Consolidated financial statements of PJSC Rostelecom for 2016 with independent auditor’s report Consolidated financial statements of PJSC Rostelecom Contents Page Independent auditor’s report 3 Consolidated statement of financial position 5 Consolidated statement profit or loss and other comprehensive income 6 Consolidated statement of cash flows 7 Consolidated statement of changes in equity 8 Notes to the consolidated financial statements 10 2 PJSC Rostelecom Consolidated statement of profit or loss and other comprehensive income (In millions of Russian roubles) Year ended 31 December Notes 2016 2015 Revenue 23 297,446 297,355 Operating expenses Wages, salaries, other benefits and payroll taxes 24 (90,340) (91,081) Depreciation, amortisation and impairment losses 7, 8 (55,589) (60,599) Interconnection charges (52,161) (49,825) Materials, utilities, repairs and maintenance 25 (24,917) (25,125) Gain on disposal of property, plant and equipment and intangible assets 4,556 2,133 Bad debt expense 14 (2,775) (882) Other operating income 26 12,948 14,630 Other operating expenses 27 (49,332) (48,020) Total operating expenses, net (257,610) (258,769) Operating profit 39,836 38,586 Loss from associates and joint ventures 10 (7,296) (3,583) Finance costs 28 (17,175) (16,311) Other investing and financial gain/(loss), net 29 1,061 (434) Foreign exchange gain/(loss), net 515 (1,431) Profit before income tax 16,941 16,827 Income tax expense 22 (4,692) (2,436) Profit for the year 12,249 14,391 Other comprehensive (loss)/income Items that may be reclassified subsequently to profit and loss: Exchange differences on translating foreign operations (453) 584 Items that will not be reclassified to profit and loss: Remeasurement of defined benefit pension plans 21 (379) (412) Income tax relating to items that will not be reclassified 76 82 Other comprehensive (loss)/income for the year, net of tax (756) 254 Total comprehensive income for the year 11,493 14,645 Profit attributable to: Equity holders of the Group 11,751 13,944 Non-controlling interests 498 447 Total comprehensive income attributable to: Equity holders of the Group 10,985 14,182 Non-controlling interests 508 463 Earnings per share attributable to equity holders of the Group − basic (in roubles) 32 5.24 6.20 Earnings per share attributable to equity holders of the Group − diluted (in roubles) 32 5.20 6.11 The accompanying notes are an integral part of these consolidated financial statements. 6 PJSC Rostelecom Consolidated statement of cash flows (In millions of Russian roubles) Year ended 31 December Notes 2016 2015 Cash flows from operating activities Profit before tax 16,941 16,827 Adjustments to reconcile profit before tax to cash generated from operations Depreciation, amortisation and impairment losses 7, 8 55,589 60,599 Gain on disposal of property, plant and equipment and intangible assets (4,556) (2,133) Bad debt expense 14 2,775 882 Loss from associates and joint ventures 7,296 3,583 Finance costs excluding finance costs on pension and other long-term social liabilities 28 16,699 15,560 Other investing and financial (gain)/loss, net 29 (1,061) 434 Foreign exchange (gain)/loss, net (515) 1,431 Share-based motivation program 31 1,019 1,251 Changes in net working capital (Increase)/decrease in accounts receivable (3,941) 1,629 Decrease in employee benefits (561) (1,356) (Increase)/decrease in inventories (2,351) 892 Increase in accounts payable, provisions and accrued expenses 1,376 268 Increase in other assets and liabilities (3,131) (25) Cash generated from operations 85,579 99,842 Interest paid (18,410) (17,082) Income tax refund 4,391 2,559 Income tax paid (4,383) (4,469) Net cash provided by operating activities 67,177 80,850 Cash flows from investing activities Purchase of property, plant and equipment and intangible assets (61,857) (62,726) Proceeds from sale of property, plant and equipment and intangible assets 7,978 3,838 Acquisition of financial assets (9,736) (15,943) Proceeds from disposals of financial assets 10,831 10,442 Interest received 1,029 1,495 Dividends received 22 7 Purchase of subsidiaries, net of cash acquired 6 (2,438) (1,145) Proceeds from equity accounted investees − 322 Proceeds from disposal of equity accounted investees − 240 Proceeds from disposals of subsidiaries, net of cash disposed (1) − Acquisition of equity accounted investees 10 (2,778) (2,098) Net cash used in investing activities (56,950) (65,568) Cash flows from financing activities Sale of treasury shares 157 − Purchase of treasury shares (314) (2,867) Proceeds from bank and corporate loans 655,190 546,080 Repayment of bank and corporate loans (665,936) (550,410) Proceeds from bonds 15,000 10,000 Repayment of bonds (2,734) (12,112) Repayment of vendor financing payable (9) (48) Repayment of other non-current financing liabilities (1) (4) Options settlement repayments (319) (5,361) Repayment of finance lease liabilities (160) (57) Acquisition of non-controlling interest 9 − (2,349) Dividends paid to shareholders of the Group 17 (13,295) (7,676) Dividends paid to non-controlling shareholders of subsidiaries (258) (308) Net cash used in financing activities (12,679) (25,112) Effect of exchange rate changes on cash and cash equivalents (456) 50 Net (decrease) in cash and cash equivalents (2,908) (9,780) Cash and cash equivalents at beginning of the year 7,165 16,945 Cash and cash equivalents at the end of the year 4,257 7,165 The accompanying notes are an integral part of these consolidated financial statements. 7 PJSC Rostelecom Consolidated statement of changes in equity (In millions of Russian roubles) Attributable to equity holders of the Group Unrealized loss on Remeasure- Total equity available- Translation of ments of attributable to Share Additional paid- for-sale foreign Treasury Other capital defined benefit Retained shareholders Non-controlling Total capital in capital investments operations shares reserves pension plans earnings of the Group interests equity Balances at 1 January 2016 93 87 (10) 1,385 (68,669) 2,120 6,153 304,589 245,748 3,916 249,664 Profit for the year − − − − − − − 11,751 11,751 498 12,249 Other comprehensive income Exchange differences on translating foreign operations − − − (463) − − − − (463) 10 (453) Actuarial losses (Note 21) − − − − − − (379) − (379) − (379) Income tax in respect of other comprehensive income items − − − − − − 76 − 76 − 76 Total other comprehensive income/(loss), net of tax − − − (463) − − (303) − (766) 10 (756) Total comprehensive income/(loss) − − − (463) − − (303) 11,751 10,985 508 11,493 Transactions with shareholders, recorded directly in equity Dividends to shareholders of the Group (Note 17) − − − − − − − (13,295) (13,295) − (13,295) Dividends to non-controlling shareholders of subsidiaries − − − − − − − − − (246) (246) Purchase of treasury shares − − − − (314) − − − (314) − (314) Sale of treasury shares − − − − 224 − − (67) 157 − 157 Acquisition of non-controlling interest (Note 9) − − − − − − − − 32 32 Disposal of non-controlling interest − − − − − − − 9 9 (72) (63) Non-controlling interest in acquired subsidiaries (Note 6) − − − − − − − − − 179 179 Employee benefits within share-based employee motivation program − − − − 1,725 (107) − (599) 1,019 − 1,019 Other changes in equity − 3 − − − 7 − (3) 7 − 7 Total transactions with shareholders − 3 − − 1,635 (100) − (13,955) (12,417) (107) (12,524) Balances at 31 December 2016 93 90 (10) 922 (67,034) 2,020 5,850 302,385 244,316 4,317 248,633 The accompanying notes are an integral part of these consolidated financial statements. 8 PJSC Rostelecom Consolidated statements of changes in equity (continued) Attributable to equity holders of the Group Unrealized loss on Remeasure- Total equity available- Translation of ments of attributable to Share Additional paid- for-sale foreign Treasury Other capital defined benefit Retained shareholders Non-controlling Total capital in capital investments operations shares reserves pension plans earnings of the Group interests equity Balances at 1 January 2015 97 819 (10) 817 (82,023) 1,850 6,483 313,118 241,151 4,076 245,227 Profit for the year − − − − − − − 13,944 13,944 447 14,391 Other comprehensive income Exchange differences on translating foreign operations − − − 568 − − − − 568 16 584 Actuarial losses (Note 21) − − − − − − (412) − (412) − (412) Income tax in respect of other comprehensive income items − − − − − − 82 − 82 − 82 Total other comprehensive income/(loss), net of tax − − − 568 − − (330) − 238 16 254 Total comprehensive income/(loss) − − − 568 − − (330) 13,944 14,182 463 14,645 Transactions with shareholders, recorded directly in equity Dividends to shareholders of the Group (Note 17) − − − − − − − (7,676) (7,676) − (7,676) Dividends to non-controlling shareholders of subsidiaries − − − − − − − (308) (308) Purchase of treasury shares − − − − (2,867) − − − (2,867) − (2,867) Acquisition of non-controlling interest (Note 9) − − − − − − − 312 312 (2,661) (2,349) Non-controlling interest in acquired subsidiaries (Note 6) 1,538 1,538 Redemption of treasury shares (4) − − − 15,306 − − (15,302) − − − Employee benefits within share-based employee motivation program − − − − 915 657 − (321) 1,251 − 1,251 Other change in equity − (732) − − − (387) − 514 (605) 808 203 Total transactions with shareholders (4) (732) − − 13,354 270 − (22,473) (9,585) (623) (10,208) Balances at 31 December 2015 93 87 (10) 1,385 (68,669) 2,120 6,153 304,589 245,748 3,916 249,664 The accompanying notes are an integral part of these consolidated financial statements. 9 PJSC Rostelecom Notes to the consolidated financial statements for the year ended 31 December 2016 (In millions of Russian roubles) Reporting entity The accompanying consolidated financial statements are of PJSC Rostelecom (“Rostelecom” or the “Company”), and its subsidiaries (together the “Group”), which are incorporated in the Russian Federation (“Russia”). The registered address of the Company is Russian Federation, St. Petersburg, Dostoevsky Street, 15. Since February 2016 the headquarters are located in the Russian Federation, Moscow at Goncharnaya Street, 30 (on 31 December 2015: Moscow at 1st Tverskaya-Yamskaya Street, 14).