Liquidity and Capital Resources

Cash Flows

The following table illustrates TMK’s total cash flows for the twelvemonth periods ended 31 December:

  2010 2009 Change Change
  in millions of U.S. dollars in %
Net cash flows from operating activities 386 853 (467) (55)%
Net cash flows used in investing activities (271) (891) 620 (70)%
Net cash flows (used in)/ from financing activities (186) 135 (321) (238)%
(Decrease)/increase in cash and cash equivalents (71) 97 (168) (173)%
Effect of exchange rate changes on cash and cash equivalents (15) 4 (19) n/m
Cash and cash equivalents as of 1 January 244 143 101 71%
CASH AND CASH EQUIVALENTS AS OF 31 DECEMBER 158 244 (86) (35)%

Operating Activities

Net cash flow provided by operating activities in 2010 was down 55% to U.S.$386 million from U.S.$853 million in 2009.

Net cash flows from operating activities before changes in working capital tripled from U.S.$328 million in 2009 to U.S.$942 million in 2010. This increase was mainly attributable to a pre-tax profit of U.S.$185 million in 2010 as compared to a pre-tax loss of U.S.$427 million in 2009. In 2010, cash flows in the amount of U.S.$527 million were used to finance working capital as opposed to a working capital release of U.S.$558 million in 2009.

Investing Activities

In 2010, net cash used for investing activities equalled to U.S.$271 million, or 70% less than the U.S.$891 million in 2009.

The reduction in net cash used in investing activities was mainly attributable to the absence of acquisition of subsidiaries in 2010 as compared to 2009 when TMK exercised its call option for the remaining 49% interest in NS Group, Inc. for a total amount of U.S.$508 million. Decline in net cash used in investing activities also resulted from disposal of TMK-Hydro, in late 2010 for cash consideration of Euro 20 million. Selling of TMK-Hydro, a non-core TMK’s asset, was performed in order to optimise TMK’s assets structure. With the onset of the global economic crisis, ТМК reviewed its Strategic Investment Program for the period from 2004 to 2011. Thus capital expenditures decreased from U.S.$395 million in 2009 to U.S.$314 million in 2010 as a result of certain projects postponements in TMK’s Strategic Investment Program.

Financing Activities

In 2010, net cash used in financing activities amounted to U.S.$186 million as compared to U.S.$135 million net cash received from financing activities in 2009.

A reduction in net cash from financing activities was principally attributable to a change in cash flows from borrowings: net cash inflow amounted to U.S.$103 million in 2010 as compared to U.S.$582 million in 2009. In January 2009, TMK exercised its option for the remaining 49% interest in NS Group, Inc. in the amount of U.S.$508 million. See “Investing activities”. In 2010, TMK made interest payments in the amount of U.S.$343 million as compared to U.S.$444 million in 2009.

TMK received U.S.$33 million for sales of non-controlling interests in OOO “TMK-INOX” and a U.S.$23 million contribution from non-controlling interests owners of OAO “Sinarskaya heat and power plant” in 2010.

TMK completed the placement of 64,585,094 additional ordinary shares for a total amount of U.S.$279 million in 2010. In 2010, in connection with the convertible bonds issue, TMK purchased 64,478,432 treasury shares for a total of U.S.$281 million to secure the fulfillment of the obligation to the holders of the convertible bonds to convert the bonds into GDRs.

In 2010, ТМК purchased non-controlling shares in subsidiaries for U.S.$1 million as compared to U.S.$9 million in 2009.

Dividends

In 2010, TMK made no dividend payments for 2009 to shareholders of OAO TMK as decided by the Company’s shareholders at the annual shareholders meeting in June 2010. TMK paid dividends to noncontrolling shareholders of its subsidiaries in the amount of U.S.$1 million in 2010 as compared to U.S.$2 million in 2009.

Indebtedness

TMK’s debt is nominated in different currencies and comprises mainly fixed-rate credit facilities. The following table presents information on TMK’s debt as of 31 December 2010:

  in RUB in U.S.S in EUR in LEI Total debt
  in millions of U.S. dollars
Fixed-rate debt 1,641 1,816 84 2 3,543
Floating-rate debt - 113 179 - 292
Total loans and borrowings 1,641 1,929 263 2 3,835
Finance lease liability - 37 0 - 37
TOTAL DEBT 1,641 1,966 263 2 3,872

TMK’s maturity profile has significantly improved with a declining share of short-term loans in the credit portfolio. The following table illustrates TMK’s indebtedness maturity profile as of the end of 2010 and 2009:

  Loans and borrowing maturity profile  
  <1 year 1-3 years > 3 years unamortised debt issue costs Total debt
  in millions of U.S. dollars  
As of December 31, 2010: 706 1,222 1,968 (24) 3,872
As of December 31, 2009: 1,549 1,114 1,164 (75) 3,752

The Company’s outstanding loans and borrowings increased by 3% from U.S.$3,752 million as of 31 December 2009 to U.S.$3,872 million as of 31 December 2010. TMK managed to improve the structure of its credit portfolio by extending its maturity profile. Its short-term borrowings accounted for 18% of total borrowings as of 31 December 2010 as compared to 41% as of 31 December 2009.

Bank Loans

TMK’s most significant borrowings as of 31 December 2010 were as follows:

Type of borrowing Bank Original currency Outstanding principal amount
(in thousands)
Maturity date
      in original currency in U.S. dollars  
Loan ZAO AB Gazprombank USD 1,107,542 1,107,542 January 2017
Convertible bonds - USD 412,500 412,500 February 2015
Loan OAO Alfa-bank RUR 10,200,000 334,680 November 2016
Credit facility Sberbank of the Russian Federation RUR 10,000,000 328,117 September 2015
Bonds - USD 186,700 186,700 July 2011
Bonds - RUR 5,000,000 164,059 February 2011
Bonds - RUR 5,000,000 164,059 October 2013
Credit facility Sberbank of the Russian Federation RUR 5,000,000 164,059 July 2016
Credit facility Sberbank of the Russian Federation RUR 4,000,000 131,247 June 2015
Credit facility Sberbank of the Russian Federation RUR 3,680,000 120,747 September 2012
Loan Wells Fargo Capital Finance USD 96,706 96,706 December 2014
        3,210,416  
Other borrowings       621,660  
Total borrowings       3,832,076  

In January 2011, TMK partially repaid U.S.$1,108 million Gazprombank loan facilities using proceeds from the issuance of 2,500 loan participation notes in the amount of U.S$500 million.

In February 2011, TMK entered into new credit line agreements with Gazprombank for the amount of RUB 12,000 million with a maturity in 2014 for refinancing of maturing Russian bonds and certain other credit facilities.

Russian Bond Issuances

On 21 February 2006, ТМК issued non-convertible interest-bearing bonds in the aggregate principle amount of RUB 5,000 million due on 15 February 2011. In February 2010, a buy-back option on the outstanding bonds has expired and the full bond issue was left outstanding. As of 31 December 2010, an aggregate of RUB 5,000 million remained outstanding under the bond series. On 15 February 2011, the bonds were fully redeemed.

In December 2009, TMK established a Russian bond programme in the total amount of RUB 30,000 million registered at MICEX on 30 December 2009. Under the programme, TMK may issue bonds in four tranches, each with a three-year maturity, with two tranches in the amount of RUB 5,000 million each and two tranches in the amount of RUB 10,000 million each. On 26 October 2010, TMK placed the first tranche of the bonds in the aggregate amount of RUB 5,000 million due on 22 October 2013. As of 31 December 2010, an aggregate of RUB 5,000 million remained outstanding under the bond series. TMK has made no decision with respect to the timing of issue of the remaining bond series under the programme.

Eurobonds

On 29 July 2008, TMK completed an offering of U.S.$600 million 10% loan participation notes due July, 2011. The notes have been admitted to trading on the London Stock Exchange. The proceeds of the notes were used to partially repay a U.S.$1,200 million syndicated bridge loan for the TMK IPSCO acquisition. In July 2009, TMK redeemed notes with a par value of U.S.$413 million using the proceeds of the August 2009 OAO Bank VTB facility. As of 31 December 2010, the aggregate principal amount of outstanding notes was U.S.$187 million.

Convertible Bonds

On 11 February 2010, ТМК completed an offering of U.S.$413 million 5.25% convertible bonds due in February 2015. As of 31 December 2010, the carrying value of the bond liability component and the liability under the embedded conversion option were U.S.$378 million and U.S.$48 million, respectively. There were no conversions of these bonds. See “Issuance of Convertible Eurobonds”.

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