Interim Report as at June 30, 2015
2 Letter to the Shareholders Dear Shareholders The value of the company s investment portfolio in CHF terms during the first half of 2015 remained virtually unchanged ( 0.2 %). This performance is significantly given the deep recessionary climate of the emerging market economies in Eastern Europe, combined with weak energy commodity prices, as well as, a further significant decrease of the Ukrainian Hryvna and the Russian Ruble vs. the reporting currency, CHF. Overall during the first half of 2015, EEII s (the Company ) net asset value ( NAV ) declined by 4 % from CHF 5.61 to CHF 5.39 per share. In absolute terms, the Company reports a net loss of CHF 0.3 million (H1 2014: net profit of CHF 2 million). The primary negative contributors to the NAV development during H1 2015 were the weakening currencies of Eastern Europe against the CHF. The Ukrainian Hryvna in particular lost more than 29 % of its value against the CHF during the reporting period. In addition, Kaz Minerals lost 25 % in share value due to weakening commodity prices, and the value of the Company s Ukrainian electricity company shares also suffered from the weakening Hryvna and lost overall 4 % in local currency in the reporting period. The positive share price developments of EEII s largest investments, Ukrnafta, and Gazprom virtually fully compensated for the negative developments. Overall Ukrnafta and Gazprom rose 1.2 % and 4.3 % in CHF terms respectively, during the reporting period. The ongoing territorial conflict between Russia and Ukraine continued to massively affect the economies of the two countries where EEII s main investments are located. Ukraine s industrial output, with the background of a factual war situation in the Donbas region, decreased by almost 20 % in 2015, and does not show recovery signals yet. Based on Ukraine s staff-level agreement with the IMF, the European Union recently disbursed a first tranche of EUR 600 mln, out of a total EUR 1,8 bln loan package to Ukraine. The loan aims to address Ukraine s urgent financing needs and tries to stabilize its economy. In return, Ukrainian authorities have agreed to implement reforms in the areas of public finance management, governance, and the energy and financial sectors. With respect to the Russian economy, based on preliminary estimates by the Ministry of Economy and Rosstat for 2015, Russia s GDP declined by more than 2 % in comparison with the previous year. The primary causes of Russia s macroeconomic instability in 2015 remain the high rate of inflation of almost 17 %, mainly caused by the weakening ruble and the ongoing trade restrictions imposed on Russia due to its involvement in the Ukraine conflict, as well as declining commodity prices which continue to form the most significant source of income of Russia s economy. EEII therefore continues to face severe country risks within its core investment region. Many countries in Eastern Europe continue to experience heavy net capital outflow, and most international institutional investors remain concerned about the challenging investment environment in Eastern Europe, in particular in Russia and Ukraine where the unresolved border conflict in the Donbas region negatively impacts the outlook of both economies. We continue to observe these developments closely. Although we are well aware that the company s investment portfolio can continue to develop in a volatile manner we are convinced that the current share price levels of EEII s investments by far do not reflect their underlying fundamental values and the market growth potential of the companies. In addition, we are encouraged that in spite of deeply negative developments in the past, we succeeded to virtually hold the overall value of EEII s investments constant during this period. We are keeping to our positions and our positive long term view of the energy and infrastructure markets in Eastern Europe, in particular with the implementation of structural reforms in the areas of the Ukrainian energy and financial sector. In the name of the entire Board of Directors, I thank you for your continued trust in the Company. Yours sincerely, Heinz-Dieter Waffel Chairman
Determination of the Net Asset Value 3 Determination of the Net Asset Value as of June 30 in CHF 2015 2015 2014 2014 Following IFRS Following IFRS presentation presentation Representing the shareholders economic interest Representing the shareholders economic interest Cash and other assets 382,505 382,505 2,216,119 2,216,119 Financial assets at fair value through profit or loss 7,983,402 7,983,402 12,502,429 12,502,429 Total assets 8,365,907 8,365,907 14,718,548 14,718,548 Total current liabilities 134,320 134,320 1,832,354 1,832,354 Share capital 10,845,321 10,845,321 10,845,321 10,845,321 (Accumulated deficit)/accumulated profit (2,613,734) (2,613,734) 2,040,873 2,040,873 Total shareholders equity 8,231,587 8,231,587 12,886,194 12,886,194 Total liabilities and shareholders equity 8,365,907 8,365,907 14,718,548 14,718,548 Total shares outstanding 1,527,510 1,527,510 Number of treasury shares Net Asset Value per share CHF 5.39 CHF 9.55 Net Asset Value per share ex* CHF 8.43 * Net Asset Value per share excluding the pending payment to the shareholders of CHF 1.12 according to the capital decrease as decided by the AGM April 3 rd, 2014
4 Interim Report 2015 Interim IFRS Financial Statements IFRS Statement of Financial Positions as of June 30 in CHF (unaudited) Notes 30.06.2015 31.12.2014 Assets Cash and cash equivalents 382,222 729,923 Other assets 283 6,426 Total current assets 382,505 736,349 Financial Assets at fair value through profit or loss 5,6,7 7,983,402 8,002,606 Total non current assets 7,983,402 8,002,606 Total assets 8,365,907 8,738,955 Liabilities and shareholders equity Accounts payable 4,007 82,481 Accrued expenses and other liabilities 4 130,313 83,000 Total current liabilities 134,320 165,481 Share capital 10,845,321 10,845,321 (Accumulated deficit) (2,613,734) (2,271,847) Shareholders equity 8,231,587 8,573,474 Total liabilities and shareholders equity 8,365,907 8,738,955
IFRS Statement of Financial Positions // IFRS Statement of Income 5 Interim IFRS Statement of Income for the period from January 1 st to June 30 in CHF (unaudited) 2015 2014 Operating income Interest income 72 146 Unrealised (loss)/income on financial assets at fair value through profit or loss (19,203) 2,329,731 Income from sale of financial assets - 32,755 Foreign exchange (loss)/gain (34,407) 1,515 Net operating (loss)/profit (53,538) 2,364,147 Operating expenses Management & Advisory fees 87,500 110,000 Administrative fees 26,778 26,779 Directors fees 71,134 71,134 Personnel cost 25,023 Professional fees 34,080 44,665 Other expenses 41,282 66,927 Bank charges and interest expenses 1,927 4,101 Capital tax expense 457 950 Total operating expenses 288,181 324,556 (Loss)/income before tax (341,719) 2,039,591 Income taxes 240 Net (loss)/income after tax/total comprehensive (loss)/income (341,479) 2,039,591 Net earnings per share Net (loss)/profit (341,479) 2,039,591 Weighted Average Number of shares (basic and diluted) 1,527,510 1,527,510 Net (loss)/income per share (basic and diluted) (0.22) 1.34 Interim IFRS Statement of Comprehensive Income in CHF (unaudited) 2015 2014 Net (loss)/profit for the year (341,479) 2,039,591 Other comprehensive income: Items that will not be reclassified to profit or loss Remeasurements of post employment benefit obligations (444) Income taxes on remeasurement of post employment benefit obligations 36 Total other comprehensive income (408) Total comprehensive (loss)/income for the year (341,887) 2,039,591
6 Interim Report 2015 Interim IFRS Cash Flow Statement for the period from January 1 st to June 30 in CHF (unaudited) 2015 2014 Operating activities (Loss)/income before tax (341,719) 2,039,591 Adjustments to reconcile (loss)/profit before tax to net cash flows Non-Cash: Defined benefit cost recognised in profit or loss 3,007 Interest income (72) (146) Foreign exchange (gain) on cash and cash equivalents (34,407) (1,515) Unrealized losses/(gains) on financial assets at fair value through profit or loss 19,203 (2,329,731) Realized (gain) on financial assets at fair value through profit or loss (32,755) Working capital adjustments Decrease in other assets 6,419 7,089 Decrease in accounts payable (78,474) (79,813) Increase in accrued expenses and other liabilities 43,863 51,300 Net cash flows used in operating activities (382,180) (345,980) Investing activities Disposal of equity instruments 149,325 Interest received 72 146 Net cash flows from investing activities 72 149,471 Financing activities Increase in financial receivables from shareholder (1,457,463) Net cash flows used in financing activities (1,457,463) (Decrease) in cash and cash equivalents (382,108) (1,653,972) Cash and cash equivalents at the beginning of the year 729,923 2,411,109 Foreign exchange gain on cash and cash equivalents 34,407 1,515 Cash and cash equivalents at the end of the period 382,222 758,652 Cash and cash equivalents consist of: Cash at banks 382,222 758,652 Short-term deposits Cash and cash equivalents as defined for the cash flow statement 382,222 758,652
IFRS Cash Flow Statement // IFRS Statement of Changes in Equity 7 Interim IFRS Statement of Changes in Equity in CHF (unaudited) Share capital Share premium Treasury stock (Accumulated deficit)/retained earnings Total equity Balance as of January 1 st, 2013 15,275,100 3,774,508 (3,113) (4,127,705) 14,918,790 Net loss for the year/ Total comprehensive loss (2,362,905) (2,362,905) Transactions with owner in their capacity as owners Dividend Sale of treasury shares 3,113 (1,584) 1,529 Balance as of December 31 st, 2013 15,275,100 3,774,508 (6,492,194) 12,557,414 Net loss for the year/ Total comprehensive loss (2,273,128) (2,273,128) Share capital/share premium set off against accumulated deficit (2,718,968) (3,774,508) 6,493,476 Transactions with owner in their capacity as owners Nominal value reduction (1,710,811) (1,710,811) Balance as of December 31 st, 2014 10,845,321 (2,271,847) 8,573,474 Net loss for the period (341,479) (341,479) Transactions with owner in their capacity as owners Nominal value reduction Other comprehensive loss for the year (408) (408) Total comprehensive loss for the year (341,887) (341,887) Balance as of June 30, 2015 10,845,321 (2,613,734) 8,231,587
8 Interim Report 2015 Notes to the IFRS Financial Statements as of June 30, 2015 // Note 1 Changes in accounting principles In accordance with International Financial Reporting Standards, the interim financial statements have been prepared using the same accounting policies and methods of computation and valuation as used in the 2014 financial statements and are in compliance with IAS 34 interim financial reporting. // Note 2 Fair value of the investment portfolio // Note 3 Exchange Rate The Company holds assets denominated in currencies other than Swiss Francs, the functional currency. It is therefore exposed to currency risk, as the value of the securities denominated in other currencies will fluctuate due to changes in exchange rates. The exchange rates used against the CHF were: 2015 2014 USD 0.93400 0.98938 UAH 0.04354 0.06147 GBP 1.46807 1.53675 Fair value is determined on the basis of bid prices for actively traded investments and on the basis of fair value models for illiquid investments. // Note 4 Retirement benefit plan In accordance with IAS 19, an actuarial calculation has been prepared for the Company s retirement benefit plan as at June 30, 2015. According to the actuarial calculation, the pension plan shows a shortfall of CHF 3,451 as at June 30, 2015. The resulting adjustments are recognized in the statement of income (CHF 3,007) and in the statement of comprehensive income (CHF 444).
Notes to the IFRS Financial Statements 9 // Note 5 Investments as of June 30, 2015 Financial assets at fair value through profit or loss Balance as of January 1 st, 2015 Balance as of June 30, 2015 Quantity CHF Quantity CHF Ukranian Energos/Power Generation Companies Centrenergo 141,000 64,900 141,000 48,493 Dniproenergo 1,380 56,097 1,380 25,752 Donbasenergo 11,400 22,742 11,400 11,180 Kievenergo 13,400 9,637 13,400 9,217 Zakhidenergo 9,800 83,352 9,800 72,628 Ukrainian Oil & Gas Companies Ukrnafta 302,701 3,848,573 302,701 3,895,571 Ukrainian Oblenergos/Power Distribution Companies Cherkasyoblenergo 1,139,044 53,306 1,139,044 31,940 Dniprooblenergo 1,250 4,769 1,250 4,438 Krimenergo 155,000 19,096 155,000 4,470 Volynobelenergo 2,085,000 30,035 2,085,000 25,329 Zhytomyroblenergo 552,204 68,723 552,204 49,010 Total Ukrainian Investments 4,261,230 4,178,028 Other Investments Gazprom ADR 742,800 3,417,407 742,800 3,562,996 KAZ Minerals 81,517 323,969 81,517 242,378 Total Other Investments 3,741,376 3,805,374 Total financial assets at fair value through profit or loss 8,002,606 7,983,402 // Note 6 Financial Assets at fair value through profit or loss in CHF 30.06.2015 31.12.2014 Financial Assets at fair value through profit or loss brought forward 8,002,606 10,289,268 Purchase Sale (408,418) Unrealised loss on financial assets at fair value (19,204) (2,018,841) Realised gain on financial assets at fair value 140,597 Financial Assets at fair value through profit or loss 7,983,402 8,002,606 Listed shares CHF % CHF % Liquid shares (Level 1 in fair value hierarchy IFRS 13) 7,926,133 99 7,919,265 99 Shares with limited liquidity (Level 3 in fair value hierarchy IFRS 13) 57,269 1 83,341 1 Total 7,983,402 100 8,002,606 100 Ukraine 4,178,028 52 4,261,230 53 Russia 3,562,996 45 3,417,407 43 Kazakhstan 242,378 3 323,969 4 Total 7,983,402 100 8,002,606 100
10 Interim Report 2015 // Note 7 Shares with limited liquidity (Level 3 in fair value hierarchy IFRS7) in CHF 30.06.2015 31.12.2014 Financial Assets at fair value through profit or loss At fair value as of January 1 st 83,341 127,036 (Loss) in profit or loss (26,072) (43,695) as of June 30 57,269 83,341 Fees, Securities and Capital Structure // Management fee // Weekly NAV information Until December 31 st, 2014 the Company, pursuant to an Investment Management Agreement, conferred investment management activities on AIL Structured Finance Ltd, Zürich. An annual flat fee of CHF 220,000 was applicable. In early 2015, the Investment Management Agreement was amended and a new CEO was elected by EEII. The Investment Management Agreement has been amended as of the beginning of the year 2015. Since then AIL serves as an advisor to EEII on the basis of a new mandate agreement and the annual fee has been reduced to CHF 175,000. // Shares Bloomberg: EEII SW www.eeii.ch // Capital structure As of June 30, 2015 the Company s share capital consisted of 1,527,510 ordinary bearer shares with a nominal value of CHF 7.10 (CHF 10.00 until June 20, 2014) per share (Security No. 716 295/ISIN Code CH007162958). Each share represents one voting right. As per June 30, 2015 Gehold SA, Geneva owned 92.41 % of the outstanding shares of the Company. Listed on Swiss Exchange (SWX) on January 21 st, 1999 (Valor 716 295). Nominal value: CHF 7.10 (CHF 10.00 until June 20, 2014). In total, 1,527,510 shares have been issued (see capital structure).
11 Organization, Related Parties, Manager and Address Registered office EEII AG Alpenstrasse 15 P.O. Box 4853 6304 Zug Manager of the Company Andres Heusser, CEO Advisor AIL Structured Finance Ltd Schaffhauserstrasse 418 8050 Zurich Team of the Advisor Beat Imwinkelried, AIL Structured Finance Ltd Urs Gerspacher, AIL Structured Finance Ltd Custodians UBS AG Baarerstrasse 14a 6300 Zug PJSC PrivatBank Ukraine Naberezhnaya Peremogy 50 49094 Dnipropetrovs k Ukraine Administrator Moore Stephens Zug AG Alpenstrasse 15 P.O. Box 4853 6304 Zug Auditor BDO Ltd Fabrikstrasse 50 8031 Zurich For general inquiries AIL Structured Finance Ltd Schaffhauserstrasse 418 8050 Zurich Phone +41 43 299 62 00 Fax +41 43 299 62 12 www.ailsf.ch info@ailsf.ch EEII AG Alpenstrasse 15 P.O. Box 4853 6304 Zug Phone +41 41 729 42 80 Fax +41 41 729 42 29 www.eeii.ch