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www.railways.kz Annual Report Address of the CONTENTS Chairman of the Board of Directors } 02 Information on JSC «NC «Kazakhstan Temir Zholy» } 04 Operating results 0208 for 2015 } Assets profile of the Company } 22 Objects and Plans for Future Periods } 30 Risks Management } 34 Corporate Governance } 38 Sustainable 02 Development } 56 Financial Statement } 66 Address of the Chairman www.railways.kz Dear readers of the annual report, colleagues, partners! In 2015 negative global economic trends, political tensions, and sanctions policy against countries that are trade partners of Kazakhstan continued to exert its influence on the main basic positions of Kazakhstan’s exports and the overall performance in the country’s economy. In the reporting period, the pace of the national economy development fell to 1.2%, in 2014 this figure was 4.3%. In January-December 2015 the foreign trade turnover of Kazakhstan amounted to 76 billion US dollars and decreased by 37.1% compared to 2014, including exports - by 42.5%. Trade turnover with Russia and Belarus, which accounts for over 50% of the volume of rail transportation decreased by 27.8% and 37.8%, respectively. Generally this had a negative impact on operation of the transport and logistics sector of the country, especially in a traditional for JSC «NC «KTZ» segment of export shipments of general cargo mass. So, due to decrease of world prices and of demand for iron ore on the world market, mainly in the Chinese market, a shipper of such cargo - Sokolov-Sarbaiskoye mining and processing production association - during 2015 exported to China the iron ore in the amount of 190 thousand tons against 2.8 million tons in 2014 and comparing with the level of 2013, this figure had decreased by 30 times. In connection with that, the company directed its efforts on diversification and increase of the volume of transit container transportation. In 2015, in the direction of China - Europe - China 47.4 thousand TEUs were carried, which is 2 times more than the annual output in 2014, or 40 times more than the level of 2011. JSC «NC «KTZ» has also introduced a new transit container trains in the direction of Iran and the Caucasus. As a result, in 2015, we have increased the level of income from transit traffic to 706 million US dollars, accounting for 30% of the Company’s revenues. This cushioned the fall in traffic volume of conventional goods, the devaluation of the national currency, and limited capacities for tariff increases. On the whole, in 2015 the total income of JSC «NС «KTZ» amounted to 810 billion tenge, profit from operating activities to 54 billion tenge, index of EBITDA margin amounted to 21.6%. The devaluation of the national currency influenced deterioration of the final financial results of the company significantly. In order to preserve the financial stability of the company during 2015 anti-crisis measures for costs optimization were carried out, which allowed for neutralization of more negative factors that affect the operating profit and net income. The overall effect of those measures amounted to 169 billion tenge. As the main operator of the program «Nurly Zhol» in the field of transport infrastructure development, in the past year we launched a project for construction of a second track with its electrification at the Almaty - Shu portion of line with the length of 111 km, a ferry complex in the port of Kuryk. Projects on construction of a railway section Borzhakty - Ersai and expansion of the port of Aktau were completed in the west. The largest in Central Asia transport and logistics center of «A» class was put into operation in Astana. In 2015 the company updated the development strategy of JSC «NC «KTZ». In accordance with an updated mission and vision of JSC «NC «KTZ» - a highly integrated transport and logistics holding with a main source of business growth in our key segment of through transportation. Development of new competences, and harsh competitive environment in the global transport and logistics market place high demands on quality and effectiveness of our products, the level of our business. That is why the business transformation program of th eJSC «NC «KTZ» is a key strategic initiative. In 2015 a large amount of work on re-engineering of the business was conducted. A diagnosis and design of all business processes were implemented, a concept of business architecture was formed, business initiatives undertook analysis, a portfolio of projects was develop, as well as an assessment of necessary resources, investments and the expected benefits. The company continues to expand the product range of railway engineering. In 2015 the Aktobe rail and section works began producing its first products. A plant for production of diesel engines was launched in Astana. In order to create infrastructure conditions for development of the capital city as we approach EXPO-2017 the passenger terminal of the International Airport of Astana is being reconstructed and a railway junction and a railway station are being built. In accordance with the corporate vision and business philosophy a great attention is paid to achievement of social goals. I would like to express my gratitude to customers and partners for our successful joint efforts. I hope that our future cooperation will be as efficient and productive. Sincerely yours, President of JSC «NC «KTZ» A. Mamin www.railways.kz Annual Report Mamin Askar Uzakpaevich 2015 President of JSC «NC «KTZ» 4 www.railways.kz Annual Report Аbout the company Brief Information of JSC «NC «KTZ» The Republican State Enterprise «Kazakhstan Temir Zholy» was created by decree of the Government of the Republic of Kazakhstan dated January 31, 1997 No.129 «On reorganization of railway enterprises of the Republic of Kazakhstan « by merging national state enterprises: the Almaty railway administration, the Tselinnaya railway administration, and the West Kazakhstan railway administration. The aim of the merger was to optimize a transportation process management structure and to eliminate unnecessary branches, as well as a financial and economic recovery of the railroad industry. Degree of the Government of the Republic of Kazakhstan dated March 15, 2002 No. 310 «About creation of the closed joint-stock company «National Company «Kazakhstan Temir Zholy» the Closed Joint Stock Company «National Company «Kazakhstan Temir Zholy» was formed by merging of the Republican State Enterprise «Kazakhstan Temir Zholy» and its subsidiaries state-owned enterprises. On April 2, 2004 in accordance with the law «On Joint Stock Companies», the CJSC «NC «KTZ» was re-registered as JSC «NC «KTZ» April 2, 2004 in accordance with the Law of the Republic of Kazakhstan dated May 13, 2003. Currently JSC «NC «KTZ» has a holding structure based on ensuring the functional integrity and manageability of the railway industry in transportation process. The sole shareholder of JSC «NC «KTZ» is JSC «National Welfare Fund «Samruk-Kazyna». As of January 01, 2016: - number of authorized shares - 502,040,458 ordinary shares; - nominal value of the authorized shares – 1,000 tenge; - number of outstanding shares - 494,698,044 ordinary shares. JSC «NC «KTZ» carries out the following activities: acting as an operator of a mainline railway network, transportation of passengers and goods by rail. To date, rail transport is an important component part of the industrial infrastructure of the Republic of Kazakhstan. 05 Key financial and operating indicators of the group of companies JSC «NC «KTZ» for 2015 6 ITEM UNIT 2014 год 2015 год % EViatiON Freight rate/turnover index mln. t – km net 216 524 189 759 -12,4 Loading thous. tons 247 161 220 441 -10,8 Freights carried thous. tons 275 261 251 509 -8,6 Passenger turnover mln. pass-km 18 229 17 030 -6,6 Total revenues mln. tenge 937 366 810 949 -13,5 incl. freight revenues mln. tenge 743 243 629 050 -15,4 Total expenses mln. tenge 906 968 1 271 824 40,2 incl. foreign exchange mln. tenge 71 979 449 940 525,1 loss (net balance) Total income / loss mln. tenge 30 397 -460 875 7 8 www.railways.kz Annual Report Operating results for 2015 Key financial and operating indicators of the group of companies JSC «NC «KTZ» for 2015 The freight rate/turnover index amounted to 189,759 million ton-km net. Regarding the year 2014 a reduction was 12.4%, which is associated with a decrease in cargo transportation of main nomenclature with exception of sulfur ore and non-ferrous raw materials, chemical and mineral cargo and non-ferrous metals. In terms of types of services the following changes in comprison to 2014 took place: - in the interrepublican service a decline by 4.8% due to a decrease in traffic by 4.6% and an average distance of carriage of goods by 0.2%; - for the export a decline was 22.9% due to decrease in traffic by 16.8% and an average distance of carriage of goods by 7.4%; - for the import a decline reached 1.9% due to a decrease of medium-range cargo transportation by 3.7% with an increase in traffic by 1.9%; - for the transit a decline of 11.5% due to a decrease in traffic by 12.8% with an increase in the average haul by 1.5%. Nevertheless in the transit of container traffic in the direction of China - Europe - China according to the results of 2015 a double growth was achieved comparing to the level of 2014, which amounted to 47.4 thousand TEU. Freight handling reached 220,441 thous. tons. In comparison to 2014 a decrease was 10.8%, which is associated with a decrease in loading of main types of goods except for color ore and sulphuric raw materials and cement.