First of all, the possibility of creation the material with the planned characteristics is being solved with the help of organic synthesis more successfully nowadays. Secondly, polymeric material can have such characteristics which compensate defects of “traditional” materials. Spheral Solar combined traditions and innovation technologies quite successfully in its construction. part II // INDUSTRIAL ACTIVITY // 46 RESOURCES EFFICIENCY RESOURCES EFFICIENCY For estimation of power resources efficiency the index of power consumption was applied. During last 7 years the given index of power consumption tends to fall. POWER INTENSITY OF COMMERCIAL OUTPUT (IN PRICES OF 2004), TONES OF CONVENTIONAL FUEL/THS.RUR. 0.0400 0.0388 0.0366 0.0350 The index of thermal capacity of commod- The increase in consumption was because of ity output has decreased by 12.2 % in 2006, the following reasons: when reduction of thermal energy consumption made 8.5 % in comparison with 2005. The index of electro capacity has increased putting into work of the additional equipment for keeping up of the technological mode; by 9.7 %, when increase in current consumpworks of the equipment in the un- tion made 14.6 %. loaded mode and small loadings be- 0.0337 0.0333 47 cause of insufficient amount of raw 0.0324 materials; 0.0300 2002 2003 2004 starting up of the process equip- 2006 2005 ment after carrying out of adjustment works. The index of power consumption of commodity output has decreased by 3.9 %. AVERAGE PRICE OF ELECTRICAL AND HEAT ENERGY ( RUR) The effect from resources savings actions was reflected in the indexes of power resources use. So, the share of power resources in the cost price of commodity output has decreased in comparison with 2005 by 3 % and has made 12.6 %. 942 1000 SHARE OF ENERGY RESOURCES IN THE COST OF PRODUCTION, % 790 800 661 707 613 600 20.0 19.6 411 400 18.0 196 16.6 244 300 341 200 15.6 15.0 0 2002 2003 2004 2005 2006 12.6 electrical energy, MW/h 10.0 2002 2003 2004 2005 2006 heat energy, Gcal The rise in prices for heat power for 2006 has iff group named «Base consumers» from made 21 % on average in comparison with 01.01.2006. 2005. The prices for the electric power have decreased in 2006 by 25 % in comparison with 2005. Reduction of the average tariff for electric power in 2006 is connected with the decision of the republican Power Commission of Tatarstan Republic from 22.11.2005 №17/1 on the base of which OJSC «Kazanorgsintez» is belonged to the tar- According to the work results of 2006, the enterprise was awarded with the Diploma of the Ministry of Economy and Industry of Tatarstan Republic «For significant, stable results on energy-and resource saving». part II // INDUSTRIAL ACTIVITY // 48 ECOLOGICAL POLICY OJSC “Kazanorgsintez”, being engaged in production of products of organic synthesis, inorganic products, polymers and products made of polymers is aware that process of production, gener- OUR PURPOSES: Organization of production according to the requirements of nature protection legislation; ated waste products and output affects environ- Development of production processes with con- ment. secutive minimization of negative influence on We consider that introduction and sustenance environment; of ecological management system functioning Reduction of consumption of raw materials, ma- meeting the requirements of ISO 14001:2004 is terials, water and power resources per unit of pro- one of the main ways of solving and prevention of duced output; environmental problems. Constant improvement of activity in the field of environment protection; Decrease in level of emergency situations with ecological consequences. OUR TASKS: To create integrated system of quality manage- activities related with nature protection, having ment and ecological management according to created system of motivation of their ecological the requirements of standards ISO 9001:2000 and activity; ISO 14001:2004; To raise qualification of workers of the company To analyze tendencies, to take into account chang- in the field of environment protection, using own es and to develop necessary documents and pro- resources and participating in regional and inter- cedures according to requirements of nature pro- national projects; tection legislation, recommendations of territorial nature protection bodies, generally accepted principles of ecological management; To provide regular monitoring of the ecological aspects and their affects on the environment and To provide economical use of raw material, materials, water and power resources; NATURE PROTECTION OJSC «Kazanorgsintez» activities are carried out on the basis of necessary licensing documents, according to the nature protection legislation and ecological policy. Expenses for the environment protection in the reported year made 208.5 mln. roubles, which is by 9.5 % more than in 2005. Growth of expenses is connected with increase in charges at carrying out of nature protection activities and increase in charges for operation of fixed capital for nature protection purposes. 26 activities for soil and ground resources protection, water objects, atmospheric air protection have been executed in the reported year 2006 with the purpose of prevention the harmful influence of operating objects to the environment. The total amount of expenses for performance of nature protection activities made 71.4 mln. roubles in 2006 (in 2005 – 60.8 mln.roubles). All expenses are made from Company’s resources. In 2006 there were put into operation: new biogenic station of washing sewage purification, pump station, 4 cooling towers. Cost of nature protection assets has increased by the end of the reported period in 1.5 times and has made 288 mln.roubles (in 2005 – 197.7 mln.roubles.) including: To provide stage-by-stage switch to introduction of resource saving technologies. functioning of system of ecological management; To involve workers of OJSC “Kazanorgsintez” into The management of OJSC “Kazanorgsintez” declares that ecological management is included into number of supreme priorities of our enterprise as a basis of the concept of steady development, in this connection: realizes special responsibility for achieving fixed objectives and expects active participation cooling towers of circulation water supply; biological sewage disposal units; station for thermal liquid waste neutralization; unit for collection and recycling of hydrocarbon purges with their return to the process; green plantings; from each employee in implementation of the objectives; other funds. undertakes to take all measures directed on constant increase of productivity of the ecological management system; declares readiness for open dialogue with the public and other interested parties regarding influence on environment. 49 The total releases of harmful substances into atmosphere, discharge of polluting substances in the reservoir, limits of waste formation, and limits of water consumption for 2006 do not exceed the established specifications. The control over a sanitary condition of the air environment, quality of sewage discharged into r. Volga, the control over soil pollution are made by sanitary-industrial laboratory of the Company and laboratory of purification units according to the plansschedules confirmed by the state inspecting bodies. In 2006 there was a decrease of the established limit of harmful substances emission in the atmosphere from 13.9 down to 12.3 ths. tons. The amount of emissions of harmful substances has decreased also and made 9.2 ths.tons (in 2005 – 10 ths.tons). 3,340 analyses were made, excess of set specifications was not revealed. With a view of provision of the enterprise with water for industrial and householddrinking needs, and also for transfer to users, water draw off was made from the river Volga in the amount of 35.6 mln. cubic meters (in 2005 – 34.2 mln. cubic meters). The increase in the amount of taken water is connected with increase in capacity of water-circulation systems of the enterprise. The percent of the water-circulation made 96.7 %. Actual volumes of draw off water and the sewage discharged into basin didn’t exceed the established limits. Contents of polluting substances in the treated sewage in the reported period remained at the level of 2005 within the established limits. part II // INDUSTRIAL ACTIVITY // 50 NATURE PROTECTION 51 MANAGEMENT OF PERSONNEL NUMBER OF EMPLOYEES BY THE END OF THE YEAR During 2006 at the enterprise 31 ths.tons of waste products of production and consumption were generated (in 2005 34.6 ths.tons). As a whole during the year 23.6 ths.tons of waste products were transferred to the specialized organizations for further use and recycling, 5.5 ths.tons of waste products were neutralized, 1.2 ths.tons were used for own needs, other part was placed at special platforms of the enterprise. In 2006 The Board of Russian Consumers’ Service of Tatarstan Republic carried out the complex check of all divisions of the Company on observance of sanitary-and-epidemiologic rules and rates. Essential remarks and infringements concerning the preservation of the environment have not been revealed. Within 2006 the Body of certification OJSC “VNIIS” carried out twice the checks of conformity of in force quality management system, ecological management system and integrated quality management system to the requirements of GOST R ISO 9001-2001, ISO 14001:2004. By the results of the checks the certificates of conformity of in force systems to the requirements of GOST R ISO 90012001, ISO 14001:2004 were given out. In 2006 The Board of Russian Technical Service of Tatarstan Republic has drawn the positive conclusion allowing OJSC «Kazanorgsintez» receiving the license for the manipulation with dangerous waste. The management aspires to observe the bal- Payments to «CLATM of TR» of the FSI «CLATM of VFD»* in 2006 due to environmental affect made 2,978.1 ths. roubles (in 2005 – 3,397.5 ths. roubles), including: the enterprise development. for emissions of polluting substances into the atmosphere – 945.4 ths. roubles; 7,252 ance between the economic and social effi- 7,996 8,323 ciency of the management of personnel, as the human factor is one of the major aspects of competitiveness and stability provision of The main purpose of the personnel policy is duly provision of the enterprise with qualified personnel in the necessary quantity, use of knowledge and experience of employees of the enterprise with maximum efficiency. for discharge of polluting substances into basin – 456.4 ths. roubles; for accommodation of waste products – 1,576.3 ths. roubles. The sum of ecological payments in comparison with 2005 has decreased by 12.4 % (419.4 ths. roubles), that is connected to the decrease of normative rates for some kinds of payments. In 2006 OJSC «Kazanorgsintez» has been recognized as the winner of competition «Ecoleader» in the nomination «Introduction of technologies for secondary resources gathering and processing» among enterprises of Tatarstan Republic, and was awarded with the diploma «For effective nature protection activity» and commemorative medal «Ecoleader». 2004 2005 2006 TASKS OF PERSONNEL POLICY: I II III Provision of terms for realization of rights Number of personnel of the enterprise by and duties of citizens stipulated by labour the end of the year made 8,323 persons, and increased by 327 person (+4 %) in com- legislation; parison to 2005. The given changes basically Rational use of personnel potential; have occurred due to the acceptance of the personnel to bisphenol-A plant and polycarbonates plant which are under construction, Formation and maintenance of and also to auxiliary productions. effective work of labour collective. AGE COMPOSITION > 60 years old * “Center of Tatarstan Republic for laboratory analysis and technical measures” of the Federal State Institution “Center of laboratory analysis and technical measures of Volga Federal District” 2% 50-59 y.o. 22% 20-29 y.o. 21% 1% < 20 years old 31% 40-49 y.o. 23% 30-39 y.o. part II // INDUSTRIAL ACTIVITY // 52 53 MANAGEMENT OF PERSONNEL MANAGEMENT OF PERSONNEL Selection of the personnel is carried out at The wages at the enterprise consist of the Rate of labour productivity growth made ductive work; the Gratitude has been an- OJSC «Kazanorgsintez» according to the constant (the tariff rate) and the variable 9.5 % in current prices. Thus rate of labour nounced to 430 workers; the rank of the necessary educational level, practical experi- (premium) parts. It allows to provide social productivity growth advances the rate of «Honorable worker of OJSC «Kazanorgsintez» ence, and the professional, business, person- security for workers on the one hand, and to monthly average wages growth. The param- have been received by 16 persons; 8 persons al and morally-ethical characteristics, which motivate them to achieve the planned pa- eter of staff turnover made 9.7 %, at the rate have been awarded the rank «Honorable are necessary for execution of certain func- rameters of the divisions, and the enterprise 10 %. chemist of the Russian Federation»; 8 em- tions. During 2006 the rejuvenation of the as a whole on the other hand. Definition of ployees of the enterprise have been awarded personnel structure is observed at the enter- the level of payment is based on the concept OJSC «Kazanorgsintez» also uses non-mate- the Honor Certificate prise. So, the number of workers of the age of effective wages, competitive at the local rial methods for encouraging its employees, of the Ministry of In- category of 20-39 years has increased by 7 % labour markets, which provides the attraction which promote formation of perception dustry and Energy in comparison with and staying at the enterprise of the person- of the participation and the importance of of the Russian Fed- 2005 and has made nel with necessary vocational characteristics workers in corporate purposes achievement. eration; 10 persons 44 %. Average age of and high motivation to the effective work. In In 2006, 873 persons have been awarded have got the Honor the working person- total it has been spent 1,628 mln. roubles for with the Honor Certificate of the enterprise Certificate nel made 40.28 years wages payments in the reporting year. for high professional skill, diligent and pro- Ministry of Econom- The average salary at the enterprise made 16.7 thousand roubles in 2006, which is by 8.3 % more than in 2005, and by 56 % more in comparison with the average salary across Russia. of the in 2006 (2005 – 40.50 ics and industry of y.o., 2004 – 41.19 y.o.). Tatarstan Each third worker of Letters of gratitude the enterprise has LABOUR EFFICIENCY (THS. RUR /MONTH) Republic, of the President and the higher educa- Prime tion. Tatarstan minister of Republic have been handed 154 164 180 There are 1,158 managers, highly skilled experts and workers at the enterprise trained to bases of the pedagogical knowledge among which 517 persons are certified as teachers and 641 - as instructors of inservice training. over to two workers of the enterprise. AVERAGE SALARY (THS. RUR /MONTH) At the enterprise the system of continuous professional and economic training of 12.2 15.5 16.7 staff is operating. Development of professional competence is the basic purpose of the educational activity and the tasks directed to the improvement of professional skills of the personnel. Training and improvement of professional skill of the staff is being carried out according to the requirements of ISO 9001: 2000 (GOST ISO 9001-2001) and ISO 14001: 2004. In 2006, 2004 2005 2006 4,089 workers have passed vocational training and improvement of professional skills. 2004 2005 2006 POLYMER SAVES LIVES The group of engineers under the management of Christopher Coughlin from Naval Air Systems Command considers that the number of polymers, used in the sports industry field nowadays can help in creation of the new system of life support for air vessels, space ships and submarines, due to the effect of self-healing. Not long ago, American scientists discovered, for example, that polymer which covers the skittles for bowling, helmets and balls for golf, has the curious feature - it can “pull together” open holes very quickly. They try to find out the reason of the polymer self-healing mechanism. Scientists consider that the reason is in the “melting properties” of the polymer - “self-healing” occurs when the polymer heats up till the determined temperature. Nowadays, when contacting with fuel, polymer breaks up so that it is necessary to hold the great research first, before using the material for fuel tanks and fuselages covers. Christopher Coughlin considers that this problem can be solved by experiments with the more resistant to aggressive environment material, for example urethane. part II // INDUSTRIAL ACTIVITY // 56 SOCIAL FIELD SOCIAL FIELD Activity of OJSC «Kazanorgsintez» in social field is directed to the creation and keeping up of Construction of housing for workers of the enterprise. In 2006 the favorable conditions for effective labour activity, formation of healthy psychological climate construction of the last of 3 houses with 125 apartments of housing complex of and rendering of social support concerning the personnel of the enterprise and Company as OJSC «Kazanorgsintez» was finished. Workers of the enterprise have a priority a whole. The company aspires, that its social responsibility was an integral part of corporate at distribution of apartments which carries out according to the Regulations of culture. Following to the given target allows to reduce possibility of reputation and financial selection of nominees for housing purchasing under the Program of the social risks and not to miss new opportunities. mortgage. OJSC «KAZANORGSINTEZ» ASPIRES TO HARMONIZE THE BUSINESS-PURPOSE WITH THE PURPOSES OF COMPANY DEVELOPMENT BY MEANS OF: I REALIZATION OF SOME SOCIAL PROGRAMS directed to granting of privileges, guarantees and indemnifications to the employees. The structure defending the labour rights and social and economic interests of workers is the Trade-union committee of OJSC II RENDERING THE CHARITABLE AND SPONSOR’S HELP DIRECTED TO: science and education development, and support of children’s homes and boarding schools. So, in 2006 it has been transferred 900 ths. roubles for these purposes. «Kazanorgsintez». By the end of 2006, 95 % of workers of the enterprise are the members of the Trade union. The primary goals of social partnership between labour collective and sports support and development of a healthy way of life. In 2006 the enterprise has management are reflected in the collective agreement accepted for the period from 2005 to 2007, where the basic components of workers’ social package are reflected. At the trade- es 2006, which took place at the hippodrome of Kazan. The collective of physical union conference on results of 2006, the trade-union committee of the enterprise has stated a positive estimation of terms and conditions and performance of the collective agree- transferred 1 mln. roubles for organization of the Cup-final of the World for race horsculture of OJSC «Kazanorgsintez» has hold 41 activities of different kinds of sports with participation of about 3,000 workers of the Company. OJSC «Kazanorgsintez» is the general sponsor of water polo team “Sintez”. In 2005 for the ment. The number of priority directions of workers social support consists of the following: first time in history, Kazan water polo team won the Cup of Russia. In Euro cup LEN TROPHY of the 2005-2006 season the team “Sintez” has won the second place and has entered the Rendering material assistance to the workers of OJSC «Kazanorgsintez» according to the collective agreement. In 2006 the total amount of payments made semifinal of Cup LEN TROPHY 2006-2007. The team “Sintez” is also included into number of 33 mln. roubles. season. In 2006 it has been directed 80 mln. roubles for keeping the team. Non-state pensions provision. The program works since 1999 and allows forming additional social guarantees for workers. During 2006 15.2 mln. roubles have been transferred to the fund of non-state pensions provision. The order of granting and conditions of calculation of non-state pension are determined by «Regulations on non-state pensions provision for workers of OJSC «Kazanorgsintez». Health services, sanatorium treatment and recreation. In 2006, 5,307 workers of the enterprise have been rendered free-of-charge services for the amount of 4.3 mln. roubles by the medical-sanitary unit of OJSC «Kazanorgsintez». Due to the modern equipment and skilled experts medical-sanitary unit renders a wide spectrum of services on revealing, diagnostics and preventive measures of diseases. In sanatorium – preventorium, which belongs to the Company 1,156 of people passed the course of treatment in 2006. leaders among the teams of the supreme league in the championship of Russia of 2006-2007 57 SOCIAL FIELD SOCIAL FIELD 10 divisions of OJSC «Kazanorgsintez» are engaged in the solving of problems of creation the favorable conditions for effective labour activity and formation of the healthy psychological climate in the collective. By the end of 2006, 743 people are occupied in these divisions. Such divisions of the enterprise include: RECREATION CENTERS: “Solnechny”, SWIMMING POOL “SINTEZ”, where all “Shelanga”, “Observatoria”. In total 2,766 peo- necessary conditions are created, both for ple has had a rest in the centers during 2006. health improvement of the workers of the The comfortable territory and buildings enterprise, and for maintenance of training equipped with all necessary facilities allow process. During 2006, 36 sports-mass events accepting the workers of the enterprise and have been hold there, by the results of one members of their families for the rest all the of which Federal Agency on physical training year round. In 2006 such large events as «Day and sports of Russia has noted an excellent of chemists», VI Republican television festival hardware of the pool with the electronic and of variety art, Russian festival of children’s sound equipment for carrying out the com- COMBINE OF PUBLIC CATERING. It unites 14 branches for 1,450 seating places, the trading house “Sintez” with the area of choreographic collectives «Spring trick», the petitions and the good organization. The All-Russia forum of young citizens have been sportsmen of the swimming pool “Sintez” OJSC «KAZANORGSINTEZ» HISTORY hold at the center “Solnechny”. are the winners of Russian, European and the MUSEUM, established in 1977 under the world championships. administration initiative. During 2006 the 350 sq.m. located in the territory of the plant, WATER-ROWING CENTER “SINTEZ”, with and 6 buffets. The combine of public cater- the total area of 7,830 sq. meters, located in ing has hold 25 exhibitions of sales, competi- the coast of the river Kazanka. The center has tions of professional skills, «Days of national the steam-ship “Sintez”, which is used for ex- cookery», consumer conferences in 2006. cursions along the river Volga for employees museum has hold 239 excursions, with 1,740 visitors. and the guests of the enterprise. MEDICAL-SANITARY UNIT. The structure of the medical-sanitary unit includes the polyclinic, dental unit, 2 day time hospitals, 2 health centers and the sanatorium equipped with the up to date medical equipment. PALACE OF CHEMISTS. Is one of the lead- There are 6 department medical units. Such HOUSING COMPLEX for accommodation of workers of the enterprise and the people sent to the business trip. Structure of the ing cultural centers of Kazan which is visited experts as a therapist, a gynecologist, a surcomplex consists of the hotel «House of fornot only by workers of OJSC «Kazanorgsin- geon, an ophthalmologist, a neurologist, a eign experts» for 116 people and 2 hostels. tez», but also the citizens. There are 2 visual radiologist, an otolaryngologist, a doctor of During 2006 the quantity of living people in cinema halls for 650 and 150 seats, a sports ultrasonic diagnostics, a doctor-physiatrist, the hotel made 1,974 persons or 8,107 perhall, 2 banquet halls and cafe in there. Daily, a doctor-urologist, a doctor of acupuncture son/days. 295 people lived in the hostels of 14 creative collectives with more than 700 are always operating. In November, 2006 the complex. the fluorographic device has been mounted people are working in the Palace. and put into operation. Used new methods of diagnostics allow to reveal diseases at an early stage and to carry out their preventive measures. The expenses for social field objects maintenance and social payments in 2006 made 700 mln. roubles and have grown up by 5.5% in comparison with 2005. The basic tools of the social reporting of the Company are: the official web-site of the company www.kazanorgsintez.ru, the newspaper “Sintez”, weekly meetings of the trade-union committee leaders, the annual report of financial and economic activity of the enterprise, and also other external sources of accommodation the information of social policy of the enterprise. PART III COMMERCIAL ACTIVITY POSITION IN INDUSTRY Annually «Kazanorgsintez» sells more than 170 kinds of various chemical products in volume more than 500 thousand tons. The marketing network of the company covers 27 countries of the world, including Russia. More than 2,000 enterprises are the buyers of our production. POSITION IN INDUSTRY IN 2006 Name of the product Production volume, ths. tons Russia OJSC “ Kazanorgsintez “ Share of OJSC “Kazanorgsintez”, % HDPE 476.0 208.3 44% LDPE 588.1 181.8 31% Polyethylene pipes 170.0 27.7 16% Phenol 221.3 24.5 11% Acetone 135.6 15.4 11% Ethyleneglycol 409.4 43.9 11% Ethanolamines 36.0 12.0 33% part III // COMMERCIAL ACTIVITY // 62 REVIEW OF THE BASIC PRODUCTS MARKETS 63 REVIEW OF THE BASIC PRODUCTS MARKETS POLYETHYLENE PIPES POLYETHYLENE POLYETHYLENE PRICE DYNAMICS IN RUSSIA AND EUROPE AVERAGE PRICES FOR POLYETHYLENE PIPES IN RUSSIA (INCL.VAT) In 2006 the total amount of the domestic The volume of the domestic market of market of polyethylene in Russia made polyethylene pipes in Russia made 179 1,194 ths.tons and increased for a year by $/TON 2,500 RUR /TON ths. tons and has grown by 18 % to the 12 %, including due to increase in con- 6,500 level of 2005. sumption of low density polyethylene by 6,000 2,000 The volume of production in Russia has 2.5 % and HDPE by 9.5 %. 5,500 grown by 17.5 % in comparison with 1,500 The volume of production in Russia in 5,000 2005 and has made 170 ths. tons. 4,500 comparison with 2005 increased by 2.5 % 2004 1,000 and made 1,064.2 ths. tons, including due 2005 2006 to increase in LDPE volumes by 2.4 % and Information source: Him-Expert, ICI’S 12.06 10.06 08.06 06.06 04.06 02.06 12.05 10.05 08.05 06.05 04.05 02.05 12.04 10.04 08.04 04.04 06.04 500 HDPE by 0.1 %. Information source: OJSC “Kazanorgsintez” (according to price lists of producers) Russia (incl. VAT) Europe (spot prices, FD NWE) POLYETHYLENE CONSUMPTION IN RUSSIA (THS. TONS) According to the data of the Ministry of Industry and Energy of Russia, the level of operating capacities use in polyethylene production has come nearer to 100 %. In this connection reserves for essential growth of production practically are absent. 943 1,066 1,194 Growth of production volumes of polyethylene in 2006 basically has POLYETHYLENE PIPES CONSUMPTION IN RUSSIA (THS. TONS) 143 152 179 been provided by increase of LDPE and HDPE at OJSC «Kazanorgsin- +13% +12% The contribution of producers to the total gain of production has made: -1.3 % - decrease in volumes of «Kazanorgsintez» by 6.2 % down to 27.7 ths. tons; tez» and LDPE of LLC «Tomskneftekhim», thus LLC «Stavrolen» has +12.1 % - increase in production of the enterprises with ca- reduced volumes of HDPE production. pacities of more than 10 ths. tons, excepting «Kazanorgsintez»; The share of «Kazanorgsintez» in production volume of polyethylene +6.7 % - increase in production of the enterprises with ca- +17.8% of the Russian Federation has made 37 % in 2006 (in 2005 - 32 %). +6.3% pacities less than 10 ths. tons. Export of polyethylene in 2006 in comparison with 2005 increased by 14 % in natural units, which is by 10 % caused by increase in HDPE 2004 2005 2006 Information sourse: Market Report Company (MRC) export and by 4 % - increase in LDPE export. Export and import practically have not influenced on the domestic Import of polyethylene increased in comparison with the last year by market of pipes. 52 %, which is mainly caused by increase in HDPE import in 2 times The share of «Kazanorgsintez» in the all-Russian production was re- up to 225 ths. tons and reduction of LDPE import by 71 % in compari- duced from 20 % in 2005 down to 16 % in 2006 which is connected son with 2005 down to 36 ths. tons. with increase in production volumes of the basic competitor Chemi- Average polyethylene prices dynamics is shown on the chart. The cal Combine «Eurotrubplast», Moscow in 1.6 times. The average pric- average polyethylene prices of OJSC «Kazanorgsintez» made 41 ths. 2004 2005 2006 roubles/ton including VAT in 2006. Information sourse: Market Report Company (MRC) es for polyethylene pipes of OJSC «Kazanorgsintez» made 60.1 ths. roubles/ton including VAT. part III // COMMERCIAL ACTIVITY // 64 REVIEW OF THE BASIC PRODUCTS MARKETS PHENOL REVIEW OF THE BASIC PRODUCTS MARKETS PHENOL CONSUMPTION IN RUSSIA (THS. TONS) In 2006 consumption of phenol in Russia ETHYLENEGLYCOL ETHYLENEGLYCOL CONSUMPTION IN RUSSIA (THS. TONS) Demand of the Russian market for Ethyleneg- made 184 ths.tons and increased by 0.6 % in 177 comparison with the previous period. Unlike 65 183 184 197 lycol has increased by 30 % in 2006 and made 154 200 200 ths. tons. Growth of the market demand the last years, in 2006 the home market has has been completely caused by increase in shown the moderate dynamics. Volumes of producers’ volumes by 12.6 % up to 409.4 ths. phenol production in Russia decreased by tons. The main producers of monoethylene- 9 % in comparison with 2005 and made 221 ths. tons. Volumes of export were reduced by +3.4% +0.6% glycol are «Sibur-Neftekhim», «Petrokam», -21.8% +29.9% «Nizhnekamskneftekhim» and «Kazanorg- 38 %. Decrease in volumes of phenol produc- sintez». The share of OJSC «Kazanorgsintez» tion in Russia basically is connected with de- in production volume made 10.7 %, thus crease in production of OJSC «Kazanorgsin- the volume of production has decreased by tez» in 1.7 times which is caused by carrying 2.6 % and made 43.9 ths. tons. out of reconstruction. Demand of consumers in the home market is completely satisfied Export of products has decreased slightly - with the Russian producers. Import of phenol by 1 % down to 210 ths. tons, thus import continues to remain insignificant – 0.5 % from was reduced in 5.6 times down to 430 tons. volume of the domestic market. The share of The average prices for ethyleneglycol of OJSC phenol of OJSC «Kazanorgsintez» in the total «Kazanorgsintez» made 24.7 ths. roubles/ton production of the Russian Federation has de- 2004 creased by 6 % in 2006 in comparison with 2005 and made 11 %. 2005 2006 2004 including VAT. Information source: Information center “Kortes” 2005 2006 Information source: Information center “Kortes” PHENOL PRICE DYNAMICS IN RUSSIA AND EUROPE ETHYLENEGLYCOL PRICE DYNAMICS IN RUSSIA AND EUROPE The average phenol prices Changes of ethylenegly$/TON of OJSC «Kazanorgsintez» in the chart. Information source: Information center “Kortes”, ICI’S Russia (incl. VAT) Europe (spot prices, FOB ERDAM) Information source: Information center “Kortes”, ICI’S 12.06 10.06 08.06 06.06 04.06 02.06 12.05 10.05 08.05 06.05 04.05 400 04.04 12.06 11.06 10.06 09.06 08.06 07.06 06.06 600 05.06 500 04.06 800 03.06 1,000 02.06 1,000 01.06 1,500 02.05 ton, including VAT. Europe are presented on 1,200 12.04 2,000 col prices in Russia and in 1,400 10.04 2006 made 34.6 ths. roubles/ 08.04 2,500 06.04 $/TON Russia (incl. VAT) Europe (spot prices, CIF NWE) POLYMER FIGHTS WITH LIGHTNING The founder of the company BoltBlocker (San Diego, California) Doug Palmer offers absolutely new way of fighting with lightnings. His lightning rod will be designed from... the water jet, which will be injected directly into the thunder clouds. Lightning rod water represents itself the salt brine, where liquid polymers will be added: salt intended for strengthening of water electrical conduction, and polymer will interfere to the jet “disintegration” into the separate drops. Creation of the working lightning rod aerial with the polymer help can, for example, be based on the ability of the particles of the number of up to date polymer compounds “to connect” with them inorganic molecules with the help of electric charge of the environment. Thus, the atmosphere electricity makes “a trap” for itself. Diameter of the jet is about 1 centimeter, and the maximum height - 300 meters. Water jet will be turned on automatically when the level of electrifying will be high enough, and the probability of thunder hit - maximum. Current will “run down” along the jet and ground in the special earth device. Such lightning rods first of all are intended for industrial en- terprises, on the territory of which there is no opportunity to install stationary constructions, and also for the enterprises, representing vital value for environment and population: different kinds of electric stations, chemical industry objects, dams, bridges and other constructions, which because of their significance need the special protection. Of course, there are no any words of nature management for the presence, but according to the opinion of some scientists, the project of the water lightning rod is one of the most effective steps to this goal achievement. part III // COMMERCIAL ACTIVITY // 68 REVIEW OF OUTPUT RESULTS REVIEW OF OUTPUT RESULTS STRUCTURE OF SOLD OUTPUT BY THE BASIC KINDS OF PRODUCTS IN 2006 In 2006 OJSC «Kazanorgsintez» sold goods and services in amount of 15.5 bln.roubles., which is by 2.2 bln. roubles (+16.4 %) more than in the last year. The growth of sales proceeds has occurred basically because of increase in sales volumes and the prices of polyethylene. The sales volume of polyethylene in natural measures increased by 28.1 %, the average prices of sale increased by 7.1 %. In comparison with 2005 the total amount of HDPE sales increased in 1.7 times, and LDPE - in 1.2 times. 69 STRUCTURE OF OUTPUT SOLD IN THE DOMESTIC MARKET BY DISTRICTS IN 2006 The share in sales proceeds in the home market made 82 % and has increased in compari- Polyethylene pipes and details Others 7% Glycols 6% Phenol, acetone son with the last year by 2 %. 41% It is sold products for the amount of 12.7 bil- 6% 9% Others lion roubles in the domestic market, which 10% Processing services 5% is by 19 % more, than in 2005. The increase 53% in sales in the domestic market has occurred HDPE Central Federal District Privolzhskiy Federal District due to the more favorable conjuncture of 31% 32% LDPE the Russian markets of basic products. The main sales of OJSC «Kazanorgsintez» fall for The basic specific weight in structure of sales proceeds belongs to polyethylene of high and low density (63 %). Privolzhskiy Federal district and the Central 12,703 mln. RUR Federal district of Russia (94 %). 15,518 mln. RUR STRUCTURE OF EXPORT OUTPUT BY MAIN KINDS OF PRODUCTS IN 2006 Sales of the Company are based on the following principles: Granting preferential terms to the constant consumers buying significant volumes of products for a long time; LDPE 41% Expansion of highly effective commodity markets and search of new consumers; Others 6% Phenol, acetone 8% Glycols 11% HDPE 34 % In 2006 OJSC «Kazanorgsintez» exported products to 27 countries of Europe and Asia for the total amount of 2.8 bln.roubles. The basic relative share in export structure be- The establishment of such prices for products which would allow entering the planned volume of profit and to seize the greatest possible share in the market. Demand for OJSC «Kazanorgsintez» products, market conditions, competitors’ prices, costs of production are considered when defining the price level; A choice of deliveries to the domestic or the foreign market is carried out to maximize profitability of sales and keep sufficient volume of export for its increasing at a favorable conjuncture. longs to high and low density polyethylene (75 %). In 2006 the export sales proceeds increased by 181 mln. roubles. (+6.9 %). The basic influence on sales proceeds growth was increase in export volumes of polyethylene (+ 44 % in 2,815 mln. RUR comparison with 2005). STRUCTURE OF SALES PROCEEDS BY COMMODITY MARKETS STRUCTURE OF EXPORT OUTPUT BY COUNTRIES 14.8% 14.0% Kazakhstan 20.8% Others reported year. The markets of these coun- 6.5% Finland tries are characterized by growth of chemi- 6.2% China cal products consumption and higher price 5.5% Poland connection OJSC «Kazanorgsintez» consid- 4.1% Uzbekistan ers the given export direction as the priority. 28.1% The main foreign markets are the countries of the near abroad such as Ukraine, Belarus, Export 20% 18% Export Kazakhstan and Uzbekistan the share of which has come to 61 % of all export in the Domestic market 80% 82% Domestic market level in comparison with world prices, in this 2005 2006 2,815 mln. RUR Belarus Ukraine part III // COMMERCIAL ACTIVITY // 70 RAW MATERIAL SUPPLY 71 RAW MATERIAL SUPPLY LARGE SUPPLIERS OF THE BASIC RAW MATERIAL IN 2006 In 2006 expenses of OJSC «Kazanorgsintez» ths.tons for raw materials and materials made 5,451 mln. roubles, including the share of raw materials and materials purchased in the do- The name of raw material 2004 mestic market, which has made 98 %, import 2005 2006 2006/2005 - 2 %. Ethane 324 210 323 154% The main raw materials for «Kazanorgsintez» Including processing 137 64 118 184% are the following: ethane, propane-butane, Propane-butane 233 274 225 82% ethylene and benzene. The share of expens- Including processing 99 109 15 14% es for the basic raw materials in the total Ethylene 138 135 136 101% expenses for raw materials and materials in Including processing 44 28 5 16% 2006 made 79 %. The part of the basic raw Benzene 45 45 27 60% material is supplied as processing. Volume of Including processing 1.1 6.1 1.6 26% OJSC “Gasprom” 30 % 15 % Other OJSC “Impex neftekhim” 11 % 18 % OJSC “Sibur Holding” 13 % OJSC “Tatneft” 13 % OJSC “Nizhnekamskneftekhim” supply of the basic kinds of raw material is presented in the table: The prices for the main raw material in different extent are subject to influence of the world oil prices. Propane-butane and benzene fall under the strongest influence. RATES OF PRICE RISE ON THE MAIN RAW MATERIAL IN RELATION TO 2002 ETHANE – it is used for ethylene production. PROPANE-BUTANE – alternative kind of BENZENE – is used for phenol and acetone Ethane supply to OJSC «Kazanorgsintez» is raw material in relation to ethane which also production. Deliveries of benzene are carried carried out by ethane pipeline connect- is used for ethylene production. Producers of out by railway transportation in tanks. The ing Orenburg GPZ and Minnibaevsky GPZ propane-butane are gas-oil refining plants. main deliveries of benzene are carried out (Tatarstan Republic). Deliveries of ethane in Transportation of the given raw material is from such producers as OJSC «Sibur-Neft2006 increased by 54 % in comparison with carried out by railway tanks as condensed ekhim», OJSC «Severstal» and LLC «KINEF». the last year, which is connected with resum- gas. Volumes of purchase have been re- Deliveries of benzene in 2006 are by 40 % ing of production at Orenburg gas process- duced in 2006 by 18 % in comparison with lower than in 2005 that is connected with ing plant. 300 % 281 238 250 206 reconstruction. 156 152 150 123 100 100 102 ETHYLENE – it is used for production of polyethylene and ethylene oxide. OJSC «Kazanorgsintez» produces ethylene independently, and 221 162 200 the last year in connection with growth of phenol-acetone productions shutdown for ethane deliveries. 262 168 138 115 117 126 50 2002 2003 2004 2005 also buys it from outside. Transportation of ethylene is carried out by ethylene pipeline which connects five industrial enterprises among themselves: «Kazanorgsintez», «Nizhnekamskneftekhim», «Ufaorgsintez», «Sterlitamak petrochemical plant» and «Salavatnefteorgsintez» thanks to that any of producers can deliver ethylene to another. Deliveries of ethylene were kept at the level of 2005. Benzene Ethylene Propane-Butane Ethane 2006 CAR FROM PLASTIC For moving around the city economically and with comfort mini car is needed. Nobody argues with this. But “mini” doesn’t mean “cheap”, “simple”, “boring” automatically. It is more “not ordinary”. One of the little-known Brazil companies pretends to win some share of the market not somewhere, but in the USA. It is clear that many people in Brazil drive American cars (though their own auto industry is quite developed here), but it is difficult to imagine that satiated with assortment Americans will pay attention to some car from Brazil. What they can offer to attract consumers? Cars offered to American consumers are very small, but not intended for people wishing to save money at all. Their price vary from $14 up to $28 thousand. And at the same time it worth to consider that the length of the offered car models makes “funny” 2.65-3.2 meters (like “Oka” model). And it is asked: what is it for to pay such money, if you buy urban “minicar - beetle”? The answer is: for design, originality, and equipment. Both cars have the bodies from the composite panels on the still framework. High level of the passive safety is promised as due to the reasonable body construction, as due to the blow bags, included in the basic equipment. It is clear that such cars don’t weigh too much: 600 kg, 750 kg. Believing that people drive alone around the city, and only sometimes with one passenger, Brazilians decided that there is no need in five or four chairs in the car. That’s why they make both cars with three chairs. PART IV INVESTMENT ACTIVITY DEVELOPMENT PROGRAM THE FIRST STAGE (2004-2007) Modernization of ethylene production unit with increase in capacity from 430 up to 640 ths. tons per year (for providing HDPE plant with the raw material). Modernization of HDPE production unit with increase in capacity from 197 up to 510 ths. tons per year (for increasing the share in polyethylene market and creation of new up to date grades). Construction of bisphenol-A plant with capacity of 70 ths. tons per year (for processing of own phenol and acetone, providing polycarbonates plant with raw material and entry to new commodity markets). Construction of polycarbonates plant with capacity of 65 ths. tons per year (for processing of own bisphenol-A and entry to new commodity markets). Modernization of phenol production (for stabilization of work of existing production for provision of bisphenol-A plant with raw material) THE SECOND STAGE (2008-2010) Construction of ethylene-propylene plant with capacity of 600 ths. tons per year of ethylene and 200 ths. tons per year of propylene (for providing of own productions with raw material with use of alternative kinds of raw material for ethylene production and producing new kinds of output). Construction of linear polyethylene plant with capacity of 350 ths. tons per year (for increasing the share on polyethylene market). part IV // INVESTMENT ACTIVITY // 76 DEVELOPMENT PROGRAM FINANCING DEVELOPMENT PROGRAM FINANCING THE AVERAGE INTEREST RATE UNDER CREDITS AND THE SHARE OF SECURED CREDITS ARE PRESENTED IN THE TABLE: FINANCING ORGANIZATION STRATEGY I Attraction of long-term credits for a period from 7 till 12 years in national and in foreign currencies, with beneficial period of crediting during realization of investments. 2 3 Cooperation with the international and Russian banks. 6 7 8 of export-credit agencies (Hermes, cash breaks. Entering the international market of debt unsecured financing. The share of secured credits on 31.12.2005 10.05% 32.25% on 31.12.2006 7.47% 13.77% Long-term credits with the repayment period of over 5 years make 35.5 % in the structure of credits and loans, 53.5 % make credits with the repayment period from 3 till 5 years. LIST OF PROJECTS OF THE 1ST STAGE OF DEVELOPMENT PROGRAM Atradius, JBIC). 4 Optimization of expenses for debt (bln.roubles including VAT) service at signing investment contracts by opening the letters of credit, purchase of Has been financed in 2006 Has been financed from 2004 till 2005 the equipment in leasing, delay of payment till equipment delivery. HDPE-510 Project 2.8 3.4 5 EP-640 Project 1.7 0.8 BPA-70 Project 3.1 1.5 PC-65 Project 2.8 2.0 10.4 7.7 Use short- and medium term credits for Average % under credits and loans Execution of overdraft unsecured credits for covering of time The priority is given for attraction of unsecured credits. Attraction of credits under covering 77 current activity financing. Total At signing the contracts the payment terms and conditions such as letters of credit, purchases of the equipment in leasing, delay of payment till equipment delivery were worked out in order of OJSC «Kazanorgsintez» credit indebtness diminishing. With a view of debt service cost minimizing OJSC «Kazanorgsintez» has entered the international capital market, having placed a debut unsecured Eurobond issue for 200 mln. USD in October, 2006. Listing of papers is carried out by the London stock exchange. The funds received from bonds issue have been completely directed for repayment of the secured credit of the Savings Bank of the Russian Federation. In 2006 it has been financed 10.4 bln.roubles, including own funds 3.3 bln.roubles. For financing the investment program the following long-term credit contracts have been concluded: The Eurobond issue in the amount of 200 mln. USD for repayment of se- concluded in August, 2006 for the period of 7 years; The International Moscow Bank - a multi currency line (USD/ EURO/RUR), an equivalent of 50 mln. USD. It is concluded in December, 2006 for the period of 3 years; ABN AMRO Bank (Moscow) - 30 mln. USD. It is concluded in July, 2006 for the period of 3 years;; cured credits. It is concluded in Octo- RZB Finance - 1,717 mln. USD. The credit is given under guar- ber, 2006 for the period of 5 years; antee of ECA ExIm Bank (USA) for financing the 85 % of the The Savings Bank of Russia - rouble equivalent of 75 mln. USD for financing ethylene production unit modernization, bisphenol-A and polycarbonate plants construction. It is equipment supply contract with the firm Grif Management Inc. and 100 % of insurance premium of ECA ExIm Bank. It is concluded in July 2006 for the period of 5 years. In 2006 OJSC «Kazanorgsintez» has confirmed the international credit ratings from agencies Standard & Poor’s «В-», the outlook is stable, and Fitch Ratings “B”, the outlook is stable. Management of OJSC «Kazanorgsintez» forms credit portfolio keeping the optimum ratio of own and loan capital that allows to provide the sufficient level of financial stability for carrying out stable operational activity and execution of development program. part IV // INVESTMENT ACTIVITY // 78 DEVELOPMENT PROGRAM PERFORMANCE 79 DEVELOPMENT PROGRAM PERFORMANCE ETHYLENE PRODUCTION UNIT RECONSTRUCTION HDPE PRODUCTION UNIT RECONSTRUCTION Within the given task realization in 2006: The project of ethylene production unit modernization from 430 up to 640 thousand tons a year provides combination of the 2nd «Univation Technologies» HDPE modernization project provides increasing of capacities from 197 up to 510 ths.tons a year as well as release of the new grades of products such as: 1 2 and the 3rd units of gas separation to a single production unit with addition of the new equipment, capacity thus will be increased from 160 up to 330 ths.tons per year and modernization of the 4th unit of gas separation from 235 up to 275 ths.tons per year. Modernization of the first unit of gas separation with increase in capacity is not foreseen. grades without analogues in the Russian Federation intended for gas and water-pipes production, produced on the basis of PE-100; high-molecular film grades for durable films production with thickness of 7-20 mk; Within the given task realization in 2006: 1 2 «Technip Benelux B.V.» basic design for ethylene production unit reconstruction was executed; The execution of the detailed design of ethylene pro- 5 6 The new ethylene pump has been installed, modernization of the two existing pumps is being continued; The main and auxiliary equipment of «Technip Benelux B.V.» high-selective double-cell cracking furnace with productivity duction expansion by State Unitary Enterprise “Bashgi- of ethylene of 18 tons/hour have been installed, the installation of Instrument system and heat insulation of pipelines is being continproneftekhim” is at the final stage; 3 4 Modernization of the propylene compressor of the refrigerating cycle has been carried out; The new ethylene compressor of the refrigerating cycle has been installed; grades for petrol tanks and other high rigidity containers extrusion moulding; ued; grades intended for rotary moulding; grades intended for food and medical industry; grades of linear low density polyethylene. Works of reactors “A” and “C” modernization were completed; The following items were installed and put into operation: the construction of raw material purification; the equipment for receipt, preparation and supply of the catalysts; circulating gas compressors; circulating gas water heat exchangers; ethylene compressor; the system with purge bins for polymer degassing; the pelletizing and pneumotransport system; unit for polyethylene shipment in containers; the automated technological process control system; 3 4 5 Commissioning works and final adjustments are being carried out at the new compounding line; High pressure nitrogen compressors were installed; 7 8 The foundations for additional equipment, racks and constructions have been carried out; There is an installation of bearing constructions. Installation of the incoming equipment is being continued. Subprojects: The pressure-swing adsorber (PSA) of the firm «Linde», producing highly purified hydrogen for HDPE Plant, with capacity of 240 kg. an hour has been put into operation. Construction of the warehouse for liquefied hydrocarbon gases is being carried out. Installation for the tank battery foundation was executed. The supply and installation of the tank battery equipment is being carried out. The building of the operator’s room, fire and pump station was executed. Recovery unit equipment installation works are being carried out; gas regeneration compressor was installed. part IV // INVESTMENT ACTIVITY // 80 DEVELOPMENT PROGRAM PERFORMANCE 81 DEVELOPMENT PROGRAM PERFORMANCE Subprojects BISPHENOL-A PLANT Within the given task realization in 2006: Increasing of air separation units capaci- Hexene-1 and isopentane warehouse exties: pansion: Plant construction is carried out on OJSC 1 2 3 4 5 6 7 8 Air separation and compressor units were installed and put into operation; Liquid nitrogen warehouse equipment was installed; the installation of the Instrument system equipment is being carried out. «Kazanorgsintez» territory. Capacity - 70 ths. tons per year. In industry bisphenol-A is pro- Hexene-1 and isopentane receiving and keeping tanks, intershop communications pipelines were installed, the pump house was constructed and its equipment was installed; The wiring of the basic process equipButene-1 production unit reconstruction: ment and installation of the tanks servThe static and dynamic equipment ing platforms is being carried out. was supplied in full, Instrument system Butene-1 basis warehouse reconstruction: equipment, pipelines and connecting Foundation construction was completdetails deliveries are being completed; ed; The main process equipment at the exDesign documentation development is ternal unit was installed, intershop combeing carried out. munications lines installation was completed; Control room and catalyst building were constructed; Equipment wiring works are carried out. duced by condensation of phenol with acetone in presence of mineral acids and ion exchange resin. The process of production at the bisphenol-A plant will be carried out by method of «Idemitsu Kosan Co., Ltd», which has the following advantages: environmentally appropriate process; obtained product possesses high quality. The main raw materials for bisphenol-A production are phenol and acetone produced by the enterprise. In its turn bisphenol-A is the basic raw material for polycarbonates, phenol formaldehyde and epoxide resins production. Foundation construction was completely finished; Static equipment delivery and installation is at the final stage; Dynamic and Instrument system equipment delivery and installation are being continued; Pipelines for the process equipment connection and intershop stockades of heat and material pipes are being installed; Construction of operational building for technological process management is being completed; Demineralized water production unit capacity was increased; The building of the fire and pump station and the laboratory was completed; Administration building reconstruction for bisphenol-A and polycarbonates plants was completed. part IV // INVESTMENT ACTIVITY // 82 DEVELOPMENT PROGRAM PERFORMANCE DEVELOPMENT PROGRAM PERFORMANCE POLYCARBONATES PLANT PHENOL PRODUCTION UNIT MODERNIZATION. Plant construction is carried out near the bisphenol-A plant. Capacity Within the given task realization in 2006: - 65 ths.tons per year. Polycarbonate is a complex linear polyether of The basis design was completely finished; carbonic acid and phenols. There are two industrial ways of polycar- Phenol production unit reconstruction for increase in capacity up to bonates production: phosgenation of bisphenol-A and interesterfication of diphenyl carbonate with bisphenol-A (non-phosgene method). Production process at polycarbonates plant will be based on non-phosgene method, developed by «Asahi Kasei Engineering Corporation». Bisphenol-A, ethylene oxide, and CO2 are used as raw material. This process does not use phosgene and methylene chloride and forms small quantity of waste products. Production process represents innovative technology without participation of contaminants and without environmental contamination. Such unit is successfully used by «Kimei Asahi Corporation» in Taiwan since June, 2002. 1 2 3 4 5 6 polycarbonates find wide application as a constructional material in Worn out static and dynamic equipment replacement was fin- 3 4 5 ished; was started; 65 ths. tons per year is being carried out with the purpose of bisphenol-A stable provision with phenol and acetone. The automated technological process control system, including new bunker type control room was put into operation; The additional transformer substation and distributive posts were installed and put into operation; The most part of the detailed design documentation was de- Within the given task realization in 2006: veloped; Dynamic and static equipment delivery is being continued; Process equipment and heat and material pipes intershop stockades are being installed; Civil works of the process control room are at the final stage; Tank battery equipment installation is at the final stage. Due to thermostability, high impact strength and chemical inertness, 83 the electrical engineering and electronics, motor industry and production of consumer goods (lens, gears, multilayered glasses, packing, CD, and etc.). Subprojects Carbonic dioxide production unit construction: detailed design development was completed; more than a half of the basic process equipment was supplied, installation was started. Water circulation supply block: construction and installation are at the final stage. Reconstruction of purification units: biogenic industrial sewage purification installation was put into operation; additional tanks and warehouse capacities are installed. Water-line, steam line, underground communications construction works are at the final stage. 1 2 Additional raw material warehouse capacities were put into operation, the tank car loading and receiving racks construction Worn out Instrument system underground communications and As a result of the reconstruction works the production capacity of 65 ths.tons of phenol per year has been reached. pipelines equipment, was replaced; PART V CORPORATE MANAGEMENT part V // CORPORATE MANAGEMENT // 86 CORPORATE MANAGEMENT STRUCTURE OF BOARD OF DIRECTORS Corporate management of the enterprise the competence and preparations of recom- Shigabutdinov Albert Kashafovich Chairman of Board of directors, general director of OJSC “TAIF” is carried out according to the current leg- mendations to Board of directors for deciislation, the Charter, on the basis of precise sion-making on these questions. distribution of the rights and duties of Board of directors and Executive management. The Corporate management system of OJSC «Kazanorgsintez» is based on the Russian 87 The purpose of the Committee on audit is provision of actual participation of Board of directors in the control of financial and economic activity of the Company. and international practice, and principles of «Code of corporate behavior» of the Russian The Committee of Board of directors of the Federation, and is directed to respect of the Company on compensations and the per- Presnyakov Vladimir Vasilevich Deputy Chairman of Board of directors, deputy general director for oil refining and petrochemistry of OJSC “TAIF” Alyokhin Leonid Stepanovich Member of Board of directors, chairman of Executive management, general director of OJSC “Kazanorgsintez” Alekseev Sergey Vladimirovich Member of Board of directors, first deputy general director of OJSC “Svyazinvestneftekhim” Gaizatullin Radik Raufovich Member of Board of directors, RТ Minister of Finance, pre-doctorate degree in economic sciences Kudryashov Vladimir Nikolaevich Member of Board of directors, member of Executive management, first deputy general director - technical director on production and development of OJSC «Kazanorgsintez», pre-doctorate degree in technical sciences Metshin Ilsur Raisovich Member of Board of directors, head of municipal formation “city of Kazan” Sulteyev Rustem Nurgasimovich Member of Board of directors, first deputy general director of OJSC “TAIF” Safina Guzelija Muharjamovna Member of Board of directors, deputy general director on economy and finance of OJSC “TAIF” Safiullin Marat Rashitovich Member of Board of directors, state adviser to President of Tatarstan Republic for social and economic issues, doctor of economic sciences Sabirov Rinat Kasimovich Member of Board of directors, head of oiland-gas chemical complex department of RT Cabinet of Ministers, pre-doctorate degree in chemical sciences Sarkin Andrey Vladislavovich Member of Board of directors, chief of the corporate management of property and investments of OJSC “TAIF”, pre-doctorate degree in economic sciences Fardiev Ilshat Shaekhovich Member of Board of directors, general director of OJSC “Tatenergo” rights and interests of all persons interested sonnel - promotes attraction to the managein the enterprise successful activity, promotes ment of the Company the qualified experts keeping, development and augmentation of and creation of the necessary stimulus for shareholders assets, growth of the market their successful work. cost, maintenance of financial stability and The purpose of creation the Committees profitability of the organization. is the achievement of balance of interests All the most significant events are carried of various groups of shareholders and acout on the basis of the open information ceptance by Board of directors of as much interchange with shareholders and other in- as possible objective decisions according terested parties. The executive management to the interests of all shareholders of OJSC aspires to the maximal transparency of the «Kazanorgsintez», and also increase of investactivity directed to duly providing of objec- ment attraction. In case of need the experts, tive data about the company to all interested possessing necessary professional knowlpersons on the one hand, and to safety confi- edge for work in the specified Committee, dential and insider information, on the other can be involved in the work of the Committees. hand. In November, 2006, Board of directors of The Committees of Board of directors act on OJSC «Kazanorgsintez» decided to create the basis of internal documents of the Comthe two committees, - Committee of Board pany - Regulations on the corresponding of directors on audit and Committee of Committees approved by Board of directors Board of directors on compensations and where tasks and functions of the Committhe personnel, and also the plan of work of tees, the order of their formation, activity and the Committees for 2007 was approved. The quantitative structure are determined. given committees are created according to principles and positive international practice of corporate management and intended for preliminary consideration of the most important questions within the framework of part V // CORPORATE MANAGEMENT // 88 CORPORATE MANAGEMENT STRUCTURE OF EXECUTIVE MANAGEMENT According to the requirements of the Federal law «On joint-stock pal formation “city of Kazan”). Other eleven members of Board of dicompanies», Board of directors is elected by annual meeting of rectors have been re-elected. shareholders for the period of one year. 89 Alyokhin Leonid Stepanovich Chairman of Executive management, mem- In the first half-year 2006 Board of directors had held 4 sessions, in- ber of Board of directors, general director Board of directors of OJSC «Kazanorgsintez» consists of 13 members cluding 2 in the correspondence form. In the second half-year 2006 of OJSC «Kazanorgsintez» Kudryashov Vladimir Nikolaevich Member of Board of directors, Member of Executive management, first deputy general director - technical director on production and in the specified structure was approved on June, 8th, 2006 by in the new structure, approved at the annual assembly of sharehold- and development of OJSC «Kazanorgsintez», decision of annual general shareholders meeting. According to the ers, Board of directors had held 6 sessions, including 1 in the cor- pre-doctorate degree in technical sciences decision the following persons left structure of Board of directors: respondence form. During the sessions parameters of financial and Minkina Guzelija Talgatovna (Head of administration of Moscow dis- economic activity of the Company, the issues connected to sale/ trict of Kazan) and Raimov Asaf Magsumovich (member of Executive purchase of assets, the issues of attracting external financing, deals management, deputy general director –director on commerce of connected to purchase of the own shares by the enterprise, and othOJSC «Kazanorgsintez»). Following persons joined Board of directors: er questions of OJSC «Kazanorgsintez» activity were considered. Alekseev Sergey Vladimirovich (first deputy general director of OJSC “Svyazinvestneftekhim”) and Metshin Ilsur Raisovich (head of munici- Mukhametshin Marat Faritovich Gainullin Nail Samigullovich Member of Executive management, deputy Member of Executive management, general director - director on economy and deputy general director - chief engineer finance of OJSC «Kazanorgsintez», pre-doc- of OJSC «Kazanorgsintez» torate degree in economic sciences MEMBERS OF BOARD OF DIRECTORS AND EXECUTIVE MANAGEMENT, POSSESSING SHARES OF OJSC «KAZANORGSINTEZ» PARTICIPATION OF MEMBERS IN THE SESSIONS OF BOARD OF DIRECTORS (for December, 31st, 2006) 1 half-year 2006 Name Participated 2 half-year 2006 Name in sessions (times) 4 Member of Executive management, deputy Participated in sessions Alyokhin L.S. Potashkin Andrey Fedorovich (times) Alyokhin L.S. 6 Gaizatullin R.R. 3 Alekseev S.V.** 6 Kudryashov V.N. 4 Gaizatullin R.R. 3 Minkina G.T.* 4 Kudryashov V.N. 5 Presnyakov V.V. 4 Metshin I.R.** 1 Raimov A.M.* 3 Presnyakov V.V. 5 Safiullin M.R. 4 Safiullin M.R. 5 Sabirov R.K. 4 Sabirov R.K. 6 Sulteyev R.N. 3 Sulteyev R.N. 3 Safina G.M. 4 Safina G.M. 6 Sarkin A.V. 4 Sarkin A.V. 5 Fardiev I.S. 3 Fardiev I.S. 4 Shigabutdinov A.K. 4 Shigabutdinov A.K. 5 Surname, name, patronymic/ position Kudryashov Vladimir Nikolaevich Member of Board of directors, member of Executive management Share in the authorized capital, % general director - director on production of OJSC «Kazanorgsintez»» Raimov Asaf Magsumovich Member of Executive management, deputy general director - director on commerce of OJSC «Kazanorgsintez» 0.013 Gainullin Nail Samigullovich Member of Executive management 0.003 Mukhametshin Marat Faritovich Member of Executive management 0.01 Shaikhiev Gaifutdin Gilazovich Kaleeva Larisa Nikolaevna Member of Executive management 0.011 Total 0.037 The share of the specified persons in the authorized capital of joint-stock company Gataullin Magdut Makhmutovich Member of Executive management, deputy Member of Executive management, deputy general director - director on personnel and general director - director on capital con- general issues of OJSC «Kazanorgsintez» Kurbanov Ravil Barievich struction of OJSC «Kazanorgsintez» Kaleeva Larisa Nikolaevna during 2006 did not change. * Left Board of directors, according to the decision of the annual meeting of shareholders from June, 08th, 2006 ** Joint Board of directors, according to the decision of the annual meeting of shareholders from June, 08th, 2006 Member of Executive management, deputy general director - director on economic safety and regime of OJSC «Kazanorgsintez» Member of Executive management, chief accountant of OJSC «Kazanorgsintez» ALL-SEEING EYE Scientists from the Massachusetts Institute of Technology (MIT) designed the device , that solved number of lens optics problems, which sufficiently limited the opportunities of many devices earlier. The matter is that the opportunities of the optical system are determined by the lens’ properties, through which the view is carried out with their optical axis. However the offer of the scientists, eliminate such kinds of problems: the matter first of all is that there is no any lens in this invention. As a material, some unusual wire with the width of about millimeter is used. It consists of the regular metal strand, covered with insulator from the transparent polymer. When the light fall onto this unusual polymer (created in MIT several years ago) weak electric current is produced in the material, which goes in the wire. For item location determination, the scientists constructed the network of wires at first, presenting itself the model of Descartes coordinate system. By electric impulses the authors of the work could determine the linear parameters of the source and even its sizes in the plain net projection. For the practical appliance of the new device, MIT scientists gave the spherical form to the device - as it is came to something like parallels and meridians. That allowed to register the luminous radiation not in the plane but in the 3D space. Actually it is possible to use any other construction form, but the sphere allows to project the image to the more convenient owing to its symmetry coordinate system. By the way, a ray, falling onto the sphere, is registered from the one “side” first , and running though it (transparent skin allows to do so) - from another. The coordinates of crossing the ray with the sphere are transferred to the computer, which calculates the space location of the line, to which direction the ray is falling, by those two points. Using such device in practice, according to the inventors’ opinion, will allow to realize the dreams of the science-fiction writes in the nearest future, such as long-distance connection, supersensitive devices and eyes’ prosthesis, allowing the person to see. part V // CORPORATE MANAGEMENT // 92 AUTHORIZED CAPITAL AND STOCK MARKET AUTHORIZED CAPITAL AND STOCK MARKET By categories of shares Authorized capital was distributed as follows: As for January, 1st, 2007 the size of the Authorized capital of the Company has not been changed comparing to data for the beginning of 2006 and made 1,904.71 million roubles. Authorized capital has been paid complete- Type of shares Cost, roubles In 2006 the situation in the stock market DYNAMICS OF RTS AND RТS-2 INDEXES BY MONTHS (AT CLOSING) DURING 2006 was characterized by sufficient growth of in- Proportion, % dexes: as of the end of the reporting period the RTS index reached maximum value and Common 1,785,114,000 93.72 Preferred 119,596,000 6.28 Total 1,904,710,000 shares with the face-value of 1 rouble per ly. 93 Extra general meetings of shareholders were share. made 1,921.9 points on closing. The index of 2,500 Moscow Interbank Stock Exchange (MISE) at the end of 2006 made 1,693.5 points. During 1,922 2,000 1,704 2006 growth of MISE index made 59 %. Rates of growth of the index of RTS have decreased not held during 2006. 1,693 1,707 1,521 1,477 1,495 1,500 1,293 1,551 1,477 1,435 1,461 1,316 1,627 1,565 1,614 1,838 1,697 1,657 1,453 at the same time. Thus, within 2005 increase of RTS index made 83.3 %, and in 2006 - only 1,777 1,548 1,550 1,529 1,398 1,000 1,126 70.7 %. Data on declared shares of the Company 500 Common registered stocks of OJSC «Kaza- “Stock exchange “Russian Trading System” (RTS) since May, 1997. Following trading codes on RTS were assigned to shares of the Index RTS-2 Index RTS Company: КZOSP (RTS Board), KZOSG (RTS Structure of stock capital Exchange), KZOS (RTS Classical). on 31/12/2006 Name % of Authorized capital Number of persons registered in the list of shareholders as of During the all examined period shares of OJSC «Kazanorgsintez» were included into the list of securities on the basis of which the Index of RTS-2 is calculated. The index of shares of LLC “Telecom-Management” 48.76 31/12/2006 makes 8,904. Reduction of number of shareholders in OJSC “Svyazinvestneftekhim” 26.64 comparison with the last year has occurred due to increase of the RTS-2 is the indicator of the tenders at Stock exchange of RTS with shares related to «the Other legal entities 12.65 share of LLC “Telecom-Management” in the Authorized capital by second echelon» according to liquidity and capitalization. Physical persons 11.95 0.13 % and other legal entities by 0.83 % that has lowered a share of In 2006 the volume of the tenders at the Exchange market of OJSC “RTS” made 21.3 billion physical persons - shareholders by 0.96 %. roubles. Thus the volume of the tenders with shares of “the second echelon” under which influence there is a change of RTS-2 index, made 10.3 billion roubles that corresponds to 48.5 % of general turnover. The volume of the tenders with shares of OJSC «Kazanorgsintez» made 23.6 million roubles, or 0.23 % of total amount of the tenders with shares of “the second Dividends echelon”, where the greatest turnover has fallen to the common shares of OJSC “Novolipetz- Quantity of shares on which dividends are charged: 1,904,710,000 shares. Owners of preferred shares according to the Charter have the right to receive annual dividends not less than 25 % of face-value of shares. Dynamics of dividend payments on shares of the Company Type of shares Percent to face value on years 2003 2004 2005 2006 Common 25 27.5 15.14 27.5 Preferred 25 25 25 25 kiy metallurgical combine” (OJSC “NLMC” ) – 5.08 % and OJSC “Uralsvyazinform” – 3.31 %. As at the end of 2006 the weight of the share of OJSC «Kazanorgsintez» among 68 emitters By the decision of Board of directors of OJSC «Kazanorgsintez» it is included into the list of securities on the basis of which RTS-2 index is calculated, made recommended to pay dividends for work in 2006: preferred shares 0.78 %. The weight of the share shows the influence of shares of the emitter on change of the 25 %, common shares 27.5 % of face-value of shares. Cumulative pay- RTS-2 index and is determined by the ratio of capitalization of this share considered in the ments will make 520 mln.roubles that makes 23.5 % of net profit of index to the total capitalization of all securities included in the list for the given index calcula- 2006. tion. The greatest weight of the share, among participants of the given list has OJSC “NLMC” – 8.41 %, the least weight belongs to the shares of OJSC “Nizhnekamskshina” – 0.13 %. 12.06 11.06 10.06 09.06 08.06 07.06 06.06 720,000,000 0 05.06 720,000,000 of Non-commercial partnership of OJSC 04.06 1 Common norgsintez» are quoted at the trading system 03.06 Total amount, roubles. 02.06 Quantity, pieces 01.06 Face-value, roubles 12.05 Type of shares part V // CORPORATE MANAGEMENT // 94 95 AUTHORIZED CAPITAL AND STOCK MARKET AUTHORIZED CAPITAL AND STOCK MARKET RESULTS OF TENDERS OF OJSC «KAZANORGSINTEZ» AT CLASSICAL MARKET OF RTS WITHIN 2006 TABLE OF QUOTATIONS OF COMMON SHARES OF OJSC «KAZANORGSINTEZ» IN THE CLASSICAL MARKET OF RTS USD 0.64 Period Max quotation Min quotation Min quotation Max quotation for purchase for purchase for sale for sale 3.6 3.5 4.0 4.3 2 quarter* 0.036 0.022 0.035 0.052 0.44 3 quarter 0.036 0.031 0.035 0.046 0.39 4 quarter 0.077 0.025 0.055 0.16 1 quarter 0.1515 0.03 0.0635 0.24 2 quarter 0.128 0.03 0.119 0.24 3 quarter 0.16 0.08 0.1215 0.36 4 quarter 0.175 0.1 0.155 0.25 1 quarter 0.305 0.0002 0.16 0.41 2 quarter 0.277 0.095 0.11 0.28 3 quarter 0.449 0.08 0.275 0.55 4 quarter 0.442 0.3 0.38 0.6 1 quarter 0.6 0.35 0.445 1.05 In 2006 at RTS stock exchange the maximal tors rights, purchase of earlier placed shares 2 quarter 0.583 0.3 0.42 0.78 quotation for purchase of one share of OJSC was carried out by the Company. 3 quarter 0.51 0.31 0.4155 0.78 4 quarter 0.62 0.375 0.4875 0.8 0.59 0.54 2003 0.49 2004 Purchase price Sales price 01.07 12.06 11.06 10.06 09.06 08.06 07.06 06.06 05.06 04.06 03.06 02.06 01.06 0.34 Average price 2005 Min ($) Мax ($) Purchase price 0.37 0.62 Sales price 0.42 0.64 Average price 0.40 0.63 2006 «Kazanorgsintez» made $0.62, the minimal quotation for sale made $0.42, thus the total volume of tenders made $ 6,343 thousand. During 2006, 5,693,800 common shares have been acquired on the balance of OJSC “Kazanorgsintez”. In April 2006 the part of According to RTS, capitalization of OJSC common shares (2,393,500 pieces) has been «Kazanorgsintez» on 29/12/2006 made sold through the professional participant $1,129.1 million, that is higher than the level of the stock market with the license for reof 2005 by 54.9 %. For execution the decision of Board of directors of the Company and with a view of realizing the actions on increasing market cost of shares and capitalization of the Company, and maintaining the shareholders and inves- 1 quarter. alization of broker activity. As a result from operations with own shares the income of 2.5 million roubles is received. As of 31/12/2006 there are 3,300,300 common shares on the balance of the Company in the total amount of 46.3 million roubles. * Decrease in quotations of shares is connected to increase in authorized capital 100 times part V // CORPORATE MANAGEMENT // 96 LIST OF AFFILIATED PERSONS ESSENTIAL FACTS AND DEALS ANNUAL GENERAL SHAREHOLDERS 1) Approvement of the annual report, annual accounting reporting of OJSC «KazanorgsinMEETING, 8TH OF JUNE, 2006 tez», including the report on profits and losses by results of financial 2005. 2) Distribution of the profit of OJSC «Kazanorgsintez», including payment of annual divi- 01 Shigabutdinov Albert Kashafovich Chairman of Board of directors 02 Presnyakov Vladimir Vasilevich Deputy chairman of Board of directors 03 Alekseev Sergey Vladimirovich Member of Board of directors 04 Gaizatullin Radik Raufovich Member of Board of directors 05 Metshin Ilsur Raisovich Member of Board of directors 06 Sabirov Rinat Kasimovich Member of Board of directors 07 Sarkin Andrey Vladislavovich Member of Board of directors 08 Safina Guzelija Muharjamovna Member of Board of directors 09 Safiullin Marat Rashitovich Member of Board of directors 10 Sulteyev Rustem Nurgasimovich Member of Board of directors 11 Fardiev Ilshat Shaekhovich Member of Board of directors dends in monetary form by results of financial 2005 was approved. The size of the dividend under shares of each category is the following: a) under preferred shares - at the rate of 25 % from their face-value; b) under common shares - at the rate of 15.14 % from their face-value. Term of dividends payment is till the 8th of June, 2007, according to the Charter of OJSC «Kazanorgsintez». 3) Members of Board of directors of OJSC «Kazanorgsintez» were elected. 4) Auditor of OJSC «Kazanorgsintez» - Joint-Stock Company «DELOITTE AND TOUCHE CIS» was authorized. 5) Members of Revision committee were elected. 6) Changes and additions to the Charter of OJSC «Kazanorgsintez» were made and approved in the new wording. 12 Alyokhin Leonid Stepanovich 7) The deal between OJSC «Kazanorgsintez» and LLC «Telecom - Management» on granting the property, transferred by LLC «Telecom - Management» (depositor) in the mortgage for a 13 Kudryashov Vladimir Nikolaevich Member of Board of directors Member of Executive management 14 Gainullin Nail Samigullovich Member of Executive management 15 Gataullin Magdut Mahmutovich Member of Executive management 16 Kaleeva Larisa Nikolaevna Member of Executive management 17 Kurbanov Ravil Barievich Member of Executive management 18 Mukhametshin Marat Faritovich Member of Executive management 19 Potashkin Andrey Fedorovich Member of Executive management 20 Raimov Asaf Magsumovich Member of Executive management 21 Shaikhiev Gaifutdin Gilazovich Member of Executive management security of credit of OJSC «Kazanorgsintez» (borrower) was approved. The price of the transaction: 1 % per year from mortgaging cost of the property - $311 million. 8) The decision of participation in Noncommercial partnership “Kazan industrial district” as the founder was taken. CHANGE OF THE SHARE IN THE Since 14th of July, 2006, OJSC «Kazanorgsintez» has increased the share in the Authorized AUTHORIZED CAPITAL OF OJSC capital of OJSC “Spetzneftekhimmontazh” from 91.01 % up to 99.75 %. The share of belong“SPETZNEFTEKHIMMONTAZH”, ing to OJSC «Kazanorgsintez» of common shares has made 99.75 %. 14TH OF JULY 2006 EUROBOND ISSUE, OJSC «Kazanorgsintez» has carried out the issue of unsecured Eurobonds, terms of repay30TH OF OCTOBER 2006 ment: 30th of October, 2011; the amount of the transaction: 200 000 000 US dollars under 9.25 %; share from asset value: 21.21 %; Date of decision-making on approval of the transaction by general shareholders meeting - 12th of September, 2005. Member of Board of directors Chairman of Executive management 22 LLC “Telecom-Management” Possession more than 20 % of voting shares of the Company 23 OJSC “Svyazinvestneftekhim” Possession more than 20 % of voting shares of the Company 24 CJSC “Ankorit” Possession more than 20 % of the authorized capital of this company 25 OJSC “Spetsneftekhimmontazh” Possession more than 20 % of the authorized capital of this company 26 LLC “TAIF INVEST” Possession more than 20 % of the authorized capital of this company 27 LLC “Tatkhimremont” Possession more than 20 % of the authorized capital of this company SESSION OF BOARD OF DIRECTORS, The transaction by opening the credit line between OJSC «Kazanorgsintez», ABN AMRO 27TH OF NOVEMBER, 2006 BANK N.V., Netherland Deutschland Frankfurt-on-Main, Federal Republic of Germany and 28 JV “Elmer LTD” Possession more than 20 % of the authorized capital of this company «ABN AMRO Bank Joint-Stock Company» is approved. The amount of the credit line (Facility): 29 LLC “Agrosintez” Possession more than 20 % of the authorized capital of this company 30 LLC “Trade House Orgsintez” Possession more than 20 % of the authorized capital of this company 31 LLC “Novomoskovsky trubny zavod” Possession more than 20 % of the authorized capital of this company 32 LLC “SHP “Kolos-Sintez” Possession more than 20 % of the authorized capital of this company 33 LLC “DK Khimikov” Possession more than 20 % of the authorized capital of this company does not exceed €4.7million. SESSION OF BOARD OF DIRECTORS, The decision on purchase of shares of OJSC «Kazanorgsintez» in the amount of not more 26TH OF DECEMBER, 2006 than 10 % from the authorized capital of the Company is accepted. As of 01/01/2007 97 DATA ABOUT THE COMPANY Name of the enterprise: Kazan Open Joint Stock Company “Organichesky sintez” (shortened name OJSC “Kazanorgsintez”) Address of the enterprise: 420051, Republic Tatarstan, Kazan, Belomorskaya street, 101 Information on state registration: Registered by RT Ministry of Finance in August 31, 1993, № 400. Main state registration number in uniform state register of legal entities: 1021603267674 Chief of the enterprise: General Director Leonid Stepanovich Alyokhin Legal status: Open Joint Stock Company Main kinds of activity of the company are as follows: Production, sale of products and goods, rendering services. DATA ABOUT THE COMPANY Representation of Company : Moscow Representation of OJSC «Kazanorgsintez» Location and postal address: 117186, Russian Federation, Moscow, Sevastopol avenue, 43А, case 2 Chief - Zotov Alexander Gennadievich Information about the Company is published: In newspapers “Respublika Tatarstan”, “Vatanym Tatarstan”, “Sintez”; magazine “Bulletin of FSFR”; in Internet on the site of the company by the address: www.kazanorgsintez.ru Structure of Revision committee: Hamzina Farida Asatovna - Chairman of revision committee, chief accountant of OJSC “TRK “TBT” Gabdrakhmanova Aida Rinatovna - Member of revision committee, deputy chief of economical department of OJSC «Kazanorgsintez» Gilmutdinova Nailya Zalyalyutdinova - Member of revision committee, chief advisor of RT Ministry of Finance Production and realization of research and developmental works, development and introduction of new technologies in production. Gazizullina Milyausha Rakhimzyanovna - Member of revision committee, deputy chief accountant of “TAIF” Production of equipment for chemical, petrochemical, oil refining and other production and objects connected with use or storage of explosion and fire dangerous, toxic substances and mixes. Voronina Yulia Vladimirovna- Member of revision committee, the chief advisor of the chemical and petrochemical complex of Department of the fuel and energy complex strategic development of RT Ministry of economy and industry Financial, investment activity. Work with shareholders is carried out by: Management bodies of the Company: Data on Auditor: Data on registry holder: General shareholders meeting Board of directors Individual executive body (General director) Collective executive body (Executive management) Auditor of the Company is CJSC «Deloitte and Тouche CIS» Data on license of the auditor: Number of license: Е002417 Date of issue: 06.11.2002 Validity: till 06.11.2007 Body issued the license: the Ministry of Finance of the Russian Federation Register of shareholders is kept by Kazan branch of LLC «Eurasian Registrar» Location: Tatarstan, 420043, Kazan, Vishnevsky street, 6 Number of license: 10-000-1-00332 Date of issue: 10.03.2005 Validity: without restriction of validity Body issued the license: Federal service on the financial markets of the Russian Federation Tchekmaryov Sergei Fedorovich - Secretary of Board of directors Phone: (843) 533-98-18 E-mail: Sergey.Checmarev@kos.ru Galyamova Alfia Zamirovna - Press secretary of OJSC «Kazanorgsintez» Phone: (843) 533-99-67 E-mail: pressa@kos.ru Gavrilov Igor Viktorovich - Chief of the corporate management department Phone: (843) 533-99-85 E-mail: Gavrilov@kos.ru Annual report was authorized by the decision of Board of directors PART VI INDEPENDENT AUDITORS’ REPORT AND CONSOLIDATED FINANCIAL STATEMENTS part VI // INDEPENDENT AUDITORS’ REPORT AND CONSOLIDATED FINANCIAL STATEMENTS // 102 103 STATEMENT OF MANAGEMENT’S RESPONSIBILITIES FOR THE PREPARATION AND APPROVAL OF THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2006 INDEPENDENT AUDITORS’ REPORT The following statement, which should be read in conjunction with the independent auditors’ ZAO Deloitte & Touche CIS Business Center “Mokhovaya” 4/7 responsibilities stated in the independent auditors’ report set out on pages 2-3, is made with Vozdvizhenka St., Bldg. 2 Moscow, 125009 Russia a view to distinguishing the respective responsibilities of management and those of the Tel: +7 (495) 787 0600 Fax: +7 (495) 787 0601 www.deloitte.ru independent auditors in relation to the consolidated financial statements of Open Joint Stock Company “Kazanorgsintez” and its subsidiaries (the “Group”). Management is responsible for the preparation of consolidated financial statements that present To the Board of Directors of Open Joint Stock Company “Kazanorgsintez”: fairly the financial position of the Group at 31 December 2006, and the results of its operations, changes in shareholders’ equity and cash flows for the year then ended, in accordance with We have audited the accompanying consolidated financial statements (the “financial statements”) of Open International Financial Reporting Standards (“IFRS”). Joint Stock Company “Kazanorgsintez” and its subsidiaries (the “Group”), which comprise of the balance sheet as at 31 December 2006, and the statements of income, changes in shareholders’ equity and cash flows for In preparing the consolidated financial statements, management is responsible for: the year then ended, and a summary of significant accounting policies and other explanatory notes. Selecting suitable accounting principles and applying them consistently; Making judgments and estimates that are reasonable and prudent; Management’s responsibility for the financial statements Stating whether IFRS have been followed, subject to any material departures disclosed and explained in the consolidated financial statements; and Management is responsible for the preparation and fair presentation of these financial statements in Preparing the consolidated financial statements on a going concern basis, unless it is accordance with International Financial Reporting Standards. This responsibility includes: designing, inappropriate to presume that the Group will continue in business for the foreseeable implementing and maintaining internal control relevant to the preparation and fair presentation of future. financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the Management, within its competencies, is also responsible for: circumstances. Designing, implementing and maintaining an effective system of internal controls throughout the Group; Auditor’s responsibility Maintaining statutory accounting records in compliance with local legislation and accounting standards in the respective jurisdictions in which the Group operates; Our responsibility is to express an opinion on these financial statements based on our audit. We conducted Taking such steps to safeguard the assets of the Group; our audit in accordance with International Standards on Auditing. Those standards require that we comply Preventing and detecting fraud and other irregularities. with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. The consolidated financial statements for the year ended 31 December 2006 were approved on 4 May 2007 in Kazan, Republic of Tatarstan, Russian Federation, by: An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. __________________________________ __________________________________ In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation L. S. Alekhin F. M. Kalimullin and fair presentation of the financial statements in order to design audit procedures that are appropriate General Director Chief Financial Officer in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements Member of Deloitte Touche Tohmatsu part VI // INDEPENDENT AUDITORS’ REPORT AND CONSOLIDATED FINANCIAL STATEMENTS // 104 105 CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2006 INDEPENDENT AUDITORS’ REPORT (in thousands of Russian roubles) As restated We believe that the audit evidence we have obtained is sufficient and appropriate to provide Notes a basis for our audit opinion. 2006 2005 Sales 5 15,383,982 13,240,850 Cost of sales 6 (9,859,380) (8,632,555) 5,524,602 4,608,295 (2,026,232) (1,508,187) (194,003) (42,066) (152,174) (91,885) 43,152 (49,406) Opinion In our opinion, the financial statements present fairly, in all material respects, the financial position of the Group as at 31 December 2006, and of its financial performance and its cash Gross profit flows for the year then ended in accordance with International Financial Reporting Standards. Selling, general and administrative expenses Emphasis of matter 7 Loss from other sales Finance costs 8 As discussed in note 38, the corresponding figures for the year ended 31 December 2005 have Income/(loss) from investments 9 been restated to correct certain errors. We have audited the adjustments that were applied to Foreign exchange gain restate the corresponding figures. In our opinion, such adjustments are appropriate and have Other expenses 147,211 17,446 (154,894) (351,493) 3,187,662 2,582,704 (676,383) (568,887) 2,511,279 2,013,817 2,523,545 1,981,921 (12,266) 31,896 2,511,279 2,013,817 Basic 1.42 1.11 Diluted 1.33 1.04 10 been properly applied. Profit before income tax Income tax 11 Profit for the year Moscow, Russia 4 May 2007 Attributable to: Shareholders of the parent company Minority interest EARNINGS PER SHARE (RUR) 28 BASKET IN THE VESTING POCKET For some kind of liquids and bulk materials transportation, containers of different kinds and volume are used nowadays. However all existing containers have one sufficient defect: their own size is the same at the time they are full and when they are empty. That’s why empty containers occupied the same area at transportation as the full ones. The group of scientists from Germany under the management of Gotfield Gerhard offered their own way of solving this problem. German chemists designed the new kind of the organic polymer on the basis of ethanol, the main feature of which is its flexibility. This polymer has the property to stretch, keeping its total volume. Experimental examples of polymer with the width of 7-8 mm stretched till their width reached 1,2 mm. “Using this kind of polymers we will be able to create containers, which will occupy 5-6 times less place when empty than when they are full”, - tells chemists Claus Phreizenburg,- “Thus we make possible the transportation of the significant number of containers keeping the significant part of the useful space”. part VI // INDEPENDENT AUDITORS’ REPORT AND CONSOLIDATED FINANCIAL STATEMENTS // 108 109 CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY FOR THE YEAR ENDED 31 DECEMBER 2006 CONSOLIDATED BALANCE SHEET AT 31 DECEMBER 2006 (in thousands of Russian roubles) (in thousands of Russian roubles) As restated Notes 2006 Equity attributable to shareholders of the parent company 2005 Notes ASSETS Share Additional Treasury Retained capital paid-in capital stock earnings Total Minority Total interest equity Balance at 31 December 2004 NON-CURRENT ASSETS: Property, plant and equipment 12 24,873,904 14,222,848 – as previously reported Intangible assets 13 32,599 40,528 Effect of correction of errors Long-term investments 14 52,100 52,084 Investments in associates 15 29,278 31,801 Advances paid for licenses 16 1,039,946 683,665 26,027,827 15,030,926 CURRENT ASSETS: 38 Balance at 31 December 2004 – as restated Profit for the year 1,904,710 1,515,015 (100,077) 6,245,872 9,565,520 11,694 9,577,214 - - - 120,171 120,171 - 120,171 1,904,710 1,515,015 (100,077) 6,366,043 9,685,691 11,694 9,697,385 - - - 1,981,921 1,981,921 31,896 2,013,817 - (520,178) (520,178) - (520,178) Dividends 29 - - Loss on disposal of subsidiary 31 - - - (249,787) (249,787) - (249,787) Inventories 17 2,257,163 1,819,261 Re-acquisition of issued shares - - (86,687) - (86,687) - (86,687) Trade and other accounts receivable 18 1,748,689 896,358 Taxes recoverable and prepaid 19 472,935 1,084,509 Re-issuance of ordinary shares from treasury shares - - 186,764 - 186,764 - 186,764 Cash and cash equivalents 20 1,904,710 1,515,015 - 43,590 11,041,314 - - - 2,523,545 2,523,545 (12,266) 2,511,279 TOTAL ASSETS 784,163 426,320 5,262,950 4,226,448 31,290,777 19,257,374 Profit for the year Dividends SHAREHOLDERS’ EQUITY AND LIABILITIES SHAREHOLDERS’ EQUITY: Share capital 21 1,904,710 1,904,710 Treasury stock 21 (46,251) - Additional paid-in capital 21 1,515,015 1,515,015 9,801,397 7,577,999 13,174,871 10,997,724 Retained earnings Equity attributable to shareholders of the parent company Minority interest 31,324 43,590 13,206,195 11,041,314 NON-CURRENT LIABILITIES: Long-term borrowings 23 11,301,384 4,692,117 Deferred tax liabilities 11 1,214,125 800,581 Obligations under finance leases 24 79,082 124,527 12,594,591 5,617,225 2,325,933 1,037,237 CURRENT LIABILITIES: Trade payables Advances received from customers 1,380,324 150,659 Short-term borrowings 25 925,145 913,398 Taxes payable 26 171,647 87,017 Other payables and accrued liabilities 27 TOTAL SHAREHOLDERS’ EQUITY AND LIABILITIES Balance at 31 December 2005 – as restated 686,942 410,524 5,489,991 2,598,835 31,290,777 19,257,374 - - - (300,147) (300,147) - (300,147) Re-acquisition of issued shares - - (81,300) - (81,300) - (81,300) Re-issuance of ordinary shares from treasury shares - - 35,049 - 35,049 - 35,049 1,904,710 1,515,015 (46,251) 9,801,397 13,174,871 31,324 13,206,195 Balance at 31 December 2006 29 7,577,999 10,997,724 part VI // INDEPENDENT AUDITORS’ REPORT AND CONSOLIDATED FINANCIAL STATEMENTS // 110 111 NOTES TO THE CONSOLIDATED FINANCIAL STATE MENTS FOR THE YEAR ENDED 31 DECEMBER 2006 CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 2006 (in thousands of Russian roubles) Notes 2006 2005 1 . GENERAL Organisation OPERATING ACTIVITIES: Open Joint Stock Company “Kazanorgsintez” (the “Company”) was incorporated in Kazan, Republic Cash flows from operations 30 Income tax paid Interest paid Net cash generated from operating activities 5,957,337 3,231,421 of Tatarstan, Russian Federation on 1 September 1993. The principal activity of the Company and its (152,454) (773,783) (726,523) (37,995) subsidiaries (the “Group”) is production of chemical products and derivatives thereof (mainly ethyl- 5,031,100 2,466,903 Major production facilities of the Group are located in Kazan, Republic of Tatarstan, Russian Federation. The registered office of the Company is situated at the following address: 101 Belomorskaya INVESTING ACTIVITIES: Purchase of property, plant and equipment Proceeds on disposal of property, plant and equipment Advances paid for licenses Purchase of equity investments Proceeds on disposal of equity investments Proceeds on disposal of subsidiary Interest received Dividends received Net cash used in investing activities (10,587,399) 159,412 (356,281) 40,230 5,445 (6,762,694) 3,712 (39,876) (35,243) 8,594 100 5,690 7 (10,738,593) (6,819,710) 1,428,083 (1,726,424) 13,666,544 (6,944,035) (74,757) (81,300) 2,571,975 (2,352,899) 4,905,223 (441,183) (86,687) 35,049 (265,600) 186,764 (144,061) 6,037,560 4,639,132 330,067 FINANCING ACTIVITIES: Proceeds from short-term borrowings Repayments of short-term borrowings Proceeds from long-term borrowings Repayments of long-term borrowings Dividends paid Re-acquisition of issued shares Proceeds on re-issuance of ordinary shares from treasury shares Repayment of obligations under finance lease Net cash generated from financing activities Net increase in cash and cash equivalents Cash and cash equivalents at beginning of the year Effect of exchange rate changes on cash held in foreign currencies ene and polyethylene) which are marketed and sold primarily in the Russian Federation. street, 420051, Kazan, Republic of Tatarstan, Russian Federation. Details of the Company’s subsidiaries are in Note 36. 2 . ADOPTION OF NEW AND REVISED STANDARDS In the current year, the Group has adopted all of the new and revised Standards and Interpretations issued by the International Accounting Standards Board (the “IASB”) and the International Financial Reporting Interpretations Committee (the “IFRIC”) of the IASB that are relevant to its operations and effective for annual reporting periods beginning on 1 January 2006. The adoption of these new and 426,320 revised Standards and Interpretations has not significantly affected the amounts reported for the current or prior years. At the date of authorisation of these financial statements, the following Standards and Interpretations were in issue but not yet effective: Standard/Interpretation Effective for annual periods beginning on or after IFRS 7 “Financial Instruments: Disclosures” 1 January 2007 286,325 IFRS 8 “Operating Segments” 1 January 2009 146,829 Amendment to IAS 1 “Presentation of Financial Statements” on capital disclosures 1 January 2007 27,776 (6,834) 784,163 426,320 IFRIC 9 “Reassessment of Embedded Derivatives” IFRIC 10 “Interim Financial Reporting and Impairment” Cash and cash equivalents at end of the year 1 June 2006 1 November 2006 IFRIC 11 “IFRS 2 – Group and Treasury Share Transactions” IFRIC 12 “Service Concession Agreements” 1 March 2007 1 January 2008 Management anticipates that the adoption of these Standards and Interpretations in future periods will have no material financial impact on the financial statements of the Group. Reclassifications Certain comparative information, presented in the consolidated financial statements for the prior reporting periods, has been reclassified in order to achieve comparability with the presentation used in the consolidated financial statements for the year ended 31 December 2006. Certain costs were reclassified between cost of sales, selling, administrative and general expenses and cost of other sales. Those reclasses did not affect net profit for the year ended 31 December 2005. part VI // INDEPENDENT AUDITORS’ REPORT AND CONSOLIDATED FINANCIAL STATEMENTS // 112 113 NOTES TO THE CONSOLIDATED FINANCIAL STATE MENTS FOR THE YEAR ENDED 31 DECEMBER 2006 3 . SIGNIFICANT ACCOUNTING POLICIES Statement of compliance The consolidated financial statements of the Group have been prepared in accordance with International Financial Reporting Standards. Basis of preparation The financial statements have been prepared on the historical cost basis except for the valuation of certain financial instruments. The principal accounting policies are set out below. Basis of consolidation The consolidated financial statements incorporate the financial statements of the Company and entities (including special purpose entities) controlled by the Company. Control is achieved where the Company has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. NOTES TO THE CONSOLIDATED FINANCIAL STATE MENTS FOR THE YEAR ENDED 31 DECEMBER 2006 Goodwill arising on acquisition is recognised as an asset and initially measured at cost, being the excess of the cost of the business combination over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities recognised. If, after reassessment, the Group’s interest in the net fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities exceeds the cost of the business combination, the excess is recognised immediately in profit or loss. The interest of minority shareholders in the acquiree is initially measured at the minority’s proportion of the net fair value of the assets, liabilities and contingent liabilities recognised. Investments in associates An associate is an entity over which the Group has significant influence and that is not a subsidiary. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies. The results and assets and liabilities of associates are incorporated in these financial statements using the equity method of accounting. Under the equity method, investments in associates are carried in the consolidated balance sheet at cost as adjusted for post-acquisition changes in the Group’s share of The results of subsidiaries acquired or disposed of during the year are included in the consolidated the net assets of the associate, less any impairment in the value of individual investments. Losses of an income statement from the effective date of acquisition or up to the effective date of disposal, as ap- associate in excess of the Group’s interest in that associate (which includes any long-term interests that, propriate. in substance, form part of the Group’s net investment in the associate) are not recognised, unless the Where necessary, adjustments are made to the financial statements of subsidiaries to bring their ac- Group has incurred legal or constructive obligations or made payments on behalf of the associate. counting policies into line with those used by other members of the Group. Any excess of the cost of acquisition over the Group’s share of the net fair value of the identifiable assets, All intra-group transactions, balances, income and expenses are eliminated in full on consolidation. liabilities and contingent liabilities of the associate recognised at the date of acquisition is recognised as goodwill. The goodwill is included within the carrying amount of the investment and is assessed Minority interests in the net assets (excluding goodwill) of consolidated subsidiaries are identified separately from the Group’s equity therein. Minority interests consist of the amount of those interests at the date of the original business combination (see below) and the minority’s share of changes in equity for impairment as part of the investment. Any excess of the Group’s share of the net fair value of the identifiable assets, liabilities and contingent liabilities over the cost of acquisition, after reassessment, is recognised immediately in profit or loss. since the date of the combination. Losses applicable to the minority in excess of the minority’s interest in the subsidiary’s equity are allocated against the interests of the Group except to the extent that the Where a group entity transacts with an associate of the Group, profits and losses are eliminated to the minority has a binding obligation and is able to make an additional investment to cover the losses. extent of the Group’s interest in the relevant associate. Business combinations Special purpose entities Acquisitions of subsidiaries and businesses are accounted for using the purchase method. The cost of Special purpose entities (“SPEs”) are those undertakings that are created to satisfy specific business the business combination is measured as the aggregate of the fair values of assets given, liabilities in- needs of the Group and the Group has the right to the majority of the benefits of the SPE, or exposed curred or assumed, and equity instruments issued by the Group in exchange for control of the acquiree, to risks associated with activities of the SPE. plus any costs directly attributable to the business combination. The acquiree’s identifiable assets, liabili- SPEs are consolidated in the same manner as subsidiaries when the substance of the relationship indi- ties and contingent liabilities that meet the conditions for recognition under IFRS 3 Business Combina- cates that the SPE is controlled by the Group. tions are recognised at their fair values at the acquisition date, except for non-current assets that are classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations, which are recognised and measured at fair value less costs to sell. Goodwill Goodwill arising on the acquisition of a subsidiary represents the excess of the cost of acquisition over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities of the subsidiary recognised at the date of acquisition. Goodwill is initially recognised as an asset at cost and is subsequently measured at cost less any accumulated impairment losses. MICROTHIN ULTRASTRONG The group of the British scientists under the management of professor Andre Game form Massachusetts University discovered the new class of materials, existing only in the sciencefiction movies and books earlier. This is the set of materials with the width of one atom and with the properties, which were not considered possible before. These new materials were created by the extraction of the single atom layers from the regular crystals with the use of “micromechanical cleavage” technology. Depending on crystals’ properties, their copies with the width of one atom can be polymers, metals, semiconductors, insulators, magnets and etc. Earlier it was considered, that such thin materials basically are not able to exist, but nowadays explorers demonstrated for the first time that “one atom materials” not only possible to exist but also simple to produce. “Probably, the most important in this work is that our discovery is not limited by one or two materials. This is the whole set - thousands of new materials. And they have variety of properties, allowing to chose one, the most suitable for something material”, - informed doctor Konstantin Novoselov. Discovered materials open almost unlimited spectrum of new opportunities in the space, building, chemical and military industry. Probably they will radically change the human view point to the technological development perspectives, as the plastics did in due time. part VI // INDEPENDENT AUDITORS’ REPORT AND CONSOLIDATED FINANCIAL STATEMENTS // 116 117 NOTES TO THE CONSOLIDATED FINANCIAL STATE MENTS FOR THE YEAR ENDED 31 DECEMBER 2006 NOTES TO THE CONSOLIDATED FINANCIAL STATE MENTS FOR THE YEAR ENDED 31 DECEMBER 2006 For the purpose of impairment testing, goodwill is allocated to each of the Group’s cash-generating Lease payments are apportioned between finance charges and reduction of the lease obligation so as to units expected to benefit from the synergies of the combination. Cash-generating units to which achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged goodwill has been allocated are tested for impairment annually, or more frequently when there is directly to profit or loss, unless they are directly attributable to qualifying assets, in which case they are capi- an indication that the unit may be impaired. If the recoverable amount of the cash-generating unit is talised in accordance with the Group’s general policy on borrowing costs (see below). Contingent rentals less than the carrying amount of the unit, the impairment loss is allocated first to reduce the carrying are recognised as expenses in the periods in which they are incurred. amount of any goodwill allocated to the unit and then to the other assets of the unit pro-rata on the basis of the carrying amount of each asset in the unit. An impairment loss recognised for goodwill is not reversed in a subsequent period. Operating lease payments are recognised as an expense on a straight-line basis over the lease term, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed. Contingent rentals arising under operating leases are recognised as On disposal of a subsidiary, the attributable amount of goodwill is included in the determination of an expense in the period in which they are incurred. the profit or loss on disposal. Foreign currencies The Group’s policy for goodwill arising on the acquisition of an associate is described under ‘Investments in associates’ above. The funсtional currency of the Company and all its subsidiaries, which reflects the economic substance of their operations, and presentation currency of the consolidated financial statements of the Group, is the Revenue recognition Russian rouble (‘RUR”). Revenue is measured at the fair value of the consideration received or receivable. In preparing the financial statements of the individual entities, transactions in currencies other than the Sale of goods entity’s functional currency (foreign currencies) are recorded at the rates of exchange prevailing at the dates of the transactions. At each balance sheet date, monetary items denominated in foreign currencies Revenue from the sale of goods is recognised when all the following conditions are satisfied: are retranslated at the rates prevailing at the balance sheet date. Non-monetary items carried at fair value The Group has transferred to the buyer the significant risks and rewards of ownership of the goods, which is typically at the date of loading to third party for transportation; that are denominated in foreign currencies are retranslated at the rates prevailing at the date when the The Group retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold; currency are not retranslated. The amount of revenue can be measured reliably; Borrowing costs It is probable that the economic benefits associated with the transaction will flow to the entity; Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, The costs incurred or to be incurred in respect of the transaction can be measured reliably. which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, Dividend, interest and other revenue Dividend revenue from investments is recognised when the Group’s right to receive payment has been established. Interest revenue is accrued on a time basis, by reference to the principal outstanding and at the ef- fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign Exchange differences are recognised in profit or loss in the period in which they arise. are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale. All other borrowing costs are recognised in profit or loss in the period in which they are incurred. Taxation fective interest rate applicable, which is the rate that exactly discounts estimated future cash receipts Income tax expense represents the sum of the tax currently payable and deferred tax. through the expected life of the financial asset to that asset’s net carrying amount. Current tax The loss from other sales includes revenues from sale of ancillary items, net of cost of sales. Other sales The tax currently payable is based on taxable profit for the year. Taxable profit differs from profit as reported primarily consist of sales of electricity, water and heat. in the income statement because it excludes items of income or expense that are taxable or deductible in Leasing other years and it further excludes items that are never taxable or deductible. The Group’s liability for cur- Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks rent tax is calculated using tax rates that have been enacted by the balance sheet date. and rewards of ownership to the lessee. All other leases are classified as operating leases. Deferred tax Assets held under finance leases are initially recognised as assets of the Group at their fair value at Deferred tax is recognised on differences between the carrying amounts of assets and liabilities in the the inception of the lease or, if lower, at the present value of the minimum lease payments. The cor- financial statements and the corresponding tax bases used in the computation of taxable profit, and is ac- responding liability to the lessor is included in the balance sheet as a finance lease obligation. counted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences, and deferred tax assets are generally recognised for all deductible part VI // INDEPENDENT AUDITORS’ REPORT AND CONSOLIDATED FINANCIAL STATEMENTS // 118 119 NOTES TO THE CONSOLIDATED FINANCIAL STATE MENTS FOR THE YEAR ENDED 31 DECEMBER 2006 NOTES TO THE CONSOLIDATED FINANCIAL STATE MENTS FOR THE YEAR ENDED 31 DECEMBER 2006 temporary differences to the extent that it is probable that taxable profits will be available against which Land occupied by the Group’s facilities is owned by the Group. Land is not depreciated and is included in prop- those deductible temporary differences can be utilised. Such assets and liabilities are not recognised if erty, plant and equipment. the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the Assets held under finance leases are depreciated over their expected useful lives on the same basis as similar owned assets or, where shorter, the term of the relevant lease. accounting profit. The gain or loss arising on the disposal or retirement of an asset is determined as the difference between the Deferred tax liabilities are recognised for taxable temporary differences associated with investments in sales proceeds and the carrying amount of the asset and is recognized in the income statement. subsidiaries and associates, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax Construction in progress assets arising from deductible temporary differences associated with such investments and interests are Construction in progress comprises costs directly related to construction of property, plant and equipment only recognised to the extent that it is probable that there will be sufficient taxable profits against which including an appropriate allocation of directly attributable variable overheads that are incurred in construction. to utilise the benefits of the temporary differences and they are expected to reverse in the foreseeable Depreciation of constructed assets commences when the assets are put into operation. future. Intangible assets The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the Intangible assets acquired separately are reported at cost less accumulated amortisation and accumulated impairment losses. Amortisation is charged on a straight-line basis over their estimated useful lives. The estimated asset to be recovered. useful life and amortisation method are reviewed at the end of each annual reporting period, with the effect of Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in any changes in estimate being accounted for on a prospective basis. which the liability is settled or the asset realised, based on tax rates and tax laws that have been enacted or substantively enacted by the balance sheet date. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Group expects, at the reporting date, to recover or settle the carrying amount of its assets and liabilities. Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax Software costs incurred for the development, implementation and enhancement of the operating systems, are capitalised and amortised over the expected useful life of the system. Software costs relating to the maintenance of the operating system are recognised as an expense in the period in which they occur. Impairment of tangible and intangible assets excluding goodwill assets against current tax liabilities and when they relate to income taxes levied by the same taxation au- At each balance sheet date, the Group reviews the carrying amounts of its tangible and intangible assets to thority and the Group intends to settle its current tax assets and liabilities on a net basis. determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the Current and deferred tax for the period impairment loss (if any). Where it is not possible to estimate the recoverable amount of an individual asset, Current and deferred tax are recognised as an expense or income in profit or loss, except when they relate the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. Where a to items credited or debited directly to equity, in which case the tax is also recognised directly in equity, reasonable and consistent basis of allocation can be identified, corporate assets are also allocated to individual or where they arise from the initial accounting for a business combination. In the case of a business cash-generating units, or otherwise they are allocated to the smallest group of cash-generating units for which combination, the tax effect is taken into account in calculating goodwill or in determining the excess of a reasonable and consistent allocation basis can be identified. the acquirer’s interest in the net fair value of the acquiree’s identifiable assets, liabilities and contingent Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the liabilities over cost. estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects curProperty, plant and equipment rent market assessments of the time value of money and the risks specific to the asset for which the estimates Property, plant and equipment held for use in the production or supply of goods or services, or for ad- of future cash flows have not been adjusted. ministrative purposes, are stated in the balance sheet at their cost less any accumulated depreciation and If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, accumulated impairment losses. the carrying amount of the asset (cash-generating unit) is reduced to its recoverable amount. An impairment Capitalised cost includes acquisition cost and major expenditures for improvements and replacements loss is recognised immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in that extend the useful lives of the assets or increase their revenue generating capacity. Repair and main- which case the impairment loss is treated as a revaluation decrease. tenance expenditures that do not meet the foregoing criteria for capitalisation are charged to the income Where an impairment loss subsequently reverses, the carrying amount of the asset (cash-generating unit) is statement as incurred. increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does Deprecation is computed under the straight-line method utilizing the estimated useful lives of the assets, not exceed the carrying amount that would have been determined had no impairment loss been recognised which are: Buildings Machinery and equipment Other for the asset (cash-generating unit) in prior years. A reversal of an impairment loss is recognised immediately in 25-40 years 10-22 years 3-10 years profit or loss, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase. part VI // INDEPENDENT AUDITORS’ REPORT AND CONSOLIDATED FINANCIAL STATEMENTS // 120 121 NOTES TO THE CONSOLIDATED FINANCIAL STATE MENTS FOR THE YEAR ENDED 31 DECEMBER 2006 NOTES TO THE CONSOLIDATED FINANCIAL STATE MENTS FOR THE YEAR ENDED 31 DECEMBER 2006 Inventories Available-for-sale financial assets Inventories are stated at the lower of cost and net realisable value. Cost comprises direct materials and, Available-for-sale financial assets are those non-derivative financial assets that are designated as available- where applicable, direct labour, transportation, handling costs and those overhead costs that have been for-sale or are not classified in any of the three preceding categories. After initial recognition available-for- incurred in bringing the inventories to their present location and condition. Cost is calculated using the sale financial assets are measured at fair value with gains and losses being recognised as a separate compo- weighted average method. Net realisable value represents the estimated selling price for inventories less nent of equity until the investment is derecognised or until the investment is determined to be impaired at all estimated costs of completion and costs necessary to make the sale. which time the cumulative gain or loss previously reported in equity is included in the income statement. Work in progress and semi-finished products are valued at the net unit cost of production allocated to the The fair value of investments that are actively traded in organised financial markets is determined by refer- estimated stage of completion. ence to quoted market bid prices at the closing of business on the balance sheet date. For investments Cash and cash equivalents Cash and cash equivalents include cash on hand, cash with banks, deposits and marketable securities with original maturity of three months or less. Financial assets Financial assets, except for cash and cash equivalents and financial assets out of scope of IAS 39 (Revised), Financial Instruments: Recognition and Measurement, are classified into the following specified categories: financial assets as “at fair value through profit or loss” (“FVTPL”), “held-to-maturity” (“HTM”) investments, “available-for-sale” (“AFS”) financial assets and “loans and receivables”. The classification depends on the where there is no active market, fair value is determined using valuation techniques. Dividends on AFS equity instruments are recognised in the consolidated income statement when the Group’s right to receive payments is established. Loans and receivables Loans and receivables include trade receivables, loans, and other receivables that have fixed or determinable payments that are not quoted in an active market and are measured at amortised cost using the effective interest method less any impairment. Interest income is recognized by applying the effective interest rate, except for short-term receivables when the recognition of interest would be immaterial. nature and purpose of the financial assets and is determined at the time of initial recognition. Impairment of financial assets Effective interest method Financial assets, other than those at FVTPL, are assessed for indicators of impairment at each balance sheet The effective interest method is a method of calculating the amortised cost of a financial asset and of allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts or payments through the expected life of the financial asset, or, where appropriate, a shorter period. Income is recognised on an effective interest basis for debt instruments other than those financial assets designated as at FVTPL. Financial assets at FVTPL The Group classifies financial assets as at FVTPL if: date. Financial assets are impaired where there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the investment have been impacted. For financial assets carried at amortised cost, the amount of the impairment is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. The carrying amount of the financial asset is reduced by the impairment loss directly for all financial assets with the exception of trade receivables where the carrying amount is reduced through the use of an allowance account. When a trade receivable is uncollectible, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited against the allowance account. Changes in the carrying amount of the allowance account are recognised in the income statement. they have been acquired principally for the purpose of selling in the near future; or they are a part of an identified portfolio of financial instruments that the Group manages together and has a recent actual pattern of short-term profit-taking. With the exception of AFS equity instruments, if, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognised impairment loss is reversed through the consolidated income statement to the extent that the carrying amount of the investment at the date the impairment is reversed does not HTM investments exceed what the amortized cost would have been had the impairment not been recognised. Any increase in fair value of AFS equity securities subsequent to an impairment loss is recognised directly in equity. Debt securities with fixed or determinable payments and fixed maturity dates that the Group has the positive intent and ability to hold to maturity are classified as HTM investments. HTM investments are recorded at amortised cost using the effective interest method less impairment, with income recognised on an effective yield basis. Financial liabilities and equity instruments issued by the Group Classification as debt or equity Debt and equity instruments are classified as either financial liabilities or as equity in accordance with the substance of the contractual arrangement. part VI // INDEPENDENT AUDITORS’ REPORT AND CONSOLIDATED FINANCIAL STATEMENTS // 122 123 NOTES TO THE CONSOLIDATED FINANCIAL STATE MENTS FOR THE YEAR ENDED 31 DECEMBER 2006 NOTES TO THE CONSOLIDATED FINANCIAL STATE MENTS FOR THE YEAR ENDED 31 DECEMBER 2006 Financial liabilities Value-added taxes Financial liabilities, including borrowings, trade and other payables are initially measured at fair value, net of Value-added taxes (“VAT”) related to sales are payable to the tax authorities on an accrual basis based upon transaction costs, and subsequently measured at amortised cost using the effective interest method. invoices issued to the customer. VAT incurred for purchases may be reclaimed, subject to certain restrictions, Equity instruments against VAT related to sales. 4 An equity instrument is any contract that evidences a residual interest in the assets of an entity after de- . CRITICAL ACCOUNTING JUDGEMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTIES ducting all of its liabilities. Equity instruments are recorded at the proceeds received, net of direct issue costs. Provisions In the application of the Group’s accounting policies management is required to make judgments, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a sources. The estimates and associated assumptions are based on historical experience and other factors that past event, it is probable that the Group will be required to settle the obligation, and a reliable estimate can are considered to be relevant. Actual results may differ from these estimates. be made of the amount of the obligation. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estiThe amount recognised as a provision is the best estimate of the consideration required to settle the pres- mates are recognised in the period in which the estimate is revised if the revision affects only that period, or ent obligation at the balance sheet date, taking into account the risks and uncertainties surrounding the in the period of the revision and future periods if the revision affects both current and future periods. obligation. Where a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows. Employee benefit obligations Critical judgments in applying accounting policies The following are the critical judgments, apart from those involving estimations, that management has made in the process of applying accounting policies and that have the most significant effect on the amounts Remuneration to employees in respect of services rendered during a reporting period are recognised as an recognised in financial statements. expense in that period. Taxation The Group contributes to the Pension fund of the Russian Federation and Medical and Social Insurance funds on behalf of all its employees. These contributions are recognised in the income statement as incurred. Judgments are required in determining current income tax liabilities. The Group recognises liabilities for taxes based on estimates of whether additional taxes will be due. Where the final outcome of various tax matters is different from the amounts that were initially recorded, such differences will impact income tax and deferred Segment reporting tax provisions in the period in which such determination is made. The majority of the Group’s business operations are located in the Russian Federation and relate primarily The Group has not recognised a deferred tax liability in respect of temporary differences associated with to the production and marketing of chemical products and derivatives thereof (mainly ethylene and poly- investments in subsidiaries. The Group controls the timing of the reversal of those temporary differences and ethylene). Therefore, business activities are subject to the same risks and returns and are addressed in the does not expect their reversal in the foreseeable future. consolidated financial statements of the Group as one reportable segment. Environmental obligations Dividends declared The Group’s activities are subject to various laws and regulations governing the protection of the environDividends and related taxation thereon are recognised as a liability in the period in which they have been ment. The Group pays fees to the regulatory authorities for the right to discharge within legal norms. Man- declared and become legally payable. agement believes this fee covers all environmental obligations, and this fee is recorded as an expense in the Accumulated profit legally distributable by the Company are based on the amounts available for distribu- period incurred. No other provisions for environmental obligations are recorded. tion in accordance with the applicable legislation and as reflected in the statutory financial statements of Key sources of estimation uncertainty the individual entities of the Group. These amounts may differ significantly from the amounts calculated on the basis of IFRS. The following are the key assumptions concerning the future, and other key sources of estimation uncertainty at the balance sheet date, that have a significant risk of causing a material adjustment to the carrying Treasury shares Treasury shares are recorded at cost and disclosed as a deduction from equity. amounts of assets and liabilities within the next financial year. BLIND ONE WILL SEE ONE WITH THE EYES Soon, people with the limited vision will be able to see the world more widely and more polyhedral than their healthy colleagues. The group of the French scientists under the management of Fransoir Deville created glasses prototype, construction of which is copied from the... dragonfly eye. Hemispheres of glasses consist of the set of small crystals made from the special polymer. “We decided to refuse the traditional glass”, - explains Fransoir-Ezhen, - “as it is not only fragile, but also doesn’t give the opportunity to avoid the optical distortion at glasses prismatic segments creation”. Optical device not only gives the opportunity to return vision to the people with affected eyes, it expands world perception opportunities. Visual angle of the average person doesn’t exceed 23-27 degrees. New device allow to expand the visual angle till 123,7 degrees, and also gives the opportunity of “out-of-focus” vision. Such devices are being used for mechanical supervision systems creation for a long time, but for the first time this technology was applied to the human being. Scientists consider the first experiences unconditionally successful, but by physicians’ opinion, people wearing such glasses will need seriously get used to “the new world perception”.. part VI // INDEPENDENT AUDITORS’ REPORT AND CONSOLIDATED FINANCIAL STATEMENTS // 126 127 NOTES TO THE CONSOLIDATED FINANCIAL STATE MENTS FOR THE YEAR ENDED 31 DECEMBER 2006 NOTES TO THE CONSOLIDATED FINANCIAL STATE MENTS FOR THE YEAR ENDED 31 DECEMBER 2006 (in thousands of Russian roubles) (in thousands of Russian roubles) Useful economic lives of property, plant and equipment 7 . SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Management assesses the useful economic lives of property, plant and equipment considering the current technical condition of assets and potential changes in technology and demand. Any changes of these conditions could affect prospective depreciation of property, plant and equipment and their car- The Group reviews the carrying amounts of its tangible and intangible assets to determine whether there General and administrative expenses Selling expenses Taxes, other than income tax Bank charges Other is any indication that those assets are impaired. In making the assessment for impairment, assets that do Total rying value. Impairment of assets 2006 2005 1,290,089 302,110 327,549 49,150 57,334 849,499 431,757 164,547 27,187 35,197 2,026,232 1,508,187 2006 2005 126,457 24,053 1,664 72,263 19,641 (19) 152,174 91,885 2006 2005 40,230 5,445 (2,523) 5,690 (61,241) 6,145 43,152 (49,406) 2006 2005 140,078 14,744 72 133,968 144,326 73,199 154,894 351,493 not generate independent cash flows are allocated to an appropriate cash generating unit. Management 8 necessarily applies its judgment in allocating assets that do not generate independent cash flows to ap- . FINANCE COSTS propriate cash generating units, and also in estimating the timing and value of underlying cash flows within the value in use calculation. Subsequent changes to the cash generating unit allocation or to the Contingencies Interest expense Interest under finance leases Other expense/(income) By their nature, contingencies will only be resolved when one or more future events occur or fail to oc- Total timing of cash flows could impact the carrying value of the respective assets. cur. The assessment of such contingencies inherently involves the exercise of significant judgment and 9 estimates of the outcome of future events. . INCOME/(LOSS) FROM INVESTMENTS 5 . SALES By geographic region: Domestic sales Export sales 2006 2005 12,568,787 2,815,195 10,601,990 2,638,860 Interest income Income/(loss) from investments (Loss)/income from associates Total Total 10 15,383,982 13,240,850 . OTHER EXPENSES By product: High density polyethylene Low density polyethylene Organic products Phenol, acetone and others Plastic goods 5,293,530 5,181,111 1,894,301 1,623,754 1,391,286 Total Rent of land Maintenance of social infrastructure Other expenses Total 15,383,982 13,240,850 6 Maintenance of social infrastructure comprises primarily operating costs of facilities such as hotel, dormi- . COST OF SALES Raw materials Energy and water Labor costs Depreciation Maintenance and repairs Auxiliary materials Obsolescence provision charged/ (released) Total 3,337,157 4,569,345 1,891,444 2,166,481 1,276,423 tory, hunting ground etc. In 2005 it also included losses on sale of apartments to employees. 2006 2005 5,695,534 2,030,948 971,473 619,167 378,134 160,931 3,193 4,262,796 2,068,428 1,049,609 500,321 410,812 341,147 (558) 9,859,380 8,632,555 Expenses for rent of land related to rent of an idle plot of land in the remote region of Tatarstan Republic, the agreement was concluded at the request of the local tax authorities to increase tax collection in Tatarstan Republic. part VI // INDEPENDENT AUDITORS’ REPORT AND CONSOLIDATED FINANCIAL STATEMENTS // 128 129 NOTES TO THE CONSOLIDATED FINANCIAL STATE MENTS FOR THE YEAR ENDED 31 DECEMBER 2006 NOTES TO THE CONSOLIDATED FINANCIAL STATE MENTS FOR THE YEAR ENDED 31 DECEMBER 2006 (in thousands of Russian roubles) (in thousands of Russian roubles) 12 . PROPERTY, PLANT AND EQUIPMENT 11 . INCOME TAX 2006 Land Machinery and 2005 The Group’s provision for income tax is as follows: 406,799 (143,960) 413,544 544,554 24,333 Total 676,383 568,887 and buildings equipment assets in progress At 1 January 2005 – as previously reported Effect of correction of errors 8,190,091 55,867 9,360,087 77,253 439,772 25,000 1,281,946 - 19,271,896 158,120 At 1 January 2005 – as restated 8,245,958 9,437,340 464,772 1,281,946 19,430,016 (18,765) 48,610 (94,985) (3,750) 6,794,831 (18,161) 6,843,441 (135,661) (166,951) 289,956 (146,124) 1,341,849 (7,073) 105,266 (28,062) (1,737,071) (348,210) - 8,350,198 10,586,690 559,215 6,293,483 25,789,586 (16,454) 916,908 48,425 (206,700) 2,767,831 (6,600) 76,788 11,519,978 (159,477) (3,761,527) 11,568,403 (389,231) - 9,250,652 13,196,246 629,403 13,892,457 36,968,758 (4,989,567) (6,048,184) (203,886) (170,745) (347,692) (48,364) - (566,801) 60,136 8,591 46,463 117,361 485 8,664 - 107,084 134,616 At 31 December 2005 (5,091,585) (6,232,052) (243,101) Charge for the year Eliminated on disposals (163,700) 12,194 (514,017) 185,410 (54,539) 6,536 At 31 December 2006 (5,243,091) (6,560,659) (291,104) At 31 December 2005 – as restated 3,258,613 4,354,638 316,114 6,293,483 14,222,848 At 31 December 2006 6,635,587 338,299 13,892,457 24,873,904 Additions Disposals Disposed of on a disposal of subsidiary Transfers The following presents a reconciliation of theoretical income tax calculated at the rate effective in the Russian Federation (24%) to the amount of actual income tax expense recorded in the income statement: Profit before income tax Theoretical income tax expense at 24% Effect of non-deductible expenses and other permanent differences, net 3,187,662 765,039 (88,656) 2,582,704 619,849 (50,962) Income tax expense 676,383 568,887 At 31 December 2005 – as restated Additions Disposals Transfers At 31 December 2006 Temporary differences between the Russian statutory tax accounts and these financial statements give rise to the following deferred tax liabilities: Accumulated depreciation At 1 January 2005 Deferred tax liabilities, net Total Cost Current income tax charge Adjustment recognised in the year for tax charge of prior years Deferred tax charge Property, plant and equipment Provision for doubtful debts Accrued expenses Other Other Construction 1,227,489 (8,208) (1,837) (3,319) 818,767 (16,744) (1,442) 1,214,125 800,581 Deferred tax rollforward Balance at beginning of period Charge to income statement 800,581 413,544 776,248 24,333 Balance at end of the period 1,214,125 800,581 Charge for the year Eliminated on a disposal of subsidiary Eliminated on disposals - (11,241,637) - (11,566,738) - (732,256) 204,140 - (12,094,854) Net book value 4,007,561 The Group’s plant sites presently occupy approximately 386 hectares of land for which the Group holds the title. Currently, there is no charge to the Group for land use, except for certain annual taxes, which are expensed as incurred. At 31 December 2006 property, plant and equipment with the carrying value of RUR 39,270 thousand (31 December 2005 – nil), were pledged to secure letters of credit granted to the Group. At 31 December 2006 property, plant and equipment with the carrying value of RUR 457,509 thousand (31 December 2005 – RUR 446,802 thousand) were pledged to secure certain short-term and long-term loans granted to the Group (refer to notes 23 and 25). part VI // INDEPENDENT AUDITORS’ REPORT AND CONSOLIDATED FINANCIAL STATEMENTS // 130 131 NOTES TO THE CONSOLIDATED FINANCIAL STATE MENTS FOR THE YEAR ENDED 31 DECEMBER 2006 NOTES TO THE CONSOLIDATED FINANCIAL STATE MENTS FOR THE YEAR ENDED 31 DECEMBER 2006 (in thousands of Russian roubles) (in thousands of Russian roubles) During 2006 the interest of RUR 816,480 thousand have been capitalized in property, plant and equipment 2006 2005 1,046,965 (992,863) 364,227 (276,462) 54,102 87,765 29,278 31,801 1,254,774 549,933 Total (loss)/profit for the year (11,036) 14,886 Group’s share of associates’ (loss)/profit for the year (2,523) 6,145 2006 2005 1,615,488 241,771 415,560 1,264,027 174,669 393,028 (15,656) (12,463) (2005 – RUR 105,257 thousand). At 31 December 2006 and 2005, property, plant and equipment include assets held under a number of finance lease agreements (refer to note 24). At the end of the lease term the Group takes automatic owner- Total assets Total liabilities ship of the assets. Net assets At 31 December 2006 and 2005 lease obligations were secured by leased assets with carrying value of RUR Group’s share of associates’ net assets 467,818 thousands and RUR 339,629 thousand retrospectively. Total revenue 13 16 . INTANGIBLE ASSETS Intangible assets primarily comprise of costs incurred in connection with acquisition and implementation of management information system SAP R/3 and are amortised over a period of thirteen years. 2006 2005 Book value Accumulated amortisation 109,351 (76,752) 109,536 (69,008) Net book value 32,599 40,528 . LONG-TERM INVESTMENTS OJSC “Tatneftekhiminvestholding” National non-state pension fund OJSC “Kazanskaya yarmarka” Other 7% 5% 2% - 7% 7% 2% - Total Advances paid for licenses are comprised of prepaid amounts for licenses for bisphenol and polycarbone plastic and high density polyethylene production technologies. 17 . INVENTORIES Stores and materials Work in progress and semi-finished products Finished goods 14 % Ownership 2006 2005 . ADVANCES PAID FOR LICENSES Less: obsolescence allowance 2006 2005 38,537 10,557 2,950 56 38,537 10,557 2,950 40 52,100 52,084 15 Total Several of the Group’s subsidiaries are engaged in agricultural activity of breeding livestock intended for the production of meat and planting and harvesting of potato and other agricultural products. The aggregated biological assets of these subsidiaries are not material to the accompanying Group’s consolidated financial statements and are included in stores and materials. 18 . INVESTMENTS IN ASSOCIATES Name of associate LLC “Taif-Invest” CJSC “Ankorit” LLC “Novomoskovsky trubny zavod” Principal activities Investing activities Chemical production Manufacturing . TRADE AND OTHER RECEIVABLES % of ownership interest 2006 2005 40 39 26 40 39 26 2,257,163 1,819,261 Trade receivables Advances paid Other receivables and prepaid expenses Less: provision for doubtful debts Total 2006 2005 1,102,457 441,960 294,634 602,379 196,373 164,420 (90,362) (66,814) 1,748,689 896,358 part VI // INDEPENDENT AUDITORS’ REPORT AND CONSOLIDATED FINANCIAL STATEMENTS // 132 133 NOTES TO THE CONSOLIDATED FINANCIAL STATE MENTS FOR THE YEAR ENDED 31 DECEMBER 2006 NOTES TO THE CONSOLIDATED FINANCIAL STATE MENTS FOR THE YEAR ENDED 31 DECEMBER 2006 (in thousands of Russian roubles) (in thousands of Russian roubles) Share capital balance was adjusted for the effects of inflation in accordance with IAS 29 “Financial 19 Reporting in Hyperinflationary Economies”. The effect of such adjustments was recorded as Additional . TAXES RECOVERABLE AND PREPAID Value added tax Income tax Other taxes Total 2006 2005 472,764 171 946,147 133,391 4,971 paid-in capital. The adjustment was determined using the inflation rate index from 1 September 1993, the date the Company was established as a joint stock company, through 31 December 2002. Group’s ownership structure was as follows: % of ownership 472,935 1,084,509 20 . CASH AND CASH EQUIVALENTS Cash in banks, denominated in RUR Cash in banks, denominated in currency Letters of credit Restricted cash Other cash and cash equivalents Total 2006 2005 400,921 55,582 310,602 17,058 120,866 94,014 192,051 17,789 1,600 784,163 426,320 2006 2005 OJSC “Svyazinvestneftekhim” 26.6% 26.6% LLC “Telecom-Management” 50.0% 48.6% Other legal entities and individuals 23.4% 24.8% 100.0% 100.0% Total Common shareholders are allowed one vote per share. Preferred shares are non-voting. All common shares and preferred shares are eligible for distribution of earnings available in accordance with Russian statutory accounting regulations. Preferred shares holders are entitled to an annual payment of dividends in the amount equal to 25% of their par value. Shareholders of preferred shares have a 21 preferred right to recover the par value of preferred shares in liquidation. . SHARE CAPITAL AND ADDITIONAL PAID-IN CAPITAL 2006 ‘000 shares 2005 ‘000 shares Authorised number of shares Ordinary shares at par value of RUR 1 each Preferred shares at par value of RUR 1 each One share of the Company, held by the Government of Tatartstan, carries the right to veto certain decisions taken at shareholders’ and Board of Directors’ meetings. Decisions subject to veto include: increases and decreases in share capital, amendments to the Company’s charter, liquidation or 2,505,114 119,596 2,505,114 119,596 reorganization of the Group or any of its subsidiaries or branches and investments in other legal entities. This veto right is referred to as “Golden Share”, and the term was extended indefinitely in 1998 by a decree of the President of Tatarstan and may be utilized by the Government of Tatarstan Total authorised 2,624,710 2,624,710 Issued and fully paid number of shares Ordinary shares at par value of RUR 1 each Preferred shares at par value of RUR 1 each notwithstanding its voting rights are less than 25% of the Group. Ultimate beneficial owners of the Group are: 1,785,114 119,596 1,785,114 119,596 OJSC “TAIF” (“TAIF”), which controls LLC “Telecom-Management”; The Government of Tatarstan, through its control of OJSC “Svyazinvestneftekhim”. Total issued and fully paid 1,904,710 1,904,710 Treasury shares At the beginning of the year Re-acquired by the Group Re-issued from treasury shares 5,694 (2,394) 25,257 10,030 (35,287) At the end of the year 3,300 - Treasury shares are recorded as a deduction from issued and fully paid share capital at 31 December 2006 in the amount of RUR 46,251 thousand (31 December 2005 – nil). UNIVERSAL MATERIAL In 1994 Russian scientist Fedor Barishnikov offered the idea of universal “construction” material creation, suitable for any kinds of buildings, furniture and other household items creation. According to the plan of the inventor, it should be the organic polymer, possessing the opportunity of form “fixation” under the influence of electrical dischargers passed through it, or under the influence of chemical reagents. Barishnikov’s technics is simple: special machine tool gives the polymer brick the necessary form. Then - “semifinished” item is put into the special “electric furnace” or the chamber with the chemical solution - catalyst. After “the hardening” the surface of the item is polished and processed with the paint-and-varnish materials. By Barishnikov’s opinion, there is a possibility of producing of wide spectrum of products from bridges bearing constructions and building blocks till dishes and household items. At our times, chemists from the Cornell University developed the new composite material, which got the name of “flexible ceramics”. “Ceramics” consists of microscopic silicon pieces and polymers and possesses unique properties. The mate- rial is transparent like glass, possesses elasticity, flexibility and durability. Today “flexible ceramics” is applied in industry and house constructions, at optical devices production, space industry and other industries of economy. Durability, plasticity and lightness of the material, created by the Cornell University scientists, gives us the opportunity to embody the ideas of the Russian inventor about the universal construction material, which can be used for designing of all parts of constructions from bearing constructions till window “glassing”. part VI // INDEPENDENT AUDITORS’ REPORT AND CONSOLIDATED FINANCIAL STATEMENTS // 136 137 NOTES TO THE CONSOLIDATED FINANCIAL STATE MENTS FOR THE YEAR ENDED 31 DECEMBER 2006 NOTES TO THE CONSOLIDATED FINANCIAL STATE MENTS FOR THE YEAR ENDED 31 DECEMBER 2006 (in thousands of Russian roubles) (in thousands of Russian roubles) 23 22 . LONG-TERM BORROWINGS . RECONCILIATION OF SHAREHOLDERS’ EQUITY (UNAUDITED) A reconciliation of shareholders’ equity between the Group’s combined Russian statutory financial statements prepared in accordance with Russian Accounting Standards (“RAS”) and the Group’s IFRS consolidated financial statements is as follows: 2006 Group equity per RAS Increase/(decrease) due to effect of: Property, plant and equipment valuation Investments valuation Inventory valuation Allowance for doubtful accounts Additional deferred income tax liability Other accrued expenses Additional paid-in capital valuation Other Group equity per IFRS 2005 11,188,395 9,365,878 3,084,782 55,818 (15,656) (24,179) (656,475) (21,487) (337,030) (67,973) ` 2,702,323 46,769 (12,463) (10,835) (614,673) (69,765) (337,030) (28,890) 13,206,195 11,041,314 The following represents reconciliation between earnings determined under RAS and IFRS: Group earnings per RAS Increase/(decrease) due to effect of: Additional depreciation expense Change in deferred income tax provision Change in bad debt provision Change in provision for fines and penalties Changes in inventory valuation reserves Fixed assets disposals and write-down, net Annual bonuses reversal/(accrual) Impairment of consolidated investments Difference in accounting treatment for financial leases Distribution to shareholders Other Group earnings per IFRS 2006 2005 - 841,438 International Moscow Bank A multicurrency loan facility of USD 50,000 thousand bearing the interest rates of 11% (for RUR loans), LIBOR + 1.9% (for USD loans) and EURIBOR + 1.9% (for EUR loans) per annum with final repayment due on 12 December 2009. The principal is repayable monthly starting from September 2009. The loan is unsecured. 50,395 - Sberbank A RUR-denominated loan facilities up to equivalent of USD 209,855 thousand at interest rate that changed in 2006 from 13.25% to 12% per annum with final repayment due at the date starting on 29 April to 20 November 2012. The principal is repayable in equal quarterly installments beginning after seven quarters from the date of drawing the facility. The loan was repaid in December 2006. - 2,475,739 A USD-denominated loan facility up to USD 81,200 thousand bearing a varying interest rate with a maximum of 6.9% per annum with final repayment due on 24 January 2016. The principal is repayable in equal semi-annual installments beginning after ten quarters from the date of drawing the facility. The loan is unsecured. 2,177,575 558,007 A USD-denominated loan facility up to USD 6,673 thousand bearing a maximum interest rate of 7.91% per annum with final repayment due on 24 April 2015. The principal is repayable in equal semi-annual installments beginning after six quarters from the date of drawing the facility. The loan is unsecured. 178,285 - A USD-denominated loan facility up to USD 40,000 thousand bearing interest at rate that varies from 9.5% to 11.5% per annum based on quarter revenue received with final repayment due on 10 August 2013. The principal is repayable in equal quarterly installments beginning on 27 August 2009. The loan is secured by the pledge of equipment with the carrying value of RUR 35,974 thousand. 254,733 - A USD-denominated loan facility up to USD 35,000 thousand bearing interest rate that varies from 9.5% to 11.5% per annum based on quarter revenue received with final repayment due on 29 August 2013. The principal is repayable in quarterly installments ranging from 1% to 10% of principal beginning on 27 June 2009. The loan is secured by the pledge of equipment with the carrying value of RUR 116,182 thousand. 125,158 - Vneshtorgbank A RUR-denominated loan facility of RUR 840,000 thousand bearing interest at 12.5% per annum with final repayment due on 22 March 2008. The loan was repaid on 3 July 2006. 2,175,171 1,946,053 (141,247) (3,853) (13,344) (3,193) (29,649) 62,110 332,328 132,923 33 (140,890) 19,346 (16,438) 558 (12,604) (62,110) 84,698 249,787 (54,583) 2,511,279 2,013,817 part VI // INDEPENDENT AUDITORS’ REPORT AND CONSOLIDATED FINANCIAL STATEMENTS // 138 139 NOTES TO THE CONSOLIDATED FINANCIAL STATE MENTS FOR THE YEAR ENDED 31 DECEMBER 2006 NOTES TO THE CONSOLIDATED FINANCIAL STATE MENTS FOR THE YEAR ENDED 31 DECEMBER 2006 (in thousands of Russian roubles) (in thousands of Russian roubles) 2006 ABN AMRO A EUR-denominated loan facility up to EUR 35,560 thousand bearing interest at EURIBOR + 1.25% per annum with the final repayment due on 6 September 2011. The principal is repayable in equal semi-annual installments starting from sixth month after delivery date. As a term of the loan, the Company has taken out credit insurance on behalf of ABN AMRO. A EUR-denominated loan facility up to EUR 20,033 thousand bearing interest at EURIBOR + 0.4% per annum with the final repayment due on 24 January 2017. The principal is repayable in equal semi-annual installments starting from sixth month after delivery date. As a term of the loan, the Company has taken out credit insurance on behalf of ABN AMRO. A EUR-denominated loan facility up to EUR 7,800 thousand bearing interest at EURIBOR + 2.75% per annum with the final repayment due on 22 June 2007. The principal is repayable in equal semi-annual installments starting from sixth month after delivery date. The loan is secured by equipment with the carrying value of RUR 112,827 thousand. A EUR-denominated loan facility up to EUR 49,150 thousand bearing interest at EURIBOR + 0.4% per annum with the final repayment due on 27 July 2017. The principal is repayable in equal semi-annual installments starting from sixth month after equipment start-up date. As a term of the loan, the Company has taken out credit insurance on behalf of ABN AMRO. A USD-denominated loan facility up to USD 30,000 thousand bearing an interest rate of LIBOR + 2,85% per annum with final repayment due on 06 July 2009. The loan is secured by the pledge of equipment with the carrying value of RUR 2,020 thousand. 956,475 696,881 135,535 782,347 2005 466,870 443,614 141,024 - 2006 2005 Manufacturers and Traders Trust Company A USD-denominated debt instrument of USD 1,371 thousand bearing interest at LIBOR + 0.75% per annum with the final repayment due on 12 January 2013. The principal is repaid in 13 equal semi-annual installments starting from 12 January 2007. The loan is uncesured. 36,107 - A USD-denominated debt instrument of USD 1,628 thousand bearing interest at LIBOR + 0.75% per annum with the final repayment due on 12 January 2013. The principal is repaid in 13 equal semi-annual installments starting from 12 January 2007. The loan is unsecured. 42,873 - A USD-denominated debt instrument of USD 1,371 thousand bearing interest at LIBOR + 0.75% per annum with the final repayment due on 12 January 2013. The principal is repaid in 13 equal semi-annual installments starting from 12 January 2007. The loan is unsecured. 36,107 - A USD-denominated debt instrument of USD 3,428 thousand bearing interest at LIBOR + 0.75% per annum with the final repayment due on 12 January 2013. The principal is repaid in 13 equal semi-annual installments starting from 12 January 2007. The loan is unsecured. 90,280 - A USD-denominated debt instrument of USD 2,743 thousand bearing interest at LIBOR + 0.75% per annum with the final repayment due on 12 January 2013. The principal is repaid in 13 equal semi-annual installments starting from 12 January 2007. The loan is unsecured. 72,215 - 6,056 5,965 Other borrowings 822,446 Corporate bonds Loan participation notes in the amount of USD 200,000 thousand, bearing interest at 9.25%, due on 30 October 2011 and issued by Kazanorgsintez S.A., special purpose entity, on a limited recourse basis for the sole purpose of funding a loan to the Company. The notes are fully and unconditionally guaranteed by the Company. Interest payments on the notes are due semi-annually in April and October of each year, commencing on 30 April 2007. 5,350,114 - Total Less: Current portion repayable within one year and shown under short-term borrowings (refer to note 25) Net long-term borrowings 11,856,457 4,932,657 (555,073) (240,540) 11,301,384 4,692,117 The long-term borrowings are repayable as follows: - RZB Finance LLC A USD-denominated debt instrument of USD 883 thousand bearing interest at LIBOR + 0.75% per annum with the final repayment due on 25 March 2011. The principal is repaid in 10 equal semi-annual installments starting from 25 September 2006. The loan is unsecured. 20,930 - A USD-denominated debt instrument of USD 833 thousand bearing interest at LIBOR + 0.75% per annum with the final repayment due on 25 September 2011. The principal is repaid in 10 equal semi-annual installments starting from 25 March 2007. The loan is unsecured. 21,945 - Within one year Later than one year and not later than five years Later than five years Total 555,073 8,967,603 2,333,781 240,540 2,196,448 2,495,669 11,856,457 4,932,657 part VI // INDEPENDENT AUDITORS’ REPORT AND CONSOLIDATED FINANCIAL STATEMENTS // 140 141 NOTES TO THE CONSOLIDATED FINANCIAL STATE MENTS FOR THE YEAR ENDED 31 DECEMBER 2006 NOTES TO THE CONSOLIDATED FINANCIAL STATE MENTS FOR THE YEAR ENDED 31 DECEMBER 2006 (in thousands of Russian roubles) (in thousands of Russian roubles) 24 27 . OBLIGATIONS UNDER FINANCE LEASES . OTHER PAYABLES AND ACCRUED LIABILITIES 2006 2005 91,539 83,443 153,046 136,103 174,982 (15,545) 289,149 (30,385) 159,437 (80,355) 258,764 (134,237) 79,082 124,527 Minimum lease payments Due within one year Due later than one year and not later than five years Total future lease payments Less: future finance charges Present value of minimum lease payments Less: current portion of finance lease obligations (refer to note 27) Non-current finance lease obligations At 31 December 2006 and 2005 the lease obligations are denominated in USD and secured by leased production equipment with a carrying value of RUR 467,818 thousand and RUR 339,629 thousand, respectively (refer to note 12). 25 . SHORT-TERM BORROWINGS 2006 2005 ABN Amro, EURO-denominated 305,759 ABN Amro, USD-denominated Other, RUR-denominated 64,313 Current portion of long-term borrowings repayable within one year 555,073 327,040 302,063 43,755 240,540 Total 925,145 913,398 2006 2005 300,211 105,401 94,380 80,355 4,554 102,041 81,166 131,757 134,237 150 63,214 686,942 410,524 2006 2005 - 490,279 29,899 Dividends declared in respect of the year ended 31 December 2005: -ordinary shares (RUR 0.1514 per share) 270,248 - preferred shares (RUR 0.25 per share) 29,899 - Dividends payable Wages and salaries payable Customs duties Current portion of finance lease obligations (refer to note 24) Deferred income Other payables and accrued liabilities Total 28 . EARNINGS PER SHARE The calculation of basic earnings per share is based on profit for the year of RUR 2,523,545 thousand (2005 – RUR 1,981,921 thousand) divided by weighted average number of ordinary shares in issue during the year of 1,783,414 thousand (2005–1,785,114 thousand), excluding convertible preferred shares. The calculation of fully diluted earnings per share is based on profit for the year of RUR 2,523,545 thousand (2005 – RUR 1,981,921 thousand) divided by a weighted average number of ordinary shares in issue during the year and the effect of convertible preferred shares of 1,903,010 thousand (2005–1,904,710 thousand). The interest rates per annum on these borrowings are vary as follows: EURO-denominated EURIBOR + 2.75% USD-denominated RUR-denominated From 6% to 13% EURIBOR+ 2.75% to EURIBOR+ 3.25% LIBOR+3.25% to 8.75% From 0% to 13% At 31 December 2006 property, plant and equipment with the carrying value of RUR 190,506 thousand (31 December 2005 – RUR 235,865 thousand) were pledged to secure short-term loans granted to the Group (refer to note 12). 26 Total . DIVIDENDS Dividends declared in respect of the year ended 31 December 2004: - ordinary shares (RUR 0.275 per share) - preferred shares (RUR 0.25 per share) Total . TAXES PAYABLE Property tax Unified social tax Land tax Personal income tax Income tax Other taxes 29 2006 2005 35,262 33,846 31,643 17,890 13,560 39,446 13,010 27,506 4,922 11,990 29,589 171,647 87,017 300,147 520,178 part VI // INDEPENDENT AUDITORS’ REPORT AND CONSOLIDATED FINANCIAL STATEMENTS // 142 143 NOTES TO THE CONSOLIDATED FINANCIAL STATE MENTS FOR THE YEAR ENDED 31 DECEMBER 2006 NOTES TO THE CONSOLIDATED FINANCIAL STATE MENTS FOR THE YEAR ENDED 31 DECEMBER 2006 (in thousands of Russian roubles) 30 (in thousands of Russian roubles) 32 . RECONCILIATION OF PROFIT BEFORE TAXATION TO CASH FLOWS FROM OPERATIONS As restated 2005 Related parties are considered to include shareholders, affiliates, entities under common ownership and control and members of key management personnel. 3,187,662 2,582,704 Included in financial statements are the following transactions and balances with related parties: 2006 OPERATING ACTIVITIES: Profit before income tax Adjustments for: Depreciation and amortisation (Income)/loss from investments Change in provision for doubtful debts Change in obsolescence allowance Loss on disposal of property, plant and equipment Finance costs Other . RELATED PARTIES 740,000 (43,152) 23,548 3,193 25,679 152,174 186 575,147 49,406 (18,023) (558) (2,667) 91,923 (38) Sales of goods and services Purchase of goods and services Re-issuance of ordinary shares from treasury shares Bank interest received Trade and other receivables Trade payables and advances received from customers Cash held in banks 2006 2005 326,536 3,152,719 37,578 1,398 188,218 1,210,413 22,077 653,934 975,326 186,764 1,107 208,491 168,811 127,780 Operating cash flow before movements in working capital 4,089,290 3,277,894 Increase in trade and other receivables Decrease/(increase) in taxes recoverable and prepaid, other than income tax Increase in inventories Increase in trade payables Increase in advances received from customers Increase in other payables and accrued liabilities Increase in taxes payable, other than income tax Cash flows from operations (875,895) (32,197) 478,183 (441,095) 1,288,696 1,229,665 80,857 107,636 (474,760) (409,148) 513,908 37,489 105,003 213,232 5,957,337 3,231,421 31 . DISPOSAL OF SUBSIDIARY In May 2005 the Company increased the share capital of LLC “Keramika Sintez” by contributing a brick plant with a net book value RUR 207,143 thousand and a cash contribution of RUR 35,189 thousand, bringing the Company’s total investment in the subsidiary to RUR 242,342 thousand. On 27 June 2005 the Group disposed of 100% of its holding in LLC “Keramika Sintez” to OJSC “Kazan silicate walling plant” and LLC “Industrial enterprise Kazan” (parties controlled by the largest shareholder) for a cash consideration of RUR 100 thousand. Management ceased to consolidate this company from the date on which control ceased. Loss on disposal was recorded as distribution to a shareholder directly in equity. 2005 Net assets disposed of Property, plant and equipment Other receivables Other payables 241,126 14,760 (5,999) 249,887 Total consideration Loss on disposal - 100 249,787 Key management compensation for the year ended 31 December 2006 amounted to RUR 41,199 thousand (31 December 2005 – RUR 39,587 thousand) and included salaries and bonuses to employees of the Group and remuneration to members of Board of Directors. 33 . COMMITMENTS AND CONTINGENCIES Litigation Unresolved tax litigation at 31 December 2006 amounted to approximately RUR 74,131 thousand. Management believes that the risk of an unfavorable outcome to the litigation is possible. The Group has been and continues to be the subject of other legal proceedings and adjudications from time to time, none of which has had, individually or in the aggregate, a material adverse impact on the Group. Management believes that the resolution of all business matters will not have a material impact on the Group’s financial position or operating results. Russian taxation contingencies The taxation system in the Russian Federation is at a relatively early stage of development, and is characterised by numerous taxes, frequent changes and inconsistent enforcement at federal, regional and local levels. The Government of the Russian Federation has commenced a revision of the Russian tax system and passed certain laws implementing tax reform. The new laws reduce the number of taxes and overall tax burden on businesses and simplify tax laws. However, these new tax laws continue to rely heavily on the interpretation of local tax officials and fail to address many existing problems. Many issues associated with the practical application of new legislation are unclear and complicate the Group’s tax planning and related business decisions. part VI // INDEPENDENT AUDITORS’ REPORT AND CONSOLIDATED FINANCIAL STATEMENTS // 144 145 NOTES TO THE CONSOLIDATED FINANCIAL STATE MENTS FOR THE YEAR ENDED 31 DECEMBER 2006 NOTES TO THE CONSOLIDATED FINANCIAL STATE MENTS FOR THE YEAR ENDED 31 DECEMBER 2006 (in thousands of Russian roubles) In terms of Russian tax legislation, authorities have a period of up to three years to re-open tax declarations for further inspection. Changes in the tax system that may be applied retrospectively by authorities could affect the Group’s previously submitted and assessed tax declarations. The total capital commitments for 2007 are estimated at RUR 10.2 billion, including RUR 1.01 billion of contracted commitments. Management expects to finance capital expenditures through current profit and long-term borrowings. While management believes that it has adequately provided for tax liabilities based on its interpretation of current and previous legislation, the risk remains that tax authorities in the Russian Federation could take differing positions with regard to issues of interpretation. This uncertainty may expose the Group to additional taxation, fines and penalties that could be significant. The Russian insurance industry is in a developing state and many forms of insurance protection common in other parts of the world are not yet generally available in Russia. Management has assessed possible tax risk at 31 December 2006 to be approximatelyRUR 36,090 thousand. Local authorities have significant influence on the Group’s operations. In 2006 the Group incurred RUR 140,078 thousand (2005 – RUR 133,968 thousand) under a rent agreement with Tatarstan Republic Government (refer to note 10). Management is unable to estimate the level of influence that may be imposed by the local government in the future and the potential impact on its financial position and results of operations. Russian insurance environment The Group maintains insurance cover for major production assets including insurance cover for damage related to explosion or environmental damage arising from accidents on the Group’s property or related to the Group’s operations. The Group does not have coverage for business interruption. Management believes that the existing level of insurance coverage addresses all major risks which could have a material effect on the Group’s operations and financial position. 34 . FINANCIAL INSTRUMENTS The following table sets out the carrying amount, by maturity, of the Group’s financial instruments that are exposed to interest rate risk at 31 December 2006 and 2005: Russian Federation risk As an emerging market, the Russian Federation does not possess a fully developed business and regulatory infrastructure including stable banking and judicial systems, which would generally exist in a more mature market economy. The economy of the Russian Federation is characterized by a currency that is not freely convertible outside of the country, currency controls, low liquidity levels for debt and equity markets, and continuing inflation. As a result, operations in the Russian Federation involve risks that are not typically associated with those in more developed markets. Stability and success of Russian economy and the Group’s business mainly depends on the effectiveness of economic measures undertaken by the government as well as the development of legal and political systems. Environmental matters The Group’s management believes that it is in compliance with all current existing environmental laws and regulations of the Russian Federation. However, environmental laws and regulations continue to evolve. The Group is unable to predict the timing or extent to which those environmental laws and regulations may change. Such change, if it occurs, may require that the Group modernize technology to meet more stringent standards. Capital commitments The Board of Directors of the Company approved a strategic plan for the development of its production facilities through 2010 (the “Plan”). According to that Plan the following new production facilities will be installed: Bisphenol producing plant; Polycarbonate plastics plant; New ethylene plant; New polyethylene plant; and New recycling and other auxiliary workshops. Within one year After one year but before five years After five years 80,355 370,072 555,073 79,082 8,967,603 2,333,781 159,437 370,072 11,856,457 1,005,500 9,046,685 2,333,781 12,385,966 134,237 672,858 240,540 124,527 2,196,448 2,495,669 258,764 672,858 4,932,657 1,047,635 2,320,975 2,495,669 5,864,279 Total 2006 Finance lease liabilities Short-term borrowings Long-term borrowings Total 2005 Finance lease liabilities Short-term borrowings Long-term borrowings Total Other financial instruments of the Group not included in the above table are mostly represented by accounts receivable and payable and are not subject to interest rate risk 35 . RISK MANAGEMENT The Group’s operations are dependent on a stable gas supply. Presently, the gas market in Russia is controlled by the gas monopoly OJSC “Gazprom” and its subsidiaries, the Group’s major supplier of gas. The management of the Group is continuously engaged in ensuring a stable supply of gas. The Group’s financial instruments at 31 December 2006 comprise trade accounts and other receivables, other current assets, cash and cash equivalents, bank overdrafts and trade accounts and other payables all of which are recorded at their carrying values, which approximate the fair values of these instruments as a result of their short-term duration.. THE SECOND SKIN American scientists design a survival suit for Mars, which could be possible to spray onto the person’s skin by the way of aerosol. The essence of the idea is simple: instead of sew and stick together the survival suit from the pieces of different materials, it will be sprayed directly onto the person’s skin by the way of quickly hardening spray. Though, helmet, gloves and boots will stay traditional for the time. The technology of such evaporation (as a material the special polymer is used) is already being experienced by military men. Simply it can be explained as follows, the smallest drops or short polymer fibres got the electric charge and under the influence of the electrostatic field direct to the goal - the item which should be covered with the film - where they form the conjoint surface. The scientists intend to create something alike, but capable to make water and air impenetrable film on the human body. After its hardening the film gets high strength, keeping elasticity for legs and arms moving. The main idea concluded in the fact that, when the air layer is absent the film itself will fulfill the function of the backpressure production, which won’t allow the body to blow off and burst in the extra rarefied atmosphere. Specially for this purpose the tight fit of the polymer to the human’s body is needed. The version with the evaporated gloves is also possible. To be more concrete - with the squeezed out to the palm, like a gel, and congealing at the moment. Evaporated survival suite can be taken off : and it will copy exactly the person’s body. As the authors of the bio survival suit confirm, the suit will be needed to be “strengthened” with the underwear, supplied with the built-in thermoregulation system, and probably with the exoskeleton with drivings-amplifiers, put on the survival suit. It is quite possible, that in the nearest future such survival suits will be used not only in space, but also at deep-waters conditions, radiative and chemical aggressive environment. part VI // INDEPENDENT AUDITORS’ REPORT AND CONSOLIDATED FINANCIAL STATEMENTS // 148 149 NOTES TO THE CONSOLIDATED FINANCIAL STATE MENTS FOR THE YEAR ENDED 31 DECEMBER 2006 NOTES TO THE CONSOLIDATED FINANCIAL STATE MENTS FOR THE YEAR ENDED 31 DECEMBER 2006 (in thousands of Russian roubles) (in thousands of Russian roubles) 36 The Group is exposed to currency risk in that a significant portion of long and short term borrowings are denominated in foreign currencies. The Group management controls over this risk by aligning the foreign currency borrowings with expected currency sales proceeds. The Group manages its liquidity risk through a combination of short-term and long-term financing and self generated funds. At 31 December 2006 and 2005 the Group had facilities for the management of its day to day liquidity requirements available with the following banks: 2006 2005 ABN AMRO Bank Alfa-Bank Bank overdraft facilities in MKB Avers 394,967 658,278 100,000 645,394 100,000 Total short-term borrowing facilities 1,153,245 745,394 Short-term borrowing facilities: . INVESTMENTS IN SUBSIDIARIES Nature of business 2006 % of ownership 2005 Agriculture Agriculture Repair & Maintenance 100 98 100 100 98 91 Agriculture Repair & Maintenance Trading Agriculture Entertainment 90 100 70 51 100 90 100 70 51 - Trading 50 50 - - Subsidiaries Incorporated in Russian Federation LLC “Agrosintez” OJSC “Luch Sintez” OJSC “Spetsneftekhimmontazh” OJSC “Shelangovsky plodovoyagodny sovkhoz” LLC “Tatkhimremont” LLC “Trade House Orgsintez” LLC “Kolos-Sintez” LLC “DK Khimikov” Incorporated in Hungary Less: Short-term borrowings received related to the above facilities (305,260) (624,159) Net short-term borrowing facilities 847,985 121,235 LLC “Elmer” Special purpose entity Incorporated in Luxembourg Long-term borrowing facilities: ABN AMRO Bank N.V. ABN AMRO Bank Sberbank RF Vneshtorgbank International Moscow Bank Total long-term borrowing facilities Less: Long-term borrowings received related to the above facilities Kazanorgsintez S.A. 3,604,081 1,060,566 8,761,082 1,316,555 3,550,950 266,643 8,569,343 840,000 - 14,742,284 13,226,936 (10,762,095) (4,903,465) Net long-term borrowing facilities 3,980,189 8,323,471 Net facilities available 4,828,174 8,444,706 Weighted average interest rate for bank overdrafts denominated in RUR 13% 13% Financing In August 2006 the Group founded a new entertainment company, LLC “DK Khimikov”, in which the Group holds a 100% interest. The Group made an initial contribution of RUR 300 thousand in cash. Kazanorgsintez S.A. is a special purpose entity of the Group. It was incorporated in as a public limited liability company on 4 August 2005 under the laws of Luxembourg. In October 2006 Kazanorgsintez S.A. issued USD 200,000 thousand Loan participation notes due on 30 October 2011, which are listed on the London Stock Exchange plc’s Gilt Edged and Fixed Interest Market. On 18 February 2005 the Group founded a new agricultural entity, LLC “Kolos-Sintez”, in which the Group holds a 51% interest together with LLC “UK Zolotoy Kolos” which holds the remaining 49% interest. The Group made an initial capital contribution of RUR 51 thousand in cash. In April 2005 the Group made an additional contribution of agricultural inventory and fixed assets with a carrying value of RUR 77,547 thousand to LLC “Kolos-Sintez”. The additional investment did not result in an increase in the Group’s holding in the company. . 150 151 NOTES TO THE CONSOLIDATED FINANCIAL STATE MENTS FOR THE YEAR ENDED 31 DECEMBER 2006 (in thousands of Russian roubles) 37 . EVENTS SUBSEQUENT TO THE BALANCE SHEET DATE Gas supply On 1 March 2007 the ethane main supplier OJSC “Orenburggazprom”, affiliate of OJSC “Gazprom”, stopped gas shipments due to disputes with the Group over the terms of the gas supply agreement. Management of the Group started the negotiations with OJSC “Orenburggazprom” and believes that the negotiations will be finalised by the end of May 2007 and ethane supplies will be restarted. 38 . RESTATEMENTS Subsequent to issuing of the Group’s consolidated financial statements for the year ended 31 December 2005, management identified certain errors in accounting for property, plant and equipment, and the related deferred taxes, in 2004, and disposal of a subsidiary in 2005. It was concluded that consolidated financial statements for the year ended 31 December 2005 should be restated to correct these matters. The effects of restatement are summarised below: Notes Group equity at 31 December 2004 – as previously reported 9,577,214 Net book value of property, plant and equipment 12 158,120 Deferred tax liabilities recognised on net book value of property, plant and equipment 11 (37,949) Total effect of correction of errors 120,171 Group equity at 31 December 2004 – as restated 9,697,385 Profit for the year ended 31 December 2005 – as previously reported 1,764,030 Loss on disposal of a subsidiary recorded directly in equity Profit for the year ended 31 December 2005 – as restated . ©A-GROUP. 2006 31 249,787 2,013,817