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Russian Railways announces FY2013 results according to IFRS

Russian Railways Group’s total revenues for the year 2013 increased by 14.4% year-on-year to 1 762.8 billion rubles from 1 540.3 billion rubles for the year 2012. The key drivers of revenue growth in 2013 were consolidation of logistic company GEFCO and higher revenues in passenger segment. Revenue of GEFCO amounted to 168.9 billion rubles for the year 2013 and this amount is reflected in the line of logistic revenues, which totaled to 179.2 billion rubles in 2012 comparing to 8.0 billion rubles in 2012. Passenger revenues grew by 7.1% thanks to higher passenger turnover and tariff indexation of passenger rail transportation services. Freight revenues increased by 1% comparing to 2012 on the back of lower average yield of freight rail transportation due to higher share of low-yield cargos in freight turnover and higher share of empty-runs.

Operating costs grew by 17.8% over the reporting period to 1 689.9 billion rubles (1 434.3 billion rubles a year ago). Major drivers of costs’ growth were consolidation of GEFCO, higher depreciation and amortization expenses, increase in tax payment due to reduction of certain tax privileges with regard to rail infrastructure assets, as well as higher staff costs. Depreciation and amortization costs increased by 8.44% from 193.6 billion rubles in 2012 to 210 billion rubles in 2013 reflecting commission of new assets. Growth of tax payments in the part of property tax amounted to 9.5 billion rubles. Staff costs increased from 646.6 billion rubles in 2012 to 697.6 billion rubles in 2013, which is explained by consolidation of GEFCO (22.6 billion rubles) and salaries indexation by 5.7% in 2013 in accordance with the Labor contract of RZD for 2011-2013.

The Group generated EBITDA of 332.9 billion rubles in 2013 comparing to 356.3 billion rubles a year ago. EBITDA margin was at 20.4%, which is in line with the Company’s forecasts (23.2% in 2012). On the back of unfavorable economic conditions and lower yield of freight transportation services the Group’s companies implemented a number of measures to reduce costs that supported operating income and margins in the target corridor. The total effect of cost optimization program amounted to 100 billion rubles comparing to the initial budget for 2013 thanks to optimization of technological processes, optimization of infrastructure maintenance expenses, increase in general efficiency of business, administrative cost cutting and declined volumes of operations under the weak economic conditions.

The Group’s net profit amounted to 36.7 billion rubles in 2013 (93.7 billion rubles in 2012). Reduction of net profit comparing to 2012 was mainly explained by unfavorable economic conditions and lower yield of freight transportation services due to higher share of low-yield cargos in rail freight turnover. Additional effect came from the line of interest expenses, which grew by 14.6 billion rubles due to higher level of financial debt (increased from 491.9 billion rubles in 2012 to 695.6 billion rubles as of 31 December 2013), which was partially offset by the decrease of average interest rate. Net foreign exchange loss in the amount of 14.6 billion rubles comparing to net gain at 5.2 billion rubles in 2012 had also negative effect on the bottom-line.

For every reporting period the Group performs an impairment test for its property, plant and equipment based on detailed budgets and forecasts, which are prepared separately for each of the Group’s business units. In 2013 the Group identified risks of impairment for the first time. These risks are related to negative changes in the expected long-distance passenger transportation volumes due to overall stagnation in Russian economy, insufficient indexation of tariffs in long-distance and suburban passenger transportation, and overall losses in suburban passenger transportation caused by insufficient level of compensation for lost revenues in passenger transportation due to tariffs regulation. In case of further deterioration of economic conditions and insufficient tariff indexation in rail freight transportation these risks are likely to increase.

The Net Debt to EBITDA ratio was at 1.74x as of 31 December 2013 compared to the corresponding figure of 0.93x as of 31 December 2012. Higher level of Net Debt to EBITDA ratio is related to lower EBITDA and higher level of debt mainly explained by placement of infrastructure CPI-linked ruble bonds to finance long-term infrastructure projects. In 2013 RZD placed 3 tranches of infrastructure bonds for the total amount of 150 billion rubles with maturities from 15 to 30 years that increases average maturity of RZD borrowings from 4.9 years as of 31 December 2012 to 9 years as of 31 December 2013. EBITDA to Net Interest Expenses ratio (including capitalized interest expenses) has declined to 7.3x comparing to 14x at the end of 2012. Thus, the key debt ratios of the Group are in line with the target parameters of its credit policy.

The amount of the Group’s capital investments for the year 2013 amounted to 566 billion rubles comparing to 578 billion rubles in 2012. The core part of the Group’s investment program in 2013 related to modernization of rail infrastructure for Winter Olympics 2014, renovation of locomotive fleet, development of Moscow rail junction, elimination of infrastructure bottlenecks on the way to sea ports, implementation of security measures and development of rail infrastructure related to passenger transportation.

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