Annual Report 2015 0 1 0 0 1 1110 1000111 10 10 1 100 0000 0 010011 0100 10001 1001001 1010100 00 10000 1 10010 0 10 00 1001001 1000111 1000001 10011 00 1000001 101000 TABLE OF CONTENTS KEY FIGURES 2 KEY EVENTS 3 COMPANY’S PROFILE 4 Leadership in Integrated Communications 6 Investment Highlights 7 Communication Networks 10 STRATEGIC REPORT 14 Letter from the Chairman of the Board 16 Letter from the President 18 About Report Strategy 22 Bridging the Digital Divide 28 The Report is presented by Rostelecom PJSC (Rostelecom, The Report provides consolidated financial (accounting) Key Risks 34 the Company) and its subsidiaries, collectively referred to as information in accordance with the International Financial Business Model 40 the "Group", in accordance with section 9 “Subsidiaries” of Reporting Standards (hereinafter - the IFRS), except where Market Overview 42 the Company’s consolidated financial statements prepared in expressly stated that the financial (accounting) information is accordance with the International Financial Reporting presented in accordance with other accounting standards. The RESULT OVERVIEW 56 Standards (hereinafter – the IFRS) for the year ended on consolidated financial information is presented by Rostelecom Overview of Operating Results 58 31 December 2015. and its subsidiaries in accordance with the principles of Technological Advantages 59 consolidation of financial statements, as described in section Differentiated Offerings 63 COMPLIANCE WITH STANDARDS 4 "Fundamentals of Accounting Policy" of the Company’s Best-in-class Customer Service 76 This annual report (hereinafter - the Report) is prepared in consolidated financial statements prepared in accordance with Organizational Transformation 79 accordance with the requirements of the Federal Law the IFRS for the year ended on 31 December 2015. Improved Operational Efficiency 81 № 208-FZ of 26 December 1995 "On Joint Stock Companies", To ensure comparability and consistency of disclosures here the Regulation on Disclosures by Issuers of Securities approved in the operational and other non-financial indicators are also FINANCIAL PERFOMANCE OVERVIEW 84 by the Bank of Russia on 30 December 2014, № 454-P, presented for Rostelecom and its subsidiaries for which the Financial Highlights 86 the Resolution of the Government of the Russian Federation Company’s consolidated financial statements are made, unless Structure of Revenues by Product 88 № 1214 of 31 December 2010, and the recommendations otherwise specified. Structure of Revenues by Segment 89 of the Corporate Governance Code, approved on 21 March 2014 Operating Expenses 90 by the Board of Directors of the Bank of Russia. OIBDA 90 Debt 91 CORPORATE GOVERNANCE 92 Disclaimer Corporate Governance Framework 94 Board Leadership 96 Certain statements contained in the Report are "the statements These risks, uncertainties and other factors include the following: containing projections regarding future events" in the meaning of the • risks related to changes in political, economic and social conditions in Russia as Board of Directors Effectiveness 97 US federal securities laws, and, consequently, these statements are well as global economic conditions; Control and Reporting 107 subject to the provisions of these laws, which provide for exemption • risks relating to the Russian legislation, legal regulation and taxation, from liability for good faith action. Such statements containing including laws, regulations, decrees and resolutions governing the Russian Executive Bodies 115 projections regarding future events include the following information telecommunications industry, activities related to the issuance and circulation Corporate Governance Evaluation 120 (but not limited to it): of securities, and foreign exchange controls relating to Russian companies, not • estimates of future operating and financial performance of the Company, as excluding the official interpretation of such regulations by the regulatory bodies; Remuneration 123 well as forecasts of factors affecting the current value of future cashflows; • risks related to the Company’ activities, including achievement of the projected Governance Body Liability Insurance 133 • the Company’s plans to participate in the authorized capitals of other results, levels of profitability and growth; ability to create and meet demand organizations; for the Company's services, including their promotion; the Company's ability to • the Company's plans for the network construction and modernization, as well as remain competitive in the Russian liberalized telecommunications market; FOR SHAREHOLDERS AND INVESTORS 134 planned investments; • technological risks related to the operation and development of the • growth in demand for the Company’s services and the Company's plans for the communications infrastructure, technological innovations as well as the Share Capital 136 development of existing and new services and pricing; convergence of technologies; Shares 138 • plans to improve the corporate governance practices of the Company; • other risks and uncertainties. • future Company's position in the telecommunications market and forecasts for Shareholders and Investors Relations 144 the market segments in which the Company operates; A more detailed review of these factors is contained in the Company's publicly General Meeting of Shareholders 153 • economic outlook and industry trends; available documents. • possible regulatory changes and assessment of impact of certain regulations on Dividend Policy 153 the Company's activities; Registrar 155 • other Company's plans and forecasts regarding the events that have not • taken place yet. APPENDICES 156 Appendix 1. Consolidated Financial Statements and Auditor's Opinion 157 The above statements containing projections regarding future events are subject to risks, uncertainties and other factors that may cause actual results ultimately Appendix 2. Glossary 243 inconsistent with the stated. Most of the above factors are beyond the Company's control or forecast. Therefore, in view of the above, the Company is not to place undue Appendix 3. Company's Profile 245 reliance on any statements regarding future events that are listed in the Report. The Company assumes no obligation to publicly revise these projections - neither to reflect events or circumstances that have occurred after the Report publication, nor for the purpose of unanticipated events - except where it is required by applicable law. Additional Appendices to the Annual Report 247 1 Key Figures 2015 Key Events Resolutions of the Board of Directors It adopted a strategy for the development of new In December 2015, the Board of Directors segments: approved a new, progressive dividend policy RUB bln RUB bln RUB bln 1 • launch of Interactive TV 2.0; 3 that allows the shareholders to receive no less 297.4 100.8 22.0 • launch on the market of its own product to than 75 % of the free cash flow, but not less than Revenues OIBDA FCF provide integrated geoinformational services - RUB 45 bln for three years cumulatively. "Geodata Information System" solutions. The company has passed through the capital expenditure peak due to major works on the It was resolved to establish a dedicated SPV to manage capital-intensive projects of the network 2 the Company’s real estate. The SPV will carry out the infrastructure modernization, related to the released property monetization strategy development transfer to the optics of the "last mile" and and implementation, managing, developing and selling increased transport network capacity. the property along with the interested investors. Rostelecom will transfer to the SPV the real estate From 2016 onwards, it is expected to decrease for sale and rent, as well as redevelopment and the size of investments, which will create the repositioning. conditions for the release of funds and an 11.6 mln 8.6mln 30.7mln increase in free cash flow for dividends. Broadband Pay TV Households subscribers subscribers connected by fibre Market Development The Company continued to strengthen its market • The joint venture with Tele2 Russia entered the market positions in the major markets: in the Moscow region. Tele2 Russia has built a network • B2C broadband market share grew by 1.1 p. p. up to in Moscow region in an unprecedented short period 37.3 %, B2B broadband market share grew by 4.0 p. of time - in just one year, commissioning over 100 p. to 34.8 %, Pay TV market share grew by 4.4 p. p. base stations per week. Tele2 Russia will continue to 27.6 %. to develop the network - to increase coverage and capacity. Transactions • Rostelecom has acquired control over IQMen IBS - • In 2015, Rostelecom increased its stake in the joint the Russian Big Data developer. venture with VGTRK (Digital Television), created for • Rostelecom has acquired control over SafeData group the media business development, up to 41 %. - the largest player in the provision of data centres, traffic exchange and content services. BACK TO CONTENT BACK TO CONTENT 2 3 Back to p. 37 COMPANY’S PROFILE Leadership in Integrated Communications p. 6 Investment Highlights p. 7 Communication Networks p. 10 1001001 101 01 00 10 00 00 1 1 00 1000001 100 11 110 00 0 1 1000 000 00 1010010 1010101 1010011 1010011 100100 00 1 10 101 000 00 01 10 1 1010 1 0101 011 1 00000 01 101 001000 1 0011 1010011 1001001 Vla 1 divo s 100 01 tok 1000 000 00 100 1 1 00 1 0011 01 10 000001 101 00 010 0 01 1001110 0 1000111 1 10 00000 10 01 001 00 00 1 1 1001110 1000111 100 00 000 10001 1 00 1 00 00 1 10 10 0 00 1 11 10 1 10 00 0100 11 1 1 1 010 10 100 01 00 1 1 01 0100 1 000001 Financial For Shareholders Annual Report 2015 · Rostelecom PJSC Company's Profile Strategic Report Result Overview Performance Overview Corporate Governance and Investors Leadership in Integrated Communications Investment Highlights Access to markets with high growth potential, Leader in the majority of digital and such as cloud services, TV, data centres, geo- telecom segments №1 data and industrial Internet of Things Exposure to attractive markets: № 1 in the key markets, CAGR1 The largest fixed network in Russia Presence in the Russian mobile communica- of new markets - 26 %.