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Annual report of OJSC VolgaTelecom for year 2009 1
November December Annual report of OJSC VolgaTelecom 2009 Content 2 disclosure manual
Reading implies at least two depth Auxiliary facilities levels. That what is on the surface is comprehensible to the naked eye. We will equip you.
Disclosing its depth essence, the book will appear in a new light. This light of superhuman subspectrum is designed to establish authenticity. Advance page by page. Illuminate your route.
Accessory is attached 3
For nothing is hidden that will not be made manifest, nor is anything secret that will not be known and come to light.
The Evangel of St.Matthew 4 Contents
6 Information about the Company 10 Address of the Board of directors’ Chairman 11 General Director’s address 14 I. Major corporate events in 2009 18 II. The Company’s position in the industry 22 III. The Company’s business priorities 26 IV. The results of the Company’s development in priorities 36 V. Development prospects 38 VI. Risk management 40 VII. Personnel development 46 VIII. Corporate governance 52 IX. Securities 58 Х. Major corporate events after balance sheet date 60 Supplement No 1. Information about the Company’s equity participation in other entities providing telecommunications services 61 Supplement No 2. Balance sheet and audit opinion 73 Reference information for shareholders 74 Disclaimer of forward-looking statements 5
Kirov Kirov branch Mariy-El Republic branch Mordovia Republic branch Nizhny Novgorod branch Orenburg branch Izhevsk Penza branch Nizhny Ioshkar Ola Samara branch Novgorod Saratov branch Cheboksary Udmurtia Republic branch Ulyanovsk branch Chuvashia Republic branch
Saransk Ulyanovsk
Penza Samara
Orenburg Saratov 6 Information about the Company
The date of the Company’s state registration and the registration number The certificate of legal entity state registration - series НРП-НН No 20362, the date of registration – December 15, 1993; state registration number 448, was issued on June 28, 2002. Open Joint Stock Company VolgaTelecom (hereinafter – OJSC VolgaTelecom or the Company) was registered in the Uniform State Register of Legal Entities by the Inspection of Russia’s Ministry of Taxation for Nizhegorodskyi district of Nizhny Novgorod on August 01, 2002 under primary state registration number 1025203014781. Open Joint Stock Company “Svyazinform” of Nizhny Novgorod oblast (OJSC “Nizhegorodsvyazinform”) was established by the Committee for management of state property of Nizhny Novgorod oblast pursuant to the Edict of the President of the Russian Federation of July 01, 1992 No 721 “On Organizational Measures for Reorganization of State Enterprises, Voluntary Affiliation of State Enterprises into Joint Stock Companies” and also the Regulation of the Government of the Russian Federation of December 22, 1992 No 1003 “On Privatization of Communications Enterprises” on the basis of state enterprise of communications and IT “Rossvyazinform” of Nizhny Novgorod oblast (SECIT “Rossvyazinform”) and is the successor of all its rights and obligations. The Company was registered by Order of the head of the Administration of Nizhny Novgorod No 1605-r of December 15, 1993. Basing on the resolution of general meeting of shareholders of OJSC “Nizhegorodsvyazinform” of November 9, 2001 the Company was reorganized by way of affiliation to it of OJSC “Kirovelectrosvyaz”, OJSC “Martelcom”, OJSC "Svyazinform” of Mordovia Republic, OJSC “Electrosvyaz of Orenburg oblast”, OJSC “Svyazinform” of Penza oblast, OJSC “Svyazinform” of Samara oblast, OJSC “Saratovelectrosvyaz”, OJSC “Udmurt Telecom”, OJSC “Ulyanovskelectrosvyaz”, and OJSC “Svyazinform” of Chuvashia Republic. On June 28, 2002 general meeting of shareholders of OJSC “Nizhegorodsvyazinform” approved the Company’s Articles of association as restated where the Company’s name was changed to Open Joint Stock Company VolgaTelecom (OJSC VolgaTelecom). 7 Mission Global objectives
OJSC VolgaTelecom’s Mission is to encourage the creation of 1 Integration of new technologies in day-to-day life; modern society, the growth of regional economy and improvement of the quality of life of the Volga region residents through implementing advanced information technologies in day-to-day 2 Leadership position in telecommunications market of the life. We aim at offering the people new challenges, at making their Volga region; life easier and livelier.
Meeting the demand for telecommunications services and developing advanced communications infrastructure at priority 3 Improvement of quality of rendered services through rates we are achieving the growth of operating efficiency thus the development and modernization of communications increasing the equity value and creating jobs for the residents of infrastructure, implementation of digital technologies, the Volga Federal District. Ensuring sustained growth of business improvement of client servicing system; OJSC VolgaTelecom takes care of the employees’ welfare, their professional development and social security system. Development and efficient use of OJSC VolgaTelecom’s Relying on the principle of customer focus we are implementing 4 personnel potential to ensure priority trends of business new technologies, improving quality of services and subscribers’ development; servicing level by applying innovation methods of marketing and sales in our activity. 5 Achievement and maintaining high profitability through the enhancement of business efficiency and optimization of costs;
6 Arrangement of favorable conditions for attraction of investments through capitalization growth and maintaining established business reputation;
7 Improvement of corporate governance system in accordance with the best world practices. 8 9
Each spoken word has an action behind it, and sometimes a lifetime 10 Address of the Board of directors’ Chairman
Dear shareholders!
Today Svyazinvest Group is verging towards sweeping credit ratings, which exhibits progressive trends of the changes. Holding’s reorganization started by the government Company’s operations positively perceived by the investment decision through affiliation of Mega-Regional Companies community. to OJSC Rostelecom will ensure the creation of national operator – leader of Russia’s telecommunications industry, Today we are facing the task to use new business and result in considerable growth of capitalization and credit environment of telecommunications market to the full extent: ratings of the consolidated company. New Rostelecom will change of consumers’ preference, introduction of innovation become a real blue chip. However, to achieve it we all have to technologies, and emergence of efficient business-models. do serious hard work. It is important not just timely react to ongoing structural changes, but through their analysis, to act proactively and to In 2009 OJSC VolgaTelecom as well as all the companies use the opportunities presented by the market. of communications industry operated in anything but simple environment. But the Company’s management was I am sure that shareholders will in full appraise positive able to oppose negative trends through considered anti- dynamics of OJSC VolgaTelecom’s development throughout recessionary measures intended at cost reduction and tight 2009 and support the initiatives intended at creating control of operating expenses. Satisfactory result of such incorporated telecommunications company. In my earnest competent and timely actions was positive dynamics of conviction the company being created will become development demonstrated by the Company amid the crisis unchallenged leader of the industry. and forthcoming reorganization. These measures of the management in financial field were worthily appraised by the largest rating agencies which raised OJSC VolgaTelecom’s
Sincerely yours, Chairman of OJSC VolgaTelecom’s Board of directors Evgeny Yurchenko 11 General Director’s address
Dear shareholders!
Presenting the report of the results of OJSC VolgaTelecom’s One of the most important challenges met by OJSC operations I would like to note that in 2009 the Company VolgaTelecom’s management within the framework of continued to develop and upgrade the network, to introduce reducing the impact of economic crisis on the Company’s and to promote modern communications services thus operations was the maximum use of proprietary funds to strengthening its positions on the market and confirming finance operating and investment activities. This allowed for the status of the largest telecommunications operator of the enhancing the efficiency of financial and economic operations Volga region. and increasing the growth of free cash flow. Our indicators demonstrate sustainable growth and provide for the The Company’s major objective is stated in its Mission: “to opportunity to plan further active development for certain. encourage the creation of modern society, the growth of At 2009 year-end the Company’s revenues have increased regional economy and improvement of the quality of life of by 2.5% amounting to RUB 27, 077 million and the net profit the Volga region residents through implementing advanced has grown by 44.4% coming up to RUB 4, 263 million. An information technologies in day-to-day life”. It was this idea important achievement was 43.1% reduction of the amount that became the starting point for the development of the of VolgaTelecom’s net debt. strategy of OJSC VolgaTelecom’s operations in the time of crisis. The management’s key attention was focused on the We have fulfilled everything what was planned, but the most development of the Company as a universal operator capable essential result was that we managed to reverse the trend of offering the clients a package of in-demand services of of outstripping growth of expenses, and at the year-end the high level of quality and customer service. growth ratio of revenue exceeded the growth ratio of expenses. 12
Following the trends of telecommunications market Competitive environment dictates to us the need of for mastering new lines of business and winning new development the major investments in 2009 were made elaborating decisions allowing for prompt and flexible markets in the shortest possible time, which will ensure into the development of modern telecommunications reaction to the change in demand for telecommunications for us the growth of revenues and market capitalization. services. Their share in the total CAPEX amounted to services. With this end in view the Company changes In 2009 the Company’s largest shareholder OJSC about 50%. The decision was made of gradual scaling over to a new corporate structure which provides for Svyazinvest made the decision of establishing an down ADSL projects and of priority development of FTTx/ the availability of business units at the level of cities and incorporated company on the basis of Svyazinvest Group Ethernet-based Internet broadband access services as county towns, as well as redistribution of responsibility assets, which will be a new impetus for the development the most promising technology as related to ensuring centers. These changes will allow for increasing the of Russian telecommunications industry. So, year 2010 competitive capacity on telecommunications services speed of making local managerial decisions and for will be for us the most important stage of integrating market. As a result, in 2009 VolgaTelecom’s subscribers prompt reacting to market requirements. The change of business into a single system combining all-powerful base of Internet services users has grown by 28% and approaches to corporate structure and management, as telecommunications resources of the country. And our early 2010 it surmounted 1 million of broadband services well as revision of the system of incentive and personnel task is to go through this transient stage and to join the users. remuneration of labor are intended at enhancing incorporated company as a powerful, reliable unit capable the efficiency of employees operation and general The Company has started the realization of the IV- of meeting the challenges of business expansion and optimization of the Company’s governance. th phase of construction of intraregional multiservice participating in national level projects. data transmission network, and ten branches have Upon the whole year 2009 was challenging but successful We thank our clients, shareholders and investors for successfully completed the arrangements of the networks for us and for our shareholders. VolgaTelecom’s efforts of cooperation. The operation of the Company’s collective upgrading on the basis of NGN equipment. Digitalization improving business and corporate governance, increasing in challenging year 2009 has demonstrated that we do level has reached 81%. information transparency to shareholders and investors have all the resources and potential for improving cost were positively appraised by stock market. Based on the Year 2009 was an important milestone in mobile effectiveness and strengthening market positions. results of MICEX trading the Company’s capitalization has business development. Realizing VolgaTelecom’s increased 3.5 times and exceeded the level of RUB 20 Board of directors decision of subsidiary business billion. The evidence of the Company’s financial security reorganization, since December 2009 mobile subsidiary was the raise early 2010 by International Rating Agency Ulyanovsk-GSM affiliated to ZAO NCC and started to FitchRatings of VolgaTelecom’s long-term Issuer Default provide mobile telephony services under NCC single Rating from “BB-“ to “BB”, and national long-term rating brand. As a result, NCC services became available to from “A+(rus)” to “AA-(rus)”, outlook “Stable”. the residents of 7 regions of the Volga Federal District. After reorganization the total subscribers’ base of The Company’s further development is anticipated in incorporated mobile telephony company amounted to the creation of telecommunications infrastructure of about 3.5 million subscribers. NCC continues steadily to such a level which would allow for not just meeting the hold strong positions among the top 10 largest mobile growing requirements of the industry and the residents companies in Russia. in quality and modern telecommunications services, but
Sincerely yours, OJSC VolgaTelecom’s General Director Vladimir Rybakin 13
Simple outlines of calendar dates are the summary of all our life I 14 Major corporate events in 2009
May ‣‣ OJSC VolgaTelecom took part in international exhibition “Svyaz – Expocomm-2009” ‣‣ OJSC VolgaTelecom presented RAS unaudited unconsolidated financial statements of its operations for Q 1-2009 ‣‣ Rating agency FitchRatings affirmed OJSC VolgaTelecom’s Long-term Issuer Default rating at “BB-“, Short-term IDR at “B”, National Long-term rating at “A+(rus)” and National Senior Unsecured at “A+(rus)”. The outlooks for the Long-term IDR and National Long-term rating are “Stable” March ‣‣ OJSC VolgaTelecom was awarded the diploma of ‣‣ New tariff rates for local and intrazonal telephony national contest “The best social responsibility report/ services provided by OJSC VolgaTelecom were put report in the area of sustainable development” in into effect “Debut” nomination ‣‣ OJSC VolgaTelecom paid the tenth coupon yield on its BT-4 series bonds June ‣‣ OJSC VolgaTelecom paid the seventh coupon yield April January on its BT-2 and BT-3 series bonds and the eleventh ‣‣ OJSC VolgaTelecom presented audited unconsolidated coupon yield on its BT-4 series bonds, and also paid ‣‣ OJSC VolgaTelecom got the certificate of participant financial statements of its operations for 2008 as per off 20% of the par value of BT-2 and BT-3 series and acknowledgement of Federal Agency for the Russian Accounting Standards (RAS) bonds the Youths Affairs of the Russian Federation for ‣‣ Annual general meeting of VolgaTelecom’s participating in contest “Employer of the Year of the ‣‣ As per the data of consulting company J’son & shareholders was held in Nizhny Novgorod Youths: engineering personnel for innovation Russia” Partners OJSC VolgaTelecom was rated the third among Top-100 of broadband access services ‣‣ VolgaTelecom’s Board of directors formed the February operators by the number of households in the Russian Management board Federation at 2008 year-end ‣‣ OJSC VolgaTelecom presented audited consolidated ‣‣ OJCS VolgaTelecom’s Management board approved ‣‣ Vladimir I. Rybakin was appointed VolgaTelecom’s financial statements for 2008 as per the International the Code of Corporate Ethics General Director Financial Reporting Standards (IFRS) 15
July
‣‣ The Company completed the transaction of acquiring 100% equity stake in authorized capital of Limited Liability Company Gorodskaya Telephonnaya Svyaz of Sarov town providing fixed line telephony services ‣‣ VolgaTelecom’s Board of directors formed new compositions of its Committees
August September ‣‣ OJSC VolgaTelecom presented RAS unaudited ‣‣ OJSC VolgaTelecom paid the 12-th coupon yield on its unconsolidated financial statements of its operations BT-4 series bonds for H 1-2009 ‣‣ OJSC VolgaTelecom in full discharged its obligations ‣‣ OJSC VolgaTelecom paid preferred dividend for 2008 within the offer of BT-4 series bonds acquisition fiscal year October ‣‣ VolgaTelecom’s BT-2 series bonds were excluded ‣‣ The number of VolgaTelecom’s subscribers using from A 1 quotation list and included into non-listed ‣‣ OJSC VolgaTelecom was registered in Federal register Internet broadband access services exceeded 900,000 stock of ZAO MICEX Stock Exchange of bona fide suppliers and entitled “Bona fide supplier of the year” ‣‣ VolgaTelecom’s Board of directors approved the ‣‣ VolgaTelecom’s ordinary shares were delisted from amount of coupons from the 13-th to the 18-th on A2 quotation list and listed in A1 quotation list of ZAO ‣‣ OJSC VolgaTelecom was honored the award of the BT-4 series bonds MICEX Stock Exchange contest “The entity of high social efficiency” arranged by the Government of Udmurtia Republic ‣‣ International rating agency Standard&Poor’s affirmed ‣‣ OJSC VolgaTelecom presented IFRS unaudited VolgaTelecom’s Corporate Governance Score (global unconsolidated interim financial statements ‣‣ OJSC VolgaTelecom took part in XIV International scale) at CGS-5 (Russia national scale at CGS-5.4) for H 1-2009 Scientific and Industrial Forum “Russia unified” 16
December ‣‣ Within the framework of “The strategy of OJSC VolgaTelecom’s mobile business development” approved by the Board of directors on March 15, 2006 ZAO Ulyanovsk-GSM was taken over to ZAO NCC ‣‣ OJSC VolgaTelecom paid the eighth coupon yield on its BT-2 and BT-3 series bonds and the thirteenth coupon yield on its BT-4 series bonds, and also paid off 20% of the par value of BT-2 and BT-3 series bonds November ‣‣ OJSC VolgaTelecom in full discharged its obligations within the offer of BT-2 series bonds acquisition ‣‣ International Rating Agency Standard&Poor’s revised the outlook of VolgaTelecom’s credit rating from ‣‣ OJSC VolgaTelecom was awarded the diploma of Negative to Stable and at the same time the Agency All-Russian contest “100 best goods of Russia” affirmed the Company’s Score (Russia National scale) in nomination “Industrial Services” for “Corporate at «ruAА-» networking for enterprises” service ‣‣ OJSC VolgaTelecom presented RAS unaudited ‣‣ OJSC VolgaTelecom presented IFRS unaudited unconsolidated financial statements of its operations consolidated interim financial statements of its for nine months of 2009 operations for nine months of 2009 ‣‣ OJSC VolgaTelecom determined the rate of the ninth ‣‣ OJSC VolgaTelecom’s Board of directors approved and the tenth coupons on its BT-2 series bonds Regulations for internal control system ‣‣ OJSC VolgaTelecom was awarded national prize ‣‣ OJSC VolgaTelecom paid the dividend attributed to “Leader of Russian Economy” for breakthroughs in the ordinary shares for 2008 fiscal year area of communications and telecommunications ‣‣ VolgaTelecom’s preferred shares were delisted from A2 quotation list and listed in A1 quotation list of ZAO MICEX Stock Exchange ‣‣ Mrs. Natalia Pokrovskaya, VolgaTelecom’s corporate secretary was awarded national prize “Director of the year – 2009” in nomination “Corporate Governance Director - Corporate Secretary” 17
Respect for others occasions respect for yourself II 18 The Company’s position in the industry
Regional development VolgaTelecom’s service area comprises 11 of 14 regions making up the Volga Federal most multi-national Federal district; about 140 various nations, nationalities and ethnic District (hereinafter - VFD): groups are living here. ‣‣ 7 oblasts: Kirov, Nizhny Novgorod, Orenburg, Penza, Samara, Saratov, and Ulyanovsk, Global financial-economic crisis had negative effect on social-economic situation ‣‣ 4 Republics: Mariy-El Republic, Mordovia Republic, Udmurtia Republic and Chuvashia in VFD regions; crisis phenomena were most vivid in industrial production sector. Republic. Telecommunications industry was less affected by financial-economic crisis: in 2009 the VFD territory is 1 038 thousand square km (7.27% of the Russian Federation territory). volume of telecommunications market in the regions of VolgaTelecom’s operation has More than 30 million people are living here (21.25% of the total population of Russia). grown by 12% and amounted to RUB 107 billion. At 2009 year-end VolgaTelecom’s share The Volga Federal District is the second outman (after Central Federal District) and the is 24.4% of all revenues of telecommunications sector in the Company’s service area. 97.2% 94.9% 84.0% 82.2% OJSC VolgaTelecom’s market share in its service area 59.4% 55.7%
Market share, 2008
Market share, 2009
Local telephony Intrazonal telephony Internet and data transmission network 19
Major factors affecting the industry’s development Mobile communications In 2009 two key factors affected the development of telecommunications market: In mobile communications market OJSC VolgaTelecom is represented basically by subsidiaries’ assets. The subscribers’ base of mobile operators continues to grow, but the gain in active subscribers is insignificant. In the medium term the major driver of Industry’s technological development: mobile services revenue growth will be the development of Internet wireless broadband access services. ‣‣ Deployment of fiber-optic networks in large cities, at the same time large alternative players increased their expansion outside the limits of oblast’s and republican centers Internet and data transmission to towns with population above 50, 000; ‣‣ ADSL substitution by FTTx; The market of Internet broadband access services is one of the most high growth segments of telecommunications market. ‣‣ Development of 3G networks by mobile operators, active promotion of mobile Internet. In 2009 the growth ratio of broadband access market slowed down under the effect of the following factors: Financial-economic crisis: ‣‣ Broadband access market saturation in large cities. ‣‣ Reduction of investment programs of the operators for the development of In 2009 broadband access services penetration in a number of oblasts centers communications networks due to appreciation of financial resources; exceeded 40%. Further growth of broadband access services subscribers’ base will ‣‣ Reduction of volumes of communications services consumption due to overall cost largely be outside the limits of large cities. reduction, inclusive of the costs for communications services. ‣‣ Reduction of corporate clients’ costs. Bankruptcy of a number of small enterprises, reduction of the number of newly established enterprises, as well as the policy of cost cutting pursued by large Major factors affecting the change in demand in the industry companies reduced the growth ratio of revenue from corporate clients’ segment. ‣‣ Increase in competition. Traditional telephony market In 2009 “Household” segment demonstrated avalanche growth of access rates at unlimited tariffs. In “Organizations” segment the policy of price dumping was The market of traditional wire telephony services is very much affected by mobile accompanied by applying individual approach to tariff design for large corporate substitution resulting in the churn of lines and traffic. Major trends formed by mobile clients and SME clients. substitution are as follows: ‣‣ Development of Internet wireless broadband access. ‣‣ Reduction in volumes of local traffic; The most common services of mobile wireless access to Internet are Wi-Fi and ‣‣ Reduction in volumes of F2F zonal traffic and the service revenue; mobile Internet of mobile network operators. The subscribers’ base of these services ‣‣ Reduction in volumes of F2M zonal traffic and the service revenue; users is growing. As of today the appearance of MNOs on the market of mobile Internet begins to have material effect on the level of competition on broadband ‣‣ Reduction of DLD/ILD traffic; access market, and in the future this effect will grow. ‣‣ Reduction of subscribers’ base.
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Major trends of development of other services of data transmission: Interconnect and traffic transit ‣‣ Substitution of Internet dial-up access services. The following factors have effect on the development of interconnect and traffic transit ‣‣ Active reduction in the number of Internet dial-up access services users is going services market and on dynamics of the Company’s revenue from these services: on due to passing to broadband access connection. ‣‣ Increase in competition at zonal level. ‣‣ Growth of IP-telephony services revenue (migration of voice traffic to IP ‣‣ Obtaining licenses for zonal communications and construction of zonal nodes by networks). the operators result in the reduction in value of call zonal termination by alternative ‣‣ IP-telephony service is still a niche service. In the medium term the growth of IP- operators. telephony subscribers is expected, VolgaTelecom’s subscribers inclusive. ‣‣ Reduction in the volumes of transited zonal and DLD/ILD traffic as affected by mobile ‣‣ Growth in demand for VPN services. substitution and traffic churn through alternative zonal transit nodes. ‣‣ Development of intracorporate SIP-telephony services, of automated ‣‣ The effect of mobile substitution results in the reduction in volumes of transited traffic management systems (CRM, ERP, etc.) at the enterprises stimulates the demand in fixed-line network operators and the growth of traffic volumes in the networks of for VPN services. MNOs. ‣‣ IPTV development. ‣‣ Substitution of Internet dial-up access by broadband access. ‣‣ In order to increase the competitive capacity on the market in 2009 the Company ‣‣ The result of this substitution is substantial reduction of traffic of local initiation service. launched the pilot project of IPTV service in VolgaTelecom’s Nizhny Novgorod ‣‣ Conclusion of direct contracts for interconnect and traffic transit services among the branch in commercial service. At March 01, 2010 Nizhny Novgorod branch had operators. over 2, 000 subscribers of IPTV service. In 2010 it is scheduled to realize the service in all the Company’s branches. This results in the reduction of the Company’s traffic in item “Local transit”. 21
It is not direction that is important, but the ultimate goal. If the goal is clear, one may go in any direction III 22 The Company’s business priorities
In accordance with OJSC Internet broadband access services VolgaTelecom’s estimates the region’s ‣‣ Ensuring the gain in broadband access ports through the construction of high- telecommunications market will rate access lines in rural area to settlements having social infrastructure objects, continue to grow and by 2014 it will including at realization of the appropriate regional and investments programs. reach RUB 147 billion. The market structure will go through essential ‣‣ Upgrade of data transmission network to ensure the consumption of “hard” content modifications related to the growth (video, audio, etc.). in demand for Internet and data ‣‣ Ensuring technical capability of increasing the access rates of unlimited tariffs: the transmission network services and access rate up to 10 Mbps in competitive cities. significant redistribution of traffic ‣‣ In order to improve quality and ensure long term competitive capacity the Company’s and revenue in favor of mobile major priority will be FTTx development at reduction of investments in DSL. communications. OJSC VolgaTelecom’s key priorities VPN services of services provision are generated ‣‣ The increase in the trend of organizations’ passing to VPN connections is anticipated, with due account for major market including in SME segment for the purpose of introducing intracorporate SIP- trends of telecommunications markets telephony, electronic document management and other automated systems (CRM, development and the change of ERP, planning and interaction, etc.). For the purpose of increasing revenue from the macroeconomic situation. existing and potential VPN clients it is planned to introduce controlled parameters of traffic quality in all the Company’s branches.
Fixed-line telephony and SIP-telephony services ‣‣ Ensuring telephone penetration to new constructions with due account for the forecast of real property construction market recovery to the pre-crisis level. ‣‣ The Company will continue to develop SIP-telephony services in all its branches and realize value-added services on the basis of SIP technology (services control via WEB interface, video call, contact list, import of contacts from e-mail, instant messaging, automatic dial-back, etc.). 23
IPTV services ‣‣ The Company is planning to continue the development of Interactive TV project on the basis of IPTV technology for household. Data-Centers services ‣‣ It is planned to expand technical capabilities of the Company’s Data-Center with due account for the forecast of growth in demand for the service (hosting, co-location, virtual servers, SaaS applications, etc.).
Client service ‣‣ Expansion of technical infrastructure of the Company’s single contact-center as the service functions shift from the branches’ regional contact centers. ‣‣ Development of remote clients’ servicing “personal office”: connection and control of services, payment for services, including of Priorities in technical development outside companies, remote information and ‣‣ Ensuring technical realizability of subscriber’s broadband access network development technical maintenance, etc. on the basis of FTTx and PON technologies. ‣‣ Realization of uniform system of requests ‣‣ Construction of transport networks with the creation of ring structures ensuring 100% control of broadband access service redundancy of links at intrazonal level on the basis of existing and being constructed connection. DWDM networks. ‣‣ Construction of packet transport networks by applying IP/MPLS technologies. ‣‣ Construction of corporate networks on the basis of VPN technology using infrastructure of IP/MPLS networks. ‣‣ Telephony development by using NGN and TDM technologies. ‣‣ Construction of local telephony networks with due account for further introduction of value-added services over packet-switched networks via SIP protocol. ‣‣ Ensuring 100% digitalization of local telephony networks by 2014. ‣‣ Equipping the duct-work with locking device having opening alarm, introduction of control systems of unauthorized access. ‣‣ Creation and updating technical architecture of IT-projects for providing new services and ensuring continuous up and running of basic information systems. 24 25
Major success is made up of a great number of contemplated and deliberate trivial matters IV 26 The results of the Company’s development in priorities
Key indicators of economic operations With the view of minimizing the effects of global Rate of indicators change economic crisis in 2009 OJSC VolgaTelecom adopted Indicator 2008 2009 2009/2008 a number of documents and introduced additional Sales revenue, RUB million 26, 420 27, 077 102.5% business-processes intended at reducing the debt load Telecommunications services revenue, RUB which in the environment of general increase in currency 24, 944 25, 653 102.8% million rate allowed for substantially reducing the costs of credit Internet and data transmission network services portfolio servicing. 4, 953 5, 775 116.6% revenue, RUB million One of major tasks faced by the Company’s management in 2009 was the task of maximum use of own resources Sales profit, RUB million 5, 522 5, 980 108.3% for financing operating and investment activities and Net profit, RUB million 2, 952 4, 263 144.4% also of passing the peak of payments. The major Net profit margin, % 11.17% 15.74% 4.6 percentage points objective of anti-recessionary measures was to increase the operating efficiency and free cash flow. All stated EBITDA, RUB million 9, 916 11, 963 120.7% objectives were met which together with favorable news EBITDA margin, % 37.5% 44.2% 6.7 percentage points background of OJSC Svyazinvest Group reorganization made it possible to increase substantially the Company’s OIBDA margin, % 37.4% 40.0% 2.6 percentage points shareholder value. Net debt, RUB million 11, 533 6, 563 56.9% Free cash flow, RUB million 3, 168 6, 007 189.6% Leverage ratio, % 0.52% 0.65% 0.1 percentage points ROIC, % 10.98% 15.45% 4.5 percentage points 27
The results of the Company’s The Company’s intraregional multiservice data NGN development operations in technical development transmission network All the Company’s branches have successfully realized the area In 2009 OJSC VolgaTelecom completed the third stage next phases of the project of networks reconstruction on of construction of intraregional multiservice data the basis of NGN equipment. 49, 264 numbers were put transmission network and started to realize the fourth into operation, so at the year-end the installed capacity stage of construction on the basis of DWDM equipment. 33 of NGN-based telephony facilities accounted for 577, 400 nodes were modernized and 1 new node was constructed. numbers. Within the framework of this project realization So, intraregional multiservice data transmission network pilot zones were assigned for realization of FMC and Wi- comprises 90 nodes located in the territory of 11 regions of Max technologies. the Volga Federal District. Universal service Within the framework of the fourth stage realization The number of the Company’s installed universal service DWDM transport network was expanded to 10 GE and payphones within the framework of government program the carrying capacity of channels from central nodes “Universal service” accounted for 23, 000 which meets in Nizhny Novgorod and Samara to each oblast’s and OJSC VolgaTelecom’s obligations under the contracts of republican centers, other than Ioshkar Ola and Saransk, Universal service provision. was increased. Introduction of monitoring system of line-cable structures The project realization will contribute to the improvement status of reliability of provision of data transmission and Internet ВIn 2009 the Company equipped the duct-work with access services to clients, and to the optimization of costs locking device having opening alarm, and also introduced for backbone Internet traffic. Furthermore, this project control systems of unauthorized access, which will allow will expand the range of provided services; and also it will for excluding the opportunities of unauthorized access to enable the Company to provide the services of arranging the wells of the Company’s duct-work. corporate networks for clients having distributed structure of branches in the Volga region.
Development of subscriber broadband access networks The installed capacity of DSL ports has increased from 1, 046, 000 to 1, 240, 700; the installed capacity of Ethernet ports has increased more than two-fold – from 22, 200 to 48, 300 ports. 28
Investment policy Key indicators of investment development In 2009 the amount of investments accounted for RUB Investments, RUB million 2008 2009 Rate of indicators change 2, 138, 100 million which is by 64.7% lower than in 2008. 2009/2008,% Major requirements of projects pay-back, as well as the Company’s policy intended at annual growth of the share Amount of investments 6, 061.1 2, 138.1 35.3 of projects having high financial payoff predetermined Traditional telephony 1, 253.1 222.6 17.8 the industry’s redistribution of investments amid adopted anti-recessionary documents. Value-added services 3, 094.9 1, 027.6 33.2
IT investments 423.5 162.0 38.2
Data transmission network and 701.8 456.6 65.1 infrastructure
Other investments 587.8 269.3 45.8 Composition of investment
Data transmission Data transmission network and Value-added network and Value-added infrastructure services infrastructure services
11.6% 51.1% 21.4% 48.1%
2008 2009
Other Traditional Other Traditional investments IT investments telephony investments IT investments telephony
9.7% 7.0% 20.7% 12.6% 7.6% 10.4% 29
Basic indicators of network development Network development in 2009
Major trend of investments in 2009 were value-added Rate of indicators services. Their share in the total investments amounted to Indicator 2008 2009 change 2009/2008 48.1% or RUB 1, 027.6 million. Within this trend the major projects were as follows: Gain in the length of DLD (intrazonal) telephony 5, 022.8 164.4 3.3% ‣‣ Arrangement of xDSL access; channels, thousand channel/km ‣‣ Arrangement of Ethernet/FTTx access; Including those arranged by digital transmission 5, 108.8 500.4 9.8% ‣‣ Construction and upgrading of communications systems networks by using Softswitch technology; Percentage of digitalization of local telephony network, % 80.03 81.12 1.1 percentage points ‣‣ Construction and expansion of cable TV networks and IPTV. Installed capacity of broadband access ports, ports 1, 068, 198 1, 289, 007 120.7% RUB 456.6 million or 21.4% of the total investments The number of subscriber units connected to mobile 235.908 205.368 87.1% were invested into data transmission network and network, thousand units infrastructure. The projects of this trend development are basically connected with the expansion of transport networks for providing Internet broadband access services, increase in carrying capacity of intrazonal links, creation of stand by links for ensuring failure-free services provision, as well as with the construction and upgrading of intraregional multiservice data transmission network of OJSC VolgaTelecom. Within the framework of infrastructure development 453 km of fiber-optic links and 148 km of microwave radio links were put into operation, the objects of interstation communications facilities and Intrazonal fiber-optic links are available in 306 out of 327 number of subscribers’ lines was switched over to these zonal transit nodes were constructed and upgraded. county towns and towns subordinate to oblast’s centers. new PBX. In 2009 the investments allocated for the development of OJSC VolgaTelecom at its local telephony networks put Thus, at 2009 year-end the total number of automatic local telephony on the basis of TDM technology amounted into operation 59, 300 numbers due to new construction, exchanges accounted for 5, 549 units of the total installed to RUB 222.6 million or 10.4% of the total investments. Of expansion, upgrade and reuse of PBX equipment, of capacity of 5, 243, 400 numbers, of which 4, 397, 800 at which more than RUB 120 million were allocated for the which at urban telephony network 46, 700 numbers and urban telephony networks and 845, 600 at rural telephony replacement and upgrade of existing automatic telephone at rural telephony network 12, 600 numbers. Occupation networks. exchanges. efficiency of the installed capacity of PBX accounted for 92.2%, of which 92.8% at urban telephony networks and At 2009 year-end digitalization ratio of telephony network In 2009 IT investments amounted to RUB 162.0 million or 89.1% at rural telephony networks. has grown to 81.1%. 7.6% of the total investments. Major efforts were focused on the creation of technical architecture of ERP-system, 87 analog switches were dismantled due to the as well as on the expansion and upgrade of billing system. commissioning of new digital switches and substantial 30
Key performance indicators ‣‣ Optimization of cash flows from operating activity The gain in OJSC VolgaTelecom’s revenue was basically through: ensured due to the development of Internet broadband In 2009 OJCS VolgaTelecom’s major efforts were focused - curtail of programs and projects the realization of access services and indexation of regulated tariff for local on overcoming negative effects of general economic which could be curtailed or postponed; telephony services since March 01, 2009 (Federal Tariff recession started in 2008. Amid heavy increase in the cost - maintaining the expenses related to ensuring stable Service order No 305-с/10 of 28.11.2008). of loans, reduction in consumer demand (particularly in operation of the network – first order payments; The following factors had the effect on the dynamics of net corporate clients segment) the Company’s major objective - postponement of payments under the existing profit growth vs. 2008: was to ensure further development through maximum contracts subject to the lack of overdue accounts use of internal resources. It should be noted that, as early payable. ‣‣ Change of dividend from participation in other entities; as the crisis triggered in Russia OJSC VolgaTelecom ‣‣ Optimization of cash flows of investment activity ‣‣ Reduction of other loss due to classifying in 2008 headed for the improvement of efficiency, removal of through: statements of idle licenses and some software economic imbalances, growth of free cash flow, which - curtail of investment projects the realization of which products work; made it possible to mitigate financial risks, to ensure the does not affect profitable projects generating cash flow; gain in revenues, and to improve operating and financial ‣‣ Reduction of costs for charity and of other operating - negotiations with equipment suppliers about efficiency. expenses; postponement of payments under 2008 investment ‣‣ Reduction of income tax rate since January 01, 2009 As related to minimization of the effects of crisis plan to Q-II–IV of 2009; from 24% to 20%. - prevention of growth of volumes of construction in phenomena in economics, the Company identified several As a result of arrangements intended at enhancing the directions of operation contributing to the enhancement of progress at 2008 year-end; - reduction of volumes of 2009 investment program. operating efficiency and optimization of the investment business financial stability. Inter se: program the Company substantially improved generation ‣‣ Ensuring the inflow of cash from operating activity at As a result of made arrangements the growth ratio of revenue of free cash flow and reduced the debt load. This made the level of budgetary parameters. (102.8%) exceeded the growth ratio of expenses (101.0%). it possible to mitigate refinancing risks and improve the liquidity. So, in 2009 OJSC VolgaTelecom’s net debt reduced by RUB 4, 970 million (56.9% vs. 2008) and accounted for RUB 6, 563 million. The Company’s key performance indicators Rate of indicators change Indicator, RUB million 2008 2009 2009/2008,%
Revenue from sales of goods, works and services 26, 420 27, 077 102.5
Telecommunications services revenue 24, 944 25, 652 102.8 Expenses 20, 898 21, 097 101.0 Sales profit 5, 522 5, 980 108.3 Sales profit under comparable conditions with due account for compensation for losses from universal service 6, 405 7, 037 109.9 provision* * Pursuant to the accounting policy the Company classifies the expenses related to universal service provision at the prime cost in Pretax earnings 4, 076 5, 309 130.3 the items of ordinary operations, and the compensation for losses Net profit 2, 952 4, 263 144.4 from universal service provision from Universal Service Fund is Net debt 11, 533 6, 563 56.9 classified in other operations. 31
Revenue structure by types and categories of consumers
The structure of telecommunications services revenue for 2009* In 2009 telecommunications services revenue Value, RUB million amounted to RUB 25, 652 million (102.8% vs. 2008), Rate of change of which telecommunications services revenue Services 2008 2009 2009/2008, % from household accounted for RUB 15, 191 million (107.8% vs. 2008). Total Total Total Of which Of which from Of which from In the reporting period intrazonal telephony services (exclusive (exclusive (exclusive from household household revenue accounted for RUB 4, 561 million (94.6% vs. of VAT) of VAT) of VAT) household 2008). The major factor of reduction of intrazonal telephony services revenue was the drop of average Telecommunications services 24, 944 14, 091 25, 652 15, 191 102.8 107.8 volume of traffic consumption per a subscriber. revenue total, of which: Local telephony services revenue amounted to RUB Intrazonal, DLD & ILD 11, 458 million, having increased by RUB 454 million 4, 822 2, 057 4, 561 1, 910 94.6 92.9 telephony (104.1% vs. 2008) as a result of increase in tariffs in Q I-2009. Local telephony 11, 004 8, 335 11, 458 8, 733 104.1 104.8 At 2009 year-end the subscribers’ base of Internet broadband access services users increased by Recording communications 5, 097 2, 809 5, 912 3, 651 116.0 130.0 126.9% and accounted for 996, 000. The growth ratio of Internet access and data transmission Of which data network services revenue accounted for 116.5% (in transmission network and 5, 001 2, 778 5, 825 3, 621 116.5 130.4 “Household” segment – 130.4%), having ensured the telematic services major growth of the Company’s revenue. 11.1% reduction in interconnect and traffic transit Mobile services 381 329 341 294 89.5 89.4 services revenue was caused by the increase in competition on wholesale market and the churn of Interconnect and traffic a part of traffic to zonal transit nodes of alternative 2, 928 - 2, 633 - 89.9 - transit services operators.
* The information is provided on the basis of data of form No 65-communications for 2009. 32
Telecommunications Social insurance operators’ services deductions expenses 6.8% 10.3%
Other expenses
21.1% Expenditure pattern
Efficient cost management was the major driver of the Company’s profitability growth in 2009. In 2009 VolgaTelecom’s expenses amounted to RUB 21, 097 million (101.0% vs. 2008).
Expenditure pattern
2009 Value, RUB million Structure, % Indicator Rate of change Rate of change 2008 2009 2008 2009 2009/2008,% 2009/2008
Prime cost of sold goods 20, 898 21, 097 101.0 100.0 100.0 -
2.2 percentage Depredation of fixed assets 4, 348 4, 846 111.5 20.8 23.0 points -0,4 percentage Labor costs 6, 305 6, 279 99.6 30.2 29.8 points Depredation Material costs of fixed assets Social insurance deductions 1, 423 1, 433 100.7 6.8 6.8 - 9.1% 23.0% Material costs (materials, -0.1percentage electric power and heat 1, 921 1, 917 99.8 9.2 9.1 supply, mail expenses) points Labor costs Telecommunications -1.0 percentage 29.8% operators’ services 2, 373 2, 175 91.7 11.4 10.3 expenses points -0.6 percentage Other expenses 4, 527 4, 448 98.3 21.7 21.1 points 33
Key indicators of the Company’s operating efficiency In 2009 major increase in expenses was in item Due to the pursued policy of operations efficiency improvement through the optimization of business-processes and “Amortization expenses” (111.5% vs. 2008) which costs OJSC VolgaTelecom in 2009 substantially improved the indicators of operating efficiency. was caused by realization of investment program and commissioning of a large number of new objects at 2008 year-end. Key indicators of operating efficiency Labor costs in 2009 amounted to RUB 6, Rate of indicators 279 million (99.6% vs. 2008). As a result of Indicator 2008 2009 change 2009/2008 arrangements of headcount optimization the average number of employees (including dual Sales profit margin, % 26.4 28.3 +1.9 percentage points job-holders and employees under civil contracts) Net profit margin,% 14.1 20.2 +6.1 percentage points reduced by 2, 700 persons and accounted for 29, Prime cost of RUB 100 of sales revenue, RUB 79.1 77.9 98.5% 873 persons (91.7% vs. 2008). EBITDA, RUB million 9, 916 11, 963 120.6% The arrangements of optimization of patterns of EBITDA margin % 37.5 44.2 +6.6 percentage points intraoperator’s interaction with backbone Internet- Revenue per a line, RUB 5, 179 5, 325 102.8% providers and reduction of cost for the pass bands resulted in the reduction of telecommunications Sales profit per a line, RUB 1, 082 1, 176 108.6% operators’ services expenses by RUB 199 million. Revenue per an employee, RUB thousand* 812 907 111.7% OJSC VolgaTelecom treats the trend of cost Sales profit per an employee, RUB thousand* 170 200 117.6% saving as one of major aspects of improving the Number of lines per an employee* 157 170 108.7% operating efficiency. Within the work being done * Staff on the payroll is taken into account. the Company approved five initiatives intended at improvement of operating efficiency as related to cost management. The Company’s net assets These initiatives substantiated by European Over the reporting period OJSC VolgaTelecom’s net assets have grown by RUB 3, 505, 844, 000 or 115.07%. practice of operating efficiency improvement comprise: Information about the amount of net asset
‣‣ Reform of sales channels; At December 31, Indicator ‣‣ Optimization of procurement process; 2009 ‣‣ Reduction of own operated premises; Net assets (RUB thousand) 26, 765, 024 ‣‣ Reduction of administrative (overhead) expenses; Authorized capital (RUB thousand) 1, 639, 765 ‣‣ Reduction of expenses for the network Required reserve (RUB thousand) 81, 988 maintenance and operation. Net assets to authorized capital ratio (line 1/line 2), % 1, 632.25 % The synergetic effect of the initiatives realization in Net assets to authorized capital and required reserve ratio (line 1/(line 2+line 3)) (%) 2009 amounted to RUB 964 million. 1, 554.52 % 34 35
If you work for present, your efforts will be vain; you need to work keeping in mind only the future V 36 The Company’s development prospects
Telecommunications industry features gradual saturation or retardation of growth ratio of major markets (fixed-line telephony, mobile telephony, Internet access and data transmission network, pay-TV, interconnect and traffic transit). Ensuring dynamic development in the near term is likely through the acquisition of alternative operators and in the longer term through entering new related markets.
Major trends of the Company’s development for 2010 – H 1-2011:
Acquisition of alternative operators ‣‣ In 2010 – 2011 it is scheduled to make several transactions of acquisition of alternative telecommunications operators both in the territory of VolgaTelecom’s service area and in other regions of the Volga Federal District. Development of innovation services ‣‣ Development of Internet-services intended at monetization of traffic, sale of value- added broadband access services, development of Internet-payments and termination of traffic inside the network (intraregional information-entertainment portal, regional content projects, etc.). ‣‣ Design of engineering solutions and introduction on the market of the services of monitoring and control of life-supporting functions for enterprises and private sector (video surveillance, alarm systems, automatic reading of metered values, etc.). ‣‣ Development of integrated corporate customer service in the entire range of telecommunications, information and software products required for the customer. ‣‣ Expansion of the range of user equipment (PCs, notebooks, etc.) for the sale to household. ‣‣ Development of advertising services. 37
Most at risk are those who are not at risk VI 38 Risk management
Risk management program OJSC VolgaTelecom has been managing the risks since 2007. Risk Management Program for 2009 was approved by the Company’s Board of directors. The Program defines the procedures and methods of identification, The major objective of the development of risk management system in the Company is assessment and management of the Company's risks, it also defines organizational the enhancement of the efficiency of management of threats and opportunities for the level of risk management and control, it fixes the responsibility of specific managers for purpose of increasing the Company’s shareholder value. risk management. In 2008 OJSC VolgaTelecom timely assessed the threats of the started crisis: the The Program comprises the register of the Company’s identified risks and action plans management analyzed competitive environment, assessed strategic market risks and of risk management in accordance with the defined strategy. executed the works of elaborating protection measures against recessionary effects in economics, introduced new management instruments assisting prompt decision General economic recession in the country in H 1-2009 represented by drop in making amid dynamic external environment. These served as the basis of Risk production of industrial products, rouble devaluation and appreciation of borrowings Management Program for 2009 and the Program of VolgaTelecom’s development for contributed to realization of the following risks fundamental for the Company: 2009-2013. ‣‣ Regulatory risk related to regulator's making decision of postponement of dates of increase in tariffs for local telephony services. ‣‣ Financial risk related to the increase in interest rates on borrowings. ‣‣ Strong competitive pressure on the market of Internet access services resulted in realization of market risk related to ARPU reduction of Internet broadband access services. For the purpose of mitigating the negative effects of occurred risks on the results of its operations the Company realized the measures provided for by Risk Management Program which made it possible to find additional sources of revenue, reduce operating expenses, reduce the amounts of borrowings, optimize the investment program, etc. As a result the Company managed to level off completely the effects of occurred risks on the Company’s operating results; the growth net profit vs. original budget accounted for more than RUB 1 billion. The Company’s achievement of key strategic indicators of efficiency testifies about the successful operation of risk-management system in 2009. 39
The only reasonable method of teaching people is to lead by example VII 40 Personnel development
In 2009 the Company’s employees wages were based on the system of grades. Within the framework of grade system administration the Company’s HR specialists in Q II-2009 assessed newly created exemplary jobs of heads of Intraregional telecommunications centers and Area telecommunications centers and defined their place in grade structure. They also ranked area structural units of the Company’s branches by basic indicators of earning power and formed the group for defining the grades of executive employees. In parallel with implementation of corporate structure by the principal of functional verticals the Company’s HR specialists designed and put into operation the system of incentives of commercial bloc employees since January 2009 and of the employees of technical and auxiliary blocs since June 2009. The system of incentives is built on address key indicators of efficiency of operation of a specific structural unit; the employees are Labor and wages capable to influence these indicators. Organization of labor and wages in OJSC VolgaTelecom is intended at implementation of Since July 2009 the system of incentive of top management was revised. Such indicators advanced types of wages motivating increase in labor productivity and at optimization of as sales revenue and sales profit became major indicators for bonus payment to the Company’s headcount. executive employees of all the levels. The system of incentive of executive employees In 2009 the average monthly wages of the Company’s employees amounted to RUB 17, is complemented by priority tasks and projects stated in individual action plans and the 275; 7.5% growth vs. the prior year. degree of their accomplishment affects the amount of bonus. In the reporting period the average headcount was 29, 873 persons and reduced by 8.3% One of the major tasks of labor rate setting at the present stage and from now on is to set vs. the prior year. and to maintain at required level of technically based standards of labor content the use of which will allow for ensuring further increase in labor productivity and enhancement of efficiency of operation of all the Company’s structural units. All in all in 2009 the Company Labor indicators designed and implemented 33 worktime standards, and their total number accounted for Rate of change 3, 339 standards (6% more vs. 2008). The annual economic effect of newly designed and Indicator 2008 2009 2009/2008, % earlier applied worktime standards in 2009 in the Company upon the whole accounted for 638, 000 standard hours, or financial saving of RUB 47.3 million. Employees’ average wages (RUB) 16, 064 17, 275 107.5 In 2010 the tasks in labor rate setting are further improvement of organization and labor rate setting with a view of optimizing the Company’s effective business-processes, Average headcount (persons) 32, 587 29, 873 91.7 planning and analysis of labor resources use, reduction of labor content of work in progress and setting equal pay for equal work under similar conditions. 41
Improvement of management structure In 2008 the Company started to realize the project “Optimization of corporate structure and processes of operating and strategic activity of OJSC VolgaTelecom”. In Q I-2009 all the Company’s branches established functional structural units which comprised the units at all levels of management – from the level of branch directorate to the level of oblast’s district: commercial vertical, technical vertical and auxiliary vertical.
For the purpose of further improvement of corporate structure and ensuring flexibility in reacting to market situation through increasing independence and responsibility in H II-2009 all the Company’s branches established business-units – Intraregional Telecommunications Centers (hereinafter – ITC) which are the centers of responsibility for all business-processes in the fixed territory, performing technical, commercial and auxiliary functions.
Regional branch
Intraregional Telecommunications Intraregional Telecommunications Center Center Center Center Center Center Center Center Regional Telecommunications Regional Telecommunications Regional Telecommunications Regional Telecommunications Regional Telecommunications Regional Telecommunications Regional Telecommunications 42
Staff relations White-collar Executives workers 1, 449 persons 6 persons
Recruitment and adaptation of personnel 10,2% of the total 0,04% of the total The system of personnel recruitment in the Company is focused on the Company’s number of trained number of trained internal resources: in filling any vacancy in the first place the candidates among the employees employees Company’s employees are considered. The search for outside candidates for a vacant post is made only if based on the results of internal selection not a single eligible candidate was found. The procedure of adaptation is intended at ensuring faster pertaining to office (profession) of a new (transferred) employee, reduction of the number of errors related to the start of work, as well as at successful trial engagement which in many ways depends on adaptation of a new employee on work place.
Staff training and development Staff training and development is a key function in HR management. The major tasks of staff training and development are: ‣‣ to provide the Company with highly qualified staff; ‣‣ to implement uniform methodology of management of staff training and development processes; Specialists Workers ‣‣ to build and improve comprehensive and efficient staff training and development 5, 530 persons 7, 267 persons system in accordance with the documents effective in the Company; ‣‣ to optimize the costs for personnel assessment, training and development. 38,8% of the total 50,96% of the total In 2009 14, 252 employees were trained in the Company (84% vs. 2008). number of trained number of trained employees employees 43
Corporate emulation Since 2006 the Company has been practicing corporate emulation among the collectives of VolgaTelecom’s branches. The objective of corporate emulation is to improve the efficiency of branches operations, to increase profit, to improve the quality of communications, to expand the range of provided services, to stimulate the development of new services and technologies. Training costs amounted to RUB 20.7 million (62% vs. 2008). In determining the form The winners at 2009 year-end were: of training the priority is given to organization of internal training: involvement of internal trainers among the Company’s employees, training on the basis of proprietary ‣‣ I place – Nizhny Novgorod branch; training classrooms and training through distance education systems. ‣‣ II place – Mordovia Republic branch; For the purpose of increasing the interest in and the activity of personnel for the ‣‣ III place – Penza branch. improvement of professional occupation and displaying their creative potential in 2009 For the purpose of improving the image of blue-collar job, popularizing advanced the Company designed and implemented the project of implementing the employees’ work experience, and also of recognizing the merits of the most professional workers innovations proposals “Ideas. Innovations. Solutions”, the project’s slogan was the tradition of holding the contests of professional skill was revived. The contest “Everything May Be Changed for the Better”. of professional skill for the title “Best in profession” is held in four nominations: cable jointer, electrician of external plants, electrician of exchange equipment and 195 persons took part in the project; all together they made 366 proposals. By the communications operator. The contest’s winners as well as all the participants were decision of Innovation committees 77 proposals got the status “For implementation” awarded the diplomas and valuable gifts. Furthermore, all the participants of the 2-nd of which 49 innovation solutions were implemented in 2009. The economic effect of stage of the contest will be receiving a monthly increment to the salary for professional implementation amounted to RUB 9. 9 million. skill and high qualification. The contest was a perfect incentive to the increase of book OJSC VolgaTelecom’s project “Ideas. Innovations. Solutions” was the winner of knowledge and improvement of hand-on experience. annual independent award “HR-BRAND-2009” awarded to companies – Russia’s best employers in “Region” nomination. The judges of the contest noted the consistency Medical insurance and non-government pension fund scheme of the approach underlying the project and the fact that it was realized on a virtual In 2009 in accordance with the contracts of voluntary medical insurance concluded by platform by using advanced telecommunications facilities. and between OJSC VolgaTelecom, OJSC SOGAZ and LLC Rosgosstrakh-Povolzhie 434 key specialists of the Company were insured. The Company allocated RUB 9.4 million for Awards these purposes. In 2009 OJSC VolgaTelecom’s employees received the following awards: In 2009 earlier concluded contract between the Company and LLC Rosgosstrakh- ‣‣ “Master of communications” title was bestowed to 71 employee; Povolzhie continued to be effective, within this contract 21, 750 VolgaTelecom’s ‣‣ “Honored radio operator” badge was awarded to 13 persons; employees were insured against industrial accidents to the total amount of RUB ‣‣ Certificate of honor of OJSC Svyazinvest was awarded to 40 persons; 2.2 million. In December 2009 the new contract of voluntary collective insurance of ‣‣ Certificate of honor of OJSC VolgaTelecom was awarded to 72 persons. VolgaTelecom’s employees against industrial accidents was concluded by and between the Company and OJSC IC Ural-AIL. Within this contract 29, 000 persons were insured for In 2009 12 persons were entered VolgaTelecom’s Book of Honor and 12 employees were the total amount of RUB 4.9 million. entered VolgaTelecom’s honors board. In Q IV-2009 the Company’s Management board approved the Regulations for awarding the title “Honored radio operator of Povolzhie”. For the purpose of providing supplementary pension to the employees the Company is The award of “Honored radio operator of Povolzhie” title is the highest recognition of working with Non-government Pension Fund “Telecom-Soyuz”. At January 01, 2010 the merits of the Company’s employees who made specific (considerable) contribution to the number of participants in non-government pension fund upon the whole in the Company development of production and social activity. accounted for 19, 328 persons, and 7, 171 person get non-government pension. 44 45
Communications and management are the essence of a man’s interior life to a no lesser extent than of his social life VIII 46 Corporate governance
The Company’s corporate structure OJSC VolgaTelecom as the company seeking after complying with the best world practice of corporate General meeting of shareholders governance is making great efforts to ensure respect for and observance of rights and legitimate interest of its shareholders, investors, clients and partners. The basis of the Company’s corporate governance Board of directors Auditing committee is the Company’s corporate structure comprising management and control bodies.
Strategic Committee Management Development for Audit Committee board Personnel Corporate and Remuneration Governance Committee General Director Committee Corporate Internal secretary Audit Department Kirov branch Mariy-El Republic branch Mordovia Republic branch Nizhny Novgorod branch General directorate Orenburg branch Penza branch Samara branch Saratov branch Udmurtia Republic branch Ulyanovsk branch Chuvashia Republic branch 47
Composition of the Board of directors elected at annual general meeting of shareholders on June 08, 2009
Evgeny V. Yurchenko Chairman of the Company’s Board of directors OJSC Svyazinvest, General Director
Ekaterina S. Erofteeva OJSC Svyazinvest, Executive Director – Director of Strategic Development Department
Lyudmila A. Kormilitsyna OJSC Svyazinvest, chief of section of Corporate Governance and Legal Support Department
Mikhail I. Kritskyi OJSC Svyazinvest, Deputy General Director
Board of directors Mikhail A. Leshchenko OJSC Svyazinvest, Deputy General Director The Board of directors is the Company’s collegial management body performing corporate management of the Company’s operations (other than the matters Vladimir F. Lyulin OJSC Svyazinvest, Advisor to General Director referred to the competencies of shareholders’ general meeting) and namely: it performs strategic management of the Company’s operations, it exercises control over reasonable and bona fide performance by executive bodies of efficient Vladimir A. Rumyantsev Gazprombank (Open Joint Stock Company), management of the Company’s day-to-day operations in the interests of ensuring Managing Director its long-term sustainable development. The operation of the Board of directors is intended at increasing the growth of the Victor D. Savchenko OJSC Svyazinvest, Deputy General Director Company’s value, including the increase in its assets, price of shares and other securities, and improvement of the Company’s image. Yuri S. Sizov ZAO Lider (the company for administration of assets In its operation the Board of directors is guided by the following principles: of pension fund), Deputy General Director for Strategic Development ‣‣ decision making on the basis of reliable information about the Company’s operations; ‣‣ inadmissibility of restriction of rights of shareholders to participate in the Oleg R. Fedorov ZAO VTB Capital, Managing Director, CEO of the Company’s operations management, to receive dividend and information about Department of Relations with State Institutions, the Company; Department of Investment-Banking Operations ‣‣ achievement of balance of interests of various groups of shareholders and in Global Markets making most objective decisions by the Board of directors in the interests of all Alexander A. Filatov Non-Commercial Partnership “Association of shareholders of the Company. Independent Corporate Directors”, Executive Director VolgaTelecom’s Board of directors is annually elected by annual general meeting of shareholders to the number of 11 persons by cumulative voting. The Company’s Board of directors comprises seven independent directors. 48
Operation of the Board of directors in 2009
In 2009 VolgaTelecom’s Board of directors held 32 Company’s Management board with the term of office bearer bonds of BT-2 series subject to obligatory meetings and considered 239 issues. from 16.06.2009 to 31.07.2010. centralized custody and set the interest rate at 9.5% Key decisions made in the meetings of the Company’s ‣‣ The Board of directors approved VolgaTelecom’s per annum. Board of directors in 2009: investment priorities for 2010. ‣‣ The Board of directors made the decision to terminate ‣‣ The Board of directors approved terms and conditions ‣‣ For the term of its authority the Company’s Board VolgaTelecom’s participation in JSCB “C-BANK” (ZAO) of the contract of indemnity against liability of the of directors established the following committees through the sale of 5, 979, 761 ordinary registered members of the Company’s Board of directors, of the of the Company’s Board of directors: Personnel and uncertified shares of JSCB “C-BANK” (ZAO) of the members of the Company’s Management board and of Remuneration Committee, Committee for Audit, par value of RUB 1 per a share owned by OJSC the Company’s General Director, as well as of persons Strategic Development Committee, and Corporate VolgaTelecom. who had held or will hold these posts in the Company’s Governance Committee. ‣‣ The Board of directors approved VolgaTelecom’s management bodies. ‣‣ The Board of directors made the decision of acquiring budget for 2010, the Program of risk management ‣‣ The Board of directors made modifications and VolgaTelecom’s placed inconvertible interest bearing for 2010, Action plan of Internal Audit Department for amendments in Regulations for the Company’s certified bearer bonds of BT-4 series subject to 2010. dividend policy. obligatory centralized custody from their owners and ‣‣ The Board of directors approved Regulations for the ‣‣ The Board of directors approved Regulations determined their maturity term. system of VolgaTelecom’s internal control. for the procedure of holding tender for the right ‣‣ The Board of directors made the decision of Furthermore, according to Action plans of the Company’s to conclude the contract for mandatory audit of determining the amount of the 13-th, 14-th, 15-th, Board of directors for 2008 – 2009 and 2009 – 2010 it VolgaTelecom’s RAS accounting (financial) statement 16-th, 17-th and 18-th coupons of VolgaTelecom’s also considered the following issues: of defining the and VolgaTelecom’s IFRS consolidated financial inconvertible interest bearing certified bearer bonds of priority trends of the Company’s operations, including statements. BT-4 series subject to obligatory centralized custody the approval of annual budget, medium-term and long- ‣‣ The Board of directors appointed VolgaTelecom’s and set the interest rate of the Bonds’ 13-th, 14-th, term budgets, strategies and programs of the Company’s General Director, defined the term of his authority 15-th, 16-th, 17-th and 18-th coupons at 12.00% per development, it made modifications in these documents and approved terms and conditions of labor contract annum. following the consideration of the results of their concluded with him. ‣‣ The Board of directors made the decision of fulfillment. ‣‣ The Board of directors approved the adjusted budget of approving terms and conditions of Contract of audit Also as and when necessary the Board of directors OJSC VolgaTelecom for Q II – IV-2009. services of audit of VolgaTelecom’s RAS accounting considered the issues of preliminary approval of (financial) statement and VolgaTelecom’s IFRS candidacies for the posts of Deputy General Director, ‣‣ The Board of directors approved the adjusted Program financial statements concluded by and between OJSC branches directors. of the Company’s transformation in sales and VolgaTelecom and ZAO KPMG. customer service. In accordance with Regulations for the Company’s Board ‣‣ At considering the issues referred to the competencies of directors as restated, the members of the Board of ‣‣ The Board of directors elected the chairman and of general meetings of shareholders of ZAO NCC directors are compensated for the expenses related to deputy chairman of VolgaTelecom’s Board of directors. and ZAO Ulyanovsk-GSM the decision was made to their exercise of their functions and are paid quarterly and ‣‣ The Board of directors made the decision of joining reorganize ZAO NCC in the form of affiliating ZAO annual remuneration. LLC GTS as a member through acquiring 100% equity Ulyanovsk-GSM to it and the Board of directors stake in authorized capital of LLC GTS. approved the Contract of affiliation. ‣‣ The Board of directors early terminated the authority ‣‣ The Board of directors made the decision of of active composition of VolgaTelecom’s Management determining the amount of 9-th and 10-th coupons of board and appointed the new composition of the VolgaTelecom’s inconvertible interest bearing certified 49
The Board of directors’ Committees Composition of the Management board operating at December 31, 2009 For efficient exercise of the functions of the Board of directors four Vladimir I. Rybakin Chairman of the Company’s Management board, committees are operating in OJSC VolgaTelecom: Committee for Audit, VolgaTelecom’s General Director Personnel and Remuneration Committee, Corporate Governance Committee and Strategic Development Committee. Igor A. Volfson The Company’s Deputy General Director – Director of VolgaTelecom’s branch in Mordovia Republic In its operation the Board of directors’ Committees are guided by Regulations for the Committee, the Russian Federation legislation in effect, Articles of association, Corporate Governance Code and Regulations Mikhail V. Dyakonov The Company’s Deputy General Director for Capital for the Board of directors of the Company. The Committees through Construction preliminary consideration of issues as per their competencies prepare recommendations to the Board of directors on these issues. Personnel and Remuneration Committee and Committee for Audit of Andrey S. Zakharov The Company’s Deputy General Director – Technical the Company’s Board of directors are headed by independent directors of Director VolgaTelecom’s Board of directors. Elena V. Konstantinova The Company’s Deputy General Director – HR Director General Director General Director is the sole executive carrying out management of the Company’s day-to-day operations. General Director is appointed by the Company’s Board of directors. Andrey G. Kuznetsov The Company’s Deputy General Director – Chief Commercial Officer Vladimir I. Rybakin was appointed VolgaTelecom’s General Director on April 22, 2009. At April 27, 2009 his equity share in the Company’s authorized capital was 0.10816%, and the share of ordinary stock – 0.14421%. In the Vladimir F. Lyulin OJSC Svyazinvest, Advisor to General Director reporting year the Company’s General Director Vladimir I. Rybakin made the transactions of the Company’s shares disposal: in August 2009 he disposed of 354, 728 ordinary registered uncertified shares. Elena V. Neverova The Company’s Deputy General Director for Corporate Development Management board Mikhail V. Petrov ZAO NCC, General Director Management board is the Company’s collegial executive body; it prepares and submits the materials to VolgaTelecom’s Board of directors and to the Committees of the Company’s Board of directors in accordance with Nikolai I. Popkov The Company’s Chief Accountant approved action plans, and also on the instructions of the Company’s Board of directors. Dmitry V. Proskura The Company’s Deputy General Director – Director To ensure the Company’s efficient operations the Company’s Management board is guided by the following principles: of VolgaTelecom’s Nizhny Novgorod branch ‣‣ Promptitude in making maximum objective decisions to the benefit of the Company and its shareholders; Taisiya M. Sipatova The Company’s Deputy General Director for Economics and Finance (CFO) ‣‣ Bona fide, timely and efficient execution of resolutions of shareholders’ general meeting and decisions of the Company’s Board of directors. In 2009 the Company’s Management board held 25 meetings and Valery A. Shchukin The Company’s Deputy General Director – Director considered 231 issue. for security and secrecy order 50 Auditing committee Control over the Company’s financial and economic operations is exercised by the In 2009 the Auditing committee operated in the following areas: Auditing committee elected at the annual general meeting of shareholders on June ‣‣ verification of compliance with established procedure of maintaining the accounting and 08, 2009; the composition of the Auditing committee is as follows: of drawing up financial statements; ‣‣ monitoring of legality of decisions and actions of the Company’s executive bodies, Olga G. Koroleva Chairman of the Auditing committee, inclusive of concluded contracts and made transactions; OJSC Svyazinvest, Chief Accountant ‣‣ verification of compliance with legal acts in financial and economic operations in basic lines of business (capital construction, rendering of interconnect and traffic transit Irina A. Arkhipova OJSC Svyazinvest, Deputy Director of the services, rendering of communications services); Department of Economic Planning and Budgeting ‣‣ verification of compliance with natural monopolies laws and regulations in acquiring financial services; ‣‣ analysis of the Company’s financial position, assessment of efficiency of the Company’s Svetlana N. Bocharova OJSC Svyazinvest, chief of tax section of the financial investments management; Department of Bookkeeping, Tax and Statistics ‣‣ analysis of promptitude and accuracy of settlements with counterparties, budgets of Accounting various levels, shareholders and other debt holders of the Company; ‣‣ analysis of organization of internal control; Alexey V. Maltsev OJSC Svyazinvest, Strategy and Development ‣‣ control of payment discipline; analysis of settlements with the Company’s debtors, Department, chief of section of the development of inclusive of promptitude and completeness of measures taken by executive bodies. the Group’s strategy The Auditing committee audited VolgaTelecom’s financial and economic operations for 2009. Based on the results of the audit the committee drew up its Findings on the Natalia V. Feoktistova OJSC Svyazinvest, Corporate Governance and Legal Company’s statements for 2009. Support Department, chief of section of operation The violations identified by the Auditing committee are insignificant and do not have effect with associated companies on the reliability of the Company’s accounting statement and annual report for 2009.
Information about the Company’s auditor (RAS and IFRS) Information about the Company’s registrar Full brand name: Closed Joint Stock Company KPMG. Full brand name: Open Joint Stock Company Obiedinennaya Registratsionnaya Location: Block C, Naberezhnaya Tower Complex, Moscow-City, 18 Kompaniya. Krasnopresnenskaya Nab., Moscow, 123317, Russia Location: 4-th Floor, «Omega Plaza» Business Center, 19 Leninskaya Sloboda Phone: +7 (495) 937-44-77 Street, Moscow, Russia Fax: +7 (495) 937-44-99 Mailing address: P.O.Box 151, Moscow, 115280, Russia E-mail: [email protected] Phone: +7 (495) 775-18-20 License No Е 003330 issued by the RF Ministry of Finance on January 17, 2003 for Fax: +7 (495) 775-18-20 the term of five years (expended to January 17, 2013 by order No 573 of September 17, 2007 of the Ministry of Finance of the Russian Federation). E-mail: [email protected] ZAO KPMG was approved as the Company’s auditor for 2009 by annual general License No 10-000-1-00314 issued by the RF FCSM on March 30, 2004 without meeting of VolgaTelecom’s shareholders on June 24, 2008. limitation of the validity term. 51
If you view money as wage and salary workers and take care of them, then they in return will take care of you IX 52 Securities
Authorized capital OJSC VolgaTelecom is one of the largest Russian issuers. The Company’s authorized capital amounts to RUB 1, 639, 764, 970 and consists of 327, 952, 994 shares of RUB 5 par value of each share.
The Company’s outstanding and authorized shares (at December 31, 2009)
Category (type) of shares Quantity, shares Par value, RUB
Outstanding shares, total 327, 952, 994
Ordinary shares 245, 969, 590 5.00 Preferred A type shares 81, 983, 404 5.00 Authorized shares, total 1, 830, 589 Ordinary shares 1, 299, 093 5.00
Preferred A type shares 531, 496 5.00
Shareholders’ equity structure Shareholders’ equity structure (at December 31, 2009)
Quantity Share of Shareholder/ of ordinary Quantity authorized Share of voting Nominee holder shares of preferred shares capital, % stock, % OJSC Svyazinvest 124 ,633, 745 - 38.00 50.67
Nominee holders 97, 117 324 64, 348, 190 49.24 39.49 ADR owners 10, 331, 836 - 3.15 4.20 Individuals 9, 179, 738 16, 904, 742 7.95 3.73 Legal entities 4, 706, 947 730, 472 1.66 1.91
Total 245, 969, 590 81, 983, 404 100.00 100.00 53
Information about the owners of largest blocks of shares Dividend OJSC Svyazinvest holds the controlling block of VolgaTelecom’s shares (its share in the Company’s authorized capital is The resolution on payment and the amount of annual 38%, share of ordinary stock – 50.67%). dividend is passed by general meeting of the Company’s shareholders on the recommendation of the Board of directors. VolgaTelecom’s Articles of association provides Owners of over 1% of authorized capital or over 1% of the Company’s ordinary shares (at December 31, 2009) for the commitment to pay preferred dividend to the Ordinary shares Preferred shares amount of at least 10% of the net profit at the last fiscal year-end, if annual general meeting of the Company’s Share of shareholders passes the resolution to pay dividend. Shareholder/Nominee Quantity Share of Quantity Share of preferred authorized holder ordinary stock stock capital, % The amount of dividend for 2008 was approved by annual general meeting of VolgaTelecom’s shareholders on June Open Joint Stock 08, 2009, minutes No 9 of June 10, 2009: Company «Investment 124, 633, 745 50.67 - - 38.00 communications ‣‣ RUB 3.600753 per a share on preferred A type shares, company» (Svyazinvest) ‣‣ RUB 1.800235 per a share on ordinary shares. Closed Joint Stock VolgaTelecom paid dividend on its shares for 2008 within Company «Depositary- 27, 320, 003 11.11 35, 634, 47 43.47 19.20 the following period: Clearing Company» ‣‣ On preferred A type shares – till August 07, 2009, ‣‣ On ordinary shares – till December 31, 2009. Closed Joint Stock In 2009 the Company allocated 25.0% of net profit gained Company «National 57, 250, 022 23.28 21, 440, 105 26.15 23.99 at 2008 fiscal year-end for the payment of dividend on Depositary Center» ordinary and preferred stock. The total amount allocated for dividend payment accounted for RUB 738. 005 million. ING Bank (Eurasia) ZAO (Closed Joint Stock 14, 715, 065 5.98 4, 094, 703 4.99 5.74 Company)
Open Joint Stock 3, 528, 547 1.43 - - 1.08 Company RTK-Leasing
Closed Joint Stock 3, 170, 444 1.29 28, 706 0.04 0.98 Company UBS Nominees 54 Dividend dynamics 5.199311
Ordinary shares (RUB)
Preferred A type shares (RUB) 4.0534 3.600753 2.9928 2.599451 ADR program 2.1346
1.800235 Since autumn 1997 VolgaTelecom has been realizing
1.5776 Level I ADR program for ordinary shares. In 1997 the Bank of New-York was selected as the depositary bank of ADR program and in 2002 the program was transferred to JPMorgan Chase Bank. * The amount of dividend proposed by the Company’s The nominee holder of ADR program in Russia is Board of directors for the approval at annual general ZAO ING Bank (Eurasia). ADR to share ratio is 1/2 (2 meeting of shareholders. 2006 2007 2008 2009* VolgaTelecom’s shares are underlying one ADR). At December 31, 2009 the ADRs accounted for 5,165,918 pieces which is 4.20% of the Company’s voting stock. Stock Exchanges The ADRs are traded on the USA OTC market, on Frankfurt In 2005 VolgaTelecom’s shares passed through the listing procedure and were included into quotation lists of two leading Stock Exchange and on XETRA. Russian stock exchanges – MICEX and RTS.
Stock Exchanges Dynamics of ordinary shares quotations, 2002-2010 800% Stock exchange Ticker Quotation list Trading volume 700% VTEL (ordinary shares) А1 RUB 4, 306.0 MLN ZAO MICEX SE 600% VTELP (preferred shares) А1 RUB 2, 095.5 MLN 500% OJSC RTS NNSI (ordinary shares) А2 US$5.5 MLN 400% Classical market NNSIP (preferred shares) А2 US$2.8 MLN 300% OJSC RTS NNSIG (ordinary shares) А2 RUB 247.7 MLN 200% Stock market NNSIPG (preferred shares) А2 RUB 10.8 MLN 100% USA OTC VTEL (ADR for ordinary shares) - US$6.8 MLN 0% 55
Ratings
Information about the Company’s credit ratings at December 31, 2009
Object of rating assignment Rating agency Rating
International: Long-term corporate foreign currency credit rating: «ВВ-», outlook «Stable», Standard&Poor's Long-term corporate domestic currency credit rating: «ВВ-», outlook «Stable». National: Long-term credit rating: «ru АА-».
The Company International: Information about the Company’s corporate governance Long-term Issuer Default rating: ratings at December 31, 2009 «ВВ-», outlook «Stable», FitchRatings Short-term Issuer Default rating: «В». Rating agency Rating National: Long-term rating:
Corporate Governance Rating Standard&Poor's International: 5, National: 5,4. National: Standard&Poor's Priority unsecured bonds rating: «ru АА-». BT-2, BT-3 and BT-4 series bonds National: National Corporate Governance FitchRatings Expert RA Senior unsecured bonds rating: «А+(rus)». Rating: А (7+ in digital scale) 56 57
Our happiness depends to a great extent upon how we face the events of our life than on the nature of the events X 58 Major corporate events after the balance-sheet date
January ‣‣ VolgaTelecom’s quality management system was found to comply with the requirements of GOST R ISO 9001- 2008 (ISO 9001:2001) ‣‣ VolgaTelecom disposed of its equity share in non-core asset JSCB «C-BANK» ‣‣ The number of VolgaTelecom’s subscribers using Internet broadband access services exceeded 1 million
February ‣‣ VolgaTelecom was honored First Class award of annual independent Prize «HR-BRAND 2009» which is warded to companies – the best employers in Russia
March ‣‣ FitchRatings has raised OJSC VolgaTelecom’s Long-term Issuer Default Rating from «BB-» to «BB», National Long- term rating from «A+(rus)» to «AA-(rus)». The outlooks for the Long-term IDR and National Long-term Rating are «Stable». Short-term IDR has been affirmed at «B». ‣‣ VolgaTelecom paid out 14-th coupon yield on its BT-4 series bonds 59
Information is might. And sometimes when time is running out, it is also the speed Supplement № 1 60 Information about the Company’s equity participation in other entities providing telecommunications services
(the Company’s equity stake in their authorized capital is at least 25%)
Key performance indicators
Equity stake in authorized capital Share in authorized Number Sales revenue, Net profit, Company’s name Core business of entity, % capital, RUB thousand of subscribers RUB thousand RUB thousand
ZAO Nizhegorodskaya GSM, AMPS-DAMPS mobile 100 35, 097 3, 465, 526 5, 725, 392 316, 915 Sotovaya Svyaz services
ZAO Ulyanovsk-GSM Mobile services 100 100 523, 655 858, 853 187, 108
LLC NIZHEGORODSKYI Data transmission services and 100 2, 700 586 69, 509 5, 148 TELESERVICE telematic services
LLC GTS Local telephony services 100 315, 619 32, 000 96, 121 (5, 924)
ZAO Orenburg-GSM GSM mobile services 51 102 177, 439 216, 666 3, 045
Local telephony services ZAO Narodnyi Telephone 50% + 1 via radio access equipment 50 33, 447 44, 886 (19, 542) Saratov preferred share
Local telephony services ZAO NIZHEGORODSKYI via radio access equipment 50 50 1, 100 7, 015 (1, 135) RADIO TELEPHONE
ZAO Samara Telecom Local telephony services 27.8 75 45, 000 305, 273 19, 676 Supplement № 2 61
Balance sheet and audit opinion
BALANCE SHEET CODES
OKUD Form № 01 0710001
At December 31, 2009 Date (year, month, day) 2009.12.31
Entity OJSC VolgaTelecom OKPO code 01142788
Taxpayer Identification Number 5260901817 TIN 5260901817
Line of business Electric communication OKVED code 64.20
Form of incorporation / ownership form Open Joint Stock Company / private OKOPF/OKFS code 47/16
Measure unit: RUB thousand OKEI code 384
Address: Dom Svyazi, M. Gorky Square, Nizhny Novgorod, 603000
Date of approval
Date of dispatch (receipt) March 30, 2010. 62
At the reporting At the reporting ASSETS Notes Item code Line code period beginning period end
1 1а 2 2а 3 4
I. NON-CURRENT ASSETS 110 110 2, 486 1, 880 Intangible assets
Property, plant and equipment 4.1 120 120 30, 371, 431 28, 036, 608
CAPEX 4.2 130 130 1, 119, 076 411, 836
Income-bearing lease investments 135 135 71, 676 3, 871
Long-term financial investments 4.3 140 140 3, 783, 165 4, 082, 531 of which: 141 3, 716, 626 4, 066, 207 investments in subsidiaries investments in associates 142 6, 055 75 investments in other entities 143 19, 133 16, 249 other long-term financial investments 4.4 144 41, 351 -
Deferred tax assets 4.5 145 145 206, 151 207, 958
Other non-current assets 4.6 150 150 3, 465, 113 3, 065, 678
Total for section I 190 190 39, 019, 098 35, 810, 362 63
At the reporting At the reporting ASSETS Notes Item code Line code period beginning period end
1 1а 2 2а 3 4
II. CURRENT ASSETS 210 210 542, 723 478, 117 Inventories of which: 4.7 211 211 412, 603 346, 993 raw materials, supplies and other similar values work in progress expenses (distribution costs) 213 213 - - finished goods and goods for resale 214 214 30, 092 15, 643 goods shipped 215 215 3 9, 576 prepaid expenses 216 216 100, 025 105, 905 other inventories and expenditure 217 217 - -
VAT on acquired valuables 220 220 105, 740 44, 988 of which: to be refunded in more than 12 months 221 27, 639 4, 622 after the reporting date to be refunded within 12 months after the reporting date 222 78, 101 40, 366 64
Accounts receivable (payments are expected 230 230 2, 984 57, 341 in more than 12 months after the reporting date) of which: 231 231 598 2, 620 trade receivable advances paid out 232 - 53, 168 other debtors 233 2, 386 1, 553
Accounts receivable (payments are expected within 12 240 240 2, 679, 338 2, 314, 723 months after the reporting date) of which: 4.8 241 241 2, 044, 063 1, 868, 867 trade receivable advances paid out 242 145, 736 168, 630 other debtors 4.9 243 489, 539 277, 226
Short-term financial investments 4.4 250 250 203, 283 401, 774
Cash 260 260 1, 562, 117 1, 954, 137
Other current assets 270 270 601 381
Total for section II 290 290 5, 096, 786 5, 252, 461
BALANCE (sum of items 190+290) 300 300 44, 115, 884 41, 061, 823 65
At the reporting At the reporting LIABILITIES Notes Item code Line code period beginning period end
1 1а 2 2а 3 4
III. EQUITY AND RESERVES 4.10 410 410 1, 639, 765 1, 639, 765 Authorized capital
Capital surplus 420 420 3, 533, 964 3, 445, 259
Surplus 430 430 81, 988 81, 988
Treasury stock 411 440 - -
Retained earnings (uncovered loss) of past years 470 460 17, 846, 643 17, 193, 959
Retained earnings (uncovered loss) of the reporting year 470 470 - 4, 262, 572
Total for section III 490 490 23, 102, 360 26, 623, 543
IV. NON-CURRENT LIABILITIES 4.12 510 510 7, 940, 810 6, 273, 518 Loans and borrowings of which: 511 6, 880, 000 5, 250, 000 loans borrowings 512 1, 060, 810 1, 023, 518
Deferred tax liabilities 4.13 515 515 1, 130, 246 1, 210, 172
Other non-current liabilities 4.14 520 520 421, 172 160, 749
Total for section IV 590 590 9, 492, 228 7, 644, 439 66
V. CURRENT LIABILITIES 4.12 610 610 5, 153, 872 2, 244, 001 Loans and borrowings of which: 611 808, 041 1, 204, 428 loans borrowings 612 4, 345, 831 1, 039, 573
Accounts payable, 4.15 620 620 5, 534, 904 3, 655, 080 of which: 621 621 3, 413, 900 1, 732, 835 trade payable advances from customers 625 622 463, 293 461, 569 wages payable 622 623 80, 447 122, 051 debt to government extrabudgetary funds 623 624 50, 943 61, 294 tax debt 624 625 499, 634 1, 018, 885 other creditors 625 626 1, 026, 687 258, 446
Debt to members (founders) for income payments 630 630 18, 620 19, 372
Deferred revenue 4.16 640 640 156, 820 141, 481
Provision of costs to be incurred 4.17 650 650 647, 419 719, 198
Other current liabilities 4.18 660 660 9, 661 14, 709
Total for section V 690 690 11, 521, 296 6, 793, 841
BALANCE (sum of items 490+590+690) 700 700 44, 115, 884 41, 061, 823 67
Statement of tangible assets shown on off-balance-sheet accounts At the reporting At the reporting Item Notes Item code Line code period beginning period end
1 1а 2 2а 3 4
Leased property, plant and equipment 910 901 3, 957, 546 3, 935, 650 including leasing 911 911 2, 372, 033 2, 371, 887
Inventory items received in custody 920 902 51, 262 33, 454
Goods taken on commission 930 903 12, 767 9, 539
Written-off debts of insolvent debtors 940 904 350, 279 353, 912
Collaterals received on liabilities and payments 950 905 11, 503, 081 11, 502, 048
Collaterals issued on liabilities and payments 960 906 4, 308, 840 2, 216, 857
Depreciation of housing stock 970 907 9, 758 6, 787
Depreciation of land improvement facilities and other 980 908 2, 490 2, 694 similar facilities
Statement of net assets value At the reporting At the reporting Item Notes Item code Line code period beginning period end
1 1а 2 2а 3 4
Net assets 1000 23, 259, 180 26, 765, 024 68
INCOME STATEMENT CODES
OKUD Form No 02 0710002
For the year ended December 31, 2009 Date (year, month, day) 2009.12.31
Entity OJSC VolgaTelecom OKPO code 01142788
Taxpayer Identification Number 5260901817 TIN 5260901817
Line of business Electric communication OKVED code 64.20
Form of incorporation /ownership form Open Joint Stock Company private OKOPF/OKFS code 47/16
Measure unit: RUB thousand OKEI code 384
For the reporting For the similar period Item Notes Item code Line code period of the prior year
1 1а 2 2а 3 4 I. Revenues and expenses from ordinary operations Revenues (net) from sales of goods, products, works, 5.1 010 010 27, 076, 989 26, 420, 079 and services (minus VAT, excise taxes and similar mandatory payments)
Of which from sales: of telecommunications services 011 25, 652, 466 24, 944, 280
Prime cost of sold goods, products, works and services 5.2 020 020 (21, 096, 950) (20, 898, 169)
Of which: telecommunications services 021 (20, 503, 959) (20, 156, 244)
Sales profit (loss) (items 010 - 020) 050 050 5, 980, 039 5, 521, 910 69
II. Other revenues and expenses 060 060 201, 873 124, 616 Interest receivable
Interest due 070 070 (1, 446, 978) (1, 205, 908)
Revenues from participation in other entities 080 080 566, 025 402, 017
Other revenues 5.3 090 090 2, 726, 475 1, 732, 347
Of which compensation for losses caused by universal 091 1, 057, 595 882, 971 services provision
Other expenses 5.3 100 100 (2, 718, 816) (2, 498, 759)
Profit (loss) before tax 140 140 5, 308, 618 4, 076, 223 (items 050+060-070+080+090-100)
Income tax expenses (items -151+/-152+/-153) 5.4 150 (1, 046, 046) (1, 124, 204) including: deferred tax liabilities 142 151 (80, 889) 52, 969 deferred tax assets 141 152 2, 362 13, 870 current income tax 150 153 (983, 240) (1, 190, 923)
Additional payments of income tax for prior tax 151 154 15, 721 (120) (reporting) periods
Net profit (loss) of the reporting period (items 140-150) 190 190 4, 262, 572 2, 952, 019
FOR REFERENCE 201 (1, 061, 724) (978, 294) Profit tax for accounting purposes
Recurrent tax liabilities 200 202 (181, 341) (282, 310)
Recurrent tax assets 200 203 197, 019 136, 400 70
For the reporting For the similar period Item Notes Item code Line code period of the prior year
1 1а 2 2а 3 4
Basic earnings (loss) per share 5.5 301 0.01559 0.01080
Diluted earnings (loss) per share 302 - -
Breakdown of individual profit and loss
Item Item code Line code For the reporting period For the similar period of the prior year
Profit Loss Profit Loss 1 1а 2 3 4 5 6
Fines, late payment interests and forfeit penalties, which were acknowledged or to be 401 71, 768 (1, 093) 62, 516 (1, 796) collected according to court (arbitration court) judgment
Past years profit (loss) 402 125, 828 (135, 666) 77, 651 (293, 326)
Reimbursement of damages caused by default 403 4, 127 (950) 6, 326 (2, 016) or inadequate performance of obligations
Foreign exchange differences in foreign 404 29, 336 (33, 212) 12, 706 (33, 891) currency operations
Deductions to allowances 405 — (140, 697) — (200, 706)
Debt amortization of payables and receivables 406 22, 876 (8, 308) 10, 875 (4, 862) 71 Audit opinion OJSC VolgaTelecom Audit opinion on Accounting (financial) statement for year 2009
To the shareholders of Open Joint Stock Company VolgaTelecom
We have audited the accompanying accounting (financial) statement of Open Joint Stock Company VolgaTelecom (hereinafter – the Company) for year 2009.
Accounting (financial) statement on 62 pages comprises: ‣‣ Accounting balance-sheet at December 31, 2009; ‣‣ Income statement for year 2009; ‣‣ Supplements to accounting balance-sheet and income statement, including: — Statement of changes in equity for year 2009; — Cash flow statement for year 2009; — Supplement to accounting balance-sheet; ‣‣ Notes. The Company’s management body is responsible for preparation and presentation of this accounting (financial) statement. Accounting (financial) statement means the statement provided for by Federal Law «On Accounting». Our responsibility is to express an opinion on the reliability in all material respects of this accounting (financial) statement based on our audit.
We conducted our audit in accordance with Federal Law «On the Audit Activity», Federal standards of audit activity, KPMG own audit standards, as well as rules and standards accepted by Audit Chamber of Russia. 72
The audit was planned and performed to obtain reasonable assurance whether the accounting (financial) statement is free from material misstatements. The audit was conducted on a sample basis and included the examination by testing of evidence confirming the figures of accounting (financial) statement and the disclosure of information on financial and economic activity in the accounting (financial) statement, the assessment of compliance with bookkeeping principles and rules applied at preparation of the accounting (financial) statement, the consideration of material estimates obtained by the Company’s management, and also the evaluation of presentation of accounting (financial) statement. We believe that the audit evidence we have obtained is sufficient to provide a basis for our opinion on the reliability of the accounting (financial) statement.
We believe that the Company’s accounting (financial) statement accompanying this Audit opinion presents fairly in all material respects the Company’s financial position at December 31, 2009 and its financial and operating results for the period from January 1 to December 31, 2009 inclusive in accordance with the Russian Federation legislation requirements as related to accounting (financial) statement preparation.
March 30, 2010
L. V. Klimanova ZAO KPMG General Director
E. A. Akylbek Audit executive head, General audit qualification certificate № К029616, for an indefinite term 73 Reference information for shareholders Branches Penza branch 1/3 Kuprin Street, Penza, 440606 Phone: (8412) 52-17-12 Fax: (8412) 52-36-88 E-mail: [email protected]
Samara branch Kirov branch 17 Krasnoarmeiskaya Street, Samara, 43/1 Drelevsky Street, Kirov, 610000 443010 Phone: (8332) 35-95-02, Phone: (846) 332-10-20 Fax: (8332) 32-02-53 Fax: (846) 340-05-10 E-mail: [email protected] E-mail: [email protected]
Mariy-El Republic branch Saratov branch 138 Sovetskaya Street, Ioshkar Ola, 40 Kiselev Street, Saratov, 410012 The Republic of Mariy-El, 424000 Phone: (8452) 27-14-18, Phone: (8362) 66-45-71 Fax: (8452) 50-84-53 Fax: (8362) 63 -00-99 E-mail: [email protected] E-mail: [email protected] Udmurtia Republic branch Mordovia Republic branch 278 Pushkinskaya Street, Izhevsk, 13 Bolshevistskaya Street, Saransk, Udmurtia Republic, 426008 Mordovia Republic, 430005 Phone: (3412) 22-69-91 Phone: (8342) 32-70-04, Fax: (3412) 51-01-41 Fax: (8342) 47-60-70 E-mail: [email protected] E-mail: [email protected]
Nizhny Novgorod branch Ulyanovsk branch 56 Bolshaya Pokrovskaya Street, 60 L.Tolstoy Street, Ulyanovsk, 432063 Nizhny Novgorod, 603000 Phone: (8422) 41-20-10 Phone: (831) 430-55-32, Fax: (8422) 41-13-52 OJSC VolgaTelecom Fax: (831) 434-05-19 E-mail: [email protected]; [email protected] Dom Svyazi, Maxim Gorky Square, Nizhny E-mail: [email protected] Novgorod, 603000. Chuvashia Republic branch Phone: +7 (831) 437-50-00 - office of Orenburg branch 2 Lenin Avenue, Cheboksary, VolgaTelecom’s General Director, 11 Volodarsky Street, Orenburg, 460000 Chuvashia Republic, 428000 Fax: +7 (831) 430-67-68, Phone: (3532) 77-34-10, Phone: (8352) 62-43-04, E-mail: [email protected] Fax: (3532) 72-01-62 Fax: (8352) 66-22-93 Internet web-site: www.vt.ru E-mail: [email protected] E-mail: [email protected] 74 Disclaimer of forward-looking statements
Certain statements in this report are not historical facts and are “forward- looking”. They are based on forecasts, and as consequence are subject to material risks and uncertainties. A number of factors may cause the actual results or events differ materially from those expressed by forward-looking statements. The factors which may cause the difference of actual and predicted results and events include the possibility of change of financial and economic conditions of the Company’s operations and its business prospects; the possibility of change of political and economic situation in Russia; change of existing or future regulation of Russian communications industry; the possibility of change of Russian legislation; and also the impact of competition and other factors. In view of the above, the forward-looking statements are valid only at the date of their presentation, and the Company does not undertake any obligation to update or to revise them, whether as a result of new information, future events or otherwise. The Company does not make any representations, warranty or predictions that the results anticipated by such forward-looking statements will be achieved. Such forward-looking statements represent only one of many possible scenarios and should not be viewed as the most likely or standard scenario. 6
2009