IFRS Financial Results for 1H2014 August 29, 2014 Disclaimer The information contained in this presentation has been prepared by the Company and presented on an “as is” and “as available” basis, and, consequently, you shall bear the risks associated with the use of and reliance upon such information. The recipient shall not rely upon the information contained herein or its completeness, accuracy, or objectivity, for any purposes. The information contained herein shall be verified for authenticity, completeness, and updates. Some information contained in this presentation may contain forecasts and assertions concerning future events or financial performance of ROSSETI (“Company”) and its subsidiaries. Such assertions are based on numerous assumptions related to the current and future plans of the Company’s business strategy and the conditions in which such strategy will be pursued in the future. We caution you that such assertions shall not guarantee certain results in the future and are connected with risks, uncertainty, and assumptions that may not be predicted with full certainty. Consequently, the actual results and outcomes of activities may be substantially different form the presumptions or forecasts stated in such assertions with respect to any future events. Such assertions are made as of the date of this presentation and are subject to change without notice. We have no intention of updating such assertions to bring them into line with any actual results. This is not a prospectus or advertisement of any securities. This is not an offer or invitation to sell, or a recommendation to subscribe to or buy any securities. Nothing contained herein shall form the basis of any contract or commitment whatsoever. 2 Key Corporate Highlights May 26, 2014 May 16, 2014 March 27, 2014 February 10, 2014 The Strategy for Developing and Improving the Internal Control System of ROSSETI and Subsidiaries and Dependent Companies is approved. The Procurement Policy is approved. The Company’s GDRs were admitted to trading on the Moscow Exchange on May 28, 2014. Standard & Poor’s assigned a BBB- longterm credit rating to Rosseti. May 20, 2014 A strategic cooperation agreement is signed with State Grid Corporation of China. April 28, 2014 February 10, 2014 Moody’s affirms ROSSETI’s Ba1 corporate rating and revises the rating outlook from developing to stable. The Innovative Development, Energy Conservation, and Energy Efficiency Enhancement Policy is approved. 3 Key Financial Results Revenue bn RUB EBITDA (adj. 1) bn RUB +6,0% +8,6% 400.0 379.5 349,4 140 120 300.0 100 200.0 32.1% 60 0.0 40 1H2013 1H2014 Net income (adj. 2) bn RUB 1H2013 EBITDA 38.1 38 36.3 36 10.4% +27,5% 540 440 37 1H2014 EBITDA margin Net debt bn RUB +5,0% 39 367.1 467.9 1.9 340 10.0% 35 240 1.7 140 34 40 1H2013 Net income 2- 32.9% 80 100.0 1- 121.9 115.0 1H2014 Net income margin 1H2013 Net Debt 1H2014 Net Debt/ EBITDA adj. Adjusted EBITDA is calculated as EBITDA excluding losses from impairment of available-for-sale investments, promissory notes and accounts receivable; Adjusted net profit is calculated as net profit for the period excluding losses from impairment of available-for-sale investments, promissory notes, accounts receivable and deferred income tax expense related to them. 4 Key Financial Indicators Indicators Revenue Operating expenses EBITDA 1 EBITDA (adj.) Operating profit Net profit/loss Net profit (adj.) 2 Net debt 1H2014 bn RUB 1H2013 3 bn RUB bn RUB % 379.5 349.4 30.1 8.6 (331.7) (318.7) 13.0 4.1 113.7 66.9 46.8 69.9 121.9 50.6 31.5 38.1 467.9 115.0 32.6 (2.1) 36.3 6.9 18.0 33.6 1.8 100.8 6,0 55.2 5.0 27.5 367.1 Change Revenue grew mainly due to increased revenue from electricity transmission as a result of the average tariff of electricity distribution services grew. Operating expenses increased due to the growth of the price of electricity distribution services provided by other distribution grid companies (specifically, because of tariff grew of territorial grid organizations), personnel expenses (related to the indexation of salaries in accordance with the current Industry Agreement dated 1 July 2013 and from the increase in personnel expenses due to the commissioning of new facilities), amortization expenses (related to the commissioning of facilities as part of the investment programme), and provisioning for accrued for estimated liabilities, including provisioning for legal proceedings (mainly in relation to electricity distribution services contracts of territorial grid organizations). The key factors contributing to a rise in EBITDA and Net Profit were the accelerated growth of revenue above the growth of operating expenses and decrease in financial expenses related to the reduction of losses from impairment of investments (specifically, the recognized impairment losses on shares in Inter RAO as a result of the decrease in their market value in the 1st half of 2013). Adjusted EBITDA went up due to increased operating profit (resulting from higher revenue from electricity distribution) and profit before tax and because of a rise in interest expenses (resulting from the Company’s increased loan portfolio) and higher depreciation and amortization (as a consequence of putting into operation new capital assets covered by the capex program). Adjusted Net Profit was up due to a growth in revenue from electricity transmission services. The Group’s increased net debt programme. was due to the growth of the loan portfolio as the Company attracted loan facilities to finance its investment 1- Adjusted EBITDA is calculated as EBITDA excluding losses from impairment of available-for-sale investments, promissory notes and accounts receivable; Adjusted net profit is calculated as net profit for the period excluding losses from impairment of available-for-sale investments, promissory notes, accounts receivable and deferred income tax expense related to them. 3 - Definite relative figures had been reclassificated for making comparable with reporting period data. 2- 5 Revenue Structure 1H2014 1H20131 bn RUB bn RUB bn RUB % Electricity transmission 307.6 283.2 24.4 8.6 Sales of electricity and capacity 55.4 51.5 3.9 7.6 Technological connection services 12.3 10.4 1.9 18.3 Other revenues 4.2 4.3 349.4 (0.1) (2.3) 30.1 8.6 Total 379.5 Change Revenue from electricity distribution services accounted for over 81% of revenue in the 1st half of 2014 The growth in revenue from electricity transmission services was largely due to the higher average tariff of electricity distribution services; The rise in electricity sales revenue was due to higher electricity tariffs; The rise in revenue from network connection services was due to the larger number of signed network connection contracts as a result of the implementation of the Action Plan (Road Map) “Enhancing the Affordability of the Power Infrastructure” approved by the Decree of the Government of the Russian Federation No. 1400-r of August 09, 2013. Revenue Structure 3,2% 1.1% Electricity transmission 14.6% Sales of electricity and capacity 81,1% Technological connection services Other revenues 1 – Definite relative figures had been reclassificated for making comparable with reporting period data. 6 Operating Expenses Structure Change 1H2014 bn RUB 1H20131 bn RUB bn RUB % Personnel costs 79.2 72.6 6.6 9.1 Electricity transmission 63.2 54.7 8.5 15.5 Amortization and impairment 61.1 56.8 4.3 7.6 Electricity for compensation of technological losses 43.9 43.3 0.6 1.4 Purchased electricity for resale 30.9 28.8 2.1 7.3 Taxes other than income tax 7.1 4.9 2.2 44.9 Allowance for impairment of receivables 6.4 21.6 (15.2) (70.4) Other expenses Total expenses 39.9 36.0 3.9 10.8 331.7 318.7 13.0 4.1 Operating expenses change factors Personnel costs: increased due to wage indexation in accordance with the current Sectorial Wage Rate Agreement and due to the commissioning of new facilities under the capex program. Electricity distribution expenses: increased primarily due to higher tariffs of territorial grid organizations. Depreciation and amortization and impairment: increased as a consequence of putting into operation new capital assets covered by the capex program. Purchased electricity for resale: increased due to higher tariffs of purchased electricity. Taxes except profit tax: increased largely because of property tax raised by amendments to tax legislation (gradually abolished tax relief on property related to power lines since January 1, 2013). 12% 9% 13% 19% 19% 2% 2% 7% 9% 14% 2% Allowance for impairment of receivables Taxes other than income tax 18% Purchased electricity for resale 17% Impairment of receivables: decreased due to substantial provisioning in 2013 in connection with the supplier of last resort functions taken on and performed by ROSSETI subsidiaries in 12 Russian regions. 24% 23% Other expenses: increased due to provisioning for estimated liabilities for certain subsidiaries. 1H2014 1H2013 1 – Definite relative figures had been reclassificated for making comparable with reporting period data. Other expenses 11% Electricity for compensation of technological losses Amortization and impairment 7 Debt Position Total debt breakdown bn RUB Debt maturity structure bn RUB 325 310 225 248 213 36 6/30/2014 Bonds 2015 Loans 2016 after 2016 Bonds Average weighted rate trends 9.0% 8.5% 8.3% 8.1% 8.2% 31.03.2014 8.5% 31.12.2013 8.6% 8.5% 8.4% 8.0% 30.06.2014 30.09.2013 7.5% 30.06.2013 Rosseti –“BВВ-” S&P (March 2014), “Ba1” Moody’s (July 2010) Lenenergo – “Ba2” Moody’s (November 2009) MOESK - “Ba2” Moody’s, “BВ” S&P, “ВВ+“ Fitch (October 2007 /January 2012/ August 2013) MRSK of Centre - “BB” S&P (November 2009) MRSK of Volga - “Ba2” Moody’s (October 2012) MRSK of Centre&Volga - “Ba2” Moody’s (October 2012) MRSK of Volga - “Ba2” Moody’s (October 2012) FGC UES - “Baa3“ Moody’s, «ВВВ» Fitch, «ВВВ-» S&P (February 2006/ October 2013/March 2014) 110 85 37 31.03.2013 Credit ratings 31.12.2012 12/31/2013 Loans 46 15 16 2H2014 8 EBITDA adj. Analysis 160 150 +30,2 +0,9 140 -6,6 130 -8,6 -0,6 -2,2 -2,2 121,9 -3,7 120 -0,3 115,0 110 100 EBITDA adj. 1H2013 Revenue growth Other income, net growth Personnel costs growth Electricity Purchased transmission electricity for expenses growth compensation of technol. losses growth Purchased electricity for resale growth Taxes other than Other operating Net finance income taxes expenses growth income and profit growth share from assos. companies decrease EBITDA adj. 1H2014 9 Net Income adj. Analysis 45 +6,9 40 +2,2 38,1 Income tax change* Net profit adj. 1H2014 -4,4 36.3 -2,9 35 30 25 20 Net profit adj. 1H2013 * - Including deferred income tax expenses EBITDA growth adj. Amortization growth Interest expense growth 10 Free Cash Flow 120.0 113.7 100.0 85.9 -18,7 -7,0 80.0 -2,1 60.0 +7,2 +13,7 40.0 38.1 27.8 -17,5 20.0 -61,5 0.0 EBITDA 1H2014 Changes in Working Capital Income Tax Non-cash Adjustments Operating Cash Flow Net capex Acquisition of Free Cash Flow Net borrowings Net Interest paid Free cash flow investments and & finance lease to the equity placement of bank deposits 11 Key Balance Sheet Indicators Indicators Assets, including: Non-current assets 31.06.2014 31.12.2013 mln RUB mln RUB bn RUB Change % 1,988.0 1,946.0 42.0 2.2 1,683.5 1,657.4 26.1 1.6 Current assets 304.5 288.6 15.9 5.5 Liabilities, including: 1,988.0 1,946.0 42.0 2.2 Equity 1,092.1 1,061.7 30.4 2.9 895.9 884.3 11.6 1.3 - long-term 583.4 574.4 9.0 1.6 - short-term 312.5 309.9 2.6 0.8 Liabilities: Key factors affecting changes in balance sheet indicators Assets Key factors contributing to changes in the value of non-current assets: • increased value of property, plant and equipment largely due to putting into operation new facilities under the capex program; • increased non-current accounts receivable due to a rise in overdue receivables for electricity distribution services. Key factors contributing to changes in the value of current assets: • higher costs of building materials and a growth in inventories due to certain subsidiaries’ switching over to using their own resources to carry out repairs; • considerably increased cash and cash equivalents due to a rise in cash at banks, including as a result of bank deposits closed as at the balance sheet date. Liabilities Key factors contributing to changes in the structure of equity: • increased retained earnings resulting from the reporting period. Key factors contributing to changes in the structure of liabilities: • increased trade and other payables resulting from a rise in advance payments received for network connection services due to the larger number of signed network connection contracts; • increased loans and borrowings aimed at implementing the capex program; • increased other provisions due to additional provisioning for estimated liabilities (mainly in relation to electricity distribution services contracts of territorial grid organizations, including retail operations arising from the supplier of last resort functions performed by certain subsidiaries). 12 Capex program Areas covered by the capex program 2015-2019* 54.0% Sources of financing in 1H2014 Transmission and distribution lines development Tariff-based revenues 17.0% Renovation of fixed assets 28.0% 4% Borrowed funds 15.0% 63,0% Additionally issued shares Technological connection services Connection fees and other 18.0% New capacity and lines commissioning (`000 km) 40 32.4 30 20 10 Financing dynamics bn RUB (incl. VAT) 30.8 23.8 27.8 31.9 333 22.4 0 2011 2012 GVA 2013 `000 km 329 8.5 313 3.1 1H2014 93 2011 2012 2013 1H2014 Capex program for 2015–2019:* • • Commissioning of transformer capacity: 107,5 GVA Commissioning of power lines: 99,000 km * Targets, pending approval from federal executive authorities 13 Thank you! 14 Appendix 15 Financial Position Statement in millions of Russian roubles ASSETS Non-current assets Property, plant and equipment Intangible assets Investments in equity accounted investees Non-current accounts receivable Other investments and financial assets Deferred tax assets Total non-current assets Current assets Inventories Other investments and financial assets Current tax assets Trade and other receivables Cash and cash equivalents Total current assets Total assets EQUITY AND LIABILITIES Equity Share capital Share premium Treasury shares Other reserves Retained earnings Total equity attributable to equity holders of the Company Non-controlling interest Total equity Non-current liabilities Loans and borrowings Trade and other payables Employee benefits Deferred tax liabilities Total non-current liabilities Current liabilities Loans and borrowings Trade and other payables Provisions Current tax liabilities Total tax liabilities Total liabilities Total equity and liabilities 30 June 2014 г Unaudited 31 December 2013 1 625 968 15 853 1 209 9 822 25 931 4 666 1 683 449 1 595 862 16 557 1 202 7 442 27 309 9 012 1 657 384 27 521 41 600 6 391 139 253 89 742 304 507 1 987 956 23 920 53 306 5 568 143 944 61 917 288 655 1 946 039 163 154 212 978 (2 819) (5 662) 421 435 789 086 303 021 1 092 107 163 154 212 978 (2 819) (6 265) 396 711 765 759 295 932 1 061 691 498 253 18 393 27 700 39 045 583 391 492 229 14 487 28 971 38 715 574 402 59 370 240 651 12 407 30 312 458 895 849 1 987 956 57 808 241 266 10 397 475 309 946 884 348 1 946 039 16 Comprehensive Income Statement in millions of Russian roubles Revenue and government subsidies Operating expenses Other income, net Results from operating activities Finance income Finance costs Net finance cost Share of profit of equity accounted investees (net of income tax) Profit before income tax Income tax expense Profit/(loss) for the period Other comprehensive income Items that are or may be reclassified subsequently to profit or loss: Net change in fair value of available-for-sale financial assets Foreign currency translation differences for foreign operations Income tax on items that are or may be reclassified subsequently to profit or loss Total items that are or may be reclassified subsequently to profit or loss Items that will never be reclassified to profit or loss: Remeasurements of the defined benefit liability Income tax on items that will never be reclassified to profit or loss Total items that will not be reclassified to profit or loss Other comprehensive income for the period, net of income tax Total comprehensive income/(loss) for the period Profit/(loss) attributable to: Owners of the Company Non-controlling interest Total comprehensive income/(losses) attributable to: Owners of the Company Non-controlling interest Profit/(loss)/ income earnings per share Basic and diluted income/(loss) earnings per ordinary share (in RUB) Six months ended, 30 June 2014 (Unaudited) Six months ended, 30 June 2013 (Unaudited) 379 526 (331 698) 2 814 50 642 5 194 (13 990) (8 796) 1 41 847 (10 307) 31 540 349 371 (318 671) 1 913 32 613 5 285 (35 511) (30 226) 12 2 399 (4 486) (2 087) 18 (76) (4) (62) (109) 81 20 (8) 1 112 (136) 976 914 32 454 1 032 (131) 901 893 (1 194) 22 724 8 816 (1 840) (247) 23 327 9 127 (947) (247) 0,14 (0,01) 17 Cash Flow Statement in millions of Russian roubles Six months ended, 30 June 2014 (Unaudited) Six months ended, 30 June 2013 (Unaudited) OPERATING ACTIVITIES Profit/(loss) for the period Adjustments for: Depreciation, amortization and impairment Finance costs Finance income Profit/(loss) on disposal of property, plant and equipment Share of profit of equity accounted investees (net of income tax) Loss on disposal of subsidiaries Other non-cash transactions Income tax expense Operating profit before working capital changes and reserves Change in trade and other receivables Change in financial assets related to employee benefit fund Change in inventories Change in trade and other payables Change in employee benefit liabilities Change in provisions Cash flows from operations before income taxes and interest paid Income taxes paid Interest paid Net cash flows from operating activities INVESTING ACTIVITIES Acquisition of property, plant and equipment and intangible assets Proceeds from sale of property, plant and equipment Acquisition of investments and placement of bank deposits Proceeds from sale of investments and withdrawal of bank deposits Interest received Net cash flows used in investing activities FINANCING ACTIVITIES Proceeds from loans and borrowings Repayment of loans and borrowings Purchase of non-controlling interest in subsidiaries Proceeds from shares issued Dividends paid Payment of finance lease liabilities Net cash flows from financing activities Net increase /(decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the period Cash and cash equivalents at the end of the period 31 540 (2 087) 61 139 13 990 (5 194) (113) 56 752 35 511 (5 285) 1 128 (1) (28) 10 307 111 640 1 793 332 (3 612) (17 979) (1 264) 2 010 92 920 (7 039) (22 123) 63 758 (12) 12 154 4 486 90 659 10 509 71 (5 210) (553) (256) (3 793) 91 427 (6 256) (17 576) 67 595 (63 090) 1 627 (19 393) 33 079 4 651 (43 126) (86 003) 2 115 (32 874) 62 586 3 349 (50 827) 50 671 (43 038) (9) (431) 7 193 27 825 61 917 89 742 86 076 (69 997) (764) 500 (1 000) 14 815 31 583 59 815 91 398 18