Annual report and accounts 2012

Discontinued operations and assets held for sale

OAO Severstal and Subsidiaries
Notes to the Consolidated Financial Statements
27. Discontinued operations and assets held for sale

for the years ended December 31, 2012, 2011 and 2010
(Amounts expressed in thousands of US dollars, except as otherwise stated)

The Group’s discontinued operations represented the Lucchini segment, Severstal Sparrows Point LLC, Severstal Warren LLC, Severstal Wheeling Inc and Mountain State Carbon LLC, which were an operating segment within the Severstal International reporting segment, and the Gold segment, following the management’s decision to dispose of these businesses.

The results of discontinued operations were as follows:

 Year ended December 31,
 201220112010
Revenue161,0721,949,5345,041,064
Expenses(73,252)(1,720,251)(5,357,717)
Loss on remeasurement of disposal groups to fair value less costs to sell--(1,300,050)
Profit/(loss) before income tax87,820229,283(1,616,703)
Income tax expense(10,112)(77,605)(144,693)
Profit/(loss) net of tax77,708151,678(1,761,396)
Net (loss)/gain on disposal(31,345)59,095-
Profit/(loss) for the period46,363210,773(1,761,396)
Attributable to:   
shareholders of OAO Severstal29,597127,563(1,800,086)
non-controlling interests16,76683,21038,690

Lucchini segment

In March 2010, the Group acquired a 20.2% stake in Lucchini S.p.A. from a Lucchini family company for a total consideration of € 82.5 million (US$ 113.3 million at the transaction date exchange rate). After the acquisition, the Group’s share in the capital of Lucchini S.p.A. became 100%.

In June 2010, the Group sold its 50.8% stake in Lucchini S.p.A. to the Majority Shareholder for a total consideration of € 1 (US$ 1.2 at the transaction date exchange rate). The Group continued to consolidate the Lucchini segment primarily due to a call option exercisable within the following five years and a contractual entitlement, for the benefit of the Group, to any gain on a subsequent sale of this stake to a third party. In view of the projected disposal the Group classified the Lucchini segment as assets held for sale and discontinued operations.

The fair value less costs to sell of the Lucchini segment as of December 31, 2010 was measured using a combination of valuation techniques. The loss on remeasurement of the Lucchini segment to fair value less costs to sell recognized in 2010 in the amount of US$ 1,010.3 million was allocated to property, plant and equipment and intangible assets on a pro-rata basis.

In February 2011, the Group signed an amendment to Lucchini’s share purchase agreement with the Majority Shareholder which cancelled the call option and the entitlement, for the benefit of the Group, to any gain on a subsequent sale of this stake to a third party. Effective from the date of this amendment the Group accounts for the investment in Lucchini using the equity method.

Upon deconsolidation, the Group’s investments in Lucchini were stated at fair values of US$ nil with the difference on remeasuring to fair value recognized within the profit/(loss) from discontinued operations.

A cumulative net loss of US$ 46.8 million was recognized in the Group’s other comprehensive income as at December 31, 2010 in relation to foreign exchange differences and changes in cash flow hedges for the Lucchini segment.

North America disposal group

As of December 31, 2010 the North America disposal group was measured at the fair value less costs to sell determined based on price offers available.

The loss on remeasurement of the North America disposal group to fair value less costs to sell recognized in 2010 in the amount of US$ 289.8 million was allocated to property, plant and equipment and intangible assets on a pro-rata basis.

In March 2011, the Group sold its 100% stake in Severstal Sparrows Point LLC, Severstal Warren LLC, Severstal Wheeling Inc and a 50% stake in Mountain State Carbon LLC. The remaining share in Mountain State Carbon LLC of 50% is accounted for using the equity method.

Upon deconsolidation, the Group’s investment in Mountain State Carbon LLC was stated at fair value of US$ 116.1 million with the difference on remeasuring to fair value recognized within the profit/(loss) from discontinued operations.

A cumulative net income of US$ 33.0 million was recognized in the Group’s other comprehensive income as at December 31, 2010 in relation to the fair value adjustment upon acquisition of subsidiary to previously held interest for the North America disposal group.

Gold segment

In November 2011, the Group decided to separate the Gold segment by exchange of 100% shares of Nord Gold N.V., the segment’s holding company, for OAO Severstal shares and GDRs based on the relative fair values.

At December 31, 2011 the Group recognized the liability for the Gold segment separation of US$ 1,547.0 million (Note 11) in treasury shares equal to the book value of the Gold segment’s net assets attributable to shareholders of OAO Severstal at that date. The book value was used for the assessment of liability since the Gold segment continued to be controlled by the Group's majority shareholder after separation. The transaction costs of US$ 13.0 million were also recognized in treasury shares as at December 31, 2011.

In the year ended December 31, 2012 the Group additionally recognised in treasury shares the amount of US$ 103.8 million as a result of further increase in the Group’s share in the Gold segment’s net assets compared to December 31, 2011.

A cumulative net income of US$ 119.5 million was recognized in the Group’s other comprehensive income as at December 31, 2011 in relation to foreign exchange differences and changes in fair value of available-for-sale financial assets for the Gold segment’s foreign operations.

In March 2012, the Group completed the separation of the Gold segment by exchange of 100% shares of Nord Gold N.V., the segment’s holding company, for OAO Severstal shares and GDRs resulting in the increase of the Group’s treasury stock by 192,900,120 shares (Note 26).

A summary of assets and liabilities disposed during the years ended December 31, 2012, 2011 and 2010 is presented below:

 Year ended December 31,
 201220112010
Assets held for sale(2,827,037)(3,599,109)-
Liabilities related to assets held for sale536,6493,495,149-
Net identifiable assets(2,290,388)(103,960)-
Foreign exchange differences and other reserves76,089(53,872)-
Fair value adjustment for equity accounted investments-83,943-
Consideration:   
Consideration in cash-84,094-
Consideration in other financial assets*(107,434)67,600-
Selling costs-(18,710)-
Net (loss)/gain on disposal(31,345)59,095-
Net change in cash and cash equivalents-84,094-

*In the year ended December 31, 2012 the Group recognised an impairment allowance in the amount of US$ 107.4 million within the profit/(loss) from discontinued operations in respect of consideration in other financial assets receivable from the sale of the North America disposal group.

The Group’s assets held for sale represented the Gold segment that was classified as held for sale as at December 31, 2011 and the Lucchini segment and Severstal Sparrows Point LLC, Severstal Warren LLC, Severstal Wheeling Inc and Mountain State Carbon LLC as at December 31, 2010.

The major classes of assets and liabilities of the disposal groups measured at the lower of carrying amount and fair value less costs to sell at December 31, 2012, 2011 and 2010 were as follows:

 December 31,
 201220112010
Current assets:   
Cash and cash equivalents-217,133208,928
Short-term financial investments-3,5965,862
Trade accounts receivable-367711,162
Accounts receivable from related parties-5943,835
Inventories-387,5901,135,314
VAT recoverable-57,0318,870
Income tax recoverable-3,05113,163
Other current assets-73,30165,429
Total current assets-742,6632,152,563
Non-current assets:   
Long-term financial investments-86,37038,972
Investments in associates and joint ventures-4,77570
Property, plant and equipment-582,7091,204,978
Intangible assets-1,252,22770,335
Deferred tax assets-2,812-
Other non-current assets-5,75442,964
Total non-current assets-1,934,6471,357,319
Total assets-2,677,3103,509,882
Current liabilities:   
Trade accounts payable-95,190680,535
Short-term debt finance-58,8111,071,286
Income tax payable-18,1764,360
Other taxes and social security payable-25,49664,433
Other current liabilities-76,961223,160
Total current liabilities-274,6342,043,774
Non-current liabilities:   
Long-term debt finance--354,820
Deferred tax liabilities-200,93053,723
Retirement benefit liabilities--592,772
Other non-current liabilities-74,559227,265
Total non-current liabilities-275,4891,228,580
Total liabilities-550,1233,272,354

As of December 31, 2010 the short-term debt finance included US$ 767.0 million of the Lucchini segment debt finance reclassified to short-term due to breach of finance covenants of related loan agreements.