MegaFon - Sustainability Disclosure Database

Transcription

Meeting
the challenge
Annual Report 2014
Contents
Strategic report
Meeting the challenge At a glance Geographic presence Highlights Chairman’s statement
Our business model
Our strategy
Chief Executive’s review Market overview Review of operations Financial review Sustainability Risk and risk management
02
12
14
16
18
20
22
24
27
34
51
54
62
Meeting
the challenge
Approved by Annual General Shareholders
Meeting of MegaFon PJSC
on 30 June 2015
Preliminarily approved by the Board
of Directors of MegaFon OJSC1
on 28 April 2015
Chief Executive Officer I.V. Tavrin
Chief Accountant L.N. Strelkina
1
On 30 April 2015 the Company’s name was changed
to MegaFon PJSC in accordance with the resolution
of 20 April 2015.
Governance
Our approach to Governance Board of Directors Management Board Leadership Accountability and effectiveness Other corporate governance issues Shareholders’ equity Directors’ responsibility statement
74
76
78
80
85
86
88
91
Financial statements
Independent auditors’ report
93
Consolidated statement
of comprehensive income
94
of financial position
96
of changes in equity
97
of cash flows
98
Notes to the consolidated financial
statements99
Additional information
Glossary Contacts Disclaimer statements 144
145
146
We are committed to meeting the challenges we
face in everything we do. While we operate in a
dynamic market characterised by opportunity, we
recognise that it contains a range of challenges –
maintaining growth and leadership, sustaining
innovation, delivering value – that require worldclass performance across our business. We are
inspired by the Olympic ideals and confident in our
ability to compete effectively.
Our development as one of Russia’s leading
telecommunications businesses is reflected in
our achievements. Our strong business model
and clear strategy have resulted in a highly
competitive positioning and consistent value
generation for stakeholders.
Total number of our
mobile subscribers
as of 31 December 20141
Strategic report
72.2m
+5.9%
Total year-on-year revenue
growth for FY 2014
Governance
4G
Go online
ir.megafon.com
stores
We are a leading 4G/LTE
operator, providing 4G services
to 51%2 of the population,
in 72 Russian regions
8,087
Our extensive retail network
includes more than 8,000
owned-and-operated, thirdparty MegaFon mono-brand
and Euroset stores
In focus
Leadership in innovation
Resilient and efficient growth
Read more on pages 02-03
Disciplined investment in business development
Dynamic culture and strong team spirit
Figures in this report may vary from similar figures quoted in previous material due to updated calculations.
1 Data includes subscribers of the Company in Russia and subscribers of its subsidiaries: ‘TT mobile’ CJSC in the Republic of Tajikistan, ‘AQUAFON-GSM’
2
CJSC in the Republic of Abkhazia and ‘OSTELEKOM’ CJSC in the Republic of South Ossetia.
Russian population as of the latest census in October 2010.
MegaFon Annual Report 2014 01
Meeting the challenge…
…through leadership
in innovation
Maintaining our leadership position depends on
our ability to effectively predict market trends,
develop technology and embrace the current
and future needs of our customers.
Innovation is therefore at the heart of our
business, and our track record of successful
innovation reflects our ability to meet the
challenges of our dynamic and rapidly
developing market.
02MegaFon Annual Report 2014
Strategic report
LTEAdvanced
1st in the world to
commercially launch
LTE-Advanced
4G-enabled devices
registered on MegaFon
network as of
31 December 2014
72
>270
4G base stations
were set up in Sochi to provide
quality network operations
Russian regions
with access to
MegaFon 4G/LTE
services
5.8m
Governance
The leading
4G provider
in Russia
…through resilient
and efficient growth
We are clearly focused on delivering profitable
growth, and we have a strong record of consistent
competitive achievement. We aim to continue
growing our market share through investment in
products and services, thereby delivering superior
value and returns to all our stakeholders.
Strategic report
c.300,000
subscribers
Governance
from more than 70 countries used
roaming services provided by MegaFon
during the Sochi Olympics
+5.9%
revenue growth
year-on-year
44%
OIBDA margin for FY 2014
26.1%
OIBDA-CAPEX/revenue
indicator for FY 2014 –
the highest among
‘Big three’ companies
Strong
financial
performance
…through disciplined
investment in business
development
Investment is at the core of our growth
strategy. We have a robust investment
programme focused around best-in-class
network development, technological
innovation and customer support which
drives our commitment to sustainable
value generation for customers, partners,
investors and employees alike.
Number of 4G
stations increased
by 84% to 18,636
units in 2014
extensive fibre-optic
communication network
in Russia
total CAPEX spent in 2014
RUB 56.5bn
Governance
166,453 km
Strategic report
+84%
Continuous
network
roll-out and
modernisation to
provide the best
service quality
RUB 10bn
invested by MegaFon into
preparation for the Sochi Olympic
and Paralympic Games
…through a dynamic
culture and strong
team spirit
We have a dynamic workforce that is
characterised by a strong team spirit and
connected by common values and principles.
We have an ethical culture of transparency,
honesty and openness which has enabled
us to build a leading business whose
achievements we all share in, and which
enables us to celebrate success wherever
it happens.
Strategic report
25,000
volunteers
Governance
were communicating with each
other free of charge during the
Sochi Olympics using a special
tariff plan from MegaFon Financial statements
30,8541
employees
MegaFon is one of
the largest and most
attractive employers
in Russia
Our people are
at the core of
our business
20,000
employees
have taken part in the
annual ‘Point of Destination
– Our Client’ programme
over the last eight years
HR-Brand award
The MegaFon corporate
portal MegaNet received
the HR-Brand award
1
According to the new methodology, the number of employees includes full-time and temporary employees,
excluding those on maternity leave and outsourced employees, and represents the annual time average.
Meeting the challenge
Delivering world-class
support for a major
international event…
MegaFon was the
Mobile Communications
Partner for the XXII Winter
Olympic and XI Paralympic
Games in Sochi, creating a
bespoke mobile network
infrastructure and
providing high-quality
communication services
for the most connected
Winter Olympics ever.
LTE-Advanced
>950
Data transmission speed of up to
300 Mbit/s on the LTE-Advanced
network was demonstrated
during the Sochi Olympics
Base stations were built by
MegaFon for the Sochi Olympics
20 Mbps
Average speed of 4G mobile
internet at the Sochi Olympics
Data traffic used by the
participants and guests
of the Sochi Olympic and
Paralympic Games
>220 km
Smotri+
Length of FOCL built for the
Sochi Olympics
The application was among the
top free applications on the
App Store and Google Play with
600,000 users during the Olympics
660 terabytes
We are proud of the achievements we
have made in developing MegaFon as
one of the leading operators in our market,
with a reputation for innovation, creativity
and ambition.
1st operator to launch
a nationwide
3G network
in Russia
We intend to continue breaking new ground
and leading our market through innovative
and creative thinking, enhancing the
experience of our customers and
delivering value to our stakeholders.
3G
4G
The 2014
Olympics in Sochi
had 4G technology
provided by
MegaFon
MMS
1st operator
in Europe to
launch ‘MMS’
Mobile-TV
5G
We signed a
memorandum of
understanding with
Huawei on the joint
development of 5G
technology in Russia
1st operator in Russia
to introduce ‘Mobile-TV’
LTE-Advanced
1st operator in the world to commercially
launch the fastest mobile data network,
and 1st operator in the world to launch
sales of routers supporting super-fast
LTE-Advanced speeds
1st operator
to launch a
4G network
in Russia
Governance
…based on a trackrecord of long-term
achievement
1st operator to launch HSPA+
internet service and deploy
HD Voice
Strategic report
HSPA+
At a glance
A year of innovation
MegaFon is one of Russia’s largest mobile
operators in terms of revenue and subscribers.
We provide services in all market segments,
including voice, data and other mobile and
fixed-line telecommunications services,
digital TV and IP telephony. We also have
subsidiaries in Tajikistan, Abkhazia and
South Ossetia.
Our extensive
networks
Our broad service
portfolio
Our advanced infrastructure enables us to
deliver a wide range of high-quality mobile
services throughout Russia. MegaFon invests
continuously in improving service quality, and
in 2014 we reached all our infrastructure
development targets. We expanded our
network into new regions and increased
the total number of base stations by 19.5%
to 103,128 units. Our 2G and 3G networks
cover 93.1% and 83.5% of the population
respectively.1 At the end of 2014, our 4G
services were available in 72 Russian regions
and in 14 out of the 15 largest cities with
a population exceeding 1 million citizens.
Our high-quality services, all targeting real
customer needs, extend far beyond voice,
mobile and fixed-line data transfer. We also
provide a range of value-added services to
retail customers, business and government
clients and other telecommunication
service providers. We work with corporate
clients to develop and provide bespoke
business solutions. We have a consumer
hardware business, selling handsets and
other devices. Our MegaLabs subsidiary,
meanwhile, specialises in developing
innovative solutions in M2M, financial
services, media, content and the cloud.
Read more on page 40
1
Based on MegaFon estimates.
Our respected
brand
MegaFon is one of Russia’s most
prominent brands, built on a heritage of
innovation, market-leadership and targeted
sponsorship. In 2014, we had the highest
score in ‘Power of Brand’ among the top
four Russian telecom operators. Our key
unique brand attributes were: ‘the fastest
internet’, ‘the highest quality of mobile
internet’ and ‘the innovative operator,
operator of the future’. Our General Mobile
Partnership at the 2014 Winter Olympics
and Paralympics in Sochi further enhanced
our profile.
February
MegaFon acted as General Communications Partner
for the Olympic and Paralympic Games in Sochi, where
it lived up to its commitment to provide high-quality
communications services
May
Placement of Series BO-04 exchange bonds for a total
amount of RUB 15bn
Governance
Commercial launch of the fastest mobile data network –
LTE-Advanced with a mobile internet speed of up to
300 Mbit/s
Strategic report
Key events of 2014
June
Signing of seven-year network modernisation contract
with Huawei
Upgrade of MegaFon ordinary shares to the MOEX
‘Highest’ quotation list QL 1
July
Completed acquisition of 50% interest in Euroset
November
Signing of a memorandum of understanding with
Huawei on the development of 5G technology
Our retail network
MegaFon’s own retail chain numbers 2,047
owned-and-operated stores across Russia.
Their presence complements a network
of MegaFon-branded franchised stores
and the nationwide Euroset chain, which
we own in partnership with VimpelCom.
Together, these are the primary places
in which we come into face-to-face
contact with customers, adding value and
enhancing our brand through the friendly
and speedy resolution of issues, the
delivery of professional advice and high
standards of service.
Exceptional people
The commitment and accountability of
MegaFon’s employees are what makes
our business so successful. Attracting
and retaining the best possible talent is
the mission-critical driving force behind
all our training and personal development
activities. As of 31 December 2014, we
employed 30,854 people.
Innovative,
affordable hardware
We aim to improve our customers’ lives at a
reasonable cost with every device we sell.
Our affordable data-enabled smartphones
and tablets are enabling customers to
access innovative services that open up
new opportunities for them right across
Russia. The wide range of 4G-enabled
devices, including almost 200 models of
routers, modems, dongles and other devices
(including different colours), which we offer in
our MegaFon Retail stores, is making it easy
to access the new world of 4G.
August
Launch of sales of Login 3 tablet supporting
3G technology
Prepayment of 90% of consideration for Scartel/Yota
Geographic presence
Driving continuous development
Customer numbers by region
1 1.7m
1 0.4m
Moscow region
5 .9m
North-West region
Urals region
Murmansk
Belomorsk
Petrozavodsk
St Petersburg
Pskov
Arkhangelsk
Kotlas
Kostroma
Moscow
Salekhard
Ukhta
Syktyvkar
Nyagan
Voronezh
Kazan
Samara
Rostov-on-Don
Krasnodar
Yekaterinburg
Tyumen
Ufa
Chelyabinsk
Volgograd
Sochi
Omsk
Abkhazia
Tomsk
Novosibirsk
Krasnoyarsk
Astrakhan
Tajikistan
South Ossetia
Noyabrsk
Surgut
Nizhny Novgorod
Belgorod
Nadym
Makhachkala
1 0.5m
Caucasus region
Barnaul
Abakan
1 5.5m
Volga region
4.5m
Central region
Taishet
Ir
Strategic report
Governance
Russia
4.9m
Far East region
MegaFon
Customer base
69.7m
Market share by customer
29%
Mobile internet users
27.7m
4G-enabled devices
registered on network, units 5.8m
Revenues, RUB
310.8bn
CAPEX in 2014, RUB
55.3bn
Tajikistan
TT mobile
2.2m
22%
0.5m
–
2.6bn
0.7bn
Abkhazia
Lazarev
Poronaysk
AQUAFON-GSM
Khabarovsk
Chita
Yuzhno-Sakhalinsk
Vladivostok
Customer base
0.15m
61%
0.1m
4G-enabled devices
registered on network, units –
Revenues, RUB
1.1bn
CAPEX in 2014, RUB
0.3bn
South Ossetia
OSTELECOM
Key
5.0m
Existing fibre-optic network
Fibre-optic network under construction
Customer base
0.07m
100%
0.03m
4G-enabled devices
registered on network, units 0.003m
Revenues, RUB
0.3bn
CAPEX in 2014, RUB
0.2bn
Siberia region
Customer base
4G-enabled devices
registered on network, units Revenues, RUB
CAPEX in 2014, RUB
rkutsk
We remain focused on increasing the quality of the
connections across Russia and improving services
through the modernisation of 4G, 3G and 2G networks.
Highlights
Dedicated to performance
2014 was another successful year, in which we delivered strong
financial performance and confirmed our leading position in mobile
data and 4G/LTE services.
Superior operating performance1…
Non-financial highlights
Subscribers
m people
62.6
Users of mobile internet
m people
68.1
69.7
25.2
Data services penetration
%
27.7
33.6
37.0
39.8
21.0
2012
2013
2014
ARPU2
RUB per month
319
2012
2013
2014
ARPDU
RUB per month
326
2012
2013
3G and 4G base stations3
Number of stations
209
321
164
2014
56,787
181
43,4044
30,010
2012
1
2013
2014
2012
2013
2014
2012
All figures disclosed under non-financial highlights refer to our Russian operations.
2 Total wireless services revenues, including interconnection and roaming charges but excluding connection revenues, for
a given period divided by average number of wireless subscribers in the period, divided by number of months in the period.
3 In units for Russia only.
4 Verified data for 2013.
2013
2014
Strategic report
New
service
We launched 4G/LTE-Advanced
in February 2014
Governance
Speeds of up to
300 Mbps
…translating into solid financials
Financial highlights
Revenue
RUB bn
OIBDA
RUB bn + OIBDA margin, %
43.0%
272.3
297.2
44.6%
314.8
132.6
Net profit5
RUB bn + Net profit margin, %
44.0%
16.3%
138.5
117.1
17.4%
11.7%
51.6
44.4
2012
2013
2014
CAPEX
RUB bn + CAPEX to Revenue, %
16.6%
15.9%
2012
47.1
2012
2013
2014
2012
2013
2014
Free cash flow
RUB bn + Free cash flow to Revenue, %
17.9%
26.0%
56.5
45.2
2013
27.7%
22.3%
82.3
70.8
2014
2012
70.2
2013
2014
5 Profit for the year attributable to equity holders of the Company.
36.7
Chairman’s statement
Committed to our goals
We have made strong progress during the year,
and remain committed to achieving our strategic goals
and to maintaining international best practices in
corporate governance.
“Despite the ongoing
macroeconomic turbulence
we faced, MegaFon delivered
a robust performance in 2014
that I believe gives grounds
for considerable optimism
about the future.”
Sergey V. Soldatenkov
Chairman of the Board
2014 was in many ways a challenging year,
with economic turbulence in Russia following
the fall-out of a sharp decline in the price of
oil and events in Ukraine. The latter events
led to the imposition of Western sanctions
against Russia, which gave rise to a variety
of foreign currency and liquidity issues.
However, very few of these issues directly
impacted our Company. Indeed, we were
able during the year to make a number of
key strategic decisions which have enabled
us to adjust our business to the new
challenges, achieve strong financial and
operational results and consolidate our
leading position in the Russian telecoms
market. Indeed, I believe that our focus
on our strategic priorities is already
contributing to the clarity of vision and
understanding of our unique strengths
and opportunities that will support our
sustainable success in years to come.
It was also a year in which we successfully
reasserted our commitment to quality
customer service and enhanced our brand
visibility through our prominent involvement
in the 2014 Sochi Winter Olympics. Through
our investment in mobile infrastructure and
services specially developed, configured
and adapted for the Olympics, we played
a key role in enabling millions of viewers
to enjoy the dramatic spectacle of the
Games. We were proud to be a part of the
first 4G-enabled games in the history of the
Olympic movement.
Strategic report
Sergey Soldatenkov was MegaFon’s CEO until 2012,
when he handed over the role to Ivan Tavrin and
took up the position of Chairman of the Board.
Governance
Governance developments
As we have in previous years, we continued
to follow global best practice in 2014.
We did this in several important ways:
designating two of our Directors as
independent; re-appointing our Corporate
Secretary; improving insider information
protection; developing additional control
over related-party transactions; and
establishing relevant Committees to ensure
the Board of Directors has the support it
requires to discharge its duties.
These measures have enabled us to bolster
our corporate governance system and
improve the transparency of our business,
helping to maintain trust among investors
and other stakeholders and reaffirming the
overall integrity of our operations.
The Company’s ongoing strategic
development is always MegaFon’s
overarching priority, and this is particularly
the case during a turbulent period such as
2014. This conferred particular importance
on the two strategic summit sessions
we convened during the year at which we
defined the key business areas for MegaFon
and set priorities for the future.
I believe the outcomes of these sessions
will prove to be key drivers of our future
direction. As an innovative business, we
recognise that we must be able to respond
rapidly and decisively to new growth
opportunities and adjust smoothly to the
demands of a fast-changing environment.
This recognition was the catalyst behind the
decision we announced last year to develop
a second core business that we can use
to identify and realise new opportunities
for leveraging our existing activities and
current subscriber base. These include the
development of B2C fixed broadband in key
regions and the pursuit of new value-added
services, such as machine-to-machine and
geo-services, IP communications, mobile
finance, cloud solutions and more. We will
keep you advised of our progress in this
area, which I am confident will provide
further strong foundations for our future
growth.
Dividends
MegaFon first paid dividends in 2012, and
in 2014 we continued to evolve our dividend
payment practice to meet Company needs
and respond to investor expectations.
At our Annual General Shareholder Meeting
on 30 June 2014, we approved the payment
of a final dividend for the 2013 financial year
of RUB 64.51 per share (or GDR). In total,
the Company paid out RUB 46.4 billion in
dividends for the 2013 financial year which,
including the Q1 2013 interim dividend
previously paid in July 2013, implied an
aggregate distribution of RUB 74.85 per
share (or GDR).
You can read more about our dividend
payment system and the taxation of
dividends on page 90.
Outlook
Overall, despite the ongoing macroeconomic
turbulence we faced, MegaFon delivered a
robust performance in 2014 that I believe
gives a better base going forward. The year
gone by proves the resilient and progressive
nature of our business, and I am confident
in our abilities to rise to the challenges that
lie ahead.
Above all, I believe we have the people,
systems, and processes in place to
deliver another successful year of further
sustainable growth. I would like to
thank all those who contributed to our
positive performance in 2014, including
our shareholders, our managers and our
employees. I firmly believe that we can
together all achieve similar success once
again in 2015.
I am pleased to report that during the year
MegaFon’s shares reached the Moscow
Stock Exchange’s highest quotation list, A2,
less than three years after the Company
was first listed. While this shows our
business is moving in the right direction, it
is just one step in our process of continuous
development and we recognise that there
remains further room for improvement.
Strategic direction
As a listed company, MegaFon depends
on rigorous governance to underpin its
business growth ambitions. This fact
ensured that 2014 was also a busy
and eventful year from a governance
perspective, during which my fellow
Directors on the Board and I continued
to develop our corporate governance
system to keep up-to-date with changing
disclosure and compliance requirements.
For example, we have been working to
ensure that the Company complies with
the provisions of the New Corporate
Governance Code which was approved by
the Central Bank of Russia in March 2014.
Since our listing on the London Stock
Exchange (LSE), we also need to comply
with the Disclosure and Transparency Rules
of the UK Financial Conduct Authority
for ‘standard’ companies and the LSE
Listing Rules, and we devoted considerable
effort to ensuring all our systems and
processes were aligned to these additional
transparency requirements.
Our business model
Customers at the
heart of our business
Our clients
Effective financial management
to create value
Consumers
Corporate
Cash flow
Investments
Dividends
Free cash flow
72.2m
subscribers
Government
Operators
Customers at
the heart of
our business
Our value propositions to clients
Best network and product
Best distribution
Best customer experience
Services
and innovations
Devices
and tariffs
Network
Retail
Brand
experience
Our people
Best core and
new products
Growing data
usage
Increased
network capacity
Focus on data sales
and developing
controlled retail
network
Brand awareness
and loyalty
Boosting
service quality
Reinvestment
Our primary source
of revenue is from
subscriber payments
We reinvest our cash
flow in business
growth and
strengthening our
market position
We provide tailored
services to meet the
needs of our customer
segment
We are always seeking to strengthen
our market position by reinvesting cash
flow into the business. Because of our
determination that investors should receive
an appealing return, we also distribute a
significant proportion of our cash in the
form of dividends. For these reasons, free
cash flow is one of our most important KPIs.
We deploy the reinvested capital in a
number of ways to support growth and
make the business more competitive.
These include ongoing network roll-out and
infrastructural enhancements, marketing
initiatives, strategic acquisitions, product
and service development, and constantly
improving quality of service.
Customers
We know that our activities matter to our
customers. That is why we do everything
we can to exceed their expectations,
meeting their ever-growing demand for
products and services as they become
increasingly important aspects of day-today life. We believe our future is extremely
attractive and that our strategy is the right
one to deliver the growth that we and our
shareholders are aiming for.
Payments from our subscribers are our
main source of revenue. We have designed
our revenue structure to mitigate exposure
to credit risk and support a stable cash
flow. With these aims in mind, we provide
our retail and SME customers with prepaid
services and restrict the offer of post-paid
plans to major corporate and government
bodies.
Tailored
services
Under our licences to provide different
telecoms services across Russia, we serve
subscriber segments including private
retail customers, corporates, government
institutions and other telecommunication
operators.
Governance
Revenue
Strategic report
Our business model is built around our growth and reinvestment
strategy. We are always seeking to strengthen our market position
by reinvesting our cash flow back into the business.
Our strategy
Maintaining leadership
in efficient growth
Continue growing
faster than the
market in core
business areas
Strategic priorities
KPIs
Best product
• Revenue
• Mobile data revenue (Russia)
• Mobile data service user base
• VAS revenue
Best distribution
• Continue the ‘smart development’
of the retail network with focus on
active subscriber base growth
• Share of new subscribers acquired
through the controlled retail network1
• Number of data-enabled devices sold in
the Company’s controlled retail network
Best experience
• Active subscriber base
Corporate business
• Share of B2B, B2G and B2O revenue
Fixed business
• Fixed business revenue
• Launch of Fixed-to-Mobile (FMC)
products and services
New businesses
• New businesses revenue
• On-time delivery of new products
Best performance
• OIBDA margin
• Implementation of operational
excellence initiatives
Best network
• CAPEX/Revenue %
• Coverage (% of Russian population)
Best management system
• Implementation of developed
management system
• Employee motivation
• Maintain leadership in mobile data
• Maintain revenue growth from
value-added services
• Retain customers through excellence
of end-to-end customer experience
Leverage secondary
core businesses
• Leverage potential in B2B, B2G and
B2O business segments, increasing
their ‘weight’ within the Company
• Leverage and realise synergies between
fixed broadband and mobile businesses
• Leverage opportunities in new businesses
through development and delivery of
innovative products synergetic to the
core business
Deliver best-in-class
efficiency in the
management of the
business
• Identify and deliver continuous
operational improvements
• Continue to actively develop network
and service quality, combined with
high efficiency
• Develop management system
focused on value creation
Strategic report
Our strategy focuses on generating strong cash flows
through revenue growth, network development, high
quality service and operational efficiency.
Governance
Risks
Actions for 2015
• Revenue: RUB 314.8 billion (up 5.9%)
• Mobile data revenue: RUB 67.2 billion (up 33.3%)
• Mobile data service user base: 28.3 million
subscribers (up 10.0%)
• VAS revenue: RUB 37.3 billion (stable)
• Economic instability
in Russia
• Reduced disposable
income among clients
• Increased competition
including Tele2 and RTK
joint venture
• Retain the revenue at the same
level as in 2014
• Launch of 4G+ in new cities
• Continue developing bundles
• 8,087 stores within retail network (stable)
• >71% of all new subscribers acquired through
the controlled retail network (up 2 p.p.)
• 3.8 million smartphones and tablets sold (up 68.2%)2
• 72.2 million active subscribers (up 3.0%)
• 15.1% (up 0.7 p.p.)
• Deliver excellence initiatives
to improve customer experience
• Monitor customer satisfaction index (‘CSI’)
and link it to the technical network KPIs
• Economic instability
in Russia
• Increased competition
• Potential changes in
legislation in B2G segment
• RUB 4.1 billion (up 89%)
• 44.0% (in line with the Company’s outlook for 2014)
• 17.9% (up 2 p.p.)
• 4G coverage – 51%3 (up 15.1 p.p)
• Developed a framework for the management system
focused on value creation
1
• Implement the updated corporate
strategy as a basis for consistent
business development through all
corporate segments
• Increase delivered synergies between
the fixed line, fixed broadband and
mobile businesses
• Focus on high-priority new business
streams (OTT TV, Mobile finance and
M2M services)
• Continue developing innovative
new products and services through
MegaLabs, the Company’s R&D unit
• Ruble weakening
• Price reduction by
competitors and consequent
downward pressure on
margins and profitability
• Maintain OIBDA margin not less
than 40%
• Develop 3G/LTE/LTE-A networks
• Improve service quality
• Deliver expected capital expenditures
in the range of RUB 165-180 billion for
2013-2015, as previously announced
by the Company during the IPO
• Develop people strategy
Includes the Company’s own sales network MegaFon Retail, third party points-of-sale stores operating under the MegaFon brand and Euroset stores.
2 Includes MegaFon branded equipment (smartphones and tablets only) sold in 2014 in the controlled retail network and third-party equipment sold in MegaFon Retail.
3
Russian population as of the latest census in October 2010.
• RUB 22.2 billion (up 10.4%)
• Launch of WireFire, a double-play FMC service
(OTT TV and broadband)
• Develop strong data-enabled device
portfolio
• Continue renovation of owned-andoperated points of sale
Progress in 2014
Chief Executive’s review
Meeting the challenge
“Our revenue growth rate
in 2014 was the fastest
among the ‘Big three’
operators in Russia.”
Ivan Tavrin
Chief Executive Officer
In 2014 MegaFon delivered a solid
operational and financial performance.
During a period of economic instability
and uncertainty in Russia, we implemented
well-timed measures to help weather
the storm and mitigate potential risks.
We know that in the year ahead, only the
most disciplined operators will be able to
succeed, and we go into 2015 determined
to maintain our leading market position
through our commitment to continuous
improvement.
Our performance
In 2014, MegaFon demonstrated financial
resilience despite the considerable
economic turmoil seen during the second
half of the year, and managed to achieve
results that were fully consistent with
the guidance throughout the year for both
revenue and OIBDA.
Our projections for revenue growth were
the highest among telecoms operators in
Russia and were not revised once during
2014. The Company’s revenues for the
year increased by 5.9% compared to 2013,
reaching RUB 314.8 billion, and meeting our
lowest projected estimate for the year.
Total revenue growth
year-on-year, in line
with FY guidance
Strategic report
+5.9%
+33.3%
Mobile data revenue
growth year-on-year
Governance
In 2014 we took steps enabling us to
be well-prepared for possible market
uncertainties and cater for our mediumterm requirements in terms of the financing
of our further infrastructure development.
We signed financing agreements with
China Development Bank Corporation and
Finnvera for the purchase of equipment and
services from Huawei and Nokia Siemens
Networks, respectively, and also entered
into long-term contracts with Ericsson
and Huawei for the construction and
modernisation of our network based on the
total cost of ownership concept. In fact, we
were one of a few corporate borrowers to
successfully tap the domestic ruble bond
market, and overall we ended the year
with sufficient liquidity, a stable leverage
position, and the highest OIBDA-CAPEX
indicator in the industry – RUB 82 billion.
During 2014 we enjoyed our leading position
in mobile data. MegaFon has been a leader
in mobile data transmission since 2008, and
in 2014 this continued to be a key growth
driver with revenue from mobile data
services increasing by 33.3% year-on-year
and representing 21.3% of total revenue
compared to 17.0% in 2013. We managed
to achieve a 39.2% market share in mobile
data revenue among the ‘Big three’
operators in Russia.
In 2014 we focused our effort on the
further development of our networks
and expansion of our fibre-optic cable
line infrastructure, ensuring we offer a
broad spectrum of network capacity and
services to our customers. To strengthen
our preeminent position in 4G/LTE, in 2014
we added 23 regions to our 4G network
coverage and, as of the year-end, our
4G services, were available in a total of
72 federal regions. Our 4G penetration
also doubled, from 3 million 4G-enabled
devices registered on our network in 2013
to 5.8 million devices in 2014, while data
transmission traffic per subscriber (DSU)
was up 64.1%. In 2014 we also began to
focus on LTE-roaming and during the year
managed to expand our roaming coverage
to 37 popular travelling destinations by
concluding contracts with the 37 operators
serving those markets.
In February 2014 we commercially launched
the world’s fastest network, LTE-Advanced,
and started offering internet access
at speeds of 150-300 Mb/s in Moscow,
St. Petersburg and Chelyabinsk. At the
moment of launch, the MegaFon network
was recognised by GSA (Global Supplier
Association) as the fastest commercial
mobile network in the world. This year we
are planning to continue deployment of this
network in the biggest Russian cities. Also,
to access the LTE-Advanced network, we
launched sales of our branded MegaFon
Space router and became the first operator
in the world to do this.
In recognition of these developments, and
of our 4G leadership generally, Telecom
Daily announced in 2014 that MegaFon
provides the fastest internet speeds in
eight Russian cities with a population of
over one million people, including Moscow,
Nizhny Novgorod and Samara.
On the back of extensive 4G/LTE network
development in Russia and the growing
popularity of 4G devices, across the 4G
device portfolio in our retail network, we
currently offer around 200 4G-enabled
models. During 2014, our sales of 4G devices
went up twofold, reaching 1.7 million
devices, while sales of 4G tablets grew
nine times more than in 2013 and sales
of 4G smartphones three times more.
To stimulate higher mobile data usage
we promoted sales of affordable branded
data-enabled devices. MegaFon is a strong
player in this category, providing branded
and customised budget smartphones
and tablets that meet customers’ quality
expectations. In 2013, we launched the first
budget Login smartphones and tablets,
creating a revolution in the market, and in
2014, we launched sales of the MegaFon
Login 3 tablet at the lowest market price.
The MegaFon Login 3, initially priced at
RUB 1,990, achieved record sales from the
moment it launched, and for the last five
months of the year was a bestseller in our
MegaFon Retail chain. Our customised
devices also sold well during the year, with
3.4 million units sold in total, up 5.7% on
2013. Sales of customised smartphones
exceeded 650,000 units and customised
tablets 640,000 units, which is 26% and
almost ten times, respectively, higher
than a year ago.
Our net profit decrease of 28.8% yearon-year was due to a non-cash foreign
exchange loss incurred primarily as a result
of the considerable ruble depreciation in the
fourth quarter of the year. However,
a number of management decisions taken
in 2014 as part of our overall long-term risk
management strategy allowed us
to substantially mitigate the broader
impact of these currency fluctuations.
In particular, early payment of our
US dollar obligation relating to the Euroset
transaction, the refinancing of our USDdenominated deferred obligation for the
Scartel acquisition in 2014, and a proactive
approach to CAPEX management, helped
to minimise our losses.
Leading the field in mobile data
In fact, our revenue growth rate in 2014 was
the fastest among the ‘Big three’ operators
in Russia. We also managed to maintain a
high level of OIBDA and OIBDA profitability
for the year, through our revenue growth
and close attention to operating costs.
OIBDA was up 4.4% in Russia, which is our
core segment, and our OIBDA margin of
44.5% was the highest in the industry.
Chief Executive’s review
Meeting the challenge continued
Commitment to service quality
and customer experience
Maximising subscribers’ experience in all
areas of our services was certainly a key
focus in 2014. We invested significantly in
attracting and retaining new customers. We
rolled out a number of products and tariffs
to ensure MegaFon remains an accessible
and affordable option. By the end of the
year we increased our mobile subscriber
base by 3.0% year-on-year to 72.2 million
subscribers, with our total number of
customers in Russia up 2.4% to 69.7 million;
the number of data service users in Russia,
meanwhile, went up 10%, reaching almost
40% of the total customer base.
Looking ahead: 2015 and beyond
Nowhere was our commitment to service
quality more evident than during the 2014
Winter Olympics in Sochi. For this purpose
we invested heavily in the deployment of
mobile infrastructure, building this from
scratch, completing everything on deadline,
and installing over 220 km of fibre-optic
cable and constructing more than 950 base
stations, including over 270 4G stations.
As a result of our efforts, the Sochi Winter
Olympics were officially the ‘most mobile’
Olympics Games in history. Once again,
MegaFon proved itself a reliable partner
in a major international event, and we are
proud of the part we played in delivering
exceptional quality to the millions of people
who enjoyed the Games via our networks,
services and products. What’s more, these
investments enabled us to strengthen
MegaFon’s brand and increase brand
recognition and visibility on a global stage.
During the year, we continued to put much
effort on improving customer service via
our MegaFon Retail chain, call centres
and client account tools. We introduced
a new 24/7 virtual service called ELENA,
which uses speech recognition to help
solve customer problems and answer
questions, launched a brand-new site for
our corporate and government clients, and
revealed a dedicated mobile account service
application to replace numerous outdated
applications. As a result of our effort aimed
at delivering customer excellence, we
retained the highest Net Promoter Score1
in the industry at the year-end and were
named by our clients the leader in clientoriented businesses among domestic
telecommunication companies.
We will also continue our efforts to enhance
the quality of our network and maintain
our leading coverage and capacity. Having
invested significant amounts in 3G and 4G
network rollout over the last few years, we
are currently at such an advanced stage
of technological development that we are
now prioritising expenditure in efficient
network development and infrastructure
maintenance rather than investing heavily
in next generation technology. In fact,
CAPEX increases in 2014 were more related
to Russian currency fluctuations and
instability than outright investment.
Delivering exceptional client service
remained a major strategic priority for
MegaFon in 2014. We continued to leverage
our unrivalled competitive and technological
advantage to deliver the highest quality
services and products to our customers.
This commitment was reflected in our
investment in premium network coverage
during 2014, with CAPEX up 20% on 2013
levels, and in our completion of planned
infrastructure developments despite the
market situation.
Looking ahead, we know that 2015 is likely
to be a challenging year. Our strategic
priorities for 2015 include retaining our
leadership position in mobile internet
and other key business areas; continuing
our development of innovative products
and services in line with customer needs;
retention and continuous expansion
of our subscriber base; rationalising
our expenditures and improving our
operational efficiencies; and improving
our internal business processes, including
implementation of the unified billing system.
I would like to personally thank all
our dedicated employees, whose hard
work, ingenuity and skill helped us
achieve another successful year. I would
also like to thank the members of the
Board of Directors and my colleagues in
management, as well as our shareholders,
for their ongoing commitment and support.
Ivan Tavrin
1
According to the research conducted for Q4 2014 by independent agency Synovate Comcon.
Strategic report
Market overview
A vibrant and growing market
Governance
The global telecoms market
The increasing penetration of data-enabled
devices, popularity of heavy-data traffic, like
video, games and file downloads, and OTT
services lead to higher mobile data traffic
usage. According to Cisco, in 2014, the global
mobile data traffic grew by 69% to reach
2.5 exabytes per month, with mobile video
traffic exceeding 50% of total mobile traffic.
This is predicted to increase to more than
24 exabytes per month in 2019.
The Russian telecommunications market
witnessed a slowdown in 2014, resulting
from a decreased rate of growth within
the mobile sector – the largest telecom
segment and market driver – from 5%
in 2013 to 3% in 2014.3 Another cause
of the slowdown was the continuing
decline of the fixed-line segment, as
well as the saturation of traditionally
dynamic segments such as broadband
internet and Pay-TV. According to TMT
Consulting, the overall volume of the
Russian telecommunications market
in 2014 reached RUB 1,655 billion.
While the uncertain economic environment
makes it difficult to forecast market trends,
TMT Consulting anticipates a growth rate
of 1% in 2015. Despite a general decline in
purchasing power and a likely reduction in
network construction paces, the geographical
expansion of 3G and 4G is expected to be
the main growth driver in the year ahead,
along with a corresponding increase in data
consumption and bundled offerings.
Mobile business
At the end of December 2014, Russia
had approximately 240.7 million mobile
subscribers, down 2.1 million compared to
the end of 2013. Mobile penetration in 2014
was 168.2%, down 1.8 p.p. on 2013.4
In 2014, the telecommunications market
was affected by two major developments:
the introduction of a new version of
the law ‘On Communications’, and the
adoption of the mobile number portability
(MNP) principle. The updated law ‘On
Communications’ means mobile operators
must now receive user consent for the
provision of value-added services (VAS)
(‘Advice on charge’). This new measure
has already impacted the VAS revenue of
mobile operators and may restrict revenue
growth in the future. The introduction of the
MNP principle, which now enables mobile
users to retain their mobile numbers when
changing from one mobile network operator
to another. MegaFon is the main beneficiary
of this process with 35% of total numbers
ported in.
During the year, new market trends included
the development of M2M (machine-tomachine)5 technology (or the ‘Internet of
Things’) and Big Data – two key areas of the
VAS market where MegaFon is developing
innovative products and services and
working to monetise data transmission.
As described elsewhere in this report,
MegaFon is currently the second-largest
mobile telecoms operator in Russia in
terms of revenue and subscriber base,
with a 29.0% market share in total mobile
subscribers.6 Other major players in the
Russian mobile market include MTS, the
country’s largest telecoms operator;
VimpelCom, the third-largest operator in
Russia; and Tele2, a joint venture between
Rostelecom and Tele2 Russia, which has
emerged as the fourth-largest operator
in Russia (for more information, see Key
Competitors on page 33). During the
year, the ‘Big three’ players continued to
dominate the market with an aggregate
83.6% share in terms of subscribers.
Mobile business in Russia7
RUB bn + Penetration, %
170.0%
161.3%
829.7
2012
168.2%
873.9
889.9
2013
2014
1,2GSMA Intelligence.
3TMT Consulting report, ‘Russian telecommunications
market 2014-2020’.
4,6Company’s estimates based on data of AC&M
Consulting.
5M2M refers to technologies that enable wireless and
wired systems to communicate with other devices of
the same type.
7 Company’s estimates based on data of AC&M
Consulting for wireless revenue.
The global market is currently witnessing
a shift to mobile broadband networks on
the back of faster deployment of 4G/LTE
networks worldwide. According to GSMA,
2G remains the dominant technology in
terms of the number of connections, but
its proportion has fallen from 90% of total
connections in 2008 to around 60% by
the end of 2014. This decline is likely to
accelerate by 2020 with 2G connections
accounting for only a third of the total
connection base. The share of 3G/4G in total
connections is predicted to increase from
40% of the global total in 2014 to almost
70% in 2020. This shift also takes place on
the back of higher adoption of smartphones
and other advanced devices. Deloitte
predicts that the smartphone base will
increase from 1.8 billion in 2014 to
2.2 billion in 2015 with one billion
smartphones purchased as upgrades –
generating over US$300 billion in sales.
The Russian telecoms market in 2014
The global mobile industry continues to
grow rapidly, supported by the development
of higher-speed mobile broadband networks
and increasing adoption of mobile devices.
At the end of 2014, the total number
of unique mobile subscribers reached
3.6 billion1 (CAGR (Compound Annual
Growth Rate) 2008-2014 at 9.8%2), while
the penetration rate was at 50%. With
increasing demand for mobile data, lowering
prices and an astonishing breadth of
available data-enabled devices, mobile data
transmission has become the main driver
of growth for global mobile operators.
Market overview
A vibrant and growing market continued
Voice services
Data services
Voice is the largest traditional segment
of the mobile market in Russia, and voice
communications continued to represent the
biggest share of MegaFon’s total revenue
in 2014, generating RUB 162.3 billion.8
However, total voice revenues declined
in 2014 as a result of market saturation,
migration of subscribers to bundled tariffs,
growing mobile data usage – with key
market players focusing on 3G and LTE
network development, and increased price
competition. The share of voice revenues in
total wireless revenues of mobile operators
decreased to 66.2% (down 3.1 p.p. vs 2013).
Data remained the fastest growing
segment and the primary source of revenue
growth for mobile operators in Russia
during 2014. Data is certainly a major
growth area in Russia, where there are
currently 99 million mobile data users10 –
an increase of 10% compared to 2013.
Indeed, for the past ten years the structure
of data usage in Russia has changed.
Experts predict that by the end of 2018 the
mobile data subscriber base will exceed
150 million11 and the number of LTE
subscribers will increase to 20 million,
up from 7 million in 2014.12
Mobile voice market in Russia9
RUB bn
In 2014, the Russian mobile data market
grew by around 31% to RUB 176.7 billion,13
and the share of mobile data in total
wireless revenues of mobile increased from
15.5% in 2013 to 19.9% in 2014. The main
market drivers are the increasing adoption
of data-enabled devices, rapid expansion
of 3G/4G networks and popularity of
heavy content. According to Cisco, mobile
internet traffic in Russia grew by 89%
in 2014 (52 times the rate of 2009). On
average, every user of a data-enabled device
consumed 372 megabytes of traffic per
month in 2014. The monthly traffic usage by
tablet owners increased by more than 220%,
while for smartphone owners it increased by
more than 90%. Cisco forecasts that mobile
data traffic in Russia will reach 1.4 exabytes
per month by 2019. Other key drivers of the
mobile data market include the development
of M2M solutions (or the ‘Internet of Things’)
and geolocation services.
599.9
605.8
589.2
2012
2013
2014
However, for those operators providing
mobile data services, revenue growth
does not currently correlate with data
traffic growth. The slower rate of mobile
data revenue growth is attributable to the
promotion of bundled tariff plans among
Russian mobile operators and packaged
data tariff options: the more traffic
available in the package, the lower the
cost of each megabyte of traffic.
8 Voice includes revenues from local subscribers, which includes monthly fees, airtime revenues, own
subscriber roaming and connection fees; wireless interconnection revenues; roaming charges to other
wireless operators and other wireless revenues.
Mobile data market in Russia14
RUB bn
176.7
135.1
100.0
2012
2013
2014
MegaFon is very well positioned to take
advantage of data service growth and
traffic consumption due to the wide
coverage of its 4G network and high
data speeds provided. According to data
from the Federal Service for Supervision
in the Sphere of Telecom, Information
Technologies and Mass Communications,
the total number of active 4G base stations
at the end of 2014 increased by 3.4 times –
up to 42,047 units from 12,364 units in 2013.
MegaFon holds 44% of the total number
of base stations and provides 4G services
in 72 Russian regions.
Value-added services
The VAS segment remained the third
largest segment of the wireless market
with a 13.9% share (down from 15.2%
in 2013). The traditional VAS segment
comprises short messaging and mobile
content services. During 2014, VAS
revenues in these areas remained flat or
decreased for most telecoms operators
due to the introduction of a new regulation
designed to restrict the flow of automated
SMS messages to subscribers (see page 32).
In 2014, the VAS segment decreased
by around 7% to RUB 123.9 billion.
9, 11, 13, 14
AC&M Consulting.
10,12, 17 J’son & Partners Consulting.
Strategic report
As our mobile business continues to grow, we are
focused on expanding our 4G/LTE network to enhance
the lives of people across Russia through the ongoing
quality, capacity and connectivity of data transmission.
Governance
MegaFon is making product and service
development in this area a major strategic
priority through its innovation unit,
MegaLabs. It is focusing on scalable
products with API and packaged products
such as M2M monitoring, as well as offerings
such as Car Fleet Monitoring and Employee
Monitoring (see page 44 for details).
Another key VAS area is digital media
content, which comprises information
and entertainment (e.g. game and video)
content. According to estimates by J’son
& Partners Consulting, Russia is one of
the world’s largest players in the global
digital media content market, with a share
of 2%. Sales of digital media content via
the internet and other remote channels
were at approximately US$2 billion in 201317
Other VAS markets include OTT service
vendor solutions such as iMessage
(Apple), Google Hangouts (Google), Skype
(Microsoft), and third-party solutions
such as WhatsApp and Viber. Through its
MultiFon service, MegaFon provides its
customers with the opportunity to make
calls over the internet to any number in the
world, send MMS and SMS messages, and
receive a usage chart.
Mobile finance is one of the rapidly
developing segments of the VAS market.
According to different sources, the
m-commerce market is estimated at
US$1-1.5 billion18 with a share of 6-7% of
the total e-commerce market in Russia.
Experts calculate that the mobile finance
market volume doubled in 2014, while the
e-commerce market grew by 25-30% in
2014. During the year, MegaFon continued
to develop its mobile finance services, and
the volume of mobile payments made by its
customers exceeded RUB 12 billion in 2014.19
MegaFon also continues to develop Big
Data services as a high-margin and high
added-value business for corporate and
government customers, and as a means of
improving operational efficiencies (for more
information, see page 45).
VAS market in Russia20
RUB bn
129.9
133.0
2012
2013
123.9
2014
Fixed-line business
Fixed-line broadband has been a key focus
area for Russian wireless operators over
the past few years. MegaFon has continued
to strengthen its broadband business,
expand backbone capacity, and streamline
its fixed-line assets. Market consolidation in
this area has also seen further expansion of
B2B/B2G fixed-line services among all the
major telecoms operators in Russia.
Competition in the fixed-line market is
particularly strong in the Moscow region,
where penetration is over 80% and there
are more than 300 active providers.21
Looking ahead, market trends point to the
increased provision of single account bundled
solutions, and the development of digital TV
and OTT data transmission via the internet.
Fixed-line market in Russia22, 23
RUB bn
576.3
585.5
2012
2013
529.6
19 Excluding payments via USSD.
15 GSMA Intelligence.
16 Cisco.
18Company’s estimates based on data provided
by AnalyticResearchGroup.
20 AC&M Consulting.
21 Telecomza.ru
22 iKS-Consulting (2012 and 2013 figures).
23 TMT Consulting (2014 figure).
2014
This segment is a young but rapidly
growing area within the global and Russian
telecommunications markets. Now M2M
solutions are mainly dedicated to satisfying
the needs of corporate clients, but they
are also becoming more popular in the
retail segment. J’Son & Partners
Consulting predicts that the Russian M2M
market will grow approximately 45% per
year between 2013 and 2017, while globally
the M2M market is expected to increase
to US$19 trillion in the next decade16 as
new technologies continue to stimulate
data traffic (particularly in Mobile Health).
According to Cisco, M2M traffic in Russia
might increase 45-fold from 2014 to 2019
at a CAGR of 114%.
and were expected to reach US$2.5 billion
in 2014. This growth is being driven by
the increased adoption of digital devices
adapted for content consumption, and the
ongoing development and offering of mobile
content. Mobile video files are the leaders
in terms of consumer demand. According
to forecasts by Cisco, the mobile traffic
generated by video might increase 20-fold
in Russia. Through its mobile TV (MegaFon
TV) and SMOTRI+ application, MegaFon
continues to be a major digital media
content provider.
Beyond the traditional areas, the VAS
service portfolio is diversifying into new
market niches. These include M2M services,
or the ‘Internet of Things’. According to
GSMA, as of December 2014, there were
243 million cellular M2M connections
globally, which accounted for 3%15 of total
connections (up from 1% in 2012). According
to Cisco, in Russia, the number of mobileconnected M2M modules grew 1.5-fold in
2014 and reached 17 million units.
Market overview
Voice services
In 2014, the collective revenues of all
Russian operators providing fixed-line
telephony services decreased by 7% to
RUB 171.4 billion compared to 2013.24
Annual revenues from local services, which
account for 74% of the fixed-line voice
segment, decreased by 4.6%, while ‘zonal
communications’ revenues fell by 14.7% to
RUB 21.8 billion – the most notable drop
during the year. This fall in revenue was
due to the migration of users to mobile
networks with comparable communication
tariffs and free on-net calling as well as
the increasing popularity of OTT services.
Despite MegaFon’s primary focus on
mobile services, it currently provides
fixed-line voice services for corporate and
government clients and will continue
to extend this offer in the future.
Broadband internet access
The growth of the Russian broadband
market is slowing. In 2014, the broadband
market volume increased by 6.4% compared
to 2013, totalling RUB 176 billion. Of this
total, RUB 117 billion was generated by
B2C users (compared to 111 billion in
2013),25 with the number of B2C users
totalling 28.9 million households.26 As a
result, broadband internet penetration in
the B2C segment reached 51.7%. Overall,
broadband internet penetration in Russia
is higher than the world’s average (which
is 43.6% according the International
Telecommunication Union), but lower
that the average level of penetration
in developed countries (78%).27
Overall, the subscriber growth rate was
4.5%, almost half that of 2013 (7.7%). This
slowdown is largely explained by market
saturation in large and medium-sized cities;
the expansion of wireless technologies
(primarily LTE); the reduced rate of network
construction by Russia’s largest operators;
and increasing price competition. The B2B/
B2G broadband subscriber base reached
1.5 million in 2014. The market has reached
saturation point, with penetration increasing
from 65% in 2012 to 70% in 2014.28
24, 25, 26, 27, 29, 30, 32 iKS-Consulting.
28, 31 TMT Consulting.
Fixed-line broadband access
market in Russia, B2B/B2G segments30
RUB bn, Penetration %31
65.0%
51.5
2012
68.0%
55.3
2013
Fixed-line broadband access
market in Russia, B2С segment32
RUB bn, Penetration %
70.0%
42.0%
59.0
101.4
2014
The Russian broadband internet market
is highly competitive – with 65%29 of the
market volume in revenue terms controlled
by top-five players. The Moscow region’s
market is even more competitive due to
a high level of saturation. According to
iKS-Consulting, MegaFon is among the
top five operators within this segment in
the Moscow region, with a 10% market
share, in terms of subscriber base. Indeed,
NETBYNET, our wholly-owned subsidiary,
is one of the main players in the Moscow
market and the largest in terms of revenue.
Despite the high saturation of this market
(above 80%) and increasing competition,
NETBYNET’s attractive offers (such as
WiFire solutions linked to one account)
and general expansion are helping MegaFon
to increase its market share.
Looking ahead, the market growth rate
is likely to continue decreasing, mainly
due to the rapid expansion of wireless
technologies and increasing price
competition. Indeed, iKS-Consulting
predicts that by 2019 subscriber growth
will be about 1%, with the bulk of new
broadband subscriptions coming from small
and medium-sized cities, where fixed-line
networks are currently being built.
2012
47.0%
110.5
2013
51.7%
116.7
2014
Pay-TV
Russia is one of the biggest players in the
global Pay-TV market. Due to the rapid
growth of digital technologies and the
expansion of satellite operators, the Pay-TV
market structure has changed significantly
in recent years. Market growth has been
dynamic but uneven, and over the past few
years satellite television has emerged as
the absolute growth leader in this area.
The IPTV segment has developed rapidly,
despite a relatively small proportion of
total Pay-TV subscribers (12% at the end
of 2014), and cable television has now
lost its leadership position to satellite TV
due to segment stagnation. According to
iKS-Consulting, 37.7 million households in
Russia are subscribed to cable, satellite or
IPTV, with penetration above 68%, while
the total market volume amounted to
RUB 61.2 billion having demonstrated
a 12% year-on-year increase.
Currently, all six of the largest Russian
telecommunications holding companies
offer Pay-TV services, with five of these
offering bundled service packages.
However, these service bundles don’t go
beyond ‘triple play’, which traditionally
includes fixed telephony, broadband
internet access and Pay-TV. To address this
issue, in early 2015 MegaFon’s subsidiary
NETBYNET launched a mobile-inclusive
‘Quad-play’ under its WiFire offering.
Strategic report
Governance
Equipment sales
The increasing affordability of mobile
services, the need for ‘heavy’ content
(video and music), and the expansion of
data transmission continued to stimulate
demand for data-enabled sophisticated
and high-functioning devices in 2014.
The segment of NFC-smartphones (Near
Field Communication technology-enabled)
is rapidly growing. According to Svyaznoy
estimates, the total share of NFCsmartphones in total smartphone sales
amounted to 16% in unit terms and 35% in
monetary terms. With further development
of payment systems, the usage of NFC
technology and demand for NFC-enabled
smartphones are expected to grow.
Tablet market penetration, however,
reached record levels in 2014, with one
tablet for every three smartphones sold
in Russia, compared to one for every five
worldwide. According to Svyaznoy retail
chain, this trend is most likely a result of the
growing popularity of low-end models and
local ‘B-brands’. Indeed, by the end of 2014,
65% of tablets sold in Russia were B-brand
products, with three in four costing less
than RUB 10,000. Market growth is likely to
slow further in 2015, with pockets of growth
anticipated in small towns where market
maturity has not yet been reached.
USB-modems
Mobile device sales in Russia:
growth and structure35
RUB bn
41.3
67.6
27.0
242.1
185.4
137.0
49.5
2012
78.1
75.7
201336
2014
Tablets
Mobile phones
Smartphones
Mobile device sales in Russia37
Units, m
5.8
22.0
5.0
16.8
Sales of USB-modems in Russia are
decreasing, with tablets with SIM-cards
and mobile routers fast becoming the
products of choice in this area. Indeed, on
average, tablets consume three to four
times less data traffic than modems which
significantly improves network efficiency.
6.1
29.3
The growth in popularity of portable
data-enabled devices, to the detriment
of notebook sales, has impacted demand
for USB-modems. For example, USBmodem sales in the Svyaznoy retail chain
decreased by 16% in 2014 to approximately
500,000 units.
3.2
6.8
9.1
2012
2013
2014
27.5
19.3
12.7
Tablets
Mobile phones
Smartphones
USB modems
33, 34, 35 Company’s estimates based on data provided by International institute of marketing research ‘GfK Rus’ LLC.
36 Verified data.
37 GfK Rus, Company’s estimates.
According to estimates based on GfK
analytics, in 2014 the Russian mobile
and smartphone market amounted to
44.3 million devices, up from 41.3 million
in 2013, with smartphones accounting for
62% of total sales. During the year, the
average cost of a smartphone decreased
by 9%,33 while the average price of a mobile
phone declined by 26%. Overall, sales of
smartphones in Russia increased by 43%
in unit terms in 2014 compared to 2013,
and the smartphone market as a whole
amounted to RUB 242 billion34 – up 30% on
2013. The increase in sales was primarily
the result of the growing popularity of
mobile internet access and the reduced
average cost of devices, as well as the
generally positive dynamics of the mobile
phone market as a whole.
In 2014, according to estimates based
on GfK analytics, in Russia more than
9 million tablets were sold. Although this
is 34% more than in 2013, market growth
slowed down dramatically due to general
saturation and market maturity. In total,
the turnover of tablet computers amounted
to approximately RUB 75.7 billion.
Mobile phones and smartphones
Tablet PCs
Market overview
Regulatory developments
MegaFon’s market and operating
environment is continually impacted by
regulatory developments. When monitoring
the regulatory issues that are most
relevant to our business, we follow best
practice and ensure our responses are
timely, informed and effective.
SMS spam
In 2014 the Russian Government passed
a law designed to tackle the issue of SMS
spam. The new law prohibits automated
sending of SMS messages to subscribers,
as well as sending messages via numbers
which do not correspond to the Russian
numbering system, or which contravene
inter-network cooperation agreements
with foreign communications operators.
The sending of SMS messages is now
dependent upon subscribers’ consent
and the contract with the operator. Since
coming into force, the new law has led
to a significant reduction in the quantity
of SMS spam sent over the MegaFon
communication network.
Telephony services
In 2014, new regulations were passed
regarding the Rendering Telephony Services.
These regulations govern landline and
mobile communications simultaneously and
contain a number of novelties for the field.
In particular, the regulations govern the
MNP (Mobile Number Portability) procedure
concerning the subscriber numbers of
government and municipal customers.
Federal communications
Additionally, rights were established
for federal bodies to connect to the
Government’s data communications
network, which is to be administered by
one of the communications operators. This
new regulatory initiative could result in
MegaFon losing its B2G market share in the
provision of communications services to
federal customers. However, during 2014 we
retained all of our key government clients
and public procurement contracts.
Inter-operator cooperation
During the year, the Government
Communications Commission of the
Ministry of Communications discussed
amending existing regulations regarding
inter-operator cooperation.
In January 2015, the decision was made
to change these regulations on a stepby-step basis. This decision was taken at
a meeting at the Government’s Analytical
Centre attended by representatives of the
Executive Office, heads of federal executive
bodies, and heads of landline and mobile
operator companies. The first stage of this
development will involve taking measures
to determine a single price for a call service
within a constituent entity of the Russian
Federation. It will also involve simplifying
the requirements concerning traffic transfer
at relevant connection levels.
At the second stage, in around two years’
time, authorities will consider possible
methods of regulating inter-operator
cooperation among landline and mobile
communications, taking into account the
technological, financial and socio-economic
consequences of such changes.
The implementation of these government
initiatives may result in decreased call service
rates and communications services costs.
We are also aware that there are a range
of other regulatory developments facing
our industry that we need to monitor and
prepare for. For more information on how
we address these evolving challenges,
please see our Risk Management section
on pages 62-73.
Opportunities in 2015
Looking ahead to 2015, key opportunities
facing our business include:
• Technological neutrality: To help
accelerate the development of 3G and
4G in Russia, the State Commission for
Radio Frequencies (SCRF) has introduced
the principle of technology neutrality for
the 900 MHz and 1,800 MHz bands. This
principle allows operators to develop
any communications technology over
available frequency bands and will have
an impact on the telecommunications
market – particularly as the SCRF plans
to extend the principle to other frequency
ranges in 2015. These developments
are likely to increase competition for
MegaFon, although we view renewed
focus on this principle not only as a risk
but as an opportunity to provide betterquality services to our customers through
the extended frequency range.
• Joint use of radio frequencies’
spectrum: The State Duma is considering
amendments to the Telecommunications
Law concerning the possibility of joint
use of radio frequencies’ spectrum. This
initiative will provide more effective use
of radio frequency resources and help
all operators to improve the quality
of their services.
• VoLTE: In December 2014, the Ministry of
Mass Communications began to develop
regulatory measures relating to the use
of the IMS (IP Multimedia Subsystem) and
VoLTE (Voice over LTE) technologies in
the public telephone network. Transition
to IP is considered a major driver of
mobile radio telephony, and the proposed
changes could result in the creation of a
single communications network based
on IP correspondence to advanced global
standards. The changes could also lead
to a decrease in the costs of voice traffic,
an increase of ROI in the LTE network and
a convergence of services and commercial
cooperations with OTT providers.
Strategic report
Governance
Key competitors
MegaFon’s key competitors include:
• MTS: founded in 1993, the largest
wireless telecoms operator in Russia;
• VimpelCom: founded in 1992, the thirdlargest wireless telecoms operator
in Russia;
• Rostelecom and Tele2 Russia: in 2014,
Rostelecom, the state-controlled
telecoms company which provides mainly
wireline services, completed a deal to
create a joint venture with Tele2 Russia, a
private company operating in Russia since
2003. During the year, Rostelecom also
fully completed the transfer of mobile
assets to the joint venture. As a result,
the fourth-largest federal mobile market
player operating under the brand name
Tele2 was created.
Our strategic approach centres on
continuous innovation and improvement to
create competitive advantage and deliver
profitable growth. Our core focus remains
the leveraging of our infrastructure and
strong position in the mobile data market
to monetise data transmission. We are also
focused on developing new and innovative
VAS, while taking a prudent approach
to CAPEX spending and maximising
operational efficiencies.
Looking ahead, we aim to further
consolidate our leadership in 4G/LTE,
and deepen customer loyalty through
the ongoing provision of high-quality
and tailored services.
12.6%
29.8%
24.9%
2014
32.7%
MegaFon
VimpelCom
MTS
Others
Key Russian players by subscribers39
16.3%
29.0%
23.8%
2014
30.9%
MegaFon
VimpelCom
MTS
Others
38, 39 Company’s
estimates based on data provided by AC&M Consulting.
Strategy and innovation
Key Russian players by revenue38
• DATA MVNO: In 2015, the Government
plans to pass regulatory acts permitting
the use of virtual data networks when
rendering telematic and data transfer
services, as well as virtual mobile
radio telephony communications in the
TETRA network with frequencies lower
than 300-400 and 800-900 MHz. These
developments will expand opportunities
for operators providing MVNO services.
• Governmental control and supervision:
The working group of the Chamber of
Commerce is discussing principles of
the new regulation of governmental
control and supervision. The concept
of the new law is to switch to a riskoriented model of regulation, which may
significantly lower the administrative
burden on businesses, including the
telecommunications sector.
Review of operations
Services and products
One of our core commitments is to offer high-quality, convenient
services at affordable prices. Through our competitively-priced
tariffs and devices, we enable customers to access the services
and products they need at prices they can afford.
Mobile voice
In 2014, our voice communications remained
the largest segment of our business and
generated RUB 164.9 billion.1 The share of
voice revenue in total revenue declined from
57.6% in 2013 to 52.4% in 2014. This was
due to a number of factors, including:
a general trend of migration of subscribers
to bundled tariffs, higher mobile data usage,
increasing popularity of OTT content,
ongoing price competition, and our decision
to discontinue the active targeting of
seasonal guest workers in Russia.
Despite the fall in revenue, mobile voice
communication remains an in-demand
service and a part of everyday life in modern
Russia. As such, we are committed to the
ongoing development of this segment.
Furthermore, the potential for high levels of
gross margin remain strong for voice services.
In 2014, our full-year blended ARPU
amounted to RUB 321 (down 1.5% yearon-year). Our voice traffic increased by
2.2% year-on-year, but due to the faster
growth of data users in the total subscriber
base, our blended minutes of use (MOU)
decreased by 2.9% year-on-year and stood
at 334.
During the year, our primary focus was the
promotion of bundled tariffs, as well as
the ongoing unification and federalisation
of tariff plans designed to attract new
subscribers and boost voice traffic. In 2014,
we were actively promoting our bundled
tariff line ‘Vse vklyucheno’ (‘Everything
included’), which represents a package of
voice minutes, messages and mobile data
traffic to stimulate users of traditional
tariffs to switch to tariff packages.
The marketing campaigns with special
price offerings for Vse vklyucheno S for
RUB 150/month held in August-October
and Vse vklyucheno XS for RUB 99/month
held in December enabled us to increase
the share of the Vse vklyucheno bundled
tariff line in total sales and attract new
customers. We also refined our ‘Perekhodi
na 0’ (‘Switch to Zero’) tariff providing free
on-net calls within the region of residence.
We continued to develop offerings for our
corporate and government clients. We
upgraded our ‘Corporate Unlimited’ tariff
plan packs to offer higher amounts of
available voice and mobile data traffic, as
well as making incoming calls for roaming
in Europe free on the premium version of
this pack. We also expanded our convergent
service offerings for corporate clients,
which are now provided in 49 Russian
regions, and comprise services, which
facilitate the management of voice calls,
call forwarding and other communication
technologies.
Mobile data
Mobile data remains the key growth driver
for our business. In 2014, we focused on
developing our 4G and 3G network by
expanding the coverage and improving
the quality of communication, stimulating
higher mobile data usage through special
price offerings and upgrades of our data
tariff options, and promoting data-enabled
devices in our controlled retail channels.
As of the year-end, our 4G network, the
largest in Russia, comprised 18,636 base
stations, and our 4G services were available
to 51%2 of the country’s population – in
14 out of 15 large cities with a population
over one million citizens and in 72 Russian
regions. As of 31 December, 5.8 million
4G-enabled devices were registered on
the MegaFon network. During the year,
MegaFon data users generated more than
290 petabytes of 4G traffic.
According to research
conducted by TelecomDaily
in November-December 2014,
MegaFon provides the fastest
data transmission in LTE
networks in eight Russian
cities with populations over
1 million.
In February 2014, we launched 4G/LTEAdvanced – the latest standard in mobile
internet services. As of the year-end,
LTE-Advanced services were available in
three major cities. Our 4G/LTE-Advanced
network delivers data transmission speeds
of 300 MB per second, and during network
testing with Ericsson in early 2015 we
reached speeds of up to 450 MB per second.
Simultaneously, we launched sales of our
branded router MegaFon Space, which
supports LTE-Advanced speeds.
In January 2014, we started providing 4G/
LTE international roaming services. At
the year-end, we managed to open LTEroaming in 37 countries, including half of the
European countries and popular travelling
destinations. The countries in which our
customers can now access 4G/LTE roaming
account for about 60% of our internet traffic
overseas.
1Voice includes revenues from local subscribers which includes monthly fees, airtime revenues, own subscriber
roaming and connection fees; wireless interconnection revenues; roaming charges to other wireless operators
and other wireless revenues.
2Russian population as of the latest census in October 2010.
Strategic report
28.3m
Total mobile data
users, 39% of total
subscriber base
Governance
MegaFon 4G network roll-out map
Key
MegaFon 4G/LTE services availability
MegaFon 4G/LTE network built and legalised*
Cities with a population of more than 1 million people
St. Petersburg
Moscow
Nizhny
Novgorod
Perm
Yekaterinburg
Kazan
Rostov-on-Don
Samara
Volgograd
Ufa
Omsk
Chelyablinsk
Krasnoyarsk
Novosibirsk
*4 G services will be commercially launched in 2015.
Our overall data service user base
expanded, at a faster rate than the overall
subscriber base, to reach 28.3 million users
as of the year-end. The number of data
service users in Russia increased by 10%
to 27.7 million accounting for around 40%
of our overall subscriber base in Russia.
This increase was the result of numerous
initiatives aimed at stimulating higher data
usage and the switch of ‘pure’ voice users
to data, including special price offerings
for selected internet tariff options.
In 2014, we achieved a strong increase
in DSU (monthly average data services
usage per user), up 64.1% year-on-year
to 2,603 Mb/month. Our ARPDU (average
monthly revenue per data services user)
increased by 15.5% year-on-year to RUB
209. Overall, in 2014, our mobile data
revenue increased by 33.3% year-on-year
and represented 21.3% of total revenue
compared to 17.0% in 2013. This was
achieved due to the expansion of our data
user base, active marketing efforts and
attractive tariff offerings stimulating use
of our 4G services on the back of intensive
network development and expansion
of coverage, increasing popularity of
data-consuming products in Russia and
stimulation of sales of data-enabled
devices through controlled retail channels.
As of the end of 2014, the share of dataenabled devices on the MegaFon network
increased to 45.6% compared to 37.5%
a year earlier. For more information on
the promotion and sales of data-enabled
devices, see page 36.
Services and products continued
An Olympic first with
our 4G network
The 2014 Sochi Winter Olympic Games
was the first ever Winter Olympics to
make 4G speeds available. MegaFon
provided continuous communication
via its 4G/3G/2G networks and
high-speed internet for participants
and guests, having developed the
necessary infrastructure from scratch
and constructed more than 950 base
stations. The density of base stations
in the 2 square kilometre Olympic
park was the highest in the world.
During the Games, we tested our LTEAdvanced network with a speed of up
to 300 Mbps. Participants and guests
of the Sochi Olympic and Paralympic
Games generated 660 terabytes of
data traffic.
DSU3
Mb/month
2,603
1,586
1,068
2012
2013
2014
MegaFon branded devices sold4
4.5%
4%
0.5%
3%
19%
16%
2%
2014
57%
2013
19%
75%
Feature phones
Smartphones
Mobile devices
The sale of our branded (customised)
affordable data-enabled devices is one of
the key elements of our marketing efforts
to promote higher data usage among
customers. Through our diversified branded
devices portfolio, including five models of
branded smartphones and three models
of branded tablets, we encourage our ‘pure’
voice users to switch to mobile internet
usage, and our advanced data users to
migrate to our high-speed networks.
MegaFon sells the following types of
branded mobile devices: smartphones,
tablets, WiFi routers and modems.
During the year, sales of branded
(customised) devices in all retail channels
increased 5.7% year-on-year to 3.4 million
devices, with the share of sales made via
MegaFon Retail up from 51% in 2013 to 56%
in 2014. Sales of smartphones increased
26% to 650,600 units, while sales of tablets
grew almost tenfold to 640,500 units.
Tablets
Modems
Routers
We concentrated our efforts on expanding
our offering of portable data-enabled
devices. In August 2014, we launched our
new budget branded device – the MegaFon
Login 3 tablet. MegaFon Login 3 runs on
Android 4.4.4; it is faster, smarter and more
productive than its predecessors, and has a
larger memory capacity and an IPS display
which provides a better viewing angle and
image quality. Indeed, following a hugely
successful media and launch campaign, it
has fast become one of our most popular
own-branded products, with total sales
exceeding 330,000 units over a five-month
period. In 2014, we also launched a
customised smartphone under the Alcatel
brand using the FireFox operational system.
In 2014, sales of branded (customised)
smartphones and tablets, as part of total
sales of branded (customised) data-enabled
devices in all retail channels, increased from
19% in 2013 to 38% in 2014.
With the roll-out of our 4G network, in 2014
we also undertook efforts to promote sales
of branded 4G-enabled devices. As a result,
the share of 4G devices as part of the total
number of customised data-enabled devices
sold in controlled retail channels increased
from 24.1% in 2013 to 44.0% in 2014.5
3Total number of megabytes transferred during a given period divided by average number of data subscribers
during the period, divided by number of months in the period.
4Sales of branded devices via controlled retail channels, including MegaFon Retail, Euroset and franchised stores.
5
Verified data.
B2B/B2G mobile
data revenue growth
in 2014 year-on-year
Strategic report
+56.4%
DREAM
named Best European
Project at the Global
Carrier Awards 2014
Governance
B2X telecommunication services
MegaFon offers a range of mobile and
fixed-line B2X telecommunication services,
encompassing the B2B, B2G and B2O
market segments.
Due to our continuous effort to improve our
customer service and offerings, in 2014 our
B2B and B2G segment delivered a strong
performance: wireline revenue increased by
18.5% year-on-year, mobile revenue grew
by 12.7% year-on-year and mobile data
revenue increased by 56.4% year-on-year.
Online, we created a brand new website for
corporate clients, b2b.megafon.ru, which
includes all the necessary information
on offerings, customer service and tariff
plan choices, while in our branches we
introduced an upgraded personal account/
client area for corporate clients.
Also in 2014, we continued to develop a
range of new products and initiatives. We
upgraded our ‘Corporate Unlimited’ tariff plan
packs to offer a higher amount of available
voice and mobile data traffic, as well as
making incoming calls for roaming in Europe
free on the premium version of this pack.
We focused on developing our M2M
Monitoring (machine-to-machine) service,
which is primarily for corporate subscribers.
This service allows our clients to control
and monitor the movements, location
and condition of devices and equipment
via a SIM-card transmitting mobile data.
It is particularly useful for companies
engaged in vehicle tracking and passenger
transportation, logistics, energy and security.
In 2014, MegaLabs designed a special
M2M Monitoring platform, an integrated
platform for creating telemetric systems for
monitoring and collecting data and remote
management. At the end of 2014, we had
more than 1.2 million M2M users (SIM-cards)
(a more than 1.5-fold increase compared to a
year ago), which, according to our estimates,
constituted c.20% of the Russian M2M
market share. For more information on
M2M Monitoring, see page 45.
The development of our content delivery
network (CDN) was another key B2B
highlight during the year. MegaFon offers
its clients customised CDN solutions to
meet different content-related needs,
such as guaranteeing delivery of content
to remote regions, publishing streamlining
video files during online broadcasts,
ensuring accessibility during peak hours,
and providing high-speed transmission, etc.
We also offer a network with a free capacity
of more than 200 Gbps to provide stable
operations under extreme loads.
In 2014, our B2X customer base continued
to expand. At year end, the number of
persons/devices using our services reached
almost 6.9 million. In the B2B and B2G
segments we managed to acquire several
large and medium-sized corporate clients
and government bodies, some of whom
became our clients via the MNP (mobile
number portability) process.
We launched a new service for corporate
clients, called ‘Internet for Business’. This
service allows employers to control their
staff’s use of mobile web content and
restricts access to non-corporate webbased resources. The blocking of resources
(which is pre-set by the supplier) prevents
corporate mobile devices from becoming
infected, helps to regulate employee social
media activities, and protects users from
data leakages.
Across our B2X portfolio, we provide a wide
range of services and offer flexible tariffs
to organisations of varying size and need,
with a focus on connecting employees
and managing corporate SIM-cards and
devices. As part of our commitment in this
area, we strive to improve our B2B, B2G
and B2O service quality and deliver flexible
solutions tailored precisely to customer
requirements.
During 2014 we focused on increasing the
quality of service for all our clients. For
SME B2B clients (small-to-medium size
enterprises), we improved the availability of
our services by increasing our representative
offices in Russia by almost 100 stores,
bringing the total to more than 2,000 at
the end of 2014. We continued to expand
our network of dedicated call centres and
managed to reduce maximum customer
standby time to 30 seconds, which is the
best indicator in the sector. We also created
a 24/7 Federal Centre for Corporate Client
Services which is designed to deal with
written communications and queries within
24 hours, and we implemented a new
system of employee training and testing
to help enhance client service quality.
Services and products continued
Our CDN is built on widely-distributed
server infrastructure designed to ensure
uninterrupted delivery of user content
to remote regions at exceptionally high
speeds. With the CDN, users benefit from
a server response time of 20 milliseconds
or less, whereas conventional servers can
often take up to 200 milliseconds.
Our CDN solutions are essential to the
successful delivery of ‘heavy content’ (music,
videos etc.), and our clients in this area include
large Russian content providers such as
Wargaming and VGTRK, software suppliers,
online movie theatres, TV channels, online
stores and games developers.
In 2014, we also continued to develop
our DREAM project. The DREAM (Diverse
Route for European and Asian Markets)
infrastructure enables us to optimise
connectivity to Europe, and by the end of
2014 we had six DREAM clients, including
major international operators such as China
Telecom, China Unicom, Deutsche Telecom
and Interoute. DREAM was also named
Best European Project at the Global Carrier
Awards 2014. For more information on
DREAM, see page 41.
During the year, we continued to develop
fixed mobile convergence (FMC), our
package of convergence services. These
allow our corporate and government clients
all over Russia to use the same type of
services in networks of different types, as
FMC removes differences between fixed
and mobile networks. Our offerings to
corporate customers include services such
as hotlines, office zones, numbers starting
with 8-800, short dialing and others.
Additionally, we attracted a range of new
large-sized corporate and government
clients, including Transaero, QIWI and
RBC; the federal state unitary enterprise
Rosmorport, the Pension Fund of the
Russian Federation, EMERCOM of Russia,
the Russian Federal Treasury and the
Ministry of Internal Affairs, among others.
In 2014, MegaFon was named best
communications services provider in the
B2G segment at the All-Russian Forum &
Exhibition, ‘GOSZAKAZ-2014’.
Fixed-line communications
for the mass market
Our service offering to customers goes
beyond mobile to encompass fixed-line
broadband internet, Pay-TV and fixed-line
telephone services. In 2014, we focused on
achieving organic growth in those areas
where we already operate, and integrating
the assets we acquired in 2013 and
throughout the year.
All our broadband fixed-line assets
are integrated under the umbrella of
NETBYNET, a Russian broadband telecom
operator and wholly-owned subsidiary
acquired in 2011. In 2014, NETBYNET
continued to expand its presence in the key
markets and enter new territories through
both organic growth and acquisitions.
During the year, we acquired several local
fixed-line and Pay-TV assets in the Moscow
region and the North-West federal region.
Moreover, we continued to focus on the
consolidation of MegaFon’s broadband
assets on a single ‘platform’, and, therefore,
transferred certain companies, previously
owned by MegaFon, to NETBYNET.
NETBYNET also manages the operations
of certain MegaFon’s fixed-line subsidiaries
in North-West region. These assets
strengthen our position in the market
and enable us to provide better services
to our subscribers. Unification of internal
procedures and processes enables us to
implement the process of integration of
newly acquired assets within three months
on average.
In 2014, we focused on network
development, improvement of service
quality and modernisation of integrated
assets. During the year, we expanded
the channel capacity in most regions of
presence, upgraded a significant part
of the telecommunications equipment
and developed the network using FTTB
technology. In 2014, we launched a new
call centre in Cheboksary, which enables
NETBYNET to maintain high standards of
service quality with a growing subscriber
base, and introduced our new WiFire product.
WiFire is a dynamic package of services,
including wireless digital TV and WiFi
for households. Due to a flexible tariff
model, our customers are not limited to
standardised offerings, and can choose
the most suitable mix of services available
at different prices. All services are
available under one account. In late 2013,
NETBYNET received an MVNO licence
to provide both fixed-line and mobile
internet services under one account (Fixed
Mobile Convergence). Under this licence,
NETBYNET is permitted to use MegaFon’s
network infrastructure, which in early 2015
enabled us to launch a new service under
the WiFire offering: a high-speed LTE
mobile internet called WiFire Mobile.
As a result, NETBYNET clients can now get
a triple-play offering and choose from four
available tariff plans with different mobile
data speeds.
During the year, through organic growth,
integration and acquisitions, our fixed-line
communications coverage significantly
increased and reached approximately
3.6 million households in total by the end
of the year. The fixed-line subscriber base
exceeds 940,000 B2C customers with
the total number of Pay-TV B2C users
increasing to 156,500 – up 36% – and the
number of broadband customers increasing
to almost 660,300 users. During the year,
we saw the increase of the total amount
of fixed-line data traffic per user, which
was linked to higher consumption of OTT
content: video, audio files, and online games.
Looking ahead, our fixed-line strategy
for 2015 will involve the promotion of
the WiFire product line, the expansion
of our presence in other regions and the
completion of our programme of fixed-line
asset integration.
Strategic report
37
Our 4G/LTE roaming is
available in 37 countries
Governance
Roaming
MegaFon is one of the world’s top five
providers of roaming availability, as our
roaming services are available across
Russia and in more than 220 countries
worldwide.
A major development in our roaming
programme during 2014 was the launch of
4G/LTE international roaming in January.
Offering high speeds of mobile data
transmission even when overseas, our 4G/
LTE options are designed to be convenient
and cost-effective. Prices per 1 Mb of traffic
are the same as on our 3G networks, enabling
customers to access high-speed internet
abroad without incurring huge expenses.
During 2014, we managed to open 4G/LTE
roaming in 37 countries, including half of the
countries in Europe and popular travelling
destinations. Starting with launches in one
or two countries a month at the beginning
of the year, we were adding a new country
every week by late 2014. As of the year-end
we confirmed our position as one of the
world’s leading telecom operators in terms
of LTE-roaming coverage. The countries in
which our customers can now access 4G/
LTE roaming account for approximately
60% of our internet traffic overseas.
During the Olympics the fastest mobile internet
was available not only to our subscribers but also
to subscribers of other telecom operators through
inter-network roaming. The service was used by
people from 70 different countries.
Also in January, we launched our ‘Vsya
Rossiya’ (‘All Russia’) tariff option on a
national level for those who travel within
Russia but outside their region of residence.
Under the tariff, the first subscription is
free, as are all incoming calls from any
number. Additionally, outgoing calls and
SMS to Russia-registered numbers are
provided at an attractive price.
Due to the macroeconomic situation in
Russia and the depreciation of the ruble,
in 2014 we did have to increase all of
our roaming tariffs, as settlements with
foreign operators/counteragents are made
in foreign currencies. We also balanced
our roaming tariffs in line with the market
average. However, we still offer the lowest
prices in European roaming among our
federal peers.
4G roaming
In 2014, we continued to develop new
roaming offers to ensure our customers
receive high-quality communication and
internet services – and are able to control
their expenses – when they are on the
move. In January, we launched our ‘Ves
mir’ (‘Around the World’) tariff option on a
national level for those who travel outside
Russia. At a fixed daily subscription fee,
this option offers 30 free incoming minutes
per day, regardless of whether they are
used in one go or separately, with the major
benefit of providing genuine transparency
in roaming costs. This option enables us to
stimulate usage of other roaming services
and tariff options.
To help customers better control their
mobile data expenses when travelling and
protect them against roaming ‘bill shock’,
we launched our ‘Internet za granitsey’
(‘Internet abroad’) tariff in June. A unique
tariff option within the Russian market,
‘Internet za granitsey’ allows subscribers
to access the internet in any country
at a manageable expense. There is no
subscription fee, and the cost of mobile
data usage is fixed depending on the
country of location and the amount of
traffic chosen (10 Mb or 30 Mb per day).
The client account is charged only if a
subscriber uses mobile data on a particular
day, and mobile internet access is blocked
if the daily traffic limit is reached.
Infrastructure
4G/LTE
We take great pride in the fact that we
were the first of the ‘Big three’ operators to
launch 4G mobile communication services
in Russia. Our 4G/LTE network was first
deployed in Novosibirsk in 2012, and since
then we have worked hard to expand its
reach and quality.
During 2014, we extended our 4G network
coverage to an additional 23 regions.
At year-end, MegaFon’s 4G services were
available to 51% of the Russian population.
This includes 14 out of 15 cities with a
population of more than 1 million (up from
11 in 2013) and a total of 72 federal regions.
By the end of December 2014, we had
also completed the construction of base
stations in two more regions; 4G services
are expected to be launched in these
regions during 2015. As of the end of 2014,
the number of 4G base stations had grown
to 18,636 units (up 84% year-on-year).
In February 2014, we commercially
launched the LTE-Advanced standard,
offering super high-speed internet
transmission to our customers. We based
the roll out of LTE-Advanced on our existing
base station infrastructure. During the year,
we launched LTE-Advanced in three large
cities: Moscow and St. Petersburg with
speeds up to 300 Mbit per second (Mbps),
and in Chelyabinsk with speeds up to 150
Mbps. We plan to extend the geographical
reach of LTE-Advanced in 2015.
MegaFon’s 4G/LTE roll-out in Russia
Number of regions
68
58
60
1Q 2014
2Q 2014
3Q 2014
72
4Q 2014
VoLTE technology to support advanced
voice services
In 2014, we tested our new VoLTE (Voice over Long Term Evolution) technology
in Moscow and St. Petersburg using equipment made by the Chinese company
Huawei. The VoLTE technology enables customers to make voice calls without
leaving the 4G network, provides connection set-up speeds of less than one second,
allows ‘seamless’ connectivity across 4G, 3G and 2G and enables high-quality voice
transmission. VoLTE will be commercially launched across all regions of our 4G/LTE
presence as soon as all necessary approvals are received.
3G
Since becoming the first Russian mobile
operator to launch a 3G network in 2008,
we have maintained our position as a 3G
market leader in terms of base station
numbers and network coverage.
In 2014, 3G remained the technology of
choice for data transmission among Russian
mobile customers. During the year, our 3G
strategy was to retain our strong position
in the regions where we have historically
performed well and to improve network
quality and capacity in other key areas.
Overall, our aim was to develop our network
and retain our average rate of 3G data
transmission speed.
During the year we continued to improve
our 3G capacity and modernise our network
infrastructure. In certain regions, we
introduced DC-HSPA technology which
allows subscribers to increase their data
transfer rate. We also optimised network
signalling and maintenance/administrative
traffic, leading to increased opportunities for
data transfer. Overall, in 2014 we extended
our total number of 3G base stations to
38,151 units (up 15% year-on-year).
In addition, we worked to eliminate local
3G network congestion and reduce cut-off
calls, while continuing to improve network
quality in office buildings and at corporate
clients’ premises. By the end of the year we
had achieved progress against key quality
indicators across all Russian operations,
reaching an average 3G call set-up success
rate of 99.52%, with drop-call rate down
to 0.52%.
Number of MegaFon base stations
Units
Growth
19.5%
18,636
10,106
33,298
38,151
42,929
46,341
2013
2014
2G
3G
4G
Strategic report
2G
Developing our backbone and backhaul
networks is part of our commitment to
meeting the increasing needs of customers.
Increasing capacity in line with traffic
forecasts and developing a greater
operational presence remain our key areas
of focus here. During 2014, we increased
the length of our backbone fibre-optic
communications line (FOCL) by more than
8,300 km (a 7.4% increase).
A major highlight in our backbone
development was the launch of the second
stage of MegaHighway, a high-speed,
100G DWDM-based network designed to
facilitate the movement of international
traffic between Europe and Asia. Our work
in 2014 enabled us to protect DREAM
client traffic on the Russian part of the
MegaHighway route, thereby reducing the
cost of arranging channels in this area.
During the year, we increased to 67%
the share of base stations in cities
interconnected through fibre-optic lines. We
also grew by 8% the share of communities
connected to the backbone by FOCL to
58%. The key trend in developing our
backbone network in 2014 was the usage
of high-speed 100G interfaces on the
IP/MPLS network, as well as 100G coherent
transponders on the DWDM network.
Due to the development of our own
backbone networks in Russia and abroad
in 2014, the total capacity of our rented
backbone channels did not increase during
the year. However, the consumption
of traffic by backbone network clients
increased by 60%.
During the year, we also continued to
participate in national projects designed
to extend 2G mobile coverage to remote
regions of the country. Working to targets
set by the Ministry of Communications, we
helped to expand mobile coverage across
federal transportation routes and took part
in a range of initiatives to help enhance
service quality. Overall, in 2014 we extended
the number of our 2G base stations to
46,341 units (up 8% year-on-year).
Backbone and backhaul networks
DREAM route
Key
DREAM route
Transit trunk line (via TransBaltic Gateway)
Transit trunk line (via Belarus)
MegaFon Backbone
Cross-border links
St. Petersburg
Moscow
Nizhny Novgorod
//
Vilnius
//
Berlin
Tula
//
Minsk
Voronezh
Orel
//
Frankfurtam-Main
Bratislava
Belgorod Saratov
We continued to develop our 2G network
with the primary aim of maintaining our
voice traffic levels. This development was
carried out on a targeted basis to address
local issues, and on a larger scale to
upgrade our existing 2G network to improve
the quality of voice traffic. By the end of the
year we achieved a 2G call set-up success
rate of 97.13%, with a drop-call rate down
to 0.82%. This progress is particularly
important in preparation for the re-farming
of the radio frequency spectrum.
Governance
In our development of network infrastructure, we want to
provide customers with the quickest and most convenient
means of communication. Our strategy is focused on
achieving the highest penetration of 4G services, expanding
our 4G/LTE network quality and coverage, and continuing
to improve our existing 3G and backbone infrastructure.
Samara
//
Uralsk
Aktobe
Vienna
Shymkent
Almaty
//
Khorgos
Infrastructure continued
MegaFon’s backbone infrastructure
Growth
112,783
7.4%
121,102
67%
62%
2013
Backbone
FOCL, km
2014
Share of BS
interconnected
via FOCL, %
Increasing network
capacity through
FOCL extension
Investing in the construction of our
own backbone FOCL is a key part of
our infrastructure strategy. Through
the extension of our FOCL, we aim to
increase our mobile network capacity
and improve data speeds across 4G,
3G and fixed broadband technologies
– particularly in the Far Eastern
Region and Eastern Siberia. In 2014 we
expanded the regional FOCL in the Far
East by 40%; new lines were launched
in the Trans-Baikal Region, Sakhalin
area, Irkutsk Region, Khabarovsk
area and other eastern regions.
At the end of year, the total length
of FOCL in the Far Eastern branch
reached 15,400 km; and with more
than 60% of MegaFon’s urban base
stations linked to the FOCL in the
East, this expansion programme will
lay the foundations for further
4G/LTE development in the more
remote regions of Russia.
Network quality
In 2014, we implemented a set of measures
to improve communications quality. We
delivered a major upgrade to our packetbased traffic billing system; we also
carried out the planned extension of the
radio subsystem and both domains of the
mobile network commutation subsystem.
Meanwhile, technology improvements
were made to our radio access networks
to optimise their parameters. We also
tested and deployed the SON system,
which enables automatic adjustments to
logical and physical parameters of the radio
network without any manual intervention.
Looking ahead, we are planning further
technological improvements to our radio
network, and a major upgrade of our traffic
network to increase the throughput of data
transmission channels.
Global Network Operational Centre
In recent years we have been developing
our new Global Network Operational Centre
(GNOC), which is enabling us to improve
network quality by centralising those
operational and maintenance activities
that can be managed remotely. Previously,
our network operation was managed by
eight regional hubs and several centres
of competence, including our IP/MPLS
(Multi-Protocol Label Switching) backbone,
our national and long-distance telephone
network, and national and international
roaming. With the launch of the GNOC, we
have integrated these hubs into a single
network operation centre located across
two sites – St. Petersburg (NOC West) and
Samara (NOC East). In 2014, we came close
to completing the integration of our regional
branches in the GNOC. By year-end, the
GNOC included almost 200,000 network
objects and elements under
its management.
The two NOC sites share the overall
workload and can back up each other in
the event of catastrophic failure. The GNOC
uses umbrella OSSs (Operation Support
Systems) to ensure efficient 24/7 network
quality control and a timely reaction to
Leading the way in
the Moscow region
The Moscow region continues to be
a key area of focus for our network
development. MegaFon currently
has the most extensive network in
Moscow and the Moscow region with
some 20,000 base stations (20% of
the total) including more than 4,500
4G base stations (25% of the total).
In the region, we have built a network
allowing ‘seamless’ connectivity for
our subscribers across 4G, 3G and 2G.
Approximately 60% of our subscribers
use mobile internet. In 2014, the
amount of data transmitted by
MegaFon subscribers increased
2.4-fold.
Each year we strive to improve
coverage in Moscow and the Moscow
region, increasing service reliability
and quality. We enhanced our ability
to control network quality through our
Federal Centre of Network Monitoring,
mobile measuring units and
information received from subscribers
(via call centres, our hotline, email
and social networks). This resulted
in improvement across several key
indicators: as of December 2014, for
example, the call set-up success rate
increased to 99.24% for 3G and the
drop-call rate fell to 0.43% for 3G.
any communications issues. In 2014, we
deployed the new Fault Management
System in cooperation with IBM and the
new Network Resource Inventory System,
provided by NEC. We also completed
the centralisation of our Trouble Ticket
System, which is based on Hewlett Packard
software. In late 2014, the GNOC, as a highlevel technology environment, processed on
average more than 12 million notifications
and messages and solved around 2,500
defects a day.
Strategic report
+84%
Year-on-year growth
in the number of
4G base stations
Governance
Information technology
The development of our IT capabilities
is vital to helping us address a large
number of business issues and increase
our operational efficiency. During 2014, we
launched a range of initiatives designed to
enhance our IT systems and infrastructure.
In order to improve the efficiencies of our
business processes and reduce operating
costs, we are in the process of deploying a
centralised system for the management of
employee access to IT resources from all
branches. This new system includes access
control mechanisms, interfaces, reporting
and support services. The aim of the project
is to bring together all local access control
initiatives into a single federal system.
During the year, the first stage of project
implementation resulted in the reduction
of internal access systems from nine to
one, while annual technical support costs
decreased eightfold. We plan to finalise
the process in 2015-2016.
Other IT-related programmes rolled out
in 2014 included the implementation
of a centralised system for controlling
network and IT incidents, faults and
planned maintenance works as well
as monitoring SLAs.
Building Olympic infrastructure
For the 2014 Sochi Winter Olympic Games, MegaFon created the bespoke Olympic
Park telecommunications infrastructure from scratch. As a result of our work and
investment, the Olympic Park (measuring 2 square kilometres) boasted the highest
density of base stations anywhere in the world.
In preparation for the Games, MegaFon installed over 220 km of fibre-optic cable
and constructed more than 950 base stations, including over 270 4G stations, in Sochi.
As a result, the Sochi Winter Olympics were officially the ‘most mobile’ Olympic
Games in history.
To help us protect important internal and
corporate information, we are developing
a unified system, Mobile Device Manager,
to help manage, monitor and secure the
mobile devices (corporate and personal)
of certain employees who have access
to confidential data. Also in 2014, we
completed the Company-wide launch of our
virtual desktop infrastructure (VDI) service,
which allows all employees remote access
to a virtual workplace via a two-stage
authentication process. In 2014, over 4,000
employees used the VDI service.
For example, we implemented an
automated task administration system
for B2B sales, creating a unified sales
process linked to HP Service Manager,
SFA Management System and MegaGIS.
We also implemented a unified accounting
report library based on our Corporate Data
Warehouse, and we plan to start generating
accounting reports for Head Office and
branches from one centralised source
in 2015.
Innovative products and VAS
To ensure we maintain our leadership
position in this area, in 2011 we founded
MegaLabs – our wholly-owned subsidiary
that focuses exclusively on researching
and developing innovative Value-added
services (VAS) for our subscribers.
Today, MegaLabs employs 206 technical
experts and professionals working in
project management, product marketing,
application and system development,
customer research and industry
collaboration.
In 2014 we changed the direction of
MegaLabs to concentrate development
on a narrower set of products that will
help us achieve our strategic goals in the
market. The MegaLabs product range now
has seven key offerings across business
and consumer-facing segments. We also
transferred traditional VAS products to
MegaFon headquarters, restructured
our personnel where necessary and
centralised functions, such as marketing
and advertising, at head office level; these
moves allowed us to reduce our operating
costs considerably.
In 2014, we continued to deliver solutions
designed to stimulate data traffic growth
and to enable us to further monetise
data, enhance profitability and increase
customer loyalty. Throughout the year we
launched numerous innovative products
and services, and developed our capabilities
in M2M, cloud, mobile advertising and
TV services, which have strengthened
our position as one of the leading Russian
telecommunications companies. Indeed,
the total number of downloads of MegaFon
applications doubled and reached 4 million.
Video services
In 2014 we streamlined our Content and
Media products into a new platform,
Video Services, which focuses on two key
products – SMOTRI+ and MegaFon TV.
During the year, the users of these two
products, including both MegaFon and
non-MegaFon subscribers, generated
4.3 petabytes of traffic.
Following the success of SMOTRI+, a mobile
application that broadcasted live games
from the Sochi Winter Olympics, in 2014
we expanded this platform for additional
sporting events, including the Brazilian
World Cup and the World Hockey Cup. We
offered the free app to all MegaFon and
non-MegaFon subscribers allowing them to
enjoy live matches, webcasts, replays and
statistical information. In 2014, SMOTRI+
received 1.5 million installations, while
during the Olympics it gained over 70,000
simultaneous viewers. The success of
SMOTRI+ was confirmed by the Apple Store,
which named it one of the best apps of 2014.
An important development during the year
was the expansion of our MegaFon TV
application, which enables users to watch
feature films, shows and more than 100
Russian and foreign channels on demand
on their smartphone, tablet, computer
or SMART TV. In 2014, we extended this
service to non-MegaFon subscribers
and launched complimentary products,
including an LG SMART TV, MegaFon TV 2.0
beta and an online video recording service.
This led to approximately 30,000 active
MegaFon TV users.
Strategic report
Our success in Meeting the Challenge is closely linked to our leadership
in innovation. Our innovative, value-added services (VAS) and products
are designed to enhance our subscribers’ lives and experiences, providing
unrivalled levels of speed and access to transform everyday interactions,
activities and consumption of data and information.
Governance
M2M and geo-services
MegaFon’s geo-services enable subscribers
to locate family members, employees and
machines, and offers secure SIM-cards and
telematics monitoring and management,
as well as data gathering systems.
For our B2B customers, in September 2014
we launched our M2M Monitoring platform,
which was unveiled in six branches. This
offering is for major integrators who
manage a pool of SIM-cards and need to
carry out the remote control and online
management of M2M equipment. M2M
Monitoring enables them to transmit data
between devices and gather information
on their location and condition. It can be
adapted to any industry and provides
flexible functionality and a user-friendly
interface to meet the SIM-card management
needs of this business segment.
Another B2C product is the SMS-Socket,
which allows users to remotely control
electric systems within their house through
a GSM-equipped device. For example, air
conditioning, heating, computer power, hot
water, lights and plant watering systems
can be managed remotely, either through
an automatic schedule or via SMS.
Big Data
Big Data is a technology enabling users to
accumulate, process and analyse extralarge data sets to derive new knowledge
and improve the efficiency of operations.
It represents a very promising growth area
for telecommunication companies, as it
enables them to improve their investment
efficiency through better-developing their
infrastructure and retail activities, and
to develop new value-added products for
individual and corporate customers.
M2M services enable MegaFon to monetise
its data transmission infrastructure and
expand its services to subscribers. At
the end of 2014, MegaFon had more than
1.2 million M2M users (SIM-cards), which,
according to our estimates, constituted
an approximate 20% share of the Russian
M2M market in terms of subscriptions to
M2M services.
Our Employee Monitoring service also
continued to prove popular in 2014. A large
number of clients using this service are taxi
organisations who benefit from high-speed
mobile internet on board their vehicles in
order to control employees’ movements.
Through our service, clients can identify
employees who are the closest to a certain
destination and highlight route deviations.
They can also pinpoint employees’ locations
through interactive maps, customise
their location schedules and receive
automatically-generated reports via email.
In 2014 the number of customers using
this service doubled. In 2014 we launched
a new service combining both employee
and vehicle monitoring. Furthermore,
technological enhancements scheduled
for implementation in 2015 will enable us
to provide unparalleled M2M capabilities
for businesses.
MegaFon also offers B2C geolocation
services, including Radar and MegaFon
Navigation. Our Radar programme enables
subscribers to locate both their own
and any other SIM-card, while MegaFon
Navigation provides the ability to determine
the location of people (family, colleagues,
friends). Currently, the subscriber base for
these two geolocation services exceeds
one million people.
In recent years MegaFon has been closely
scrutinising developments in the M2M
(machine-to-machine) and geo-services
markets, while implementing individual
solutions for existing corporate and
individual customers. This has enabled
us to develop the requisite competencies
to launch our out-of-the-box products in
monitoring: through our B2B solutions
in Car Fleet Monitoring and Employee
Monitoring; our B2C solutions in Radar and
Navigator services; integrated scalable
solutions through our M2M Monitoring
platform; and our ‘smart house’ product
SMS-Socket.
Another key M2M offering is our Car Fleet
Monitoring service, which enables corporate
clients to monitor and track their vehicle
fleets in real time. Through a combination
of software and hardware, installed in
vehicles and company control rooms,
clients can monitor mileage, idle time and
fuel consumption. Through this service our
customers can save up to 30% of their costs
due to reduced vehicle misuse. This solution
has the added benefit that customers can
connect to the service without having to
replace their existing SIM-cards. In 2014
we expanded the equipment range on our
Car Fleet Monitoring service and reduced
subscription costs by 20%.
Innovative products and VAS continued
Having set up a Big Data unit in 2011,
MegaFon continues to expand utilisation
of Big Data to improve business efficiencies.
This strategy spans several years and
involves using Big Data to: assess regional
demand for new base stations; improve
network operational efficiencies through
online identification of bottlenecks and
reduction of fault-correction time; improve
the billing system through preventing
accidents and promptly processing
customer requirements and claims; and
carry out mobile fraud counteraction.
Big Data, via in-depth analysis of subscriber
needs and behaviour patterns, enables
us to develop personalised products and
services, and communicate with subscribers
at the right time and in the right place.
In 2014, the overall contribution from the
implementation of Big Data services to
MegaFon’s B2C mobile revenue exceeded
one percentage point.
In 2013, MegaFon was the first Russian
mobile operator to present geospatial
analytics for urban planning and retail
location optimisation. This service, which
is the only service of its kind in Russia,
applies Big Data analysis to effectively
plan urban environments and can be used
by businesses to address their commercial
needs. The data is anonymous and
aggregated, with no involvement from
external organisations, while the service is
legally compliant, as analysing equipment
loads and extrapolating anonymous
data doesn’t require subscriber consent.
MegaFon’s large market share enables
us to ensure that data sets used in the
analysis are sufficient to create highly
accurate representative models. Unlike
conventional research techniques that are
time and cost-heavy, MegaFon’s geospatial
analytics provide the same insight as
traditional research methods, at a lower
cost and with greater efficiency.
MegaFon is developing Big Data as a new
high-margin and high added-value business
for corporate and government customers.
The Company’s large-scale access to data
provides unprecedented insight into the
population’s structure and how people
interact with urban infrastructures. This
is of particular benefit to businesses
and urban planners, providing faster and
more efficient analysis while reducing
costs. Indeed, MegaFon became the first
Russian mobile operator to sign a contract
with the Government of Moscow and the
Institute of Moscow City Master Plan, to
provide structural population and urban
infrastructure analysis. Reports are
provided monthly and enhance the efficacy
of transport and construction development.
We are currently initiating partnerships
with other cities, offering them services
to evaluate their own infrastructure use.
In addition, we are expanding our range of
Big Data offerings by developing unique
products for government, retail, transport,
architecture, financial services and
infrastructure development companies.
Cloud and IT solutions
In 2014 we launched MegaDisk, our secure
and easy cloud solution which now allows
unlimited storage and data syncing on PC,
Mac, Android and iOS smartphones. This
service is free to all MegaFon clients and
enables users to combine and access files
across multiple internet-connected devices.
With the launch of MegaDisk, which was
initially piloted in 2013, MegaFon became
the first mobile operator to offer a service
of this kind in Russia. In 2014 MegaDisk was
launched in all branches which considerably
increased the volume of users to 14,150.
Strategic report
Governance
Mobile advertising
We continued to expand our Terminal
Payment Network, a federal network of
terminals across our owned-and-operated
retail network. Within this, self-service
terminals enable customers to top-up their
accounts and pay for a number of services
with 0% commission. As of the end of 2014,
the total number of terminals installed
reached 848 units. In 2014, MegaFon
was the first of the official agents of the
Moscow Metro to offer the opportunity
to top up Troika cards (e-wallets) in the
terminals.
Convergent services
MegaFon’s mobile financial services and
products enable our subscribers to conduct
a wide range of personal banking and
accounting tasks through their mobile
phones and tablets. In 2014, the average
monthly number of users of our Mobile
Payment service grew by 63% year-onyear, reaching three million people. Total
revenue from our mobile financial services
(including MegaFon Money product, www.
oplata.megafon.ru, www.money.megafon.
ru, mobile payments via USSD commands
and others), which enable users to make
easy and secure mobile transfers, reached
almost RUB 1 billion.
Throughout the year our efforts generated
strong results, with total payment volumes
exceeding RUB 12 billion, excluding
payments via USSD commands (short SMS).
Our mobile advertising division, created
to develop innovative mobile advertising
products and services, continued to perform
well in 2014. Our Mobile Notification, a B2B
service disseminating information on behalf
of companies, enables businesses to reach
their target audiences quickly and directly
to inform them about products, services
and special offers. This service is very
popular among our corporate clients in the
banking sector, who use it to inform their
customers about completed transactions.
In 2014, our total revenue from mobile
advertising and Mobile Notification reached
almost RUB 2.6 billion.
Our convergent services, primarily focused
on B2B clients, are provided in 49 Russian
regions and comprise services which
facilitate the management of voice calls,
call forwarding and other communication
technologies. Made from any network and
terminated to another type of traffic, such
as a fixed mobile number or IP connection,
our key voice services include: short dialling,
hotlines, office space, quick dial codes, call
numbers starting with ‘8-800’, MultiFon
and mobile automatic telephone stations.
Use of MegaFon’s convergent services
grew significantly in 2014: year-on-year, the
volume of users increased by 18%, while the
number of corporate clients grew by 25%.
In 2014, our revenue from convergent services
provided to corporate clients increased by
35%, exceeding RUB 350 million.
In addition, we developed a new interface
and concept of the B2B Online Cloud, a
single access interface for all business-tobusiness products.
Financial services
In 2014 we continued to focus on creating
agile products and software, an approach
which aims to maximise customer
satisfaction by enabling later changes to
be incorporated within the development
process. During the year, we continued
to develop products for MegaFon’s B2B
clients: Online Conferences, our service
for video conferences and seminars,
was launched in the Moscow and Volga
branches in 2014, with a lighter subscription
model released federally; Virtual Office,
a comprehensive communications service
enabling customers to deploy a corporate
virtual network and provide each employee
with all necessary services, was launched
in Moscow, Ural and Siberian branches.
Subscriber satisfaction
Controlled sales network
Through our subsidiary, MegaFon Retail,
we are committed to developing our own
sales network. This network of ownedand-operated stores is a hugely valuable
resource for MegaFon, helping us to
retain existing subscribers and attract
new customers. As of the end of 2014, we
had 2,047 MegaFon Retail points-of-sale,
while our controlled retail sales network
included 1,985 franchised stores (or thirdparty points-of-sale operating under the
MegaFon brand), up from 1,700 in 2013,
and 4,055 Euroset stores. Euroset is a
nationwide retail store system in which
we acquired a 50% interest in 2012.
In 2014, we focused on improving our client
services and boosting the popularity of
the MegaFon Retail brand. To this end,
we increased the share of our controlled
sales network (for both B2C and B2B
sales) to 71%, up from 69% in 2013, which
should enable us to ensure service quality
and increase the scope of our service
operations. Additionally, we continued
to improve the efficiency of our internal
processes and procedures; we also updated
and improved our brand-book and point-ofsale signs, and elaborated and launched
a new line of branded in-store equipment.
We also continued to develop our MegaGuru
service, which helps customers to set up
equipment and provides technical advice on
how to use devices. MegaGuru is available
in 80 cities, and in 2014 our MegaGuru
specialists met more than 360,000 client
requests. Overall, our main brand priority
was communicating the integrated nature
of the MegaFon Retail chain and reminding
customers that we provide both on-andoffline services for product sales
and consultation.
In 2014, we continued to increase the
number of new MegaFon subscribers
coming through direct sales and the
MegaFon Retail network – the share of
new connections (both B2C and B2B) made
through MegaFon Retail went up from
35% in 2013 to 37% in 2014 to reach almost
12.8 million new subscriptions. The number
of subscriptions through franchised stores
increased by 11% and came to 6.2 million
new subscribers, while subscriptions
through Euroset accounted for 16% of the
total amount of subscriptions compared
to 18% in 2013.
The sale of data-enabled devices1
(including branded devices), and especially
the sale of affordable devices, remained
the key priority for our retail network.
In MegaFon Retail, we offer more than
600 models of smartphones and more
than 100 models of tablets (including
different colours), including 200 models
of budget smartphones (up to RUB 5,000),
and 45 models of budget tablets (up to
RUB 10,000). During the year, we actively
promoted sales of affordable data-enabled
devices through special price offerings for
different models (including branded ones)
with our mobile data tariff options included.
As a result of our active marketing efforts,
in 2014, we increased our assortment of
smartphones by 20% and tablets twofold.
The number of total devices (including
customised devices) sold by MegaFon
Retail increased by 12.8% year-on-year,
up to 6.1 million units.2 The total sales
of data-enabled devices made through
MegaFon Retail grew by 35%, while sales of
smartphones increased 33% to 2.74 million
units, and sales of tablets increased almost
fivefold to 0.7 million units. MegaFon Retail’s
market share in sales of smartphones and
tablets increased from 8.5% in 2013 to
9.4%3 in 2014, while share in sales of tablets
grew from 2.2% to 7.7%.
With the development of 4G networks
in Russia, the popularity of 4G-enabled
devices increased in 2014. Through
MegaFon Retail, we offer almost 200
models of 4G-enabled devices (including
different colours). The total number of 4G
devices (including customised devices) sold
through the MegaFon Retail chain more
than doubled and reached 22% of all sales
of data-enabled devices, with the share
of 4G-enabled smartphones and tablets
in total sales of smartphones and tablets
increasing from 3% in 2013 to 7% in 2014.
In 2014, MegaFon and LLC Apple Rus (a
Russian affiliate of Apple Computers Inc)
concluded a three-year agreement for
the distribution of various smartphone
models. The sales of Apple products in
controlled retail during the year exceeded
155,700 units.
We also actively developed our online sales
channels and our online shop, which offers
a wide range of retail services including the
sale of equipment and accessories. During
the year, we enhanced the integration of
the online shop with our other websites,
redesigned key sections of the online shop
and adapted it to all types of mobile devices
and computers. We also launched two
special sections, ‘Devices’ and ‘iPhone’,
and redesigned the ordering process, which
enabled us to decrease the number of
pending orders by 15%.
During the year, more than 300,000 new
MegaFon subscribers were secured through
the MegaFon online shop, up 38.5% from
2013. In 2014, we completed almost 320,000
orders, including sales of SIM-cards, and
sold more than 130,000 smartphones and
tablets, which is two times higher than a
year ago. The share of 4G-enabled devices
sold via the online shop in total device sales
increased fivefold from 11% in 2013 to 44%
in 2014. Meanwhile the total turnover of
our online shop amounted to more than
RUB 1.7 billion in 2014, which is three times
higher than a year ago.
Looking ahead to 2015, we plan to continue
relocating our owned-and-operated
stores, as well as our franchised monobrand stores, into the most strategically
important areas. We will continue to
improve store design, layout, showcases,
leaflets and other equipment and materials
to ensure the MegaFon in-store experience
is comfortable and pleasurable for our
customers. We will also launch new selfcare products and enhance integration of
online and offline retail channels.
1Includes smartphones, tablets, modems and routers.
2
3
Net of returns of products.
Company estimates based on data provided by GfK Rus.
Strategic report
Governance
Other retail sales channels
Call centres and subscriber services
Investing significantly in communication,
customer care and service quality is a
vital part of our approach to subscriber
satisfaction.
Our call centres are staffed by dedicated
MegaFon employees who provide
subscribers with information and advice
to help them make informed choices about
tariff plans and other services. At the end
of the 2014, we had eight call centres
spread across 13 separate sites.
We also continued to create a call centre
operations management hub. As part of
the process of billing solution integration,
we are developing a distributed single
client service queue which will expand
simultaneously with the growth of our
subscriber base. Upon completion, all our
call centres will be integrated within the
single queue.
In 2014, the measures we implemented in
previous years enabled us to reduce costs
and improve call centre efficiency. The
average cost per one minute of service for
the year was RUB 7.0, down from RUB 7.1
in 2013.
Another key development in 2014 was
the expansion and centralisation of our
telemarketing functions. We opened
a second federal telemarketing hub in
Novosibirsk, which is focused on our
eastern operations, and we began the
process of closing regional telemarketing
branches. The growth of our telemarketing
capacity enabled us to increase the number
of calls processed per quarter from
1.5 million in Q4 2013 to 2.8 million in Q4
2014. In addition, the conversion rate for
incoming calls to sales increased to 13%
compared to 9% in 2013, and to 34%
for outgoing calls compared to 22%
12 months previously.
In 2013, we incorporated first call resolution
(FCR) into our KPIs to improve customer
service and motivate call centre employees
to deal with client requests quicker and
more efficiently. In 2014, our FCR rate
was 78.3%. The introduction of this
indicator enabled us to raise our customer
satisfaction levels in relation to call centre
employee competence and ability to resolve
customer issues at the first attempt.
In order to improve our remote customer
care, in 2014 we launched a new 24/7
virtual service called ELENA, which uses
speech recognition to help solve customer
problems and answer questions. Currently
processing 15,000 calls a day on average,
ELENA is proving more popular with
customers than tone input via keypad
IVR (interactive voice response). Indeed,
following the launch of this service new
subscriber automation increased, while the
number of return calls to IVR decreased.
Our website plays a key role in delivering
quality customer care and subscriber
services. By updating and improving core
sections of our website, we aim to increase
customer interaction with our commercial
site, megafon.ru. In 2014, the average
number of unique visits to megafon.ru grew
more than 1.5-fold to reach 6.8 million per
month, compared to 4.4 million in 2013
(in December 2014 there were 6.3 million
unique visitors, compared to 5.7 million
visitors in December 2013).
In 2014, our independent dealer network,
which includes stores of local dealers,
multi-brand electronic retail stores, Russian
Post outlets, and others, increased by
3,000 points-of-sale and amounted to
more than 45,000 stores. However, with
our focus on increasing the number of new
MegaFon subscribers coming through
our controlled retail network, the share
of new connections (both B2C and B2B)
from uncontrolled retail decreased from
31% in 2013 to 29% in 2014. We expect
that the trend of reducing the share of the
independent dealer network in total sales in
favour of our controlled retail channels will
continue in 2015. We also predict that, given
the challenging macroeconomic situation in
Russia, only large federal players (including
the Russian Post, federal telecom retail
chains – including the Svyaznoy network –
and electronic retail chains) will keep their
position in the mobile retail market.
In addition to controlled points-of-sale, we
have a number of retail channels through
which we sell our products and services
to customers. In the past, we have also
relied on a large number of independent
and multi-brand stores, but with the
development of our controlled retail
channels the independent dealer network’s
share of total sales has been decreasing.
Subscriber satisfaction continued
To enhance our customer-oriented web
functionality, in April 2014 we launched a
brand new version of Online Client Account
services in our Moscow branch, with further
rollout in the Central and North-West
branches. With a modern interface and
upgraded platform, the new Online Client
Account service employs user-friendly
features with adaptive layout for computer,
smartphone and tablet devices. Through
the online service improvement, we aim
to acquire new subscribers and increase
satisfaction for existing customers. As of
December 2014, 2.6 million subscribers
signed in to both the new and old versions
of the Service, which is a 21% increase
compared to December 2013.
In addition to the new Online Client Account
service, during the year we also launched
a dedicated mobile account service
application to replace numerous outdated
applications. The new application was
launched for iPhone in April 2014 and for
Android in October 2014. By year-end, the
number of downloads of the new app for
both platforms reached 760,000.
Social media is an important area of
interest and activity for MegaFon, and in
2014 we further extended our customer
care programme in social networks. With
a presence on Vkontakte, Odnoklassniki,
Twitter, Facebook and LinkedIn, we
improved the efficiency of our operations
in this area, handling 50% more client
requests via social networks compared to
2013. This will enable us to increase public
interest in MegaFon and expand our social
media audience further.
We also continued to develop our online
account services:
• For our customers travelling across
Russia and abroad we have a MegaFellow
Traveller shortcut service providing
customer information on tariffs, charges
and options when abroad
• We facilitated a process of return
for missed payments and launched
automated functionality, which allows
customers to transfer payment to the
right number without visiting a pointof-sale
• Following regulatory changes regarding
the provision of content on request, we
launched a shortcut service providing
customers with information on all types
of subscriptions
• Following further 4G network
development, we launched a shortcut
service providing customers with
information regarding 4G compatibility
for SIM-cards and devices
Brand and marketing
In 2014, we focused our marketing activity
on further promoting our mobile data
services and data-enabled products
following the launch of the high-speed
LTE-Advanced network, continuous roll-out
of our 4G network, and the launch and
development of LTE-roaming.
To stimulate higher data usage and
adoption of data-enabled devices, we
implemented several initiatives. They
included further promotion of bundled
tariffs with higher data components, special
campaigns in internet tariff options to
promote a switch of ‘pure’ voice users to
mobile data usage: ‘Internet XS’ for half
the price and ‘Internet S’ at a favourable
price; and the launch of sales of our Login 3
3G-enabled tablet.
Our marketing initiatives for MegaFon
tablets, involving campaigns with highprofile celebrities, noticeably increased the
volume of tablets in our subscriber base
and our revenues from these devices. These
positive results were further consolidated
by our competitive edge and reputation as
the fastest internet provider in Russia.
We continued with our efforts to increase
adoption of pre-paid bundled tariffs by
our subscribers. Bundled tariffs offers a
subscriber a complex of mobile services
in one pack at a fixed favourable price. We
launched a number of initiatives to promote
such tariffs, including marketing campaigns
with celebrities and special price offerings.
For our corporate clients, we continued to
promote the message that our customertailored solutions will speed up and simplify
their business processes, helping them to
be more flexible and efficient. We launched
a new website designated exclusively for
corporate clients with comprehensive
information on services, tariffs and client
support. We also focused on active
promotion of services for corporate clients
in our controlled retail channels.
Underpinning our marketing initiatives in
2014 was a comprehensive visual brand
refresh. Our objective here was to increase
brand recognition and differentiate
our brand profile, thereby reducing our
dependence on competitors’ pricing
strategies and helping to increase customer
loyalty and expand our subscriber base.
To achieve this, we enhanced the brand’s
visual elements and delineated its scope to
create consistency across our advertising
portfolio. We believe that the development
of our brand image over the long term
will supplement the short-term impact of
promotional advertising and increase our
return on marketing investment.
Overall, at the end of 2014 we had the
highest score in the ‘Power of brand’4
among the top four Russian telecom
operators. Our key unique brand attributes
were: ‘the fastest internet’, ‘the highest
quality of mobile internet’ and ‘the
innovative operator, operator of the future’.
We will continue to capitalise on these
strengths in 2015 to achieve our strategic
objectives. Indeed, our brand perception
was supported by our high-profile
involvement in the 2014 Winter Olympics in
Sochi where, among other achievements,
we enabled the ‘most mobile’ Olympic
Games in history.
4
According to ‘Business Analytics’ research.
Strategic report
Financial review
Delivering consistent
financial performance
This review is based on MegaFon’s
IFRS results for the 12 months to
31 December 2014. We have included
financial results from our majority-owned
operating subsidiaries in Tajikistan,
Abkhazia and South Ossetia in our
consolidated figures.
Our consolidated revenue grew by 5.9%
year-on-year in 2014 to RUB 314.8 billion,
mainly driven by strong growth in mobile
data revenue, increased sales of equipment
and accessories and higher wireline
revenue. In 2014, MegaFon was the
second largest mobile operator in terms
of consolidated revenue in Russia with a
32.1% market share among the ‘Big three’
operators.
Net debt was RUB 136.2 billion as
of 31 December 2014, compared to
RUB 103.2 billion at the end of 2013.
This increase was due primarily to the
refinancing of the deferred consideration
due in respect of our 2013 Scartel
acquisition, which was paid in June 2014,
and the revaluation of our net foreign
currency denominated debt due to the
depreciation of the ruble in 2014.
Free cash flow for the year decreased by
14.7% year-on-year from RUB 82.3 billion
in 2013 to RUB 70.2 billion, mainly as
a result of the substantial increase in
capital expenditures aimed at ensuring our
network’s premium quality and coverage,
including expansion of our 4G footprint.
During 2014, the Russian market accounted
for the majority of our business, comprising
98.7% of our total consolidated revenue
for the year.
2014
Revenue, RUB billion
OIBDA, RUB billion
OIBDA margin
Net profit, RUB billion
Net profit margin
Free cash flow, RUB billion
Net debt, RUB billion
Net debt/LTM OIBDA, times
314.8
138.5
44.0%
36.7
11.7%
70.2
136.2
0.98x
2013 Change, y-o-y
297.2
132.6
44.6%
51.6
17.4%
82.3
103.2
0.78x
Consolidated mobile revenue1 for the
year was RUB 269.5 billion, compared to
RUB 259.0 billion in 2013, or a 4.0% increase
on a yearly basis, on the back of overall
subscriber base expansion of 3.0% year-onyear and solid growth in mobile data revenue.
Mobile data revenue continued to be one
of our main revenue streams, increasing
33.3% year-on-year to RUB 67.2 billion and
accounting for 21.3% of total revenue, as
compared to 17.0% in 2013. This increase
was the result of data user base growth
(2.5 million additions during the year),
active marketing efforts and attractive
tariff offerings stimulating use of our 4G
services on the back of intensive network
development and expansion of coverage,
stimulation of sales of data-enabled devices
through our controlled retail channels
(the share of data-enabled devices on
the MegaFon network exceeded 45%),
increasing popularity of data-consuming
products in Russia, and our acquisition of
Scartel in 2013. MegaFon remained the top
mobile operator among the ‘Big three’ in
terms of mobile data revenue in Russia with
a 39.2% market share.
Voice revenue declined by 3.7% year-onyear due to the migration of subscribers
to bundled tariffs, the discontinued active
targeting of seasonal guest workers, and
price competition.
Despite regulatory changes introducing
‘advice on charge’, which came into effect
in 2014, and the ongoing substitution of
SMS services, revenue from VAS remained
stable and essentially at the level achieved
in 2013.
+5.9%
+4.5%
-0.6 p.p.
-28.8%
-5.7 p.p.
-14.7%
+32%
+0.20x
1 Certain prior year amounts have been reclassified
to conform to the presentation adopted in 2014.
Consolidated key financial indicators
Net profit decreased by 28.8% year-on-year
to RUB 36.7 billion; this was primarily a
result of FX losses related to the significant
depreciation of the ruble in the second
half of 2014.
Mobile revenues
Our leading position in the Russian mobile
market and financial resilience allowed us
to achieve results that were consistent
with our guidance throughout the year for
both revenue and OIBDA. We were able to
generate steady cash flows while ensuring
affordable products and tariffs and highquality services to our customers. For the
second time in the Company’s history as
a public company we paid dividends to our
shareholders fully in line with our dividend
policy while maintaining a comfortable level
of leverage.
Consolidated OIBDA increased by 4.5% yearon-year to RUB 138.5 billion, in line with
our targets for the year. Our OIBDA margin
reached 44.0%, compared to 44.6% in 2013.
This 0.6 p.p. decrease was due to a growing
share of lower margin sales of handsets and
wireline services in total revenue, as well
as higher general and administrative costs
relating to network rollout.
Governance
In 2014, MegaFon once again delivered a stable financial performance
despite turbulent macroeconomic conditions in the latter half of the year.
Financial review
Delivering consistent financial performance continued
Fixed-line revenues2
Wireline revenues3 increased 10.4% yearon-year to RUB 22.2 billion. This growth
was mainly attributable to the successful
expansion of our B2B and B2G client base.
In support of this growth, we also continued
to strengthen our broadband business,
expand backbone capacity, and streamline
our fixed-line assets.
Handsets and accessories
Capital expenditures (CAPEX)
MegaFon’s CAPEX increased by 19.8% to
RUB 56.5 billion, representing 17.9% of total
revenue. However, in the fourth quarter
CAPEX decreased by 14.2% year-on-year to
RUB 20.5 billion due to our spreading of capital
expenditures more evenly throughout the year.
Overall, our CAPEX remains in line with the
industry in terms of our CAPEX-to-sales ratio.
During 2014, we continued to execute our
investment strategy and met our guidance
on CAPEX despite foreign exchange
fluctuations in the second half of the year.
Our increase in CAPEX was mainly the
result of our efforts to broaden our network
coverage, including 4G footprint, increase
network capacity and improve service
quality. Indeed, we continued to invest in
those areas where future ‘smart’ growth
can be achieved, such as network capacity
increase, 4G/LTE network rollout, network
quality control and monitoring, and the
replacement of obsolete and energy
inefficient radio equipment.
Sales of handsets and accessories
increased 27.5% year-on-year, reaching
RUB 23.1 billion. This growth was driven
primarily by the active promotion of
MegaFon-branded and customised
products and sales of equipment through
MegaFon Retail, including sales of heavy
data-usage Apple products.
Consolidated revenue growth bridge
RUB bn
Growth
297.2
18.1
20.1
37.3
16.8
0.0
CAPEX
RUB bn + CAPEX to Revenue, %
16.6%
15.9%
17.9%
56.5
45.2
47.1
2012
2013
2014
Our OIBDA-CAPEX indicator decreased
by 4.0% year-on-year in 2014 to
RUB 82.0 billion despite higher capital
spending throughout the year. Our OIBDACAPEX was the highest among the
‘Big three’ operators in Russia.
5.9%
2.1
5.0
314.8
23.1
22.2
(6.3)
37.3
67.2
50.4
171.3
164.9
Wireless revenue
+4.0%
+33.3%
Revenue
2013
Data
-3.7%
Voice
year-on-year growth
0.0%
VAS
+10.4%
Wireline
services
+27.5%
Handsets
Revenue
and
2014
accessories
Handsets and accessories
Wireline
VAS
Data
Voice
2 Fixed-line revenue means wireline revenue.
3 Certain prior year amounts have been reclassified
to conform to the presentation adopted in 2014.
Strategic report
Governance
Liquidity and financial stability
Credit rating
In 2014/15, MegaFon’s credit rating was
impacted by Russia’s sovereign credit rating.
In February 2015, following its downgrade
of Russia’s sovereign rating, Standard and
Poor’s Ratings Services (S&P) affirmed
MegaFon’s local currency rating at BBB-. At
the same time, S&P downgraded MegaFon’s
foreign currency rating to BB+, following
constraints imposed by the agency’s Transfer
and Convertibility assessment of Russia.
Also in early 2015, Moody’s Investor Service
(Moody’s) downgraded MegaFon’s credit
rating from Baa3 to Ba1. This downgrade
also reflected Moody’s earlier downgrade
of Russia’s sovereign credit rating, and
subsequent lowering of Russia’s country
rating ceilings, to Ba1 levels.
However, MegaFon’s outlooks were
upgraded to Stable by both Moody’s and
S&P, confirming our overall financial
strength. MegaFon is also the highest-rated
telecom company and one of the highestrated corporates in Russia.
Breakdown of MegaFon’s debt by currency6
In December 2014, MegaFon drew
RUB 15 billion of the RUB 30 billion available
under our existing VTB facility. This preemptive withdrawal of funds was designed
to mitigate anticipated interest rate hikes
and covers most of our scheduled ruble
maturities in 2015. We also signed a financing
agreement with China Development Bank
Corporation and an export credit facility
backed by Finnvera, the Finnish export
credit agency, to finance the purchase of
equipment and services from Huawei and
Nokia Siemens Networks, respectively, for
network development, allowing us to cater
for our medium term requirements.
In May 2014, MegaFon placed 10-year
bonds5 in the amount of RUB 15 billion at an
attractive coupon rate of 9.45% per annum.
In fact, we were one of the few corporate
borrowers to successfully tap the domestic
ruble bond market in 2014.
3%
2%
21%
21%
2014
15%
2013
62%
76%
Liquidity split by currency4
RUB
USD
USD
swapped7
EUR
33%
Breakdown of MegaFon’s debt maturity profile
46%
20%
USD
HKD
14%
24%
21%
RUB
11%
2014
24%
2013
equivalents and Short-term investments.
9%
54%
20%
11%
12%
4 Liquidity is calculated as the sum of Cash and cash
5
The coupon will be re-set, and the holders of the
bonds will have a put, on the first anniversary of the
placement.
6 On a nominal basis.
7 Including structured and plain vanilla FX swaps
on a nominal basis.
By the end of 2014, the Company had
sufficient liquidity and a stable leverage
position of 0.98x Net Debt/LTM OIBDA. Most
of our liquidity was kept in hard currencies to
mitigate foreign exchange risks, and despite
the volatile market situation we continued
to enjoy access to funding and support from
our major financing counterparties, while
monitoring all developments and taking
necessary steps to mitigate any adverse
impacts. The Company has access to
untapped credit facilities sufficient to
meet current liabilities and finance CAPEX.
1 year
2 years
3 years
4 years
5 years and longer
Sustainability
A proactive, nationwide approach
Our approach to sustainability
Mobile communications unite people
across the globe and play an integral role
in the daily lives of millions of MegaFon
subscribers. As a leading provider of this
vital public service to all the regions of
Russia, we have significant responsibilities
– to the state, to more than 72 million
subscribers in Russia and abroad
and to society as a whole. It is these
responsibilities that define our approach
to sustainable development.
As our company grows, so do our social
obligations. We understand that the
success of our business is determined not
only by market share, network expansion
and financial growth, but by the impact we
make on our society. This means fulfilling
our commitments to all our stakeholders,
whether customers, employees, local
communities, shareholders, the state
or our industry and business partners.
Throughout our business, we adhere to
applicable legal requirements, maintain
accepted moral and ethical standards,
endorse transparent conduct, support
environmental initiatives and respect
human rights. Our sustainability activities
are also guided by international regulations
and standards, including the United Nations
Global Compact, the Social Charter of
Russian Business, ISO 26000 (Guidelines
on Social Responsibility), and the Global
Reporting Initiative (GRI) recommendations.
However, by adopting a proactive, initiativedriven approach to sustainability, our
efforts go beyond our legal obligations.
We endorse and develop projects carefully
designed to tackle acute problems
within our society, whether focussing
on local communities or country-wide
challenges. We also encourage employee
initiatives to deliver positive change. Our
sustainability goals complement our
company mission to overcome barriers to
voice and data transmission and to unite
Russia from a communications perspective.
In 2014, the rating agency Reputation
reaffirmed MegaFon’s AA(s)-rating for its
corporate social responsibility policies and
performance. This continued high ranking
reflects our adoption of and adherence to the
necessary regulatory practices in this field.
Stakeholder interaction
In the development of our social,
environmental and charitable initiatives,
we take great care to define our core
stakeholders and determine those issues
which most matter to them. Through regular
engagement and consultation, we ensure
that our stakeholders feel listened to and
that our sustainability programmes reflect
their wishes, needs and expectations.
Customers
We conduct our relationships with
customers in a cooperative, fair and
responsible way. We provide effective
customer support and amicable complaints
resolution, and we are firmly committed
to the principles of responsible marketing.
Additionally, we ensure our customers
benefit from continuous service, information
security and access to vital services, as well
as health and safety protection and the
dissemination of information and knowledge.
Strategic report
As MegaFon grows, so do our responsibilities – both to our
stakeholders and the general public. These responsibilities
underpin our approach to sustainable investment and form
an integral part of how we do business.
Governance
Industry and business partners
Committed to sustainability
Employees
MegaFon provides a working environment
characterised by social dialogue, work
safety and personal development. Our
interactions with employees are founded in
mutual and fair labour relations, acceptable
working conditions and the provision of
social benefits.
Local communities
As our business continues to expand
throughout all regions within Russia, we are
developing strong relationships with local
communities. In addition to providing access
to new technologies, our social investments
also improve quality of life by delivering
educational opportunities, preserving
heritage, protecting the environment and
endorsing sustainability.
Shareholders
Our corporate culture and governance
are based on the principles of social
responsibility. This approach is reflected
in our relations with shareholders, whose
rights we respect and uphold equally
at all times.
The state
In acknowledgement of the importance of
our activities to the state, in all areas of our
work we are fully compliant with Russian
law. By supporting nationwide initiatives,
we contribute to the modernisation of
Russia’s telecommunications infrastructure
and the development of an information
space. Additionally, we provide support in
national emergencies, protect public safety
and play an active role in social investment.
Sustainable development is an integral
part of MegaFon’s business strategy. Our
commitment to this shapes activity across
the business, influencing our approach to
innovation and the products we develop.
MegaFon’s Chief Executive Officer, Board
of Directors and Management Board
collectively guide the strategic leadership
behind our approach to sustainability, while
selected employees adopt responsibility for
implementing programmes and initiatives
that reflect our strategy.
We support transparency, fair competition
and anti-corruption within Russia’s
telecommunications industry. We engage
in industry-wide processes, and through
our own activities we aim to encourage
increased investment in sustainability
among our corporate partners.
Sustainability
Our people – the future
of our business
MegaFon strives to foster a corporate
culture that promotes employee
engagement and responsibility, while
providing a supportive environment with
rewarding opportunities for professional
development.
In 2014, MegaFon had 30,854 employees.1
Training and development
We believe our employees should have
consistent access to training and
development opportunities, wherever
they are based.
We also believe that by developing
employees’ professional, managerial and
leadership skills, we will further unlock the
potential of our people and our company.
In 2014 we launched a number of new
training initiatives as part of our systematic
and integrated approach to professional
development.
To strengthen our leadership, we
implemented the Development Centre –
a comprehensive programme designed
to assess management professionals’
knowledge and devise tailored development
plans. We also provided supplementary
change management training for our senior
management.
For our corporate business development
employees, we enhanced our corporate
education and development system
MegaAcademy to offer a wide range of
courses. Meanwhile, following changes
within our Infrastructure business and the
creation of Global Network Operations
centres, we provided additional training for
our technical employees to increase their
expertise and efficiency.
In addition, all MegaFon employees,
including those from our subsidiaries,
undertook training in anti-corruption.
As part of our effort to explore new
educational opportunities, in 2014 we
increased our provision of distance learning
courses, including new training in Finance
and English language. We also expanded
the scope and capabilities of MegaPortal;
a single electronic system to simplify and
facilitate remote learning. These distance
learning tools are proving popular among
our employees while meeting the challenges
of our regionalised presence. In addition,
we launched an online educational system
to improve and assess retail employees’
knowledge of our products and services.
2014 marks the eighth anniversary
of our internal field visits programme
‘Point of destination – Our Client’, whereby
employees gain first-hand experience as
in-store consultants for one day. To date,
20,000 employees, including CEO Ivan
Tavrin, have taken part in the programme,
providing customers with specialist
knowledge and receiving direct feedback
and insight.
Career opportunities
MegaFon encourages employees to
enhance their potential through the
considerable opportunities available on
our open job-posting system. To support
this progression, we give priority to
internal candidates when recruiting
for management-level vacancies.
Motivation
MegaFon recognises the importance of
motivated employees and we strive to
incentivise employees accordingly. Pay
reviews take place annually and reflect
individual performance and market salaries.
In 2014, the average salary at MegaFon
increased around 4% year-on-year. We
also enhanced the precision of our frontline
short-term incentives system.
1 According to the new methodology, number of employees includes full-time
and temporary employees, excluding maternity leave and outsourced
employees, and represents the annual time average. Number of employees
for 2013 and 2012 changed for 29,318 and 31,450, respectively.
Employee engagement survey
In order to deepen our understanding of
our people’s needs, views and motivations,
in 2014 we conducted an employee survey
across all functions and levels of the
Company, with participation by 6,600
employees. Following the survey, 1,292
managers received individual reports
evaluating their management style,
team environment and recommendations
for development.
The values of all components of MegaFon’s
organisational climate, both current and
expected, were in the upper quartile, which
is indicative of a leading company, while
67% of managers were found to create
an environment that positively influences
employees’ results.
According to the survey, our employees
have ambitious objectives, high
expectations, an appetite for responsibility
and a desire to understand their role in
achieving Company goals. In addition,
employees’ expectations correlated with
their current situation in five out of six
evaluation criteria.
Internal communications
Communicating informatively and
transparently is key to ensuring that our
employees are aware of developments
within the Company. In 2014, we
implemented a range of changes across
our internal communications channels to
streamline our communications process
and better meet business requirements.
We employed a range of platforms, from
intranet and web-magazine to events
and surveys, to assess and enhance our
corporate culture.
During the year, we transitioned a number
of our corporate publications to electronic
format, including Our MegaFon, and created
a single information space through our
weekly news digest for corporate business
development. This allowed us to be
more environmentally sustainable while
streamlining our communications platform.
Strategic report
Dedicated and motivated employees are our key
asset. We identify, invest and develop the best
talent in the industry.
Governance
In order to realise further improvements,
MegaFon develops a management system
oriented on value creation.
Our vision is leadership in efficient
growth. To do this, we aim to establish
a management system based on value
creation, people engagement and will
therefore continue to implement a series
of changes across the Company.
We are working to create a company
management model, which will ensure the
transparency of areas of responsibility
at every level of governance and in
every function. In parallel we continue to
focus on transparent, optimal business
processes, including cross-functional SLAs,
which will help faster decision-making,
cross-functional co-operation and result
achievement.
The portfolio of critical initiatives is created
with rigorous monitoring of implementation
process by the top management in order to
ensure proper transition.
We will continue to unify and simplify
business processes within the company,
with the special focus on federalsation
of IT systems and creation of federal
centres of competencies, with the ability
to provide higher level of service quality
to entire Company not dependent on
physical location.
People engagement is the essential factor
for the establishment and operation of
effective management model. We plan
to develop a people strategy, using all
available tools: improve goal setting and
motivation systems, develop employees
competencies and management styles,
facilitate career opportunities.
We will integrate this changed approach
into MegaFon’s corporate culture – not
only in the declaration of our values but
in our adherence to them as well. Through
a value-oriented approach and efficient
management model, we can achieve our
goal of efficient growth leadership.
Vision: leadership in efficient growth
Organisational structure
and business processes
• Clear areas of responsibility
by levels and functions leading
to faster decision making
• Further optimisation and
unification of businessprocesses
• Federalisation of IT systems
and services
Employees and
competencies
• Increase in productivity and
strengthening of competences
• Creation of federal centres of
competencies and services
supporting entire Company
• Stronger focus on internal
candidates fill rate and
in-house people development
KPI management system
• Timely and transparent
cascading of Company’s goals
to individual level targets
• Transparent bonus system
linked to performance results
for all employees
• Cross-functional and project
KPIs and SLAs facilitating
critical end-to-end business
processes
Corporate culture
• Focus on customers and
efficiency
• New vision is supported by new
values, which are continuously
implemented
• People engagement as a key
success factor
In 2014, we also initiated a new approach
to live communications events. Specifically,
we evolved our bi-annual leadership
presentation into a panel discussion, with
special guests Nikolai Nikiforov, Minister
for Communications and Leonid Konik,
Editor-in-Chief of ComNews. This improved
format facilitated greater dialogue and
engagement for the 3,500-employee
audience, addressing topics pertinent to
our industry. Additionally, we enhanced
our employee connectivity: besides video
conferencing and online broadcasting, we
introduced mobile device connection for
the audience and SMS voting capabilities.
Achieving leadership through
efficiency
We also upgraded the design, functionality
and accessibility of our corporate portal,
MegaNet, consolidating news streams and
making it simpler to build webpages for
business units and projects. This innovative
approach to communication was rewarded
when MegaNet received the HR Brand of
the Year prize.
Sustainability
Focusing on environmental
sustainability
Being a responsible business means
harmonising commercial, social and
environmental interests. At MegaFon,
we believe that scientific and technological
progression should serve to protect
rather than endanger the natural
environment. Accordingly, throughout
our Company’s history we have not only
complied with environmental laws but
also sought to safeguard the environment
wherever possible, preserving it for future
generations. Year-on-year, we continue
to reduce the impact of our operations on
the environment.
Energy conservation and efficiency
MegaFon strives to conserve resources,
specifically electricity, thermal energy,
water and paper. By optimising our climate
control equipment according to the season
we save heat and reduce thermal loss in
winter. Additionally, our offices use heating,
ventilation and air conditioning systems
with recuperative heat-exchange and
self-cooling functions to minimise energy
expenditure.
When constructing base stations, we utilise
new energy technologies to reduce our
power consumption. By installing climate
control with air-conditioning unit rotation,
we have substantially extended the
service life of our base stations by evening
out equipment wear. When designing
and installing our data centres, we also
use suppliers that adhere to the highest
environmental standards.
As part of our holistic approach to energy
conservation, MegaFon encourages all
employees to take responsibility for
energy use in the workplace. We ensure
that lighting, office and HVAC equipment
are switched off after working hours.
In addition, we install our offices with
fluorescent rather than incandescent
lamps. We also encourage employees to
use individual light sources and minimise
additional electrical equipment where
possible.
While increasing the energy efficiency of
our base stations, equipment and offices,
we are aware that this electric energy
still derives primarily from non-renewable
sources. Accordingly, we are gradually
transitioning to alternative energy systems
that minimise our environmental impact.
Use of fuel and energy resources in 2014
Fuel and
industrial fluids
Gas (including
condensate), ‘000 m3
Technical
equipment
Fuel,
‘000 litres
Oil and processed
fluids, litres
Utilities services
Electricity,
‘000 kW*h
Heat, Gcals
Consumption
Cost,
‘000 RUB
403
1,152
2,735
55,385
3,902
920
1,031,563 2,684,029
3,543
3,405
Resource conservation
and waste management
MegaFon’s use of modern technology for
document management enables us to
improve efficiency while simultaneously
reducing paper. We decrease paper
consumption through our uniform
library module and the use of electronic
documents and memo systems.
Furthermore, during conferences and
workshops we encourage employees
to avoid hard copy material. We also
promote day-to-day use of electronicbased communications instead of paper,
and sustainable printing or photocopying
settings.
In 2014, to further decrease our paper
footprint, we continued transitioning to
integrated electronic systems for the
preparation, retention, archiving and
signing of documents. In addition, we
also communicated the majority of our
subscriber correspondence electronically.
Health and safety
When constructing our network we
strictly adhere to all national guidelines
and standards relating to our mobile
infrastructure equipment and base stations.
Our mobile equipment and base stations
are certified and comply with obligatory
requirements allowing to minimise effect
on health and quality of life.
Our environmental initiatives underpin
our commitment to improving the world in
which our employees and subscribers live
and work, and preserving our environment
for future generations.
Strategic report
A responsible corporate citizen
Governance
At MegaFon we aim to harmonise our
commercial aspirations with the interests
of society. Our sustainability goals are
oriented to address societal challenges and
help create a sustainable future for Russia.
With a strong presence across Russia, we
are one of the first organisations to respond
to national emergencies. We also support
our employees and their relatives in times
of hardship.
Award-winning
social initiative
Olympic engagement
Engaging our employees
Our ambitious hospitality programme
meant that more than 800 employees
were able to visit the Olympics through
contests and bonus schemes. Meanwhile,
all employees with children with disabilities
were given the opportunity to visit the
Paralympics, enabling 40 children and their
parents to attend.
During the four years of preparation for
the Games, our employees were actively
involved in our ‘Create Your Olympics’
initiative, in which 30,000 people
participated. The success of this project
was recognised nationally when we won
an award from ‘People Investor’, honouring
our commitment to investing in people.
Specially for the Winter Olympic and
Paralympic Games 2014 in Sochi,
MegaFon developed a special project
– MegaFaces pavilion. This is an
installation, which brings to life selfies
of visitors and participants of the Games
via the transformation of their faces into
huge moving sculptures with the help
of 11,000 actuators. Over 140,000 fans’
faces from all over the world were shown
on the MegaFaces facade during the
Olympic Games in Sochi. For this project
MegaFon was awarded the Grand-prix
of Cannes Lions.
Engaging the public
During 2014, in order to facilitate nationwide
engagement we held three national contests
to enable children with disabilities from
throughout Russia to visit the Games.
One contest involved the design of
postcards which MegaFon printed and
presented to the Games participants.
In partnership with the Russian Olympic
Committee and Sport-FM, we also provided
students across Russia with insight into
the Olympics through class visitations by
famous athletes. These visits took place
in schools in Novokuznetsk, Krasnoyarsk,
Tula, Omsk, Tyumen and Yaroslavl.
Supporting Paralympic athletes
One of MegaFon’s most important areas
of social activity is providing support for
Paralympic sports. In addition to our role
as a General Partner of the Games, we
are also a General Partner of the Russian
Paralympic Committee, as well as the 2010,
2012, 2014 and 2016 Russian Paralympic
teams, and a General Partner of the Russian
national ice-sledge hockey team. As part of
our sponsorship, in 2014 we purchased new
equipment and organised training camps
and tournaments for our athletes.
Our support and investment in the Russian
national ice-sledge hockey team bore
fruit when the team was rewarded with
silver medals for its debut performance. In
2014, we provided an annual investment of
RUB 7.5 million. We will continue providing
support for Paralympic sports for the next
three years.
We approach social investment with a
dual focus. Firstly, we support projects
that strengthen sports, culture, arts and
educational opportunities, particularly for
vulnerable groups. Secondly, we invest in
charities that support orphaned children,
help people with disabilities and assist in
treating young people who are seriously ill.
MegaFon’s role as sponsor and General
Mobile Partner of the 2014 Olympic and
Paralympic Winter Games in Sochi was one
of our most significant social investment
projects in recent years. Beginning in 2009,
we invested RUB 10 billion to support
the success of the Games in Sochi. As a
General Mobile Partner, we implemented an
ambitious programme of social initiatives,
including creation of a 4G mobile network
infrastructure for the Olympic and
Paralympic Games in Sochi making this the
first ever ‘4G Olympics’, and also developed
mobile applications to enhance the public’s
Olympics experience.
We believe MegaFon should generate
value not only in the form of dividends
for shareholders, but for society as well.
Indeed, charitable activities have always
held an integral role in our corporate
responsibility. In 2014, we allocated
RUB 150 million to social initiatives
throughout Russia and implemented
more than 50 projects in 80 cities.
Sochi Olympics and Paralympics
Sustainability
A responsible corporate citizen continued
Investing in sport
To reinforce the future of sports in Russia,
in 2014 we supported the Boccia Federation
in their search for and development
of high-potential athletes to compete
internationally. During the year, MegaFon
assisted athlete participation in the Defi
Sportif Boccia World Open in Montreal,
the Boccia World Open in Povoa, the
World Championship in Beijing, the Polska
Boccia and the Russian Cup. As a result
of our support, 120 athletes partook in
Russian competitions, 33 in international
competitions and 14 in training events.
MegaFon also helped organise the Boccia
Russian Cup.
In addition to the Paralympics, we also
implemented a number of programmes
across Russia for wheelchair-using athletes
and to rehabilitate adults and children with
disabilities. We support regular events and
competitions for people with disabilities and
their families across a wide range of sports
– from horse riding to athletics, swimming,
darts and more.
In 2014 we also organised wheelchair
tennis tournaments, including the ITF
Series MegaFon Dream Cup international
paralympic tennis tournament, the ITF
Zelenograd Open international tennis
tournament, and the Moscow Cup Open 4,
in partnership with the Charitable Fund for
Persons with Locomotive System Disability.
We also jointly developed a skiing
rehabilitation programme for disabled
children and adults in Russia, and we
initiated physical activity programmes to
enable disabled children to engage in active
lifestyles in the Republic of Bashkortostan,
Vladivostok, Yuzhno-Sakhalinsk,
Chita, Ulan-Ude, Irkutsk, Yakutsk
and Blagoveshchensk.
Sport for children
Russia’s future health and prosperity
depend on our younger generation. By
fostering talent among Russia’s youth
and promoting health and sports, MegaFon
is helping secure our country’s future.
The Company’s ‘The Future Depends on
You’ project is an open Russian football
championship for children. Held among
teams from children’s homes and boarding
schools since 2005, we consider this event
as important as more prestigious national
sporting competitions. In 2014, 573 teams
of children from 72 cities in Russia, South
Ossetia, Tajikistan, Latvia and Abkhazia
took part in ‘The Future Depends on You’.
Since its inception, more than 21,000
children in 1,300 teams have participated,
and in 2015, the programme will celebrate
its ten-year anniversary.
In 2013 the Ministry of Education and
Science, the Ministry of Sport and the
Football Union of Russia joined the
organising committee and in 2014 we
implemented official regulations to cover
this programme.
During the year, we also continued our
support of a national youth hockey
initiative, the Goalkeeper School project.
This consisted of a series of workshops in
Nizhny Novgorod, during which NHL goalie,
Stanley Cup winner and world champion
Ilya Bryzgalov provided training and
guidance for young hockey goalkeepers.
We believe that every tournament,
sporting event or workshop we organise
provides young people with the tools and
opportunities to make positive life choices.
By involving young people in sport, we
are more likely to see future generations
leading healthy, active lives and possibly
even excelling at a competitive level.
Professional sport
In addition to youth sports teams, we also
support the Russian Biathlon Union, the
Continental Hockey League and the Russian
Hockey Federation. In 2014, MegaFon
sponsored the Russian Football Union,
as well as Russia’s national, youth and
women’s hockey teams, and the All-Russian
Federation of Rhythmic Gymnastics.
MegaFon is also an official partner of the
International Fencing Federation, and a
partner of the Russian National Volleyball
Federation.
Strategic report
We believe that businesses should also improve
society, so our charitable activities form an
integral part of our social responsibility.
Governance
Access for All
MegaFon consistently strives to improve
the quality of life for people with disabilities.
Through our ‘Access for All’ programme,
we increase awareness of the challenges
disabled people face on a daily basis and
seek to eliminate these barriers.
Educating through technology
Our business operates in most of the
regions throughout Russia and our social
investments reflect this. We foster strong
relationships with local communities and
expand their access to new technologies,
services and educational opportunities. We
launched our own line of Login smartphones
and touch tablets to increase communication
channels across Russia and provide services
to those who previously lacked access. We
also deepened our sustainable initiatives,
aimed at facilitating technology as a tool
for education and medical advancement,
while safeguarding vulnerable users.
In addition, through the joint project
‘Education for Everybody’, MegaFon
provided free 4G modems and internet
access to enable remote learning for
children with disabilities. This initiative
reached 950 children aged 10-14 years
in the Volgograd, Kaluga, Moscow,
Novosibirsk, Ryazan and Samara Regions
and the Tatarstan Republic. We also
launched a new touch tablet, Login 3,
which has 28 educational applications for
children, as well as anti-virus protection.
Investing in our culture
Preserving Russian heritage and promoting
its culture is an important part of improving
the lives of our subscribers and the general
public. In 2014, we provided charitable
support to the State Academic Bolshoi
Theatre, facilitating the production of
several new performances. Since 2009
we have also helped modernise and fund
restoration for the Polytechnic Museum
of Moscow, enabling exhibitions, festivals,
public education programmes and further
development. In 2011, we began a five-year
commitment to invest RUB 30 million in the
Polytechnic Museum annually.
Since 2010, MegaFon has embarked on
the ‘barrier-free environment’ project.
This aims to minimise the barriers
encountered by people with disabilities
in their daily life and to increase
awareness of these problems.
Each of our 8,000 stores have
salespeople trained in servicing
disabled customers. In addition, we
are equipping our stores with ramps,
handrails, automatic doors, call
buttons and elevators to improve
disability access.
So far, more than 48% of our stores
have been adapted to meet disability
needs. In the Krasnodar Territory,
where the Paralympic Games were
held, more than 76% of stores have
been adapted, while in Sochi, 97% of
stores have been modified with these
improvements.
Future investment
In 2015, we aim to increase our number
of social investment projects to 60, with
a charitable budget of RUB 150 million. In
addition to continuing our range of ongoing
projects, we will also hold the first training
conference for charitable funds and nonprofits, in partnership with Mail.ru and
Metalloinvest. More than 140 organisations
from across Russia will participate in the
event, with the opportunity to deliver
five-minute presentations to business
community representatives.
As a result of our sustainable investment
efforts in 2014, three of our social projects
were nominated for five awards. These
included the PROsport Awards and
event.ru’s Event of the Year nomination
for our football tournament, The Future
Depends on You.
Since 2010, MegaFon has supported
the festival of social internet resources,
‘World of Equal Opportunities’, organised
by the charity ‘One Country’. This festival
highlights websites, social networks
and forums dedicated to helping people
with disabilities. In 2014, the Company
also provided 14 grants to develop online
resources, with prizes awarded to winners
and festival participants.
Since 2009, we have educated children,
teachers and parents in mobile literacy
throughout Russia, including how to
protect themselves from online dangers.
To safeguard children, we developed the
Children’s Internet service, restricting
access to undesirable content across
500 million websites, with up to 100,000
websites updated daily. In 2014 we also
provided equipment and mobile services for
lessons in 20 schools, reaching more than
1,600 pupils, to educate students in using
the internet and highlighting programmes
for intellectual development.
Creating a barrier-free
environment
To facilitate this, we have developed
special tariffs for subscribers with hearing
impairments and a dedicated website for
those with impaired vision. This provides
information about our services in an
optimised form, using appropriate font
sizes, colours and screen backgrounds.
To enhance medical progress, MegaFon
supported developments in the early
diagnosis of myocardial infarction in
the Krasnoyarsk Territory, providing its
data transmission network for remote
ECG (electrocardiogram) consulting. The
success of this experience has opened
up possibilities for utilising networks and
mobile technology in future large-scale
public health projects.
Risk management
Approach to risk management
Good risk management policies and
processes have certainly become
increasingly important since the IPO in 2012,
and during 2014 we continued to make
progress in this area.
Our approach to risk management
During 2014, we continued to develop
a well-structured, tailored and explicit
risk management system through the
adoption of new risk management
structures, policies and processes. In 2013,
we successfully completed the rollout of
our enterprise risk management (ERM)
programme across all branches. This
process was accompanied by training for
employees and the implementation of risk
identification and mitigation procedures.
In 2014, we continued to broaden the
Company’s risk management system
and enhance our risk culture framework.
As part of these improvements, the
risk management reports that go to
management now include a risk dashboard,
which affords managers a clear view of
changes within the corporate risk profile,
and gives them the opportunity to review
mitigation activities and understand
emerging issues in key risk areas. We also
use a range of probabilistic and stochastic
models to help forecast risk.
Our ERM system comprises three levels
of risk analysis and discussion: 1) regular
discussions with every internal function
based on interviews and questionnaires,
2) cross-function workshops and
brainstorming sessions, and 3) meetings of
the Risk Committee (including top Company
managers) based at our Headquarters and
in the branches.
At all three levels, risks are regularly
reviewed in terms of their potential impact
on the Company’s business. This review
process then helps us to shape and prepare
a Company register of key risks, including
legal, market, political and macroeconomic
risks, and a set of appropriate mitigation
measures. The register and mitigation
procedures are discussed, amended as
necessary, and approved by the Head
Office Risk Committee, which holds its
meetings twice a year. The approved risk
mitigation actions are then forwarded
to branches, departments and relevant
individuals. As of 2014, the risk mitigation
process is conducted electronically which
allows us to exercise stricter control over
the implementation of approved measures
and helps to increase the efficiency of risk
identification and mitigation.
Our risk management process is continually
reviewed by the Audit Committee and
Internal Audit. The Committee evaluates
the effectiveness of our risk management
systems and makes recommendations for
risk response and systems improvement.
Our risk management levels and flow of
responsibilities are set out in the diagram
opposite.
We strive to comply with international risk
management standards, and in 2014 we
continued to develop our risk management
system in order to expand its scope
and improve its overall compliance and
effectiveness. As part of our effort to be
more compliant with ISO 31000:2009, the
international risk management standard,
we performed an assessment and identified
areas for further development, including
risk culture.
We define ‘risk culture’1 as the norms of
behaviour for individuals and groups within
an organisation that determine collective
ability to identify and understand, openly
discuss and act upon, the organisation’s
current and future risks. We believe that
managing risks is essential to achieving
corporate goals; however, the prevailing risk
culture within an organisation can have a
major impact on how well the organisation
manages its risks.
1Definition is in line with the guidance of the Institute
of Risk Management.
Strategic report
MegaFon’s success and strength in the market is
underpinned by a robust risk management system.
Governance
Levels of risk identification
Reporting
Board of Directors
Audit
Audit Committee
Committee
Internal Audit Department
Risk
Risk Committee
Committee (Head
(Head Office)
Office)
CFO
CFO
Risk identification levels
Risk Management Function
(Head Office)
Risk Committee (Branch)
Heads
Heads of
of Business
Business Functions
Functions
(Head
(Head Office)
Office)
Branch Risks Coordinator
Business Process Risks/
Project Risks
(tax risks, network maintenance risks,
SAP risks, fraud risks, etc.)
We are developing our risk culture model,
which is based on four main aspects:
• Tone at the top: this requires that senior
managers act as role models in the
discussion of risk and risk tolerance,
actively seek information about risk
events and recognise those who help
to identify and unveil risks.
• Governance: this requires that risk
accountabilities are included in
employees’ job descriptions and targets,
timely communication about risks is
encouraged, and all risks are regarded
as opportunities to improve and learn.
Head Office Risks
Branch Risks
• Competency: this requires that the risk
function is given a defined remit and
leadership support in order to support
those employees who manage risks,
a special structure of risk champions is
created, and all employees are trained to
competently identify and manage risks.
• Decision-making: this requires that
information about risks is used in the
decision-making process within the
Company, the Company’s willingness to
take on risk is communicated, and senior
management performance is linked to
risk taking.
Project Risks
Coordinator/
Business Function Coordinator
Approval of Branch Risks
by Head Office
Risk management
Risk management
Principal risks and uncertainties
Geopolitical risks
Sanctions
Liquidity risk
Description and potential impact
Several entities and individuals in Russia are
already subject to sanctions arising from the
conflict in Ukraine, and there is a risk of heightened
sanctions and a widening of the circle of parties
subject to them.
Deterioration of Russian corporates’ access to
western capital markets and higher domestic
refinancing interest rates may limit our access
to capital and increase our cost of borrowing.
Additional sanctions could lead to restrictions on
access to clearing systems or specific transaction
freezes, which would affect our international
payments.
Mitigation measures
Despite a volatile market situation, we continue
to enjoy access to funding and support from our
existing major financing counterparts while, at the
same time, we are successfully cultivating other
financing sources to mitigate the adverse impact
of any cutback in our existing sources.
Relationships with
vendors and suppliers Additional sanctions might be imposed on
equipment, software and services supplied from
the EU and US.
Mitigation measures
Neither the Company, nor the telecom industry
are currently directly subject to any sanctions,
and we do not currently anticipate such sanctions
being imposed.
The fact that essentially all of our operations are in,
and essentially all of our revenues are derived from,
the Russian Federation should help minimise the
impact on our operations and financial results of
any such sanctions.
We have implemented a number of measures
allowing us to partly mitigate this risk:
• Aligning the credit portfolio with our business
needs, so that over 60% of our borrowings
are now denominated in rubles, while another
15% are covered by cross-currency hedging
arrangements. Our FX portion of the portfolio
is represented by cheap and ‘long’ ECA-type
financings.
• More than 55% of the amounts outstanding
become due in 3 years or later providing us
sufficient headroom to refinance through the
current elevated interest rates environment.
• Diversification of currency deposits – the bulk
of our funds were converted into and are now held
in rubles and Hong Kong dollars.
• Tightening of our cash deposit policies – limiting
the number of banks with which we deposit funds
to top-tier Russian and Chinese banks.
• Changing our practice for intra-group settlements
and loans so that they are denominated in rubles
or alternate currencies. The majority of our
significant intra-group financings have now been
switched into rubles.
Mitigation measures
In order to treat this risk, we have done a thorough
analysis of vendors that might be at risk, evaluated
the possible impact, analysed possible alternatives
and developed a list of substitutes and other
measures to counter the impact of such sanctions.
Strategic report
In its business MegaFon encounters a number of risks.
Here we describe the principal risks we face and describe
the mitigation measures we have developed in response
to these risks to help minimise their overall impact.
Governance
Geopolitical risks continued
Bank accounts of
strategic companies
If additional sanctions are imposed, there is a
possibility that Law No. 213-FZ, which is currently
mainly aimed at strategic companies in the defence
industry, may be extended to strategic companies
in other sectors, such as our Company, which has
already been designated as a strategic economic
company.
Mitigation measures
We are closely monitoring the situation, and expect
to undertake appropriate measures if this risk
materialises.
Mitigation measures
MegaFon’s credit ratings may be constrained by
either sovereign credit ratings on Russia, or the
agencies’ country ceilings for Russian corporates,
as the Company’s business is concentrated
predominantly in Russia.
Furthermore, unlike many corporates, our existing
facilities do not have any interest rate step-up
mechanisms tied to changes in our credit ratings.
Notwithstanding the recent downgrade, MegaFon’s
ratings remain one of the highest among Russian
corporates and this fact, along with our ability to
deliver strong financial performance, is anticipated
to continue to underpin our access to funding.
Thus, a downgrade of Russia’s sovereign credit
rating has resulted and may further result in a
reduction of MegaFon’s corporate rating, which
could lead to increases in the cost of borrowing.
Macroeconomic risks
Risk of
macroeconomic
slowdown
Mitigation measures
A macroeconomic slowdown might also lead to the
withdrawal of investment in certain projects, which
would slow our network growth.
We have entered into long-term contracts with
Huawei, Ericsson and Nokia Siemens Networks
to assure the continued construction and
modernisation of our network.
Lowering oil prices, a weaker Russian currency and
rising inflation could negatively impact the Russian
economy, leading to reduced consumer purchasing
power and a decrease in household consumption,
potentially resulting in lower revenues from
telecoms services.
According to our internal analysis, the wireless
market is more resilient in an economic crisis as
consumers tend to be dependent on mobile and
internet services, and as a result do not consider
decreasing their spending on these services.
We have also signed financing agreements with
China Development Bank Corporation and Finnvera
for the purchase of equipment and services from
Huawei and Nokia Siemens Networks, respectively,
for network development, allowing us to cater for
our medium-term requirements.
Russia has been and may be further subject to
a sovereign credit rating downgrade by certain
international credit rating agencies.
Credit ratings
On 22 July 2014 Bank Accounts Opening Law
No. 213-FZ came into force. According to the law,
certain strategic companies may open accounts,
maintain deposits and purchase bank securities
in Russian banks as determined by the Central
Bank of the Russian Federation and/or by the
Government. Further, when performing these
transactions with foreign banks, such companies
are required to notify the authorities thereof.
Risk management
Principal risks and uncertainties continued
Industry risks
Competition
Mobile business, which provides the bulk of our
revenue, is one of the most developed areas
of the Russian telecommunications sector.
The mobile market in Russia is characterised
by high penetration (168.2% in 20141) and
tough competition, with all operators trying to
increase existing customer loyalty and attract
new subscribers through service excellence and
attractive offers.
Our key competitors are the federal operators,
MTS and VimpelCom.
In 2014, Rostelecom also completed the final stage
of a deal to create a new national mobile operator
– Tele2, which is a joint venture with Tele2 Russia.
As part of this deal, Rostelecom transferred all its
mobile assets to Tele2.
Tele2 has announced its plans regarding the
further roll-out of 3G/4G networks in Russia in 2015.
The company expects to start providing 3G/4G data
services in the Moscow region in mid-2015.
MTS and VimpelCom have decided to jointly
develop their 4G/LTE networks.
Evolving business models in our market may lead
to changes in market structure and dynamics.
Failure to anticipate and respond to these, and to
make consequent adjustments to our model may
affect our customer relationships, service offerings
and market position and result in a negative impact
on our operating results.
Technological
developments
1
The Russian telecommunication industry is
experiencing significant changes due to the rapid
development of new technologies and standards
(LTE, LTE-A, etc.). As a result, many operators
are at risk of their services becoming outdated
and uncompetitive.
Source: AC&M-Consulting.
Mitigation measures
MegaFon is the second largest Russian mobile
operator by subscriber base and revenue. We
have licences to provide GSM, 3G and 4G services
throughout the country. Due to our unrivalled
spectrum advantage and coverage, we occupy a
leading position in the 4G/LTE market – a position
that has been reinforced through our acquisition of
Scartel/Yota in 2013.
At the end of 2014, our 3G services were available
in all Russian regions, while our 4G services were
available in 72 regions. We also have a strong retail
network, including 2,047 owned-and-operated
stores and 1,985 franchised stores, allowing us to
control our distribution and deliver high-quality
services to customers.
The strength of our networks and 4G/LTE
leadership, together with our retail reach, means
we are well positioned to manage the competition
risks and challenges within the Russian market.
We believe the Company’s solid presence in the
telecom market, unrivalled spectrum advantage,
strong track-record in 4G and 3G network
development, and smart approach to CAPEX
allocation and cost optimisation will enable us to
withstand any competitive pressure from these
developments.
Mitigation measures
We intend to maintain pace with technological
progress and new industry standards by adopting
the latest technology, and to develop more
effective and innovative products and services.
We also intend to capitalise on the fact that
we remain one of the few telecommunications
providers in Russia with a 3G network in every
region, and to take advantage of the 4G/LTE licence
we received in July 2012 covering the whole of
Russia. Additionally, our acquisition of Scartel/Yota
has enabled us expand our 4G/LTE network and
achieve an unrivalled spectrum advantage.
Strategic report
Governance
Industry risks continued
Churn
Business
combinations and
strategic alliances
Mitigation measures
Telecommunication
fraud risks
In addition, we have a specialised system for fraud
management, called ‘HP FMS’. This allows for
real-time detection and prevention of attempts
to cause damage to our assets or records, and
a second system for identifying illegal termination
of international traffic on our network.
MegaFon may continue to expand its business
through business combinations and strategic
alliances. Should there be any element of failure in
integrating or managing any acquired company or
strategic alliance, there is a risk that management’s
attention will be diverted away from other business
concerns. In addition, any potential acquisition
could negatively affect our financial position and
credit ratings or dilute the value of existing shares.
MegaFon may incur losses caused by intentional
acts by unscrupulous counterparties and
subscribers.
We also risk losing subscribers who become victims
of fraud, with associated reputational damage.
Mitigation measures
We have a special division for managing fraud. This
division operates in accordance with MegaFon’s
‘Fraud Management Strategy’, which identifies and
defends against known and newly emerging forms
of fraud. It also analyses subscribers’ international
roaming activity, which is now a requirement for all
operators under a resolution of the International
GSM Association.
Our aim is to increase our value and integrate any
new acquisitions or assets to achieve maximum
synergy. We analyse our asset portfolio to ensure
the efficient integration of acquisitions and the
intended realization of related cost and revenue
synergies, as well as the active development of the
acquired operations.
In 2014, we continued our efforts to prevent
fraud and offered new anti-fraud services to
our customers. During the year, we identified
1.44 million cases of fraud. As a result of our antifraud actions, the losses associated with fraud
amounted to 0.013% of revenue, which is lower than
in 2013. We also recovered RUB 223.6 million of the
total amount lost, and prevented potential damage
of RUB 1,411.6 million. The overall economic effect
of our fraud management efforts accounted for
0.48% of the Company’s revenue.
In 2014, in order to maintain the loyalty of our
existing customers, amongst other things,
we continued to improve the quality of our
communication services through further rollout
of our 4G/LTE network. We also continued our 3G
network modernisation programme and adopted a
new fault management system.
Mitigation measures
Additionally, during the year we implemented
several initiatives aimed at improving customer
service quality and reducing churn including:
• introduction of several initiatives to improve the
quality of customer service, including introduction
of the 24/7 ‘virtual consultant’ service ELENA;
• expansion of tariff offerings and services
at favourable prices;
• development of new sales channels such
as online platforms and call centres;
• launch of LTE-roaming and MegaDisk cloud
storage;
• switch to a 12-month revenue sharing scheme
with most of our independent dealers; and
• analysis of reasons behind customer moves
to other service providers under the MNP
programme.
Like other Russian operators, we have a significant
churn rate. Given the competitive mobile
environment in Russia and introduction of MNP
(mobile number portability) in 2014, it is vital that
we can retain existing customers and strengthen
their loyalty.
Risk management
Regulatory risks
General
Russia’s mobile telecommunications industry is governed by federal laws on Communications, Personal
Data, Information, Information Technology and Information Protection, as well as numerous related
regulations and standards.
The terms of the applicable legislation and regulations are sometimes unclear, conflicting and subject to
change, while the work of regulatory bodies is not always transparent or predictable. All of this entails
risks for market participants.
We monitor all changes in the legislative and regulatory framework, in order to make changes to business
processes to comply with current legal and regulatory requirements.
Transfer pricing
In 2012, amended Russian transfer pricing
legislation took effect. The amended transfer
pricing rules appear to be extremely elaborate and
provide for an increased range of methods used to
monitor the prices under controlled transactions,
the list of which was also extended. Taxpayers
must inform the tax authorities about all controlled
transactions (transactions with related parties and
some types of transactions with unrelated parties)
performed by them, while the tax authorities have
the ability to make transfer pricing adjustments
and impose additional tax liabilities in respect
of controlled transactions, provided that prices
applied by the taxpayers under such transactions
are not at arm’s length.
These new rules might involve the risk of additional
tax liabilities imposed by the tax authorities.
Controlled foreign
companies
Following the message of the Russian President
‘on de-offshorisation of the Russian economy’, at
the end of 2014 the Russian Parliament passed a
law ‘On controlled foreign companies’ (CFC rules),
which came into force on 1 January 2015. The CFC
rules provide for Russian taxation of the retained
profits of foreign companies and non-corporate
structures (including trusts) controlled by Russian
tax residents (companies and individuals). Russian
taxpayers (controlling parties) must inform the tax
authorities of the foreign companies controlled
by them, while the tax authorities may impose
additional tax liabilities on taxpayers failing to
include the retained profit of their foreign controlled
companies in their taxable base.
Mitigation measures
In order to comply with these new rules, we have
carried out a range of measures to align the pricing
policy of the Company with the amended transfer
pricing legislation and, therefore, to mitigate
the risk.
In particular, since 2012 we have implemented and
have been continuing to improve the Company’s
internal procedures, including the internal system
for the identification of controlled transactions,
for the purposes of compliance with the transfer
pricing legislation.
In addition, we have formed a consolidated group of
taxpayers within our corporate Group. Transactions
within consolidated group of entities are not subject
to transfer pricing control.
Accordingly, we believe that the Company’s transfer
pricing policy and practice complies with the
transfer pricing legislation.
Mitigation measures
Starting from 2014, we have been monitoring the
status of the CFC rules’ enactment and have been
implementing a wide range of measures to mitigate
the possible risks.
We have developed internal procedures to
identify those companies in our Group which may
be treated as controlled foreign companies. We
have further developed a step-by-step plan in
relation to such companies and the schedule for
preparation and filing of the required documents
with the tax authorities. In order to comply with
the new legislation we continue to improve internal
procedures in accordance with official directives
and clarifications provided by the competent
authorities.
Strategic report
Governance
Regulatory risks continued
Risk of revocation,
suspension or
non-renewal of
our licences
Mitigation measures
So far, MegaFon has not faced difficulties in
obtaining or renewing any licences or permits, or in
gaining access to adequate spectrum or numbering
capacity. To ensure this continues, we will work
constructively with the regulator and ensure
that we meet all of the conditions of our licence
agreements and other regulations affecting our
activities.
There are a number of other regulatory initiatives being proposed at various levels of government which,
if implemented, could have a negative effect on our business, operations and prospects.
We are carefully monitoring these possible developments to ensure that, if any are adopted, their final
form will minimise any potential adverse impact on our business.
Technological
neutrality
In December 2013, the SCRF approved the principle
of technological neutrality for UMTS technologies
in the 900 MHz frequency band and for LTE
technology in the 1,800 MHz frequency band, and in
2014 for LTE technology in the 900 MHz frequency
band. The expressed objective of this is to stimulate
the development of 3G and 4G technologies in the
country, because this now means that the operators
who have 2G licenses for 900 MHz and 1,800 MHz
frequencies may now use these frequencies to
deploy 3G and 4G technologies.
Changes in
inter-operator
relationships
In 2014, the Government Communications
Commission of the Ministry for Communications
of the Russian Federation discussed the issue
of amending the existing regulation of operator
cooperation with regard to requirements for traffic
transfer procedures in communications networks
and requirements for networking.
In spite of the fact that at this stage the amendments,
which involved government interference in the
pricing of traffic services by applying equal
rates to different types of call services for all
communications operators, have been pronounced
economically ungrounded, government regulatory
bodies continue to develop new regulations in the
field of operator relationships.
The SCRF plans to continue this work and to extend
the principle of technological neutrality in 2015
to allow LTE technology to be deployed in other
frequency ranges.
Mitigation measures
We regard technological neutrality not only as
a risk, but also as an opportunity because it will
allow us to provide better quality services to our
customers as a result of making available our
entire frequency range.
The implementation of these government initiatives
may result in a decrease in rates for call services
and, respectively, a decrease in revenues from
communication services.
Mitigation measures
Amendments of the existing regulation regarding
inter-operator relationships between mobile
operators and fixed operators are planned for 2017.
We are in the process of developing a series
of measures in order to mitigate the potential
negative consequences of the risk.
Technological neutrality can potentially increase
competition for MegaFon in the future in spite of
the significant investment requirements made by
the State Commission for Radio Frequencies of the
Russian Federation (SCRF).
Other regulatory
issues and activities
Since MegaFon’s main activity is providing
telecommunications services, revocation, suspension
or non-renewal of our licences could have a
significant impact on our business. The Company
also uses facilities which are finite in number or
extent, including the radio frequency spectrum and
numbering resources, and their unavailability for
any reason could adversely affect our operations.
Risk management
Data communications
network
On 24 November 2014 the Government of the
Russian Federation amended the procedure for
organising the data communications networks
of federal government bodies.
Such bodies have now been given the right to
connect to data communications networks
which are part of the infrastructure of
government services administered by one of the
communications operators. The implementation
of this regulatory initiative could result in the
Company’s loss of the B2G segment of the data
transfer and telematics services market.
Communication
quality
MVNO
Mitigation measures
Services that are rendered to federal government
bodies represent a significant part of the services
provided by the Company in the B2G market.
We are carefully monitoring the possibilities of
modifying the procedure in question and developing
measures in order to minimise possible market
share losses.
Mitigation measures
Mitigation measures
Legislation in the Russian Federation currently
does not contain provisions specifically requiring
compliance by communication services with
minimum quality parameters. The regulator’s
current philosophy is that the quality of
communication services will be assured as long
as a subscriber has the right to select their
communication operator, based on operators’
mandatory provision of information about
service quality.
At present, Russian law does not require an
operator of cellular communications systems to
offer virtual operators access to its infrastructure.
In June 2014, the Government Communications
Commission issued a decision stating that it did not
deem it necessary to set requirements for cellular
phone operators in terms of entering into contracts
with virtual operators, including the regulation
of commercial terms and procedures for mutual
settlements.
The chances that minimum parameters for
communication quality will be required in the
medium term are not significant. However, even
if the regulator changes its current approach, the
Company believes that it will be able to ensure
its services comply with any such minimum
parameters.
Although we consider the risk of sudden changes in
the regulator’s approach to the regulation of MVNO
relations in the Russian Federation insignificant,
the Company cannot entirely exclude this
possibility, which could adversely affect MegaFon’s
and its subsidiaries’ operation.
Strategic report
Governance
Personal data on the
internet
In 2014, significant changes in the field of processing
internet users’ personal data were made.
A procedure to limit access to information on the
internet processed in violation of the legislation
in the field of personal data was also introduced.
Shifting overhead
communication lines
to underground
The Ministry of Culture of Russia has proposed a
draft law providing for a global licence for internet
users to access third party content (audio, visual,
and written), under which internet users will be
given the right to download and use such content,
with the cost of such use being charged to the
subscriber by the internet access provider and being
paid by the provider to the owner of the content
(or any organisation managing the owners’ rights on
a collective basis). In its latest version the draft law
creates a significant risk that the communications
operators will become directly liable for payments
due to the content owners.
In 2013-2014, the administrations of a number of
large Russian cities adopted initiatives requiring
overhead lines of communication to be buried
underground. In particular, in 2014 the Government
of Moscow adopted a draft resolution ‘concerning
approval of the Procedure of Locating Overhead
Lines of Power Supply and Communications in
the City of Moscow’, which actually prohibits the
overhead location of communications lines.
The likelihood of the draft resolution being formally
adopted is regarded as extremely high. Nevertheless,
it is expected that the requirement for re-location of
communications lines will only apply to the historical
city centre and near large highways.
Mitigation measures
We fully comply with the current legislation,
in as much as the personal data of all of our
subscribers is processed within the territory of the
Russian Federation. In addition, we believe that
we will be able to comply fully with the additional
requirements.
If the draft law is passed, the Company will be
required to acquire expensive equipment to monitor
internet users’ use of third party content (including
games). In addition, an increase in the cost of
communications services to transfer data and to
provide telematic communications services is to
be expected.
Mitigation measures
We are carefully monitoring these possible
developments to ensure that, if any of them are
implemented, we will develop measures to minimise
any potentially adverse impact on our business.
Considering the fact that compensation for moving
the lines is not supposed to be provided for in the
budget, this initiative could result in significant
expense for operators, decreased communications
quality, and increased communications services
costs.
Mitigation measures
We are developing complex measures to
mitigate the risk of additional costs relating
to the reconstruction and shifting of overhead
communications lines. We are also developing
measures to prevent any breaches of network
integrity or safety.
Global licence
It is expected that in the upcoming years further
legislative changes in the field of processing
internet users’ personal data will follow.
In particular, a law was passed according to
which the recording, filing, accumulation, storage,
clarification, and extraction of personal data of
Russian citizens must be carried out using database
servers located within the territory of Russia
starting from 1 September 2015.
Finally, in August 2014, the Government of the
Russian Federation introduced a requirement for
the mandatory identification of users of nonrecurring services of access to the internet in public
access points.
Risk management
International compliance
General
Insider information
protection risk
MegaFon’s ordinary shares are traded on the London Stock Exchange (LSE) in the form of global
depository receipts (GDR). Therefore the Company is subject to a variety of regulatory regimes in the UK,
particularly the regulations of the UK Financial Conduct Authority and the London Stock Exchange, which
generally govern a company’s ongoing disclosure obligations and its relations with investors. MegaFon’s
ordinary shares are also traded on the Moscow Stock Exchange, to whose regulations the Company
is also subject.
As a public company, MegaFon is obliged to
ensure the security of insider information. Insider
information is information which is directly or
indirectly linked to the Company’s operations and/
or its securities, and which has not been publicly
disclosed and which may have an impact on the
share price.
Under Russian and UK law, the Company and its
employees have responsibilities to ensure proper
usage and protection of insider information. Failure
to discharge these responsibilities could result in
financial and reputational damage.
Disclosure and other
securities-related
risks
As a publicly-traded company, we are exposed
to the risk of claims against our Directors and
top managers from regulatory authorities,
shareholders and investors for improper and/or
untimely disclosure of information affecting the
Company’s business, operations or prospects
as well as disclosure of incomplete, confusing
or contradictory information.
Mitigation measures
We cannot fully protect ourselves against the
risk of improper disclosure of insider information
since modern information systems cannot provide
a 100% security guarantee against deliberate
wrongful acts.
However, as a mitigation measure we have
developed an insider information protection system.
This includes the adoption of special internal
procedures, and the introduction of technical
safeguards, training programmes and tests for
employees.
The Company’s Audit Committee oversees the
execution of these measures, which are designed
to ensure that all shareholders and investors
are treated equally in their access to data and
information.
Mitigation measures
To limit the extent of losses or costs incurred by our
Directors, our officers or the Company as a result
of legal claims, we have purchased a Directors’
and Officers’ (D&O) Liability Policy covering these
risks. This covers claims, mistakes and omissions
that could potentially occur in the course of regular
management activity.
We also have a separate Public Offering of
Securities Insurance (POSI) Policy, which provides
cover against claims arising specifically in relation
to the 2012 IPO.
Strategic report
Governance
Financial risks
Foreign currency/
exchange rate risks
Furthermore, since the Company’s borrowings
consist of loans denominated in both rubles and
foreign currencies, should the ruble fall further
against the US dollar and/or the euro, we could
experience difficulties repaying or refinancing any
non-ruble borrowings.
For contracts which remain denominated in foreign
currencies (in respect to both CAPEX and OPEX),
we have implemented additional controls in order to
ensure that the transactions are cost-effective and
that real value is being provided.
As a result, as of the end of 2014, the share of our
ruble-denominated financings accounted for over
60% of our debt portfolio, while another 15% of
our debt portfolio was covered by cross-currency
hedging arrangements.
• We further expanded the amount of our bank
deposits held in foreign currencies other than
the US dollar and euro, in order to offset the P&L
effect of FX differences and cater for our
FX-denominated CAPEX and OPEX needs.
Mitigation measures
Any increase in rates could increase the cost of
raising new financing for the Company’s operations
and investments and, where existing financing
carries a floating rate, the cost of servicing such
financing.
The major part of the Company’s funding portfolio
is long-term and has been sourced at compelling
interest rates.
We assessed every counterparty (vendor, service
provider, etc) to re-set payment terms in rubles,
or fix a specific exchange rate for the purpose of
payments under the contracts.
Interest rate risks
Interest-rate risk is the risk of incurring financial
losses from adverse fluctuations in interest rates
payable on obligations and liabilities, including
items off the balance sheet.
In late 2014, we saw a surge in ruble funding costs
across the market as the Central Bank of Russia
increased its key rate from 5.5% p.a. early in the year
to 17.0% p.a. at the end of the year.
In 2014 we continued our strategy of limiting our
exposure to floating rate funding instruments. As a
result, only 14% of our debt portfolio has a floating
rate of interest, while the Company has no rubledenominated facilities with interest rates tied to
the key rate of the Central Bank of Russia.
More than 55% of the amounts outstanding
become due in three years or later providing us
sufficient headroom to refinance through the
current elevated interest rate environment.
Mitigation measures
In 2014, we continued to pro-actively manage
our currency exchange risk, taking several steps
allowing us to significantly reduce our open
currency position:
• We continued to implement the Company’s hedging
programme approved by the Board of Directors
in 2013. In 2014, we hedged US$650 million of
our foreign debt with long-term cross-currency
swaps and structured derivatives.
• We refinanced the Company’s largest FX
liabilities which totalled approximately
US$1.66 billion, as follows:
–– in June 2014 we paid off 90% of the total
consideration in respect of the Scartel
acquisition using newly-issued ruble bonds
and available cash;
–– in July 2014 we settled our remaining US dollar
obligations in respect of the Euroset transaction
using the Company’s treasury shares.
Part of our capital expenditures, borrowings,
liabilities and costs (roaming, interconnection,
frequency fees, etc) are denominated in foreign
currencies, particularly the US dollar and the euro.
The recent ruble depreciation (the ruble depreciated
from 32.66 per US dollar as at 1 January 2014 to
56.26 per US dollar as at 31 December 2014, and
has continued to decline since then) could increase
these expenses in ruble terms, creating exchange
rate losses and thereby reducing our net income.
Governance
Our approach to governance
The Board of Directors and the CEO take
ultimate responsibility for corporate
governance at the Company. Corporate
governance also guarantees a balancing
of the interests of shareholders and our
management. As part of our commitment to
continuous improvement, we are constantly
looking at ways to improve and enhance
our corporate governance policies and
procedures.
Building and maintaining trust
As part of our commitment to excellence
and industry leadership, we maintain high
standards of corporate governance. Observing
these standards is essential to our reputation
as a business. We believe that transparency
in our management and decision-making
processes, as well as full and timely
disclosure of Company activities, enable us
to grow in an effective and sustainable way.
Our approach to corporate governance
is guided by our Corporate Governance
Principles. These Principles are designed to
help us ensure that all of our shareholders
are treated equally and can exercise their
rights, and that we operate in compliance
with national and international legislation
and norms. Our Corporate Governance
Principles are:
• protection of the legitimate rights and
interests of all shareholders;
• equal treatment of all shareholders;
• transparency in corporate activities
for shareholders, investors and other
interested parties;
• respect for all our stakeholders, including
employees and subscribers;
• independence of the Board of Directors
in decision-making; and
• following best practice as well as legal
norms in conducting business.
To help us put these principles into practice,
we have developed a clear governance
structure. Its key elements are:
• The General Meeting of Shareholders
• The Board of Directors, and its
committees:
–– Audit Committee
–– Remuneration and HR Development
Committee
–– Finance and Strategy Committee
• Corporate Secretary
• The Management Board
• CEO
• The Revision Commission
• The Internal Audit Department
Our corporate governance structure
ensures support of the aforementioned
principles.
MegaFon’s corporate governance structure
General Meeting of Shareholders
Revision
Commission
Board of Directors
Remuneration and
HR Development
Committee
Finance and
Strategy
Committee
Audit
Committee
Internal Audit
Department
Management Board
Key
Reports to
Elects
Appoints
Recommendations
Appoints based on the recommendations
of the Audit Committee
Strategic report
The integrity, success and sustainability of our
Company are founded upon good corporate
governance. Corporate governance is how we build
and maintain trust among our investors, employees,
local communities and other key stakeholders.
Governance
Subsidiaries and dependent companies
as of 31 December 2014
Aquafon
50%
Ostelecom
75%
TT Mobile
75%
Smarts Volgograd
100%
Scartel
100%
Nakhodka
Telecom
100%
Web Plus
100%
Metrocom
100%
PSKOV CNT
100%
Wireless
Wireline and BB
Retail
MegaFon Retail
100%
Innovative & VAS
Auxiliary
Euroset
50%
MegaLabs
100%
MegaFon Finance
100%
MICL1
100%
RNIC – Kurgan
51%
RNIC – JAO
51%
RC ISS3
51%
VAS Media
100%
Innovative & VAS
RNIC2 – Vladimir
51%
1
2
3
MegaFon Investments (Cyprus) Limited, holds 3.92% stake in MegaFon.
Regional Navigation & Information Centre.
Regional Centre for Information and Satellite Services.
NETBYNET
100%
Governance
Board of Directors
Chairman of the Board of
Directors
Member of the Remuneration and
HR Development Committee
Member of the Audit Committee
Sergey Soldatenkov was born in 1963. He
holds a degree in Radio Engineering from the
Leningrad Institute of Aviation Instrument
Engineering. He was previously the Company’s
Chief Executive Officer (CEO), a position he
held from April 2003 to April 2012.
MegaFon Board member since May 2012.
Percentage of the Company’s ordinary
shares held: nil.
On 21.05.2013 Sergey Soldatenkov acquired
79,506 Company GDRs.
Key attributes: vast experience working
in Russian telecoms sector.
Percentage share ownership in the
Company: 0.0128%.
Vladimir Y. Streshinsky
Member of the Board of Directors
Chairman of the Finance and
Strategy Committee
Vladimir Streshinsky was born in 1969.
He graduated from the Moscow Institute
of Physics and Technology in 1992. He is
currently CEO of USM Advisors LLC.
Member of the Remuneration and
HR Development Committee
MegaFon Board member since June 2008.
Lord Paul Myners
Lord Myners was born in 1948. He graduated
from the University of London with an honours
degree in Education. He is currently Chairman
of the London School of Economics and
Political Science and a non-executive Director
at RIT Capital Partners.
Independent Member of the
Board of Directors
Chairman of the Remuneration
and HR Development Committee
Company: 0.012%.
MegaFon Board member since March 2013.
Company: 0.000484%.
Carl Peter Christian Luiga
Member of the Finance and
Strategy Committee
Christian Luiga was born in 1968. He holds a
Bachelor of Economics from the University of
Stockholm. He has been Senior Vice President
and Chief Financial Officer at TeliaSonera AB
since April 2014. Mr Luiga is also Chairman
of the Board of Fintur Holding B.V.
Company: nil.
shares held: nil.
On 17.04.2014 Vladimir Streshinsky acquired
75,767 Company GDRs.
Key attributes: in-depth knowledge and
understanding of business strategy and
finance.
shares held: nil.
On 05.03.2014 Lord Paul Myners acquired
3,000 Company GDRs.
Key attributes: broad sector experience,
extensive knowledge of finance, politics
and governance.
shares held: nil.
Key attributes: extensive knowledge
of finance and corporate control.
Strategic report
Governance
Sergey A. Kulikov
Member of the Finance and
Strategy Committee
Member of the Audit Committee
Kenneth Karlberg was born in 1954. He is a
graduate of the Senior Officer Programme at
the Swedish Military Academy. He is currently
the owner and Managing Director of KarNet AB.
shares held: nil.
MegaFon Board member since
September 2013.
Company: nil.
shares held: nil.
Key attributes: in-depth knowledge
of technology and telecoms sectors and
excellent management skills.
Key attributes: in-depth knowledge
of international telecoms sector.
Company: nil.
Jan Erik Rudberg
Independent Member of the
Board of Directors
Chairman of the Audit Committee
Jan Rudberg was born in 1945. He is a
graduate of the Gothenburg School of
Business Administration. Since 2003 he has
been a Corporate Advisor to, and is now
Chairman of, Hogia AB. Mr Rudberg is also
Chairman of the Board of KCELL JSC and
a member of the Board of Turkcell Iletsisim
Hizmetleri A.S.
Company: nil.
shares held: nil.
Key attributes: strong background in
business administration, extensive experience
in international telecoms sector.
MegaFon Board member since June 2010.
Kenneth Karlberg
Sergey Kulikov was born in 1976. In 1999, he
graduated from the Military University of the
Ministry of Defence of the Russian Federation.
In 2009, he graduated from the Russian
Academy of Public Service under the President
of the Russian Federation and holds a degree
in State and Municipal Management. In 2011,
Mr Kulikov presented his thesis and received a
Candidate of Economic Sciences degree at the
Military Academy of the General Staff of the
RF Armed Forces. He is an Executive Director
of Rostech State Corporation. Mr Kulikov is
also a member of the Russian Foundation for
Technological Development.
Governance
Management Board
1
Ivan Tavrin
Gevork Vermishyan
Ivan Tavrin was born in 1976. He graduated
from the Moscow State Institute for
International Relations in 1998 with a
diploma in Law. He has been a member of
the Management Board since 7 March 2012.
He was First Deputy CEO of MegaFon until
20 April 2012, when he became the CEO
and Chairman of the Management Board.
Gevork Vermishyan was born in 1978. He
graduated from the Financial University
under the Government of the Russian
Federation in the faculty of International
Economic Relations. He was appointed Chief
Financial Officer of MegaFon in July 2011.
He has been a member of the Management
Board since November 2011.
Company: 0.0447%.
Company: 0.000968%.
shares held: nil.
shares held: 0.000968%.
In June and July 2013 Mr Tavrin acquired
a total of 277,000 GDRs.
On 6 March 2014 and 17 March 2014
Mr Vermishyan acquired a total of 6,000
ordinary shares.
CEO and Management Board Chairman
Alexander Bashmakov
Chief Financial Officer
Anna Serebryanikova
Chief Legal and Government Relations
Officer
Anna Serebryanikova was born in 1974.
She graduated with honours from the
Law faculty of Moscow State University
and holds a Masters of Law degree from
Manchester University.
In 2008, Ms Serebryanikova was elected by
the Board of Directors as the Company’s
Corporate Secretary and appointed Chief
Legal Officer of the Company, serving in
this role until 2012 when her responsibilities
were expanded and her title was changed
to Chief Legal and Government Relations
Officer.
Company: nil.
Mikhail Dubin
shares held: nil.
Evgeny Chermashentsev
Company: nil.
Mikhail Dubin was born in 1978. He holds a
degree in International Economics from the
Financial University under the Government
of the Russian Federation and a degree
and a doctorate in Economics. He joined
MegaFon in July 2010 as the First Deputy
General Director for Strategic Development
and has been a member of the Management
Board since November of that year. In
October 2012 he was appointed Executive
Director for Consumer Business.
shares held: nil.
Company: nil.
Company: nil.
Anait Gasparian
shares held: nil.
shares held: nil.
Chief Strategy and Procurement Officer
Alexander Bashmakov was born in 1984.
He graduated from the Economics Faculty
of the Ural State Technical University with
a major in Marketing. He joined MegaFon
in March 2012, and since October of that
year has acted as Director of Strategy. In
early 2013, he was also appointed Chief
Procurement Officer. He has been Member
of the Management Board since June 2013.
Director for Corporate Development
Executive Director for Consumer Business
Director of Infrastructure
Evgeny Chermashentsev was born in 1977.
He graduated from Saratov State University
named after Chernyshevsky N.G. He has
been a member of the Management Board
since October 2012. He has been Director
for Corporate Business Development since
May 2012, and Director of Infrastructure
since November 2013.
Anait Gasparian was born in 1981. She
holds a degree in Economics from the
St. Petersburg State University. She
was appointed Director for Corporate
Development at MegaFon in April 2012,
Board since October of that year.
Company: nil.
shares held: nil.
1
As at 31 December 2014.
Strategic report
Governance
Valery Velichko
Konstantin Likhodedov
Stanislav Frolov
Valery Velichko was born in 1970. He is a
graduate of the Dzerzhinsky Higher Institute
of Border Defence, the Ministry of Internal
Affairs’ Special Police School in Bryansk and
Ural Academy for State Service. He has been
a member of the Management Board since
June 2011. He has been Director of Urals
Operations since April 2011.
Konstantin Likhodedov was born in 1976.
He graduated from the St. Petersburg State
University of Finance and Economics. He
joined MegaFon in June 2012. He has been
a member of the Management Board since
October 2012 and is Director of Stolichny
Operations.
Stanislav Frolov was born in 1975. He
graduated from Voronezh State University
and from the All-Russian Extramural
Institute of Finance and Economics. He joined
the MegaFon Head Office in 2012. He was
appointed Director of Caucasus Operations in
September 2012, and has been a member of
the Management Board since October 2012.
Director of Urals Operations
shares held: nil.
Pavel Korchagin
Director of Volga Operations
Company: nil.
shares held: nil.
Andrey Levykin
Director of Far East Operations
Andrey Levykin was born in 1973. He
graduated from Samara State Technical
University and has a degree in Mechanical
Engineering. He was appointed Director
of MegaFon’s Far East Branch in
September 2013. He has been a member of
the Management Board since October 2013.
Company: nil.
shares held: nil.
Alexey Semenov
Director of North-West Operations
Alexey Semenov was born in 1982. He
graduated from the State Economic
Academy of Samara. He has been
Director of North-West Operations
since August 2012 and a member of the
Management Board since October 2012.
Company: nil.
shares held: nil.
Alexei Tyutin
Director of Siberia Operations
Alexei Tyutin was born in 1963. He holds
degrees in Industrial and Civil Construction
from the Mikoyan Kuibyshev Institute
of Engineering and Construction, and in
Economic and Social Planning from the
Samara Institute of Economics. He is
MegaFon’s Director of Siberia Operations
Board since June 2009.
Company: nil.
shares held: nil.
shares held: nil.
Company: nil.
shares held: nil.
Vlad Wolfson
Head of Corporate Business Development
Vlad Wolfson was born in 1977. He
graduated from the Kyiv National University
of Trade and Economics in Ukraine, and
the University of Haifa in Israel. He joined
MegaFon in 2012 as Director of Corporate
Sales, and in December 2013 was appointed
Head of Corporate Business Development.
He has been Member of the Management
Board since June 2014.
Company: nil.
shares held: nil.
Dmitry Kononov
Director of Investor Relations and
Mergers & Acquisitions
Dmitry Kononov was born in 1964. He
graduated from the University of Colorado
Denver in 1989. In 2008 Mr Kononov
was appointed Director for Mergers &
Acquisitions, and in 2012 he also became
Director of Investor Relations. He has been
a Member of the Management Board since
June 2014.
Company: nil.
shares held: nil.
2 Stolichny Operations spans Moscow
and the Moscow region.
Pavel Korchagin was born in 1960. He
graduated from the Bauman Moscow
State Technical University with a
degree in Automated Systems. He was
appointed Director of Central Operations in
September 2011 and has been a member of
the Management Board since November of
that year. In January 2015 he was appointed
Director of Volga Operations by the Board of
Directors resolution (Minutes No. 220 (284)
dated 24 December 2014).
Company: nil.
Director of Caucasus Operations
Company: nil.
Director of Stolichny Operations2
Governance
Leadership
In keeping with the Joint Stock Companies
Law and the MegaFon Charter, our principal
governance bodies are the General Meeting
of Shareholders, the Board of Directors,
the Management Board and the General
Director (CEO).
General Meeting of Shareholders
The General Meeting of Shareholders is
our main governing mechanism. Under the
Company’s Charter and applicable Russian
legislation, shareholders are required to
approve a number of measures, such as the
distribution of profits and approval of major
transactions. All relevant procedures for the
Meeting are set out in the Regulations on
the General Meeting of Shareholders, which
are available on the Company’s website
at http://ir.megafon.com/corporate_
governance/charter_amendments/bylaws_and_other_internal_documents/
We hold an Annual General Meeting (AGM)
once a year. This must take place no earlier
than two months and no later than six
months after the end of the fiscal year. The
2014 AGM was held on 30 June 2014. The
key actions taken at the 2014 AGM were:
• approval of the Company’s 2013 Annual
Report;
• approval of the annual financial
statements, including the profit and
loss statement of the Company;
• decisions regarding distribution of profits
and losses, including a dividend payment
(declaration) based on the 2013 financial
year results, determination of the amount
of dividend to be paid upon shares, and
the payment method and procedure;
• election of the Company’s Board
of Directors;
• approval of the size of, and election
of the Company Management Board;
• appointment of the Company’s Auditor;
• election of the Revision Commission of
the Company;
• determination of the amount of fees to
be paid and the amount of expenses to
be reimbursed at year-end 2013 to those
Board members who did not receive
compensation during the year.
In between AGMs, we sometimes hold
extraordinary general meetings (EGMs).
The decision to do so is made by the Board
of Directors – either on its own initiative or
at the request of the Revision Commission,
the Auditor, or shareholders holding at least
10% of voting shares. In 2014, the Company
held four extraordinary shareholder
meetings: three of which were held via
absentee ballot, and one of which was
held face-to-face.
For more details on EGMs held and
decisions taken at EGMs in 2014 please
go to: http://ir.megafon.com/general_
shareholders_meetings/extraordinary_
general_shareholders
Board of Directors
The role of the Board
The Board of Directors exercises overall
supervision of the Company’s activities
through setting business development
priorities and defining the Company’s
strategy. The Board’s main purpose is to
enhance the efficiency and transparency
of the Company’s internal control
mechanisms, improve its monitoring system
and the accountability of its management
bodies, while protecting and promoting
the rights of all shareholders.
The full powers of the Board are set out
in detail in the Company Charter and the
Regulations on the Board of Directors,
which are available on the Company’s
website: http://ir.megafon.com/corporate_
governance/charter_amendments/bylaws_
and_other_internal_documents/
Composition of the Board of Directors
In 2014, the Company’s Board of Directors
consisted of seven members, including two
independent Directors.
Up until 17 March 2014 the Board of
Directors consisted of the following:
• Sergey V. Soldatenkov (Chairman)
• Curt Per-Arne Blomquist
• Berndt Kenneth Karlberg
• Lord Paul Myners
• Jan Erik Rudberg
• Vladimir Y. Streshinsky
• Jan David Erixon
Since 17 March 2014 the Board of Directors
has consisted of the following:
• Sergey V. Soldatenkov (Chairman)
• Sergey A. Kulikov
• Carl Peter Christian Luiga
• Lord Paul Myners
• Jan Erik Rudberg
Board of Directors meetings
During 2014, the Board of Directors held
17 meetings (six face-to-face and 11 by
absentee ballot), as well as two strategy
sessions. During these meetings the Board
took a number of decisions related to the
overall management of the Company,
including but not limited to:
• identification of the Company’s key
development priorities and focus areas,
as well as the Company’s strategy;
• improvement of the Corporate
Governance system;
• review of the Company’s budget and
business plan;
• review of operations and plans of the
Company’s branches and subsidiaries;
• review of changes to Russian Federation
Law;
• review of the 2014 Winter Olympics
in Sochi;
• review of MegaLabs CJSC performance in
2013 and plans for 2014;
• review of the Scartel integration;
• analysis of CAPEX spending and
recommendations to the Company’s
management;
• approval of the Company’s transactions.
Strategic report
Governance
Board Committees
Committee members are selected upon
election of a new Board of Directors.
Audit Committee
The Board’s Audit Committee is responsible
for all issues relating to internal and
external Company audits.
In 2014, ten meetings of the Audit
Committee were held. The key actions
taken in 2014 were:
• review of operation of internal controls;
• analysis of tax exposures and results
of tax audits;
• risk identification and operation of the
Company’s risk management system;
• development of the internal control and
risk management systems;
• implementation of the anti-bribery policy
within the Company;
• monitoring of the Company’s compliance
with the laws of the Russian Federation
and the UK regarding disclosures and
reporting;
• implementation of the Company’s Code
of Business Conduct and Ethics;
• approval of the annual internal audit plan;
• consideration of the internal audit
reports;
• implementation of a personal data
protection system in the Company;
• consideration of interestedparty transactions and making
recommendations on their approval for
the Board of Directors.
A detailed list of interested-party
transactions approved by the Board of
Directors in 2014 is available at: https://
ir.megafon.com/ai/document/6154/file/
MegaFon_AR_2014_Statutory_Disclosure_
materials.pdf
Finance and Strategy Committee
The Finance and Strategy Committee
exercises control over the strategic
development, business planning, budgeting
and investment processes of the Company.
The Committee’s principal responsibilities
are to:
• determine the Company’s strategic
direction, including review of
management reports on fulfilment
of strategic objectives;
• agree the Company’s annual budgets
and business plans and oversee their
implementation;
• oversee the Company’s cash management
policies and liquidity position;
• review, and approve the terms of
proposed M&A transactions;
• review the terms of borrowings and make
the Board of Directors;
• review the terms of large transactions
and transactions with a cumulative value
exceeding US$50,000,000 and make
the Board of Directors.
In 2014, the following Board Members
were elected to the Finance and Strategy
Committee:
• Vladimir Y. Streshinsky (Chairman)
• Sergey A. Kulikov
• Carl Peter Christian Luiga
In 2014, ten meetings of the Finance and
Strategy Committee were held. The key
actions taken in 2014 were:
• approval of the 2014 budget and business
plan;
• review and approval of the approach
to acquisition of new assets by the
Company’s subsidiaries;
• review of the Company’s related-party
transactions, including the approval
of loans between the Company and its
subsidiaries;
• review of transactions with a cumulative
value exceeding US$50,000,000,
including: facility agreements between
the Company and Banks, agreements on
the supply of telecom equipment, target
profit forwards and revolver options.
The Committee’s principal responsibilities
are to:
• make recommendations regarding
external auditors and fees; resolve issues
arising during audits; and review the work
and performance of internal Auditors;
• analyse the effectiveness of internal
controls; review reports and
recommendations from the Revision
Committee and internal Auditors; and
review the effectiveness of procedures
of internal control over the Company’s
financial and operational activities;
• continuously evaluate risk management
systems; and make recommendations for
risk response and systems improvement;
• oversee the development and
implementation of the Company’s insider
information protection systems; and
oversee the execution of the action plan
to improve personal data protection.
As of 31 December 2014, the following
Board Members were members of the
Audit Committee:
• Jan Erik Rudberg (Chairman)
• Sergey V. Soldatenkov
MegaFon’s three principal Board
Committees provide oversight and strategic
planning in three areas of concern to the
Board of Directors. They are:
• Audit Committee
• Finance and Strategy Committee
• Remuneration and HR Development
Committee
Governance
Leadership continued
Remuneration and HR Development
Committee
The key functions of the Remuneration
and HR Development Committee are to:
• assess the performance of the Company’s
Board of Directors;
• review and make recommendations on
performance targets of the Company, and
make recommendations to the Board on
bonuses and incentive plans
for top management;
• review remuneration strategies and
make recommendations to the Board of
Directors on employee bonus schemes;
• review HR processes for motivating
employees and achieving challenging
targets, superior results and maximum
profit;
• review specific HR initiatives and projects;
• review regular and ad hoc surveys of
employee performance and attitudes.
In 2014, the following Board Members were
elected to the Remuneration and
HR Development Committee:
• Lord Paul Myners (Chairman)
• Sergey V. Soldatenkov
In 2014, five meetings of the Remuneration
and HR Development Committee were held.
The key actions taken in 2014 were:
• reporting to the Board of Directors
on the results of the 2013 Employees’
Satisfaction Survey;
• assessment of the performance of the
Company’s CEO and the top management
team;
• implementation of the talent
management and development
programmes;
• review of the CEO’s options plan and
the short-term incentive programme for
management, with recommendations
made to the Board of Directors.
Board members’ independence and
balance
In compliance with criteria established
by Russian law, we endeavour to identify
those members of our Board who may
be considered independent. After election
all members of the Board of Directors
go through a process to determine
their compliance with the criteria of
independence stipulated in the Code of
Corporate Governance. In the final stage
of this process the Board evaluates
whether the candidates can be considered
independent and makes a final decision
on their independence.
Board remuneration
Our Board members are remunerated for
the performance of their duties. The amount
of remuneration is approved by the General
Meeting of Shareholders and depends on
the actual hours worked in
the previous year.
In 2014, the AGM approved the amount
of remuneration of the Board and payment
practice.
The total amount paid to Board members
in 2014 was RUB 48 million.
Following these procedures, in 2014
the Board of Directors confirmed Jan
Erik Rudberg and Lord Paul Myners as
independent Directors.
The other members also reflect the
diversity and balance of the Board –
Kenneth Karlberg and Carl Peter Christian
Luiga have been elected to the Board as
representatives of TeliaSonera, and Sergey
V. Soldatenkov, Vladimir Y. Streshinsky and
Sergey A. Kulikov have been elected to the
Board as representatives of the Company’s
controlling shareholder, USM Holdings Ltd.
We also refer to the relevant provisions
of the UK Corporate Governance Code
which, although not binding on us, provide
additional guidance in determining the
independence of Board members.
Breakdown of remuneration for 2014
Remuneration, RUB million
Remuneration type
Salary
Benefits
Reimbursement of expenses
Bonus
Long-term incentives
Pension
Total remuneration
Chairman of
the Board
of Directors
Independent
members of
the Board of
Directors
Nonindependent
members of
the Board of
Directors
3
0
0
0
0
0
3
35
0
2
0
0
0
37
8
0
0
0
0
0
8
Strategic report
Governance
Corporate Secretary
The Corporate Secretary acts as the
guarantor of the compliance by the
Company’s management with procedures
and principles that ensure the exercise of
rights and legitimate interests of Company
shareholders.
The current Corporate Secretary is Elena
Breeva, who was elected in November 2013
and re-elected in 2014. The Corporate
Secretary also acts as the Company’s
controller who is responsible for insider
information control and security.
Ivan Tavrin was elected CEO in April 2012.
Previously, from 2003 to April 2012, Sergey
Soldatenkov was the CEO of MegaFon (he
has been Chairman of the Board of Directors
since June 2012).
Providing leadership support to the CEO,
the Management Board is the executive
collegial management body at MegaFon. It
is responsible for all aspects of operational
management, apart from those which fall
within the remit of the General Meeting of
Shareholders and the Board of Directors.
The size and composition of the
Management Board are approved annually
at the General Meeting of Shareholders
based on recommendations from the
CEO. The CEO is the Chairman of the
Management Board.
Remuneration of the Management
Board and CEO
The Board of Directors decides the
structure and the level of the remuneration
for the executive management. The total
amount of payments to members of the
Management Board for remuneration and
reimbursement of expenses in 2014 was
RUB 413 million.
Remuneration paid to the Management
Board in 2014
Remuneration type
Salary
Benefits
Reimbursement of expenses
Bonus and long-term incentives
Pension
Total remuneration
RUB million
237
3
0
173
0
413
In October 2012, the Board of Directors
approved a three-year long-term incentive
programme for key executive and senior
level employees. Under this scheme
participants are awarded phantom share
options, which vest in April-May 2014 and
April-May 2015. These options are settled in
cash upon vesting, based on the difference
between the base price of US$17.86 per
share and the weighted average price of
the Company’s GDRs on the London Stock
Exchange from 15 January to 15 March
in the year the option vests. A total of
7 million phantom share options may be
awarded under the plan. In February 2013
a total of 2,133,000 phantom share options
were granted to certain key executive
and senior level employees. In May 2014,
788,400 phantom share options vested and
were exercised.
The Corporate Secretary is elected by
the Board of Directors and reports to it.
MegaFon has stringent requirements for
the person elected to this position. Today,
the role of the Corporate Secretary goes
far beyond its traditionally administrative
remit. It is increasingly outward-focused,
incorporating investor engagement and
corporate communications.
The CEO is the principal executive officer of
MegaFon. Together with the Management
Board, he manages the Company’s
current operations. The CEO is elected
by and reports to the General Meeting of
Shareholders. He also reports to the Board
of Directors.
The Corporate Secretary is responsible
for effective communication with our
shareholders, and organises the work
of the Board of Directors and the Board
committees. The Corporate Secretary
ensures that the Company’s management
bodies strictly follow their mandates, and
helps the executive management, the
Board of Directors and the shareholders
interact more effectively.
The CEO and the Management Board
Governance
Leadership continued
In March 2015, the Board of Directors
approved an amendment to the terms
of the programme to change the basis
for determining the base price and the
weighted-average price of the Company’s
shares for the awards outstanding on
31 December 2014 whose remaining
payment is due in April-May 2015. Under
the amendment, the base price will be
denominated in rubles and will be set at
555 rubles per share and the weightedaverage price of the Company’s shares will
be based on prices on the Moscow Stock
Exchange over the period from 15 January
2015 to 15 March 2015.
In November 2012, the Board of Directors
also approved a long-term incentive
programme for the CEO. Under the terms
of the programme, Mr Tavrin was given the
right, exercisable until May 2017, to buy
from our subsidiary, MegaFon Investments
(Cyprus) Limited, shares representing in
the aggregate a 5% interest in MegaFon
at a price equal to the IPO price, or
US$20 per share. Mr Tavrin exercised his
option to acquire shares representing a
1.25% interest in each of 2012 and 2013.
In March 2014, the Board of Directors of the
Company approved an amendment to the
terms of the plan to accelerate the vesting
of Mr Tavrin’s final options to acquire a 2.5%
interest in the Company, permitting the
remaining options to be exercised at any
time after 1 May 2014. In addition, the Board
agreed to remove a restriction on Mr Tavrin
holding more than 5% of the authorised
share capital of the Company at any time
prior to May 2017. On 30 December 2014,
Mr Tavrin exchanged his 2.5% interest in the
Company and the 15,500,000 unexercised
options (for the acquisition of a 2.5%
interest in the Company) for an interest
in USM Group.
In August 2013, the Company’s Board of
Directors approved a long-term motivation
and retention programme for key executive
and senior level employees. In the
aggregate, a total of 7,000,000 phantom
share options may be awarded (equal to
1.1% of the share capital of the Company)
at the base price of US$24.25 per share.
The plan has a three-year duration. The
share options awarded vest in April-May
2015 and April-May 2016 and will be settled
in cash. Payments shall be made on the
basis of the difference between the base
price and the weighted average price of
the Company’s GDRs on the London Stock
Exchange from 15 January to 15 March of
the relevant year of vesting. In June 2014,
a total of 2,192,000 phantom share options
were granted to certain key executive
and senior level employees under this
programme.
Strategic report
Accountability and effectiveness
Governance
Effectiveness and accountability underpin
our corporate governance measures. To
ensure we are effective and accountable in
our operations, we have a number of internal
organisations and mechanisms in place.
The Revision Commission
More information on the Revision
Commission is available at:
http://ir.megafon.com/corporate_
governance/revision_commission/
Internal Audit
The Internal Audit team reports
administratively to the CEO, and
functionally to the Audit Committee of
the Board of Directors. Its operations are
based on the Regulations on Internal Audit
approved by the Board of Directors, as
well as the International Standards for the
Professional Practice of Internal Auditing.
The Company’s branches and MegaFon
Retail also have Internal Audit teams,
which, in turn, report to the Internal Audit
team at the Company’s headquarters. The
Internal Audit team provides assurance to,
and advises on the Company’s operational
processes, including procurement,
investment, construction, customer
service, processes for external and internal
reporting, and IT and information security
systems, as well as participating in the
development of various internal procedures.
The effectiveness of our internal control
system is maintained through the following
actions:
• updating codes and standards relating
to the internal control system and its
functioning;
• regular monitoring of the quality of
control procedures execution;
• regular surveys among key business
process owners on the effectiveness
of internal control;
• analysis of business processes and
related risks and whether the internal
control system functions effectively
in these processes;
• annual testing of key control procedures
on a sample basis.
On 30 June 2014, the Company’s AGM
approved Ernst & Young LLC as its external
auditor. The auditor was paid the amount
of RUB 56 million for audit services and
RUB 39 million for non-audit services, Ernst
& Young being engaged to perform the
latter services based upon a determination
that the firm was best placed to undertake
these due to its knowledge of the business,
or because the services were related to its
audit function.
We engage independent external auditors
to audit our annual and review our
quarterly financial statements. These
auditors must be approved by the General
Meeting of Shareholders based upon
a recommendation from the Board of
Directors.
The current members of the Revision
Commission are Pavel Kaplun (Chairman),
Managing Director, Head of Investment and
Analytical Department of USM Advisors
LLC; Yuri Zheimo, Director of Internal Audit
at MegaFon; and Sami Haavisto, Senior
Business Controller at TeliaSonera Eurasia.
External audit
We have an internal control system
which represents a set of organisational
measures, policies, instructions and
procedures designed to ensure the
preparation of reliable financial statements
and to comply with statutory regulatory
requirements in this area.
Our Revision Commission is elected by the
General Meeting of Shareholders and is
responsible for monitoring and controlling
MegaFon’s financial and economic activity.
The Commission’s members cannot be
members of the Board or other executive
bodies of the Company. There can also be no
more than three members at any one time.
Internal control over financial reporting
In 2014, we continued to improve our
internal control system. We analysed the
system in terms of its alignment with best
practice and updated the internal control
methodology COSO 2013.
The results of all actions implemented
are submitted to the Board of Directors’
Audit Committee, the Company’s top
management and the Company’s external
auditor.
Governance
Other corporate governance issues
Financial markets
regulatory compliance
In March 2014, the Central Bank of Russia
adopted a new Corporate Governance
Code – one of the most significant events
in corporate governance during the year.
The new version of the Code is a result of
the joint efforts of market regulators, the
Moscow Stock Exchange, international
organisations, investors and issuers,
and international and Russian corporate
governance experts. The new Code contains
best practice standards and is designed to
take Russian companies to the next level
of corporate governance.
For each fiscal year ending 31 December,
we publish audited consolidated financial
statements prepared in accordance with
IFRS. We also provide unaudited, condensed
consolidated financial statements prepared
in accordance with IFRS at the end of the
first, second and third fiscal quarters.
We place announcements of our financial
results, as well as notices of upcoming
General Meetings of Shareholders and other
important and price-sensitive information,
on the London Stock Exchange website
via an information distribution system
(RNS) and official information agency in
Russia – Interfax. These announcements
are followed by the publication of press
releases on our corporate website at
http://ir.megafon.com/news/capital_
market_releases/ and/or www.corp.
megafon.ru/investors/disclosure/. We
also publish, via authorised agencies in
Russia and the UK, as mentioned above,
information required by Russia’s Federal
Law on the Securities Market and the
Regulation on Information Disclosure by
Issuers of Securities. This information is
also available on our corporate website.
The Code’s recommendations are primarily
aimed at public companies and major
government-controlled companies. Certain
standards and recommendations of the
Code have already been included in the
new Listing Rules of the Moscow Stock
Exchange.
Compliance is the foundation of our
corporate governance system. We comply
with regulations relating to joint-stock
companies, including the provisions of
Russia’s Joint Stock Company Act. Since
our listing on the London Stock Exchange
(LSE), we shall now comply with the
UK Companies Act, the Disclosure and
Transparency Rules of the UK Financial
Conduct Authority for ‘standard’
companies, and the LSE Listing Rules.
Information on MegaFon’s compliance
with the Russian new Corporate
Governance Code as well as how our
governance practices in 2014 compared
to the recommendations of the Corporate
Governance Code can be found at:
http://ir.megafon.com/ai/document/6154/
file/MegaFon_AR_2014_Statutory_
Disclosure_materials.pdf
Corporate governance developments
in 2014
During 2014 we continued to improve and
upgrade our corporate governance system
to keep pace with our disclosure and
compliance responsibilities. We did this by:
1.Developing additional control over
related-party transactions
In 2014, a MegaFon working group
continued our efforts to optimise control
over related-party transactions by:
• requiring non-affiliation representations,
where applicable, in contracts;
• conducting audits of related-party
transactions once a year;
• improving the detection of relatedparty transactions, and speeding up the
processes by which they are approved by
our governing bodies.
2.Improving insider information
protection systems
MegaFon needs to prevent the unlawful
use of the large amounts of non-public
information it generates on a regular basis.
In 2012, the Board of Directors adopted
specific Russian legislative requirements
to prevent such unlawful use. In 2013, the
Company established internal procedures
to improve its ability to meet these
requirements, enabling it to:
• restrict access to information;
• designate locations for storing and
reviewing information;
• protect IT systems against the loss
of key data and access by third parties;
• implement techniques to protect insider
information.
The Company, under the supervision of the
Audit Committee, continued to improve its
insider information protection system –
for example, by introducing new technical
safeguards and quarterly reviews of insider
information protection tools.
In 2014, we created and started
implementing a number of special technical
insider information protection systems,
which ensure protection and control over
insider information flow on the mobile
devices of the Company’s insiders, as well
as control over the entire spectrum of
potentially dangerous devices and network
communications.
We have continued to provide training
programmes and tests to engage
Company employees with this businesscritical issue. The remote educational
course and the tests are obligatory for
employees included on the insider list.
The actual test comprises 36 questions
on theory and practice that can only be
answered satisfactorily if the participant
is familiar with the subject matter,
thereby encouraging employees to study
and understand the relevant legislative
requirements.
Strategic report
Governance
3.Identifying independent Board Members
Using the criteria set out in the relevant
Russian regulation, the Board of Directors
identified two independent members of
the Board. Following the approval in 2014
of the Code of Corporate Governance by
the Central Bank of Russia, the criteria
for identifying the independence of Board
members have been significantly expanded.
Despite the fact that the provisions
of the Code of Corporate Governance
are advisory, the Company uses these
criteria in determining the independence of
members of the Board of Directors (for more
information see page 76).
A list of MegaFon’s interested-party
transactions approved by the Board
of Directors in 2014, is provided on
the Company’s website, at http://
materials.pdf
4.Adopting new corporate
governance polices
To reinforce our commitment to good
corporate governance, in 2014 we:
• adopted a new version of the regulations
on the Management Board;
• improved our information disclosure
procedures;
• optimised the process of remuneration for
the Board of Directors; in line with best
practice, this issue will no longer be on
shareholder meeting agendas.
We are committed to combating corruption
and ensuring fair competition. As a part
of these efforts, we adopted a Code of
Business Conduct and Ethics in 2013 and
an Anti-corruption Policy a year earlier.
We believe that our corporate responsibility
efforts make us an attractive counterparty
for our current and potential partners.
We are confident these measures will
strengthen our corporate governance
processes and enhance the transparency of
our operations. For more information about
these developments, please visit: http://
materials.pdf
Related-party transactions are specifically
governed by Chapter XI of Federal Law
No. 208-FZ ‘On Joint Stock Companies’.
Under these provisions, transactions in
which the shareholders, the Board of
Directors, or individual Board members are
interested parties must be approved by
either the Board of Directors or the General
Meeting of Shareholders. The approval
depends on the nature of the transaction,
and is subject to the requirement that
the interested member(s) of the Board of
Directors or the interested shareholder(s)
does/do not vote on the transaction.
Major transactions
In 2014, MegaFon concluded no
transactions which qualify as ‘major
transactions’, (as defined by Article 78 of
Federal Law No. 208-FZ On Joint-Stock
Companies).
Industry and business partners
Anti-corruption policy
MegaFon values its reputation for adhering
to internationally recognised standards of
ethics and integrity in business, as well as
specific anti-corruption regulation in the
Russian Federation, such as the Federal
Law ‘On Countering Corruption’ and the
‘Methodical Recommendations’ of the
Ministry of Labour and Social Security,
adopted in 2013. In addition, in 2014 we
joined the Anti-Corruption Charter of
Russian business.
Following the adoption of our Anti-bribery
Policy in 2012, in 2013 the Board of
Directors adopted the Code of Business
Conduct and Ethics which emphasised
the Company’s ‘zero-tolerance’ attitude
towards corrupt and unethical behaviour.
These policies and notice of the Company’s
position are disseminated, among other
things, through the Company’s website.
Additionally, MegaFon’s Gifts and
Hospitality Policy provides guidance on
the requirements to be met by all MegaFon
employees before accepting gifts from,
or making gifts to, suppliers or other
third parties.
In 2014, we focused on the internal
procedures that are necessary for
compliance with these policies. We
conducted training of employees in
MegaFon’s headquarters as well as in
branches and subsidiaries on the Antibribery Policy and the Gifts and Hospitality
Policy. All new employees are also given
such training.
We have a ‘Direct Line’ through which
MegaFon employees and other stakeholders
can receive guidance as to whether a
particular action is deemed corrupt, or can
discreetly (and, if required, anonymously)
report violations. Through this Direct Line
employees can also get advice on the
terms of the Code of Business Conduct and
Ethics. Direct Line usage statistics and
information on the most important issues
is communicated to the Audit Committee.
Related-party transactions
We rolled out educational tools and
materials designed to enhance our
employees’ understanding of the principles
of insider information protection as well
as of methods of insider information
processing and security. On our internal
corporate website, for example, our
Controller continues to host a regular blog,
posting articles on the most interesting
cases of legal practice relating to insider
information in Russia and the UK and
answering questions from internal users.
We also made a short educational film,
which gives a general overview on the
protection of insider information.
Governance
Shareholders’ equity
Charter capital
MegaFon’s charter capital consists of
620,000,000 ordinary registered uncertified
shares, each with a par value of RUB 0.1.
It is authorised to issue an additional
100,000,000,000 ordinary shares. It has
no preferred shares. All ordinary registered
uncertified shares have been combined
into one issue whose state number is
1-02-00822-J. The government does not
hold shares in the charter capital.
In November 2012, MegaFon held an
initial public offering (IPO) on the London
and Moscow Stock Exchanges. The issue
price was US$20 per ordinary share or
global depositary receipt (GDR) (each GDR
representing one ordinary share). The total
offering size was US$1.8 billion, including
the overallotment option (2,153,000
ordinary shares and 89,326,500 GDRs). This
implied a market capitalisation for MegaFon
on the listing date of US$11.2 billion.
Shareholder structure
As of 31 December 2014, MegaFon is
controlled by USM Group, which holds
56.32% of the Company’s authorised
capital. The holding of USM Group
in MegaFon changed compared to
31 December 2013 as a result of the
following actions:
• In July 2014, the interest of USM Group
increased from 50%+100 shares to
53.65% as a result of the completion
of the settlement for the acquisition
by the Company of a 50% interest in
Euroset. MegaFon used its shares held
by its subsidiary MegaFon Investments
Cyprus Limited (MICL). As a result of this,
the percentage interest of MICL in the
Company’s share capital went from 7.57%
to 3.92%.
• In December 2014, Telecominvest
Holdings Limited (a USM Group company)
purchased 1,029,464 GDRs and ordinary
shares in the market, which resulted in
USM’s interest increasing from 53.65%
to 53.82%.
• In December 2014, the holding of USM
increased from 53.82% to 56.32% as
a result of a transaction between the
Company’s CEO Ivan Tavrin and USM
Group under which Mr Tavrin transferred
to USM Group, as part of the settlement
for his acquisition of a stake in USM
Group, MegaFon shares representing
a 2.5% interest in the Company which
had been acquired by him earlier under
the CEO long-term incentive plan. The
terms of the transaction also provided
for the transfer to USM Group of options
to purchase an additional 2.5% interest
in the Company which were awarded to
Mr Tavrin pursuant to the CEO long-term
incentive plan. These options can be
exercised in whole or in part at US$20 per
share at any time prior to May 2017.
As of 31 December 2014, the interest of
TeliaSonera remained unchanged from the
end of 2013, at 25.17%; the interest of MICL
decreased from 7.57% at the end of 2013 to
3.92%; following the transaction with USM
Group discussed above, the holding of the
CEO Ivan Tavrin was reduced to 0.0447%;
and the free-float accounted for 14.59%.
MegaFon equity structure as of 31 December 2014
USM Group
TeliaSonera Group
56.32%
25.17%
MegaFon Investments
(Cyprus Limited)
3.92%
100%
Free float
14.59%
The chart above indicates the effective equity capital structure which may be inconsistent with the architecture of the formal ownership through special purpose
entities which, for the sake of simplicity, are not shown above.
Strategic report
Governance
MegaFon share price performance in 2014
Dividend policy
US$45
US$40
-7.1%
-25.7%
US$30
US$25
-48.5%
US$20
US$15
-58.9%
MFON MOEX (indexed)
MSCI Russia (indexed)
MICEX index (indexed)
In the year 1 January to 31 December 2014,
MegaFon ordinary shares demonstrated
a downward trend mainly due to pressure
from geopolitical issues in Russia. As of
31 December 2014, the price of MegaFon’s
ordinary shares had decreased by 25.7%.
MegaFon ordinary shares on the
Moscow Stock Exchange
01/12/14
01/11/14
01/10/14
01/09/14
In the year 1 January to 31 December 2014,
the price of MegaFon GDRs demonstrated
a downward trend in line with the MSCI
Russia index. As of 31 December 2014, the
GDR price had decreased by 58.9%.
MegaFon GDRs on the LSE
01.01.2014 –
31.12.2014
01.01.2014 –
31.12.2014
52-week high, RUB per share
52-week low, RUB share
Year-end price (at close
on 30 December 2014),
RUB per share
01/08/14
01/07/14
01/06/14
01/05/14
01/04/14
01/03/14
01/01/14
01/02/14
MFON LSE
1,138.5
804
52-week high, US$ per share
52-week low, US$ per share
Year-end price (at close
on 31 December 2014),
US$ per share
33.5
13.78
13.78
820
US$10
The Company aims to pay at least 50% of
adjusted net profit or 70% of adjusted cash
flow (whichever is greater) in dividends
annually. The target pay-out percentages
may be adjusted upwards or downwards
by the Board of Directors as needed to
maintain a capital structure based on a net
debt/adjusted OIBDA ratio of 1.2–1.5.
US$35
In 2012, MegaFon paid dividends for the first
time in the Company’s history (previously,
net income was always reinvested in
business development). In accordance with
the Company’s dividend policy approved in
2012, the General Meeting of Shareholders
approves the amount of dividend to be
disbursed, based on a recommendation by
the Board of Directors (following preliminary
determinations by the CEO). The amount
will depend on the financial results, the
cash needed by the Company to develop its
business, implement its strategy and meet
its obligations, and any other factors that
the Board of Directors believes relevant,
including the impact on the Company’s
investment-grade credit ratings.
Governance
Shareholders’ equity continued
Payment of dividends
As of 1 January 2014, considerable changes
were made to the regulatory framework
for the payment of dividends in Russia.
This meant that, in July 2014, MegaFon’s
dividends for the 2013 financial year were
paid out for the first time in line with a new
‘cascade system’:
• The payment of dividends for the 2013
financial year in the total amount of
RUB 40 billion (RUB 64.51 per share (or
GDR)) was approved at the AGM held on
30 June 2014 and 11 July 2014 was set
as the record date for the determination
of shareholders entitled to receive
dividends. This implied a total dividend
pay-out in the amount of RUB 46.4 billion
(RUB 74.85 per share (or GDR)) for the full
year 2013, including the Q1 2013 interim
dividend previously paid in July 2013.
• The dividends were transferred to direct
shareholders and registered nominee
holders listed in the Company’s register
as shareholders.
• The registered nominee holders
then distributed the dividends to the
sub-nominees, trustees and direct
shareholders listed in their registers. The
sub-nominees (such as Bank of New York
Mellon, a depositary for the Company’s
GDR issuance program) then paid out
dividends to those persons listed in their
registers as shareholders.
Dividend history Year
2012
2013
Dividend period
Q2-Q4
Total payment,
RUB bn
33.59
DPS, RUB
54.17
Record date
21/05/2013
Price, CoB, RUB
1,066.30
Dividend yield¹
5.1%
Dividend payout ratio²
96%
FY
46.41
74.85
11/07/2014
1,043.40
7.2%
Taxation of dividends
Based on the Russian tax legislation
dividend income received by the
shareholders is subject to Russian
income tax at the following rates:
• tax at the rate of 9%3 is payable on the
dividend income received by companies
and individuals that are Russian tax
residents;
• tax at the rate of 15% is payable on the
dividend income received by non-Russian
tax residents (both companies and
individuals). This rate may be reduced
in accordance with the provisions of the
effective Double Tax Treaties concluded
between Russia and the countries of
residence of the beneficial owners of
dividends.
The above tax is to be determined, withheld
and paid to the Russian Treasury by the
tax agent upon each payment of dividends,
i.e. by MegaFon in relation to the dividends
paid to the shareholders (e.g., Sonera
Holding B.V.), rights to the shares of
which are accounted for in the Company’s
securities register, and by the Russian
depositary in other cases.
To benefit from a reduced tax rate
envisaged by a Double Tax Treaty, a foreign
shareholder must provide the tax agent
with a certificate confirming his residence
in the country which concluded the relevant
Double Tax Treaty with Russia. Such
a certificate must be duly notarised by
the competent authority and provided
to the tax agent prior to the date of
dividend payment.
90%
1
Calculated based on closing price as of the record date of a MegaFon ordinary share traded on the MOEX.
2
Total dividend as a percentage of profit for the same dividend period attributable to equity holders of the
Company in accordance with IFRS.
3
Following amendments to Russian tax legislation effective from 1 January 2015, the income tax rate applicable in
relation to dividends received by Russian tax residents in 2015 and thereafter has increased from 9% to 13%.
4Following amendments to Russian tax legislation effective from 1 January 2015, the 30% tax rate will no longer
be applicable to dividend income received in 2015 and beyond. Therefore, tax agents should apply general tax
rates provided by the Russian Tax Code and Double Tax Treaties.
Special rules apply to shareholders that
hold MegaFon shares or GDRs through
foreign nominee holders. In this case, the
depository withholds income tax at the
general rates prescribed by the Russian
Tax Code or by the Double Tax Treaty (if
applicable). Should the Double Tax Treaty
provide for an additional reduction in the
tax rate in the case of certain criteria being
met, a reduced rate is not applied. Prior to
the payment of dividends, nominee holders
must provide the depository with the
aggregated information of the shareholders,
who hold MegaFon shares and/or GDRs.
Failure to provide such information may
result in a punitive 30%4 rate of withholding
tax applied by the depository.
Shareholders may make claims for the
refund of excess tax withheld and paid
to the Russian Treasury by the tax agent
by providing the Russian tax authorities
with documents confirming their right to a
reduced rate of income tax. Such a refund
claim may be filed within 3 years following
the year of dividend payment.
MegaFon intends to comply with the
legislation affecting the payment of
dividends as directed by its professional
advisers. In the absence of satisfactory
evidence that a different rate of withholding
tax is applicable, MegaFon intends to
withhold tax on dividend payments,
if applicable, at the standard rates set
out above.
MegaFon recommends that shareholders
consult with their tax advisers as to how
they may minimise their exposure to
Russian withholding tax on dividends
to which they may be entitled.
Strategic report
Governance
Directors’ responsibility
statement
Governance
The Directors are responsible for preparing annual accounts for each of the financial years of the Company, and to ensure that they
present fairly, in all material respects, the assets, liabilities, financial position and profit or loss of the Company.
The Board of MegaFon confirms that to the best of its knowledge:
2.The Business Review contained in MegaFon’s Annual Report for 2014 gives a fair view of the performance of the business, and
specifically the operational results of MegaFon, of its efforts to meet its strategic objectives, and of the risks and uncertainties faced by
the business, as well as other events which in the near future may have an impact on the operations of the Company.
On behalf of the Board
1.The consolidated financial statements, prepared in accordance with International Financial Reporting Standards as of
31 December 2014 and 2013, and also for the years ended on those dates, including the consolidated statements of financial position,
consolidated statements of comprehensive income, cash flows, changes in equity and notes to the consolidated financial statements,
present fairly, in all material respects, the state of affairs of MegaFon in accordance with International Financial Reporting Standards.
Consolidated statement of comprehensive income
Consolidated statement of financial position
Consolidated statement of changes in equity
Consolidated statement of cash flows
Notes to the consolidated financial statements
1. General
2. Basis of preparation
3. Basis of consolidation
4. Significant accounting policies
5. Significant accounting judgments, estimates and assumptions
6. Standards issued but not yet effective
7. Equity
8. Group information
9. Business combinations
10. Investments in associates and joint ventures
11. Segment information
12. Income taxes
13. Earnings per share
14. Property and equipment
15. Intangible assets
16. Impairment test
17. Financial assets and liabilities
18. Non-financial assets and liabilities
19. Inventory
20. Trade and other receivables
21. Cash and cash equivalents
22. Assets held for sale
23. Provisions
24. Trade and other payables
25. Share-based compensation
26. Long-term incentive programme
27. Sales and marketing expenses
28. General and administrative expenses
29. Related parties
30. Financial risk management
31. Commitments, contingencies and uncertainties
32. Events after the reporting date
93
94
96
97
98
99
99
99
99
100
107
109
111
112
112
114
116
116
118
119
120
122
124
130
131
132
132
133
133
133
134
136
136
136
137
138
141
143
Strategic report
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Moscow, 115035, Russia
Tel:
+7 (495) 705 9700
+7 (495) 755 9700
Fax:
+7 (495) 755 9701
www.ey.com/ru
ООО «Эрнст энд Янг»
Россия, 115035, Москва
Садовническая наб., 77, стр. 1
Тел.:
+7 (495) 705 9700
+7 (495) 755 9700
Факс:
+7 (495) 755 9701
ОКПО:59002827
Governance
The Board of Directors and Shareholders of OJSC MegaFon
We have audited the accompanying consolidated financial statements of OJSC MegaFon and its subsidiaries, which comprise the
consolidated statement of financial position as of 31 December 2014, and the consolidated statement of comprehensive income,
statement of changes in equity and statement of cash flows for the year then ended, and a summary of significant accounting policies
and other explanatory information.
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with
International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the
preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in
accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan
and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material
misstatement.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of OJSC MegaFon
and its subsidiaries as at 31 December 2014, and its financial performance and cash flows for the year then ended in accordance with
International Financial Reporting Standards.
/s/ Ernst and Young LLC
10 March 2015
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial
statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement
of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal
control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s
internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant
accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
Management’s responsibility for the consolidated financial statements
(in millions of Rubles)
Note
Years ended
31 December
2014
2013
Revenues
Services
Sales of equipment and accessories
Total revenues
291,656
23,139
314,795
279,087
18,142
297,229
Operating expenses
Cost of services
Cost of equipment and accessories
Sales and marketing expenses
General and administrative expenses
Depreciation
Amortisation
Loss on disposal of non-current assets
Total operating expenses
63,148
21,481
16,456
75,190
47,431
7,827
1,437
232,970
58,480
16,912
18,687
70,558
44,851
6,131
1,200
216,819
81,825
80,410
10
29
17
17
(13,792)
1,155
(516)
(1,370)
(50)
(16,884)
(12,184)
1,888
(202)
(81)
269
(2,914)
12
50,368
13,368
67,186
15,416
37,000
51,770
27
28
14
15
Operating profit
Finance costs
Finance income
Share of loss of associates and joint ventures
Other non-operating loss
(Loss)/gain on financial instruments, net
Foreign exchange loss, net
Profit before tax
Income tax expense
Profit for the year
The accompanying notes are an integral part of these consolidated financial statements.
17
Strategic report
(in millions of Rubles, except per share amounts)
Note
Years ended
31 December
2014
2013
Other comprehensive income/(loss)
(188)
136
(52)
51,718
Profit for the year
Attributable to equity holders of the Company
Attributable to non-controlling interest
36,726
274
51,608
162
Total comprehensive income/(loss) for the year
Attributable to non-controlling interest
36,055
(46)
51,600
118
Earnings per share, Rubles
Basic, profit for the year attributable to ordinary equity holders of the Company
Diluted, profit for the year attributable to ordinary equity holders of the Company
13
13
63
63
91
89
(1,288)
297
(991)
36,009
17
Governance
Other comprehensive income/(loss) to be reclassified to profit or loss in subsequent periods:
Foreign currency translation difference, net of tax
Net movement on cash flow hedges, net of tax
Net other comprehensive loss to be reclassified to profit or loss in subsequent periods
Total comprehensive income for the year, net of tax
Consolidated statement of financial position
Note
Assets
Non-current assets
Property and equipment
Intangible assets, other than goodwill
Goodwill
Investments in associates and joint ventures
Non-current financial assets
Non-current non-financial assets
Deferred tax assets
Total non-current assets
As of 31 December
2013
2014
restated*
14
15
9, 15
10
17
18
12
224,655
57,427
32,292
34,944
2,863
2,053
782
355,016
220,272
58,848
31,899
35,460
425
1,300
3,673
351,877
19
18
12
20
17
21
6,484
5,161
3,713
16,260
48,887
22,223
102,728
–
457,744
8,376
5,960
2,777
12,493
39,296
9,939
78,841
1,516
432,234
7
157,689
144
157,833
138,034
271
138,305
Non-current liabilities
Loans and borrowings
Other non-current financial liabilities
Non-current non-financial liabilities
Provisions
Deferred tax liabilities
Total non-current liabilities
17
17
18
23
12
156,319
1,270
1,712
4,958
19,572
183,831
130,825
20,838
1,170
5,355
17,752
175,940
Current liabilities
Trade and other payables
Other current financial liabilities
Current non-financial liabilities
Income taxes payable
Total current liabilities
24
17
17
18
12
36,622
51,149
7,658
20,493
158
116,080
35,636
21,184
40,785
19,490
894
117,989
457,744
432,234
Current assets
Inventory
Current non-financial assets
Prepaid income taxes
Trade and other receivables
Other current financial assets
Cash and cash equivalents
Total current assets
Assets held for sale
Total assets
Equity and liabilities
Equity
Equity attributable to equity holders of the Company
Non-controlling interests
Total equity
Total equity and liabilities
* Certain amounts do not correspond to the 2013 financial statements and reflect adjustments made, refer to Notes 4 and 9.
22
Strategic report
Consolidated statement of changes in equity
Ordinary shares
620,000,000
–
Amount
526 54,690,089 (39,133) 12,567 143,468
–
–
–
– 51,608
(73) 117,355
– 51,608
–
–
7
–
–
–
–
51,608
– (36,968)
25
–
–
–
–
–
–
1,178
1,178
–
1,178
25
–
–
(7,750,000)
5,545
–
(122)
(554)
4,869
–
4,869
17
–
–
–
–
–
–
–
–
(233)
(8) 51,600
– (36,968)
(671)
(320)
–
–
(671)
7
–
–
–
–
36,726
– (38,428)
25
–
–
–
–
–
–
689
689
10
–
–
(22,641,056) 16,201
–
5,138
–
21,339
–
–
–
–
–
–
–
(671) 36,055
– (38,428)
–
–
561 157,689
(991)
(46) 36,009
– (38,428)
–
689
– 21,339
51
51
(132)
(132)
144 157,833
–
–
–
–
–
–
526 24,299,033 (17,387) 12,567 161,422
(233)
(132)
(132)
271 138,305
274 37,000
–
–
620,000,000
118 51,718
– (36,968)
–
–
543 138,034
– 36,726
–
–
(44)
(52)
–
–
(8)
518 117,873
162 51,770
–
–
–
–
–
–
526 46,940,089 (33,588) 12,567 157,986
–
–
–
– 36,726
(8)
Total
equity
–
–
620,000,000
–
–
Noncontrolling
Total
interests
As of 1 January 2013
Net profit
Other comprehensive
loss
Total comprehensive
income
Dividends
Share-based
compensation
Sale of treasury shares
upon exercise of stock
options
Sale of interest in
Synterra-Media
Dividends to noncontrolling interests
As of 31 December 2013
Net profit
Other comprehensive
loss
Total comprehensive
income
Dividends
Share-based
compensation
Settlement of
convertible debt
Contribution of noncontrolling interest
Dividends to noncontrolling interests
Amount
Number of
shares
Other
capital
Capital Retained reserves
surplus earnings (Note 7)
Governance
Note
Number of
shares
Treasury shares
Consolidated statement of cash flows
Note
Operating activities
Profit before tax
Non-cash adjustment to reconcile profit before tax to net cash flows:
Depreciation
Amortisation
Loss/(gain) on financial instruments, net
Net foreign exchange loss
Change in impairment allowance for receivables and other non-financial assets
Finance costs
Finance income
Equity-settled share-based compensation
Working capital adjustments:
(Increase)/decrease in inventory
(Increase)/decrease in trade and other receivables
(Increase)/decrease in current non-financial assets
Increase/(decrease) in trade and other payables
Decrease in current non-financial liabilities
Change in VAT, net
Income tax received
Income tax paid
Interest received
Interest paid, net of interest capitalised
Net cash flows from operating activities
Investing activities
Purchase of property, equipment and intangible assets
Proceeds from sale of property and equipment
Acquisition of subsidiaries, net of cash acquired
Payment of deferred and contingent consideration
Net change in short-term demand deposits
Proceeds from sale of Synterra-Media, net of cash
Net cash flows used in investing activities
Financing activities
Proceeds from borrowings, net of fees paid
Repayment of borrowings
Dividends paid to equity holders of the Company
Dividends paid to non-controlling interests
Payment of liability for marketing related licences
Proceeds from exercise of stock options
IPO transaction fees paid
Other
Net cash flows used in financing activities
Net increase in cash and cash equivalents
Net foreign exchange difference
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
14
15
17
10
28
25
17
9
17
17
17
17
17
7
15
25
Years ended
31 December
2014
2013
50,368
67,186
47,431
7,827
1,437
50
16,884
516
1,398
13,792
(1,155)
689
1,370
44,851
6,131
1,200
(269)
2,914
202
2,037
12,184
(1,888)
1,178
81
1,900
(6,048)
(416)
(3,684)
(236)
2,122
427
(10,052)
1,183
(11,190)
114,613
(3,050)
1,154
2,078
3,947
(851)
(3,103)
2,393
(16,344)
1,687
(9,025)
114,693
(58,146)
751
(189)
(36,330)
165
–
(93,749)
(43,022)
2,514
(15,219)
(5,878)
(14,148)
76
(75,677)
48,522
(23,178)
(38,428)
(132)
(184)
–
–
51
(13,349)
32,200
(31,193)
(36,968)
(132)
(539)
4,869
(212)
403
(31,572)
7,515
4,769
9,939
22,223
7,444
108
2,387
9,939
Strategic report
Notes to the consolidated financial statements
1. General
Open Joint Stock Company MegaFon (“MegaFon”, the “Company” and, together with its consolidated subsidiaries, the “Group”) is a
company incorporated under the laws of the Russian Federation (“Russia”) and registered in the Unified State Register of Legal Entities
under number 1027809169585. Its registered office is at 30 Kadashevskaya Embankment, Moscow, 115035, Russian Federation.
In Russia, MegaFon has constructed and continues to operate a nationwide wireless communications network that operates on the dual
band GSM 900/1800 standard. In May 2007 the Group was awarded a licence that expires in May 2017 for the provision of 3G wireless
telephony services based on IMT-2000/UMTS standards throughout the entire territory of Russia. In July 2012 the Group was awarded
a licence which expires in July 2022 for the provision of fourth-generation (“4G”) technology services under the Long Term Evolution
(“LTE”) standard throughout the entire territory of Russia. As of 31 December 2014, the Group is providing and expanding 3G services in
almost all of the regions in which it operates throughout Russia and, following its acquisition of LLC Scartel (“Scartel”) in October 2013
(Note 9), provides 4G services in 72 regions of Russia. The Group also holds licences for local and long-distance telephony services, data
transmission, broadband access services, and communication channels leasing covering the entire territory of Russia. The Group has its
own land-line and leased satellite transmission network capacities.
As of 31 December 2014, the Group is primarily owned by USM Group, an indirect controlling shareholder, and TeliaSonera Group, another
major shareholder with significant influence over the Group, whose parent is a publicly owned Swedish company.
In November 2012 MegaFon completed an initial public offering (“IPO”) and listed its ordinary shares on the Moscow Exchange and its
ordinary shares represented by Global Depositary Receipts, or GDRs, on the London Stock Exchange, in each case under the symbol
“MFON”.
Governance
MegaFon is a leading integrated telecommunications operator in Russia and provides a broad range of voice, data and other
telecommunication services to retail customers, businesses, government clients and other telecommunication services providers.
In August 2014 USM Holdings Limited (“USMHL”), a non-public entity and the parent company of the USM Group, announced a
restructuring amongst its shareholders. As a result of this restructuring the voting interest held by Mr Alisher Usmanov, which previously
enabled him to control USMHL, has been reduced to a 48% voting interest.
These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as
issued by the International Accounting Standards Board (“IASB”).
The consolidated financial statements have been prepared on a historical cost basis, unless disclosed otherwise. The consolidated
financial statements are presented in millions of Rubles, except for per share amounts which are in Rubles or unless otherwise indicated.
The consolidated financial statements were authorised for issue by the Company’s Chief Executive Officer (“CEO”) and Chief Accountant
on 10 March 2015.
3. Basis of consolidation
The consolidated financial statements comprise the financial statements of the Company and its subsidiaries as of 31 December 2014.
Subsidiaries are consolidated from the date of acquisition, being the date on which the Group obtains control, and continue to be
consolidated until the date when such control ceases. The financial statements of the subsidiaries are prepared for the same reporting
period as the parent company, using consistent accounting policies.
Profit or loss and each component of other comprehensive income (“OCI”) are attributed to the equity holders of the Company and to the
non-controlling interests, even if this results in the non-controlling interests having a deficit balance.
When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies in line with the
Group’s accounting policies. All intra-group assets and liabilities, equity, income, expenses and cash flows relating to transactions
between members of the Group are eliminated in full on consolidation.
2. Basis of preparation
Notes to the consolidated financial statements continued
4. Significant accounting policies
Business combinations and goodwill
The Group applies the acquisition method of accounting and recognises the assets acquired, the liabilities assumed and any
non-controlling interest in the acquired company at the acquisition date, measured at their fair values as of that date.
Determining the fair value of assets acquired and liabilities assumed requires management’s judgment and often involves the use
of significant estimates and assumptions, including assumptions with respect to future cash inflows and outflows, discount rates,
licence and other asset useful lives and market multiples, among other items. Results of subsidiaries acquired and accounted for by
the acquisition method have been included in operations from the relevant date of acquisition.
Any contingent consideration to be transferred by the Group is recognised at fair value at the acquisition date. Subsequent changes in
the fair value of the contingent consideration classified as an asset or liability that is a financial instrument within the scope of IAS 39,
Financial Instruments: Recognition and Measurement, are recognised in accordance with IAS 39 in the statement of comprehensive
income. If the contingent consideration is not within the scope of IAS 39, it is measured in accordance with the appropriate IFRS.
Contingent consideration that is classified as equity is not re-measured and subsequent settlement is accounted for within equity.
Goodwill represents the excess of the consideration transferred plus the fair value of any non-controlling interest in the acquired company
at the acquisition date over the fair values of the identifiable net assets acquired, and is not amortised, but tested for impairment at least
annually.
Acquisition-related costs are expensed as incurred and included in general and administrative expenses.
After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose of impairment testing,
goodwill acquired in a business combination is allocated from the acquisition date to each of the cash-generating units (“CGUs”), or
groups of CGUs, that is expected to benefit from the synergies of the combination. Each CGU or any group of CGUs to which the goodwill
is allocated represents the lowest level within the entity at which the goodwill is monitored for internal management purposes.
Combination of entities under common control
To account for business combinations between entities under common control the Group uses the acquisition method of accounting as
defined in IFRS 3, Business Combinations (“acquisition method”), if the transaction has substance from the perspective of the Group.
Otherwise the pooling-of-interest method is used. When evaluating whether the transaction has substance, the Group considers the
following factors: the purpose of the transaction, the involvement of outside parties in the transaction such as non-controlling interests
or other third parties, whether or not the transaction is carried out at fair value, the existing activities of the entities involved in the
transaction, and whether or not it is bringing entities together into a reporting entity that did not exist before.
Associates and joint ventures
Investments in associates and joint ventures which are jointly controlled entities are accounted for using the equity method of accounting
and are initially recognised at cost. The Group’s share of the profits and losses of these companies is included in the ‘share of profit
of associates and joint ventures’ line in the accompanying consolidated statements of comprehensive income with a corresponding
adjustment to the carrying amount of the investment.
Unrealised gains on transactions between the Group and its associates or joint ventures are eliminated only to the extent of the
Group’s interest in the associates or joint ventures. Unrealised losses are also eliminated unless the transaction provides evidence of an
impairment of the asset transferred. Accounting policies of associates or joint ventures have been changed where necessary to ensure
consistency with the policies adopted by the Group.
Foreign currency transactions and translation
The Group’s consolidated financial statements are presented in Rubles, which is also the functional currency of OJSC MegaFon and its
principal subsidiaries.
Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the
transactions or fair value measurement where items are re-measured to their fair value. Foreign exchange gains and losses resulting from
the settlement of such transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated
in foreign currencies are recognised in the ‘Foreign exchange gain/(loss), net’ line in profit or loss.
The assets and liabilities of foreign operations are translated into Rubles at the rate of exchange prevailing on the reporting date and
their statements of comprehensive income are translated at exchange rates prevailing on the dates of the transactions. The exchange
differences arising on the translation are recognised in OCI.
The functional currency of TT-Mobile, the Company’s 75% owned subsidiary in Tajikistan, is the US dollar as a majority of its revenues,
costs, property and equipment purchases, debt and trade liabilities is either priced, incurred, payable or otherwise measured in US dollars.
Strategic report
Revenue recognition
Revenue is measured at the fair value of the consideration received or receivable, and represents amounts receivable for the sale of goods
and services in the ordinary course of the Group’s activities, net of value added taxes, returns and discounts.
Governance
The Group recognises revenue when the amount of revenue can be reliably measured, when it is probable that future economic benefits
will flow to the applicable entity and when specific criteria have been met for each of the Group’s activities as described below. The Group
bases its estimate of return on historical results, taking into consideration the type of customer, the type of transaction and the specifics
of each arrangement.
Service revenue
Service revenue is generally recognised when the services are rendered. In these financial statements the presentation of service revenue
has been changed so as to present wireless and wireline revenue combined, in line with the trend of continued integration of these
services.
The revenue from provision of content is presented net of related costs when the Group acts as an agent of the content providers while
gross revenues and related costs are recorded when the Group is a primary obligor in the arrangement.
(b) Multiple element arrangements
The Group enters into multiple element arrangements in which a customer may purchase a combination of equipment (e.g. USB
modems, handsets) and telecommunication services (e.g. airtime, data, and other services). The Group allocates consideration
received from subscribers to the separate units of accounting based on their relative fair values but not exceeding the contractual
consideration receivable for the delivered element. Revenues allocated to the delivered equipment and related costs are recognised
in the accompanying consolidated statements of comprehensive income at the time of sale provided that other conditions for revenue
recognition are met. Amounts allocated to telecommunication services are deferred and recognised as revenue over the period of
rendering the services.
(c) Roaming rebates
The Group enters into roaming discount agreements with a number of wireless operators. According to the agreements the Group is
committed to provide and entitled to receive a discount that is generally dependent on the volume of roaming traffic generated by the
respective subscribers. The Group uses actual traffic data to estimate the amounts of rebates to be received or granted. Such estimates
are adjusted and updated on a regular basis. The Group accounts for discounts received as a reduction of roaming expenses and rebates
granted as a reduction of roaming revenue.
The Group takes into account the terms of the various roaming discount agreements in order to determine the appropriate presentation
of the amounts receivable from and payable to its roaming partners in its consolidated statement of financial position. Amounts of
rebates earned from and given to roaming partners are included in trade and other receivables and payables (Notes 20, 24), respectively,
in the accompanying consolidated statement of financial position.
Wireline revenue
The Group earns wireline revenues for usage of its fixed-line network, which include payments from individual, corporate and government
subscribers for local and long-distance telecommunications and data transfer services. Charges are based upon usage (e.g. minutes
of traffic processed), period of time (e.g. monthly service fees) or other established fee schedules. Wireline revenues also include
interconnection charges from wireless and wireline operators for terminating calls on the Group’s wireline networks. Revenue from service
contracts is recognised when the services are rendered. Billings received in advance of service being rendered are deferred and recognised
as revenue as the service is rendered.
(a) Loyalty programme
The Group operates a loyalty programme which allows customers to accumulate awards for usage of the Group’s cellular network.
The awards can then be redeemed for free services or products, subject to a minimum number of awards being obtained. The portion
of consideration received is allocated to the awards based on their fair value and deferred until the award credits are redeemed or expire.
The Group estimates the fair value of awards to a customer by applying a statistical analysis.
Wireless revenue
The Group earns wireless revenues for usage of its cellular system, which include airtime charges from contract and prepaid subscribers,
monthly contract fees, interconnect fees from other wireless and wireline operators, roaming charges, data transfer charges, and charges
for value added services (“VAS”). Interconnect revenue includes revenues from wireless and wireline operators that was earned from
terminating traffic from other operators. Roaming revenues include revenues from customers who roam outside their selected home
coverage area and revenues from other mobile carriers for roaming by their customers using the network of the Group. VAS include SMS,
MMS, provision of content and media and commissions for mobile payments.
4. Significant accounting policies (continued)
Sales of equipment and accessories
Revenue from the sale of equipment and accessories is recognised when the significant risks and rewards of ownership of the goods have
passed to the buyer, usually on delivery of the goods.
Dealer commissions
Dealer commissions for connection of new subscribers are expensed as incurred (Note 27).
The Group’s third party dealer arrangements call for provision of post-sales services and revenue sharing. As a result, dealer commissions
are recognised as the services are performed, generally during a twelve-month period from the date a new subscriber is activated.
Advertising costs
Advertising costs are expensed as incurred (Note 27).
Government pension funds
The Group contributes to the local state pension funds and social funds on behalf of its employees. The contributions are expensed
as incurred. Contributions for the years ended 31 December 2014 and 2013 were 5,112 and 4,599, respectively.
Taxes
Current income tax
The tax expense for the year comprises current and deferred tax. Tax is recognised in profit or loss, except to the extent that it relates
to items recognised in OCI or directly in equity. In this case, the tax is also recognised in OCI or directly in equity, respectively.
The current income tax is calculated on the basis of the tax laws enacted or substantively enacted at the reporting date in the countries
in which the Company and its subsidiaries operate and generate taxable income. Management periodically evaluates positions taken in
tax returns with respect to situations in which the applicable tax regulation is subject to interpretation. If the applicable tax regulation is
subject to interpretation, it establishes a provision where appropriate on the basis of amounts expected to be paid to the tax authorities.
Deferred income tax
Deferred income tax is recognised using the liability method, on temporary differences arising between the tax bases of assets and
liabilities and their carrying amounts in the financial statements. However, deferred income tax is not accounted for if it arises from initial
recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither
accounting nor taxable profit or loss. Deferred income tax is determined using tax rates and laws that have been enacted or substantively
enacted at the reporting date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax
liability is settled.
Deferred income tax assets are recognised only to the extent that it is probable that future taxable profit will be available against which
the temporary differences can be utilised. Deferred income tax is provided on temporary differences arising on investments in subsidiaries
and associates, except for deferred income tax liability where the timing of the reversal of the temporary difference is controlled by the
Group and it is probable that the temporary difference will not reverse in the foreseeable future.
Value-added tax
Value added tax (“VAT”) related to revenues is generally payable to the tax authorities on an accrual basis when invoices are issued to
customers. VAT incurred on purchases may be offset, subject to certain restrictions, against VAT related to revenues, or can be reclaimed
in cash from the tax authorities under certain circumstances.
Management periodically reviews the recoverability of VAT receivables and believes the amount reflected in the consolidated financial
statements is fully recoverable within one year (Note 18).
Segment reporting
Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker
(“CODM”). The CODM is responsible for allocating resources and assessing performance of the operating segments. The Company’s CEO
has been designated as the CODM.
Strategic report
Property and equipment is stated at cost, less accumulated depreciation and impairment, if any. Cost includes all costs directly
attributable to bringing the asset to the location and condition for its intended use. Depreciation is recorded on a straight-line basis over
the estimated useful life of the asset.
Governance
The estimated useful lives are as follows:
Telecommunications network
Buildings and structures
Vehicles, office and other equipment
3 to 20 years
7 to 49 years
3 to 7 years
Leasehold improvements are depreciated over the shorter of the lease term or the estimated useful lives of the assets. The lease term
includes renewals when such renewals are reasonably certain.
The assets’ residual values, useful lives and depreciation methods are reviewed, and adjusted if appropriate, at each reporting date.
The present value of the expected cost for the decommissioning of an asset after its use is included in the cost of the respective asset.
Please refer to ‘Significant accounting policies – Provisions’, below, and Note 23 for further information about the provision
for decommissioning liabilities.
At the time of retirement or other disposition of property or equipment, the cost and accumulated depreciation are removed from the
accounts and any resulting gain or loss is recorded in profit or loss.
Leases
Finance leases, that is, leases that transfer substantially all the risks and benefits incidental to ownership of the leased item to the
Group, are capitalised at the commencement of the lease at the fair value of the leased property or, if lower, at the present value of the
minimum lease payments. Lease payments are apportioned between finance charges and reduction of the lease liability so as to achieve
a constant rate of interest on the remaining balance of the liability. Finance charges are recognised in finance costs within profit or loss.
A leased asset is depreciated over the lesser of the lease term or the useful life of the asset.
Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases.
Payments made under operating leases (net of any incentives received from the lessor) are charged to profit or loss on a straight line
basis over the period of the lease.
Borrowing costs
Borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset during the construction phase
that necessarily takes a substantial period of time are capitalised as part of property and equipment until the asset is ready for use.
All other borrowing costs are expensed in the period in which they occur. Borrowing costs consist of interest and other costs that the
Group incurs in connection with the borrowing of funds.
Repair and maintenance costs are expensed as incurred. The cost of major renovations and other subsequent expenditure is included in
the carrying amount of the asset or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits
associated with the item will flow to the Group and the cost of the item can be measured reliably.
Intangible assets
Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business
combination is their fair value as of the date of acquisition. Following initial recognition, intangible assets are carried at cost less
accumulated amortisation and impairment, if any. Intangible assets consist principally of operating licences, frequencies, software,
marketing related licences and customer base.
The useful lives of intangible assets are assessed as either finite or indefinite. The Group does not have intangible assets with indefinite
useful lives, other than goodwill. All intangible assets, except for 2G standard wireless licences, are amortised on a straight-line basis
over the following estimated useful lives:
4G operating licences
Other operating licences
Frequencies
Software
Marketing related intangible assets
Customer base
Other intangible assets
20 years
10 years
10 to 12 years
2 to 5 years
4 to 5 years
4 to 19 years
1 to 10 years
2G licences are amortised on a sum-of-the-years’-digits basis over a period of 10 years (Note 15).
The Group continues to evaluate the amortisation periods to determine whether events or circumstances warrant revised amortisation
periods. Additionally, the Group considers whether the carrying value of such assets should be impaired based on the expected future
economic benefits.
Impairment of non-financial assets
Assets, including goodwill, that have indefinite useful lives are not subject to amortisation and are tested annually for impairment.
Assets that are subject to depreciation or amortisation are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s or CGU’s
carrying amount exceeds its recoverable amount. The recoverable amount is the higher of (1) an asset’s or CGU’s fair value less costs to
sell and (2) value in use. The recoverable amount is determined for each individual asset, unless the asset does not generate cash inflows
that are largely independent of those from other assets or groups of assets.
Impairment losses relating to continuing operations are recognised in profit or loss in the expense categories which are consistent with
the function of the impaired asset.
For assets other than goodwill, an assessment is made at each reporting date to determine whether there is an indication that previously
recognised impairment losses no longer exist or have decreased. If such indication exists, the Group estimates the asset’s or CGU’s
recoverable amount. A previously recognised impairment loss is reversed only if there has been a change in the assumptions used to
determine the asset’s recoverable amount since the last impairment loss was recognised. The reversal is limited so that the carrying
amount of the asset does not exceed its recoverable amount, nor exceed the carrying amount that would have been determined, net of
depreciation, had no impairment loss been recognised for the asset in prior years. Such reversal is recognised in profit or loss.
Goodwill impairment reviews are undertaken annually as of 1 October or more frequently if events or changes in circumstances indicate
potential impairment. Impairment is determined for goodwill by assessing the recoverable amount of each CGU (or group of CGUs) to which
the goodwill relates. When the recoverable amount of the CGU is less than its carrying amount, an impairment of associated goodwill is
recognised immediately as an expense and is not subsequently reversed.
For associates and joint ventures accounted for using the equity method, at each reporting date the Group determines whether there is
objective evidence that the investment in the associate or joint venture is impaired. If there is such evidence, the Group calculates the
amount of impairment as the difference between the recoverable amount of the associate or joint venture and its carrying value, then
recognises the loss as ‘Share of profit of associates and joint ventures’ within profit or loss.
Non-current assets held for sale
Non-current assets are classified as assets held for sale (“AHFS”) and stated at the lower of carrying amount and fair value less costs
to sell if their carrying amount is recovered principally through a sale transaction rather than through continuing use and the sale is
considered highly probable.
Inventory
Inventory, which primarily consists of telephone handsets, portable electronic devices, accessories and USB modems, is stated at the
lower of cost and net realisable value. Cost is determined using the weighted-average cost method. Net realisable value is the estimated
selling price in the ordinary course of business less the estimated costs necessary to make the sale.
Strategic report
Cash and cash equivalents comprise cash on hand and deposits in banks with original maturities of three months or less.
Ordinary shares
Treasury shares
The Company’s own issued equity instruments that are reacquired (treasury shares) are recognised at cost and deducted from
equity. No gain or loss is recognised in profit or loss on the purchase, sale, issue or cancellation of the Group’s own equity instruments.
Any difference between the carrying amount and the consideration received upon any subsequent sale is recognised in equity.
Governance
Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares are shown in equity as
a deduction, net of tax, from the proceeds.
Earnings per share
Basic earnings per share (“EPS”) are computed by dividing net profit available to shareholders of the Company by the weighted-average
number of ordinary shares outstanding for the period.
Provisions
Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events, it is probable that an
outflow of resources will be required to settle the obligation, and the amount can be reliably estimated. Provisions are not recognised for
future operating losses.
Diluted earnings per share are computed by dividing adjusted net profit available to shareholders by the weighted-average number of
ordinary shares outstanding during the period increased to include the number of additional ordinary shares that would be issued on the
conversion of all the potentially dilutive securities into ordinary shares. Potentially dilutive securities include outstanding stock options
and convertible debt instruments.
Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that
reflects current market assessments of the time value of money and the risks specific to the obligation. Any increase in the provision due
to passage of time is recognised as finance costs.
Share-based compensation
Equity-settled transactions
The cost of equity-settled transactions, such as stock options under the CEO long-term incentive plan (Note 25), is determined by the fair
value at the date when the grant is made using an appropriate valuation model. That cost is recognised, together with a corresponding
increase in other reserves in equity, over the period in which the service conditions are fulfilled in employee benefits and related social
charges expense (Note 28). No expense is recognised for awards that do not ultimately vest. The dilutive effect of outstanding options
is reflected as additional share dilution in the computation of diluted earnings per share.
Cash-settled transactions
The cost of cash-settled transactions, such as phantom stock options under the 2012 and 2013 long-term incentive plans (Note 25), is
measured initially at fair value at the grant date using an appropriate valuation model. This fair value is expensed over the period until
the vesting date with recognition of a corresponding liability. The liability is re-measured to fair value at each reporting date up to, and
including the settlement date, with changes in fair value recognised in employee benefits and related social charges expense (Note 28).
Other long-term employee benefits
The Group operates another long-term employee benefits programme (Note 26) which is accounted for in accordance with IAS 19,
Employee benefits. These benefits are unfunded. The amount recognised as a liability for other long-term employee benefits is the
present value of the defined benefit obligation at the end of the reporting period. To determine the present value of the defined benefit
obligation and the related current service cost, the Group attributes the cost of benefits to years of service on a pro-rata basis.
Re-measurements of the defined benefit liability are recognised in profit or loss when they occur.
Decommissioning liabilities
The Group has certain legal obligations related to rented sites for base stations and masts, which include requirements to restore
the real estate upon which the base stations and masts are located upon their being decommissioned. Decommissioning costs are
determined by calculating the present value of the expected costs to settle the obligation using estimated cash flows, and are recognised
as part of the cost of the particular asset. The cash flows are discounted at the current pre-tax rate that reflects the risks specific to
the decommissioning liability. The unwinding of the discount is expensed in profit or loss as finance costs. The estimated future costs
of decommissioning are reviewed annually and adjusted as appropriate. Changes in estimated liability resulting from revisions of the
estimated future costs or in the discount rate applied are added to or deducted from the cost of the asset.
Financial instruments
Initial recognition and measurement
Financial assets and financial liabilities within the scope of IAS 39 are recognised initially at fair value plus transaction costs that are
directly attributable to the acquisition or issue of the financial asset or financial liability, except for a financial asset or financial liability
accounted for at fair value through profit or loss, in which case transaction costs are expensed.
Subsequent measurement of financial assets and liabilities
The subsequent measurement of financial assets and liabilities depends on their classification as described below:
Fair value through profit or loss
Derivatives, including separated embedded derivatives, are classified as held for trading and accounted for at fair value through profit or loss
unless they are designated as effective hedging instruments. Financial assets and liabilities accounted for at fair value through profit or loss
are carried in the consolidated statement of financial position at fair value with changes in fair value being recognised in profit or loss, in
the ‘foreign exchange gain/(loss)’, ‘finance costs’ or ‘gain/(loss) on financial instruments’ lines, depending on the nature of the changes.
Loans and receivables (assets) and loans and borrowings (liabilities)
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market.
After initial measurement, loans and receivables and loans and borrowings are subsequently measured at amortised cost using the
effective interest rate (“EIR”) method. Amortised cost is calculated by taking into account any discount or premium on acquisition and
fees or costs that are an integral part of the EIR. The amortisation based on EIR is included in profit or loss.
De-recognition of financial assets
A financial asset is de-recognised when the rights to receive cash flows from the asset have expired; or the Group has transferred its
rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay
to a third party under a ‘pass-through’ arrangement; and either (a) the Group has transferred substantially all the risks and rewards of
the asset, or (b) the Group has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred
control of the asset.
Impairment of financial assets
A financial asset or a group of financial assets is impaired and impairment losses are incurred if there is objective evidence of impairment
as a result of an event that occurred subsequent to the initial recognition of the asset. The Group assesses at each reporting date
whether there is objective evidence that a financial asset or group of assets may be impaired. For assets carried at amortised cost, the
impairment loss is the difference between the asset’s carrying amount and the present value of estimated future cash flows at the
original EIR (excluding future expected credit losses that have not yet been incurred). The carrying amount of the asset is reduced through
the use of an allowance account and the amount of the loss is recognised in profit or loss. Financial assets together with the associated
allowance are written off when there is no realistic prospect of future recovery and all collateral has been realised or has been transferred
to the Group. If, in a subsequent year, the amount of the estimated impairment loss increases or decreases because of an event occurring
after the impairment was recognised, the previously recognised impairment loss is increased or reduced by adjusting the allowance
account. If a write-off is later recovered, the recovery is credited to the relevant costs in profit or loss.
De-recognition of financial liabilities
A financial liability is de-recognised when the obligation under the liability is discharged, cancelled or expires. When an existing financial
liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially
modified, such an exchange or modification is treated as the de-recognition of the original liability and the recognition of a new liability.
The difference in the respective carrying amounts is recognised within profit or loss.
Fair value of financial instruments
The fair value of financial instruments that are traded in active markets at each reporting date is determined by reference to quoted market
prices or dealer price quotations, without any deduction for transaction costs. For financial instruments not traded in an active market, the
fair value is determined using appropriate valuation techniques, which include using recent arm’s length market transactions; reference to
the current fair value of another instrument that is substantially the same; a discounted cash flow analysis; or other valuation models.
The Group uses the following hierarchy for determining and disclosing the fair value of financial instruments by valuation technique:
Level 1: quoted (unadjusted) prices in active markets for identical assets or liabilities;
Level 2: other techniques for which all inputs which have a significant effect on the recorded fair value are observable, either directly
or indirectly;
Level 3: techniques which use inputs that have a significant effect on the recorded fair value that are not based on observable market data.
Strategic report
Governance
Derivative financial instruments and hedge accounting
Derivative financial instruments which include currency and interest rate swaps are initially recognised in the consolidated statement of
financial position at fair value on the date a derivative contract is entered into and are subsequently re-measured at their fair value. Fair
values are obtained from quoted market prices and discounted cash flow models as appropriate. Derivatives are included within financial
assets at fair value through profit or loss when fair value is positive and within financial liabilities at fair value through profit or loss when
fair value is negative. Certain derivatives embedded in other financial instruments are treated as separate derivatives when their economic
risks and characteristics are not closely related to those of the host contract and the combined instrument is not measured at fair value,
with changes in fair value being recognised in profit or loss.
The Group has derivatives which it designated as cash flow hedges and derivatives which it did not designate as hedges (Note 17). At
the inception of a hedge relationship, the Group formally designates and documents the hedge relationship to which the Group wishes
to apply hedge accounting and the risk management objective and strategy for undertaking the hedge. Such hedges are expected to be
highly effective in achieving offsetting changes in cash flows and are assessed on an ongoing basis to determine that they actually have
been highly effective throughout the financial reporting periods for which they were designated.
The Group uses derivatives to manage interest rate and foreign currency risk exposures. The Group does not hold or issue derivatives
for trading purposes.
Changes in accounting policies and disclosures
During 2014 the Group applied the following amendments for the first time:
5. Significant accounting judgments, estimates and assumptions
The preparation of these consolidated financial statements required management to make judgments, estimates and assumptions
that affect the amounts reported in the consolidated statement of financial position and the consolidated statement of comprehensive
income. Actual results, however, could differ from those estimates.
Critical accounting estimates
The key assumptions concerning the future and other key sources of estimation uncertainty at the reporting date that have a significant
risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are described below.
The Group based its assumptions and estimates on parameters available when the consolidated financial statements were prepared.
Existing circumstances and assumptions about future developments, however, may change due to market changes or circumstances
arising beyond the control of the Group. Such changes are reflected in the assumptions when they occur.
Revenue recognition
The Group sells services to other operators in different countries and across borders. Management has to make estimates relating to
revenue recognition, relying to some extent on information from other operators on values of services delivered. Management also makes
estimates of the final outcome in instances where the other parties dispute the amounts charged.
Management also makes judgments about the reporting of revenue on a net versus gross basis, depending on an analysis of the Group’s
involvement as either principal or agent.
Allocation of each separable component of a bundled offer based on the individual components’ relative fair values also involves
estimates and judgment.
The Group estimates the fair value of awards under customer loyalty programmes by applying statistical techniques. Inputs to the models
include making assumptions about expected redemption rates, the mix of products that will be available for redemption in the future and
customer preferences. Such estimates are subject to significant uncertainty.
IAS 32 Offsetting Financial Assets and Financial Liabilities (Amendments)
The amendments to IAS 32, Offsetting Financial Assets and Financial Liabilities, specify that an entity has a legally enforceable right to
set-off if that right is not contingent on a future event and that right is enforceable both in the normal course of business and in the event
of the default, insolvency or bankruptcy of the entity and all counterparties. The amendments are effective for annual periods beginning
1 January 2014, and are to be applied retrospectively. As a result of adoption of the amendments, the Group’s trade and other receivables
and trade and other payables have increased as of 31 December 2014 and 31 December 2013 by 2,180 and 1,761, respectively, because the
criteria for offsetting were not met (Notes 20, 24). In particular, the current bankruptcy legislation in Russia does not allow offsetting if
this has an impact on the scheme of settlements determined by the law.
The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges are recognised in
OCI. The gain or loss relating to the ineffective portion is recognised immediately in profit or loss. For derivative instruments that are
not designated as hedges or do not qualify as hedged transactions, the changes in the fair value are reported in the profit or loss.
5. Significant accounting judgments, estimates and assumptions (continued)
Business combinations
The Group has made acquisitions of other businesses in the past (Note 9). The identification of assets acquired and liabilities assumed
as a result of those acquisitions as well as the allocation of any contingent consideration between the identified assets and liabilities
based on their fair values and quantification of resulting goodwill required significant judgment and estimates. Those estimates were
based on comparative market information, entity-specific future cash flow projections, discount rates, terminal growth rates and other
assumptions.
Impairment of non-financial assets
The Group tests goodwill for impairment annually and more often if impairment indicators exist, and tests other long-lived assets for
impairment when circumstances indicate there may be a potential impairment (Note 16). Estimating recoverable amounts of assets and
CGUs is based on management’s evaluations, including determining the appropriate CGUs and estimates of applicable multiples, if the
market approach is used, or future cash flows, discount rates, terminal growth rates, and assumptions about future market conditions, if
the income approach is used. Allocation of the carrying value of the assets being tested between individual CGUs also requires judgment.
Depreciation and amortisation
Depreciation and amortisation expenses are based on management’s estimates of residual value, the depreciation method used and the
useful lives of property and equipment and intangible assets. Estimates may change due to technological developments, competition,
changes in market conditions and other factors, and may result in changes in estimated useful lives and depreciation and amortisation
charges. Critical estimates of useful lives of intangible assets are impacted by estimates of average customer relationship based on
churn, remaining licence period and expected developments in technology and markets. The actual economic lives of long-lived assets
may be different from the estimated useful lives. A change in estimated useful lives is accounted for prospectively as a change in
accounting estimate.
To determine the accounting model for the 4G operating licences acquired in the Scartel business combination (Note 9) the Group has
evaluated additional factors, such as the ability to extend the Group’s licences or obtain new licences and frequencies for a new standard,
and international telecommunications carriers’ practices of estimating the value of similar licences. The Group determined the useful life
of 4G operating licences to be 20 years and applied a straight-line method of amortisation.
Deferred tax assets and uncertain tax positions
The Group assesses the recoverability of deferred tax assets based on estimates of future earnings (Note 12). The ability to recover these
taxes depends ultimately on the Group’s ability to generate taxable earnings over the period for which the deferred tax assets remain
deductible. The recognition of tax assets and liabilities depends on a series of factors, including estimates as to the timing and realisation
of deferred tax assets and the projected tax payment schedule.
Actual Group income tax receipts and payments could differ from the estimates made by the Group as a result of changes in tax
legislation or unforeseen transactions that could affect tax balances. The expected resolution of uncertain tax positions is based upon
management’s judgment of the likelihood of sustaining a position taken through tax audits, tax courts and/or arbitration, if necessary.
Circumstances and interpretations of the amount or likelihood may change through the settlement process.
Fair value of financial instruments
Where the fair value of financial assets and financial liabilities recorded in the consolidated statement of financial position and disclosed
in the notes cannot be derived from active markets, their fair value is determined using valuation techniques including the discounted
cash flow model. The inputs to these models are taken from observable markets where possible, but where this is not feasible, a degree
of judgment is required in establishing fair values. The judgments include considerations of inputs such as liquidity risk, credit risk and
volatility. Changes in assumptions about these factors could affect the reported fair value of financial instruments.
Share-based payments
The Group measures the cost of equity-settled and cash-settled share-based payment transactions with employees by reference to the
fair value of the equity instruments at the date at which they are granted. For cash-settled awards the fair value is re-measured every
reporting period. Estimating fair value for share-based payment transactions requires a determination of the most appropriate valuation
model, which is dependent on the terms and conditions of the grant. This estimate also requires determination of the most appropriate
inputs to the valuation model including the expected life of the share option, volatility and dividend yield and making assumptions about
them. The assumptions and models used for estimating fair value for share-based payment transactions are disclosed in Note 25.
Decommissioning provision
The Group records a provision for decommissioning obligations associated with restoration of rented sites where base stations are installed
(Note 23). In determining the fair value of the provision, assumptions and estimates are made in relation to discount rates, the expected
cost to dismantle and remove the asset from the site, including long-term inflation forecasts, and the expected timing of those costs.
Strategic report
6. Standards issued but not yet effective
The standards and interpretations that are issued, but not yet effective, up to the date of issuance of the Group’s financial statements,
and are applicable to the Group are disclosed below. The Group intends to adopt these standards when they become effective unless
otherwise stated below.
In May 2014 the IASB issued IFRS 15, Revenue from Contracts with Customers, a common revenue recognition guidance that replaces
the following previous revenue recognition standards: IAS 18, Revenue, IAS 11, Construction Contracts, IFRIC 13, Customer Loyalty
Programmes, IFRIC 15, Agreements for the Construction of Real Estate, IFRIC 18, Transfers of Assets from Customers, and SIC-31,
Revenue – Barter Transactions Involving Advertising Services.
Governance
IFRS 15 Revenue from Contracts with Customers
The core principle of the guidance is that an entity should recognise revenue to depict the transfer of promised goods or services to
customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
To achieve that core principle, an entity should apply the following steps:
For a public entity, the Standard is effective for annual reporting periods beginning on or after 1 January 2017. Early application is
permitted.
An entity should apply the amendments in this Standard using one of the following two methods:
2.Retrospectively with the cumulative effect of initially applying this standard recognised at the date of initial application. If an entity
elects this transition method it also should provide the additional disclosures in reporting periods that include the date of initial
application of:
• The amount by which each financial statement line item is affected in the current reporting period by the application of IFRS 15 as
compared to the guidance that was in effect before the change.
• An explanation of the reasons for significant changes.
The Group is currently evaluating the possible effect of the Standard on its financial statements and the best date for its adoption, as well
as the transition method to be used.
IFRS 11 Accounting for Acquisitions of Interests in Joint Operations – Amendments to IFRS 11
In May 2014, the IASB issued amendments to IFRS 11, Joint Operations, which require the acquirer of an interest in a joint operation
in which the activity constitutes a business, as defined in IFRS 3, Business Combinations, to apply all of the principles on business
combinations accounting in IFRS 3 and other IFRSs except for those principles that conflict with the guidance in IFRS 11. In addition, the
acquirer should disclose the information required by IFRS 3 and other IFRSs for business combinations. The amendments are effective
for annual periods beginning on or after 1 January 2016. Early adoption is permitted. The Group will adopt the amendments from
1 January 2016. The amendments are not expected to have a material effect on the Group’s financial statements.
IAS 16 and IAS 38 – Clarification of Acceptable Methods of Depreciation and Amortisation
In May 2014, the IASB issued amendments to IAS 16, Property, Plant and Equipment, and IAS 38, Intangible Assets, which clarify that the
use of revenue-based methods to calculate the depreciation of an asset is not appropriate because revenue generated by an activity that
includes the use of an asset generally reflects factors other than the consumption of the economic benefits embodied in the asset.
The amendments are effective for annual periods beginning on or after 1 January 2016. Early adoption is permitted. The Group will adopt
the amendments from 1 January 2016. The amendments will not impact the Group’s financial statements.
1.Retrospectively to each prior reporting period presented and the entity may elect any of the following practical expedients:
• For completed contracts, an entity need not restate contracts that begin and end within the same annual reporting period.
• For completed contracts that have variable consideration, an entity may use the transaction price at the date the contract was
completed rather than estimating variable consideration amounts in the comparative reporting periods.
• For all reporting periods presented before the date of initial application, an entity need not disclose the amount of the transaction price
allocated to remaining performance obligations and an explanation of when the entity expects to recognise that amount as revenue.
• Step 1: Identify the contract(s) with a customer,
• Step 2: Identify the performance obligations in the contract,
• Step 3: Determine the transaction price,
• Step 4: Allocate the transaction price to the performance obligations in the contract,
• Step 5: Recognise revenue when (or as) the entity satisfies a performance obligation.
6. Standards issued but not yet effective (continued)
IFRS 9 Financial Instruments
In July 2014 the IASB completed its process to replace IAS 39, Financial Instruments: Recognition and Measurement, with the issuance
of the final amendments to IFRS 9.
The IASB divided its project to replace IAS 39 into three main phases.
• Phase 1: classification and measurement of financial assets and financial liabilities. In November 2009 the IASB issued the chapters
of IFRS 9 relating to the classification and measurement of financial assets. Those chapters require financial assets to be classified
on the basis of the business model within which they are held and their contractual cash flow characteristics. In October 2010 the IASB
added to IFRS 9 requirements related to the classification and measurement of financial liabilities. In July 2014 the IASB made limited
amendments to the classification and measurement requirements in IFRS 9 for financial assets.
• Phase 2: impairment methodology. In July 2014 the IASB added to IFRS 9 the impairment requirements related to the accounting for
expected credit losses on an entity’s financial assets and commitments to extend credit.
• Phase 3: hedge accounting. In November 2013 the IASB added to IFRS 9 the requirements related to hedge accounting.
IFRS 9 (July 2014) is effective for annual periods beginning on or after 1 January 2018. Earlier application is permitted. IFRS 9 (July 2014)
should be applied retrospectively in accordance with IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors. IFRS 9
(July 2014) should not be applied to items that have been derecognised at the date of initial application.
The Group will adopt IFRS 9 (July 2014) from 1 January 2018. The Group is evaluating the effect of the standard on its financial
statements.
Improvements to IFRSs (September 2014)
In September 2014, as a result of the Annual Improvements to IFRSs 2012-2014 Cycle, the IASB issued a number of amendments to:
• IFRS 5, Non-Current Assets Held for Sale and Discontinued Operations (changes in methods of disposal),
• IFRS 7, Financial Instruments: Disclosures (servicing contracts),
• IAS 19, Employee Benefits (discount rate: regional market issue),
• IAS 34, Interim Financial Reporting (disclosure of information ‘elsewhere in the interim financial report’).
The amendments introduced relatively minor changes to clarify guidance in existing standards. The amendments are effective for annual
periods beginning on or after 1 January 2016. The Group will adopt the amended standards from 1 January 2016. The Group does not
expect these amendments to have a material impact on the Group’s financial position or performance.
Sale or Contribution of Assets between an Investor and its Associate or Joint Venture – Amendments to IFRS 10 and IAS 28
In September 2014 the IASB issued Sale or Contribution of Assets between an Investor and its Associate or Joint Venture – Amendments
to IFRS 10 and IAS 28, which contains narrow-scope amendments to IFRS 10, Consolidated Financial Statements, and IAS 28,
Investments in Associates and Joint Ventures. The main consequence of the amendments is that full gain or loss is recognised when a
transaction involves a business (whether it is held in a subsidiary or not). A partial gain or loss is recognised when a transaction involves
assets that do not constitute a business, even if those assets are held in a subsidiary.
The amendments are effective for annual periods beginning on or after 1 January 2016. Early adoption is permitted. The Group does not
expect these amendments to have a material impact on the Group’s financial position or performance.
IAS 1 Disclosure Initiative
In December 2014 the IASB issued Disclosure Initiative – Amendments to IAS 1, which gave more guidance on disclosing information in
the financial statements, presenting the line items and aggregating information in the financial statements, including the notes, ordering
and grouping of the notes. The amendments are effective for annual periods beginning on or after 1 January 2016. The Group will adopt
them from that date. The amendments affect presentation and disclosure only and have no impact on the Group’s financial position or
performance.
Strategic report
7.Equity
Share capital
The number of treasury shares was reduced by 22,641,056 (or 16,201 at carrying value) in July 2014 following the Group’s settlement
of the amount due to Garsdale Services Investment Limited (“Garsdale”) by using its treasury shares (Notes 10, 29).
Governance
As of 31 December 2014 and 2013, the Company had 620,000,000 fully paid and issued authorised ordinary shares with a par value of
0.1 Rubles, comprised of 24,299,033 treasury shares (31 December 2013: 46,940,089) and 595,700,967 (31 December 2013: 573,059,911)
outstanding shares. In addition, the Company had 100,000,000,000 authorised ordinary shares with a par value of 0.1 Rubles, which were
not issued as of 31 December 2014 and 2013.
Annual dividend payment
On 28 June 2013 the Annual General Meeting of Shareholders of the Company approved the payment of a dividend in the amount of
54.17 Rubles per ordinary share (or GDR) for the second, third and fourth quarters of 2012. On the same date the shareholders also
approved the payment of an interim dividend for the first quarter of 2013 in the amount of 10.34 Rubles per ordinary share (or GDR).
The total sum allocated to these dividend payments was 36,968, and payment of the dividends was made in July 2013.
Other capital reserves
Foreign currency translation reserve is used to record exchange differences arising from the translation of the financial statements
of foreign operations.
On 30 June 2014, the Annual General Meeting of Shareholders of the Company approved a final dividend for the 2013 financial year in the
amount of 64.51 Rubles per ordinary share (or GDR). The total dividend payout in 2014 was 38,428. After taking into account the interim
dividend for the first quarter of 2013 paid in 2013, total dividends paid with respect to the 2013 financial year amounted to 74.85 Rubles
per ordinary share (or GDR).
Cash flow hedge reserve is used to record the accumulated impact of derivatives designated as cash flow hedges (Note 17).
Share-based compensation reserve is used to recognise the value of equity-settled share-based payment transactions provided
to employees, including key management personnel, as part of their remuneration (Note 25).
A reserve fund has been established according to the requirements of Russian law and is used to cover the Company’s losses, redemption
of its bonds and re-purchase of its own shares in the absence of other capital resources.
The disaggregation of other capital reserves and changes of other comprehensive income by each type of reserve in equity is shown below:
Foreign
currency
Share-based
translation
Cash flow compensation
reserve hedge reserve
reserve
As of 1 January 2013
Foreign currency translation
Change in fair value of cash flow hedges (Note 17)
Sale of treasury shares upon exercise of stock
options (Note 25)
Share-based compensation (Note 25)
Foreign currency translation
Change in fair value of cash flow hedges (Note 17)
Transactions
with noncontrolling
interests
Reserve
fund
Total other
capital
reserves
21
(144)
–
(261)
–
136
175
–
–
(23)
–
–
15
–
–
(73)
(144)
136
–
–
(123)
(968)
–
–
(1,091)
–
–
(125)
–
297
–
172
(554)
1,178
799
–
–
689
1,488
–
–
(23)
–
–
–
(23)
–
–
15
–
–
–
15
(554)
1,178
543
(968)
297
689
561
Reserve on transactions with non-controlling interests is used to record differences arising as a result of transactions with non-controlling
interests that do not result in a loss of control.
8. Group information
The consolidated financial statements of the Group include the following significant subsidiaries and joint ventures of OJSC MegaFon:
Principal activities
Legal entity
OJSC MegaFon Retail
LLC NetByNet Holding
LLC Scartel (Note 9)
LLC Yota
LLC MegaFon Finance
MegaFon Investments (Cyprus) Limited
LLC Euroset-Retail (Note 10)
subsidiary
subsidiary
subsidiary
subsidiary
subsidiary
subsidiary
joint venture
Retail
Broadband internet
Wireless services
Wireless services
Financing
Transactions with treasury shares
Retail
Country of
incorporation
Russia
Russia
Russia
Russia
Russia
Cyprus
Russia
% equity interest
2014
2013
100
100
100
–
100
100
50
100
100
100
100
100
100
50
LLC Yota was merged into LLC Scartel during 2014.
The Company holds interests in material subsidiaries through a number of intermediary holding companies.
9. Business combinations
Scartel
On 1 October 2013 MegaFon acquired 100% of the shares of Maxiten Co Limited, which holds a 100% interest in a group of subsidiaries
(together “Scartel”) that provide 4G telecommunication services under the brand “Yota”, from the Group’s controlling shareholder
Garsdale, for a consideration of 55,736 comprised of (1) US$ 1,180 million deferred consideration (38,331 at the exchange rate as of
1 October 2013), of which 50% plus interest at 6% per annum was payable in one year from the date of acquisition and the other 50%
plus interest at 6% per annum in two years after the acquisition; (2) settlement of Scartel’s indebtedness to Telecominvest Holdings
Limited, an indirect subsidiary of Garsdale, in the amount of US$ 477 million (15,483 at the exchange rate as of the payment date) and (3)
an effective settlement of a pre-existing cash advance of 1,069 for future services and accounts receivable of 853 for lease of the Group’s
telecommunications network due from Scartel as of the acquisition date.
On 24 June 2014 the Group prepaid in cash approximately 90% of the deferred consideration due to Garsdale for the acquisition of Scartel,
including principal and accrued interest, in the amount of 37,925 (Note 29).
The reasons for the acquisition were to gain a significant increase in network capacity and quality which will strengthen the Group’s
leadership position in the fast growing mobile data market through enhanced overall service offering and customer experience; to enable
the Group to carry out its 4G rollout with reduced capital and operating expenditures per unit of data transmission capacity because of
its enhanced spectrum position; and to realise considerable cash flow savings in network rollout and maintenance driven principally by
elimination of significant current and future operating costs.
The acquisition of Scartel was accounted for using the acquisition method (Note 5). The valuation of certain acquired assets and liabilities
assumed was not finalised as of the date the 2013 consolidated financial statements were authorised for issue; thus, the net assets
recognised in the 31 December 2013 financial statements were based on a provisional assessment of their fair value while the Group
sought an independent valuation for certain tangible and intangible assets of Scartel.
Strategic report
Values as at the date of acquisition are as follows:
Assets
Property and equipment (Note 14)
Intangible assets (Notes 5, 15)
Inventories
Current non-financial assets
13,833
43,315
52
297
2,237
278
60,012
Total identifiable net assets at fair value
Goodwill arising on acquisition
Purchase consideration transferred
(1,533)
1,072
–
–
–
–
(461)
Final
amounts
12,300
44,387
52
297
2,237
278
59,551
(1,288)
(5,886)
(118)
(232)
(3,590)
(728)
(11,842)
–
92
–
–
–
–
92
(1,288)
(5,794)
(118)
(232)
(3,590)
(728)
(11,750)
48,170
7,566
55,736
(369)
369
–
47,801
7,935
55,736
The goodwill recognised is attributable primarily to expected synergies from the acquisition and the value to be attributed to the
workforce of Scartel. The entire goodwill recognised from the Scartel acquisition has been allocated to the integrated telecommunication
services group of CGUs (Note 16).
The Group recognised Scartel acquisition-related costs as general and administrative expenses in the amount of 188 for the year ended
31 December 2013 in the consolidated statement of comprehensive income.
The Group has consolidated the financial position and the results of operations of Scartel from 1 October 2013. If the acquisition had taken
place at the beginning of the year, profit for the year for the Group would have been 44,622.
2014 acquisitions
In 2014, the Group acquired 100% ownership interests in a number of alternative wireline and broadband internet service providers in certain
regions of the Russian Federation for a total purchase consideration of 381.
The table below represents the allocation of the purchase price to the acquired net assets based on their estimated fair values.
LLC Tele MIG
Date of acquisition
Region of operations
Non-current assets
Cash
Current liabilities
Non-current liabilities
Total identifiable net assets/(liabilities) at fair value
Goodwill
Purchase consideration transferred:
Cash
Contingent consideration
LLC Aston
CJSC Express CJSC Advantage
Telecom
Telecom
5 Feb 2014
30 Jun 2014
17 Oct 2014
12 Dec 2014
Novy Urengoy Moscow region Moscow region Moscow region
43
20
26
188
36
2
2
2
(69)
–
(83)
(84)
–
–
–
(76)
10
22
(55)
30
133
38
154
49
143
60
99
79
110
60
60
1
33
–
39
78
Total
277
42
(236)
(76)
7
374
381
231
150
Contingent consideration is mainly due within one year from the date of acquisition.
In 2014, the valuation of certain assets was updated and the acquisition date fair value of the assets changed. The 2013 comparative
information was restated to reflect the adjustments to the provisional amounts. The resulting changes in depreciation and amortisation
charges from the acquisition date to 31 December 2013 were not material.
Liabilities
Non-current non-financial liabilities
Provisions
Current non-financial liabilities
Measurement
period
adjustments
Governance
Provisional
amounts
10.Investments in associates and joint ventures
Investee
LLC Euroset-Retail (“Euroset”), joint venture
LLC News Tube, associate
Total
% equity
interest
50
38
31 December
2014
2013
34,762
182
34,944
35,278
182
35,460
Euroset
On 6 December 2012 the Group and Garsdale acquired a 50% interest in Euroset via their jointly-owned subsidiary Lefbord, in which
they each held a 50% stake. Pursuant to a sale and purchase agreement with Garsdale, the Group was required to purchase on or
before 6 December 2013 (with the possibility for this obligation to be deferred until 6 December 2015) Garsdale’s interest in Lefbord
for US$ 535 million (16,491 at the exchange rate as of 6 December 2012), plus interest at the rate of 8% per annum, plus any earn-out
related payments made by Garsdale to Lefbord. The purchase price could be increased by any additional contributions made to Lefbord
by Garsdale and reduced by any payments received by Garsdale from Lefbord. The Group had, at its discretion, the option to settle this
obligation in cash or in its ordinary shares to be valued at the weighted-average market price for MegaFon GDRs for the six-month period
prior to the purchase date which had been recognised as a financial asset through profit or loss (Note 17).
Based on the terms of the obligation to acquire Garsdale’s 50% interest in Lefbord, the Group made the judgment that, with respect
to both Lefbord and Euroset, Garsdale is its de facto agent and therefore that the Group obtained access to future economic benefits
and effectively controlled Lefbord from December 2012 and that, via Lefbord, it held 50% of Euroset, rather than only 25%, from
December 2012. Accordingly, the Group consolidated Lefbord and classified the obligation payable to Garsdale (“convertible debt
instrument”) as other current financial liability in the consolidated statement of financial position from December 2012 (Note 17). The
transactions referred to above result in the holding by the Group of a 50% interest in Euroset. The remaining 50% of Euroset is indirectly
owned by VimpelCom, a Russian telecommunications operator. Lefbord and VimpelCom exercise joint control over Euroset with each
having substantive approval rights allowing them to effectively participate in all of the significant decisions of Euroset.
The liability and purchased put option components of the convertible debt instrument were accounted for separately. The fair value
of the put option asset was 1,611 immediately prior to the decision about settlement described below.
In December 2013 the obligation to purchase Garsdale’s interest in Lefbord was deferred for one year. On 9 July 2014 the Group elected
to complete the purchase earlier and to settle the amount due to Garsdale for its interest in Euroset. At the date of settlement, the total
amount due to Garsdale for its 50% interest in Euroset was US$ 657 million (22,628 at the exchange rate as of the date of settlement).
The Group also elected to settle the amount due to Garsdale in treasury shares and, as stipulated in the sale and purchase agreement,
the treasury shares were valued at the weighted-average market price for the Company’s GDRs for the immediately preceding six-month
period. Following the transaction, the number of treasury shares was reduced by 22,641,056 (or 16,201 at carrying value) (Note 7).
The Group measured the treasury shares transferred to Garsdale at the carrying value of the liability to Garsdale as of the date the
liability was extinguished, or 22,628, reduced by the fair value of the purchased put option asset on the date preceding the date of the
decision to accelerate settlement of the liability, or 1,611 (less tax effect of 322). The net effect of settlement of 5,138 is recognised
directly in retained earnings. This transaction was accounted for as transaction with shareholders acting in their capacity of a controlling
party at carrying value through equity.
The Euroset joint venture is accounted for using the equity method in the consolidated financial statements. The primary reason for the
investment in Euroset was to realise benefits from synergies related to a reduction of subscriber acquisition costs of the Group due to
implementation of a revenue sharing model, procurement savings and prominent marketing of MegaFon services in Euroset outlets.
Strategic report
The reconciliation of summarised financial information of Euroset to the carrying amount of the Group’s interest in the joint venture is
presented below:
Assets
Non-current assets
Other current assets
42,717
5,455
20,977
69,149
(8,660)
(6,928)
(1,371)
(22,326)
(39,285)
–
(7,034)
(10,021)
(21,567)
(38,622)
Total identifiable net assets
29,495
30,527
The Group’s share in the joint venture
The Group’s share of identifiable net assets
Excess of the consideration transferred over the Group’s share in the fair value of identifiable net assets
Carrying amount of the Group’s interest
50%
14,748
20,014
34,762
50%
15,264
20,014
35,278
Liabilities
Non-current financial liabilities
Other non-current liabilities
Current financial liabilities
Other current liabilities
38,934
12,711
17,135
68,780
Governance
31 December
2014
2013
The composition of the Group’s share of loss of the joint venture accounted for using the equity method is as follows:
Loss before tax
Income tax expense
Loss and total comprehensive loss of the joint venture
The Group’s share in the joint venture
The Group’s share of the loss and total comprehensive loss of the joint venture
(792)
(239)
(1,031)
(367)
(37)
(404)
50%
(516)
50%
(202)
Year ended
31 December
2014
2013
11. Segment information
The Group manages its business primarily based on eight geographical operating segments within Russia, which provide a broad range
of voice, data and other telecommunication services, including wireless and wireline services, interconnection services, data transmission
services and value added services (“VAS”). The CODM (Note 4) evaluates the performance of the Group’s operating segments based on
revenue and operating income before depreciation and amortisation (“OIBDA”). Total assets and liabilities are not allocated to operating
segments and not analysed by the CODM.
Operating segments with similar economic characteristics have been aggregated into an integrated telecommunication services segment,
which is the only reportable segment. Around 1% of the Group’s revenues and results are generated by segments outside of Russia.
No single customer represents 10% or more of the consolidated revenues.
Reconciliation of consolidated OIBDA to consolidated profit before tax for the years ended 31 December:
2014
OIBDA
Depreciation
Amortisation
Finance costs
Finance income
(Loss)/gain on financial instruments, net
Foreign exchange loss, net
Profit before tax
138,520
(47,431)
(7,827)
(1,437)
(13,792)
1,155
(516)
(1,370)
(50)
(16,884)
50,368
2013
132,592
(44,851)
(6,131)
(1,200)
(12,184)
1,888
(202)
(81)
269
(2,914)
67,186
12.Income taxes
The following presents the significant components of the Group’s income tax expense for the years ended 31 December:
2014
Current income tax:
Current income tax charge
Adjustments recognised for current tax of prior periods
Deferred tax
Income tax expense
9,069
(648)
4,947
13,368
2013
16,212
669
(1,465)
15,416
Income tax is calculated at 20% of taxable profit for the years ended 31 December 2014 and 2013, respectively.
The reconciliation between the average effective income tax rate and the applicable Russian enacted statutory tax rate is as follows:
Statutory income tax rate
Deferred tax assets write-off
Non-deductible expenses
Effect of intra-group transactions
Effect of income tax preferences
Other
Effective income tax rate
2014
2013
20.0%
3.0%
2.9%
1.6%
(0.7%)
(0.3%)
26.5%
20.0%
–
1.5%
1.6%
(0.2%)
–
22.9%
The increase in effective income tax rate during 2014 is primarily attributable to derecognition of deferred tax assets related to the
investment in Euroset and the acquisition of Scartel as well as an increase in the effect of non-deductible expenses. The effect of
intragroup transactions, in the table above, represents taxable intra-group income.
Strategic report
Deferred tax relates to the following:
(12,810)
(9,233)
(624)
2,322
622
378
(127)
(45)
727
(10,557)
(9,368)
(235)
2,706
733
1,184
781
725
(48)
(18,790)
(14,079)
Reflected in the statement of financial position as follows:
Deferred tax assets
782
(19,572)
3,673
(17,752)
2014
2013
2,253
(135)
711
384
111
806
908
770
(861)
4,947
(400)
(698)
65
(9)
376
(166)
198
(571)
(260)
(1,465)
Intangible assets
Derivative financial instruments
Loss carry-forwards
Revenue recognition
Accrued employee benefits
Accrued expenses
Investments in joint ventures and subsidiaries
Other movements and temporary differences
Deferred tax (benefit)/expense
Net deferred tax liabilities
Statement of
comprehensive income
(profit and loss)
for the years
Governance
Statement of financial
position as of 31
December
2013
restated
2014
(Note 9)
The Group recognises deferred tax assets in respect of tax losses carried forward to the extent that realisation of tax losses against
future taxable profit is probable. Deferred tax assets related to tax losses of the Group’s subsidiaries are recognised based on the tax
planning opportunities that would be implemented, if necessary, to prevent unused tax losses.
Scartel
MegaFon Retail
Balance at end of year
2014
2013
1,664
658
2,322
1,985
721
2,706
In order to utilise tax losses the Group is able to implement appropriate tax planning strategies depending on the results of these
subsidiaries in subsequent periods. The tax planning strategies may include, among others, merging of the respective subsidiaries with
OJSC MegaFon which is expected to have sufficient pretax income to utilise the accumulated tax losses of these subsidiaries.
Unrecognised deferred tax assets in the consolidated statement of financial position as of 31 December 2014 and 2013 amounted to
2,202 and 463, respectively. An increase in unrecognised deferred tax assets is due to the difference between the accounting and tax
bases of the Euroset investment which is not expected to be realised due to lack of appropriate taxable profits. The remaining part is
related to unused tax losses. Tax loss carry-forwards available for utilisation by the Group expire in 2018-2024.
Reconciliation of net deferred tax liabilities for the years ended 31 December is as follows:
2014
Balance at beginning of year
Tax benefit/(expense) during the year
Translation adjustment of foreign operations
Change through equity (Note 10)
Acquisition of subsidiaries (Note 9)
(14,079)
(4,947)
(86)
322
–
(18,790)
2013
(9,760)
1,465
10
–
(5,794)
(14,079)
The Group recognised deferred tax assets in respect of the tax losses of the following subsidiaries:
13.Earnings per share
The following table sets forth the computation of basic and diluted EPS for the years ended 31 December:
Numerator:
Net profit attributable to equity holders of the Company
Add back: interest expense and foreign exchange loss on convertible debt instrument
and gain on revaluation of purchased put option (Note 10)
Net profit attributable to equity holders of the Company, adjusted
Denominator:
Weighted-average ordinary shares outstanding
Effect of dilutive securities:
Employee stock options (Note 25)
Assumed debt conversion (Note 10)
Weighted-average diluted shares outstanding, adjusted
EPS – basic, Rubles
EPS – diluted, Rubles
2014
2013
36,726
51,608
–
36,726
1,120
52,728
583,915,212
570,151,007
3,652,843
5,532,897
– 18,454,992
587,568,055 594,138,896
63
63
91
89
Strategic report
14.Property and equipment
Property and equipment is as follows:
Vehicles, office
and other
equipment
Construction
in-progress
Total
65,709
–
176
(3,154)
(1,405)
2,591
90
23,062
63
370
(1,460)
–
2,187
88
24,059
43,082
2,760
(1,265)
(323)
(40,249)
42
416,973
43,145
12,300
(16,359)
(1,728)
–
458
31 December 2013 as restated (Note 9)
Additions
Acquisitions (Note 9)
Disposals
Transfer from AHFS (Note 22)
Put into use
Translation
338,366
–
225
(8,915)
–
46,159
2,332
64,007
–
4
(438)
1,405
2,971
808
24,310
–
2
(1,738)
–
3,397
777
28,106
49,841
7
(287)
–
(52,527)
1,102
454,789
49,841
238
(11,378)
1,405
–
5,019
31 December 2014
378,167
68,757
26,748
26,242
499,914
Depreciation as of:
1 January 2013
Charge for the year
Disposals
Transfer to AHFS (Note 22)
Translation
(168,881)
(36,488)
10,024
–
(148)
(16,530)
(4,541)
438
212
(38)
(16,013)
(3,822)
1,339
–
(69)
–
–
–
–
–
(201,424)
(44,851)
11,801
212
(255)
31 December 2013
Charge for the year
Disposals
Transfer from AHFS (Note 22)
Translation
(195,493)
(39,676)
7,824
–
(1,585)
(20,459)
(4,364)
297
(212)
(317)
(18,565)
(3,391)
1,371
–
(689)
–
–
–
–
–
(234,517)
(47,431)
9,492
(212)
(2,591)
31 December 2014
(228,930)
(25,055)
(21,274)
–
(275,259)
Net book value:
31 December 2013
31 December 2014
142,873
149,237
43,548
43,702
5,745
5,474
28,106
26,242
220,272
224,655
Included in construction in-progress are advances to suppliers of network equipment of 1,601 and 2,673 as at 31 December 2014 and 2013,
respectively.
Assets purchased under certain contracts with deferred payment terms in the amount of 1,252 (2013: 950) are pledged as security for the
related liabilities.
304,143
–
8,994
(10,480)
–
35,471
238
Cost as of:
1 January 2013
Additions
Disposals
Transfer to AHFS (Note 22)
Put into use
Translation
Governance
Telecommunications Buildings and
network
structures
15.Intangible assets
Intangible assets are as follows:
4G operating
licences
Other
operating
licences
Frequencies
Software
Marketing
related
intangible
assets
Customer
base
Other
intangible
assets
Total
Cost as of:
1 January 2013
Additions
Disposals
Transfer
Translation
–
–
42,879
–
–
–
18,795
28
–
(7)
(2)
17
5,309
1,323
–
(427)
–
–
9,486
2,063
556
(495)
21
–
3,535
–
–
–
–
–
2,889
–
844
(153)
(28)
–
6,277
585
108
(628)
9
–
46,291
3,999
44,387
(1,710)
–
17
31 December 2013
as restated (Note 9)
42,879
18,831
6,205
11,631
3,535
3,552
6,351
92,984
Additions
Disposals
Transfer
Translation
–
–
–
–
–
87
–
(14)
–
162
1,298
–
(344)
(71)
–
3,633
–
(588)
–
–
137
–
(226)
–
–
–
–
–
–
–
1,476
38
(566)
71
3
42,879
19,066
7,088
14,676
3,446
3,552
7,373
98,080
31 December 2014
6,631
38
(1,738)
–
165
Amortisation as of:
1 January 2013
Charge for the year
Disposals
Translation
–
(524)
–
–
(14,955)
(791)
1
(12)
(1,731)
(607)
341
–
(5,881)
(2,469)
437
–
(2,184)
(682)
–
–
(951)
(288)
29
–
(3,598)
(770)
499
–
(29,300)
(6,131)
1,307
(12)
31 December 2013
Charge for the year
Disposals
Translation
(524)
(2,144)
–
–
(15,757)
(702)
–
(143)
(1,997)
(783)
248
–
(7,913)
(2,424)
552
–
(2,866)
(720)
140
–
(1,210)
(543)
–
–
(3,869)
(511)
516
(3)
(34,136)
(7,827)
1,456
(146)
31 December 2014
(2,668)
(16,602)
(2,532)
(9,785)
(3,446)
(1,753)
(3,867)
(40,653)
Net book value:
31 December 2013
31 December 2014
42,355
40,211
3,074
2,464
4,208
4,556
3,718
4,891
669
–
2,342
1,799
2,482
3,506
58,848
57,427
19
7
6
2
–
3
7
15
Weightedaverage remaining
amortisation period,
years
Strategic report
Operating licences and frequencies
Operating licences and frequencies provide the Group with the exclusive right to utilise a certain radio frequency spectrum to provide
wireless communication services.
Governance
Operating licences primarily consist of:
• several 2G licences,
• a nationwide 3G licence,
• a nationwide 4G licence to use 2.5–2.7 GHz spectrum (10x10 MHz band) awarded to OJSC MegaFon in 2012, and
• a nationwide 4G licence to use 2.5–2.7 GHz spectrum (30x30 MHz band) acquired in the Scartel business combination (Note 9).
These licences are integral to the wireless operations of the Group and any inability to extend existing licences on the same or comparable
terms could materially affect the Group’s business. While operating licences are issued for a fixed period, renewals of these licences
previously had occurred routinely and at nominal cost. The Group determines that there are currently no legal, regulatory, contractual,
competitive, economic or other factors that could result in delays in licence renewal, or even an outright refusal to renew.
Nationwide 3G and 4G licences were obtained by OJSC MegaFon at nominal cost in 2007 and 2012, respectively, but require the Company
to meet certain conditions, including capital commitments and coverage requirements (Note 31).
Scartel, the Company’s subsidiary since October 2013, was licensed to use the 2.5–2.7 GHz spectrum (30x30 MHz band), a frequency band
three times broader than the Company’s 4G frequency band licensed in 2012, and any of its competitors’ licences in Russia. These 4G
licences are amortised on a straight-line basis over their estimated useful lives of 20 years.
2G licences are amortised on a sum-of-the-years’-digits basis over a period of 10 years which reflects the pattern in which the economic
benefits of these operating licences are expected to be consumed or otherwise used up and assumes a gradual decrease in the number
of 2G subscribers (Note 5). At 31 December 2014 the weighted-average period until the next renewal date of 2G licences is approximately
1.5 years.
Marketing related intangible assets
Other intangible assets
The Group accelerated amortisation of numbering capacity in 2013 due to the introduction of mobile number portability in Russia.
As of 1 January 2013 the gross book value and accumulated amortisation of numbering capacity were 1,839 and 1,622, respectively.
Goodwill
The changes in the carrying value of goodwill, net of accumulated impairment losses of nil, for the years ended 31 December 2014 and 2013
are as follows:
Measurement period adjustments
2014
2013
31,899
374
19
32,292
23,950
7,935
14
31,899
Marketing related intangible assets primarily represent the rights and licences to use Olympic symbols and the title of the General Mobile
Partner of the Games acquired in 2009 from the Organisational Committee of the 2014 XXII Olympic Winter Games and XI Paralympic
Winter Games in Sochi. The assets have been fully amortised by 31 December 2014.
16.Impairment test
(a)Goodwill
The Group performs its annual goodwill impairment test as of 1 October of each year using data that is appropriate at that time.
The test has been further updated as at 31 December 2014 considering the external indicators observed in the market at the end of 2014.
The Group considers the relationship between market capitalisation and its book value, among other factors, when reviewing for
indicators of impairment. As of 31 December 2014, the market capitalisation of the Group was not below the book value of its equity.
As a result of the annual test, no impairment of goodwill was identified in 2014 or 2013.
Goodwill acquired through business combinations has been allocated to related CGUs and groups of CGUs as follows:
31 December
2014
2013
restated
(Note 9)
Integrated telecommunication services (group of CGUs)
Broadband internet CGU
Other
Total allocated goodwill
25,262
6,812
218
32,292
17,327
6,419
218
23,964
Unallocated:
Scartel (Note 9)
Total goodwill
–
32,292
7,935
31,899
In assessing whether goodwill has been impaired, the carrying values of the CGUs (including goodwill) were compared with their estimated
recoverable amounts.
Integrated telecommunication services (group of CGUs)
The recoverable amount of the integrated telecommunication services group of CGUs has been determined based on its fair value less
costs to sell (Level 3). The fair value was estimated based on a multiple of earnings, which is 4 times OIBDA, which represents a lower
point of the range observed in the market for acquisitions of similar businesses. The fair value was reduced by 5% as an estimate of costs
to sell the business.
Management believes that a change in any of these key assumptions which currently could be reasonably anticipated would not cause
the aggregate carrying amount of the integrated telecommunication services group of CGUs to exceed the aggregate recoverable amount
of this unit.
Broadband internet CGU
The recoverable amount of the broadband internet CGU has been determined based on its value in use. The value in use was estimated
using cash flow projections from financial budgets approved by senior management covering 2015 and further seven-year projections.
Due to a less favourable economic environment foreseen for the next two years, the extended forecast period has been used for testing
to take into account different growth rates forecasted in the long term.
The calculation of value in use for the broadband internet unit is most sensitive to the following assumptions: average monthly revenue
per user (“ARPU”), discount rates, market share in Moscow, salary growth index and capital expenditures (“CAPEX”) to revenues ratio.
The key assumptions used in the forecast are as follows:
31 December
2014
2013
Growth/(reduction) of ARPU for retail customers during the forecast period by
Pre-tax discount rate
Market share in Moscow (in terms of retail customer base)
Annual salary growth rate during the forecast period
CAPEX/Revenue ratio from 2018
Revenue growth is projected based on market share, traffic growth and other factors.
5.0%
16.3%
7.1%
7.5%
10.5%
(3.0%)
12.9%
8.0%
4.5-7.1%
10.0-10.5%
Strategic report
Annual salary growth is projected based on inflation estimates.
Governance
The discount rate represents the current market assessment of the risks specific to the CGU, taking into consideration the time value
of money and individual risks of the underlying assets that have not been incorporated in the cash flow estimates. The discount rate
calculation is based on the specific circumstances of the Group and its operating segments and is derived from its weighted average
cost of capital (“WACC”). The WACC takes into account both debt and equity. The cost of equity is derived from the expected return
on investment by the Group’s investors. The cost of debt is based on the interest-bearing borrowings the Group is obliged to service.
Segment-specific risk is incorporated by applying individual beta factors. The beta factors are evaluated annually based on publicly
available market data.
Sensitivity to changes in key assumptions
The estimated recoverable amount of the broadband internet unit exceeds its carrying value by 2,015. The following changes in the key
assumptions made independently, with all other assumptions constant, would result in impairment for the broadband internet unit:
3.5%
17.9%
2.9%
10.1%
15.1%
There are no reasonably possible changes in other assumptions that could result in impairment for the broadband internet unit.
(b) Investment in Euroset joint venture
Following the adverse changes in economic environment and the decline in the market observed at the end of 2014 an impairment test
has been performed for the investment in Euroset as at 31 December 2014.
Growth of ARPU for retail customers during the forecast period reducing to Pre-tax discount rate increasing to
Market share in Moscow reducing to
Annual salary growth rate during the forecast period increasing to
CAPEX/Revenue ratio from 2018 increasing to
As a result of the test, no impairment of investment has been identified.
The assessment of value in use for the investment is most sensitive to the following assumptions:
• ability to realise synergy related to savings on dealers’ commissions in the long run,
• discount rate applied for synergy effect estimation,
• annual dealer commission savings as compared to pre-deal market rates.
The key assumptions used in the forecast as at 31 December 2014 are as follows:
Pre-tax discount rate applied for synergy effects estimation
Euroset pre-tax discount rate
Annual dealer commission savings
14.6%
17.8%
48.0%
The discount rate applied for synergy effects estimation represents the current market assessment of the risks specific to the Group
and the investee, taking into consideration the time value of money and individual risks of the underlying assets that have not been
incorporated in the cash flow estimates. The discount rate calculation is based on the specific circumstances of the Group and the
investee and is derived from their WACC. The WACC takes into account both debt and equity. The cost of equity is derived from the
expected return on investment by the Group’s and Euroset investors. The cost of debt is based on the interest-bearing borrowings the
Group and Euroset is obliged to service. Segment-specific risk is incorporated by applying individual beta factors. The beta factors are
evaluated annually based on publicly available market data.
Dealer commission savings are estimated based on the level of market commissions prior to the acquisition of share in Euroset and the
decrease of the Group’s dealer commission put into effect after the deal. The Group’s management expects to realise the synergies in the
long term.
The recoverable amount of investment has been determined based on its value in use. The value in use was estimated using cash flow
projections from financial budgets approved by senior management covering 2015 and further seven-year projections, including estimates
of synergy effects from the Group’s dealer commission savings which were incorporated into the purchase cost of the investment for the
acquisition of Euroset, as the primary reason for the investment in Euroset was to realise benefits from synergies related to a reduction
of subscriber acquisition costs of the Group due to implementation of a revenue sharing model, procurement savings and prominent
marketing of MegaFon services in Euroset outlets. Due to a less favourable economic environment foreseen for the next two years,
the extended forecast period has been used for testing to take into account different growth rates forecasted in the long term.
16.Impairment test (continued)
Sensitivity to changes in key assumptions
The estimated recoverable amount of the investment exceeds its carrying value by 5,012. The following changes in the key assumptions
made independently, with all other assumptions constant, would result in impairment for the investment in Euroset:
Pre-tax discount rate applied for synergy effects estimation increasing to
Euroset pre-tax discount rate increasing to Annual dealer commission savings reducing to
16.6%
19.8%
44.0%
The key management judgment underlying this impairment model is whether the above synergies can be realised in perpetuity. If related
synergies are not realised and sustained, a significant impairment loss would be recorded.
There are no reasonably possible changes in other assumptions that could result in impairment for the investment.
17. Financial assets and liabilities
Financial assets
31 December
2014
2013
restated
(Note 4)
16,260
12,493
Other financial assets:
Financial assets at fair value through profit or loss:
Cross-currency swap not designated as hedge
Euroset settlement put option (Note 10)
Total financial assets at fair value through profit or loss
1,533
–
1,533
300
1,176
1,476
Financial assets at fair value through OCI:
Cross-currency swap designated as cash flow hedge
Total financial assets at fair value through OCI
2,082
2,082
125
125
15,730
27,458
4,346
601
48,135
3,855
–
34,265
–
38,120
Total other financial assets
Other current financial assets
Other non-current financial assets
51,750
(48,887)
2,863
39,721
(39,296)
425
Total financial assets
Total current financial assets
Total non-current financial assets
68,010
(65,147)
2,863
52,214
(51,789)
425
Trade and other receivables (Note 20)
Loans and receivables:
Short-term bank deposits in Rubles
Short-term bank deposits in HK dollars
Short-term bank deposits in US dollars
Bank promissory notes
Total loans and receivables
Strategic report
Financial liabilities
31 December
Financial liabilities at amortised cost:
Loans and borrowings:
Bank loans
Equipment financings
Ruble bonds
Total loans and borrowings
Total current loans and borrowings
Total non-current loans and borrowings
95,140
74,964
37,364
207,468
(51,149)
156,319
75,342
46,063
30,604
152,009
(21,184)
130,825
Other financial liabilities at amortised cost:
Deferred consideration for Scartel (Note 9)
Long-term accounts payable
Contingent consideration (Note 9)
Due to employees and related social charges, non-current
Convertible debt instrument (Note 10)
Liability for marketing related licences (Note 15)
Total financial liabilities at amortised cost
7,257
1,252
150
5
–
–
216,132
39,198
950
–
283
20,678
177
213,295
16
16
–
–
215
33
248
209
128
337
Other financial liabilities at fair value:
Financial liabilities at fair value through profit or loss:
Total financial liabilities at fair value through profit and loss
Financial liabilities at fair value through OCI:
Interest rate swaps designated as cash flow hedges
Cross-currency swaps designated as cash flow hedges
Total financial liabilities at fair value through OCI
Total other financial liabilities
Other current financial liabilities
Other non-current financial liabilities
8,928
(7,658)
1,270
61,623
(40,785)
20,838
Total financial liabilities
Total current financial liabilities
Total non-current financial liabilities
253,018
(95,429)
157,589
249,268
(97,605)
151,663
35,636
36,622
Trade and other payables (Note 24)
Governance
2014
2013
restated
(Note 4)
17. Financial assets and liabilities (continued)
Principal amounts outstanding under loans and borrowings are as follows:
31 December
2014
2013
Weighted-average
interest rate
Maturity
Bank loans:
Ruble loans – fixed rates
US dollar loans – floating rates
Total bank loans
9.48%
LIBOR+2.53%
2015-2020
2015
92,072
3,375
95,447
73,579
1,963
75,542
Equipment financings:
Ruble loans – fixed rates
US dollar loans – fixed rates
US dollar loans – floating rates
Euro loans – fixed rates
Euro loans – floating rates
Total equipment financings
10.00%
2.27%
LIBOR+2.30%
3.74%
EURIBOR+2.05%
2015-2018
2015-2022
2015-2022
2015
2015-2019
734
9,521
61,339
310
3,785
75,689
–
7,202
35,241
613
3,552
46,608
8.68%
2022-2024 with a put
option in 2015-2018
36,751
30,000
207,887
(50,299)
157,588
152,150
(20,483)
131,667
Ruble bonds
Total
Total current
Total non-current
Ruble revolving credit facilities
In July 2014 the Group signed a three-year revolving credit facility agreement for up to 12,000. To date, no amount has been drawn under
this credit facility.
In December 2014 the Group drew 15,000 under its existing 30,000 revolving credit facility agreement. The tranche has a term of two
years. The funds will be used to finance current activities and, in particular, to provide additional liquidity to mitigate revaluation risks
for short-term, foreign currency denominated liabilities.
Equipment financing facilities
In February 2014 the Group signed a new credit facility agreement for up to US$ 150 million (8,439 at the exchange rate as of
31 December 2014). The credit facility must be used to finance purchases of equipment and related services and requires the Group to
make semi-annual payments, plus accrued interest, during the period from 2014 to 2022. An equivalent of 2,684 at the year-end exchange
rate has been drawn and is outstanding at 31 December 2014 under this credit facility.
In October 2014 the Group signed a new loan facility agreement for up to 1,350. The loan facility agreement must be used to finance
purchases of equipment. At 31 December 2014, 734 has been drawn under this loan facility.
In December 2014 the Group signed a Term Loan Facility Agreement for up to US$ 500 million (28,129 at the exchange rate as of
31 December 2014), with a seven-year-tenor. The proceeds will be used to finance purchases of equipment and related services (Note 31).
To date, no amount has been drawn under this loan facility.
Ruble bonds
On 20 May 2014 the Group placed its Series BO-04 Ruble denominated exchange bonds, in an aggregate principal amount of 15,000.
The bonds are due for repayment in full in May 2024 subject to a put option exercisable by the bond holders on the first anniversary
of the placement. The coupon rate was set at 9.45% per annum, paid semiannually, and will be revised in one year from the bonds’
placement. The net proceeds of the bonds were used to partially repay the liability for deferred consideration for Scartel (Note 29).
On 14 October 2014 the Group re-purchased 8,249,296 Series 05 bonds (out of 10,000,000 initially issued in October 2012) at their
nominal value of 1,000 Rubles each under a mandatory put option exercisable by the bond holders following a coupon rate reset on
24 September 2014. At 31 December 2014 the bonds are kept in treasury and may be further placed in the market should the Group decide
to. The rest of the Series 05 bonds will continue trading in the market with a coupon rate of 9.85% p.a. for a period of eighteen months,
after which the rate will be subject to further reset and the bonds will be subject to a further put option.
Strategic report
Capitalised borrowing costs
Interest capitalised was 1,789 (out of the total interest expense of 15,581) and 1,382 (out of the total interest expense of 13,566)
for the years ended 31 December 2014 and 2013, respectively. The rate used to determine the amount of borrowing costs eligible
for capitalisation was 7.2% for the years ended 31 December 2014 and 2013. The interest capitalised has been paid in cash during
the respective periods.
Governance
Covenant requirements
The majority of financing facilities contain restrictive covenants, which, among other things, with permitted exceptions, limit the Group’s
ability to incur debt, encumber assets, undertake mergers and acquisitions and make material changes in the nature of the business
without prior consent from the required majority of lenders. In addition, these financing facilities require the Group to meet various
financial covenants.
Hedging activities and derivatives
In the normal course of business, the Group is exposed to certain risks related to fluctuations in interest rates and foreign currency
exchange rates. The Group uses derivative contracts, primarily interest rate swaps and foreign currency swaps, to manage those risks.
The Group had the following outstanding interest rate swaps and cross-currency swaps stated at their notional amounts:
31 December 2013
Millions,
original
Millions,
currency
Rubles
US Dollar
Euro
460
–
25,879
–
25,879
576
11
18,852
495
19,347
Cross-currency swaps:
designated as cash flow hedge
not designated as cash flow hedge
Total cross-currency swaps
US Dollar
US Dollar
76
464
4,276
26,104
30,380
107
278
3,502
9,079
12,581
Cash flow hedges of interest rate risk
The Group’s objective in using interest rate derivatives is to add certainty and stability to its interest expense and to manage its exposure
to interest rate movements. To accomplish this objective, the Group primarily uses interest rate swaps as part of its interest rate risk
management strategy.
Interest rate swaps involve the receipt of variable-rate amounts from a counterparty in exchange for the Group making fixed-rate
payments over the life of the agreements without the exchange of the underlying principal amount of long-term debt.
The interest rate swaps have been designated and qualified as cash flow hedges of interest rate risk. There has been no ineffective
portion in the reporting period.
Cross-currency swap designated as a cash flow hedge
At 31 December 2014 the Group had a fixed-to-fixed rate cross-currency swap agreement in place that limits the exposure from changes
in US dollar exchange rates on certain long-term debt.
The swap has been designated and qualified as a cash flow hedge of foreign currency risk. There has been no ineffective portion in the
reporting period.
Derivatives not designated as hedging instruments
In March 2014 the Group entered into a cross-currency swap agreement with a notional amount of US$ 243 million (13,671 at the exchange
rate as of 31 December 2014) that limits the exposure from changes in US dollar exchange and interest rates on certain long-term debt.
The terms of the swap agreement did not meet the requirements for hedge accounting, therefore the Group has reported all gains and
losses from the change in fair value of this derivative financial instrument directly in the consolidated profit and loss.
Accordingly, at 31 December 2014 the Group had two cross-currency swap agreements in place that were not designated as cash flow hedges.
Interest rate swaps:
Total interest rate swaps
Original
currency
31 December 2014
Millions,
original
Millions,
currency
Rubles
The table below presents the effect of the Group’s derivative financial instruments designated as cash flow hedges on the consolidated
statements of comprehensive income for the years ended 31 December:
2014
Interest rate swaps:
Amount of loss recognised in cash flow hedge reserve
Amount of loss reclassified from accumulated cash flow hedge reserve into finance costs
Deferred tax on movements in OCI
Cross-currency swap:
Amount of gain/(loss) recognised in cash flow hedge reserve
Amount of gain reclassified from accumulated cash flow hedge reserve into foreign exchange loss, net
Amount of loss reclassified from accumulated cash flow hedge reserve into finance costs
Deferred tax on movements in OCI
Total in OCI
2013
(61)
216
(31)
124
(48)
139
34
125
1,981
(1,899)
134
(43)
173
(2)
(47)
63
(3)
11
297
136
At 31 December 2014, the amount recorded in OCI which is expected to be reclassified to profit and loss in the next twelve months is 604
(gain), the remaining gain of 1,305 is expected to affect the earnings in 2016-2017.
(Loss)/gain on financial instruments
Gains and losses on other financial instruments are recognised in profit and loss as follows:
Change in fair value of financial instruments measured through profit or loss:
Euroset settlement put option
Cross-currency swaps not designated as hedges
Gain from settlement of Synterra contingent consideration
Total (loss)/gain on financial instruments, net
2014
2013
435
(485)
–
(50)
58
(52)
263
269
On 2 August 2013 the Group settled the contingent consideration which was due under the sale and purchase agreement dated 2 June 2010
for the acquisition of CJSC Synterra. In full settlement, the Group transferred to the sellers its 60% interest in CJSC Synterra-Media
(a provider of telecommunication services to TV broadcasters), its 100% interest in CJSC Absolut (the owner of the Group’s head office
building in Moscow) and a cash payment of US$ 7 million (231 at the exchange rate as of 2 August 2013). The resulting gain of 263 was
recognised in the consolidated statement of comprehensive income within profit and loss.
Foreign exchange loss
Net foreign exchange loss recognised for the years ended 31 December arose from the following financial assets and liabilities
denominated in foreign currencies:
2014
2013
14,031
4,769
191
3,824
1,842
108
10
414
Financial liabilities:
Other financial liabilities
(30,617)
(3,282)
(5,800)
(3,449)
13
(1,852)
Total foreign exchange loss, net
(16,884)
(2,914)
Financial assets:
Loans and receivables
Other financial assets
Strategic report
Fair values
Set out below is a comparison by class of the carrying amounts and fair values of the Group’s financial instruments and certain
non-financial assets that are carried in the financial statements:
Assets held for sale
1,533
–
300
1,176
1,533
–
300
1,176
Level 2
2,082
125
2,082
125
Level 2
Level 2
47,534
601
51,750
38,120
–
39,721
47,534
601
51,750
38,120
–
39,721
Level 3
–
1,516
–
1,851
Level 2
Level 1
Level 3
Level 3
Level 3
170,104
37,364
7,257
1,252
150
121,405
30,604
39,198
950
–
161,981
34,664
7,257
1,252
150
124,523
29,980
39,198
950
–
Level 2
Level 3
–
–
20,678
177
–
–
20,678
177
Level 2
16
–
16
–
Level 2
Level 2
Level 3
215
33
5
216,396
209
128
283
213,632
215
33
5
205,573
209
128
283
216,126
Management has determined that cash, short-term deposits, trade receivables, trade payables, bank overdrafts and other current
liabilities approximate their carrying amounts largely due to the short-term maturities of these instruments.
The Group, using available market information and appropriate valuation methodologies, where they exist, has determined the estimated
fair values of its financial instruments. However, judgment is necessarily required to interpret market data to determine the estimated
fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Group could realise in a current
market exchange. While management has used available market information in estimating the fair value of its financial instruments, the
market information may not be fully reflective of the value that could be realised in the current circumstances.
Fair values of the Group’s loans and borrowings, except for market quoted bonds, are determined by using a discounted cash flow method
using a discount rate that reflects the issuer’s borrowing rate as at the end of the reporting period. The own non-performance risk as at
31 December 2014 was assessed to be insignificant.
Interest-rate swaps and cross-currency swaps are valued using valuation techniques which employ the use of market observable inputs.
The most frequently applied valuation techniques include swap models, using present value calculations. The models incorporate various
inputs including the credit quality of counterparties, foreign exchange spot and forward rates, yield curves of the respective currencies,
currency basis spreads between the respective currencies and interest rate curves.
The Group, in connection with its current activities, is exposed to various financial risks, such as foreign currency risks, interest rate risks
and credit risks. The Group manages these risks and monitors their exposure on a regular basis (Note 30).
Financial liabilities:
Financial liabilities at amortised cost:
Ruble bonds
Deferred consideration for Scartel
Contingent consideration
Convertible debt instrument
(Due to Garsdale for Euroset, Note 10)
Liability for marketing related licences
Financial liabilities at fair value through profit or loss:
Financial liabilities at fair value through OCI:
Interest-rate swaps designated as cash flow hedges
Cross-currency swaps designated as cash flow hedges
Due to employees and related social charges, non-current
Total financial liabilities
Level 2
Level 3
Financial assets:
Financial assets at fair value through profit or loss:
Euroset settlement put option
Financial assets at fair value through OCI:
Cross-currency swap designated as cash flow hedge
Loans and receivables at amortised cost:
Short-term bank deposits
Bank promissory note
Total financial assets
Fair value
31 December
2014
2013
Governance
Carrying amount
31 December
2014
2013
The following tables summarise the valuation of financial assets and liabilities measured at fair value on a recurring basis by the fair value
hierarchy:
Total Interest rate/
financial cross-currency
assets
swaps
Total
financial
liabilities
Euroset
settlement
put option
Crosscurrency
swaps
31 December 2014
Level 1
Level 2
Level 3
Total as of 31 December 2014
–
–
–
–
–
3,615
–
3,615
–
3,615
–
3,615
–
(264)
–
(264)
–
(264)
–
(264)
31 December 2013
Level 1
Level 2
Level 3
Total as of 31 December 2013
–
–
1,176
1,176
–
425
–
425
–
425
1,176
1,601
–
(337)
–
(337)
–
(337)
–
(337)
During the years ended 31 December 2014 and 31 December 2013 there were no transfers between levels of the fair value hierarchy.
The table below presents a reconciliation of the beginning and ending balances of financial instrument having fair value measurements
based on significant unobservable inputs (Level 3) for the years ended 31 December:
Euroset settlement put
option
2014
2013
Realised gains/(losses) recognised in profit or loss
Unrealised gains recognised in profit or loss (gain on financial instruments line)
Settlements (Note 10)
1,176
–
435
(1,611)
–
1,118
–
58
–
1,176
18.Non-financial assets and liabilities
Current non-financial assets are as follows:
31 December
2014
2013
Prepayments for services
VAT receivable
Deferred costs
Prepaid taxes, other than income tax
Prepayments for inventory
Total current non-financial assets
2,473
1,274
1,096
235
83
5,161
2,113
2,857
478
231
281
5,960
Non-current non-financial assets are as follows:
31 December
2014
2013
Deferred costs, non-current
Long-term advances
Total non-current non-financial assets
1,581
472
2,053
968
332
1,300
Strategic report
Current non-financial liabilities are as follows:
31 December
2014
2013
11,414
5,596
1,894
1,573
16
20,493
10,035
4,581
3,064
1,759
51
19,490
Governance
Advances from customers
VAT payable
Current portion of deferred revenue
Taxes payable, other than income tax
Other current liabilities
Total current non-financial liabilities
Non-current non-financial liabilities are as follows:
31 December
2014
2013
1,309
327
76
1,712
750
359
61
1,170
19.Inventory
Inventory is as follows:
31 December
2014
2013
3,968
1,156
433
310
617
6,484
5,396
1,205
1,013
287
475
8,376
The amount of inventory write-down to net realisable value and other inventory losses recognised in the ‘Cost of equipment and
accessories’ line in the statement of comprehensive income for the year ended 31 December 2014 is 2,202 (2013: 1,560).
Handsets
Electronic devices and accessories
USB modems
SIM-cards
Other
Total inventory
Deferred revenue
Advance received for sale of property and equipment
Other non-current liabilities
Total non-current non-financial liabilities
20.Trade and other receivables
Trade and other receivables are as follows:
31 December
2014
Local subscribers
Interconnection charges
Rebates receivable
Dealers
Content providers
Property and equipment sold
Roaming charges receivable
Other receivables
Impairment allowance
Total trade and other receivables
7,154
4,398
1,917
1,731
521
462
440
1,159
(1,522)
16,260
2013
restated
(Note 4)
5,245
3,612
1,605
1,921
114
226
414
818
(1,462)
12,493
The ageing analysis of financial assets that are neither past due nor impaired is as follows:
31 December
Neither past due nor impaired
Past due but not impaired:
Less than 30 days
30-90 days
More than 90 days
Total trade and other receivables
2014
2013
restated
(Note 4)
14,342
11,047
703
768
447
16,260
722
457
267
12,493
The following table summarises the changes in the impairment allowance for trade and other receivables for the years ended
31 December:
Change in the impairment allowance
Accounts receivable written off
2014
2013
1,462
1,216
(1,156)
1,522
1,259
1,163
(960)
1,462
21.Cash and cash equivalents
Cash and cash equivalents are as follows:
31 December
2014
2013
Cash at bank and on hand in
Rubles
US dollars
HK dollars
Euros
Short-term bank deposits in
Rubles
US dollars
HK dollars
Total cash and cash equivalents
4,264
4,866
1,919
110
1,984
119
–
36
2,411
5,825
2,828
22,223
1,549
6,251
–
9,939
Strategic report
22.Assets held for sale
23.Provisions
Decommissioning provision
Governance
In December 2013 the Group decided to sell its office building in Saint Petersburg with the carrying value of 1,405 at the date of classification
as held for sale (Note 14). Following the slowdown in the real estate market, in December 2014, the Group decided to change the initial
plan and retain the building. Accordingly, the building has been reclassified from assets held for sale back to property and equipment.
The Group recognised depreciation that would have been accumulated had the asset not been classified as held for sale in the amount
of 33 in the consolidated statement of comprehensive income for the year ended 31 December 2014.
The following table describes the changes to the decommissioning provision for the years ended 31 December:
2014
2013
5,355
(1,234)
–
289
548
4,958
5,724
(1,445)
232
256
588
5,355
Revisions in estimated cash flows during the years ended 31 December 2014 and 2013 in the table above mainly relate to a decrease in
expected decommissioning costs per item, as well as an increase in discounting rate and long-term inflation forecast, which also reduced
buildings and structures cost in property and equipment (Note 14).
24.Trade and other payables
Revisions in estimated cash flows
Additions
Unwinding of discount
Trade and other payables are as follows:
31 December
2014
11,243
5,078
4,875
3,971
1,708
1,661
1,362
1,105
832
640
627
571
570
2,379
36,622
10,989
3,800
5,916
2,384
968
1,677
1,366
663
934
2,754
722
268
368
2,827
35,636
Equipment suppliers
Interconnection charges
Due to employees
Inventory
Dealers
Rent and utilities
Social charges
Channels rental
Content providers
Advertising
Network repairs and maintenance
Roaming charges payable
Roaming rebates given
Other payables
Total trade and other payables
2013
restated
(Note 4)
25.Share-based compensation
Long-term incentive programme 2013
In August 2013 the Company’s Board of Directors approved a long-term motivation and retention program for certain key executive and
senior level employees under which the parties selected to participate are awarded phantom share options. In the aggregate, the value
ascribed to the full package of phantom share options for which options may be awarded is 1.1% of the share capital of the Company
(equal to 7,000,000 phantom shares) at the base price of US$ 24.25 per share. The plan has a three-year duration and the awarded
share options vest in April-May 2015 and April-May 2016 and are settled in cash upon vesting. Payments shall be made on the basis
of the difference between the base price and the weighted-average price of the Company’s shares in the period between 15 January
and 15 March of the relevant year of vesting. Vesting of the options is generally contingent upon the recipient’s continuing employment
with the Group.
In June 2014 a total number of 2,192,000 phantom share options were granted to certain key executive and senior level employees under
the 2013 long-term incentive programme.
The respective awards are classified as a liability. The fair value of the options has been estimated using the Monte Carlo model. The fair
value of each grant is estimated at the end of each reporting period. The expected volatility is estimated based on the average historical
volatility of publicly traded guideline companies over the period equal to the expected life of the options granted. The dividend yield is
included in the model based on expected dividend payments. The risk free rate is determined on the basis of U.S. Treasury yield curve
rates with a remaining term to maturity equal to the expected life of the options. The expected term of the options equals their vesting
term as the options are settled in cash at the end of the vesting period.
The fair value of options outstanding at 31 December 2014 is 8 Rubles per option. The carrying amount of the liability relating to these
awards at 31 December 2014 is 5. The employee benefits expense recognised during the year ended 31 December 2014 in the consolidated
statement of comprehensive income is 5, including related social charges.
In October 2012 the Company’s Board of Directors approved a long-term motivation and retention programme for certain key executive
and senior level employees under which the parties who are selected to participate are awarded phantom share options. In the aggregate,
the value ascribed to the full package of phantom share options available for award is 1.1% of the share capital of the Company (equal to
7,000,000 phantom shares) at the base price of US$ 17.86 per share. The plan has a three-year duration and the awarded share options
vest in April-May 2014 and April-May 2015 and are settled in cash upon vesting, based on the difference between the base price and the
weighted-average price of the Company’s shares in the period between 15 January and 15 March in the relevant year of vesting. Vesting
of the options is generally contingent upon the recipient’s continued employment with the Group.
In February 2013 a total number of 2,133,000 phantom share options were granted to certain key executive and senior level employees
under the 2012 long-term incentive programme.
The respective awards are classified as a liability. The valuation technique is described in ‘Long-term incentive programme 2013’ above.
The following table illustrates the major assumptions of the Monte Carlo model for the options for the years ended 31 December:
31 December
2014
2013
Expected term, years
Expected volatility
Expected dividend yield
Risk free interest rate
0.2
59%
7.0%
0.07%
0.3-1.3
24%-26%
7.5%
0.21%
In May 2014, 788,400 phantom share options vested and were exercised. During the year ended 31 December 2014, using its discretion
under the plan, Group management permitted employees leaving the Group, who were considered deserving, to exercise a total of 45,000
options, notwithstanding the requirements of the plan set forth above.
Strategic report
The following table summarises the share price and number of options:
Number of
options
2,133,000
(60,000)
(88,000)
1,985,000
–
(833,400)
(28,400)
1,123,200
–
CEO long-term incentive plan
As part of a long-term incentive plan approved by the Company’s Board of Directors in November 2012, Mr Ivan Tavrin, the CEO of the
Company, agreed to purchase, within 30 days of the Group’s IPO, 7,750,000 of the Group’s ordinary shares (or 1.25% of the total issued
shares) at the IPO price of US$ 20 per share. Mr Tavrin exercised the option in December 2012.
Pursuant to the plan, Mr Tavrin was also given three options to buy up to a further 1.25% of the total issued shares on each of his
employment anniversary dates in May 2013, May 2014 and May 2015 at the IPO price. The options can be exercised, in whole or in part,
on those dates or subsequently, up till May 2017, when any unexercised portion will lapse. Their exercise is subject to Mr Tavrin’s continued
employment with the Group and Mr Tavrin holding at least a 1.25% interest in the Company on the relevant exercise date. Mr Tavrin
exercised the first of these three options in May 2013 and transferred a consideration of 4,869 to the Group.
The awards are classified as equity. The following table summarises the share prices and number of options:
Number of
options
Outstanding as of 1 January 2013
Exercised at US$ 23.88 (735 Rubles) per option
Outstanding as of 31 December 2013
Exercisable as of 31 December 2013
23,250,000
(7,750,000)
15,500,000
–
15,500,000
15,500,000
On 30 December 2014 Mr Tavrin exchanged his 2.5% interest in the Company and the 15,500,000 unexercised options for an interest in
USMHL (Note 29).
On 4 March 2014 the Board of Directors of the Company agreed unanimously to amend the terms of the CEO long-term incentive plan and
to accelerate the vesting of Mr Tavrin’s final two options to acquire a 1.25% interest in the Company, so that all the remaining options may
now be exercised at any time after 1 May 2014. The change resulted in an additional employee benefits charge of 380 for the year ended
31 December 2014 due to the accelerated vesting, including incremental fair value in the amount of 111, recognised in the first half of 2014.
In addition, the Board agreed to remove a restriction on Mr Tavrin holding more than 5% of the authorised share capital of the Company at
any time prior to May 2017.
The fair value of options outstanding at 31 December 2014 is nil (2013: 458) Rubles per option. The carrying amount of the liability relating
to these awards at 31 December 2014 is nil (2013: 493) as options became out-of-money due to reduction in the Company’s US Dollardenominated share price. The respective reversal of liability has reduced the employee benefits expense recognised during the year ended
31 December 2014 in the consolidated statement of comprehensive income by 186 (2013: 557 expense), including related social charges.
Governance
Granted in February 2013
Exercised at US$ 33.52 (1,091 Rubles) per option
Forfeited
Exercised at US$ 29.34 (1,045 Rubles) per option
Forfeited
26.Long-term incentive programme
In April 2008 the Group’s Board of Directors approved a long-term motivation and retention programme. Under this programme certain
key executive and senior level employees are eligible for cash benefits that depend on the increases in the Company’s value which is
based on a formula driven calculation. These benefits vest every two years over a four-year period and are contingent upon the recipient’s
continuing employment with the Group and an increase in the value of the Group as calculated. These benefits are accounted for as other
long-term employee benefits with accrued liabilities included in trade and other payables (Note 24) and non-current financial liabilities
(Note 17) in the accompanying consolidated financial statements as of 31 December 2014 and 2013 in the amounts of 80 and 320,
respectively. Current service costs and related social charges recognised as employee benefits cost under the programme for the years
ended 31 December 2014 and 2013, included in general and administrative expenses (Note 28), totalled 10 and 176, respectively.
27.Sales and marketing expenses
Sales and marketing expenses for the years ended 31 December are as follows:
Advertising
Dealer commissions for connection of new subscribers
Cash collection and other commissions
Total sales and marketing expenses
2014
2013
6,598
5,864
3,994
16,456
8,797
5,805
4,085
18,687
During the year ended 31 December 2014, advertising costs reflect the de-recognition of approximately 1,200 of amounts accrued in
previous periods.
28.General and administrative expenses
General and administrative expenses for the years ended 31 December are as follows:
Employee benefits and related social charges
Rent
Operating taxes
Network repairs and maintenance
Radio frequency fees
Utilities
Office maintenance
Change in the impairment allowance account for trade and other receivables and advances to suppliers
Professional services
Vehicle costs
Materials and supplies
Insurance
Other expenses
Total general and administrative expenses
2014
2013
27,605
15,711
6,828
6,231
5,488
5,061
2,227
1,398
1,025
805
244
65
2,502
75,190
27,866
13,184
7,106
5,622
4,163
4,372
1,882
2,037
1,213
696
194
81
2,142
70,558
Strategic report
29.Related parties
The following tables provide the total amount of transactions that have been entered into with related parties and balances of accounts
with them for the relevant financial years:
31
838
167
1,036
764
465
240
1,469
Services from USM Group
Services from TeliaSonera Group
Services from Euroset
883
1,817
1,274
3,974
1,233
1,129
1,145
3,507
31 December
2014
2013
Due from USM Group
Due from TeliaSonera Group
Due from Euroset
Due to USM Group
Due to TeliaSonera Group
Due to Euroset
20
72
184
276
7,476
638
3
8,117
60,275
149
293
60,717
Terms and conditions of transactions with related parties
Outstanding balances at the years ended 31 December 2014 and 2013 are unsecured. There have been no guarantees provided or received
for any related party receivables or payables. As of 31 December 2014 and 2013, the Group has not recorded any impairment of receivables
relating to amounts owed by related parties. This assessment is undertaken each financial year by examining the financial position of the
related party and the market in which the related party operates.
USM Group
The outstanding balances and transactions with USM Group relate to operations with Garsdale, the Group’s parent, USMHL, an indirect
owner of Garsdale, and their consolidated subsidiaries.
The Group has entered into an agreement with Telecominvest, a member of the USM Group, for provision of legal and personnel services
effective in 2013 and 2014. In addition, the Group purchased billing system and related support services from PeterService, another
member of the USM Group, in the amount of 1,979 and 1,880 during 2014 and 2013, respectively.
On 1 October 2013 MegaFon acquired Scartel (Note 9). Before that date, Scartel was a related party of the Group as both MegaFon and
Scartel were indirect subsidiaries of Garsdale.
Amounts due to USM Group mainly represent the convertible debt instrument related to its investment in Euroset made in 2012 (Notes
10, 17) and the deferred consideration for the Scartel acquisition (Notes 9, 17). On 24 June 2014 the Group prepaid in cash approximately
90% of the deferred consideration due to Garsdale for the acquisition of Scartel, including principal and accrued interest, in the amount of
37,925. On 9 July 2014 the Group settled the amount due to Garsdale for its interest in Euroset with its own shares pursuant to the terms
of the convertible debt instrument.
The Group is a member of the Not-for-profit Partnership “Development, Innovations, Technologies” (the “Partnership”) which was
established by companies in the USM Group. The Partnership is required to incur education, science and other social costs as well as
to maintain certain social infrastructure assets in Skolkovo Innovation Centre which are not owned by MegaFon and not recorded in the
consolidated statement of financial position. The Group accrued 1,089 of contributions made to the Partnership during 2014 (2013: nil)
and 1,826 subsequently in January 2015.
13
388
379
780
Revenues from USM Group
Revenues from TeliaSonera Group
Revenues from Euroset
Governance
For the years ended
31 December
2014
2013
29.Related parties (continued)
TeliaSonera Group
The outstanding balances and transactions with TeliaSonera Group relate to operations with various companies in the TeliaSonera Group.
Revenues and cost of services principally related to roaming agreements between MegaFon and members of the TeliaSonera Group
located outside Russia and a wireline interconnection agreement with TeliaSonera International Carrier Russia.
Euroset
Euroset is the Group’s joint venture with OJSC VimpelCom (Note 10). The Group has a dealership agreement with Euroset which qualifies
as a related party transaction.
Compensation to key management personnel
Members of the Board of Directors and the Management Board of the Company are the key management personnel. The amounts
recognised as employee benefits expense to key management personnel of the Group for the years ended 31 December are as follows:
Short-term employee benefits
Long-term incentive programme (Note 26)
Total
2014
2013
603
593
12
1,208
632
1,491
63
2,186
30.Financial risk management
The Group’s principal financial liabilities, other than derivatives, comprise loans and borrowings, and trade and other payables. The main
purpose of these financial liabilities is to finance the Group’s operations. The Group has trade and other receivables, and cash and shortterm deposits that derive directly from its operations. The Group also enters into derivative transactions.
The Group is exposed to market risk, credit risk and liquidity risk. The Group’s senior management oversees the management of these
risks. The Group’s senior management is supported by the Finance and Strategy Committee of the Board of Directors that advises on
financial risks and the appropriate financial risk governance framework for the Group. The Finance and Strategy Committee provides
assurance to the Group’s senior management that the Group’s financial risk-taking activities are governed by appropriate policies and
procedures and that financial risks are identified, measured and managed in accordance with the Group’s policies. All derivative activities
for risk management purposes are carried out by specialist teams that have the appropriate skills, experience and supervision. It is the
Group’s policy that no trading in derivatives for speculative purposes shall be undertaken.
The Company’s Board of Directors reviews and agrees policies for managing each of these risks, which are summarised below.
Market risk
Market risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market prices.
Market price risks that mostly impact the Group comprise two types of risk: interest rate risk and currency risk. Financial instruments
affected by market risk include: loans and borrowings, deposits and derivative financial instruments.
The sensitivity analyses in the following sections relate to the position as of 31 December in 2014 and 2013. The sensitivity analyses
have been prepared on the basis that the amount of net debt, the ratio of fixed-to-floating interest rates of the debt and derivatives
and the proportion of financial instruments in foreign currencies are all constant and on the basis of the hedge designations in place
at 31 December 2014 and 2013.
Interest rate risk
Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market
interest rates. The Group’s exposure to the risk of changes in market interest rates relates primarily to the Group’s long-term debt
obligations with floating interest rates.
The Group manages its interest rate risk by having a balanced portfolio of fixed and variable rate loans and borrowings. To manage this,
the Group enters into interest rate swaps, in which the Group agrees to exchange, at specified intervals, the difference between fixed
and variable rate interest amounts calculated by reference to an agreed-upon notional principal amount. These swaps are designated
to hedge underlying debt obligations.
At 31 December 2014, after taking into account the effect of interest rate swaps, approximately 86% of the Group’s borrowings are at a
fixed rate of interest (2013: 86%).
Strategic report
Interest rate sensitivity
The following table demonstrates the sensitivity to a reasonably possible change in interest rates on loans and borrowings, after the
impact of hedge accounting. With all other variables held constant, the Group’s profit before tax is affected through the impact on floating
rate borrowings, as follows:
Year ended 31 December 2014
US Dollar
US Dollar
US Dollar
US Dollar
Effect on
profit
before tax
+2
-2
(7)
7
+3
-3
(5)
5
Foreign currency risk
Foreign currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in
foreign exchange rates. The Group’s exposure to the risk of changes in foreign exchange rates relates primarily to the Group’s financing
activities (when cash deposits and loans and borrowings are denominated in a different currency from the Group’s functional currency).
A significant portion of the Group’s liabilities is denominated in US dollars or Euro. If the Ruble continued to decline dramatically against
the US dollar or Euro, this could negatively impact the Group’s earnings.
The analysis is prepared assuming the amount of variable rate liability outstanding at the balance sheet date was outstanding for the
whole year.
Governance
Increase/
decrease
in basis points
To the extent permitted by Russian law, the Group keeps part of its cash and cash equivalents in US dollar and Euro interest bearing
accounts to manage against the risk of Ruble decline or devaluation, and also to match its foreign currency liabilities.
During 2014 and 2013, the Group entered into three long-term cross-currency swaps (Note 17). These derivative financial instruments
were used to limit exposure to changes in foreign currency exchange rates on certain of the Group’s long-term debts denominated in
foreign currencies (Note 17).
Overall, the share of Ruble loans (including the effect of cross-currency swaps) amounted to 65% as of 31 December 2014 (76% at
31 December 2013).
In accordance with the Group’s policies, the Group does not enter into any treasury management transactions of a speculative nature.
To minimise its foreign exchange exposure to fluctuations in foreign currency exchange rates, the Group is migrating most of its foreign
currency linked costs to Ruble based costs to balance assets and liabilities and revenues and expenses denominated in Rubles. In order
to manage the foreign currency risk the Group is also focused on increasing the proportion of Ruble loans through refinancing and hedging
activities.
30.Financial risk management (continued)
Foreign currency sensitivity
The following table demonstrates the sensitivity to a reasonably possible change in the US dollar, HK dollar and Euro exchange rates,
with all other variables held constant, of the Group’s profit before tax (due to changes in the fair value and future cash flows of monetary
assets and liabilities including non-designated foreign currency derivatives) after the impact of hedge accounting. The Group’s exposure
to foreign currency changes for all other currencies is not material.
Change in
foreign
exchange rates
Effect on
profit
before tax
US Dollar
US Dollar
Euro
Euro
HK Dollar
HK Dollar
+30%
-30%
+30%
-30%
+30%
-30%
(18,372)
18,372
(1,307)
1,307
9,644
(9,644)
US Dollar
US Dollar
Euro
Euro
+10%
-10%
+10%
-10%
(5,078)
5,078
(462)
462
The movement in the pre-tax effect is a result of a change in the fair value of derivative financial instruments not designated in a
hedging relationship and monetary assets and liabilities denominated in currencies other than the functional currency of the Company.
Although the derivatives have not been designated in a hedge relationship, they act as a commercial hedge and will offset the underlying
transactions when they occur.
Credit risk
Credit risk is the risk that a counterparty will not meet its obligations under a financial instrument or customer contract, leading to a
financial loss. The Group is exposed to credit risk from its operating activities (primarily for trade receivables) and from its financing
activities, including deposits with banks and financial institutions and other financial instruments.
The Group deposits available cash with various banks in the Russian Federation. Deposit insurance is either not offered or only offered
in de minimis amounts in respect of bank deposits within the Russian Federation. To manage the concentration of credit risk, the Group
allocates available cash to domestic branches of international banks and a limited number of Russian banks. A majority of these Russian
banks are either owned or controlled by the Russian government.
The Group extends credit to certain counterparties, principally international and national telecommunications operators, for roaming
services, and to certain dealers. The Group minimises its exposure to the risk by ensuring that credit risk is spread across a number of
counterparties, and by continuously monitoring the credit standing of counterparties based on their credit history and credit ratings
reviews. Other preventative measures to minimise credit risk include obtaining advance payments, bank guarantees and other security.
The maximum exposure to credit risk at the reporting date is the carrying value of each class of financial assets disclosed in Note 17.
The Group evaluates the concentration of risk with respect to trade receivables as low, as its customers are located in several
jurisdictions and industries and operate in largely independent markets. Concentrations of credit risk with respect to trade receivables
are limited given that the Group’s customer base is large and unrelated. Due to this management believes there is no further credit risk
provision required in excess of the normal impairment allowance for trade and other receivables.
Liquidity risk
The Group monitors its risk relating to a shortage of funds using a recurring liquidity planning tool. The Group’s objective is to maintain
a balance between continuity of funding and flexibility through the use of bank loans. Approximately 24% of the Group’s loans and
borrowings will mature in less than one year at 31 December 2014 (2013: 13%) based on the carrying value of borrowings reflected in
the financial statements. The Group assessed the concentration of risk with respect to refinancing its debt and concluded it to be low.
As of 31 December 2014 and 2013, the Group has a net current liability position. The Group believes it will continue to be able to generate
significant operating cash flows and that adequate access to sources of funding and significant amount of available credit lines are
sufficient to meet the Group’s requirements. Additionally, the Group can defer capital expenditures if necessary in order to meet shortterm liquidity requirements. Accordingly, Group management believes that cash flows from operating and financing activities will be
sufficient for the Group to meet its obligations as they become due.
Strategic report
The table below summarises the maturity profile of the Group’s financial liabilities based on contractual undiscounted payments.
4-5 years
More than
5 years
Total
31 December 2014
Deferred consideration
Derivative financial liabilities
Total 31 December 2014
64,445
36,622
7,257
–
263
108,587
85,361
–
–
1,200
–
86,561
78,125
–
–
27
–
78,152
23,036
–
–
54
–
23,090
250,967
36,622
7,257
1,281
263
296,390
31 December 2013
Deferred consideration
Convertible debt instrument
Derivative financial liabilities
Liability for marketing related licences
Total 31 December 2013
31,180
20,469
33,875
22,101
193
312
177
108,307
48,510
21,627
–
–
543
72
–
70,752
74,234
–
–
–
289
–
–
74,523
43,274
–
–
–
–
–
–
43,274
197,198
42,096
33,875
22,101
1,025
384
177
296,856
Capital management
Capital includes equity attributable to the Group’s shareholders. The primary objective of the Group’s capital management is to ensure that
it maintains a healthy credit rating and healthy capital ratios in order to secure access to debt and capital markets at all times and maximise
shareholder value. The Group manages its capital structure and makes adjustments to it in light of changes in economic conditions.
Some loan agreements also have covenants based on Net debt to OIBDA ratios. The Group believes it has complied with all the capital
requirements imposed by external parties.
Collateral
The Group did not pledge collateral as security for its financial liabilities at 31 December 2014 or 2013, except assets purchased under
deferred payment terms (Note 14).
31.Commitments, contingencies and uncertainties
Russian operating environment
Russia continues economic reforms and development of its legal, tax and regulatory frameworks as required by a market economy.
The future stability of the Russian economy is largely dependent upon these reforms and developments and the effectiveness of
economic, financial and monetary measures undertaken by the government.
In 2014, the Russian economy was negatively impacted by a significant drop in crude oil prices and a significant devaluation of the Russian
Ruble, as well as sanctions imposed on Russia by several countries. In December 2014, the Ruble interest rates increased significantly
after the Central Bank of Russia raised its key rate to 17%. The combination of the above resulted in reduced access to capital, a
higher cost of capital, increased inflation and uncertainty regarding economic growth, which could negatively affect the Group’s future
financial position, results of operations and business prospects. Management believes it is taking appropriate measures to support the
sustainability of the Group’s business in the current circumstances.
4G/LTE licence capital commitments
In July 2012, the Federal Service for Supervision in Communications, Information Technologies and Mass Media granted OJSC MegaFon
a licence and allocated frequencies to provide services under the 4G/LTE standard in Russia.
Under the terms and conditions of this licence, the Company is obligated to provide 4G/LTE services in each population centre with over
50,000 inhabitants in Russia by 2019. The Company is also obligated to make capital expenditures of at least 15,000 annually toward the
4G/LTE roll-out until the network is fully deployed, to clear frequencies currently allocated to the military at its own cost and to compensate
other operators for surrendering frequencies in an aggregate amount of 401. In 2012, the Company has fully paid the compensation due
to the other operators. It is currently not able to reasonably estimate the amount of the cost of clearing military frequencies.
The Net debt to OIBDA ratio is an important measure to assess the capital structure in light of the need to maintain a strong credit rating.
Net debt represents the carrying amount of interest-bearing loans and borrowings less cash and cash equivalents and current and noncurrent bank deposits. As of 31 December 2014 the Net debt to OIBDA ratio was 0.98 (2013: 0.77).
1-3 years
Governance
Less than
1 year
31.Commitments, contingencies and uncertainties (continued)
Equipment purchases agreements
In April 2014 and December 2014, the Group entered into two separate seven-year agreements with two suppliers to purchase equipment
and software for 2G/3G/4G network construction and modernisation. The software usage agreements contain various termination options,
however the Group is specifically committed under the agreements to pay at least three years’ worth of fees plus 50-60% worth of fees
for years four-seven for each base station in use as at the date of termination after taking into account fees already paid. The amount of
the commitments at 31 December 2014 is 9,206.
Social infrastructure expenses
From time to time, the Group may determine to maintain certain social infrastructure assets which are not owned by the Group and
not recorded in the consolidated financial statements as well as to incur education, science and other social costs. Such activities may
be conducted in collaboration with non-governmental organisations. These expenses are presented in other non-operating loss in the
consolidated statement of comprehensive income.
Taxation
Russian tax, currency and customs legislation, including transfer pricing legislation, are subject to varying interpretations and changes,
which can occur frequently. Management’s interpretation of such legislation as applied to transactions and activities of the Group may
be challenged by the relevant regional and federal authorities. Recent events within Russia suggest that the tax authorities are taking
a more assertive position in their interpretation and enforcement of the legislation and assessments and as a result, it is possible that
transactions and activities that have not been challenged in the past may now be challenged. Therefore, significant additional taxes,
penalties and interest may be assessed. Fiscal periods remain open to review by the authorities in respect of taxes for the three calendar
years preceding the current year. Under certain circumstances reviews may cover longer periods.
Russian transfer pricing legislation, which came into force on 1 January 2012, allows the Russian tax authorities to control transaction
prices for the purpose of taxation and impose additional profits tax liabilities in respect of certain transactions if the transaction price
differs from the market level of prices. Because of the lack of clarity in the current Russian transfer pricing legislation and the absence
of court precedent, consequences of litigations with the Russian tax authorities with respect to the level of prices applied by the Group
cannot be reliably assessed. However, those consequences might affect the Group’s consolidated financial statements.
In 2014 a law “On controlled foreign companies” (“CFC rules”) aimed at the fiscal stimulation of decreasing the number of the entities
registered abroad in the Russian economy were issued, and took effect on 1 January 2015. Under CFC rules retained profits of foreign
companies and non-corporate structures controlled by Russian tax residents (companies and individuals) may be subject to Russian
taxation. Russian taxpayers (controlling parties) must inform the tax authorities of the foreign companies controlled by them, while the
tax authorities may impose additional tax liabilities to the taxpayers failing to include retained profit of the foreign controlled companies
in their taxable base, where necessary.
The Group’s management believes that its interpretation of the relevant legislation is appropriate and is in accordance with the current
industry practice and that the Group’s tax, currency and customs positions will be sustained. However, the interpretations of the relevant
authorities could differ.
As of 31 December 2014 the Group’s management estimated the possible effect of additional taxes, before fines and interest, if any, on
these consolidated financial statements, if the authorities were successful in enforcing different interpretations, in the amount of up to
approximately 925.
Operating lease commitments
The Group normally enters into operating leases with a term not exceeding one year. Accordingly, the Group’s operating lease
commitments at 31 December 2014 approximate the annual rent expense (Note 28).
Litigation
The Group is not a party to any material litigation, although in the ordinary course of business, some of the Group’s subsidiaries may
be party to various legal and tax proceedings, and subject to claims, certain of which relate to the developing markets and evolving
fiscal and regulatory environments in which they operate. In the opinion of management, the Group’s and its subsidiaries’ liabilities, if
any, in all pending litigation, other legal proceedings or other matters, will not have a material effect on the financial condition, financial
performance or liquidity of the Group.
Strategic report
32.Events after the reporting date
Credit ratings
On 25 February 2015 Moody’s Investor Service (“Moody’s”) downgraded the Group’s credit rating from Baa3 to Ba1. The rating action
reflected the earlier downgrade by Moody’s of the Russia’s sovereign credit rating and subsequent lowering of Russia’s country rating
ceilings to Ba1 levels.
Governance
On 5 February 2015 Standard and Poor’s Ratings Services (“S&P”) took several actions on the Group’s credit ratings, following its
downgrade of the sovereign rating on Russia. S&P affirmed the local currency rating of the Group at the BBB- level. At the same time,
S&P downgraded the Group’s foreign currency rating to BB+, explaining that this action reflected constraints imposed by the agency’s
Transfer and Convertibility assessment of Russia.
On 10 March 2015 the Board of Directors of the Company approved an amendment to the terms of the Long-term incentive programme
2012 (Note 25) to change the base price and the strike price for the awards outstanding as at 31 December 2014 with a payment due in
April-May 2015, so that the base price is denominated in Rubles and becomes 555 Rubles per share, and the weighted-average price of
the Company’s shares is based on prices on the Moscow Exchange over the period between 15 January and 15 March in the relevant year
of vesting. As a result of the change the fair value of options outstanding at 10 March 2015 increased to approximately 440 Rubles per
option.
Glossary
4G/LTE – fourth generation of wireless technology which provides greater access to data and services through enhanced download and
upload speeds and enhanced use of spectrum.
ARPU (Average Monthly Revenue Per User) is calculated for a given period by dividing the aggregate of the Company’s wireless services
revenues from local subscribers, revenues from data transfer services and from VAS, revenues from interconnection charges and
revenues from roaming charges to other operators for the same period by the average number of its Subscribers during that period, and
further dividing the result by the number of months in that period.
ARPDU (Average Monthly Revenue Per Data Services User) is calculated for a given period by dividing the Company’s data services
revenues for a given period by the average number of its data services users during that period, and further dividing the result by the
number of months in that period.
Big Data represents the Information assets characterized by such a high volume, velocity and variety to require specific technology and
analytical methods for its transformation into value.
Capital Expenditures (CAPEX) comprises the cost of purchases of new equipment, new construction, acquisition of new or upgrades to
software and other intangible assets, and purchases of other long-term assets, together with related costs incurred prior to the intended
use of the applicable assets, all accounted for as of the earliest time of payment or delivery. Long-term assets obtained through business
combinations are not included in the calculation of capital expenditures.
Data services user is defined as a Subscriber who has used any of the Company’s data transfer services within the preceding three
months.
DSU (Monthly Average Data Services Usage per User) is calculated by dividing the total number of megabytes transferred by our network
during a given period by the average number of data services users during such period and dividing the result by the number of months in
such period.
FOCL – fiber-optic communication lines.
Free Cash Flow (FCF) means cash from operating activities, less cash paid for purchases of property, plant and equipment and intangible
assets, increased by proceeds from sales of property, plant and equipment and interest paid. It is a financial measure which should be
considered as supplementary but not as an alternative to the information provided in the Company’s financial statements. This metric
measures the Company’s ability to generate cash after accruals required to maintain and expand the Company’s assets.
Machine to Machine (M2M) refers to technologies that allow both wireless and wired systems to communicate with other devices of the
same type.
MOU (Monthly Average Minutes of Use per User) is calculated by dividing the total number of minutes of usage (including both outgoing
and incoming calls) during a given period by the average number of Subscribers during such period and dividing the result by the number
of months in such period.
Net cash/Net debt position means the difference between (a) cash, cash equivalents, and principal amount of deposits and (b)
principal amount of loans and borrowings less unamortised debt issuance fees. It is a financial measure which should be considered as
supplementary but not as an alternative to the information provided in the Company’s financial statements. The Company believes that
this metric provides useful information as to the liquidity position of the Company after debt repayments.
Net Profit is profit for the period attributable to equity holders of the Company.
OIBDA (Operating Income Before Depreciation and Amortisation) is a financial measure which should be considered as supplementary, but
not as an alternative to the information provided in the financial statements of the Company. OIBDA margin means OIBDA as a percentage
of revenue. The Company believes that OIBDA provides a better measure of the Company’s actual operational results including our ability
to finance capital expenditures, acquisitions and other investments and our ability to incur and service debt. While it does not take into
account depreciation of property and equipment, amortisation of intangible assets and gain/(loss) from disposal of non-current assets,
which are considered as operating expenses in IFRS, these expenses primarily represent non-cash charges related to long-lived assets
acquired or constructed in prior periods.
Wireless Subscriber is defined as each SIM card that is connected to the network and is ‘active’, that is, that has had at least one
chargeable traffic event (that is, use of voice, VAS or data transfer services) within the preceding three months, whether chargeable to the
Subscriber or to a third party (for example, interconnection charges payable by other operators). Where an individual person holds more
than one SIM card, each SIM card is included as a separate Subscriber.
Strategic report
Contacts
Full name: Open Joint Stock Company MegaFon¹
Short name: OJSC MegaFon
Head office:
Governance
30 Kadashevskaya emb., Moscow 115035, Russia
Tel: +7 (499) 755-2155
Fax: +7 (499) 755-2175
E-mail: [email protected]
Web: www.megafon.ru
Information for shareholders:
Corporate Secretary – Elena Breeva
Telephone: +7 (499) 755-2155
Fax: +7 (499) 755-2100
Email: [email protected]
Information for investors:
Dmitry Kononov
Director, Investor Relations and M&A
Tel: + 7(926) 200-6490
Email: [email protected]
Company’s Auditor:
Ernst & Young LLC
Avrora Business Park
77 Sadovnicheskaya emb., bldg. 1, Moscow 115035, Russia
Tel: +7 (495) 755-9700
Fax: +7 (495) 755-9701
Web: http://www.ey.com
Company Registrar:
CJSC Computershare Registrar
FCSM licence of Russia No. 10–000–1–000252 (indefinite).
Kutuzoff Tower Business Centre
8 Ivana Franko, Moscow 121108 Russia
Tel: +7 (495) 926-8160
Fax: +7 (495) 926-8178
Web: http://www.computershare-reg.ru/
GDR Depositary:
Bank of New York Mellon
101 Barclays Street, 22nd Floor West
New York, NY 10286, USA
Web: http://www.bnymellon.com/
Fax: +1 (212) 571 3050
Dividends +1 (212) 815 2135/2734/2269 Holders +1(212) 815 4888/2723
Shareowner Services 888 BNY ADRS
1
On 30 April 2015 the Company’s name was changed to MegaFon PJSC in accordance
with the EGM’s resolution of 20 April 2015.
Disclaimer
Certain statements and/or other information included in this document may not be historical facts and may constitute “forward looking
statements” within the meaning of Section 27A of the U.S. Securities Act of 1933 and Section 2(1) (e) of the U.S. Securities Exchange Act
of 1934, as amended. The words “believe”, “expect”, “anticipate”, “intend”, “estimate”, “plans”, “forecast”, “project”, “will”, “may”, “should”
and similar expressions may identify forward looking statements but are not the exclusive means of identifying such statements.
Forward looking statements include statements concerning our plans, expectations, projections, objectives, targets, goals, strategies,
future events, future revenues, operations or performance, capital expenditures, financing needs, our plans or intentions relating to the
expansion or contraction of our business as well as specific acquisitions and dispositions, our competitive strengths and weaknesses, the
risks we face in our business and our response to them, our plans or goals relating to forecasted production, reserves, financial position
and future operations and development, our business strategy and the trends we anticipate in the industry and the political, economic,
social and legal environment in which we operate, and other information that is not historical information, together with the assumptions
underlying these forward looking statements. By their very nature, forward looking statements involve inherent risks, uncertainties
and other important factors that could cause our actual results, performance or achievements to be materially different from results,
performance or achievements expressed or implied by such forward-looking statements. Such forward-looking statements are based on
numerous assumptions regarding our present and future business strategies and the political, economic, social and legal environment
in which we will operate in the future. We do not make any representation, warranty or prediction that the results anticipated by such
forward-looking statements will be achieved, and such forward-looking statements represent, in each case, only one of many possible
scenarios and should not be viewed as the most likely or standard scenario. We expressly disclaim any obligation or undertaking to update
any forward-looking statements to reflect actual results, changes in assumptions or in any other factors affecting such statements.
Strategic report
Notes
Governance
Notes
Designed and produced by Instinctif Partners www.instinctif.com

MegaFon - Sustainability Disclosure Database

Transcription

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