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TABLE OF CONTENTS
TABLE OF CONTENTS
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
o | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) | |
OR | ||
ý | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2017 | |
OR | ||
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
OR | ||
o | SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
OR
OR
OR
Commission File Number: 1-34694
VIMPELCOMVEON LTD.
Bermuda
Claude Debussylaan 88, 1082 MD, Amsterdam, the Netherlands
Scott Dresser
Scott Dresser
Group General Counsel
Claude Debussylaan 88, 1082 MD, Amsterdam, the Netherlands
Tel: +31 20 797 7200
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
| Title of | Name of | ||||||
|---|---|---|---|---|---|---|---|
| American Depositary Shares, or ADSs, each representing one common share | NASDAQ Global | ||||||
| Common shares, US$0.001 nominal value | NASDAQ Global | ||||||
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None.
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None.
Indicate the number of outstanding shares of each of the issuer’sissuer's classes of capital or common stock as of the close of the period covered by the annual report: 1,756,731,135 common shares, US$0.001 nominal value.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act:
Yes xo No ¨ý
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Yes ¨o No xý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
Yes xý No ¨o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ¨ý No ¨o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.filer or an emerging growth company. See definition of “accelerated"large accelerated filer," "accelerated filer," and large accelerated filer”"emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):Act:
| Large accelerated filer | Accelerated filer | Non-accelerated filer | Emerging growth company o |
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. o
† The term "new or revised financial accounting standard" refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
| U.S. GAAP | International Financial Reporting Standards as issued by the International Accounting Standards Board | Other |
IndicateIf "Other" has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
Item 17 ¨o Item 18 xo
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨o No xý
ITEM 1. | ||||||
ITEM 2. | 9 | |||||
ITEM 3. KEY INFORMATION | 9 | |||||
ITEM 4. INFORMATION ON THE COMPANY | 49 | |||||
ITEM 4A. UNRESOLVED STAFF COMMENTS | 91 | |||||
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS | 91 | |||||
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES | 129 | |||||
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS | 139 | |||||
ITEM 8. FINANCIAL INFORMATION | 143 | |||||
ITEM 9. THE OFFER AND LISTING | 145 | |||||
ITEM 10. ADDITIONAL INFORMATION | 146 | |||||
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | 162 | |||||
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES | 163 | |||||
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES | 165 | |||||
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS | 165 | |||||
ITEM 15. CONTROLS AND PROCEDURES | 165 | |||||
ITEM | 166 | |||||
ITEM | 166 | |||||
ITEM | 166 | |||||
ITEM | 166 | |||||
ITEM | 166 | |||||
ITEM | 167 | |||||
ITEM | 168 | |||||
ITEM | 168 | |||||
ITEM | 168 | |||||
ITEM | 169 | |||||
ITEM 17. FINANCIAL STATEMENTS | 170 | |||||
ITEM 18. FINANCIAL STATEMENTS | 170 | |||||
ITEM 19. EXHIBITS | 171 |
This Annual Report on Form 20-F includes audited consolidated financial statements as of and for the years ended December 31, 2017, 2016 and 2015 prepared in accordance with International Financial Reporting Standards, or "IFRS," as issued by the International Accounting Standards Board, or "IASB," and presented in U.S. dollars. VEON Ltd. adopted IFRS as of January 1, 2009. All references to our audited consolidated financial statements appearing in this Annual Report on Form 20-F are to the audited consolidated financial statements included in this Annual Report on Form 20-F.
Effective March 30, 2017, we changed our name from VimpelCom Ltd. to VEON Ltd. References in this Annual Report on Form 20-F to “VimpelCom” and the “VimpelCom Group,”"VEON" as well as references to “our"our company,” “the" "the company,” “our" "our group,” “we,” “us,” “our”" "the group," "we," "us," "our" and similar pronouns, are references to VEON Ltd. as of March 30, 2017 and to VimpelCom Ltd., prior to March 30, 2017, an exempted company limited by shares registered in Bermuda, and its consolidated subsidiaries. References to VEON Ltd. are to VEON Ltd. alone as of March 30, 2017 and to VimpelCom Ltd. alone prior to March 30, 2017.
All section references appearing in this Annual Report on Form 20-F are to sections of this Annual Report on Form 20-F, unless otherwise indicated.
Presentation of Financial Information of the Italy Joint Venture
We and CK Hutchison Holdings Limited ("Hutchison") jointly own and operate a joint venture holding company, VIP-CKH Luxembourg S.à.r.l, comprised of our former business, WIND Telecomunicazioni S.p.A. ("Historical WIND Business"), and Hutchison's former businesses in Italy ("H3G S.p.A."). We refer to this operation, which operates in Italy under the "3," "Wind," "Wind Tre Business" and "Infostrada" brands, as the "Italy Joint Venture" in this Annual Report on Form 20-F.
We account for the Italy Joint Venture using the equity method of accounting. On November 5, 2016, we contributed our entire shareholding in our Historical WIND Business for a 50% interest in the Italy Joint Venture and thus do not control the Italy Joint Venture's operations. However, we include operational and certain limited financial information for the Italy Joint Venture in this Annual Report on Form 20-F, because the Italy Joint Venture is a significant part of our business.
The consolidated financial data presented in this Annual Report on Form 20-F presents the Italy Joint Venture as an investment in associates and joint ventures, and accounts for the Italy Joint Venture in "Shares of (loss)/profit of associates and joint ventures." On November 5, 2016, the balance sheet of the Historical WIND Business was deconsolidated and an investment in a joint venture, in which we have joint control, was recorded. Prior to November 5, 2016 we classified the Historical WIND Business as an asset held for sale and a discontinued operation. Since January 1, 2017, management has included the Italy Joint Venture as a reportable segment due to its increased contribution to our overall financial results and position.
In addition, we are filing the financial statements of the Italy Joint Venture as Exhibit 99.3 to this Annual Report on Form 20-F. Rule 3-09 of Regulation S-X provides that if a 50%-or-less-owned person accounted for by the equity method meets the first or third condition of the significant subsidiary tests set forth in Rule 1-02(w) of Regulation S-X, substituting 20% for 10%, separate financial statements for such 50%-or-less-owned person shall be filed. These financial statements shall be prepared in accordance with accounting principles generally accepted in the United States of America or IFRS as issued by IASB. The Italy Joint Venture met the significant subsidiary test described above for the year ending December 31, 2017 and, accordingly, we have included in this Annual Report on Form 20-F the required financial statements for the years ended December 31, 2017 and 2016, and the accompanying Notes to the financial statements, of VIP-CKH Luxembourg S.à.r.l, the holding company of the Italy Joint Venture, prepared in accordance with IFRS as issued by IASB. See "Exhibit 99.3—Consolidated
financial statements of VIP-CKH Luxembourg S.à.r.l for the years ended December 31, 2017 and 2016." These statements and accompanying notes were required to be audited only for those fiscal years in which either the first or third condition of the significant subsidiary tests set forth in Rule 1-02(w) is met. The significance test is calculated as of the end of the fiscal year and for the fiscal year.
All financial information related to the Italy Joint Venture is the responsibility of the Italy Joint Venture's management and has not been prepared or approved by our management.
Non-IFRS Financial Measures
Adjusted EBITDA
Adjusted EBITDA is a non-IFRS financial measure. Adjusted EBITDA should not be considered in isolation or as a substitute for analyses of the results as reported under IFRS. We calculate Adjusted EBITDA as (loss)/profit before tax before depreciation, amortization, loss from disposal of non-current assets and impairment loss, financial expenses and costs, net foreign exchange gain/(loss) and share of associates and joint ventures. The measure includes certain non-operating losses and gains mainly represented by litigation provisions for all of its segments except for Russia. Our total Adjusted EBITDA includes certain reconciliation adjustments necessary because our Russia segment excludes certain expenses from its Adjusted EBITDA. As a result of the reconciliations, the total Adjusted EBITDA we present, which represents the Adjusted EBITDA of each of our reportable segments with the exception of the Italy Joint Venture, differs from the aggregation of Adjusted EBITDA of such reportable segments.
For a reconciliation of Adjusted EBITDA to (loss)/profit before tax, the most directly comparable IFRS financial measure, for the years ended December 31, 2017, 2016 and 2015, see "Item 5—Operating and Financial Review and Prospects—Certain Performance Indicators—Adjusted EBITDA" and Note 7 to our audited consolidated financial statements.
Our management uses Adjusted EBITDA as a supplemental performance measure and believes that Adjusted EBITDA provides useful information to investors because it is an indicator of the strength and performance of our business operations, our ability to fund discretionary spending and our ability to incur and service debt. In addition, the components of Adjusted EBITDA include the key revenue and expense items for which our operating managers are responsible and upon which their performance is evaluated. However, a limitation of Adjusted EBITDA's use as a performance measure is that it does not reflect the periodic costs of certain capitalized tangible and intangible assets used in generating revenue or the need to replace capital equipment over time.
Adjusted EBITDA also assists management and investors by increasing the comparability of our performance against the performance of other telecommunications companies that provide EBITDA (earnings before interest, taxes, depreciation and amortization) or OIBDA (operating income before depreciation and amortization) information. This increased comparability is achieved by excluding the potentially inconsistent effects between periods or companies of depreciation, amortization and impairment losses, which items may significantly affect operating profit between periods. However, our Adjusted EBITDA results may not be directly comparable to other companies' reported EBITDA or OIBDA results due to variances and adjustments in the components of EBITDA (including our calculation of Adjusted EBITDA) or calculation measures.
Adjusted EBITDA Margin
Adjusted EBITDA Margin is a non-IFRS financial measure. Adjusted EBITDA Margin is calculated as Adjusted EBITDA divided by total operating revenue, expressed as a percentage. For a description of how we calculate Adjusted EBITDA and a discussion of its limitations in evaluating our performance, see "—Adjusted EBITDA."
Functional currency financial measures
In the discussion and analysis of our results of operations, we present certain financial measures in functional currency terms. These non-IFRS financial measures present our results of operations in local currency amounts and thus exclude the impact of translating such local currency amounts to U.S. dollars, our reporting currency. We analyze the performance of our reportable segments on a functional currency basis to increase the comparability of results between periods. Our management believes that evaluating their performance on a functional currency basis provides an additional and meaningful assessment of performance to our management and to investors. For information regarding our translation of foreign currency-denominated amounts into U.S. dollars, see "Item 5—Operating and Financial Review and Prospects—Factors Affecting Comparability of Financial Position and Results of Operations—Foreign Currency Translation" and Notes 2 and 4 to our audited consolidated financial statements.
Capital Expenditures
In this Annual Report on Form 20-F, we present capital expenditures, which include purchases of new licenses, equipment, new construction, upgrades, software, other long-lived assets and related reasonable costs incurred prior to intended use of the non-current assets, accounted for at the earliest event of advance payment or delivery. Long-lived assets acquired in business combinations are not included in capital expenditures. For more information on our capital expenditures, see "Item 5—Operating and Financial Review and Prospects—Liquidity and Capital Resources—Future Liquidity and Capital Requirements" and Note 7 to our audited consolidated financial statements.
Certain Performance Indicators
In this Annual Report on Form 20-F, we present certain operating data, including number of mobile customers, mobile ARPU, number of mobile data customers and number of fixed-line broadband customers, which our management believes is useful in evaluating our performance from period to period and in assessing the usage and acceptance of our mobile and broadband products and services. These operating metrics are not included in our financial statements. For more information on each of these metrics, see "Item 5—Operating and Financial Review and Prospects—Certain Performance Indicators."
Market and Industry Data
This Annual Report on Form 20-F includes audited consolidated financial statementscontains industry, market and competitive position data that are based on the industry publications and studies conducted by third parties noted herein and therein, as well as our own internal estimates and research. These industry publications and third-party studies generally state that the information that they contain has been obtained from sources believed to be reliable, although they do not guarantee the accuracy or completeness of such information. While we believe that each of these publications and third-party studies is reliable, we have not independently verified the market and industry data obtained from these third-party sources. We also believe our internal research is reliable and the definition of our market and industry are appropriate, but neither such research nor these definitions have been verified by any independent source.
Certain market and industry data in this Annual Report on Form 20-F is sourced from the report of Analysys Mason, dated March 14, 2018. Mobile penetration rate is defined as mobile connections divided by population. Population figures for the yearsmobile penetration rates provided by Analysys Mason are sourced from the Economist Intelligence Unit. Mobile connections are on a three-month active basis such that any SIM card that has not been used for more than three months is excluded. Certain data for the year ended December 31, 2014, 20132016 sourced by Analysys Mason in our 2016 Annual Report on
Form 20-F filed on April 3, 2017 could only be provided by Analysys Mason as estimates and 2012 preparedhave therefore been restated in accordancethis Annual Report on Form 20-F.
Glossary of Telecommunications Terms
The discussion of our business and the telecommunications industry in this Annual Report on Form 20-F contains references to certain terms specific to our business, including numerous technical and industry terms. Such terms are defined in "Exhibit 99.1—Glossary of Telecommunications Terms."
Trademarks
We have proprietary rights to trademarks used in this Annual Report on Form 20-F which are important to our business, many of which are registered under applicable intellectual property laws. Solely for convenience, trademarks and trade names referred to in this Annual Report on Form 20-F may appear without the "®" or "TM" symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent possible under applicable law, our rights or the rights of the applicable licensor to these trademarks and trade names. We do not intend our use or display of other companies' trade names, trademarks or service marks to imply a relationship with, International Financial Reporting Standards, or “IFRS,” as issuedendorsement or sponsorship of us by, any other companies. Each trademark, trade name or service mark of any other company appearing in this Annual Report on Form 20-F is the International Accounting Standards Board, or “IASB,” and presented in U.S. dollars. The company adopted IFRS asproperty of January 1, 2009.its respective holder.
Other Information
In this Annual Report on Form 20-F, references to “€,” “EUR,” or “Euro” are to the currency introduced at the start of the third stage of the European economic(i) "U.S. dollars" and monetary union pursuant to the Treaty on the Functioning of the EU, as amended, references to “Russian rubles” or “rubles” or “RUB” are to the lawful currency of the Russian Federation and references to “US$” or “$” or “USD” or “U.S. dollars”"US$" are to the lawful currency of the United States of America. ReferencesAmerica, (ii) "Russian rubles" or "RUB" are to “LIBOR”the lawful currency of the Russian Federation, (iii) "Pakistani rupees" or "PKR" are to the lawful currency of Pakistan, (iv) "Algerian dinar" or "DZD" are to the lawful currency of Algeria, (v) "Bangladeshi taka" or "BDT" are to the lawful currency of Bangladesh, (vi) "Ukrainian hryvnia" or "UAH" are to the lawful currency of Ukraine, (vii) "Uzbek som" or "UZS" are to the lawful currency of Uzbekistan, (viii) "Kazakh tenge" is to the lawful currency of the Republic of Kazakhstan and (viii) "€," "EUR" or "euro" are to the single currency of the participating member states of the European and Monetary Union of the Treaty Establishing the European Community, as amended from time to time. In addition, references to "EU" are to the European Union, references to "LIBOR" are to the London Interbank Offered Rate, references to “EURIBOR”"EURIBOR" are to the Euro Interbank Offered Rate and references to “MosPRIME” are to the Moscow Prime Offered Rate, references to “KIBOR”"KIBOR" are to the Karachi Interbank Offered Rate, references to
“AB SEK” are to AB Svensk Exportkredit, references to “Bangladeshi T-Bill” are to Bangladeshi Treasury Bill and references to “Rendistato” are to the weighted average yield on a basket of Italian government securities produced and published by Bank of Italy.
This Annual Report on Form 20-F contains translations of certain non-U.S. currency amounts into U.S. dollars at specified rates solely for the convenience of the reader. These translations should not be construed as representations that the relevant non-U.S. currency amounts actually represent such U.S. dollar amounts or could be converted, were converted or will be converted into U.S. dollars at the rates indicated. Unless otherwise indicated, U.S. dollar amounts have been translated from Euro,euro, Pakistani rupee, Algerian dinar Pakistan rupee, Bangladeshand Bangladeshi taka and Canadian dollar amounts at the exchange rates provided by Bloomberg Finance L.P. and from Russian ruble, UkraineUkrainian hryvnia, Kazakh tenge Uzbek som, Armenian dram, Georgian lari and KyrgyzUzbek som amounts at official exchange rates, as described in more detail under “Itemin "Item 5—Operating and Financial Review and Prospects—Certain Factors Affecting ourComparability of Financial Position and Results of Operations—Foreign Currency Translation” below.Translation."
In addition, the discussion of our business and the telecommunications industry in this Annual Report on Form 20-F contains references to certain terms specific to our business, including numerous technical and industry terms. Such terms are defined in Exhibit 99.1—Glossary of Terms.Rounding
Certain amounts and percentages that appear in this Annual Report on Form 20-F have been subject to rounding adjustments. As a result, certain numerical figures shown as totals, including in tables, may not be exact arithmetic aggregations of the figures that precede or follow them.
Adjusted EBITDA and Adjusted EBITDA Margin. Adjusted EBITDA and Adjusted EBITDA Margin are non-GAAP financial measures. VimpelCom calculates Adjusted EBITDA as profit for the year before depreciation, amortization, impairment loss, finance costs, income tax expense and the other line items reflected in the reconciliation table in “Item 3—Key Information—A. Selected Financial Data” below. Our consolidated Adjusted EBITDA includes certain reconciliation adjustments necessary because our Russia segment excludes certain expenses from its Adjusted EBITDA. As a resultTable of reconciliations, our consolidated Adjusted EBITDA differs from the aggregation of Adjusted EBITDA of each of our reportable segment. Adjusted EBITDA Margin is calculated as Adjusted EBITDA divided by total operating revenue, expressed as a percentage. Adjusted EBITDA and Adjusted EBITDA Margin should not be considered in isolation or as a substitute for analyses of the results as reported under IFRS. Our management uses Adjusted EBITDA and Adjusted EBITDA margin as supplemental performance measures and believes that Adjusted EBITDA and Adjusted EBITDA Margin provide useful information to investors because they are indicators of the strength and performance of the company’s business operations, including its ability to fund discretionary spending, such as capital expenditures, acquisitions and other investments, as well as indicating its ability to incur and service debt. In addition, the components of Adjusted EBITDA and Adjusted EBITDA Margin include the key revenue and expense items for which the company’s operating managers are responsible and upon which their performance is evaluated. Adjusted EBITDA and Adjusted EBITDA Margin also assist management and investors by increasing the comparability of the company’s performance against the performance of other telecommunications companies that provide EBITDA (earnings before interest, taxes, depreciation and amortization) or OIBDA (operating income before depreciation and amortization) information. This increased comparability is achieved by excluding the potentially inconsistent effects between periods or companies of depreciation, amortization and impairment losses, which items may significantly affect operating profit between periods. However, our Adjusted EBITDA results may not be directly comparable to other companies’ reported EBITDA or OIBDA results due to variances and adjustments in the components of EBITDA (including our calculation of Adjusted EBITDA) or calculation measures. Additionally, a limitation of EBITDA’s or Adjusted EBITDA’s use as a performance measure is that it does not reflect the periodic costs of certain capitalized tangible and intangible assets used in generating revenue or the need to replace capital equipment over time. Reconciliation of Adjusted EBITDA to profit for the year, the most directly comparable IFRS financial measure, is presented in “Item 3—Key Information—A. Selected Financial Data” below.Contents
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 20-F contains “forward-lookingestimates and forward-looking statements” as this phrase is defined in within the meaning of Section 27A of the U.S. Securities Act of 1933, as amended or the “Securities Act,”(the "Securities Act") and Section 21E of the U.S. Securities Exchange Act of 1934, as amended or the “Exchange Act.” Forward-looking(the "Exchange Act"). Our estimates and forward-looking statements are not historical factsmainly based on our current expectations and can often be identified by the useestimates of terms like “estimates,” “projects,” “anticipates,” “expects,” “intends,” “believes,” “will,” “may,” “should”future events and trends, which affect or the negative ofmay affect our businesses and operations. Although we believe that these terms. Allestimates and forward-looking statements including discussions of strategy, plans, objectives, goals and future events or performance, involveare based upon reasonable assumptions, they are subject to numerous risks and uncertainties. Examplesuncertainties and are made in light of information currently available to us. Many important factors, in addition to the factors described in this Annual Report on Form 20-F, may adversely affect our results as indicated in forward-looking statements. You should read this Annual Report on Form 20-F completely and with the understanding that our actual future results may be materially different and worse from what we expect.
All statements other than statements of historical fact are forward-looking statements. The words "may," "might," "will," "could," "would," "should," "expect," "plan," "anticipate," "intend," "seek," "believe," "estimate," "predict," "potential," "continue," "contemplate," "possible" and similar words are intended to identify estimates and forward-looking statements.
Our estimates and forward-looking statements include:may be influenced by various factors, including without limitation:
obligations, our expectations regarding working capital and the repayment of our debt and our projected capital requirements;
2018 and our ability to meet our projected capital requirements;
products and services, including operational and network development, optimization and investment, such as expectations regarding the roll-out and benefits of 3G/4G/LTE/5G networks or other networks, broadband services and integrated products and services, such as FMC;
our ability to extract anticipated synergies or to integrate an acquired business into our group in a timely and cost-effective manner;
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our ability to meet our projected capital requirements;
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These statements are management's best assessment of our strategic and financial position and of future market conditions, trends and other potential developments. While these statementsthey are based on sources believed to be reliable and on our management’smanagement's current knowledge and best belief, they are merely estimates or predictions and cannot be relied upon. We cannot assure you that future results will be achieved. The risks and uncertainties that may cause our actual results to differ materially from the results indicated, expressed or implied in the forward-looking statements used in this Annual Report on Form 20-F include:
otherwise, that may arise due to changing social norms, our business involvement in a particular jurisdiction or an otherwise unforeseen development in science or technology;
solvency and other cash flow issues, including our ability to raise the necessary additional capital and incur additional indebtedness, the ability of our subsidiaries to make dividend payments, our ability to develop additional sources of revenue and unforeseen disruptions in our revenue streams;
the review by the independent compliance monitor;
These factors and the other risk factors described in “Item"Item 3—Key Information—D. Risk Factors”Factors" are not necessarily all of the factors that could cause actual results to differ materially from those expressed in any of our forward-looking statements. Other unknown or unpredictable factors also could harm our future results. New risk factors and uncertainties emerge from time to time and it is not possible for our management to predict all risk factors and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
Under no circumstances should the inclusion of such forward-looking statements in this Annual Report on Form 20-F be regarded as a representation or warranty by us or any other person with respect to the achievement of results set out in such statements or that the underlying assumptions used will in fact be the case. Therefore, you are cautioned not to place undue reliance on these forward-looking statements. The forward-looking statements included in this Annual Report on Form 20-F are made only as of the date of this Annual Report on Form 20-F. We cannot assure you that any projected results or events will be achieved. Except to the extent required by law, we disclaim any obligation to update or revise any of these forward-looking statements, whether as a result of new information, future events or otherwise.otherwise, after the date on which the statements are made or to reflect the occurrence of unanticipated events.
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
Not required.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not required.
A. Selected Financial Data
The following selected consolidated financial data as of and for each of the five years ended December 31, 2014 are2017, has been derived from our historical consolidated financial statements, which as of and for the years ended December 31, 2017, 2016, 2015 and 2014 have been audited by PricewaterhouseCoopers Accountants N.V., an independent registered public accounting firm, and as of and for the year ended December 31, 2014, and2013, have been audited by Ernst & Young Accountants LLP, an independent registered public accounting firm, for the years ended December 31, 2013, 2012, 2011 and 2010.except as noted below. The data should be read in conjunction with our audited consolidated financial statements and related notes included elsewhere in this Annual Report on Form 20-F and the financial information in “Item"Item 5—Operating and Financial Review and Prospects.”
| Years ended December 31, | ||||||||||||||||||||
| 2014 | 2013 | 2012 | 2011 | 2010 | ||||||||||||||||
| (In millions of US dollars, except per share amounts) | ||||||||||||||||||||
Service revenue | 18,725 | 21,529 | 22,122 | 19,579 | 10,291 | |||||||||||||||
Sale of equipment and accessories | 519 | 725 | 677 | 516 | 194 | |||||||||||||||
Other revenue | 383 | 292 | 262 | 167 | 37 | |||||||||||||||
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Total operating revenue | 19,627 | 22,546 | 23,061 | 20,262 | 10,522 | |||||||||||||||
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Operating expenses | ||||||||||||||||||||
Service costs | 4,381 | 5,133 | 5,439 | 4,962 | 2,251 | |||||||||||||||
Cost of equipment and accessories | 551 | 780 | 693 | 663 | 217 | |||||||||||||||
Selling, general and administrative expenses | 6,725 | 8,373 | 7,161 | 6,381 | 3,198 | |||||||||||||||
Depreciation | 2,839 | 3,050 | 2,926 | 2,726 | 1,403 | |||||||||||||||
Amortization | 1,479 | 1,791 | 2,080 | 2,059 | 610 | |||||||||||||||
Impairment loss | 992 | 2,973 | 386 | 527 | — | |||||||||||||||
Loss on disposals of non-current assets | 74 | 100 | 205 | 90 | 49 | |||||||||||||||
Total operating expenses | 17,041 | 22,200 | 18,890 | 17,408 | 7,728 | |||||||||||||||
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Operating profit | 2,586 | 346 | 4,171 | 2,854 | 2,794 | |||||||||||||||
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Finance costs | 2,026 | 2,150 | 2,029 | 1,587 | 536 | |||||||||||||||
Finance income | (54 | ) | (91 | ) | (154 | ) | (120 | ) | (69 | ) | ||||||||||
Other non-operating losses/(gains) | 152 | 172 | 75 | 308 | (35 | ) | ||||||||||||||
Shares of loss/(profit) of associates and joint ventures accounted for using the equity method | 38 | 159 | 9 | 35 | (90 | ) | ||||||||||||||
Net foreign exchange (gain)/ loss | 605 | (20 | ) | (70 | ) | 190 | 5 | |||||||||||||
(Loss)/profit before tax | (181 | ) | (2,024 | ) | 2,282 | 854 | 2,447 | |||||||||||||
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Income tax expense | 722 | 2,064 | 906 | 585 | 574 | |||||||||||||||
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(Loss)/profit for the year | (903 | ) | (4,088 | ) | 1,376 | 269 | 1,873 | |||||||||||||
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The owners of the parent | (647 | ) | (2,625 | ) | 1,539 | 543 | 1,806 | |||||||||||||
Non-controlling interest | (256 | ) | (1,463 | ) | (163 | ) | (274 | ) | 67 | |||||||||||
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| (903 | ) | (4,088 | ) | 1,376 | 269 | 1,873 | ||||||||||||||
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Basic, (loss)/profit for the year attributable to ordinary equity holders of the parent | $ | (0.37 | ) | $ | (1.53 | ) | $ | 0.95 | $ | 0.36 | $ | 1.50 | ||||||||
Diluted, (loss)/profit for the year attributable to ordinary equity holders of the parent | $ | (0.37 | ) | $ | (1.53 | ) | $ | 0.95 | $ | 0.36 | $ | 1.50 | ||||||||
Weighted average number of common shares (millions) | 1,748 | 1,711 | 1,618 | 1,524 | 1,207 | |||||||||||||||
Dividends declared per share | $ | 0.035 | $ | 1.24 | $ | 0.80 | $ | 0.80 | $ | 0.80 | ||||||||||
Consolidated balance sheets data: Cash and cash equivalents Working capital (deficit)(1) Property and equipment, net Intangible assets and goodwill Total assets Total liabilities Total equity At December 31, 2014 2013(2) 2012 2011 2010 (In millions of US dollars) 6,342 4,454 4,949 2,325 885 (938 ) (2,815 ) (2,421 ) (3,074 ) (1,023 ) 11,849 15,493 15,666 15,165 7,299 18,002 24,546 27,565 28,601 9,217 41,042 49,747 54,737 54,039 19,505 37,066 40,669 39,988 39,137 9,093 3,976 9,078 14,749 14,902 10,412
| Years ended December 31, | ||||||||||||||||||||
| 2014 | 2013 | 2012 | 2011 | 2010 | ||||||||||||||||
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Other data: | ||||||||||||||||||||
Adjusted EBITDA * | 7,970 | 8,260 | 9,768 | 8,298 | 4,906 | |||||||||||||||
ProspectsReconciliation of Adjusted EBITDA to profit for the year."
(Unaudited, in millions The data for 2015, 2014 and 2013 reflects the classification of US dollars)our Historical WIND Business as a discontinued operation. The data for 2016 reflects 10 months of our Historical WIND Business classified as a discontinued operation and two months of the Italy Joint Venture classified as an equity investment. For more information, see "Explanatory Note—Presentation of Financial Information of the Italy Joint Venture" and Note 6 to our audited consolidated financial statements. For a discussion of certain factors affecting comparability of our financial position and results of operations across periods, see "Item 5—Operating and Financial Review and Prospects—Factors Affecting Comparability of Financial Position and Results of Operations."
| | Year ended December 31, | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2017 | 2016 | 2015 | 2014 | 2013 | |||||||||||
| | (in millions of U.S. dollars, except per share amounts and as indicated) | |||||||||||||||
Consolidated income statements data: | ||||||||||||||||
Service revenue | 9,105 | 8,553 | 9,313 | 13,200 | 15,472 | |||||||||||
Sale of equipment and accessories | 244 | 184 | 190 | 218 | 391 | |||||||||||
Other revenue | 125 | 148 | 103 | 68 | 103 | |||||||||||
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Total operating revenue | 9,474 | 8,885 | 9,606 | 13,486 | 15,966 | |||||||||||
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Operating expenses | ||||||||||||||||
Service costs | (1,879 | ) | (1,769 | ) | (1,937 | ) | (2,931 | ) | (3,595 | ) | ||||||
Cost of equipment and accessories | (260 | ) | (216 | ) | (231 | ) | (252 | ) | (438 | ) | ||||||
Selling, general and administrative expenses | (3,748 | ) | (3,668 | ) | (4,563 | ) | (4,743 | ) | (6,256 | ) | ||||||
Depreciation | (1,454 | ) | (1,439 | ) | (1,550 | ) | (1,996 | ) | (2,245 | ) | ||||||
Amortization | (537 | ) | (497 | ) | (517 | ) | (647 | ) | (808 | ) | ||||||
Impairment loss | (66 | ) | (192 | ) | (245 | ) | (976 | ) | (2,963 | ) | ||||||
Loss on disposals of non-current assets | (24 | ) | (20 | ) | (39 | ) | (68 | ) | (93 | ) | ||||||
Total operating expenses | (7,968 | ) | (7,801 | ) | (9,082 | ) | (11,613 | ) | (16,398 | ) | ||||||
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| | Year ended December 31, | |||||||||||||||
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| | 2017 | 2016 | 2015 | 2014 | 2013 | |||||||||||
| | (in millions of U.S. dollars, except per share amounts and as indicated) | |||||||||||||||
Operating profit | 1,506 | 1,084 | 524 | 1,873 | (432 | ) | ||||||||||
Finance costs | (935 | ) | (830 | ) | (829 | ) | (1,077 | ) | (1,213 | ) | ||||||
Finance income | 95 | 69 | 52 | 52 | 90 | |||||||||||
Other non-operating (losses)/gains | (97 | ) | (82 | ) | (42 | ) | 121 | 84 | ||||||||
Share of (profit) / loss of associates and joint ventures | (412 | ) | 48 | 14 | (38 | ) | (159 | ) | ||||||||
Impairment of associates and joint ventures accounted for using the equity method | (110 | ) | (99 | ) | — | — | — | |||||||||
Net foreign exchange (gain)/ loss | (71 | ) | 157 | (314 | ) | (556 | ) | (12 | ) | |||||||
(Loss)/profit before tax | (24 | ) | 347 | (595 | ) | 375 | (1,642 | ) | ||||||||
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Income tax expense | (472 | ) | (635 | ) | (220 | ) | (598 | ) | (1,813 | ) | ||||||
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(Loss) for the year from continuing operations | (496 | ) | (288 | ) | (815 | ) | (223 | ) | (3,455 | ) | ||||||
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Profit/(loss) after tax for the period from discontinued operations | — | 920 | 262 | (680 | ) | (633 | ) | |||||||||
Profit on disposal of discontinued operations, net of tax | — | 1,788 | — | — | — | |||||||||||
Profit/(loss) after tax for the period from discontinued operations | — | 2,708 | 262 | (680 | ) | (633 | ) | |||||||||
(Loss)/profit for the year | (496 | ) | 2,420 | (553 | ) | (903 | ) | (4,088 | ) | |||||||
Attributable to: | ||||||||||||||||
The owners of the parent (continuing operations) | (483 | ) | (380 | ) | (917 | ) | 33 | (1,992 | ) | |||||||
The owners of the parent (discontinued operations) | — | 2,708 | 262 | (680 | ) | (633 | ) | |||||||||
Non-controlling interest | (13 | ) | 92 | 102 | (256 | ) | (1,463 | ) | ||||||||
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| (496 | ) | 2,420 | (553 | ) | (903 | ) | (4,088 | ) | ||||||||
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(Loss)/earnings per share from continuing operations | ||||||||||||||||
Basic, (loss)/profit for the year attributable to ordinary equity holders of the parent | (0.28 | ) | (0.22 | ) | (0.52 | ) | 0.02 | (1.16 | ) | |||||||
Diluted, (loss)/profit for the year attributable to ordinary equity holders of the parent | (0.28 | ) | (0.22 | ) | (0.52 | ) | 0.02 | (1.16 | ) | |||||||
Earnings/(loss) per share from discontinued operations | ||||||||||||||||
Basic, (loss)/profit for the year attributable to ordinary equity holders of the parent | — | 1.55 | 0.15 | (0.39 | ) | (0.37 | ) | |||||||||
Diluted, (loss)/profit for the year attributable to ordinary equity holders of the parent | — | 1.55 | 0.15 | (0.39 | ) | (0.37 | ) | |||||||||
Weighted average number of common shares (millions) | 1,749 | 1,749 | 1,748 | 1,748 | 1,711 | |||||||||||
Dividends declared per share | 0.28 | 0.23 | 0.035 | 0.035 | 1.24 | |||||||||||
| | As of December 31, | |||||||||||||||
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| | 2017 | 2016 | 2015 | 2014 | 2013 | |||||||||||
| | (in millions of U.S. dollars) | |||||||||||||||
Consolidated balance sheet data: | ||||||||||||||||
Cash and cash equivalents | 1,304 | 2,942 | 3,614 | 6,342 | 4,454 | |||||||||||
Working capital (deficit)(1) | (732 | ) | (2,007 | ) | (156 | ) | (938 | ) | (2,815 | ) | ||||||
Property and equipment, net | 6,097 | 6,719 | 6,239 | 11,849 | 15,493 | |||||||||||
Intangible assets and goodwill | 6,562 | 6,953 | 6,447 | 18,002 | 24,546 | |||||||||||
Total assets | 19,521 | 21,193 | 33,854 | 41,042 | 49,874 | |||||||||||
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Total liabilities | 15,594 | 15,150 | 29,960 | 37,066 | 40,796 | |||||||||||
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Total equity | 3,927 | 6,043 | 3,894 | 3,976 | 9,078 | |||||||||||
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| 2014 | 2013 | 2012 | 2011 | 2010 | ||||||||||||||||
Adjusted EBITDA | 7,970 | 8,260 | 9,768 | 8,298 | 4,906 | |||||||||||||||
Reconciliation adjustments | — | — | — | (42 | ) | (50 | ) | |||||||||||||
Depreciation | (2,839 | ) | (3,050 | ) | (2,926 | ) | (2,726 | ) | (1,403 | ) | ||||||||||
Amortization | (1,479 | ) | (1,791 | ) | (2,080 | ) | (2,059 | ) | (610 | ) | ||||||||||
Impairment loss | (992 | ) | (2,973 | ) | (386 | ) | (527 | ) | — | |||||||||||
Loss on disposals of non-current assets | (74 | ) | (100 | ) | (205 | ) | (90 | ) | (49 | ) | ||||||||||
Finance costs | (2,026 | ) | (2,150 | ) | (2,029 | ) | (1,587 | ) | (536 | ) | ||||||||||
Finance income | 54 | 91 | 154 | 120 | 69 | |||||||||||||||
Other non-operating losses/(gains) | (152 | ) | (172 | ) | (75 | ) | (308 | ) | 35 | |||||||||||
Shares of (loss)/profit of associates and joint ventures accounted for using the equity method | (38 | ) | (159 | ) | (9 | ) | (35 | ) | 90 | |||||||||||
Net foreign exchange loss/(gain) | (605 | ) | 20 | 70 | (190 | ) | (5 | ) | ||||||||||||
Income tax expense | (722 | ) | (2,064 | ) | (906 | ) | (585 | ) | (574 | ) | ||||||||||
(Loss)/profit for the year | (903 | ) | (4,088 | ) | 1,376 | 269 | 1,873 | |||||||||||||
SELECTED OPERATING DATA
The following selected operating data as of and for the years ended December 31, 2017, 2016, 2015, 2014 2013, 2012, 2011 and 20102013 has been derived from internal company sources. The selected operating data set forth below should be read in conjunction with our audited consolidated financial statements and their related notes included elsewhereand "Item 5—Operating and Financial Review and Prospects."
| | As of and for December 31, | |||||||||||||||
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| | 2017 | 2016 | 2015 | 2014 | 2013 | |||||||||||
Selected company operating data(1): | ||||||||||||||||
Mobile customers in millions | ||||||||||||||||
Russia | 58.2 | 58.3 | 59.8 | 57.2 | 56.5 | |||||||||||
Pakistan | 53.6 | 51.6 | 36.2 | 38.5 | 37.6 | |||||||||||
Algeria | 15.0 | 16.3 | 17.0 | 17.7 | 17.6 | |||||||||||
Bangladesh | 31.3 | 30.4 | 32.3 | 30.8 | 28.8 | |||||||||||
Ukraine | 26.5 | 26.1 | 25.4 | 26.2 | 25.8 | |||||||||||
Uzbekistan | 9.7 | 9.5 | 9.9 | 10.6 | 10.5 | |||||||||||
Others(2) | 16.2 | 15.3 | 15.7 | 16.1 | 15.3 | |||||||||||
Total mobile customers(3) | 210.5 | 207.5 | 196.3 | 197.1 | 192.1 | |||||||||||
Mobile ARPU (in U.S. dollars)(4) | ||||||||||||||||
Russia | 5.5 | 4.6 | 5.1 | 8.6 | 10.6 | |||||||||||
Pakistan | 2.2 | 2.3 | 2.1 | 2.1 | 2.3 | |||||||||||
Algeria | 4.8 | 5.1 | 6.0 | 7.9 | 8.4 | |||||||||||
Bangladesh | 1.5 | 1.6 | 1.6 | 1.6 | 1.5 | |||||||||||
Ukraine | 1.8 | 1.7 | 1.8 | 3.1 | 4.7 | |||||||||||
Uzbekistan | 4.4 | 5.6 | 5.7 | 5.6 | 5.3 | |||||||||||
Mobile data customers in millions | ||||||||||||||||
Russia | 38.4 | 36.6 | 34.3 | 31.9 | 29.4 | |||||||||||
Pakistan | 28.5 | 25.1 | 16.8 | 14.4 | 10.9 | |||||||||||
Algeria | 7.2 | 7.0 | 4.1 | 1.3 | 0.5 | |||||||||||
Bangladesh | 16.9 | 14.9 | 14.0 | 12.2 | 9.8 | |||||||||||
Ukraine | 12.5 | 11.2 | 12.0 | 11.1 | 11.3 | |||||||||||
Uzbekistan | 5.0 | 4.6 | 4.7 | 5.4 | 5.4 | |||||||||||
Others(2) | 9.1 | 7.9 | 7.8 | 8.4 | 8.1 | |||||||||||
Total mobile data customers(3) | 117.6 | 107.3 | 93.7 | 84.7 | 75.4 | |||||||||||
Fixed-line broadband customers in millions | ||||||||||||||||
Russia | 2.2 | 2.2 | 2.2 | 2.3 | 2.3 | |||||||||||
Ukraine | 0.8 | 0.8 | 0.8 | 0.8 | — | |||||||||||
Others(2) | 0.3 | 0.3 | 0.4 | 0.2 | 0.3 | |||||||||||
Total broadband customers(3) | 3.3 | 3.3 | 3.4 | 3.3 | 2.6 | |||||||||||
| As of December 31, | ||||||||||||||||||||
| 2014 | 2013 | 2012 | 2011 | 2010 | ||||||||||||||||
Selected company operating data(1): | ||||||||||||||||||||
End of period mobile customers (in millions): | ||||||||||||||||||||
Russia | 57.2 | 56.5 | 56.1 | 57.2 | 52.0 | |||||||||||||||
Italy | 21.6 | 22.3 | 21.6 | 21.0 | — | |||||||||||||||
Algeria(4) | 18.4 | 17.6 | 16.7 | 16.2 | — | |||||||||||||||
Africa & Asia(5) | 71.6 | 69.4 | 64.9 | 59.9 | 0.7 | |||||||||||||||
Ukraine(4) | 26.2 | 25.8 | 25.1 | 23.2 | 24.2 | |||||||||||||||
CIS | 26.5 | 25.4 | 24.2 | 19.7 | 15.6 | |||||||||||||||
Total mobile customers | 221.6 | 216.9 | 208.6 | 197.2 | 92.5 | |||||||||||||||
Mobile MOU(2) | ||||||||||||||||||||
Russia | 304 | 291 | 276 | 243 | 219 | |||||||||||||||
Italy | 264 | 237 | 207 | 197 | — | |||||||||||||||
Algeria(4) | 194 | 216 | 274 | 289 | — | |||||||||||||||
Africa & Asia | ||||||||||||||||||||
Pakistan | 238 | 226 | 214 | 206 | — | |||||||||||||||
Bangladesh | 197 | 184 | 216 | 209 | — | |||||||||||||||
Laos | 103 | 106 | 97 | 233 | — | |||||||||||||||
Ukraine(4) | 511 | 501 | 513 | 483 | 383 | |||||||||||||||
CIS | ||||||||||||||||||||
Kazakhstan | 309 | 290 | 213 | 148 | 120 | |||||||||||||||
Uzbekistan | 523 | 471 | 474 | 425 | 386 | |||||||||||||||
Kyrgyzstan | 293 | 265 | 272 | 303 | 258 | |||||||||||||||
Armenia | 374 | 339 | 269 | 257 | 294 | |||||||||||||||
Tajikistan | 286 | 270 | 241 | 229 | 179 | |||||||||||||||
Georgia | 228 | 244 | 237 | 207 | 137 | |||||||||||||||
Mobile ARPU (2) | ||||||||||||||||||||
Russia | US$ | 8.6 | US$ | 10.6 | US$ | 10.8 | US$ | 11.0 | US$ | 10.8 | ||||||||||
Italy | US$ | 14.6 | US$ | 16.3 | US$ | 18.5 | US$ | 21.7 | — | |||||||||||
Algeria(4) | US$ | 7.7 | US$ | 8.4 | US$ | 9.0 | US$ | 9.8 | — | |||||||||||
Africa & Asia | ||||||||||||||||||||
Pakistan | US$ | 2.1 | US$ | 2.3 | US$ | 2.6 | US$ | 2.7 | — | |||||||||||
Bangladesh | US$ | 1.5 | US$ | 1.5 | US$ | 1.8 | US$ | 1.8 | — | |||||||||||
Laos | US$ | 5.3 | US$ | 6.0 | US$ | 5.6 | US$ | 5.1 | — | |||||||||||
Ukraine(4) | US$ | 3.1 | US$ | 4.7 | US$ | 5.2 | US$ | 5.2 | US$ | 4.8 | ||||||||||
CIS | ||||||||||||||||||||
Kazakhstan | US$ | 5.8 | US$ | 7.1 | US$ | 7.6 | US$ | 8.3 | US$ | 9.2 | ||||||||||
Uzbekistan | US$ | 5.6 | US$ | 5.3 | US$ | 4.6 | US$ | 4.1 | US$ | 4.1 | ||||||||||
Kyrgyzstan | US$ | 5.5 | US$ | 6.6 | US$ | 5.5 | US$ | 5.5 | US$ | 5.3 | ||||||||||
Armenia | US$ | 6.6 | US$ | 7.1 | US$ | 6.8 | US$ | 8.1 | US$ | 10.3 | ||||||||||
Tajikistan | US$ | 9.2 | US$ | 10.0 | US$ | 8.6 | US$ | 8.8 | US$ | 6.5 | ||||||||||
Georgia | US$ | 4.9 | US$ | 6.3 | US$ | 6.7 | US$ | 6.8 | US$ | 7.5 | ||||||||||
Annual churn (as a percentage) (2) Russia Italy Algeria(4) Africa & Asia Pakistan Bangladesh Laos Ukraine(4) CIS Kazakhstan Uzbekistan Kyrgyzstan Armenia Tajikistan Georgia End of period broadband customers, mobile and fixed (in millions): Russia Italy Algeria Africa & Asia Ukraine CIS (3) Total broadband customers As of December 31, 2014 2013 2012 2011 2010 60.1 63.9 63.2 62.8 50.8 31.4 36.6 35.2 28.3 — 23.4 31.6 29.5 23.4 — 26.0 23.0 25.2 29.5 — 21.6 22.3 25.2 18.5 — 94.6 102.6 141.0 258.0 — 25.1 35.3 29.8 28.9 29.5 50.5 48.6 55.8 47.4 43.5 48.1 53.5 55.1 59.7 54.2 65.7 65.6 66.1 52.3 61.9 43.9 62.6 83.9 87.6 67.6 77.1 77.9 72.7 67.4 82.8 69.7 74.0 79.1 70.1 94.1 5.9 5.4 5.0 4.6 3.3 12.3 10.5 7.8 6.6 — — — — — — — — — — — 0.8 0.8 0.6 0.4 0.2 14.1 13.7 12.3 9.5 6.7 33.1 30.3 25.6 12.3 3.7
Not required.
Not required.
The risks below relate to our company and our ADSs.American Depositary Shares ("ADSs"). Before purchasing our ADSs, you should carefully consider all of the information set forth in this Annual Report on Form 20-F and, in particular,including, but not limited to, these risks. If any
In addition to those risk factors, there may be additional risks and uncertainties of these risks actually occur, ourwhich management is not aware or focused on or that management deems immaterial. Our business, financial condition or results of operations or prospects could be harmed. In that case, thematerially adversely affected by any of these risks. The trading price of our ADSssecurities could decline due to any of these risks, and you couldmay lose all or part of your investment.
The risks and uncertainties below are not the only ones we face, but represent the risks that we believe are material. However, there may be additional risks that we currently consider not to be material or of which we are not currently aware, and these risks could have the effects set forth above.
Substantial leverageamounts of indebtedness and debt service obligations could materially decrease our cash flow, adversely affect our business and financial condition and prevent us from raising additional capital.
We have substantial amounts of indebtedness.indebtedness and debt service obligations. As of December 31, 2014,2017, the outstanding principal amount of our external debt for bonds, bank loans, bonds, equipment financing, and other loans from others amounted to approximately US$26.411.1 billion. Much of our indebtedness relates to the 2011 acquisition of 100% of Wind Telecom S.p.A. (“Wind Telecom”), or the Wind Telecom Transaction, and the subsequent refinancing of Wind Telecom entities’ debts. Since the Wind Telecom Transaction, we have also incurred additional external debt through bank loans, bonds and equipment financing. As a result, the leverage of the VimpelCom Group is substantial. For more information regarding our outstanding indebtedness and the outstanding indebtedness of Wind Telecom entities,debt agreements, see “Item"Item 5—Operating and Financial Review and Prospects—Liquidity and Capital Resources—Consolidated Cash Flow Summary—Financing Activities.”Activities."
Agreements under which we borrow funds contain obligations, includingwhich include covenants that impose on us certain operating and financial restrictions. Some of these covenants relate to our financial performance or financial condition, such as the levellevels or ratios of earnings, debt and assets and may have the effect of preventingprevent us or our subsidiaries from incurring additional debt. Failure to meetcomply with these obligationscovenants may result in oura default, which could increase the cost of securing additional capital, and lead to the acceleration of our loans andor result in the loss of any assets that secure the defaulted debts.debts or to which our creditors otherwise have recourse. Such a default and acceleration of the obligations under one or more of these agreements (including as a result of cross default and cross acceleration)cross-default or cross-acceleration) could have a material adverse effect on our business, financial condition, results of operations andor prospects, and in particular on our liquidity and our shareholders’shareholders' equity. In addition, covenants in our debt agreements could impair our liquidity and our ability to expand or finance our future operations. For a discussion of agreements under which we borrow funds, see “Item 5—Operating and Financial Review and Prospects—Liquidity and Capital Resources—Financing Activities.”Note 17 to our audited consolidated financial statements.
Aside from the risk of default, given our substantial leverageamounts of indebtedness and limits imposed by our debt obligations, our business could suffer significant negative consequences such as the need to dedicate a substantial portion of our cash flow from operations to payments on our debt, thereby reducing funds available for paying dividends, working capital, capital expenditures, acquisitions, joint ventures and other purposes necessary for us to maintain our competitive position and to maintain flexibility and resiliency in the face of general adverse economic and industry conditions.
Further, certain bank loans entered into byTable of Contents
Our strategic initiatives, including with respect to our subsidiary OJSC “Vimpel-Communications” contain clausesdigital agenda, may not be successfully implemented and the benefits we expect to achieve may not be realized.
We continue to transform our business with the aim of reinventing our operations across all markets in which we operate. This transformation involves re-engineering fundamentals, working to revitalize the business and implementing a new digital model. There can be no assurance that enableour strategy will be successfully implemented in every respect and will not cause changes in our operational efficiencies or structure. In addition, the lenderimplementation of our strategic priorities could result in increased costs, conflicts with significant stakeholders, business interruptions and difficulty in recruiting and retaining key personnel. A failure to unilaterally increase interest rates. Any such increase in interest rates under these facility agreements nowobtain the anticipated benefits of our performance transformation program, including revenue targets, cost optimization or a delay in the futureimplementation of our transformation programs, could increasesignificantly affect our business, financial condition, results of operations, cash flows or prospects.
As part of our initiative to implement a new digital model, we launched a new global personal internet platform in five markets in 2017 (the "VEON platform"). There can be no assurance that the VEON platform will generate the results we expect. Our success will depend on our ability to translate our experience and expertise with existing business models to these markets and overcoming any new or unforeseen obstacles, addressing legal and regulatory concerns previously not applicable to us, protecting our intellectual property rights, generating and sustaining user engagement and monetizing our new digital products. As a result of these challenges, there is a possibility that the VEON platform and our efforts to become a leading digital services provider will not be successful.
We are also implementing various other initiatives to technologically and operationally modernize our core telecommunications business, including: developing new IT capabilities, self-care capacities, billing systems, customer relationship management systems, enterprise resource management systems, human capital management systems and enterprise performance management systems; implementing a "mobile first" operational model; and reducing and simplifying our IT cost base. There can be no assurance that this new strategy will generate the results we expect. We may experience implementation issues due to a lack of borrowing in Russia,coordination or cooperation with our operating companies or third parties or otherwise encounter unforeseen issues, such as technological limitations, regulatory constraints or lack of customer engagement, that could frustrate our expectations regarding cost-optimization and process redesign or otherwise delay execution of these initiatives. As a result, our strategy to modernize our technological and digital business models may not be successful and our ambition to become an innovative telecommunications operator may not be achieved, which could have a negative effect onadversely affect our business. For more information on these bank loans, see “Item 5 Operating and Financial Review and Prospects—Liquidity and Capital Resources—“Financing Activities”.business, financial condition, results of operations, cash flows or prospects.
We may not be able to raise additional capital.capital, or we may only be able to raise additional capital at significantly increased costs.
We may need to raise additional capital in the future, including through debt financing. If we incur additional indebtedness, the related risks of leverage that we now face related to our indebtedness and debt service obligations could increase. Specifically, we may not be able to generate enough cash to pay the principal, interest and other amounts due under our indebtedness. In addition,indebtedness or we may not be able to borrow money within the local or international capital markets on acceptable terms, or at all. TheWe may also be impacted by conditions in local or international markets that make it difficult to raise capital or refinance existing debt.
Our ability to raise additional capital may also be restricted by covenants in our financing agreements and our ability to raise additional capital or the cost of raising additional capital may be affected by any downgrade of our credit ratings, including for reasons outside our control, which may materially harm our business, financial condition, results of operations and prospects. In addition, the sanctions imposed by the United States, the European Union, and other countries in connection with
developments in Ukraine during 2014Russia and 2015,Ukraine, and additional sanctions which may be imposed in the
future, may also negatively affect our ability to raise external financing, particularly if the sanctions are broadened. Our ability to raise additional capital may also be affected by any downgradeFor more information on the sanctions imposed against Russia and Ukraine, see "Exhibit 99.2—Regulation of our credit ratings, even for reasons outside our control, which may harm our business, financial condition, results of operations and prospects.Telecommunications."
If we are unable to raise additional capital or if the cost of raising additional capital significantly increases, we may be unable to make necessary or desired capital expenditures, to take advantage of investment opportunities, to refinance existing indebtedness or to meet unexpected financial requirements, and our growth strategy and liquidity may be negatively affected. This could cause us to be unable to repay indebtedness as it comes due, to delay or abandon anticipated expenditures and investments or otherwise limit operations, which could materially harm our business, financial condition, results of operations andor prospects.
We are exposed to foreign currency exchange loss and currency fluctuation and convertibilitytranslation risks.
A significant amount of our costs, expenditures and liabilities are denominated in U.S. dollars, Russian rubles and Euros,euro, including capital expenditures and borrowings, while a significant amountproportion of our revenue is denominated in currencies other than the U.S. dollar, the Russian ruble and Euro.the euro. Thus, declining values of local currencies against the U.S. dollar, the Russian ruble or the Euroeuro could make it more difficult for us to repay or refinance our debt, purchase equipment or services denominated in U.S. dollar, Russian ruble or Euro-denominated debt or purchase equipmenteuro. For example, the values of the Russian, Algerian, Ukrainian, Uzbekistani, Pakistani and services. The value of Russian and UkrainianKazakh currencies for example, have declined significantlyexperienced significant volatility in recent years in response to certain political and economic issues, since December 31, 2013, and may continue to decline. The significant depreciation of the Russian ruble against theWhile our total operating revenue in U.S. dollar terms was favorably impacted in 2014 in particular negatively impacted our results of operations and resulted in a2017 from foreign currency exchange loss in 2014. In addition, the devaluation of the Ukrainian hryvnia negatively impacted revenues in our Ukraine segmenttransactions and our results of operations in 2014, and the National Bank of Ukraine’s decision in February 2015 to suspend its interventions to support the Ukrainian hryvnia has resulted in further devaluation in 2015. Currencytranslations, future currency fluctuations and volatility may result in losses or otherwise negatively impact our results of operations and result in foreign currency transaction and translation losses in the future. Changesoperations. In addition, changes in exchange rates could also impact our ability to comply with covenants under our debt agreements. For more information about foreign currency translation, see "Item 5—Operating and Financial Review and Prospects—Factors Affecting Comparability of Financial Position and Results of Operations—Foreign Currency Translation," "Item 11—Quantitative and Qualitative Disclosures About Market Risk" and Notes 4 and 17 to our audited consolidated financial statements.
Exchange rates may fluctuate if a government takes legislative or regulatory action with respect to its currency. For example, in 2017, the government of Uzbekistan announced the liberalization of its currency exchange rules and the resetting of the official exchange rate at 8,100 Uzbek som per U.S. dollar, which represented nearly a halving of the value of the Uzbek som to the U.S. dollar. The new official exchange rate has directly impacted our results by negative US$16 million, recognized as a net foreign exchange loss, and a movement in foreign currency translation reserve of negative US$420 million, recognized in our statement of other comprehensive income. Such exchange rate risks could harm our business, financial condition, results of operations andor prospects. We cannot ensure that weour existing or future hedging strategies will be able to effectivelysufficiently hedge against these risks.
In addition, exchange controls The countries in which we operate have experienced periods of high levels of inflation, including certain cases of hyperinflation. Our profit margins could be harmed if we are unable to sufficiently increase our prices to offset any significant future increase in the inflation rate, which may be difficult with our mass market customers and currency restrictionsour price sensitive customer base. Inflationary pressure in any of our geographic regionsthe countries where we have operations could materially harm our business, financial condition, results of operations, andcash flows or prospects. For example, the official currency in Uzbekistan is not convertible outside Uzbekistan due to local government or banking regulations, delays and restrictions on exchange rates. In addition, currency restrictions have made it difficult to acquire equipment produced outside of Uzbekistan for use in building and maintaining the company’s telecommunications network. We have also faced currency restrictions in some of our other countries of operation, including Algeria and Bangladesh. For more information about risks related to currency exchange rate fluctuations, see “Item 11—Quantitative and Qualitative Disclosures About Market Risk” and Notes 5 and 17 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 20-F.
"We may incur unexpected liabilities and may not realize anticipated benefits from acquisitions.
From time to time, we engage in acquisitions. Their outcome and effects may differ materially from our expectations based on factors we cannot predict:
the acquired companies’ compliance with telecommunications licenses and permissions, compliance with laws, regulations and contractual obligations, ability to obtain and maintain favorable interconnect terms, frequencies and numbering capacity and ability to protect their intellectual property;
unforeseen liabilities or obligations incurred pursuant to the acquisitions;
our ability to realize expected synergies and integrate acquired business operations while maintaining effective relationships with customers, management and employees;
risks that different geographic regions present, such as currency exchange risks, developments in competition and regulatory, political, economic and social developments; and
challenges brought by third parties.
For information about our acquisitions, please see “ItemItem 5—Operating and Financial Review and Prospects—LiquidityFactors Affecting Comparability of Financial Position and Capital Resources—Investing Activities.”
In addition, we may not be able to divest someResults of our activities as planned, and the divestitures we do carry out could negatively impact our business.Operations—Inflation."
As a holding company, VimpelComVEON Ltd. depends on the performance of its subsidiaries.subsidiaries and their ability to pay dividends, and may therefore be affected by changes in exchange controls and currency restrictions in the countries in which its subsidiaries operate.
VimpelCom VEON Ltd. is a holding company and does not conduct any revenue-generating business operations of its own. Its principal assets are the direct and indirect equity interests it owns in its operating subsidiaries. It is dependent uponsubsidiaries, and thus VEON Ltd. depends on cash dividends, distributions, loans or other transfers it receivesreceived from its subsidiaries to make dividend payments to its shareholders, (includingincluding holders of ADSs),ADSs, to repay debts, and to meet its other obligations. The ability of VimpelCom’sits subsidiaries to pay dividends and make payments or loansother transfers to VimpelComVEON Ltd. depends on the success of their businesses and is not guaranteed. Although VimpelCom has a global strategy set by leadership, management at each operation is responsible for executing many aspects of that strategy, and it is not certain local management will be able to execute that strategy effectively.
VimpelCom’s VEON Ltd.'s subsidiaries are separate and distinct legal entities. Any right that VimpelComit has to receive any assets of, or distributions from, any subsidiary upon its bankruptcy, dissolution, liquidation or reorganization, or to realize proceeds from the sale of the assets of any subsidiary, will be junior to the claims of that subsidiary’ssubsidiary's creditors, including trade creditors.
The ability of VimpelCom’s subsidiaries to pay dividends and make payments or loans to VimpelCom, and to guarantee VimpelCom’s debt, will depend on their operating results and may be restricted by, among other things, applicable covenants in debt agreements and corporate, tax and other laws and regulations. These covenants, laws and regulations include restrictions on dividends, limitations on repatriation of earnings, monetary transfer restrictions and foreign currency exchange restrictions in certain agreements and/or certain jurisdictions in which VimpelCom’s subsidiaries operate. For example, VimpelCom’s subsidiaries operating under WIND Italy are restricted from making certain payments to VimpelCom by existing covenants of the Wind Telecom Group. For more detail on the WIND Italy financings, see “Item 5—Operating and Financial Review and Prospects—Liquidity and Capital Resources—Financing Activities.” Furthermore, our ability to withdraw funds and dividends from our subsidiaries and operating companies may depend on the consent of our strategic partners where applicable. See “—Our strategic partnerships
The ability of VEON Ltd.'s subsidiaries to pay dividends and relationships carry inherent business risks”make payments or loans to VEON Ltd., and “Itemto guarantee VEON Ltd.'s debt, will depend on their operating results and may be restricted by applicable covenants in debt agreements and corporate, tax and other laws and regulations, including restrictions on dividends, limitations on repatriation of cash and earnings and on the making of loans and repayment of debts, monetary transfer restrictions, and foreign currency exchange and related restrictions in certain agreements or certain jurisdictions in which VEON Ltd.'s subsidiaries operate or both. For more information on the legal and regulatory risks associated with our markets, see "—Legal and Regulatory Risks—We operate in uncertain judicial and regulatory environments."
For more information on the restrictions on dividend payments, see "Item 5—Operating and Financial Review and Prospects—Recent DevelopmentsFactors Affecting Comparability of Financial Position and Trends—Algeria TransactionResults of Operations—Foreign Currency Controls and Settlement.”Currency Restrictions" and "—Risks Related to Our Markets—The banking systems in many countries in which we operate remain underdeveloped, there are a limited number of creditworthy banks in these countries with which we can conduct business and currency control requirements restrict activities in certain markets in which we have operations."
Our majority stake in an Egyptian public company may expose us to legal and political risk and reputational harm.
We have a 51.9% owned subsidiaryincurred and are continuing to incur costs and related management oversight obligations in Egypt, Global Telecom Holding S.A.E. (“GTH”), thatconnection with our obligations under the DPA, the SEC Judgment and the Dutch Settlement Agreement, which may be significant.
VEON Ltd. is a public company listed on the Egyptian Stock Exchange and London Stock Exchange and is therefore subject to corresponding laws and regulations, including laws and regulationsa deferred prosecution agreement ("DPA") with the DOJ, a judgment entered by the United States District Court for the protectionSouthern District of minority shareholder rights. GTH isNew York related to an agreement with the holding company forSEC (the "SEC Judgment") and a number of our assets in Africa and Asia, including Algeria, Bangladesh and Pakistan. GTH is exposed tosettlement agreement with the risk of unpredictable and adverse government action and severe delays in obtaining necessary government approvals stemming from unrest in Egypt during recent years. Furthermore, GTH may be subjected to significant tax claims under existing or new Egyptian tax law and this could expose GTH to increased tax liability.OM (the "Dutch Settlement Agreement"). For more information, on tax claims of the Egyptian authorities please see Note 2622 to our audited consolidated financial statementsstatements. In conjunction with the DPA and pursuant to the SEC Judgment, VEON Ltd. is required to retain, at its own expense, an independent compliance monitor. The independent compliance monitor was appointed in 2016. Pursuant to the DPA and the SEC Judgment, the term of the monitorship will continue until 2019, but may be terminated early or extended depending on certain circumstances, as ultimately determined and approved by the DOJ and the SEC. The monitor will assess and monitor our compliance with the terms of the DPA and the SEC Judgment by evaluating factors such as our corporate compliance program, internal accounting controls, recordkeeping and financial reporting policies and procedures. The monitor may recommend changes to our compliance program, policies, procedures, and internal accounting controls that we must adopt unless they are
unduly burdensome or otherwise inadvisable, in which case we may propose alternatives, which the DOJ and the SEC may or may not accept.
VEON Ltd. continues to incur costs in connection with compliance with the DPA, the SEC Judgment and the Dutch Settlement Agreement, including the ongoing obligations relating to the monitorship, costs of legal representation, our obligations to cooperate with the agencies regarding their investigations of other parties and the implementation of changes, if any, to its compliance program, internal controls, policies and procedures required by the monitor. We cannot fully predict the costs that we will incur associated with these matters. Such costs could be significant.
Under the DPA and pursuant to the SEC Judgment, VEON Ltd. has obligations to implement and maintain, a compliance and ethics program designed to prevent and detect violations of the U.S. Foreign Corrupt Practices Act (the "FCPA") and other applicable anti-corruption laws throughout its operations. Further, VEON Ltd. must continue to review its existing internal accounting controls, policies, and procedures regarding compliance with the FCPA and other applicable anti-corruption laws. In connection with this review, we have adopted new or modified existing internal controls, policies, and procedures regarding compliance with the FCPA and other applicable anti-corruption laws. However, the implementation of such measures is ongoing, may continue to take significant management time and resources and remains subject to ongoing internal and external review.
We could be subject to criminal prosecution or civil sanction if we breach the DPA with the DOJ, the SEC Judgment or the Dutch Settlement Agreement, and we may face other potentially negative consequences relating to the investigations by, and agreements with, the DOJ, SEC and OM, including additional investigations and litigation.
Failure to comply with the terms of the DPA, whether such failure relates to alleged further improper payments, internal controls failures, or other matters of non-compliance, could result in criminal prosecution by the DOJ, including, but not limited to, for the charged conspiracy to violate the anti-bribery and the books and records provisions of the FCPA and violation of the internal controls provisions of the FCPA that were included elsewhere in the information that was filed in connection with the DPA. Under such circumstances, the DOJ would be permitted to rely upon the admissions we made in the DPA and would benefit from our waiver of certain procedural and evidentiary defenses.
Pursuant to the SEC Judgment, VEON Ltd. is permanently enjoined from committing or aiding and abetting any future violations of the anti-fraud, corrupt payments, books and records, reporting and internal control provisions of the federal securities laws and related SEC rules. Failure to comply with this Annual Reportinjunction could result in the imposition of civil or criminal penalties, a new SEC enforcement action or both.
Any criminal prosecution by the DOJ as a result of a breach of the DPA or civil or criminal penalties imposed as a result of noncompliance with the SEC Judgment could subject us to penalties and other costs, as well as third party and shareholder actions, that could have a material adverse effect on Form 20-F.
We may also face other potentially negative consequences relating to the investigations by and agreements with the DOJ, SEC and OM. The DPA, the SEC Judgment or the Dutch Settlement Agreement do not prevent these authorities from carrying out certain additional investigations with respect to the facts not covered in the agreements or in other jurisdictions, or do not prevent authorities in other jurisdictions from carrying out investigations into, or taking actions with respect to the issuance or renewal of our licenses or otherwise in relation to, these or other matters. Furthermore, the Norwegian Government has held parliamentary hearings concerning the investigations in the past, but further hearings are not scheduled or currently anticipated.
Similarly, the agreements do not foreclose potential third party or additional shareholder litigation related to these matters. For example, a consolidated class action lawsuit has been filed in a U.S. district court against VEON Ltd. in relation to our prior disclosure regarding our operations in Uzbekistan, and relies upon the investigations by the DOJ, SEC and OM. We may incur significant costs in connection with this or future lawsuits. Any collateral investigations, litigation or other government or third party actions resulting from these or other matters could have a material adverse effect on our business, financial condition, results of operations, cash flows or prospects.
In addition, any ongoing media and governmental interest in the prior investigations, the agreements and lawsuits, and any announced investigations and/or arrests of our former executive officers, could affect the perception of us and result in reputational harm to our company.
Efforts to merge with or acquire other companies or businesses, divest our companies, businesses or assets or to otherwise form strategic partnerships with third parties may divert management attention and resources away from our business operations and success with such efforts may subject us to additional liabilities or experience integration problems.
We seek from time to time to merge with or acquire other companies or businesses, divest our companies or businesses or to form strategic partnerships through the formation of joint ventures or otherwise, for various strategic reasons, including to: outsource the management of our telecommunications tower sites; acquire more frequency spectrum, new technologies and service capabilities; network share; add new customers; increase market penetration; or expand into new markets. Our ability to successfully grow through acquisitions or strategic partnerships depends upon our ability to identify, negotiate, complete and integrate suitable companies and to obtain any necessary financing and the prior approval of any relevant regulatory bodies or courts. These efforts could divert the attention of our management and key personnel from our core business operations. As a result of any such merger, acquisition or strategic partnerships or failure of any anticipated merger, acquisition or strategic partnership to materialize (including any such failure caused by regulatory or third-party challenges), we may also experience:
In addition, a merger, acquisition or strategic partnership could materially impair our operating results by causing us to incur debt or requiring us to amortize merger or acquisition expenses and merged or acquired assets. We may not be able to assess ongoing profitability and identify all actual or potential liabilities or issues of a business prior to an acquisition, merger or strategic partnership. If we merge with, acquire or form strategic partnerships with businesses or assets, which result in assuming unforeseen liabilities or which we have not obtained contractual protections or for which protection is not available, our business, financial condition, results of operations, cash flows or prospects could be adversely affected. As we investigate industry consolidation, our risks may increase. Our integration and consolidation of such businesses may also lead to changes in our operational efficiencies or structure. For more information about our acquisitions, see Note 5 to our audited consolidated financial statements.
Further, we may seek to divest some of our businesses, including further divestitures of our tower businesses, but such divestitures may take longer than anticipated or may not happen at all. For example, we have agreed in principle to the sales of our Pakistan tower business and our Laos operations, but the closing of each of these transactions is subject to certain conditions. If these or other divestitures do not occur or closing takes longer than expected, this may result in less cash proceeds to the group and continued operations of non-core businesses that divert the attention of our management.
Integration of the Warid and Mobilink (now Jazz) brands is subject to significant uncertainties and risks.
Although the Pakistan Merger was completed in 2016, there can be no assurance that we will not experience difficulties in further integrating the operations of Warid and Mobilink brands (now jointly operating under the Jazz brand), that we will fail to realize further synergies, that the integration process will not negatively affect our customer base, revenue or market share or that we will not incur higher than expected costs. In addition, the integration of the businesses in Pakistan continues to require substantial time and focus from management, which could adversely affect their ability to operate the businesses.
The Italy Joint Venture is subject to integration and performance risks.
A portion of our operations is conducted through the Italy Joint Venture. Although the transaction closed on November 5, 2016, the Italy Joint Venture is subject to ongoing integration risks, which may affect its business or results of operations. In addition, a failure by the Italy Joint Venture to perform as anticipated or realize its business plans, due to intense competition, difficulties arising from its substantial indebtedness or any other factor, could in turn have a material adverse effect on our financial condition and results of operations. For example, as one of the structural remedies for the regulatory approval of the Italy Joint Venture, the European Commission required the entrance of a new competitor, Iliad, into the Italian market. The business plans and results of operations of the Italy Joint Venture could be adversely affected by the entrance of Iliad in the market, which is expected to occur within the first half of 2018.
Our strategic partnerships and relationships carry inherent business risks.
We participate in strategic partnerships and joint ventures in a number of countries, including Russia (Euroset)in Pakistan (PMCL), Kazakhstan (KaR-Tel LLP and TNS-Plus 2Day Telecom, KAZEUROMOBILE LLP), Algeria (Djezzy)(OTA), Uzbekistan (Buzton), Kyrgyzstan (Sky Mobile Terra)LLC, Terra LLC), Georgia (Mobitel)(Mobitel LLC), Tajikistan (Tacom),(Tacom LLC) and Laos (VimpelCom Lao Co., Ltd). We also own 50% of the Italy Joint Venture. In addition, in Algeria and Zimbabwe (Telecel).
Laos, our local partners are either government institutions or directly related to the local government, which could increase our exposure to the risks described in "—Risks Related to Our Markets."
We do not always have a controlling stake in our affiliated companies and even when we do, our actions with respect to these affiliated companies may be restricted to some degree by shareholdersshareholders' agreements entered into with our strategic partners. OurIf disagreements develop with our partners, or any existing disagreements are exacerbated, our business, financial condition, results of operations, andcash flows or prospects may be materially harmed if disagreements develop with our partners.harmed. Our ability to withdraw funds and dividends from these entities may depend on the consent of partners. Agreements with some of these partners include change of control provisions, put and call options and similar provisions, which could give other participants in these investments the ability to purchase our interests, compel us to purchase their interests or enact other penalties. If
For example, in respect of the Italy Joint Venture, with effect from November 5, 2019, each of VEON and our joint venture partner can serve a notice on the other offering to buy the other's shares at a stated price. The price is determined by the party serving the notice, and if the offer is rejected the rejecting shareholder is deemed to have agreed to buy the shares of the shareholder issuing the notice at the stated price. In Algeria, our partner can acquire the shares held by GTH at fair market value in various circumstances (including, generally, change in VEON's indirect control of OTA, insolvency of GTH or VEON or material breach of the shareholders' agreement by GTH), as well as under call option arrangements exercisable solely at its discretion between October 1, 2021 and December 31, 2021. Concurrently, GTH has a right to require our partner in Algeria to acquire its shares in various circumstances (including, generally, change of control of the Algerian National Investment Fund, material breach of the shareholders' agreement by the Algerian National Investment Fund, loss of VEON's ability to consolidate OTA, the taking of certain actions in Algeria against GTH or OTA, failure by OTA to pay a minimum dividend or imposition of certain tax assessments), as well as under put option arrangements exercisable solely at its discretion between July 1, 2021 and September 30, 2021. In Pakistan, we can potentially acquire the shares held by our partner in PMCL at fair market value with effect from July 1, 2020 (our partner has no corresponding right to acquire our shares).
In addition, if one of our strategic partners becomes subject to investigation, sanctions or liability, VimpelComwe might be adversely affected. Furthermore, strategic partnerships in emerging markets are accompanied by risks inherent to those markets, such as an increased possibility of a partner defaulting on obligations, or losing a partner with important insights in that region. In addition,
If any of the above circumstances occur, or we otherwise determine that a partnership or joint venture is no longer yielding the benefits we expect to achieve, we may decide to unwind such initiative, which may result in Algeriasignificant transaction costs or an inferior outcome than was expected when we entered into such partnership or joint venture. For example, in July 2017, PJSC Vimpel-Communications ("PJSC VimpelCom"), a subsidiary of VEON Ltd., and Laos our local partners are either government institutions or directly relatedPJSC MegaFon ("MegaFon") entered into an agreement to end their retail joint venture, Euroset Holding N.V. ("Euroset"). The transaction closed on February 22, 2018. Pursuant to the local governmentagreement, MegaFon acquired PJSC VimpelCom's 50% interest in Euroset and PJSC VimpelCom paid RUB 1.2 billion (US$21 million as of December 31, 2017) to acquire rights to 50% of Euroset's approximately 4,000 retail stores in Russia. For more information, see "Item 7—Major Shareholders and Related Party Transactions—B. Related Party Transactions—Joint Ventures and Associates—Euroset."
A disposition by our largest shareholder of its stake in VEON Ltd. or a change in control of VEON Ltd. could harm our business.
We derive benefits and resources from the participation of our largest shareholder, L1T VIP Holdings S.à r.l. ("LetterOne"), in our company such as industry expertise, management oversight and business acumen. Historically, we derived the same benefits from Telenor ASA ("Telenor"), which, in
September 2017, following completion of its share sale offering, indicated that the transaction would be the final divestment of Telenor's VEON Ltd. ADSs, as Telenor expects to use the balance of its remaining ADSs to exchange and/or redeem its exchangeable bond. See "Item 7—Major Shareholders and Related Party Transactions—A. Major Shareholders—Telenor Divestment." Should LetterOne undertake a divestment of its stake, we would be deprived of those benefits, which could increase our exposure to the risks described in “Risks Related to Our Markets—Investors in emerging markets, where most of our operations are located, are subject to greater risks than investors in more developed markets, including significant political, legal and economic risks and risks related to fluctuations in the global economy”.
We are subject to investigations by the SEC, DOJ and OM, and are conducting an internal investigation. We are unable to predict the duration, scope or results of these investigations or their impact on us.
As previously disclosed, the SEC, DOJ and OM are conducting investigations related to VimpelCom, which have been focused primarily on our prior dealings with Takilant Ltd. (“Takilant”).
In June 2007, Takilant purchased from us a 7% interest inharm our business, in Uzbekistan for US$20.0 million and entered into a shareholders agreement with us. In September 2009, Takilant exercised its option to put its 7% interest to us for US$57.5 million, an amount specified in the shareholders agreement. In addition, we had agreements with Takilant relating to the acquisition of frequency spectrum (including with respect to 3G and LTE) and channels in Uzbekistan pursuant to which we paid Takilant an aggregate of US$57.0 million.
It has also been reported in the press that Takilant is currently being investigated in Sweden and Switzerland on allegations that it and certain persons associated with it have committed acts of bribery and money-laundering connected with their activities in Uzbekistan, and also that Takilant is being investigated in the Netherlands and perhaps other jurisdictions. These investigations may, in part, involve us.
As a result of concerns arising from press reports regarding Takilant, we commenced a review with respect to our operations in Uzbekistan, including our relations with Takilant, and in 2013 we retained external counsel with expertise relating to the U.S. Foreign Corrupt Practices Act (“FCPA”) and other anti-corruption laws and regulations to conduct such review.
Following notice of the investigations by the SEC, DOJ and OM, we established a Special Committee of the Supervisory Board in March 2014 to oversee the internal investigation being conducted by the company’s external counsel and our response to the inquiries by various authorities. The Special Committee consists of directors who qualify as independent for purposes of Rule 10A-3 under the Exchange Act. The investigation being conducted by the company’s external counsel has been focused primarily on our Uzbekistan operations, including our relations with Takilant, and whether there was any conduct in our operations in Uzbekistan that may have violated the anti-bribery provisions of the FCPA, the FCPA’s books and records and internal controls provisions, applicable local laws and/or our own internal policies. The investigation is also reviewing our operations in additional countries.
We expect to continue incurring costs related to the investigations, primarily professional fees and expenses, which may be significant. These costs relate to responding to requests for information, testimony and other information in connection with the investigations and in conducting the internal investigation, and we cannot predict at this time the ultimate amount of all such costs. These matters may require the involvement of certain members of our senior management that could impinge on the time they have available to devote to other matters relating to the business. We may also see ongoing media and governmental interest in these matters that could impact the perception of us and result in reputational harm to our company. The investigations have received media attention in a number of jurisdictions, and parliamentary hearings held by the Norwegian Government have addressed the investigations.
The SEC, DOJ and Dutch investigations, as well as our own investigations, are continuing, and we have cooperated, and continue to cooperate, with the authorities in these investigations. We are also exploring the prospect of resolving the company’s potential liabilities arising from the facts established in the investigations. We are unable to predict the duration, scope or results of the ongoing investigations or how the results of these investigations or any resolutions may impact our business,financial condition, results of operations, cash flows or prospects.
In addition, our financing agreements generally have "change of control" provisions that may require us to make a prepayment if a person or group of persons (with limited exclusions) acquire beneficial or legal ownership of or control over more than 50.0% of our share capital. If such a change of control provision is triggered and we fail to agree with lenders on the necessary amendments to the loan documentation and then fail to make any required prepayment, it could trigger cross-default or cross-acceleration provisions of our other debt agreements, which could lead to our obligations being declared immediately due and payable. This could harm our business, financial condition, results of operations, cash flows or the assessment of our internal controls. Further, there can be no assurance that such investigations will not be broader in scope than they currently appear, or that new investigations will not be commenced in these or other jurisdictions, or that there will not be litigation commenced against us.
One or more enforcement actions could be instituted in respect of the matters that are the subject of some or all of the investigations. The DOJ and SEC have a broad range of civil and criminal sanctions under the FCPA and other laws and regulations including, but not limited to, judgments, settlements, injunctive relief, debarment or other relief, disgorgement, fines, penalties, modifications to business practices, including the termination or modification of existing business relationships, the imposition of compliance programs and the retention of a monitor to oversee compliance with the FCPA, and criminal convictions and/or penalties. The OM and enforcement authorities in other jurisdictions also have a range of sanctions under the relevant laws and regulations. There can be no assurance that any investigation will not conclude that a violation of applicable law has occurred. The imposition of any of these sanctions or remedial measures could have a material adverse effect on our business or financial condition.
For more information on the risks associated with anti-corruption laws, see “—Legal and Regulatory Risks—We are subject to anti-corruption laws” below.prospects.
Our strategic shareholdersshareholder may pursue diverse development strategies, and thiswhich may hinder our ability to expand and/or compete in such regions and may lead to a deterioration in the relationship among our strategic shareholders.certain regions.
Our company’s LetterOne is VEON Ltd.'s largest shareholders, LetterOne Holdings S.A. (“LetterOne”) and Telenor ASA (“Telenor”), and their respective affiliates,shareholder, beneficially own, in the aggregate,owning approximately 90.9%47.9% of our issued and outstanding shares as of March 1, 2018. In addition, LetterOne is the holder of the depositary receipts issued by Stichting Administratiekantoor Mobile Telecommunications Investor ("Stichting"), which represents an additional 8.3% of VEON Ltd.'s issue and outstanding shares as of March 1, 2018, and is therefore entitled to the economic benefits (dividend payments, other distributions and sale proceeds) of such depositary receipts and, indirectly, of the common shares represented by the depositary receipts. Stichting, however, has the power to vote and direct the voting shares.of, and the power to dispose and direct the disposition of, the ADSs, in its sole discretion, in accordance with the Conditions of Administration and Stichting's articles of association. For more information, see "Item 7—Major Shareholders and Related Party Transactions—A. Major Shareholders."
As a result, these shareholders, if acting together, have theLetterOne has some ability to determineinfluence the outcome of matters submitted to our shareholders for approval. These two shareholders have sufficientapproval and, through our cumulative voting rightsprocedures, the election of members to jointly elect a majority of our supervisory board andor, alternatively, could alternatively enter into a shareholdersshareholders' or similar agreement impacting the composition of our supervisory board. A new supervisory board could take corporate actions or block corporate decisions by VimpelComVEON Ltd. with respect to capital structure, financings, dispositions, and acquisitions and commercial transactions that might not be in the best interest of the minority shareholders or other security holders.
In the past, At various times our strategic shareholders, including Telenor, have had different strategies from us and from one another and have engaged in litigation against one another and our company with respect to disagreements over strategy. In addition,We understand that LetterOne has an indirect minority interest in Pakistan and Bangladeshcompanies that compete with our subsidiaries directly compete with subsidiaries of Telenorin Ukraine, Kazakhstan and itGeorgia. It is possible that we will compete with Telenor and/or LetterOne in other markets in the future.
We may not be able to detect and prevent fraud, other misconduct or unethical actions by our employees, joint venture partners, representatives, agents, suppliers, customers or other third parties.
We cannot assure youmay be exposed to fraud or other misconduct committed by our employees, joint venture partners, representatives, agents, suppliers, customers or other third parties that could subject us to litigation, financial losses and sanctions imposed by governmental authorities, as well as affect our reputation. Such misconduct could include misappropriating funds, conducting transactions that are outside of authorized limits, engaging in misrepresentation or fraudulent, deceptive or otherwise improper activities, including in return for any type of benefits or gains or otherwise not complying with applicable laws or our internal policies and procedures. The risk of liability for fraud and other misconduct could increase as we expand certain areas of our business, such as MFS, which requires us to hold customer funds in e-accounts.
We regularly review and update our policies and procedures and internal controls which are primarily designed to provide reasonable assurance that we, our employees, representatives, agents, suppliers and other third parties comply with applicable law and our internal policies. In addition, we conduct, as appropriate, training of our employees and assessments of, and due diligence on, our representatives, agents, suppliers, customers and other third parties. However, there can be no assurance that such policies, procedures, internal controls, training and diligence will work effectively at all times or protect us against liability for actions of our employees, representatives, agents, suppliers, customers or other third parties.
Furthermore, our reputation may be adversely impacted from any association, action or inaction which is perceived by stakeholders or customers to be inappropriate or unethical and not in keeping with the group's stated purpose and values. This reputational risk may arise in many different ways, including:
Our MFS and DFS offerings are complex and increase our exposure to fraud, money laundering and reputational risk.
The provision of MFS and DFS is complex and involves regulatory and compliance requirements. It may involve cash handling, exposing us to risk that our relationship with LetterOnecustomers engage in fraudulent activities, money laundering or terrorism financing, which in turn could result in potential liability and Telenorreputational damage. Any violation of anti-money laundering laws or LetterOne’s and Telenor’s relationship with one another will not deteriorate as a result of differing or competing business strategies, which could harm our business.
For more informationregulations on our largest shareholders, see “Item 7—Major Shareholders and Related Party Transactions—A. Major Shareholders” below.
Litigation and disputes amongMFS or DFS networks could have a material adverse effect on our two largest shareholders and us could materially affect our business.
In the past, our two largest shareholders have been involved in disputes and litigation regarding our group companies against one another and our company. Further disputes among our two largest shareholders and us could seriously harm our business, financial condition and results of operations.operation. The regulations governing these services are new and evolving and, as they develop, regulations could become more onerous, impose additional reporting or controls or limit our flexibility to design new products, which may limit our ability to provide our services efficiently or at all.
In addition, MFS and DFS each requires us to process sensitive personal consumer data (including, in certain instances, consumer names, addresses, credit and debit card numbers and bank account details) as part of our business, and therefore we must comply with strict data protection and privacy laws. For more information on risks associated with possible unauthorized disclosure of such personal data, see "—We are subject to an increasing amount of data privacy laws and regulations that may require us to incur substantial costs and implement certain changes to our largest shareholders, see “Item 7—Major Shareholdersbusiness practices that may adversely affect our results of operations."
Our MFS and Related Party Transactions—A. Major Shareholders” below.DFS business requires us to maintain a certain level of systems availability, and failure to maintain agreed levels of service availability or to reliably process our customers' transactions due to performance, administrative or technical issues, system interruptions or other failures could result in a loss of revenues, violation of certain local banking regulations, payment of contractual or
consequential damages, reputational harm, additional operating expenses in order to remediate any failures, and exposure to other losses and liabilities.
A dispositionWe may be adversely impacted by work stoppages and other labor matters.
Although we consider our relations with our employees to be generally good, there can be no assurance that our operations will not be impacted by unionization efforts, strikes or other types of labor disputes or disruptions. For instance, the implementation of internal operational and team adjustments necessary to implement our continued strategy could result in employee dissatisfaction. We may also experience strikes or other labor disputes or disruptions in connection with social unrest or political events. See "—Risks Related to Our Markets." For a discussion of our employees represented by unions or collective bargaining agreements, see "Item 6—Directors, Senior Management and Employees—D. Employees." The ability to work can also be impacted due to natural disasters, civil unrest or security breaches/threats, making access to work places and management of systems difficult. Furthermore, work stoppages or slow-downs experienced by our customers or suppliers could result in lower demand for our services and products. In the event that we, or one or bothmore of our strategic shareholders of their respective stakescustomers or suppliers, experience a labor dispute or disruption, it could result in VimpelCom or a change in control of VimpelCom could harm our business.
We derive benefitsincreased costs, negative media attention and resources from the participation of LetterOnepolitical controversy, and Telenor in our company. If LetterOne or Telenor were to dispose of its stake in our company, we would be deprived of those benefits, which could harm our business, financial condition, results of operations, cash flows or prospects.
Our majority stake in an Egyptian public company and prospects.its mandatory tender offer for any and all outstanding shares which are not owned by VEON may expose us to legal and political risk and reputational harm.
Our subsidiary in Egypt, Global Telecom Holding S.A.E. ("GTH"), is a public company listed on the Egyptian Stock Exchange and is therefore subject to corresponding laws and regulations, including laws and regulations for the protection of minority shareholder rights. In February 2017, GTH completed a share buy-back for 10% of the total issued share capital of GTH, and on March 20, 2017, cancelled its global depositary receipt listing on the Main Market for Listed Securities of the London Stock Exchange. Following ratification by the Egyptian Financial Supervisory Authority of the board minutes for the cancellation of the GDR program, our shareholding in GTH increased to 57.7% from 51.9%.
On November 8, 2017, we submitted an application to the Egyptian Financial Regulatory Authority ("FRA") to approve a mandatory tender offer ("MTO") by VEON Holdings B.V. for any and all of the outstanding shares of GTH which are not owned by VEON (up to 1,997,639,608 shares, representing 42.31% of GTH's total shares). The MTO remains subject to approval by the Egyptian authorities. VEON has been in discussions with the authorities to resolve alleged, and disputed, technical disclosure breaches of the MTO rules by certain GTH shareholders (for which the failure to reach resolution could result in the initiation of criminal proceedings). Progress on this matter (including the potential for resolution) and the approval of the MTO have been held up by the authorities apparently in connection with unrelated historic GTH tax assessments. In addition, somerecently VEON has become aware that GTH has been named as a defendant in a case before the Cairo Economic Court filed in January 2018 by certain shareholders of GTH. This action seeks a court order against the FRA to suspend the MTO, to have the court appoint an expert to conduct an appraisal of the GTH share price proposed in the MTO, and directing the FRA to reject the MTO. The Cairo Economic Court dismissed the claim in February 2018 for lack of subject-matter jurisdiction. This decision is scheduled to be heard on appeal in April 2018 by the Summary Circuit Court of Appeals. We are considering all options and there can be no assurance that the MTO will proceed. See "Item 4—Information on the Company—Overview—Recent Developments—VEON Holdings B.V. submits cash tender offer in relation to GTH."
GTH is the holding company for our debt agreements have “changeassets in Algeria, Bangladesh and Pakistan. GTH has experienced and expects to continue to experience the risk of control” provisions thatunpredictable and adverse government action and severe delays in obtaining necessary government approvals stemming from the political and economic conditions in Egypt. Furthermore, GTH is, and may require usin the future be, subject to make a prepayment if certain parties acquire beneficialsignificant tax claims under existing or legal ownershipnew Egyptian tax law and this could expose GTH to increased tax liability. For more information on tax claims of or control over more than 50.0%the Egyptian authorities, see Note 26 to our audited consolidated financial statements.
Adoption of our shares. If such a change of control provision is triggerednew accounting standards could affect reported results and financial position.
Our accounting policies and methods are fundamental to how we fail to make any required prepayment, we could trigger acceleration provisions ofrecord and report our debt agreements, making our obligations immediately due and payable. This could harm our business, financial condition and results of operations.operation. Accounting standardization bodies and other authorities may change accounting regulations that govern the preparation and presentation of our financial statements. Those changes could have a significant impact on the way we account for certain operations and present our financial position and operating income. In some instances, a modified standard or a new requirement with retroactive nature may have to be implemented, which requires us to restate previous financial statements.
In particular, we are required to adopt the new accounting standards IFRS 9 Financial Instruments and IFRS 15 Revenue from Contracts with Customers, effective from January 1, 2018, and IFRS 16 Leases, effective for the financial years from January 1, 2019. The transitional impacts on total equity upon adoption of IFRS 9 and IFRS 15 as of January 1, 2018 are expected to result in a decrease of US$48 million and an increase of US$99 million, respectively. We have yet to assess the impact of IFRS 16, which may be material, to the consolidated income statement and consolidated financial position upon adoption in 2019. Such impact is under analysis as of the date of this Annual Report on Form 20-F. For more information on the implementation of new standards and interpretations issued, see Notes 2 and 3 to our audited consolidated financial statements.
Risks Related to Ourthe Industry
Our businessThe telecommunications industry is highly capital intensive and requires substantial and ongoing expenditures of capital.
Our business The telecommunications industry is highly capital intensive, as our success depends to a significant degree on our ability to keep pace with new developments in technology, to develop and market innovative products and to update our facilities and process technology, which maywill require additional capital expenditures in the future. The amount and timing of our capital requirements will depend on many factors, including acceptance of and demand for our products and services, the extent to which we invest in new technology and research and development projects, and the status and timing of competitive developments.
Although we regularly consider and take measures to improve our capital efficiency, including selling capital intensive segments of our business and entering into managed services and network sharing agreements with respect to towers and other assets, our levels of capital expenditure will remain significant. In addition, we may not be able to divest some of our businesses or assets as planned and the divestures we carry out could negatively impact our business. There could also be transitional or business continuity risks or both associated with these divestures that may impact our service levels and business targets. If we do not have sufficient resources from our operations to finance necessary capital expenditures, we may be required to raise additional debt or equity financing, which may not be available when needed or on terms favorable to us or at all. If we are unable to obtain adequate funds on acceptable terms, or at all, we may be unable to develop or enhance our products, take advantage of future opportunities or respond to competitive pressures, which could harm our business, financial condition, results of operations, andcash flows or prospects. For more information
on our future liquidity needs, see “Item"Item 5—Operating and Financial Review and Prospects—Liquidity and Capital Resources—Future Liquidity and Capital Requirements.”Requirements."
Our revenue is often unpredictable, and our revenue sources are short-term in nature.
Future revenue from our prepaid mobile customers, our Our primary source of revenue and our contractis from prepaid mobile customers, is unpredictable. Wewho we do not require our prepaid mobile customers to enter into long-term service
contracts andcontracts. Therefore, we cannot be certain that theythese customers will continue to use our services in the future. We require our contractRevenue from postpaid mobile customers represents a small percentage of our total operating revenue and the contracts that are required to enter into service contracts; however, many of these service contractsbe signed by such customers can be canceled by the customercancelled with limited advance notice and without significant penalty. The loss of a larger number of customers than anticipated could result in a loss of a significant amount of expected revenue. Because we incur costs based on our expectations of future revenue, ourthe sudden loss of a large number of customers or a failure to accurately predict revenue could harm our business, financial condition, results of operations, cash flows or prospects. For a description of the key trends and prospects.developments with respect to our business, see "Item 5—Operating and Financial Review and Prospects—Key Developments and Trends."
We areoperate in highly competitive markets, andwhich we may face greater competitionexpect to only become more competitive, and as a result of market and regulatory developments.may have difficulty expanding our customer base or retaining existing customers.
The markets in which we operate are highly competitive in nature, and we expect that competition will continue to increase. Our financial performance has been and will continue to be significantly determined by our success in adding, retaining and engaging our customers. As penetration rates increase in the markets in which we operate, we may have difficulty expanding our customer base. If customers find our products not to be useful, helpful, reliable or trustworthy or otherwise believe our competitors can offer better products, there are a number of other competitors in each of the markets in which we operate from which to buy such products. As new players enter our markets, such as Iliad in Italy, or existing competitors combine operations, which is being contemplated in Kazakhstan, maintaining our market positions will become more difficult. For more information on the competition in our markets, see "Item 4—Information on the Company."
Each of the items discussed immediately below regarding increased competition could materially harm our business, financial condition, results of operations, and prospects.cash flows or prospects:
We
With
We
In
In such markets,base, and the continued growth in our business and results of operations will depend, in part, on our ability to extract greater revenue from our existing customers, including through the expansion of data services and the introduction of next generation technologies, which may prove difficult to accomplish;
As
The
Competitors
Our
Current
New
Reduced
Our we may be unable to implement offers, products and technology to support our commercial partnerships; and
For more information on the competition in our markets, see “Item 4—Information on the Company”.
mobile.
We could experience customer database piracy or other database security breaches.
We may be exposedunable to database piracy or other database security breaches resultingdevelop additional sources of revenue in markets where the potential for additional growth of our customer base is limited.
The mobile markets in Russia, Algeria, Ukraine, Kazakhstan, Kyrgyzstan, Armenia, Georgia and Italy have each reached mobile penetration rates exceeding 100%, according to Analysys Mason. Increasing competition, market saturation and technological development lead to the increased importance of data services in the leakageRussian market and, unauthorized disseminationto a lesser extent, the markets of personal information aboutother Commonwealth of Independent States ("CIS") countries. As a result, we will focus less on customer market share growth and more on revenue market share growth in each of these markets. The key components of our customers, which could impactgrowth strategy in these markets will be to increase our reputation, prompt lawsuits against us by individual and corporate customers, lead to violationsshare of the high-value customer market, increase usage of data protection laws and adverse actions by the telecommunications regulators and other authorities, leadimprove customer loyalty. If we fail to a loss in customers and hinder our ability to attract new customers. If severe customer data security breaches are detected, the regulatory authority can sanction our company, including suspending our operations for some time period and levying fines and penalties. Violationdevelop these additional sources of data protection laws is a criminal offence in some countries, and individuals can be imprisoned or fined. In addition, we may be exposed to cyber-attacks, which could result in equipment failures or disruptions in our operations. Our inability to operate our fixed-line or wireless networks as a result of such events may result in significant expense or loss of market shares. These occurrences, individually or in the aggregate,revenue, it could harm our business, financial condition, results of operations, andcash flows or prospects.
Our failure to keep pace with technological changes and evolving industry standards could harm our competitive position and, in turn, materially harm our business.
The telecommunications industry is characterized by rapidly evolving technology, industry standards and service demands, which may vary by country or geographic region. Accordingly, our future success will depend on our ability to adapt to the changing technological landscape and the regulation of standards utilizing these technologies. It is possible that the technologies or equipment we utilize today will become obsolete or subject to competition from new technologies in the future for which we may
be unable to obtain the appropriate license in a timely manner or at all. We may not be able to meet all of these challenges in a timely and cost-effective manner.
In our markets, Further, we operate or are considering developing third generation mobile technologies (“3G”)3G, 4G/LTE networks or fourth generation mobile technologies (“and networks beyond 4G/LTE”) networks.LTE in some markets in which we operate. New network development requires significant financial investmentscapital expenditures and there can be no assurance that we will be able to develop 3G, 4G/LTE or 4G/LTEother networks on commercially reasonable terms, that we will not experience delays in developing our networks or that we will be able to meet all of the license terms and conditions imposed by the countries in which we operate or that we will be granted such licenses at all. In addition, mobile penetration rates for 4G/LTE compatible devices may not currently support the cost of 4G/LTE development in certain markets, such as Russia, and such rates will need to increase to be commercially viable. If we experience substantial problems with our 3G or 4G/LTE services, or if we fail to introduce new services on a timely basis relative to our competitors, it may impair the success of such services, or delay or decrease revenue and profits and therefore may hinder recovery of our significant capital investments in 3G or 4G/LTE services as well as our growth.
Our brand, business, financial condition, results of operations and prospects may be harmed in the event of cyber-attacks or severe systems and network failures, or the perception of such attacks or failures, leading to the loss of integrity and availability of our telecommunications, digital and financial services and/or leaks of confidential information, including customer information.
Our operations and business continuity depend on how well we protect and maintain our network equipment, information technology ("IT") systems and other assets. Due to the nature of the services we offer across our geographical footprint, we are exposed to cybersecurity threats that could negatively impact our business activities through service degradation, alteration or disruption. Cybersecurity threats could also lead to the compromise of our physical assets dedicated to processing or storing customer information, financial data and strategic business information, exposing this information to possible leakage, unauthorized dissemination and loss of confidentiality. These events could result in reputational harm, lawsuits against us by customers or other third parties, violations of data protection and telecommunications laws, adverse actions by telecommunications regulators and other authorities, loss of revenue from business interruption, loss of market share and significant additional costs. In addition, the potential liabilities associated with these events could exceed the cyber insurance coverage we maintain.
Although we devote significant resources to the development and improvement of our IT and security systems, we remain vulnerable to cyber-attacks and IT and network failures and outages, due to factors including:
Although we have a structured vulnerability scanning process in place, there is also a possibility that we are not currently aware of certain key undisclosed vulnerabilities in our IT systems and other assets. In such an event, hackers or other cybercrime groups may exploit such vulnerabilities or may be able to cause harm more quickly than we are able to mitigate (zero-day exploits).
From time to time we have experienced cyber-attacks of varying degrees to gain access to our computer systems and networks. As of the date of this Annual Report on Form 20-F, we have suffered minor cybersecurity incidents targeting our internal infrastructure that have been contained by the response teams, generating limited or negligible impacts, including WannaCry and NotPetya. In addition, we have suffered service disruption affecting some of our fixed-line DSL services, caused by botnets that compromised vulnerable customer equipment. Such attacks may be more successful in the future or may be persistent over long periods of time during which damage can remain undetected.
If our services are affected by such attacks and this degrades our services, our products and services may be perceived as being vulnerable to cyber risk and the integrity of our data protection systems may be questioned. As a result, users and customers may curtail or stop using our products and services, and we may incur legal and financial exposure.
In general, mobile operators are directly liable for actions of third parties to whom they forward personal data for processing. If severe customer data security breaches are detected, regulatory authorities could sanction our company, including suspending our operations for some time and levying fines and penalties. In some jurisdictions in which we operate, such as Russia, legislation is being implemented to establish a legal framework for preventing cyber-attacks. Our failure to comply with data protection and telecommunications laws and regulations, and our inability to operate the VEON platform, our fixed-line or wireless networks, as a result of cybersecurity threats may result in significant expense or loss of market shares. In addition, certain violations of data protection and telecommunications laws are criminal offenses in some countries, and can result in imprisonment or fines. These events, individually or in the aggregate, could harm our brand, business, financial condition, results of operations or prospects.
Our ability to profitably provide telecommunications services depends in part on access to local and long distance line capacity and the commercial terms of our interconnectinterconnection agreements.
Our ability to secure and maintain interconnectinterconnection agreements with other wireless and local, domestic and international fixed-line operators on cost-effective terms is critical to the economic viability of our operations. Interconnection is required to complete calls that originate on our respective networks but terminate outside of our respective networks, or that originate from outside our respective networks and terminate on our respective networks. A significant increase in our interconnection costs, or decrease in our interconnection rates, as a result of new regulations, commercial decisions by other fixed-line operators, increased inflation rates in the countries in which we operate or a lack of available line capacity for interconnection could harm our ability to provide services, which could in turn harm our business, financial condition, results of operations, andcash flows or prospects. For more information, see "Item 4—Information on the Company—Interconnection Agreements."
Our existing equipment and systems may be subject to disruption and failure for various reasons, including the threat of terrorism, which could cause us to lose customers, limit our growth or violate our licenses.
Our business depends on providing customers with reliability, capacity and security, which may be disrupted by computer viruses. We cannot be sure that our network system will not be the target of a virus or, if it
is, that we will be able to maintain the integrity of our customers’ data and that a virus will not overload our network, causing significant harm to our operations. Also, in recent years, during installations of new software, we have experienced network service interruptions. In addition, oursecurity. Our technological infrastructure is vulnerable to damage or disruptions from other numerous events, including natural disasters, military conflicts, power outages, terrorist acts, government shutdown orders, changes in government regulation, equipment or system failures, human error or intentional wrongdoings, includingsuch as breaches of our network or information technology security. For example, due to a severe monsoon
The successful build-outseason, our operations in Bangladesh in late 2017 experienced substantial network availability issues. In addition, we operate in countries which may have an increased threat of terrorism. An attack on or near our premises, equipment or points of sale could result in causalities, property damage, business interruption, legal liability and operationdamage to our brand or reputation.
Our business may also be disrupted by computer viruses or other technical or operational issues. We cannot be sure that our network and information technology systems will not be subject to such issues, or, if they are, that we will be able to maintain the integrity of our networks depends heavily on obtaining adequate suppliescustomers' data or that a virus or other technical or operational issues will not disrupt our network or systems and cause significant harm to our operations. For example, in recent years, we have experienced network service interruptions during installations of switching equipment, radio access network solutions, base stations and other equipment on a timely basis.
new software. In some regions, our equipment for provision of mobile services resides in a limited number of locations or buildings. Disruption to the security or operation of these locations or buildings could result in disruption of our mobile services in those regions. Moreover, the implementation of our transformation strategies may result in under-investments or failures in internal business processes, which may in turn result in greater vulnerability to technical or operational issues, including harm from failure to detect a virus.
Interruptions of services could harm our business reputation and reduce the confidence of our customers and consequently impair our ability to obtain and retain customers and could lead to a violation of the terms of our licenses, each of which could materially harm our business. In some ofaddition, the markets in which we operate, we do not carrypotential liabilities associated with these events could exceed the business interruption insurance to prevent against network disruptions.we maintain.
We depend on third parties for certain services and products important to our business.
We rely on third parties for services and products important for our operations. We currently purchase the majority of our network-related equipment from a smallcore number of suppliers, principally Alcatel-Lucent, Cisco Systems, Comverse, Ericsson, Huawei, and Nokia Solutions and Networks, Cisco Systems and ZTE Corporation ("ZTE") although some of the equipment that we use is available from other suppliers. The successful build-out and operation of our networks depends heavily on obtaining adequate supplies of switching equipment, radio access network solutions, base stations and other equipment on a timely basis. From time to time, we have experienced delays in receiving equipment. OurIn addition, our business could be materially harmed if export and re-export restrictions impact our suppliers' ability to procure products, technology, or software that is necessary for the production and satisfactory delivery of the supplies and equipment that we are unable to obtain adequate supplies or equipmentsource from our suppliers in a timely manner and on reasonable terms.third-party suppliers.
Also, we may outsource all or a portion of our networksconstruction, maintenance services, IT infrastructure hosting and network capabilities in certain markets in which we operate.operate, such as Russia and Kazakhstan. The Italy Joint Venture also outsources a portion of its networks. For example, in late 2014 we entered into an agreement with MTS for joint planning, development and operation of 4G/LTE networks in 36 regions of Russia. In addition, in February 2015, our wholly-owned subsidiary, Wind Italy, entered into an agreement to sell 90% of Wind Italy’s towers subsidiary, Galata, to Abertis Telecom and Wind Italy has a Tower Services Agreement with Galata for the provision of a broad range of servicesmore information, see "Item 4—Information on the contributed sitesCompany—Property, Plant and sites subsequently built by Galata hosting Wind Italy equipment.Equipment." As a result, the implementation of such initiatives, including our digital stack and data management platform, is dependent on third parties.
Our business could be materially harmed if our agreements with thesethird parties were to terminate or if negative developments (financial, legal, regulatory or otherwise) regarding thesesuch parties, or a dispute between us and thesesuch parties, causes suchthe parties to no longer be able to deliver the required services on a timely basis or at all or otherwise fulfilfulfill their obligations under our agreements with them. ForIf such events occur, we may attempt to renegotiate the terms of such agreements with the third parties, but there can be no assurance that the terms of such amended agreements will be more information regarding these agreements, see “Item 5—Operating and Financial Review and Prospects—Recent Developments and Trends—Network and Tower Sharing Agreements.”favorable to us than those of the original agreements.
In addition, we rely on roaming partners to provide services to our customers while they are outside the countries in which we operate and on interconnect providers to complete calls that originate on our networks but terminate outside our networks, or that originate outside our networks
and terminate on our networks. We also rely on handset providers to provide the smartphonesequipment used on our networks. In addition, many of our mobile products and services are sold to customers through retailthird party channels. The third party retailers, agents and dealers that we use to distribute and sell products are not under our control and may stop distributing or selling our products at any time or may more actively promote the products and services of our competitors. Should this occur with particularly important retailers, agents or dealers, we may face difficulty in finding new retailers, sales agents or sales dealers that can generate the same level of revenue. Any negative developments regarding the third parties on which we depend could have a materially adverse impact onharm our business, financial condition, results of operations, andcash flows or prospects.
Allegations of health risks related to the use of mobile telecommunicationtelecommunications devices and base stations could harm our business.
There have been allegations that the use of certain mobile telecommunicationtelecommunications devices and equipment may cause serious health risks. The actual or perceived health risks of mobile devices or equipment could diminish customer growth, reduce network usage per customer, spark product liability lawsuits or limit available financing. In addition, the actual or perceived health risks may result in increased regulation of network equipment.equipment and restrictions on the construction of towers or other infrastructure. Each of these possibilities has the potential to seriously harm our business.
Our intellectual property rights are costly and difficult to protect, and we cannot guarantee that the steps we have taken to protect our intellectual property rights will be adequate.
We regard our copyrights, service marks, trademarks, trade dress, trade secrets and similar intellectual property, including our rights to certain domain names, as important to our continued success. For example, our widely recognized logos, such as "Beeline" (Russia, Kazakhstan, Uzbekistan, Armenia, Tajikistan, Georgia, Laos and Kyrgyzstan), "Kyivstar" (Ukraine), "Jazz" (Pakistan), "Djezzy" (Algeria) and "banglalink" (Bangladesh), have played an important role in building brand awareness for our services and products. We rely upon trademark and copyright law, trade secret protection and confidentiality or license agreements with our employees, customers, partners and others to protect our proprietary rights. However, intellectual property rights are especially difficult to protect in many of the markets in which we operate. In these markets, the regulatory agencies charged to protect intellectual property rights are inadequately funded, legislation is underdeveloped, piracy is commonplace and enforcement of court decisions is difficult.
We are in the process of registering the VEON name, logo and certain taglines as trademarks in the jurisdictions in which we operate and other key territories. As of the date of this Annual Report on Form 20-F, we have achieved registration of the VEON name and logo in eight of the seventeen jurisdictions sought, with the remainder pending, and the taglines still pending grant in fifteen jurisdictions (and granted in two jurisdictions). The timeline and process required to obtain trademark registration can vary widely between jurisdictions. We have received third party objections to two of our applications and we are currently working to resolve these, but there can be no assurance that we will resolve them in a timely or satisfactory manner, or at all, which could affect our ability to roll out our VEON platform as anticipated.
As we continue our digital transformation, we will need to ensure that we have adequate legal rights to the ownership or use of necessary source code and other intellectual property rights associated with our systems, products and services. For example, our VEON platform was developed initially using source code created in conjunction with third parties. We rely on a combination of contractual provisions and intellectual property law to protect our proprietary technology and software, access to and use of source code and other necessary intellectual property. There can be no assurance that our efforts to protect our intellectual property rights will be successful. Our failure to protect our ownership and use rights to our source code and other intellectual property, including as the result of disputes with our contractual counterparties, could have a material adverse effect on our results of operations and financial condition.
In addition, litigation may be necessary to enforce our intellectual property rights, to determine the validity and scope of the proprietary rights of others, or to defend against claims of infringement. As the number of convergent product offerings and overlapping product functions increase, the possibility of intellectual property infringement claims against us may increase. Any such litigation may result in substantial costs and diversion of resources, and adverse litigation outcomes could harm our business, financial condition, or results of operations.operations, cash flows or prospects. See "—Legal and Regulatory Risks—New intellectual property laws or regulations may require us to invest substantial resources in compliance or may be unclear."
We depend on our senior management and otherhighly skilled personnel, and, if we are unable to retain or motivate key personnel.personnel, hire qualified personnel, or implement our strategic goals or corporate culture through our personnel, we may not be able to maintain our competitive position or to implement our business strategy.
Our performance and ability to maintain our competitive position and to implement our business strategy is dependent to a large degreein certain important respects on our global senior management team, highly skilled personnel and other key personnel.the level of continuity. In the markets in which we operate, competition for qualified personnel with relevant expertise is intense. There is sometimes limited availability of individuals with the requisite knowledge of the telecommunications industry, the relevant experience and, in the case of expatriates, the ability or willingness to accept work assignments in certain of these jurisdictions. We have experienced certain changes in key management positions in recent years.
In addition, our compensation schemes may not always be successful in attracting new qualified employees and retaining and motivating our existing employees. The loss of ourany key personnel or an inability to attract, train, retain and motivate qualified keymembers of senior management or highly skilled personnel could have an adverse impact on our ability to compete and to implement new business models and could harm our business, financial condition, results of operations, cash flows or prospects. In addition, we might not succeed in instilling our corporate culture and prospects.values in new or existing employees, which could delay or hamper the implementation of our strategic priorities.
Our continued success is also dependent on our personnel's ability to adapt to rapidly changing environments and to perform in pace with our continuous innovations and industry developments. Although we devote significant attention to recruiting and training, there can be no assurance that our existing personnel will successfully be able to adapt to and support our strategic priorities. There is also a possibility that we are unable to attract qualified individuals with the requisite skills to implement our digital initiatives or other business strategies.
We operate in a highly regulated industry and are subject to a large variety of laws and extensive regulatory requirements.
As a global telecommunications company that operates in a number of regulated markets, we are subject to different laws and regulations in each of the jurisdictions in which we provide services. Mobile, Internet,internet, fixed-line, voice and data markets are all generally subject to extensive regulatory requirements, including strict licensing regimes, as well as anti-monopoly and consumer protection regulations. The applicable rules are generally subject to different interpretations and the relevant authorities may challenge the positions that we take. As we expand certain areas of our business and provide new services, such as MFS and the VEON platform, we may be subject to additional laws and regulations. See "—Risks Related to Our Business—Our MFS and DFS offerings are complex and increase our exposure to fraud, money laundering and reputational risk." Regulatory compliance may be costly and involve a significant expenditure of resources, thus negatively affecting our financial condition and results of operations.
Regulations may be especially strict in the markets of those countries in which we are considered to hold a significant ormarket position (Ukraine and Uzbekistan), a dominant market position including Russia, Italy,(Russia and Kazakhstan) or are considered a dominant company (Kyrgyzstan). Our operations in Pakistan and Algeria Ukraine, Kazakhstan, Tajikistan, Armenia, Uzbekistan, Kyrgyzstan and Pakistan. Regulations couldpreviously held significant market player positions. In addition, certain of our practices may become subject to regulatory scrutiny from competition or data protection authorities, which may result in fines or other administrative penalties.
Certain regulations may require us to reduce roaming prices and termination rates in mobile and/or fixed-line networks,termination rates, require us to offer access to our network to other operators, and result in the imposition of fines if we fail to fulfill our service commitments. For example, a regulation in the European Union has decreased end-user roaming charges in the European Union, and other jurisdictions in which we operate (including Russia, Kyrgyzstan and Armenia) are considering the regulation of roaming prices, which could negatively impact our roaming margins.
In some countries, we are required to obtain approval for offers and advertising campaigns, which can delay or thwart importantour marketing campaigns and require restructuring of business initiatives. We may also be required to obtain approvals for certain acquisitions, reorganizations or other transactions, and failure to obtain such approvals may impede or harm our business and our ability to expand our operations.
Laws and regulations in certain of the jurisdictions in which we operate oblige us to install surveillance, interception and data retention equipment to ensure that our networks are capable of allowing the government to monitor data and voice traffic on our networks.
The nature of our business also subjects us to certain regulations regarding open internet access, or net neutrality. For example, on March 22, 2017, the Italian competition authority (Autorità Garante della Concorrenza e del Mercato, "AGCOM"), issued a notice to the Italy Joint Venture in relation to compliance with the EU Regulation 2015/2120 (the "open internet access regulation"), which regulates, among other things, traffic management practices in the European Union, including Italy. The Italy Joint Venture fully complied with AGCOM's notice on November 20, 2017. The Italy Joint Venture also appealed AGCOM's notice and subsequent clarifications issued by AGCOM. This appeal is currently pending before the Regional Administrative Court of Lazio. As we continue to expand our selection of digital offerings, net neutrality regulations will become more applicable to our operations, and thus we may have to incur significant costs in order to comply, or prove our compliance with, such regulations.
We face risks and costs in each of the markets in which we operate and may be subject to additional regulations. Any adversefailure on our part to comply with these laws and regulations or regulatory actions could place significantcan result in negative publicity, diversion of management time and effort, increased competitive and pricing pressure on our operations, significant liabilities, third party civil claims and couldother penalties or otherwise harm our business, financial condition, results of operations, and cash flow.flows or prospects.
For more information on the regulatory environment in which we operate, see "Exhibit 99.2—Regulation of Telecommunications. For more information aboutTelecommunications."
We face uncertainty regarding our frequency allocations and may experience limited spectrum capacity for providing wireless services.
To establish and commercially launch mobile and fixed wireless telecommunications networks, we need to receive frequency allocations for bandwidths within the competition proceedingsfrequency spectrums in the regions in which we operate. There are a limited number of frequencies available for mobile operators in each of the regions in which we operate or hold licenses to operate. We are dependent on access to adequate frequency allocation in each such market in order to maintain and expand our subsidiariescustomer base. In addition, frequency allocations may be issued for periods that are involved, see Note 26shorter than the terms of our licenses, and such allocations may not be renewed in a timely manner, or at all. For instance, in Russia, we have previously been unable to obtain frequency allocations in an assigned frequency band for LTE
network development and, in Bangladesh, currently are one of the largest operators, but until recently held a small amount of the frequency spectrum. In Italy, in 2018 there may be an auction of spectrums in the 700 MHz, 3600-3800 MHz, 26.5-27.5 GHz ranges related to, among others, the prospective offering of 5G services. In Pakistan, in 2019 the following spectrum will be up for renewal: 7.8MHz (paired) in 1800MHz band and 4.8MHz (paired) in the 900MHz band.
We are also subject to the risk that government action impairs our audited consolidatedfrequency allocations or spectrum capacity. For example, in 2017, the government of Uzbekistan published a decision ordering the equitable reallocation amongst all telecommunications providers in the market, which will affect approximately half of the 900 MHz and 1800 MHz radio frequencies of our Uzbek subsidiary, Unitel LLC. The decision is expected to come into force on March 31, 2018, and, currently, we do not expect the reallocation to have a material impact on our business. In addition, in 2017, the Ministry of Information and Communications in Russia published for public consultation a draft order to increase annual spectrum fees by approximately 25% for the period between 2018-2021. The draft order has yet to be adopted.
If our frequencies are revoked or we are unable to renew our frequency allocations or obtain new frequencies to allow us to provide mobile services on a commercially feasible basis, our network capacity and our ability to provide mobile services would be constrained and our ability to expand would be limited, which could harm our business, financial statements included elsewherecondition, results of operations, cash flows or prospects.
We may be subject to increases in this Annual Reportpayments for frequency allocations under the terms of some of our licenses.
Legislation in many countries in which we operate, including Russia, requires that we make payments for frequency spectrum usage. As a whole, the fees for all available frequency assignments, as well as allotted frequency bands for different mobile communications technologies, have been significant. Any significant increase in the fees payable for the frequencies that we use or for additional frequencies that we need could have a negative effect on Form 20-F.our financial results. We expect that the fees we pay for radio-frequency spectrum could substantially increase in some or all of the countries in which we operate, and any such increase could harm our business, financial condition, results of operations, cash flows or prospects.
We are subject to anti-corruption laws.laws in multiple jurisdictions.
We are subject to a number of anti-corruption laws, including the FCPA in the United States, the Bribery Act in the United Kingdom and various otherthe anti-corruption laws.provisions of the Dutch Criminal Code in the Netherlands. Our failure to comply with anti-corruption laws applicable to us could result in penalties, which could harm our reputation and harm our business, financial condition, results of operations, andcash flows or prospects. The FCPA generally prohibits companies and their intermediaries from making improper payments to foreign officials for the purpose of obtaining or keeping business and/or other benefits. The FCPA also requires public companies to maintain accurate books and records and devise a system of sufficient internal accounting controls. We regularly review and update our policies and procedures and internal controls designed to provide reasonable assurance that we, our employees, distributors and other intermediaries comply with the anti-corruption laws to which we are subject. However, there are inherent limitations to the effectiveness of any policies, procedures and internal controls, including the possibility of human error and the circumvention or overriding of the policies, procedures and internal controls. There can be no assurance that such policies or procedures or internal controls will work effectively at all times or protect us against liability under these or other laws for actions taken by our employees, distributors and other intermediaries with respect to our business or any businesses that we may acquire.
We operate in countries which pose elevated risks of corruption violations. If we are not in compliance with anti-corruption laws and other laws governing the conduct of business with government entities and/or officials (including local laws), we may be subject to criminal and civil penalties and other remedial measures, which could have an adverse impact onharm our business, financial condition, results of operations, andcash flows or prospects. Any investigationInvestigations of any actual or alleged violations of such laws or policies byrelated to us or any governmental body could also have an adverse impact onharm our business, financial condition, results of operations, andcash flows or prospects.
Please also see “Risks Related to Our Business—We are subject to investigations by the SEC, DOJ and OM, and are conducting an internal investigation. We are unable to predict the duration, scope or results of these investigations or their impact on us.”
We may not be able to detect and prevent fraud or other misconduct by our employees, representatives, agents, suppliers or other third parties.
We may be exposed to fraud or other misconduct committed by our employees, representatives, agents, suppliers or other third parties that could subject us to litigation, financial losses and sanctions imposed by governmental authorities, as well as affect our reputation. Such misconduct could include misappropriating funds, conducting transactions that are outside of authorized limits, engaging in misrepresentation or fraudulent, deceptive or otherwise improper activities, including in return for any type of benefits or gains or otherwise not complying with applicable laws or our internal policies and procedures.
We regularly review and update our policies and procedures and internal controls which are designed, inter alia, to provide reasonable assurance that we, our employees, representatives, agents, suppliers and other third parties comply with applicable law and our internal policies. Further, we conduct, as appropriate, assessments of, and due diligence on, our employees, representatives, agents, suppliers and other third parties. However, there
can be no assurance that such policies, procedures, internal controls and diligence will work effectively at all times or protect us against liability for actions of our employees, representatives, agents, suppliers or other third parties.
New or proposed changes to laws or new interpretations of existing laws in the markets in which we operate may harm our business.
We are subject to a variety of national and local laws and regulations in the countries in which we do business. These laws and regulations apply to many aspects of our business. Violations of applicable laws or regulations could damage our reputation or result in regulatory or private actions with substantial penalties or damages. In addition, any significant changechanges in such laws or regulations or their interpretation, or the introduction of higher standards or more stringent laws or regulations, including revision in regulations for license/frequency allocation, could have an adverse impact on our business, financial condition, results of operations and prospects.
For example, in July 2014 Russiasome of the markets in which we operate SIM verification and re-verification initiatives have been implemented. In Pakistan, our subsidiary had to re-verify more than 38 million SIM cards in 2016, with operators blocking all SIM cards that could not be verified, and which resulted in a loss of customers representing approximately 13% of its customer base. In Bangladesh, the regulator initiated similar SIM re-verification requirements in 2016, which resulted in 3.8 million SIM cards being blocked by Banglalink, for which we may incur additional fees, and which may require additional time and/or resources from management at VEON and/or Banglalink. Similar actions have been introduced, or are being contemplated, in other markets in which we operate. In addition to customer losses, such requirements can result in claims from legitimate customers that are incorrectly blocked, fines, license suspensions and other liabilities for failure to comply with the requirements. To the extent re-verification and/or new verification requirements are imposed in the jurisdictions in which we operate, it could have an adverse impact on our business, financial condition, results of operations and prospects.
In addition, many jurisdictions in which we operate have adopted data processing laws, were adopted which prohibit processingthe collection and storage of personal data on servers located outside of Russia as of September 2015.the respective jurisdictions. Violation of these laws by an operator may lead to a seizure of the operator's database and equipment, impose administrative sanctions or implement a ban on the processing of personal data by such operator, which, in turn, could lead to the inability to provide services to customers. See "—We are subject to an increasing amount of data privacy laws and regulations that may require us to incur substantial costs and implement certain changes to our business practices that may adversely affect our results of operations."
Following various terrorist attacks, In certain jurisdictions in which we operate, the Governmentrelevant regulator sets MTRs. If any such regulator sets MTRs that are lower for us than the MTRs of Pakistan introduced Standard Operating Procedure (SOP) requiring all mobile operatorsour competitors, our interconnection costs may be higher and our interconnection revenues may be lower, relative to re-verify their entire prepaid unverified customer base through bio-metric verification. For our Pakistan operation this involvescompetitors. In Algeria, for example, the re-verification of more than 38 million SIM cards. We may not be able to sign up any new customers during the verification process. SIM cards which cannot be verified must be blockedMTRs set by the operators. Failure to comply with the SOP could resultregulator in significant fines, suspension2017 are lower for Optimum Telecom Algeria S.p.A. ("Optimum") than for one of our license and possible criminal liability.its competitors.
In addition, if we incorrectly block legitimate customers weare subject to certain sanctions and embargo laws and regulations of the United States, the United Nations, the European Union, and certain other jurisdictions in connection with our activities and such laws and regulations may be expanded or amended from time to time in a manner that could also face claims from these customers. The SOP regarding re-verification could have an adverse impact onmaterially adversely affect our business, financial condition, results of operations, cash flows or prospects. There can be no assurance that, notwithstanding our compliance safeguards, we will not
be found in the future to have been in violation of applicable sanctions and prospectsembargo laws, particularly as the scope of such laws may be unclear and subject to discretionary interpretations by regulators, which may change over time. Moreover, certain of our financing arrangements include representations and covenants requiring compliance with or limitation of activities under sanctions laws of additional jurisdictions enumerated in Pakistan.the financing arrangements, as well as mandatory prepayment requirements in the event of a breach thereof.
Following amendments For a discussion of certain regulatory developments and trends and the impact on our business, see "Exhibit 99.2—Regulation of Telecommunications."
New intellectual property laws or regulations may require us to invest substantial resources in compliance or may be unclear.
Current and new intellectual property laws may affect the ability of companies, including us, to protect their innovations and defend against claims of patent infringement. The costs of compliance with these laws and regulations are high and are likely to increase in the future. Claims have been, or may be threatened and/or filed against us for intellectual property infringement based on the nature and content in our products and services, or content generated by our users.
We may be subject to legal liability associated with providing new online services or content as part of our strategic priorities.
We currently, and as part of our VEON platform and other strategic priorities will continue to, host and provide a wide variety of services and products that enable users to engage in various online activities. The law relating to the Pakistan tax lawsliability of providers of these online services and products for the activities of their users is still unsettled in mid-2014,some jurisdictions. Claims may be threatened or brought against us for defamation, negligence, breaches of contract, copyright or trademark infringement, unfair competition, tort, including personal injury, fraud, or other grounds based on the nature and content of information that we use and store. In addition, we may be subject to domestic or international actions alleging that certain content we have generated, user generated content or third-party content that we have made available within our services violates applicable law.
We also offer third-party products, services and content. We may be subject to claims concerning these products, services or content by virtue of our involvement in marketing, branding, broadcasting, or providing access to them, even if we do not ourselves host, operate, provide, or provide access to these products, services or content. Defense of any such actions could be costly and involve significant time and attention of our management and other resources, may result in monetary liabilities or penalties, and may require us to change our business in an adverse manner.
Anti-terror legislation passed in Russia and other jurisdictions could result in additional operating costs and capital expenditures and may harm our business.
Russian Federal Law No 374-FZ, dated July 6, 2016, amending anti-terrorism legislation imposed certain obligations on communication providers and organizers of information distribution (for example, OTT messengers), including, among others, the obligation to store information confirming the fact of receipt, transmission, delivery and/or processing of voice data, text messages, pictures, sounds, video or other communications (i.e., meta-data reflecting these communications) for a period of three years, as well as to store the contents of communications, including voice data, text messages, pictures, sounds, video or other communications for a period of up to six months (the latter requirement will come into force starting from July 1, 2018). In addition, in accordance with Federal Law No 374-FZ, communication providers and organizers of information distribution are obliged to supply to the investigation and prosecution authorities the information about the users and any other information "which is necessary for these authorities to achieve their statutory goals," and to provide to the
investigation and prosecution authorities any information and codes necessary to decode the information. In addition, under local law, at the request of authorities, operators and OTT messengers will be required to block services for users whose personal data does not correspond to the data registered and stored by the relevant domestic operator. Failure to comply with these requirements may lead to administrative fines, impair our ability to operate and could impact the effectiveness of our licenses. In addition, Governmental Resolution No 743 dated July 31, 2014 was amended by Resolution No 21 dated January 18, 2018, which extends certain security obligations currently applicable to communication providers to organizers of information distribution (for example, OTT messengers), if required by the federal security services, such as implementing technical measures to communicate with the security services.
Federal Law No 374-FZ entered into force on July 20, 2016. However, the most cost-intensive elements, particularly the requirement to store the content of voice and data communications for up to six months, are scheduled to enter into force from July 1, 2018. The practical effects of Federal Law No 374-FZ are still unclear, since implementing legislation is yet to be adopted. The implementation and support of measures to comply with the legislation could result in substantial costs for the design and production of specialized equipment and tools, as no currently commercially available products satisfy the requirements imposed onby the new law. These costs are currently expected to be borne by telecommunications companies and organizers of information distribution and, together with diversion of management's attention and resources, could materially adversely affect our business and operations. We expect operators to charge, collectcompensate for losses through increased retail tariffs, which may, in turn, have a negative effect on demand for telecommunications services.
Similar legislation has been implemented, or is being contemplated, in other markets in which we operate. Compliance with such measures may require substantial costs and pay sales tax onmanagement resources and conflict with our legal obligations in other countries. Failure to comply may lead to administrative fines, impair our ability to operate or cause reputational damage. In addition, compliance with any such obligations may prompt allegations related to data privacy or human rights concerns, which could in turn result in reputational harm or otherwise impact our ability to operate or our results of operations.
We operate in uncertain judicial and regulatory environments.
In many of the provisionemerging market countries where we operate, the application of SIM cardsthe laws of any particular country is frequently unclear and may result in unpredictable outcomes or an otherwise uncertain judicial and regulatory environments in which to operate, which could result in:
If we are found to be involved in practices that do not comply with applicable laws or regulations, we may be ableexposed to pass on this expense to customers. These taxes are still subject to ongoing litigation but, if implemented,significant fines, the risk of prosecution or the suspension or loss of our licenses,
frequency allocations, authorizations or various permissions, any of which could have an adverse impact onharm our business, financial condition, results of operations, and prospects in Pakistan, which in turncash flows or prospects.
Laws restricting foreign investment could have an adverse impact onmaterially harm our group.business.
For a discussion We could be materially harmed by existing laws restricting foreign investment or the adoption of developmentsnew laws or regulations restricting foreign investment, including foreign investment in the telecommunications industry in Russia, Kazakhstan or other markets in which we operate.
In Russia, there are a number of laws regulating foreign investment. For example, the Federal Law "On the Procedure for Foreign Investments in Business Entities of Strategic Importance for National Defense and State Security" (the "Russian Foreign Investment Law"), limits foreign investment in companies that are deemed to be strategic. Our subsidiary PJSC VimpelCom is deemed to be a strategic enterprise under the Russian Foreign Investment Law. As a result, any acquisition by a foreign investor of direct or indirect control over more than 50% of its voting shares, or 25% in the case of a company controlled by a foreign government, requires the prior approval of the Government Commission on Control of Foreign Investment in the Russian Federation pursuant to the Russian Foreign Investment Law. In addition, the restrictions stipulated by the Federal Law dated July 27, 2006 No 149-FZ "On the Information, Information Technology and Protection of Information" affect the provision of audio-visual services by foreign entities and local companies with more than 20% of foreign investments or shares. Although these restrictions do not impact local companies operating as a strategic enterprise, such as PJSC VimpelCom, the implementation of this law could affect our VEON platform by imposing additional costs or jeopardizing revenue projections. Additionally, under Russian law, companies controlled by foreign governments are prohibited absolutely from acquiring control over strategic enterprises, and the Government Commission on Control of Foreign Investment in the Russian Federation, or the Federal Antimonopoly Service of the Russian Federation, the "FAS", which administers application of the Russian Foreign Investment Law, has challenged acquisitions of our shares in the past. Finally, while the latest draft of the implementing regulation for Federal Law 187-FZ "On the security of mobile termination rates affectingRussia's critical information infrastructure" does not contain provisions limiting the use of foreign contractors, initial drafts did include such provisions and it is possible that the regulation, once implemented, will include such provisions.
In Kazakhstan, according to the national security law, a foreign company cannot directly or indirectly own more than a 49% stake in an entity that carries out telecommunications activities as an operator of long-distance or international communications or owns fixed communication lines without the consent of the Kazakhstan government. As a result, our ability to obtain financing from foreign investors may be limited, should prior approval be refused, delayed or require foreign investors to comply with certain conditions, which could materially harm our business, financial condition, results of operations, cash flows or prospects. Such laws may also hinder potential business combinations or transactions resulting in Italy, and other important government regulations impacting our business, see Exhibit 99.2—Regulationa change of Telecommunications. For information on potential penalties for failure to identify SIM card users in Algeria, see Note 26 to our audited consolidated financial statements included elsewhere in this annual report on Form 20-F.control.
Our licenses may be suspended or revoked and we may be fined or penalized for alleged violations of law, regulations or license terms.
We are required to meet certain terms and conditions under our licenses (such as nationwide coverage, quality of service parameters and capital expenditure, including network build outbuild-out requirements), including meeting certain conditions established by the legislation regulating the communications industry. From time to time, we may be in breach of such terms and conditions. If we fail to comply with the conditions of our licenses or with the requirements established by the legislation regulating the communications industry, or if we do not obtain or comply with permits for the operation of our equipment, use of frequencies or additional licenses for broadcasting directly or through agreements with broadcasting companies, the applicable regulator could decide to levy fines,
suspend, terminate or refuse to renew the license or permit. For example, a companySuch regulatory actions could adversely impact our ability to carry out divestitures in which we have an equity investment in Zimbabwe has received correspondence from local regulators regarding non-compliance with the terms of the company’s license, in particular foreign ownership restrictions, which could result in termination of the license pending further discussion with the regulators.relevant jurisdictions.
The occurrence of any of these events could materially harm our ability to build out our networks in accordance with our plans, andour ability to retain and attract customers, could harm our reputation and could harm our
business, financial condition, results of operations, cash flows or prospects. For more information on our licenses and their related requirements, please see the sections of this Annual Report on Form 20-F entitled “Item"Item 4—Information on the Company—Description of Operations of the Russia Segment,” “—Description of Operations of the Italy Segment,” “—Description of Operations of the Algeria Segment,” “—Description of Operations of the Africa & Asia Segment,” “—Description of Operations of the Ukraine Segment,” and “—Description of Operations of the CIS Segment.”Licenses."
Our licenses are granted for specified periods and they may not be extended or replaced upon expiration.
The success of our operations is dependent on the maintenance of our licenses to provide telecommunications services in the jurisdictions in which we operate. Most of our licenses are granted for specified terms, and wethere can give yoube no assurance that any license will be renewed upon expiration. Some of our licenses will expire in the near term. For more information about our licenses, including their expiration dates, see "Item 4—Information on the Company—Licenses."
These licenses and the frameworks governing their renewals are also subject to ongoing review by the relevant regulatory authorities. If renewed, our licenses may contain additional obligations, including payment obligations (which may involve a substantial renewal or extension fee), or may cover reduced service areas or scope of service. Furthermore, the governments in certain jurisdictions in which we operate may hold auctions (including auctions for the 4G/LTE spectrum or more advanced spectrums) in the future. If ourwe are unable to maintain or obtain licenses for the provision of telecommunications services or if our licenses are not renewed or are renewed on less favorable terms, our business and results of operations could be materially harmed. For more information on our licenses, including their expiration dates, please see the section of this Annual Report on Form 20-F entitled “Item 4—Information on the Company—Description of Our Business.”
We face uncertainty regarding our frequency allocations and we may experience limited spectrum capacity for providing wireless services.
To establish and commercially launch a mobile telecommunications network, we need to receive, among other things, frequency allocations for bandwidths within the frequency spectrums in the regions in which we operate. There is a limited number of frequencies available for mobile operators in each of the regions in which we operate or hold licenses to operate. We are dependent on access to adequate frequency allocation in each such market in order to maintain and expand our customer base. In addition, frequency allocations may be issued for periods that are shorter than the terms of our licenses, and such allocations may not be renewed in a timely manner or at all. For instance, we have in the past been unable to obtain frequency allocations necessary to test or expand our networks in Russia. If our frequencies are revoked or we are unable to renew our frequency allocations or obtain new frequencies to allow us to provide mobile services on a commercially feasible basis, our network capacity and our ability to provide mobile services would be constrained and our ability to expand would be limited, which could harm our business, financial condition, results of operations and prospects.
We may be subject to increases in payments for frequency allocations under the terms of some of our licenses.
Legislation in many countries in which we operate, including Russia, requires that we make payments for frequency spectrum usage. As a whole, the fees for all available frequency assignments have been significant. Any significant increase in the fees payable for the frequencies that we use or for additional frequencies that we need could have a negative effect on our financial results. We cannot assure you that the fees we pay for radio-frequency spectrum use will not increase, and any such increase could harm our business, financial condition, results of operations and prospects. For more information on the payment requirements relating to frequency allocation, see Exhibit 99.2—Regulation of Telecommunications.
It may not be possible for us to procure in a timely manner, or at all, the permissions and registrations required for our telecommunications equipment.base stations.
The laws of the countries in which we operate generally prohibit the operation of telecommunications equipment without a relevant permit from the appropriate regulatory body. Due to complex regulatory procedures, it is frequently not possible for us to procure in a timely manner, or at all, the permissions and registrations required for our base stations, including construction permits and registration of our title to land plots underlying our base stations, or other aspects of our network before we put the base stations into operation, or to amend or maintain the permissions in a timely manner when it is necessary to change the location or technical
specifications of our base stations. At times, there can be a number of base stations or other communications facilities and other aspects of our networks for which we are awaiting final permission to operate for indeterminate periods. This problem may be exacerbated if there are delays in issuing necessary permits.
We also regularly receive notices from regulatory authorities in countries in which we operate warning us that we are not in compliance with aspects of our licenses and permits and requiring us to cure the violations within a certain time period. We have closed base stations on several occasions in order to comply with regulations and notices from regulatory authorities. Any failure by our company to cure such violations could result in the applicable license being suspended and subsequently revoked through court action. Although we generally take all necessary steps to comply with any license violations within the stated time periods, including by switching off base stations that do not have all necessary permits until such permits are obtained, we cannot assure you that our licenses or permits will not be suspended and not subsequently be revoked in the future. If we are found to operate telecommunications equipment without an applicable license or permit, we could experience a significant disruption in our service or network operation, and this wouldwhich could harm our business, financial condition, results of operations, andcash flows or prospects.
We are subject to an increasing amount of data privacy laws and regulations that may require us to incur substantial costs and implement certain changes to our business practices that may adversely affect our results of operations.
We are subject to various data privacy laws and regulations that apply to the collection, use, storage, disclosure and security of personal information that identifies or may be used to identify an individual, such as names and contact information. Many countries have additional laws that regulate the processing, retention and use of communications data (both content and meta-data). These laws and regulations are subject to frequent revisions and differing interpretations and have generally become more stringent over time. Most of the jurisdictions where we operate have laws that restrict data transfers overseas unless certain criteria are met and/or are developing or implementing laws on data localization requiring data to be stored locally. These laws may restrict our flexibility to leverage our data and build new, or consolidate existing, technologies, databases and IT systems, limit our ability to use and share personal data, cause us to incur costs or require us to change our business practices in a manner adverse to our business, or conflict with other laws we are subject to, exposing us to regulatory risk. It is possible that these laws may be interpreted and applied in a manner that is inconsistent with our data practices or in conflict with laws applicable to us in other countries in which we operate. If so, in addition to the possibility of fines, this could result in an order requiring that we change our data practices, which could have an adverse effect on our business and results of operations.
For example, in recent years, U.S. and European lawmakers and regulators have expressed heightened concern over the retention and interception of telecommunications data. As part of this initiative, the European Commission proposed a draft of the new ePrivacy Regulation on January 10, 2017. The current draft of the ePrivacy Regulation is going through the EU legislative process. When it comes into effect, it is expected to regulate the processing of electronic communications data carried out in connection with the provision and the use of publicly available electronic communications services to users in the European Union, regardless of whether the processing itself takes place in the European Union. Unlike the current ePrivacy Directive, the draft ePrivacy Regulation will likely apply to over-the-top service providers as well as traditional telecommunications service providers (including the requirements on data retention and interception and changes to restrictions on the use of traffic and location data). The Italy Joint Venture as well as VEON entities established in the European Union which process such electronic communications data are likely to be subject to this regime. The current draft of the ePrivacy Regulation also regulates the retention and interception of communications data as well as the use of location and traffic data for value added services, imposes stricter requirements on electronic marketing, and changes to the requirements for use of tracking technologies like cookies. This could broaden the exposure of our business lines based in the European Union to data protection liability, restrict our ability to leverage our data and increase the costs of running those businesses. The draft also extends the strict opt-in marketing rules with limited exceptions to business to business communications, and significantly increases penalties.
In addition, the European Union will introduce a new data protection framework, the General Data Protection Regulation (GDPR), to replace the existing EU Data Protection Directive on May 25, 2018. The GDPR implements more stringent operational requirements for processors and controllers of personal data, including, for example, requiring expanded disclosures about how personal data is processed, certain mandatory contractual provisions, stronger rights for data subjects, mandatory data breach notification requirements, and higher standards for data controllers to demonstrate that they have obtained valid consent or have another legal basis in place to justify their data processing activities. The GDPR is applicable to companies that are established in the European Union, or companies that offer goods and services to, or monitor the behavior of, individuals within the European Union. While we believe that only our Italy Joint Venture, our VEON platform and a limited number of entities, including our Amsterdam and London-based headquarters and central operation entities
that process data of individuals and entities within the European Union, will be subject to GDPR, our operations in other markets may also become subject to this law, under certain circumstances, if such operations involve the offering of goods or services to, or monitoring the behavior of, individuals in the European Union. There is also a possibility that the law will apply to a larger range of activities than we anticipate, impose more onerous compliance obligations or otherwise have a larger impact on our operations than we expect.
Any failure or perceived failure by us to comply with privacy or security laws, policies, legal obligations or industry standards may result in governmental enforcement actions and investigations, blockage or limitation of our services in the European Union or offered to EU individuals, fines and penalties (for example, of up to 20,000,000 euros or up to 4% of the total worldwide annual turnover of the preceding financial year (whichever is higher) under the GDPR and draft ePrivacy Regulation) and litigation, including third party civil claims. If the third parties we work with violate applicable laws, contractual obligations or suffer a security breach, such violations may also put us in breach of our obligations under privacy laws and regulations and/or could in turn have a material adverse effect on our business. In addition, concerns regarding our practices with regard to the collection, use, disclosure or security of personal information or other privacy-related matters could result in negative publicity and have an adverse effect on our reputation and business. For more information on GDPR, see "Exhibit 99.2—Regulation of Telecommunications—EU General Data Protection Regulation."
In addition, in Russia, we are subject to certain data protection and other laws and regulation that establish two categories of information with corresponding levels of registration, disclosure and safeguards—state secret and other data (personal data of customers, correspondence privacy and information on rendered telecommunications services), and operators must implement the required level of data protection and law enforcement disclosures. See "Exhibit 99.2—Regulation of Telecommunications—Regulation of Telecommunications in Russia—Data Protection."
For a discussion of other data protection laws and regulations to which we are subject, see "Exhibit 99.2—Regulation of Telecommunications."
We are, and may in the future be, involved in or associated with disputes and litigation with regulators, competitors and third parties.
We are party to lawsuits and other legal, regulatory andor antitrust proceedings and commercial disputes, the final outcome of which is uncertain.uncertain and there can be no assurance that we will not be a party to additional proceedings in the future. Litigation and regulatory proceedings are inherently unpredictable. For more information on these disputes, see Note 26 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 20-F. An adverse outcome in, or any settlementdisposition of, these or other proceedings (including any that may be asserted in the future) maycould harm our reputation and harm our business, financial condition, results of operations, andcash flows or prospects. For more information on these disputes, see Notes 26 to our audited consolidated financial statements.
We could be subject to tax claims that could harm our business.
Tax audits in the countries in which we operate are conducted regularly.regularly, and the outcomes of which may not be fair or predictable. We have been subject to substantial claims by tax authorities in Russia, Italy, Algeria, Egypt, Pakistan, Bangladesh, Ukraine, Kazakhstan, Armenia, Georgia, Uzbekistan, Kyrgyzstan, Tajikistan and Tajikistan.Italy. These claims have resulted, and future claims may result, in additional payments, including interest, fines and other penalties, to the tax authorities. For more information regarding tax claims and their effects on our financial statements, see Note 26 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 20-F.
Although we are permitted to challenge, in court, the decisions of tax inspectorates, there can be no assurance that we will prevail in our litigation with tax inspectorates.authorities. In addition, there can be no assurance that the tax authorities will not claim on the basis of the same asserted tax principles they have claimed against us for prior tax years, or on the basis of different tax principles, that additional taxes, interest, fines and other penalties are owed by us for prior or future tax years, or that the
relevant governmental authorities will not decide to initiate a criminal investigation or prosecution, or expand existing criminal investigations or prosecutions, in connection with claims by tax inspectorates, including with respect to individual employees and for prior tax years.
The adverse resolution of these or other tax matters that may arise could harm our business, financial condition and results of operations. For more information regarding tax claims, and their effects on our financial statements, see Notes 26 to our audited consolidated financial statements.
Unpredictable tax systems give rise to significant uncertainties and risks that could complicate our tax planning and business decisions.
The tax systems in the markets in which we operate may be unpredictable and give rise to significant uncertainties, which could complicate our tax planning and business decisions, especially in emerging markets in which we operate, where there is significant uncertainty relating to the interpretation and enforcement of tax laws. Any additional tax liability imposed on us by tax authorities in this manner, as well as any unforeseen changes in applicable tax laws or changes in the tax authorities’authorities' interpretations of the respective double tax treaties in effect, could harm our future results of operations, cash flows or the amounts of dividends available for distribution to shareholders in a particular period. We may be required to accrue substantial amounts for contingent tax liabilities and the amounts accrued for tax contingencies may not be sufficient to meet any liability
we may ultimately face. From time to time, we may also identify tax contingencies for which we have not recorded an accrual. Such unaccrued tax contingencies could materialize and require us to pay additional amounts of tax. For example, in Algeria, a new finance law in 2017 increased VAT from 7% to 19% on data services and from 17% to 19% on voice services, and also increased taxes on recharges from 5% to 7%. Such changes could have an adverse impact on our business, financial condition, results of operations or cash flows in these countries and on our group.
Introduction Moreover, recently enacted U.S. tax legislation has significantly changed the U.S. federal income taxation of corporations, including by reducing the U.S. corporate income tax rate, limiting interest deductions, adopting elements of a territorial tax system and introducing new anti-base erosion provisions. Many of these changes are effective immediately, without any transition periods or grandfathering for existing transactions. The legislation is unclear in many respects and could be subject to potential amendments and technical corrections, as well as interpretations and implementing regulations by the Treasury and Internal Revenue Service, any of which could lessen or increase certain adverse impacts of the legislation. Further, it is possible that non-U.S. taxing authorities will be reviewing current law for potential modifications in reaction to the implementation of the new U.S. tax legislation. While some of the changes made by the U.S. tax legislation may adversely affect us in one or more reporting periods and prospectively, other changes may be beneficial on a going forward basis. We continue to work with our tax advisors and auditors to determine the full impact that the recent U.S. tax legislation as a whole will have on us.
The introduction of new tax laws or the amendment of existing tax laws, such as lawsthose relating to transfer pricing rules or the deduction of interest expenses in the markets in which we operate, may also increase the risk of adjustments being made by the tax authorities and, as a result, could have a material impact on our business, financial performance and results of operations.
Repeated tax audits and extension of liability beyond the limitation period may result in additional tax assessments.
Tax declarations together with related documentation are subject to review and investigation by a number of authorities in many of the jurisdictions in which we operate, which are empowered to impose fines and penalties on taxpayers. Tax audits may result in additional costs to our group if the relevant tax authorities conclude that entities of the group did not satisfy their tax obligations in any
given year. Such audits may also impose additional burdens on our group by diverting the attention of management resources. The outcome of these audits could harm our business, financial condition, results of operations, cash flows or prospects. Under such review, the relevant tax authorities may conclude that we had significantly underpaid taxes relating to earlier periods, which could harm our business, financial condition, results of operations, cash flows or prospects.
In Russia, for example, tax returns remain open and subject to inspection by tax and/or customs authorities for three calendar years immediately preceding the year in which the decision to conduct an audit is taken. Laws enacted in Russia in recent years increase the likelihood that our tax returns that were reviewed by tax authorities could be subject to further review or audit during or beyond the eligible three-year limitation period by a superior tax authority.
Tax audits may result in additional costs to our group if the relevant tax authorities conclude that entities of the group did not satisfy their tax obligations in any given year. Such audits may also impose additional burdens on our group by diverting the attention of management resources. The outcome of these audits could harm our business, financial condition, results of operations and prospects. Under such review the relevant tax authorities may conclude that we had significantly underpaid taxes relating to earlier periods, which could harm our business, financial condition, results of operations and prospects.
In addition, in recent years, the Russian tax authorities have aggressively brought tax evasion claims relating to Russian companies’companies' use of tax-optimization schemes, and press reports have speculated that these enforcement actions have been selective and politically motivated.
We have also been the subject of repeat complex and thematic tax audits in Kazakhstan, Tajikistan and Kyrgyzstan which, in some instances, have resulted in payments made under protest pending legal challenges and/or to avoid the initiation or continuation of associated criminal proceedings.
CFCAdverse decisions of tax authorities or changes in tax treaties, laws, rules or interpretations could have a material adverse effect on our business, results of operations, financial conditions or cash flows.
The tax laws and regulations in the Netherlands, our current resident state for tax purposes, may be subject to change and there may be changes in enforcement of tax law. Additionally, European and other tax laws and regulations are complex and subject to varying interpretations. We cannot be sure that our interpretations are accurate or that the responsible tax authority agrees with our views. If our tax positions are challenged by the tax authorities, we could incur additional tax liabilities, which could increase our costs of operations and have a material adverse effect on our business, financial condition or results of operations.
Within the Organisation for Economic Co-operation and Development ("OECD") there is an initiative aimed at avoiding base erosion and profit shifting ("BEPS") for tax purposes. This OECD BEPS project has resulted in further developments in other countries and in particular in the European Union. One of the developments is the agreement on the EU Anti-Tax Avoidance Directive ("ATAD"). All EU Member States must implement the minimum standards as set out in the ATAD. The implementation of these measures against tax avoidance in the legislation of the jurisdictions in Italy and Russiawhich we do business could have a material adverse effect on us. For example, the implementation of the general interest limitation rule (Article 4 ATAD) could result in additionalan increase of our tax costs.
Italian legislation providesliabilities as certain interest costs could no longer be deductible. Another development is the recently published proposal for taxation of foreign companies located in certain countries and territories with a privileged tax regime that are directly or indirectly controlled by Italian resident individuals, companies and entities. Foreign controlled companies which are resident outside the above mentioned countries may, also, be subject to taxation if generating passive income (e.g. interest, dividends, royalties, capital gains, etc.Council Directive on a Common Corporate Tax Base ("CCTB") and ifthe re-launch of the Common Consolidated Corporate Tax Base, first tabled in 2011. If enacted, these directives could also impact our tax position, either positively or negatively. For instance, under the proposed CCTB, our taxable result realized in each of the EU Member States will be calculated on the same basis in each of these EU Member States, irrespective of whether the national corporate income tax system differs from the CCTB (noting that Member States can opt to continue to have their own corporate income tax rate). Based on the draft wording of the CCTB, the CCTB participation exemption regime would be less favorable in the country of establishment is lower than half of applicable tax in Italy. WIND Italy continues to analyze the possible application developments and interpretations of this legislation.
In 2014, new CFC (controlled foreign companies) tax legislation was introduced in Russia. Accordingcomparison to the new legislation, affiliated foreign companiesDutch regime because a minimum of OJSC VimpelCom may nowa 10% shareholding would be required, as compared to the current 5% under the Dutch regime. On the other hand, the CCTB potentially introduces a subjectnotional interest deduction on equity, which the current Dutch rules do not make available. As a result, it is difficult to taxation in Russia, whichassess the impact of the enactment of these directives on our business, but such impact could result in additional cost for the group. Moreover, during 2014 Russia ratified the Conventionhave a material adverse effect on Mutual Administrative Assistance in Tax Matters with the purposeour business, financial condition or results of enacting wider cooperation with tax authorities in foreign tax jurisdictions.operations.
WINDThe Italy Joint Venture may be subject to a deferral or to a limitation of the deduction of interest expenses in Italy.
For taxpayers like WINDthe Italy Joint Venture, Italian tax law permits the deduction of some interest expense up to a specified limit. A further deduction of interest expense is permitted up to an additional threshold, somethreshold. The amount of whichunused interest expense deduction may be carried forward to future years. Based on these rules, our subsidiary, WINDthe Italy Joint Venture currently is not able to
deduct all of its interest expenses, though it is able to carry forward accrued and unused deductions to future fiscal years. Any future changes in current Italian tax laws or in their interpretation and/or any future limitation on the use of the foreign controlled entities may have an adverse impact on the deductibility of interest expenses for WINDthe Italy Joint Venture which, in turn, could harm VimpelCom’s and WIND Italy’s financial condition and results of operations.
We operate in uncertain judicial and regulatory environments.
In many of the emerging market countries where we operate, the application of the laws of any particular country is frequently unclear and may result in unpredictable judicial or regulatory outcomes.
The uncertain judicial and regulatory environments in which we operate could result in:
restrictions or delays in obtaining additional numbering capacity, receiving new licenses and frequencies, receiving regulatory approvals for rolling out our networks in the regions for which we have licenses, receiving regulatory approvals for changing our frequency plans and importing and certifying our equipment;
difficulty in complying with new or existing legislation and the terms of any notices or warnings received from the regulatory authorities in a timely manner;
significant additional costs, delays in implementing our operating or business plans; and
a more competitive operating environment.
Laws restricting foreign investment could materially harm our business.
We could be materially harmed by existing laws restricting foreign investment or the adoption of new laws or regulations restricting foreign investment, including foreign investment in the telecommunications industry in Russia or other markets in which we operate.
For example, Russian legislation, named “Russian Foreign Investment Law,” limits foreign investment in companies that are deemed to be strategic. Under the Russian Foreign Investment Law, a company operating in the telecommunications sector may be deemed strategic if it holds a dominant position in the Russian communications market (except for the Internet services market) or, in the case of fixed-line telecommunications, if the particular company’s market covers five or more Russian regions or covers Russian cities of federal importance. With respect to mobile telecommunications, a company will be deemed to have a dominant position for purposes of application of the Russian Foreign Investment Law if its share of the Russian mobile telecommunications market exceeds 25.0%. The Government Commission on Control of Foreign Investments in the Russian Federation, or the “FAS”, has previously determined that a group of persons consisting of OJSC VimpelCom and two of its Russian subsidiaries, one of which subsequently merged with and into OJSC VimpelCom, has a dominant position, because their share of the Russian mobile telecommunications market exceeds 25.0%. As a result, OJSC VimpelCom is deemed to be a strategic enterprise and, among other things, any acquisition by a foreign investor of direct or indirect control over more than 50.0% of its voting shares, or 25.0% in the case of a company controlled by a foreign government, requires the prior approval of the Russian authorities pursuant to the Russian Foreign Investment Law. In the event of any future transactions resulting in the acquisition by a foreign investor of direct or indirect control over OJSC VimpelCom, such a transaction will require prior approval in accordance with the Russian Foreign Investment Law.
Additionally, under Russian law, companies controlled by foreign governments are prohibited from acquiring control over strategic enterprises and the FAS has challenged acquisitions of our shares in the past. As a result, our ability to obtain financing from foreign investors may be limited, should prior approval be refused, delayed or require foreign investors to comply with certain conditions imposed by FAS, which could materially harm our business, financial condition, results of operations andor prospects.
The international economic environment could cause our business to decline.
After late 2008, Our operations are subject to macro-economic and political risks that are outside of our control. The current macroeconomic environment is highly volatile, and continuing instability in global markets has contributed to a challenging global economic environment in which to operate. As future developments are dependent upon a number of political and economic factors, we cannot accurately predict how long challenging conditions will exist or the extent to which the markets in which we operate may deteriorate. Unfavorable economic conditions may impact a significant number of our customers, including their spending patterns, both in terms of the products they subscribe for and usage levels. As a result, it may be more difficult for us to attract new customers, more likely that customers will downgrade or disconnect their services and more difficult for us to maintain ARPUs at existing levels. The difficult economic environment and any future downturns in the economies of markets in which we operate or may operate in the future could also increase our costs, prevent us from executing our strategies, hurt our liquidity, impair our ability to take advantage of future opportunities or to respond to competitive pressures, to refinance existing indebtedness or to meet unexpected financial requirements, all of which could harm our business, financial condition, results of operations, cash flows or prospects.
As a global telecommunications company with operations in multiple markets, we may be adversely affected by a broad range of international economic developments. For example, the economies in our markets were adversely affected by the international economic crisis that began in the late 2000s, and some economies in markets in which we operate continue to suffer. Among other things, the crisis led to a slowdown in gross domestic product growth, increase of inflation, devaluations of the currencies in Russia and other markets in which we operate and a decrease in commodity prices. The timing of a return to sustained economic growth and consistently positive economic trends is difficult to predict. The recessionary effects, debt crisis and Euro crisis in Europe continue to pose potentially significant macroeconomic risks to our group. In addition, because Russia, Kazakhstan and Algeria currently three of our larger markets, produce and export large amounts of oil, their economies are particularly vulnerable to fluctuations in the price of oil on the world market. Since June 2014, global oil prices have been fallingOur operations may also be affected by the ongoing issues in Europe relating to risks of deflation, sovereign debt levels and are currently at verythe suitability and stability of the euro.
Adverse economic developments specific to a particular market in which we operate may also affect our operations. For example, in Russia, low levels for recent times. Moreover, economic sanctions imposed in 2014 and 2015 are impacting Russia. Low oil prices, together with the impact of economic sanctions and the significant devaluation of the Russian ruble, arehave negatively impactingimpacted the Russian economy and economic outlook. The current difficult economic environmentoutlook and any future downturns in the economies of markets in which we operate or may operate in the future could diminish demand for our services, increase our costs, constrainalso negatively impact our ability to retain existing customersraise external financing, particularly if the sanctions are broadened. For more on sanctions affecting Russia and collect payments from themhow it affects our operations, see "—Our operations may be adversely affected by ongoing developments in Russia and prevent us from executing our growth strategy. Adverse economic conditions could also hurt our liquidity and prevent us from obtaining financing needed to fund our development strategy, to take advantageUkraine."
Deterioration of future opportunities to respond to competitive pressures, to refinance existing indebtedness or to meet unexpected financial requirements, which could harm our business, financial condition, results of operations and prospects.
A deterioration in macroeconomic conditions in the countries in which we operate and/ormay also have certain accounting ramifications. For example, a significant difference between the performance of an acquired company and the business case assumed at the time of acquisition could require us to write down the value of the goodwill. In addition, the different possible developments as a result of a financial and
economic crisis,crisis—related to, in particular, related to customer behavior, competition reaction in this environmentthe reactions of our competitors in terms of offers, and pricing or intheir response to new entrants, regulatory adjustments in relation to reductions in consumer prices and our ability to adjust costs and investments in keeping with possible changes in revenue revenue—may adversely affect our forecasts and lead to a write-down in tangible and intangible assets.
A write-down inrecorded for tangible and intangible assets lowering their book values could impact certain covenants under our debt agreements, andwhich could harmresult in a deterioration of our business, financial condition, results of operations and prospects.or cash flows. For further information on the impairment of tangible and intangible assets and recoverable amounts (particularly key assumptions and sensitivity)sensitivities), see Note 10 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 20-F.statements.
Our operations may be adversely affected by ongoing developments in Russia and Ukraine.
The current situation in Russia and Ukraine, along withand the response to this situation by the governmentsrelated responses of Russia, the United States, member states of the European Union, the European Union itself and certain other nations, have the potential to materially adversely affect our business in Russia and Ukraine markets in whichwhere we have significant operations, which in turn could have a materially adverse effect onharm our business, financial condition, results of operations, andcash flows or prospects.
In connection with the current situation in Russia and Ukraine, the United States, the European Union, and a number of countries have imposed (i) sanctions that block the property of certain designated Russian, Crimean and Ukrainian businesses, organizations and individual persons,individuals, (ii) sectoral sanctions that prohibit certain types of transactions with specifically designated businesses operating in certain sectors of the Russian economy, currently including the financial services, energy, and defense sectors, and (iii) territorial sanctions restricting investment in and trade with Crimea. The U.S. and EU sanctions target entities owned and/or controlled by designated entities and individuals. Further, under the U.S. sanctions regime, even non-U.S. persons who engage in certain prohibited transactions may be exposed to secondary sanctions, such as the denial of certain privileges, including financing and contracting with U.S. persons or within the United States. In addition, the U.S.United States and EUthe European Union have implemented certain export control restrictions related to
Russia’s Russia's energy sector and military capabilities. Ukraine has also enacted sanctions with respect to certain Russian entities and individuals. Russia has responded with certain countermeasures to such international and Ukrainian restrictions and sanctions, currently including limiting the import of certain goods from the United States, the European Union, Ukraine and other countries, and imposing visa bans on certain persons, and can restrictimposing restrictions on the ability of Russian companies to comply with sanctions imposed by other nations.countries.
Recent concerns related to Ukraine have prompted calls for increasing levels of sanctions, export controls and other measures impacting Russia. Further Such sanctions, export controls and/or other measures, including sanctions on additional persons or businesses (including vendors, joint venture and business partners, affiliates and financial institutions) imposed by the United States, the European Union, Ukraine, Russia, and/or other countries, could materially adversely affect our business, financial condition, results of operations, cash flows or prospects. We are not able to predict further developments on this issue, including when these measures will cease to be in effect. In addition, there may be additions to the designated persons or business lists or other expansions of the U.S., EU and/or other sanctions that target Russia and restrict dealings related to Crimea in the future. As the United States government indicated in late 2017 that Crimea-related sanctions will remain in place until Ukraine has full control of the Crimean peninsula, it is possible that these sanctions will be in effect for the foreseeable future.
Ukraine has assigned a "temporary occupied territories" status to Crimea and an "anti-terrorist operation zone" status to certain Eastern Ukraine regions which are currently not under the Ukrainian government's control, and has imposed certain restrictions and prohibitions on trade in goods and services in such territories. Our Ukrainian subsidiary, Kyivstar JSC ("Kyivstar"), shut down its network in Crimea in 2014 as well as its network in certain parts of Eastern Ukraine in 2015 and, in each case, has written off the relevant assets. Under terms of its telecommunications licenses, Kyivstar is obliged to provide services throughout Ukraine. Kyivstar has notified the regulatory authorities that Kyivstar
has stopped providing services in these areas and has requested clarification from such authorities regarding telecommunications operations in such areas. Since September 2014, legislation has been in effect in Ukraine that authorizes the cancellation of telecommunications licenses for sanctioned parties. There can be no assurance that the escalation of the current situation will not lead to the cancellation or suspension of, or other actions under, certain or all of our Ukrainian telecommunications licenses, or other sanctions. These outcomes or other sanctions, including prohibitions and restrictions possible under draft legislation that could be passed by the Ukrainian parliament in early 2018, could have a material adverse effect on our business in Ukraine, which in turn could harm our business, financial condition, results of operations, cash flows or prospects.
The status of thesituation in Crimea and the situation in Eastern Ukraine has resulted, and may in the future result, in damage or loss of assets, disruption of our services, and regulatory issues which has, and may in the resolution of which mayfuture, adversely impact our group. In addition, if there were an extended continuation or anfurther increase in conflict in Crimea, Eastern Ukraine or in the region, it could result in further instability and/or worsening of the overall political and economic situation in Ukraine, Russia, Europe and/or in the global capital markets generally, which could adversely impact our group. Moreover, the instability in Crimea and Eastern Ukraine specifically, and in the region more generally, economic sanctions and related measures, and other geopolitical developments (including with respect to the current conflict and international interventions in Syria) could materially harm market conditions, our business, financial condition, results of operations, andcash flows or prospects. In particular, we could be materially adversely impacted by a continued decline of the Russian ruble against the U.S. Dollardollar or the Euro exchange rateseuro and the general economic performance of Russia.
In addition, our operations may be adversely affected by potential U.S. sanctions against the Russian government in response to alleged meddling in the 2016 presidential election. Though the nature of such measures, if enacted, is not yet clear, the United States government may be contemplating extending the number of Russian officials and companies on its current sanctions list and banning the purchase of Russian treasury bonds. As the United States government is reportedly revisiting whether sanctions imposed in response to the situation in Russia and Ukraine were effective, it is possible that the new measures, if enacted, would be significantly more harmful to the Russian economy than those previously enacted. For example, the Russian ruble could decline against the U.S. dollar and euro, investment in Russia or trade with Russian companies may decrease substantially and the Russian government may experience difficulty raising money through the issuance of debt in the global capital markets. As we derive a significant portion of our revenue from our Russian operations, such measures, if enacted, could have a material adverse impact on our group.
Investors in emerging markets, where most of our operations are located, are subject to greater risks than investors in more developed markets, including significant political, legal and economic risks and risks related to fluctuations in the global economy.
Most of our operations are in emerging markets. Investors in emerging markets should be aware that these markets are subject to greater risks than more developed markets, including in some cases significant political, legal and economic risks. Emerging market governments and judiciaries often exercise broad, unchecked discretion and are susceptible to abuse and corruption and rapid reversal of political and economic policies on which we depend. Political and economic relations among the countries in which we operate (including Russia and Ukraine) are often complex and have resulted, and may in the future result, in conflicts, which maycould materially harm our business, financial condition, and results of operation. In addition, emerging economies are subject to rapid change and the information set out in this Annual Report on Form 20-F may become outdated relatively quickly.operations, cash flows or prospects. The economies of emerging markets are vulnerable to market downturns and economic slowdowns elsewhere in the world. As has happened in the past, financial problems or an increase in the perceived risks associated with investing in emerging economies could dampen foreign investment in these markets and materially adversely affect their economies. Turnover of political leaders or parties in emerging markets as a result of a scheduled election upon the end of a term of service or in other circumstances may also affect the legal and regulatory regime in those markets to a greater extent than turnover in established countries. These developments could severely limit our access to capital and could materially harm the purchasing power of our customers and, consequently, our business.
Further, the nature of much of the legislation in emerging markets, the lack of consensus about the scope, content and pace of economic and political reform and the rapid evolution of the legal systems in emerging markets, place the enforceability and, possibly, the constitutionality of, laws and regulations in doubt and result in ambiguities, inconsistencies and anomalies. The legislation often contemplates implementing regulations that have not yet been promulgated, leaving substantial gaps in the regulatory infrastructure. Any of these factors could affect our ability to enforce our rights under our licenses or our contracts, or to defend our company against claims by other parties.
Many of the emerging markets in which we operate are susceptible to significant social unrest or military conflicts. Such events may create uncertain regulatory environments, which in turn could impact our compliance with license obligations and other regulatory approvals. In addition, in some of the countries in which we operate, the local authorities may order our subsidiaries to temporarily shut down their entire network or part or all of our networks may be shut down due to actions relating to military conflicts or nationwide strikes. For example, in 2014, our subsidiary in Pakistan wasis ordered to shut down parts of its mobile network and services on a regular basis. Also, our subsidiary in Bangladesh was forcedfrom time to shut down its network on a number of occasionstime due to nationwide strikes. In addition, following actions arising from the security situation in Ukraine, our subsidiary in Ukraine shut down its network in Crimea in 2014 as well as a portion of its network in Eastern Ukraine temporarily in 2015. In addition, local governmentsthe country. Governments or other factions, including those asserting authority over specific territories in areas of conflict, could make inappropriate use of the network, attempt to compel us to operate our network andin conflict zones or disputed territories and/or force us to broadcast propaganda or illegal instructions to our customers.customers or others (or face consequences for failure to do so). Forced shutdowns, or inappropriate use of our network, in the countries where we have operationscompelling us to operate our network, or broadcast propaganda or illegal instructions could materially harm our business, reputation, financial condition, results of operations, andcash flows or prospects.
Generally, investment in emerging markets is only suitable for sophisticated investors who Investors should fully appreciate the significance of the risks involved in investing in an emerging markets company and investors are urged to consult with their own legal, financial and tax advisors.
Sustained periods of high inflation may materially harm our business.
The countries in which we operate have experienced periods of high levels of inflation, including certain cases of hyperinflation.
Our profit margins could be harmed if we are unable to sufficiently increase our prices to offset any significant future increase in the inflation rate, which may be difficult with our mass market customers and our price sensitive customer base. Inflationary pressure in the countries where we have operations could materially harm our business, financial condition, results of operations and prospects.
Social instability in the countries wherein which we operate could lead to increased support for centralized authority and a rise in nationalism, which could harm our business.
Social instability in the countries in which we operate, coupled with difficult economic conditions, could lead to increased support for centralized authority and a rise in nationalism. These sentiments could lead to restrictions on foreign ownership of companies in the telecommunications industry or nationalization, expropriation or other seizure of certain assets or businesses. In most of the countries in which we operate, there is relatively little experience in enforcing legislation enacted to protect private property against nationalization or expropriation. As a result, we may not be able to obtain proper redress in the courts, and we may not receive adequate compensation if in the future the governments decide to nationalize or expropriate some or all of our assets. If this occurs, our business could be harmed.
In addition, ethnic, religious, historical and other divisions have, on occasion, given rise to tensions and, in certain cases, military conflict. The spread of violence, or its intensification, could have significant political consequences, including the imposition of a state of emergency, which could materially adversely affect the investment environment in the countries in which we operate.
The physical infrastructure in many countries in which we operate is in poor condition and further deterioration in the physical infrastructure could harm our business.
In many countries in which we operate, the physical infrastructure, including transportation networks, power generation and transmission and communications systems, is in poor condition. In some of the countries in which we operate including Ukraine, the physical infrastructure has been damaged by military conflict.conflict, such as Ukraine. In some of the countries in which we operate, including Russia, the public switched telephone networks have reached capacity limits and need modernization, such as Russia, which may inconvenience our customers and will require us to make additional capital expenditures. Some of the
markets in which we operate are vulnerable to extreme weather, the occurrence of which could result in disruptions or damage to our networks.
In addition, continued growth in local, long-distancelong distance and international traffic, including that generated by our customers, and development in the types of services provided may require substantial investment in public switched telephone networks. Any efforts to modernize infrastructure may result in increased charges and tariffs, potentially adding costs to our business. The deterioration of the physical infrastructure harms the economies of these countries, disrupts the transportation of goods and supplies, adds costs to doing business and can interrupt business operations. Further deterioration in the physical infrastructure in many of the countries in which we operate could harm our business.business, financial condition, results of operations, cash flows or prospects.
The banking systems in many countries in which we operate remain underdeveloped, there are a limited number of creditworthy banks in these countries with which our companywe can conduct business and currency control requirements restrict activities in certain markets in which we have operations.
The banking and other financial systems in many countries in which we operate are not well developed or regulated, and laws relating to banks and bank accounts are subject to varying interpretations and inconsistent
applications. We have attempted to mitigate ourSuch banking risk cannot be completely eliminated by receivingdiversified borrowing and holding funds with the most creditworthy banks available in each country. However, in the event of aconducting credit analyses. Uncertain banking laws may also limit our ability to attract future investment. A banking crisis in any of these countries affecting the capacity for financial institutions to lend or fulfill their existing obligations or the bankruptcy or insolvency of the banks from which we receive, or with which we hold, our funds could result in the loss of our deposits, the inability to borrow or refinance existing borrowings or otherwise negatively affect our ability to complete banking transactions in these countries, which could harm our business, financial condition and results of operations.
In addition, central banks and governments in the markets in which we operate may restrict or prevent international transfers or impose (foreign)foreign exchange controls or other currency restrictions, which could prevent us from making payments, including the repatriation of dividends. Thisdividends and payments to third party suppliers, particularly in Uzbekistan, Ukraine, Bangladesh and Pakistan. For more information on currency restrictions, see "Item 5—Operating and Financial Review and Prospects—Factors Affecting Comparability of Financial Position and Results of Operations—Foreign Currency Controls and Currency Restrictions." Furthermore, local banks have limitations on the amounts of loans that they can provide to single borrowers, which could limit the availability of functional currency financing and refinancing of existing borrowings in these countries. There can be no assurance that we will be able to obtain approvals under the foregoing restrictions or limitations, each of which could harm theour business, financial condition, cash flows, results of our local operations.operations and prospects.
Risks Related to the Ownership of our ADSs
Our ADS price may be volatile, and purchasers of ADSs could incur substantial losses.
Our ADS price may be volatile. The possible salestock market in general has experienced extreme volatility that has often been unrelated to the operating performance of additionalparticular companies. As a result of this volatility, holders of our ADSs may not be able to sell their ADSs at or above the price at which they purchase our ADSs. The market price for our ADSs may be influenced by many factors, including:
Telenor East's issuance of exchangeable bonds, and subsequent exchanges of these exchangeable bonds for VEON Ltd.'s ADSs, as well as our filing of a registration statement registering resale of VEON Ltd.'s ADSs deliverable upon exchange of the exchangeable bonds may negatively affect the market price of ourfor VEON Ltd.'s ADSs.
There are currently 305,000,000 VimpelCom convertible preferred shares outstanding which may be converted into VimpelCom common shares at the option of the shareholder (presently Telenor) any time between October 15, 2013 and April 15, 2016 at a price based on the NASDAQ price of VimpelCom ADSs. If convertible preferred shares are converted into common shares they will also become available for trading in the public market, subject to certain limitations under U.S. securities laws. The sale of any of the VimpelComVEON Ltd.'s shares on the public markets or the perception that such sales may occur, commonly called “market"market overhang,”" may adversely affect the market for, and the market price of, VimpelCom’sVEON Ltd.'s ADSs.
Various factors may hinder the declaration and payment of dividends.
The payment of dividends is subject to the discretion of VimpelCom’sVEON Ltd.'s supervisory board and VimpelCom’sVEON Ltd.'s assets consist primarily of investments in its operating subsidiaries. In 2014,For the VimpelCom supervisory board approvedfinancial year ended December 31, 2017, we paid a new dividend policy that reducedin the annual dividend target toaggregate amount of US$0.03528 cents per share.share, with a record date of March 5, 2018, on March 13, 2018. Various factors may cause the supervisory board to determine not to pay dividends or not to increase dividends from current levels. Such factors include VimpelCom’sVEON Ltd.'s financial condition, its earnings and equity free cash flows,flow, its leverage, its capital requirements, contractual restrictions, legal proceedings and such other factors as VimpelCom’sVEON Ltd.'s supervisory board may consider relevant. For more information on our policy regarding dividends, see “Item"Item 8—Financial Information—A. Consolidated Statements and Other Financial Information—Policy on Dividend Distributions.” See also “RisksDistributions,""—Risks Related to Our Business—As a holding company, VimpelComVEON Ltd. depends on the performance of its subsidiaries”subsidiaries and “—Our strategic partnershipstheir ability to pay dividends, and relationships carry inherent business risks.”may therefore be affected by changes in exchange controls and currency restrictions in the countries in which its subsidiaries operate."
VimpelComHolders of our ADSs may not receive distributions on our common shares or any value for them if it is illegal or impractical to make them available to them.
The depositary of our ADSs has agreed to pay holders of our ADSs the cash dividends or other distributions it or the custodian for our ADSs receives on our common shares or other deposited securities after deducting its fees and expenses. Holders of our ADSs will receive these distributions in proportion to the number of our common shares that their ADSs represent. However, the depositary is not responsible for making such payments or distributions if it is unlawful or impractical to make a distribution available to any holders of ADSs. For example, it would be unlawful to make a distribution to a holder of ADSs if such distribution consists of securities that require registration under the Securities Act but that are not properly registered or distributed pursuant to an applicable exemption from registration. The depositary is not responsible for making a distribution available to any holders of ADSs if any government approval or registration required for such distribution cannot be obtained after reasonable efforts made by the depositary. We have no obligation to take any other action to permit the distribution of our ADSs, common shares, rights or anything else to holders of our ADSs. This means that holders of our ADSs may not receive the distributions we make on our common
shares or any value for them if it is illegal or impractical for us to make them available. These restrictions may materially reduce the value of the ADSs.
VEON Ltd. is a Bermuda company governed by Bermuda law, which may affect your rights as a shareholder or holder of ADSs.
VimpelCom VEON Ltd. is a Bermuda exempted company. As a result, the rights of VimpelCom’sVEON Ltd.'s shareholders are governed by Bermuda law and by VimpelCom’sVEON Ltd.'s bye-laws. The rights of shareholders under Bermuda law may differ from the rights of shareholders of companies incorporated in other jurisdictions. In addition, holders of ADSs do not have the same rights under Bermuda law and VimpelCom’sVEON Ltd.'s bye-laws as registered holders of VimpelCom’sVEON Ltd.'s common shares. Substantially all of our assets are located outside the United States. It may be difficult for investors to enforce in the United States judgments obtained in U.S. courts against VimpelComVEON or its directors and executive officers based on civil liability provisions of the U.S. securities laws. Uncertainty exists as to whether courts in Bermuda will enforce judgments obtained in other jurisdictions, including the United States and the Netherlands, under the securities laws of those jurisdictions, or entertain actions in Bermuda under the securities laws of other jurisdictions.
As a foreign private issuer within the meaning of the Exchange Act and the rules of NASDAQ, we are subject to different U.S. securities laws and NASDAQ governance standards than domestic U.S. issuers. This may afford less protection to holders of our securities, and such holders may not receive corporate and company information and disclosure that they are accustomed to receiving or in a manner in which they are accustomed to receiving it.
We As a foreign private issuer, the rules governing the information that we disclose differ from those governing U.S. corporations pursuant to the Exchange Act. Although we currently report periodic financial results and certain material events, we are not required to file quarterly reports on Form 10-Q or provide current reports on Form 8-K disclosing significant events within four business days of their occurrence. In addition, we are exempt from the SEC's proxy rules, and proxy statements that we distribute will not be subject to certain corporate governance requirements underreview by the NASDAQ rules.SEC. Our exemption from Section 16 rules regarding sales of our shares by insiders means that holders of our securities will have less data in this regard than shareholders of U.S. companies that are subject to this part of the Exchange Act. As a result, holders of our securities may not have all the data that you are accustomed to having when making investment decisions with respect to domestic U.S. public companies.
Our ADSs are listed on the NASDAQ Global Select Market; however, as a Bermuda company, we are permitted to follow “home"home country practice”practice" in lieu of certain corporate governance provisions under the NASDAQ listing rules that are applicable to a U.S. company. The primary difference between our corporate governance practices and the NASDAQ rules relates to NASDAQ listing rule 5605(b)(1), which provides that each U.S. company listed on NASDAQNasdaq must have a majority of independent directors, as defined in the NASDAQ rules. Bermuda corporate law does not require that we have a majority of independent directors. As a foreign private issuer, we are exempt from complying fromwith this NASDAQ requirement, and werequirement. Accordingly, VEON's shareholders do not have a majority of independent directors, as defined in the NASDAQ rules. Accordingly, you will not have the same protections as are afforded to shareholders of companies that are subject to all of the NASDAQ corporate governance requirements. For more information on the significant differences between our corporate governance practices and those followed by U.S. companies under the NASDAQ listing rules, see the section of this Annual Report on Form 20-F entitled “Item"Item 16G—Corporate Governance.”Governance."
Holders of ADSs may be restricted in their ability to exercise voting rights and the information provided with respect to shareholder meetings.
Holders of ADSs generally have the right under the deposit agreement to instruct the depositary to exercise the voting rights for the equity shares represented by such holder's ADSs. At our request,
the depositary will mail to holders any notice of shareholders' meeting received from us together with information explaining how to instruct the depositary to exercise the voting rights of the common shares represented by ADSs. If the depositary timely receives voting instructions from a holder of ADSs, it will endeavor to vote the securities represented by the holder's ADSs in accordance with such voting instructions. However, the ability of the depositary to carry out voting instructions may be limited by practical and legal limitations and the terms of the common shares on deposit. We cannot assure you that you will receive voting materials in time to enable you to return voting instructions to the depositary in a timely manner.
We may lose our foreign private issuer status in the future, which could result in significant additional costs and expenses.
We could cease to be a foreign private issuer if a majority of our outstanding voting securities are directly or indirectly held of record by U.S. residents and we fail to meet additional requirements necessary to avoid loss of foreign private issuer status. Based on a review of our register of members maintained in Bermuda, as of March 1, 2018, 69.9% of our issued and outstanding common shares were held of record by BNY (Nominees) Limited in the United Kingdom as custodian of The Bank of New York Mellon and 29.1% of our issued and outstanding common shares were held of record by Nederlands Centraal Instituut Voor Giraal Effectenverkeer B.V. and where ING Bank N.V. is acting as custodian of The Bank of New York Mellon, for the purposes of our ADS program. As of March 1, 2018, 22 record holders of VEON Ltd.'s ADRs, holding an aggregate of 498,849,387 common shares (representing approximately 28.4% of VEON Ltd.'s issued and outstanding shares), were listed as having addresses in the United States. The regulatory and compliance costs to us under U.S. securities laws under such event may be significantly higher than costs we incur as a foreign private issuer, which could have a material adverse effect on our business and financial results.
ITEM 4. INFORMATION ON THE COMPANY
Overview
VimpelCom VEON is a leading global provider of telecommunicationsconnectivity and internet services. Present in some of the world's most dynamic markets, VEON provides more than 240 million customers (including the Italy Joint Venture) with voice, fixed broadband, data and digital services. VEON currently offers services to customers in 14 countries and is headquartered in Amsterdam. The company provides voice and data services through a range of traditional and broadband mobile and fixed-line technologies. The VimpelCom Group operates in12 countries: Russia, Italy and emerging markets, which include companies operating in Russia,(through our Italy Joint Venture), Pakistan, Algeria, Uzbekistan, Ukraine, Bangladesh, Kazakhstan, Uzbekistan,Kyrgyzstan, Tajikistan, Armenia Georgia,and Georgia. Our business in Laos is currently classified as an asset held for sale. VEON's reporting structure is divided into three business units—Major markets (Russia and the Italy Joint Venture), Emerging Markets (Pakistan, Algeria and Bangladesh) and Eurasia (Ukraine, Uzbekistan, Kazakhstan, Kyrgyzstan, Laos, Algeria, Bangladesh,Tajikistan, Armenia and Pakistan. The operations of these companies cover a territory with a total population of approximately 740 million as of December 31, 2014.Georgia). We provide services under the “Beeline,” “Kyivstar,” “banglalink,” “Mobilink,” “Djezzy,” “WIND”"Beeline," "Kyivstar," "banglalink," "Jazz" and “Infostrada”"Djezzy" brands. As of December 31, 2014,2017, we had 222 million mobile customers and 56,02439,938 employees. For a breakdown of total revenue by category of activity and geographic segments for each of the last three financial years, see “Item"Item 5—Operating and Financial Review and Prospects." In addition, the Italy Joint Venture provides services to customers in Italy under the "WIND" and "3" brands and had 29.5 million customers and 7,090 employees as of December 31, 2017.
In 2017, we rebranded from VimpelCom to VEON, and launched the VEON platform in Russia, Ukraine, Georgia and Pakistan, after launching in Italy in 2016, to reflect our strategy to move from being solely a telecommunications company to a company leveraging new technology platforms with an asset-light business model. Technology is continuing to revolutionize the way users communicate, travel, bank, shop, consume and are entertained. We are focused on digitalizing our core telecommunications business model to ensure that our customers can transact with us online on all dimensions, with the aim of ultimately leading to increased customer satisfaction and a potentially lower cost structure for our business. Furthermore, our new VEON platform leverages the re-engineering of our legacy systems
and data architecture, and enables us to offer new, personalized and contextual services. In 2018, we are prioritizing two strategic objectives within the organization: developing new digital services, including what we believe to be an industry-first BSS transformation, an integrated messaging and marketplace platform, and digitalizing the customer experience in our core telecommunications business.
As part of this initiative, we are working through all layers of our technology landscape to deploy a fully digital end-to-end solution to benefit our customers. The new digital IT stack and data management platform are becoming the core of our IT, while we believe our network is becoming increasingly more virtualized, software defined, intelligent and dynamic. We are continuously future proofing our networks to prepare them for data growth and for new technologies, such as 5G. In addition, we have launched a significant re-engineering of our internal administrative systems and back-office processes in order to make our operations more agile and transparent.
The VEON platform is about bringing together messaging services, content and a marketplace to provide a new personal internet platform particularly in emerging markets. With zero-rating as a fundamental component, VEON users will be able to use the VEON platform to stay connected for free, even when their data plans are out of credit. We work with partners from the music, transport, banking, e-commerce and other businesses, all of which are integrated into a single personalized internet platform. We believe that these revenue-share relationships, particularly those with local businesses in each of the countries in which we operate, will help grow business in those regions.
As part of our initiative to digitalize the core telecommunications business, we intend to continue focusing on increasing our capital investment efficiency, including with respect to our IT, network, and distribution costs. We have secured network sharing agreements and intend to maintain our focus on achieving an asset-light business model, where we own only the core assets needed to operate our business.
We anticipate combined operational expenditure and capital expenditure of approximately US$100 million per annum over the next four years as part of the rollout of the VEON platform. For further information on our capital expenditures, see "Item 5—Operating and Financial Review and Prospects—Liquidity and Capital Resources—Future Liquidity and Capital Requirements.”" We anticipate that we will finance the investments (or the VEON platform) with operational cash flow, cash on our balance sheet and external financing that we currently have in place.
VimpelCom VEON Ltd. is an exempted company limited by shares registered under the Companies Act 1981 of Bermuda, as amended (the "Companies Act"), on June 5, 2009, and our registered office is located at Victoria Place, 31 Victoria Street, Hamilton HM 10, Bermuda. The VimpelCom Group’sOur headquarters are located at Claude Debussylaan 88, 1082 MD, Amsterdam, the Netherlands. Our telephone number is +31 20 797 7200. VimpelComVEON Ltd. is registered with the Dutch Trade Register (registration number 34374835) as a company formally registered abroad (formeel buitenlandse kapitaalvennootschap), as this term is referred to in the Dutch Companies Formally Registered Abroad Act (Wet op de formeel buitenlandse vennootschappen), which means that we are deemed a Dutch resident company for tax purposes in accordance with applicable Dutch tax regulations.
Our legal representative in the United States is Puglisi & Associates, 850 Library Ave, Suite 204, Newark, DE 19711 (+1 (30) 738 6680). Our agent for service of process in the United States is CT Corporation, 11 Eighth Avenue, New York, NY 10011 (+1 (212) 894 8400).
History and Development
Our predecessor PJSC VimpelCom (formerly OJSC VimpelCom"Vimpel-Communications") was founded in 1992. Since then, VimpelCom has a rich history of adapting to shifts in the marketplace. Prior to 2014, VimpelCom focused on development and expansion throughout Russia and the CIS, then into Asia, Europe and Africa through a combination of organic growth and acquisitions. More recently, VimpelCom has turned its focus to enhancing its operations in its core markets and investing in high-speed networks.
The most significant events in the development of our business include the following:
In November 1996, our predecessor OJSCPJSC VimpelCom became the first Russian company since 1903 to list shares on the NYSE.
New York Stock Exchange, where we remained listed until 2013 when we switched our listing to
Telenor, Norway’s leading telecommunications company became a strategic partner in OJSC VimpelCom in December 1998 and Table of Contents
the Alfa Group Consortium (“Alfa Group”) acquired strategic ownership interests in 2001.
VimpelComNASDAQ Global Select Market. In the early 2000s, we began itsour expansion into the CIS by acquiring local operators or entering into joint ventures with local partners in Kazakhstan (2004), Ukraine (2005), Tajikistan (2005), Uzbekistan (2006), Georgia (2006) and Armenia (2006).
In 2009 and 2010, Telenor ASA, the parent company of the Telenor Group, and Altimo Holdings & Investments Ltd. (“Altimo Holdings”), which is now held by LetterOne, combined their ownership of OJSCPJSC VimpelCom and Ukrainian mobile operator, Kyivstar, undercombined to create a new company, called VimpelCom Ltd. (a combination we refer to as the “VimpelCom Ltd. Transaction” in this Annual Report on Form 20-F). The newLtd, and established its headquarters were established in Amsterdam.
More recently, our expansion efforts have included transactions involving operations outside of CIS. In 2011, VimpelComwe completed the acquisition of Wind Telecom S.p.A., an international provider of mobile and fixed-line telecommunications and Internetinternet services with operations in a number of countries including Italy, Algeria, Bangladesh and Pakistan.
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Our capital expenditures include purchases On July 1, 2016, Pakistan Mobile Communications Limited ("PMCL") merged with Warid Telecom Pakistan LLC ("Warid"), which resulted in the merger of licenses, new equipment, new construction, upgrades, software, other long-lived assetsour telecommunications businesses in Pakistan (a transaction we refer to as the "Pakistan Merger" in this Annual Report on Form 20-F). On November 5, 2016, we formed the Italy Joint Venture with Hutchison, through which we jointly own and related reasonable costs incurred prior to intended useoperate our Historical WIND Business and H3G S.p.A. in Italy. See "Explanatory Note—Presentation of Financial Information of the non-current assets, accounted atItaly Joint Venture" and Notes 5, 14 and 25 to our audited consolidated financial statements).
On February 27, 2017, we announced our new name "VEON," which was approved by our shareholders on March 30, 2017. On April 4, 2017, VEON began trading on Euronext Amsterdam.
Recent Developments
VEON and MegaFon agree to end Euroset joint venture in Russia
In July 2017, PJSC VimpelCom, a subsidiary of VEON Ltd., and MegaFon entered into an agreement ending their retail joint venture, Euroset. The transaction closed on February 22, 2018. Under the earliest eventagreement, MegaFon acquired PJSC VimpelCom's 50% interest in Euroset and PJSC VimpelCom agreed to pay RUB 1.2 billion (US$21 million as of advance payment or delivery. Long-lived assetsDecember 31, 2017), subject to certain adjustments, and has acquired rights to 50% of Euroset's approximately 4,000 retail stores in business combinationsRussia. As a result of the transaction, PJSC VimpelCom has fully disposed of its interest in Euroset with all of its rights and obligations.
VEON Holdings B.V. submits cash tender offer in relation to GTH
On November 8, 2017, VEON submitted an application to the Egyptian Financial Regulatory Authority ("FRA") to approve an MTO by VEON Holdings B.V. for any and all of the outstanding shares of GTH which are not includedowned by VEON (up to 1,997,639,608 shares, representing 42.31% of GTH's total shares). The MTO follows a share buyback in capital expenditures. For more informationFebruary 2017 that resulted in VEON's interest in GTH increasing from 51.92% to 57.69%. The MTO will be funded by cash on hand and/or the utilization of undrawn credit facilities. The proposed offer price under the MTO is EGP 7.90 per share. Any increase of VEON's interest in GTH will be accounted for directly in equity upon closing of the transaction. The MTO remains subject to approval by the FRA. VEON has been in discussions with the authorities to resolve alleged, and disputed, technical disclosure breaches of the MTO rules by certain GTH shareholders (for which the failure to reach resolution could result in the initiation of criminal proceedings). Progress on this matter (including the potential for resolution) and the approval of the MTO have been held up by the authorities apparently in connection with unrelated historic GTH tax assessments. In addition, recently VEON has become aware that GTH has been named as a defendant in a case before the Cairo Economic Court filed in January 2018 by certain shareholders of GTH. This action seeks a court order against the FRA to suspend the MTO, to have the court appoint an expert to conduct an appraisal of the GTH share price proposed in the MTO, and directing the FRA to reject the MTO. The Cairo Economic Court dismissed the claim in February 2018 for lack of subject-matter jurisdiction. This decision is scheduled to be heard on appeal in April 2018 by the
Summary Circuit Court of Appeals. We are considering all options and there can be no assurance that the MTO will proceed.
VEON and GTH sell their Pakistan tower business for US$940 million
On August 30, 2017, VEON and GTH announced that their subsidiary in Pakistan, Jazz, signed an agreement for the sale of its tower business, with a portfolio of approximately 13,000 telecommunications towers, for approximately US$940 million, subject to certain adjustments, to Tanzanite Tower Private Limited, a tower operating company owned by edotco Group Sdn. Bhd. and Dawood Hercules Corporation. The completion of the transaction is subject to the satisfaction or waiver of certain conditions including receipt of customary regulatory approvals.
Spectrum reallocation in Uzbekistan
On March 31, 2017, the Republican Radiofrequencies Council in Uzbekistan published a decision ordering the equitable reallocation amongst all telecommunications providers in the market, which will affect approximately half of the 900 MHz and 1800 MHz radio frequencies of our Uzbek subsidiary, Unitel LLC. The decision is expected to come into force on March 31, 2018, and, currently, we do not expect the reallocation to have a material impact on our principal capital investmentsbusiness. The decision also grants tech neutrality in the 900 and investing activities, including acquisitions and divestitures1800 MHz bands.
Liberalization of interestscurrency exchange rules in other companies, and methodUzbekistan
In September 2017, the government of financing, seeUzbekistan announced the sections entitled “Item 5—Operating and Financial Review and Prospects—Factors Affecting Comparabilityliberalization of Prior Periods” and “—Liquidity and Capital Resources—Investing Activities” and “Item 5—Operating and Financial Review and Prospects—Liquidity and Capital Resources—Future Liquidity and Capital Requirements.”
Leadership
In 2014its currency exchange rules and the beginningresetting of 2015,the official exchange rate at 8,100 Uzbek som per U.S. dollar, which represented nearly a halving of the value of the Uzbek som to the U.S. dollar. On December 22, 2017, VEON announced that its subsidiary, PJSC VimpelCom, madehad successfully repatriated a numbernet amount of strategic management appointmentsapproximately US$200 million from Unitel. The currency conversion to leadUS$200 million resulted in a foreign currency exchange loss of approximately US$49 million. In addition, the Uzbek som results of Unitel are now being translated into U.S. dollars at a higher exchange rate.
4G/LTE licenses secured in Ukraine and Bangladesh
Kyivstar secured 4G/LTE licenses and spectrum in two separate transactions in 2018. Following the auction held on January 31, 2018, Kyivstar acquired 15 MHz (paired) of contiguous frequency in the 2600 MHz band for UAH 0.9 billion (US$32 million as of December 31, 2017). In addition, on March 6, 2018, Kyivstar secured the following spectrum through auction in the 1800MHz band: 25MHz (paired) for UAH 1.325 billion (US$47 million as of December 31, 2017) and two lots of 5MHz (paired) for UAH 1.512 billion (US$54 million as of December 31, 2017).
On February 13, 2018, Banglalink acquired a 4G/LTE license, allowing the company to launch a high-speed data network. In parallel, Banglalink also acquired 5.6 MHz paired spectrum in the 1800 MHz band and 5 MHz paired spectrum in the 2100 MHz band. The spectrum is technology neutral and allows Banglalink to double its next phase3G network capacity. Banglalink purchased the spectrum for US$308.6 million, excluding VAT, with an upfront payment of development. New appointments included:60% payable in 30 days and the remaining 40% payable over four years. In addition, the company paid US$35 million, excluding VAT, to convert its existing spectrum holding in 900 MHz and 1800 MHz into technology neutral spectrum and US$1.2 million, excluding VAT, to acquire the 4G/LTE license. The investment is expected to be funded through locally available cash and local banking facilities.
VEON to sell Laos operations
On October 27, 2017, VimpelCom Holding Laos B.V. ("VimpelCom Laos"), a subsidiary of the company, entered into a sale and purchase agreement for the sale of its operations in Laos to the Lao
Jean-Yves CharlierTable of Contents
People's Democratic Republic ("Government of Laos"). Under the agreement, VimpelCom Laos will transfer its 78% interest in VimpelCom Lao Co. Limited to the Government of Laos, the minority shareholder, in exchange for purchase consideration of US$22 million. The transaction is subject to customary closing conditions and is expected to be completed in the first half of 2018.
Leadership changes
We have made changes in our management and board composition to focus on significant experience and expertise in compliance, transformation and digital. During 2017 and 2018, as of the date of this Annual Report on Form 20-F, new appointments have included Trond Westlie as Group Chief ExecutiveFinancial Officer, effective April 13, 2015;
Scott DresserUrsula Burns as Group General Counsel;
Yogesh MalikChairman of the Supervisory Board, Guy Laurence as director of the Supervisory Board, Jacky Simmonds as Group Chief Technology Officer;
Jeremy Roffe-VidalPeople Officer and Alexander Pertsovsky as an alternate director for Alexey Reznikovich. The following people also transitioned to new roles from existing positions within VEON: Joshua Drew as Group Chief Human ResourcesCompliance Officer;
Rozzyn Boy as Chief Communications Officer;
Jeffrey Hedberg as CEOChief Executive Officer of Mobilink in Pakistan;
Italy; and Vasyl Latsanych as Chief Executive Officer of Russia. In addition, on February 15, 2018, Aamir Hafeez Ibrahim, Chief Executive Officer of Pakistan, and Peter Chernyshov, as CEOChief Executive Officer of Kyivstar in Ukraine;
Vincenzo NesciUkraine, will now also serve as Head of Africa & AsiaEmerging Markets and CEO of Global Telecom Holdings; and
Andrey Patoka as Head of CIS.
In addition, Enrique Aznar, our Group Chief Compliance Officer, was appointed to our management board in 2014.
Eurasia, respectively. For more information on our directors and senior management, see “Item"Item 6—Directors, Senior Management and Employees—A. Directors and Senior Management”Management" below.
Organizational Structure
VimpelComBusiness Units and Reportable Segments
VEON Ltd. is the holding company for a number of operating subsidiaries and holding companies in various jurisdictions. Our reportingIn the third quarter of 2015, we adopted a new regional structure, in 2014 is divided intoconsisting of the fivethree following business units, all of which report to our headquarters in Amsterdam: Major Markets (which includes our operations in Russia and the Italy Joint Venture); Emerging Markets (which includes our operations in Pakistan, Algeria, Bangladesh and Laos); and Eurasia (which includes our operations in Ukraine, Kazakhstan, Uzbekistan, Kyrgyzstan, Armenia, Tajikistan and Georgia).
Russia;
Italy;
Africa & Asia;
Ukraine; Notwithstanding our new regional structure described above, we currently operate and
the Commonwealth of Independent States (or “CIS”).
Notwithstanding the foregoing, in manage VEON on a geographical basis. In accordance with accountingIFRS rules, we disclose sixthis results in eight reportable segments. These segments are based on the different economic environments and varied stages of development in differentacross the geographical areas, requiringmarkets we serve, each of which requires different investment and marketing strategies. Accordingly,Our reportable segments currently consist of the following eight segments: Russia; the Italy Joint Venture; Pakistan; Algeria; Bangladesh; Ukraine; Uzbekistan; and HQ (transactions related to management activities within the group in Amsterdam and London). As of January 1, 2017, management has included the Italy Joint Venture as a reportable segment due to its increased contribution to our overall financial results and position. "Others" represents our operations in Kazakhstan, Kyrgyzstan, Armenia, Tajikistan, Georgia and Laos as well as intercompany eliminations and costs relating to centrally managed operations monitored outside of VEON's headquarters. For more information on our reportable segments, consistsee "Item 5—Operating and Financial Review and Prospects—Reportable Segments" and Notes 7 and 14 to our audited consolidated financial statements.
Table of the six following segments:Contents
Subsidiaries
Russia;
Italy;
Algeria;
Africa & Asia;
Ukraine; and
the Commonwealth of Independent States (or “CIS”).
The table below sets forth our operating companies and significant subsidiaries, including those subsidiaries that hold our principal telecommunications licenses, and our percentage ownership interest, direct and indirect, in each subsidiary as of March 1, 2015. Except asDecember 31, 2017. Unless otherwise indicated, our percentage ownership interest is identical to our voting power in each of the subsidiaries.
| Country of Incorporation | Percentage Ownership Interest (Direct and Indirect) | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Netherlands | 100 | % | ||||||||||
| Netherlands | 100 | %(1) | ||||||||||
VEON Digital Amsterdam B.V. | Netherlands | 100 | %(1) | ||||||||||
PJSC "Vimpel-Communications"* | Russia | 100 | %(2) | ||||||||||
Golden Telecom, Inc. | USA | 100 | %(3) | ||||||||||
"Kyivstar" JSC* | Ukraine | 100 | %(4) | ||||||||||
VEON Eurasia S.à r.l. | Luxembourg | 100 | %(5) | ||||||||||
VIP Kazakhstan Holding AG | Switzerland | 75.0 | %(6) | ||||||||||
LLP "KaR-Tel"* | Kazakhstan | 75.0 | %(7) | ||||||||||
VimpelCom (BVI) AG | Switzerland | 100 | %(8) | ||||||||||
LLC "Tacom"* | Tajikistan | 98.0 | %(9) | ||||||||||
Freevale Enterprises Inc. | British Virgin Islands | 100 | %(10) | ||||||||||
Silkway Holding B.V. | Netherlands | 100 | %(11) | ||||||||||
LLC "Unitel"* | Uzbekistan | 100 | %(12) | ||||||||||
CJSC "VEON Armenia"* | Armenia | 100 | %(13) | ||||||||||
VEON Luxembourg Holdings S.à r.l. | Luxembourg | 100 | %(14) | ||||||||||
VEON Luxembourg Finance Holdings S.à r.l. | Luxembourg | 100 | %(15) | ||||||||||
VEON Luxembourg Finance S.A. | Luxembourg | 100 | %(16) | ||||||||||
Global Telecom Holding S.A.E. | Egypt | 57.7 | %(17) | ||||||||||
Oratel International Inc. Limited | Malta | 57.7 | %(18) | ||||||||||
Moga Holding Limited | Malta | 57.7 | %(19) | ||||||||||
Omnium Telecom Algérie S.p.A. | Algeria | 26.3 | %(20) | ||||||||||
Optimum Telecom Algérie S.p.A.* | Algeria | 26.3 | %(21) | ||||||||||
International Wireless Communications Pakistan Limited | Malta | 57.7 | %(22) | ||||||||||
Telecom Management Group Limited | Malta | 57.7 | %(23) | ||||||||||
Pakistan Mobile Communications Limited* | Pakistan | 49.0 | %(24) | ||||||||||
Telecom Ventures Limited | Malta | 57.7 | %(25) | ||||||||||
Banglalink Digital Communications Limited* | Bangladesh | 57.7 | %(26) | ||||||||||
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Corporate Governance
Description of Our Business
Our Mobile Telecommunications Business
VEON, through its operating companies, provides customers with mobile and fixed-line telecommunications services in certain markets, which are described more fully below.
The table below presents the primary mobile telecommunications services we offer to our customers and a breakdown of pre-paidprepaid and post-paidpostpaid subscriptions as of December 31, 2014.2017.
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Our Fixed-line Telecommunications and Our Fixed-line Internet Business
We offer voice, data and Internet services to corporations, operators and consumers using a metropolitan overlay network in major cities throughout Russia, Italy, Ukraine and the CIS. In Italy, we also use LLU, which allows us to use connections from Telecom Italia’s local exchanges to the customer’s premises.
In our fixed-line/mobile integrated business structure in Russia, Ukraine and the CIS, fixed-line telecommunications use inter-city fiber optic and satellite-based networks.
In Italy, our fixed-line business uses an integrated network infrastructure with 21,744 kilometers of fiber optic cable backbone and 1,458 LLU sites for direct customer connections.
In Africa & Asia, our fixed-line business is limited to our operations in Pakistan. Our fixed-line business in Pakistan includes internet, data and value added services over a wide range of access media, covering major cities of Pakistan.
| Russia | Pakistan | Algeria | Bangladesh | Ukraine | Uzbekistan | Others | |||||||||||||||||
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Value added and call completion services(1) | |||||||||||||||||||||||
| Yes | Yes | Yes | Yes | Yes | Yes | Yes | (3) | ||||||||||||||||
National and international roaming services(2) | Yes | Yes | Yes | Yes | Yes | Yes | Yes | (3) | |||||||||||||||
Wireless Internet access | Yes | Yes | Yes | Yes | Yes | Yes | Yes | (3) | |||||||||||||||
Mobile financial services | Yes | Yes | Yes | Yes | Yes | Yes | No | ||||||||||||||||
Mobile bundles | Yes | Yes | No | Yes | |||||||||||||||||||
| Yes | Yes | Yes | |||||||||||||||||||||
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Strategy
VimpelCom’s strategy focuses on customer excellence, capital efficiency, operating excellence and profitable growth. Our businesses combine mature, strong cash-generating companies with emerging growth opportunities in a number of regions. We combine strong positions in mobile businesses with a selective presence in fixed-line, which we expect will further support our growth strategy as mobile services continue to expand across our markets.
We seek to capture profitable growth especially in mobile data, but also in fixed-line data and mobile voice, by tailoring our strategy in each individual market according to its local characteristics.
We believe that customers will increasingly rely on mobile broadband as the primary means of accessing the Internet and other data services and, in the medium term, the principal technology for such access will be 4G/LTE in Russia and Italy, and 3G in other markets in which we operate. As such, our strategy is primarily mobile-based and we seek to prioritize resources and investment allocation to mobile broadband capacity and coverage. In particular, our focus will be on capturing growth in mobile data services by moving away from unlimited plans to tiered pricing, rationally managing traffic and differentiating our services through more sophisticated offerings.
This broader view of the business provides the basis for our strategy, which is based on local empowerment and starts with the company’s 222 million mobile customers and 56,024 employees as of December 31, 2014. Our focus remains on delivering excellence to our customers. We have created a passionate, performance oriented culture with a key focus on operations and execution at the business unit level. At the Group level, we remain a lean organization focused on value creation through performance management, portfolio management, financial structure optimization, and shared services, such as roaming and procurement.
Our strategy has the following main pillars supported by clear operational strategies executed within each of our business units.
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Our business broadly comprises three types of businesses grouped according to their stages of development:
We consider our emerging markets Russia, Ukraine, CIS, Bangladesh, Pakistan and Algeria. These markets each have significant growth potential for mobile data and in Bangladesh, Pakistan, Algeria and CIS have a large potential for customer base growth and high revenue growth from relatively low penetration. In these markets, we will seek to leverage our knowledge and experience across our
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In Italy, a large and mature market, we are focused on sustaining strong cash flow generation. We are also focused on deleveraging the business. The market is highly penetrated, but has potential for broadband growth in mobile. Here, we will remain focused on reinforcing our solid market position and continue to invest in our mobile data network. The Italian business is strong and fully self-financing, with debt being non-recourse to the rest of the VimpelCom Group.
Finally, as for our remaining asset portfolio, in 2014 we continued to focus on optimizing and we sold our interest in Telecel Globe Limited, which owned 100% of each of U-COM in Burundi and Telecel CAR in Central African Republic.
Within our group’s priorities, we pursue the following specific objectives:
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We recognize that in our industry prices of the traditional products and services that we provide are generally falling over time, despite price elasticity being significantly below one. In contrast, the costs of delivering these products and services experience significant inflationary pressure. To address this imbalance, we continuously focus on cost efficiency, especially on optimizing business support costs. We also strive to design our go-to-market actions thoughtfully, with the dual ambition of ensuring that we remain a highly attractive choice for consumers at all times, while at the same time promoting responsible industry conduct.
We also see that the telecommunications market is highly heterogeneous, consisting of a significant number of sub-segments with partially unique needs. Therefore, we selectively seek to capture opportunities in the B2C (consumer) and B2B (business) sub-segments, especially in those areas where we can leverage the fact that we have both fixed-line and mobile assets, or where our international footprint can be a source of competitive advantage.
We believe that the shift away from the traditional mobile voice- and SMS-centric world and towards a data-centric world is fundamental. We therefore carefully scrutinize any investment in legacy infrastructure that does not also support our data business, while ensuring that we remain able to deliver a set of core traditional telephone services that fully meet customer expectations.
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We believe that the move towards a data-centric world is the single biggest industry change that our core mobile business has experienced so far. We also see that a key success factor over the coming few years for any telecommunications operator with a significant mobile business will be to manage pricing of mobile data well and to be able to monetize the growth in mobile data traffic. We therefore spend considerable time and effort to ensure that we offer a proactivein Kazakhstan, Kyrgyzstan, Armenia, Tajikistan, Laos and customer-centric transition from legacy voice pricing to data-centric pricing with bundled tariff plans, with the ambition to retain and ultimately grow ARPU.
WeGeorgia, see that mobile data offerings are already becoming a significant operator decision parameter for certain customer segments, and we expect this trend to broaden further. To ensure that we are the natural consumer choice"—Mobile Business in the data-centric world, we aim to provide the best “value-for-money” data product portfolio while staying highly price-competitive at all times.
We recognize that a mobile data network is more complex to manage than a voice network and that the optimization potential in a data network is significant. We therefore pursue cost efficiency in technology investments, including traffic management and offloadingTable of traffic as well as content compression.
At the same time, we will invest in digital distribution and services anticipating increased demand for such services as mobile financial services or smart home.
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In 2014, we spent $3.9 billion, or 20% of revenue, on investments in our infrastructure across all our regions resulting in an improved market position in mobile data. Our strategy is focused on continued investments in 3G and 4G/LTE to capture growth in mobile data traffic. We plan to continue to invest in all our high-speed data networks in 2015.
We entered into an agreement with MTS for joint planning, development and operation of 4G/LTE networks in 36 regions of Russia. Under the terms of the agreement, between 2014 and 2016 MTS will build and operate 4G/LTE base stations in 19 regions and VimpelCom will build and operate 4G/LTE base stations in 17 regions of Russia. Within the first seven years of the project, VimpelCom Russia and MTS plan to share base stations, platforms, infrastructure and resources of the transportation network, with each operator maintaining its own core network.
Competitive Strengths
We believe that we are well positioned to capitalize on opportunities in all of our traditional and broadband mobile and fixed-line telecommunications markets. We seek to differentiate ourselves from our competitors by high-quality service offerings, specialized customer care and strong and recognized brand names. We offer a broad portfolio of competitive services in both the fixed-line and mobile corporate data markets that are designed to match the needs of our customers. For our business and corporate clients, we offer a wide range of data services, including wireless office Internet solutions and high bandwidth corporate Internet access.
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Description of Operations of the Russia SegmentContents
Mobile Business in Russia
Description of Mobile Services in Russia
In Russia, through our operating company PJSC VimpelCom and our "Beeline" brand, we primarily offer mobile telecommunications services to our customers under two types of payment plans: postpaid plans and prepaid plans. As of December 31, 2014,2017, approximately 8%88.6% of our customers in Russia were on prepaid plans, representing 79.4% of our revenue in Russia, and approximately 11.4% of our customers in Russia were on postpaid plans, and approximately 92%representing 20.6% of our customersrevenue in Russia were on prepaid plans.Russia.
The tablestable below presentpresents the primary mobile telecommunications services we offer in Russia.
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| Description | |||||||
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| Voice | Includes airtime charges from mobile postpaid and prepaid customers, including monthly contract fees for a predefined
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| Internet and data access | Access is offered through GPRS/EDGE, 3G/HSPA and 4G/LTE and special wireless "Plug&Play" USB modems. | |||||||
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| Roaming | As of December 31,
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Roaming agreements generally state that the host operator bills PJSC VimpelCom, which PJSC VimpelCom pays, and then PJSC VimpelCom subsequently bills customers for the roaming services on the | ||||||||
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| VAS | Caller-ID, voicemail, call forwarding, conference calling, call blocking and call waiting. | |||||||
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| Messaging | SMS (consumer and corporate), MMS and voice messaging (which allows customers to send pictures, audio and video to mobile phones and to e-mails), and mobile instant messaging. | |||||||
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| Content/infotainment | Voice services (including referral services); content downloadable to telephone (including music, pictures, games and video); RBT; mobile cloud solutions; geo-positioning and compass service for fleet and assets management; and M2M control center solution for all M2M/IoT verticals. | |||||||
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| Mobile financial services | Mobile payment, banking card, trusted payment, banks notification and mobile insurance. | |||||||
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Mobile bundles
Tiered data-plans provide smartphone customers with data, voice and SMS packages. In 2017, we focused on a new simplified tariff portfolio with competitive prices in combination with transparent services. We provide a Shared Everything Bundle Service, offering the option of multiple SIM cards for one account, and an "all in one" FMC proposal for B2C prepaid customers, combining FTTB internet, IPTV and mobile services into one bundle. Beeline Business offers FMC services to corporate clients providing use of their mobile phone as an extension of their PBX. We provide these services throughout Russia. In addition, in 2017, we launched a new line of bundle price plans, which combines voice, data and SMS services, and provided free inbound calls to customers of new line bundles (being
those customers who migrated to the new bundle price plan) throughout PJSC VimpelCom's network, with outbound calls being charged in the same way as the home region.
VEON platform
The VEON platform, launched in Russia in 2017, offers Beeline customers the ability to communicate for free, even when out of credit, and provides third party products, offers, services and content.
Distribution
Our primary sales channels in Russia consist of monobrand, multibrand and national partners. Monobrand channels constituted 25.9% of the channel mix as of December 31, 2017. The number of owned retail monobrand stores was 1,605 as of December 31, 2017, as compared to 1,499 owned retail monobrand stores as of December 31, 2016. As of December 31, 2017, the number of franchise stores was 2,084, compared to 2,041 as of December 31, 2016. As of December 31, 2017, we had 142 "Know How" stores, compared to 144 "Know How" stores as of December 31, 2016.
In 2017, we increased the number of regional dealers and alternative retail. We also continue to cooperate with Svyaznoy, a national mobile retailer, focused on the distribution of complex products, such as tariff packages and fixed and mobile convergence. Sales of bundle price plans increased for B2C sales by 23%, reaching 82% in the sales mix.
In 2017, we significantly increased the availability of call center live agents to our clients. Several incentives were taken to transfer requests of our customers from traditional voice channels to digitalized text and self-service channels. Our mobile self-service application for iOS and Android has been downloaded over 9.6 million times in 2017, and the monthly active base reached over 3.9 million active customers per month, as of December 31, 2017. The launch in March 2017 of ChatBot, a software robot that converses in natural language, provides necessary information and answers clients' questions like a call center operator in our mobile application and website, and helped us to reduce overall text channel load by more than two times as of December 31, 2017. The Beeline brand continued to enhance customer service to improve its net promoter score and to reduce its contact rate, an indicator that correlates contact numbers and customer base size.
In July 2017, PJSC VimpelCom, a subsidiary of VEON Ltd., and MegaFon entered into an agreement ending their retail joint venture, Euroset. The transaction closed on February 22, 2018. See "Item 7—Major Shareholders and Related Party Transactions—B. Related Party Transactions—Joint Ventures and Associates—Euroset."
Competition
The following table shows our and our primary mobile competitors' respective customer numbers in Russia as of December 31, 2017:
Operator | Customers (in millions) | |||
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MTS | 77.7 | |||
MegaFon | 75.8 | |||
PJSC VimpelCom | 58.2 | |||
Tele2 | 40.6 | |||
Source: Analysys Mason.
According to Analysys Mason, there were approximately 254.3 million mobile customers in Russia as of December 31, 2017, compared to 255.6 million mobile customers as of December 31, 2016,
representing a mobile penetration rate of approximately 173.8% as of December 31, 2017, compared to a mobile penetration rate of approximately 174.5% as of December 31, 2016.
Mobile Business in Pakistan
Pakistan is mainly a 2G market; however, 3G is growing following its launch in 2014, as well as 4G following its launch in 2017. We operate in Pakistan through our operating company, PMCL and our brand, "Jazz," which is the historic Mobilink brand together with the merged Warid brand. In 2017, PMCL launched 3G services in over 300 towns and cities and 4G/LTE services in 40 cities.
In Pakistan, we offer our customers mobile telecommunications services under postpaid and prepaid plans. As of December 31, 2017, approximately 96.9% of our customers in Pakistan were on prepaid plans and approximately 3.1% of our customers in Pakistan were on postpaid plans.
The table below presents the primary mobile telecommunications services we offer in Pakistan.
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| Service | Description | |||||||
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| Voice | Includes airtime charges from mobile postpaid and prepaid customers, including monthly contract fees for a predefined amount of voice traffic and roaming fees for airtime charges when customers travel abroad. | |||||||
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| Internet and data access | On GPRS, EDGE, 3G and 4G/LTE. | |||||||
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| Roaming | In Pakistan, as of December 31, 2017, we had active roaming agreements with 282 GSM networks in 155 countries. Additionally, we provided GPRS roaming with 221 networks in 131 countries and CAMEL roaming through 122 networks in 77 countries. | |||||||
Generally, each agreement with roaming partners provides that the operator hosting the roaming call sends us a bill for the roaming services used by our customer while on the host's network. We pay the host operator for the roaming services and bill the amount due for the provision of roaming services on our customer's monthly bill. | ||||||||
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| VAS | Caller-ID, voicemail, call forwarding, conference calling, call blocking and call waiting. | |||||||
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| Messaging | SMS, MMS (which allows customers to send pictures, audio and video to mobile phones and to e-mail), and mobile instant messaging. | |||||||
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| Content/infotainment | Music; live audio streaming; infotainment services for religious, sports, comedy, quotes, news, weather and other content; RBT and IVR Chat. | |||||||
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| Mobile financial services | Mobile payment, banking card, trusted payment, banks notification and mobile insurance. | |||||||
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Mobile bundles
We offer bundled offers on 4G/LTE, 3G and 2G networks. We continue to focus on a technology agnostic mobile internet portfolio. Apart from pure internet bundles, we also provide hybrid bundles, which include voice and SMS and can be individually created according to customer needs.
VEON platform
The VEON platform, launched in Pakistan in 2017, offers Jazz customers the ability to communicate for free, even when out of credit, and provides third party products, offers, services and content.
Distribution
In Pakistan, we offer a portfolio of tariffs and products designed to cater to the needs of specific market segments, including mass-market customers, youth customers, personal contract customers, SOHOs (with one to five employees), SMEs (with six to 50 employees) and enterprises (with more than 50 employees). We offer corporate customers several postpaid plan bundles, which include on-net minutes, variable discounts for closed user groups and follow-up minutes based on bundle commitment. As of December 31, 2017, our sales channels in Pakistan included one company store, 24 business centers, a direct sales force of 870 employees, 406 exclusive franchise stores, and over 220,000 non-exclusive third party retailers. For top-up, we offer prepaid scratch cards and electronic recharge options, which are distributed through the same channels. Jazz brand SIMs are sold through more than 36,000 retailers, supported by biometric verification devices.
Biometric verification
Following various terrorist attacks, the Government of Pakistan introduced Standard Operating Procedures in 2015 requiring all mobile operators to re-verify their entire customer base through biometric verification, with the exception of SIM cards issued in the names of companies for use by employees. For PMCL, this involved the re-verification of more than 38 million SIM cards, and SIM cards that could not be verified had to be blocked by the operators. As a result of the re-verification, the Mobilink brand (now Jazz) lost customers, retaining 88% of its customer base.
Competition
The following table shows our and our competitors' respective customer numbers in Pakistan as of December 31, 2017:
Operator | Customers in Pakistan (in millions) | |||
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Source: The Pakistan Telecommunications Authority for all companies except PMCL.
According to the PTA, there were approximately 144.5 million mobile customers in Pakistan as of December 31, 2017, compared to 133.2 million mobile customers as of December 31, 2016, representing a mobile penetration rate of approximately 70.8% (Analysys Mason), an increase from 68.6% (Analysys Mason) as of December 31, 2016.
Mobile Business in Algeria
The mobile industry in Algeria has grown rapidly over the past ten years as a result of increased demand by individuals and newly-created private businesses and the expansion of the Algerian economy. Innovative services and declining tariffs have made mobile services more appealing to the mass-market customer segment, while advertising, marketing and distribution activities, as well as
improved service quality and coverage, have led to increased public awareness of, and access to, the mobile telecommunications market.
We operate in Algeria through our operating company, Optimum, and our brand, "Djezzy." In October 2016, Optimum launched 4G/LTE services in Algeria and, by the end of 2017, had expanded these services to 28 provinces (out of 48 wilayas (provinces)) across the country, including Algiers, and the largest provinces in terms of population. In Algeria, we generally offer our customers mobile telecommunications services under prepaid and postpaid plans. As of December 31, 2017, prepaid, postpaid and hybrid (a monthly fee with recharge possibility) customers represented approximately 93%, 2% and 5%, respectively, of our customers in Algeria.
Omnium Telecom Algérie S.p.A. ("OTA") is owned 45.57% by our subsidiary, GTH. The Algerian National Investment Fund holds 51% directly in OTA and a local minority shareholder, Cevital S.p.A., holds directly the remaining 3.43%. The establishment of this partnership in January 2015 strengthened OTA's position and prospects, with greater opportunities for our operations in Algeria. VEON Ltd. will continue to exercise operational control over OTA and, as a result, will continue to fully consolidate OTA, which holds 99.99% of Optimum. During the course of 2015, the operating company in Algeria changed from OTA to Optimum. Historical references to our operating company in Algeria have therefore been retained as OTA throughout this Annual Report on Form 20-F.
The table below presents the primary mobile telecommunications services we offer in Algeria.
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| Service | Description | |||||||
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| Voice | Includes airtime charges from mobile postpaid and prepaid customers, including monthly contract fees for a predefined amount of voice traffic and roaming fees for airtime charges when customers travel abroad. | |||||||
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| Internet and data access | Provided through GPRS, EDGE, 3G and 4G/LTE technology. Customers can use data services both as pay-per-use and through a bundle. | |||||||
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| Roaming | As of December 31, 2017, we had active roaming agreements with 454 GSM networks in 158 countries. Additionally, we provided GPRS roaming with 302 networks in 93 countries, 3G roaming with 236 networks in 147 countries and 4G/LTE roaming with 39 networks in 26 countries. | |||||||
Roaming agreements generally state that the host operator bills OTA, which OTA pays, and then OTA subsequently bills customers for the roaming services on the customer's bill. | ||||||||
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| VAS | Caller-ID, call forwarding, conference calling, call blocking, and call waiting. | |||||||
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| Messaging | SMS, MMS (which allows customers to send pictures, audio and video to mobile phones and to e-mail), and mobile instant messaging. | |||||||
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| Content/infotainment | Sports related services, religious content, taxi applications, RBT and e-learning for customers. | |||||||
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| Mobile financial services | Peer-to-peer credit transfer and credit loan. | |||||||
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Distribution
We sell our mobile telecommunications services through indirect channels (distributors) and through our Djezzy branded shops, totalling 71,735 own Djezzy shops and indirect points of sale as of December 31, 2017, of which 146 were monobrand own shops rented, equipped, staffed and managed
by Optimum, including 146 shops equipped with IT material and sales applications. Our seven exclusive national distributors cover all 48 wilayas (provinces) of Algeria and are distributing our products through over 71,589 points of sale, of which 62,116 are authorized to sell airtime and 12,473 of which are authorized to sell SIMs. As of December 31, 2017, we also had a pool of more than 140 agents in call centers, who focus on customer care, including retention, troubleshooting and handling of complaints. This pool of agents combines a series of insourced and outsourced agents that are directly managed by Optimum in three languages (Arabic, French and Amazigh). We provide customer support for the Djezzy brand through our call centers, which are open 24 hours a day and seven days a week. During 2017, Optimum continued to enhance the quality of its customer service by auditing and addressing agent performance in several major cities, including Algiers, Oran, Constantine and Annaba.
Competition
Growth in Algeria's mobile market is expected to slow, and attention is expected to shift to maintaining or improving ARPU, supported by data revenue growth after the commercial launch of 4G/LTE networks.
The following table shows our and our competitors' respective customer numbers in Algeria as of December 31, 2017:
Operator | Customers in Algeria (in millions) | |||
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Mobilis | 20.0 | |||
Optimum ("Djezzy") | 15.0 | |||
Ooredoo | 14.3 | |||
Source: Analysys Mason.
According to Analysys Mason, there were approximately 49.3 million mobile customers in Algeria as of December 31, 2017, compared to 47.4 million mobile customers as of December 31, 2016, representing a mobile penetration rate of approximately 116.9%, an increase from 114.8% as of December 31, 2016.
Mobile Business in Bangladesh
We operate through our operating company, Banglalink Digital Communications Limited ("BDCL") and our brand "banglalink" in Bangladesh. Following the launch of 3G services in Bangladesh in October 2013, the number of 3G customers has grown rapidly and in 2017, it surpassed the 2G customer count. On February 13, 2018, BDCL acquired a 4G/LTE license for US$1.2 million in order to launch a high-speed data network. The rollout of the 4G/LTE network is expected to increase ARPU as the use of the internet grows, with improving data speed presenting a significant opportunity for mobile operators in Bangladesh to increase their market shares in significant urban centers.
The telecommunications market in Bangladesh is largely comprised of prepaid customers. As of December 31, 2017, approximately 93% of our customers in Bangladesh were on prepaid plans and approximately 7% were on postpaid plans.
The table below presents the primary mobile telecommunications services we offer in Bangladesh.
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| Service | Description | |||||||
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| Voice | Includes airtime charges from mobile postpaid and prepaid customers, including monthly contract fees for a predefined amount of voice traffic and roaming fees for airtime charges when customers travel abroad. | |||||||
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| Internet and data access | Provided through GPRS, EDGE and 3G technology. Customers can use data services both as pay-per-use and through a bundle. | |||||||
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| Roaming | As of December 31, 2017, BDCL had active roaming agreements with 455 GSM networks in 165 countries and provided GPRS roaming with 350 networks in 121 countries, in addition to maritime roaming and in-flight roaming with Emirates Airlines and Malaysian Airlines. Generally, each agreement with roaming partners provides that the operator hosting the roaming call sends us a bill for the roaming services used by our customer while on the host's network. We pay the host operator for the roaming services and bill the amount due for the provision of roaming services on our customer's monthly bill. | |||||||
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| VAS | Call forwarding, conference calling, call blocking, call waiting, caller line identification presentation, call me back and voicemail missed call alert. | |||||||
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| Messaging | SMS, MMS (which allows customers to send pictures, audio and video to mobile phones and to e-mail) and mobile instant messaging. | |||||||
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| Content/infotainment | News alert service, sports related content, job alerts, music streaming, mobile TV, content download, religious content, RBT and agricultural helpline. | |||||||
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| Mobile financial services | Provides convenient financial services like mobile-based utility bill payments, train ticketing, international remittance disbursements. Also, we partner with leading mobile financial service operators through providing Unstructured Supplementary Service Data, SMS and distribution network to Bangladesh Post Office for their mobile money order service. | |||||||
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Distribution
As of December 31, 2017, our sales and distribution channels in Bangladesh included 105 monobrand stores, a direct sales force of 61 enterprise sales managers and 121 zonal sales managers for mass market retail sales channels, 46,971 retail SIM outlets, 249,432 top-up selling outlets, online sales channels, and 1,915 banglalink brand service points. BDCL provides a top-up service through mobile financial services, ATMs, recharge kiosks, international top-up services, SMS top-up and Banglalink online recharge. The banglalink brand provides customer support through its contact center, which is open 24 hours a day and seven days a week. The contact center caters to a number of after-sales services to all customer segments with a special focus on a "self-care" app to empower customers and avoid customer reliance on call center agents. In order to stimulate mobile phones and smartphones penetration, we offer our customers a broad selection of handsets and internet-capable devices, which we source from a number of suppliers, in the case of purchase-sale models, and we offer banglalink branded internet through reverse-bundle model in device partners' channels.
Competition
The mobile telecommunications market in Bangladesh is highly competitive. The following table shows our and our competitors' respective customer numbers in Bangladesh as of December 31, 2017.
Operator | Customers in Bangladesh (in millions) | |||
|---|---|---|---|---|
Grameenphone | 65.3 | |||
Robi | 42.9 | |||
BDCL ("banglalink") | 31.3 | |||
Teletalk | 4.5 | |||
Source: BTRC for all companies except BDCL ("banglalink").
The top three mobile operators, Grameenphone, banglalink and Robi, collectively held approximately 96.9% of the mobile market where the market consisted of approximately 145.1 million customers in Bangladesh as of December 31, 2017, compared to 126.4 million customers in 2016, according to the Bangladesh Telecommunication Regulatory Commission. According to Analysys Mason, as of December 31, 2017, a mobile penetration rate comprised approximately 86.8% compared to 76.7% in 2016.
Mobile Business in Ukraine
We operate in Ukraine with our operating company "Kyivstar" JSC and our brand, "Kyivstar." The Ukrainian mobile market operates on a 2G and 3G basis. As of December 31, 2017, approximately 90% of our customers in Ukraine were on prepaid plans and approximately 10% of our customers in Ukraine were on postpaid plans. Kyivstar secured 4G/LTE licenses and spectrum in two separate transactions in 2018. Following the auction held on January 31, 2018, Kyivstar acquired 15 MHz (paired) of contiguous frequency in the 2600 MHz band for UAH 0.9 billion (US$32 million as of December 31, 2017). In addition, on March 6, 2018, Kyivstar secured the following spectrum through auction in the 1800MHz band: 25MHz (paired) for UAH 1.325 billion (US$47 million as of December 31, 2017) and two lots of 5MHz (paired) for UAH 1.512 billion (US$54 million as of December 31, 2017).
The table below presents the primary mobile telecommunications services we offer in Ukraine.
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| Service | Description | |||||||
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| Voice | Includes airtime charges from mobile postpaid and prepaid customers, including monthly contract fees for a predefined amount of voice traffic and roaming fees for airtime charges when customers travel abroad. | |||||||
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| Internet and data access | Access is offered through GPRS/EDGE and 3G. | |||||||
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| Roaming | As of December 31, 2017, Kyivstar provided voice roaming on 463 networks in 188 countries, GPRS roaming on 400 networks in 164 countries and 3G roaming on 301 networks in 130 countries. | |||||||
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| VAS | Caller-ID; voicemail; call forwarding; conference calling; call blocking and call waiting. | |||||||
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| Messaging | SMS; MMS; voice messaging and SMS services (including information services such as news, weather, entertainment chats and friend finder). | |||||||
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| Content/infotainment | Voice services (including referral services)
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| Mobile financial services | Mobile payment; banking card; trusted payment; banks notification and mobile insurance. | |||||||
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Mobile bundles
Kyivstar offers bundles including combinations of voice, SMS and MMS, mobile data and OTT services.
VEON platform
The VEON platform, launched in Ukraine in 2017, offers Kyivstar customers the ability to communicate for free, even when out of credit, and provides third party products, offers, services and content.
Distribution
Kyivstar's strategy is to maintain a leadership position by using the following distribution channels: distributors (41% of all connections), local chains (20%), national chains (11%), monobrand stores (17%), direct sales (7%) and active sales (5%). In order to avoid possible price pressure from core distributors, one of our strategic priorities is to invest in our own monobrand stores. As of December 31, 2017, the number of owned retail monobrand stores was 417 as compared to 393 stores as of December 31, 2016.
Competition
The following table shows our and our primary mobile competitors' respective customer numbers in Ukraine as of December 31, 2017:
Operator | Customers (in millions) | |||
|---|---|---|---|---|
| 26.5 | |||
"VF Ukraine" JSC | 20.8 | |||
"lifecell" LLC | 8.0 | |||
Source: Analysys Mason.
Kyivstar competes primarily with "VF Ukraine" JSC, operating under the Vodafone brand, which is 100% owned by MTS and operates a GSM900/1800 network in Ukraine. Kyivstar also competes with "lifecell" LLC, as well as with Trimob LLC, a 100% affiliate company of Ukrtelecom to provide services under a 3G license, and with other small CDMA operators.
According to Analysys Mason, as of December 31, 2017, there were approximately 58.2 million customers in Ukraine, representing a mobile penetration rate of approximately 137.4% compared to 59.0 million customers and a mobile penetration rate of 138.7% in 2016.
Mobile Business in Uzbekistan
In Uzbekistan, we operate through our operating company, LLC "Unitel," and our brand, "Beeline." We offer our customers mobile telecommunications services under postpaid and prepaid plans. As of December 31, 2017, approximately 98.4% of our customers in Uzbekistan were on prepaid plans and approximately 1.6% of our customers in Uzbekistan were on postpaid plans.
Our 3G/HSPA services were commercially launched in 2008, and the majority of the network was constructed in 2010. Our 4G/LTE services were commercially launched in 2014. Unitel was the first mobile operator to provide 4G/LTE services.
The table below presents the primary mobile telecommunications services we offer in Uzbekistan.
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| Service | Description | |||||||
| | | | | | | | | |
| Voice | Includes airtime charges from mobile postpaid and prepaid customers, including monthly contract fees for a predefined amount of voice traffic and roaming fees for airtime charges when customers travel abroad. GSM service is provided by Unitel in 2G and 3G networks throughout Uzbekistan. Call duration for one session is limited for 40 minutes. | |||||||
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| Internet and data access | Access is offered through GPRS/EDGE/3G/4G/LTE networks. | |||||||
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| Roaming | As of December 31, 2017, we had active roaming agreements with 484 GSM networks in 185 countries and provided GPRS roaming with 387 networks in 164 countries and CAMEL roaming through 263 networks in 116 countries. Generally, each agreement with roaming partners provides that the operator hosting the roaming call sends us a bill for the roaming services used by our customer while on the host's network. We pay the host operator for the roaming services and bill the amount due for the provision of roaming services on our customer's monthly bill. | |||||||
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| VAS | Caller-ID, voicemail, call forwarding, conference calling, call blocking and call waiting. | |||||||
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| Messaging | SMS, MMS, voice messaging and SMS services (including information services such as news, weather, entertainment chats and friend finder). | |||||||
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| Content/infotainment | Voice services (including referral services), content downloadable to telephone (including music, pictures, games and video), and RBT. | |||||||
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| Mobile financial services | Card to card transfer, bank card payments, trusted payment, our own payment system "Beepul", mobile transfer, loyalty program. | |||||||
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Mobile bundles
We offer bundled tariff plans, which may differ by types or volume of traffic, duration (daily, weekly, and monthly), region or charge type. Currently, we provide data bundles consisting of different
types of traffic volume, charge and duration and integrated bundles consisting of traditional voice with SMS and data traffic.
Distribution
In Uzbekistan, we offer a portfolio of tariffs and products for the prepaid system designed to cater to the needs of specific market segments, including mass-market customers, youth customers and high value contract customers. Further, we have the following four segments in our postpaid system: Large Accounts, Business to Government, SME and SOHO. As of December 31, 2017, our sales channels in Uzbekistan include 672 offices and monobrand stores, 644 exclusive stores and 1,125 multibrand stores.
Competition
The following table shows our and our primary mobile competitors' respective customers in Uzbekistan as of December 31, 2017:
Operator | Customers (in millions) | |||
|---|---|---|---|---|
LLC "Unitel" | 9.7 | |||
Ucell | 8.6 | |||
UMS | 1.8 | |||
UzMobile | 0.8 | |||
Perfectum | 0.3 | |||
Source: Analysys Mason.
According to Analysys Mason, as of December 31, 2017, there were approximately 21.3 million mobile customers in Uzbekistan, representing a mobile penetration rate of approximately 65.5% compared to 20.6 million customers and a mobile penetration rate of 64.3% in 2016. The relatively low mobile penetration rate is primarily caused by the single-SIM profile of most Uzbek mobile customers.
Mobile Business in Others
In the countries in our "Others" category, we generally offer our customers mobile telecommunications services under prepaid and postpaid plans.
On October 27, 2017, we entered into an agreement to sell our operations in Laos. For more information, see "—Overview—Recent Developments—VEON to sell Laos operations."
As of December 31, 2017, we had the following percentages of prepaid and postpaid customers:
Payment Plan | Kazakhstan | Kyrgyzstan | Armenia | Tajikistan | Georgia | Laos | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Prepaid | 95.6 | % | 96 | % | 87.4 | % | 99.9 | % | 99.99 | % | 96.4 | % | |||||||
Postpaid | 4.4 | % | 4 | % | 12.6 | % | 0.1 | % | 0.01 | % | 3.6 | % | |||||||
Call completion and VAS
In the countries in our "Others" category, we offer the same call completion and VAS as in Russia (except for location based services).
3G and 4G/LTE
We have launched 3G services in each of the countries in our "Others" category, we hold 4G/LTE licenses in Tajikistan, we hold technology neutral licenses in Kazakhstan, Kyrgyzstan, Armenia, Georgia and Laos, and we have launched 4G/LTE services in Kazakhstan, Kyrgyzstan, Armenia and Georgia.
Roaming
In the countries in our "Others" category, we have roaming arrangements with a number of other networks, which vary by country of our operation. The table below presents the material roaming agreements in each of the countries included in our "Others" category.
|
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| GPRS roaming on 487networks in CAMEL roaming on 301networks in 113countries | ||||
Kyrgyzstan | Voice roaming on 424networks in 132countries GPRS roaming on 250networks in 99countries CAMEL roaming on 185networks in 83countries | ||||
|
435 179 | ||||
GPRS roaming on 344networks in 139countries CAMEL roaming on 239networks in 105countries 3G roaming on 295networks in 126countries 4G/LTE roaming on 52networks in 40countries | ||
|
Voice roaming on 193networks in 93countries GPRS roaming on171 networks in 92countries CAMEL roaming on 123networks in 72countries | |
Georgia | Voice roaming on 190networks in 81countries GPRS roaming on 180networks in 70countries CAMEL roaming on 123networks in 59countries | |
Laos |
415 140
241 80
60 |
Generally, each agreement with roaming partners provides that the operator hosting the roaming call sends us a bill for the roaming services used by our customer while on the host's network. We pay the host operator for the roaming services and bill the amount due for the provision of roaming services on our customer's monthly bill.
Other Data ServicesWireless internet services
For We have promotional zero-zones for major local and international social networks in each of these countries (other than Laos) to lower the entry barrier for new data users and stimulate consumption for existing ones. We also focus on smartphone penetration growth in each of these countries as the major source of effective demand for our businessmobile internet services.
VEON platform
The VEON platform was launched in Georgia in 2017, and corporate clients,is yet to be adopted in the other countries in the "Others" category. The VEON platform offers our customers in Georgia the ability to communicate for free, even when out of credit, and provides third party products, offers, services and content.
Distribution
We distribute our products in the countries in our "Others" category through owned monobranded stores, franchises and other distribution channels. As of December 31, 2017, we had 200 total stores in Kazakhstan (inlcuding 14,707 other points of sale), 6,487 stores in Kyrgyzstan, 77 stores in Armenia, 112 monobranded stores in Tajikistan (25 own shops and 87 franchises), 36 stores in Georgia and 16 stores in Laos (including approximately 3,200 other points of sale).
Competition
Kazakhstan
According to Analysys Mason, as of December 31, 2017, there were approximately 25.5 million customers in Kazakhstan, representing a mobile penetration rate of approximately 141.2%, compared to 25.4 million customers and a mobile penetration rate of approximately 142.5% in 2016. We held the second position in the market in 2017, according to Analysys Mason.
Kyrgyzstan
According to Analysys Mason, as of December 31, 2017, there were approximately 7.1 million customers in Kyrgyzstan, representing a mobile penetration rate of approximately 116.5%, compared to 7.1 million customers and a mobile penetration rate of approximately 117.6% in 2016. We held the first position in the market in 2017, according to Analysys Mason.
Armenia
According to Analysys Mason, as of December 31, 2017, there were approximately 3.6 million customers in Armenia, representing a mobile penetration rate of approximately 119.1%, compared to 3.6 million customers and a mobile penetration rate of approximately 117.5% in 2016. We held the second position in the market in 2017, according to Analysys Mason.
Tajikistan
According to Analysys Mason, as of December 31, 2017, there were approximately 8.6 million customers in Tajikistan, representing a mobile penetration rate of approximately 96.7%, compared to 9.3 million customers and a mobile penetration rate of approximately 106.7% in 2016. We held the fourth position in the market in 2017, according to Analysys Mason.
Georgia
According to Analysys Mason, as of December 31, 2017, there were approximately 5.6 million customers in Georgia, representing a mobile penetration rate of approximately 140.7%, compared to 5.4 million customers and a mobile penetration rate of approximately 135.9% in 2016. We held the third position in the market in 2017, according to Analysys Mason.
Laos
According to Analysys Mason, as of December 31, 2017, there were approximately 5.6 million customers in Laos, representing a mobile penetration rate of approximately 78.4%, compared to 5.2 million customers and a mobile penetration rate of approximately 74.7% in 2016. We held the third position in the market in 2017, according to Analysys Mason.
Description of Our Fixed-line Telecommunications and Internet Businesses
We also offer fixed-lined telecommunications and internet services in Russia, Pakistan, Ukraine, Uzbekistan, Armenia and Kazakhstan. We do not offer fixed-line services in Algeria, Bangladesh, Kyrgyzstan, Tajikistan, Laos or Georgia.
In Russia, Ukraine and Uzbekistan, we offer voice, data and internet services to corporations, operators and consumers using a metropolitan overlay network in major cities. Our fixed-line telecommunications use inter-city fiber optic and satellite-based networks.
In Pakistan, we offer internet and value added services over a wide range of access media, covering major cities of Pakistan. However, we do not report customer numbers and other data on our fixed-line business in Pakistan, as we do with Russia, Ukraine and Uzbekistan, because the fixed-line business in Pakistan is not material to our overall business.
In Armenia and Kazakhstan, the fixed-line business offers range of services for B2O, B2B and B2C segments. In Armenia, our fixed-line business further offers a range of services, including PSTN-fixed and IP telephony, internet, data transmission and network access, domestic and international voice termination, IPLC and TCP/IP international transit, over our national networks.
Fixed-line Business in Russia
In Russia, we provide a wide range of telecommunications and information technology and data center services, such as network access and hardware and software solutions, including configuration and maintenance, SaaS and an integrated managed service. Our services cover all major population centers in Russia. We operate a number of competitive local exchange carriers that own and operate fully digital overlay networks in a number of major Russian cities. Our customers range from large multinational corporate groups and government clients to SMEs and high-end residential buildings in major cities throughout Russia.
We provide local access services by connecting the customers' premises to our own fiber network, international and domestic long distance services and VSAT services to customers located in remote areas. We provide internet access to both corporate and consumer customers through backbone networks and private line channels. We also provide corporate clients with IP address services, the ability to rent leased channels with different high-speed capacities and remote access to corporate information, databases and applications. We offer and deploy managed Wi-Fi networks based on IEEE 802.11b/g/n/ac wireless technology.
We also provide an increasing range of other services, including virtual PSTN number, xDSL services, session initiation protocol (SIP) connection, financial information services, data center services, such as co-location, web hosting, audio conference and domain registration services. We offer to our corporate customers IPTV services, virtual PBX, certain Microsoft Office packages (including SaaS), web-videoconferencing services and sale, rental and technical support for telecommunications equipment.
We also provide Pay TV (cable TV) and IPTV services. As of December 31, 2017, we have more than 34,700 Pay TV customers and 1.11 million IPTV customers. In 2016, we launched FMC product services in all branches in Russia and we focused on further developing this in 2017. As of December 31, 2017, we had more than 877,390 FMC customers.
Our carrier and operator services division in Russia provides a range of carrier and operator services, including voice, internet and data transmission over our own networks and roaming services. Within the VEON group, we have interconnection agreements with international global data network operators who provide a one-stop shop concept for worldwide data network services for multinational companies. Under these interconnection agreements, we provide MPLS-based IP VPN, local, domestic
and international private lines, equipment and equipment maintenance in Russia. We also provide high-speed domestic and international channels to international and Russian operators to sell excess backbone network capacity.
Distribution
We utilize a direct sales force in Moscow, operating both with fixed-line and mobile corporate customers and supported by specialists in technical sales support, marketing, customer service and end-user training. In addition, we employ a team of regional sales managers and a dedicated sales force in each of our regional branch offices, as well as having sales incentive plans with our regional partners.
Competition
Our fixed-line telecommunications business marketed as "Beeline Business" competes principally on the basis of convergent services and bundles, installation time, network quality, geographical network reach, customer service, range of services offered and price. We face significant competition from other service providers. For voice services, our main competitors are the long distance carriers Rostelecom, TransTelecom and OJSC "Multiregional TransitTelecom." For data services, including wireless office Internet solutionsour main competitors are the long distance carriers Rostelecom, TransTelecom and high bandwidth corporate Internet access. The following examples describe someMegaFon. Our main competitors in the fixed-line broadband market in Russia are Rostelecom, MTS and its subsidiaries, Akado, ER-Telecom, NetbyNet and various local home network providers.
In terms of end-user internet penetration, the consumer internet access business in Russia is saturated and end-user internet penetration is high. Competition for customers in Russia is intense and we expect it to increase in the future as a result of wider market penetration, consolidation of the services that we provide.industry, the growth of current operators and the appearance of new technologies, products and services. As a result of increasing competition, internet providers are utilizing new marketing efforts (for example, aggressive price promotions) in order to retain existing customers and attract new ones.
Fixed-line Business in Pakistan
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We provide the following services for corporate and individual business customers: high-speed internet access (including fiber optic lines and xDSL), telephony, and long distance and international long distance telephony on prepaid cards; telephone communication services, based on copper wires and the modern digital fiber optic network; dedicated lines of data transmission; and dedicated line access and fixed-line mobile convergence. |
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InterconnectDistribution
We utilize a direct sales force in Pakistan for enterprise customers. This dedicated sales force has three channels dedicated to SMEs, large/key accounts and business-to-government. These channels are led by individual channel heads who further employ a team of regional sales managers in different
regions, which are further supported by a sales force, including team leads and key account managers. There is also a centralized telesales executive team led by a manager and a dedicated sales force for customers that are engaged in reselling our services.
Competition
In Pakistan, our fixed-line business faces significant competition from other providers of fixed-line corporate services, carrier and operator services and consumer internet services. We believe that our main competitors for fixed-line corporate services are Pakistan Telecommunication Company Limited, or "PTCL," Multinet, Wateen, Supernet, Cybernet, Nexlinx and Nayatel. We believe that our main competitors for carrier and operator services are PTCL, Wateen, World Call, Wi-Tribe, and Telenor Pakistan. We believe that our main competitors for consumer internet services are PTCL, Wateen, World Call, Wi-Tribe and Qubee.
Fixed-line Business in Ukraine
In Ukraine, we offer fixed-line and wireless internet services. We provide data and internet access services in almost all metropolitan cities in Ukraine. We began providing fixed-line broadband services in Ukraine in 2008 and, as of December 31, 2017, provided services in 116 cities in Ukraine (excluding cities in Crimea and the ATO zone). In connection with these services, we have been engaged in a project to install FTTB for fixed-line broadband services in approximately 41,000 residential buildings in 116 cities, providing over 55,600 access points.
Our fixed-line services include corporate internet access, VPN services, data center, contact center, fixed-line telephony and a number of VAS. Internet access services include connection to the internet via ADSL, symmetrical and Ethernet interfaces at speeds ranging from 256 kilobytes per second to 10 gigabytes per second. Fixed-line voice services are available in many of Ukraine's major cities.
In November 2016, we launched FMC for an increasing range of mobile users in our fixed-line broadband internet base. We also offer a range of FTTB services tariffs for fixed-line broadband internet access targeted at different customer segments. We currently have 11 unlimited tariff plans with monthly fees, which offer different speeds up to 100 Mbps for active internet users. In addition, in 2015, we launched OTT TV services in partnership with Viasat.
Our joint carrier and operator services division in Ukraine provides local, international and intercity long distance voice traffic transmission services to Ukrainian fixed-line and mobile operators on the basis of our proprietary domestic long-distance/ILD network, as well as IP transit and data transmission services through our own domestic and international fiber optic backbone and IP/MPLS data transmission network. We derive most of our carrier and operator services revenue in Ukraine from voice call termination services to our own mobile network and voice transit to other local and international destinations.
Distribution
Our company emphasizes high customer service quality and reliability for its corporate large accounts while at the same time focusing on the development of its SME offerings. We sell to corporate customers through a direct sales force and various alternative distribution channels such as IT servicing organizations and business center owners, and to SME customers through dealerships, direct sales, own retail and agent networks. We use a customized pricing model for large accounts which includes service or tariff discounts, volume discounts, progressive discount schemes and volume lock pricing. We use standardized and campaign-based pricing for SME customers. Our residential marketing strategy is focused on attracting new customers. We offer several tariff plans, each one targeted at a different type of customer.
Competition
In the voice services market for business customers, we compete with Ukrtelecom, Datagroup, Farlep-Invest (Vega), and a number of other small operators. We were the third largest B2B internet provider in the country as of December 31, 2017, according to management's estimates. There is a high level of competition with more than 400 internet service providers in Ukraine. Our main competitors in the corporate market for data services are also Ukrtelecom, Farlep-Invest (Vega) and Datagroup. Our competitors for both the carrier and operator services and the voice and data services market include Datagroup, Ukrtelecom, and Farlep-Invest (Vega). Our main competitors for the provision of consumer internet services in Ukraine are Volia and Ukrtelecom. From December 31, 2016 to December 31, 2017, we increased the number of our broadband customers in Ukraine (excluding customers in the ATO zone) by 1% from 811,910 to 823,840.
Fixed-line Business in Uzbekistan
In Uzbekistan, we provide a wide range of fixed-line services, such as network access, internet and hardware and software solutions, including configuration and maintenance. We provide the following services for corporate and individual business customers: high-speed internet access (including fiber optic lines and xDSL), telephony, and long distance and international long distance telephony on prepaid cards; telephone communication services, through our copper cable network and our modern digital fiber optic network; dedicated lines of data transmission; and dedicated line access and fixed-line mobile convergence.
In Uzbekistan, we offer similar fixed-line broadband and wireless internet services as in Russia. See "—Fixed-line Business in Russia."
Distribution
One of our priorities in Uzbekistan is the development of information and communications technology, which supports economic development in Uzbekistan. Our strategy includes maintaining our current market position by retaining our large corporate client customer base.
Competition
We operate large independent fixed-line services in Uzbekistan, where we compete with the state-owned provider, Uztelecom, as well as East Telecom, Sarkor Telecom, Sharq Telecom, TPS and EVO. There is a high level of competition in the capital city of Tashkent, but the fixed-line internet market in most of the other regions remains undeveloped.
Fixed-line Business in Armenia
Our subsidiary VEON Armenia provides a range of telecommunications services in Armenia, including PSTN-fixed and IP telephony, internet, data transmission and network access, domestic and international voice termination and TCP/IP international transit traffic services. We operate a nationwide network in Armenia and provide the following services for corporate and individual customers: local telephony services; international and domestic long distance services; broadband access services (including ADSL, VDSL, LTE 450 and fiber optic lines); and VoIP services.
VEON Armenia is the Armenian incumbent operator offering countrywide wholesale services, such as leased line service and wholesale broadband services, as well as wholesale international voice termination and origination services for other local and international operators and service providers.
We offer PSTN-fixed and IP telephony services, as well as fixed-line broadband internet access based on ADSL and FTTB technologies, dial-up services and wireless internet access based on CDMA technology. In 2015, we launched FMC bundles, offering fixed internet, fixed TV and mobile services.
In 2017, we received permission from the Public Services Regulatory Commission of Armenia to include fixed voice services in our FMC bundles, which we plan to roll out in 2018.
Distribution
Our strategy includes focusing on customer retention and ARPU growth by developing new services, including internet access through a fiber optic network with a guaranteed speed to corporate customers and government organizations.
Competition
We offer a broad range of fixed-line services to government, corporate and private customers. We believe we compete primarily with U!Com and Rostelcom in Armenia, which are primarily provide fixed internet and cable TV services.
Fixed-line Business in Kazakhstan
We focus on customer experience for large enterprises through offering high-quality services. Our main business clients are concentrated in the financial and oil and gas sectors, with a new focus on international companies. We provide the following services for corporate clients: high-speed internet access; local, long distance and international voice services over IP; local, intercity and international leased channels and IP VPN services; cloud services; and integrated corporate networks (including integrated network voice, data and other services). We use the following technologies: fiber optic lines (approximately 20,715 buildings are covered by our FTTB network), wireless technologies, satellite technologies, and the TV-Everywhere platform (which is provided through the vendor, Computer Telephony Integration).
In Kazakhstan, we offer similar fixed-line broadband and wireless internet services as in Russia. See "—Fixed-line Business in Russia." In 2017, we continued to increase our coverage and completed FTTB roll-out for an additional 459 buildings. We also updated the FMC product, by adding additional mobile bundles and video content from Amediateka. In addition, in October 2017 we launched an additional parental control service, which enables location services, and can limit access to internet sites and browsing time.
Distribution
We are focusing on customer base and revenue growth, which we aim to promote by expanding our transport infrastructure, developing unique products, strengthening our position in the market and enhancing our sales efforts and data services.
Competition
We provide internet, data transmission and traffic termination services in Kazakhstan, where we believe we compete primarily with state-owned provider Kazakhtelecom, KazTransCom, TransTelecom (owned by Kazakhstan Temir Zholy, the national railway company), Astel (a leader in the provision of satellite services) and several other small local operators.
Interconnection Agreements
Our mobile and fixed-line businesses are dependent on interconnection services, which are required to complete calls that originate on our respective networks but terminate outside our respective networks, or that originate from outside our respective networks and terminate on our respective networks. In order to provide a local, domestic and international network, we have interconnection agreements in the markets in which we operate.
Russia
We have several interconnection agreements with mobile and fixed-line operators in Russia under which we provide traffic termination services. These services representDuring 2017, our MTRs in Russia were broadly stable as compared to the 2016 and 2015 historical periods.
Pakistan
We have several interconnection agreements with mobile and fixed-line operators in Pakistan and in the territories of Azad Jammu and Kashmir ("AJK") and Gilgit-Baltistan, under which we provide traffic termination services. Our MTRs in 2017 in Pakistan were broadly stable as compared to the 2015 and 2016 historical periods.
Algeria
We have several interconnection agreements with mobile, VoIP and fixed-line operators in Algeria under which we provide traffic termination services. The national incoming interconnect rate decreased for the year ended December 31, 2017 as compared to the year ended December 31, 2016, and the outgoing interconnect rate also decreased over the same period. The movements in the historical MTRs for 2017, 2016 and 2015 have been favorable to our business, however, asymmetry continues to exist between OTA and one other operator.
Bangladesh
We have several interconnection agreements with ICX, IGW, mobile operators, IPTSP and fixed-line operators in Bangladesh under which we provide traffic termination services. For international incoming calls, MTR in 2017 was broadly stable as compared to the 2016 and 2015 historical periods.
Ukraine
We have several interconnection agreements with mobile and fixed-line operators in Ukraine under which we provide traffic termination services. The rates in 2017 for termination of incoming voicenational traffic to a mobile network and dataa fixed network on an intercity level decreased compared to the 2016 and 2015 historical periods.
Uzbekistan
We have several interconnection agreements with mobile and fixed-line operators in Uzbekistan under which we provide traffic from networkstermination services. During 2017, our MTRs in Uzbekistan were broadly stable as compared to the 2016 and 2015 historical periods.
On September 5, 2017, the State Committee of Uzbekistan on Privatization, Demonopolization and Development of Competition ("State Committee of Uzbekistan") issued an injunction requiring Unitel LLC to implement equal mobile termination rates for all national operators. Unitel LLC appealed this injunction and on January 15, 2018, the appellate division of the Tashkent administrative court ruled in favor of the State Committee of Uzbekistan. Unitel LLC is currently engaged in discussions with the State Committee of Uzbekistan, other relevant regulators and national operators regarding the implementation of the injunction. Unitel LLC is also involved in litigation with UMS and Ucell in relation to unpaid mobile termination rates.
Others
We have several agreements with mobile and fixed-line operators in each of the countries in our competitors when their customers call or send data to our customers."Others" category under which we provide traffic termination services.
Sales of Equipment and Accessories. As of December 31, 2014 the number of owned retail mono-brand stores was 1,188 compared to 1,238 owned retail mono-brand stores as of December 31, 2013, and as of December 31, 2014 the number of owned modules was 56 compared to 85 owned modules as of December 31, 2013. As of December 31, 2014 we had 112 “Know How” stores, a format developed with ION in the form of a joint venture.
In order to promote Beeline’s retail chain and increase mobile data devices penetration, Beeline introduced a portfolio of own-branded smartphones and tablets throughout 2014. In addition, we also introduced the co-branded Alcatel 4G/LTE smartphone, sold in combination with a data bundle in June 2014.
Beeline has a direct sales contract with Apple and all new iPhones have been available in Beeline retail stores. Beeline customers with new iPhones are able to use our LTE network.
Specialized customer care. Beeline has introduced several initiatives and services to improve NPS in 2014, such as a new mobile self-service application for iOS and Android, allowing customers to manage all charged Beeline services. This service has been successful with more than 5.7 million downloads as of December 31, 2014. Other examples are filtering spam SMS messages, free anti-virus protection and the introduction of shared data services, offering the option of multiple SIM cards for one account, making it convenient for customers to manage their data account across multiple devices. Also, we introduced an initiative to increase transparency of content subscription costs and ban undesired subscription for our customers. These measures taken to reject unrequested services from content providers impacted our mobile service revenue negatively during 2014, but improved the NPS score.Licenses
Mobile Telecommunications LicensesFixed-line Business in Russia
GSM Licenses
In Russia, we provide a wide range of telecommunications and information technology and data center services, such as network access and hardware and software solutions, including configuration and maintenance, SaaS and an integrated managed service. Our services cover all major population centers in Russia. We hold super-regional GSM licenses (GSM 900, GSM 1800operate a number of competitive local exchange carriers that own and GSM 900-1800 standards) for the following seven out of eight super-regions in Russia: Moscow, Central and Central Black Earth, North Caucasus, North-West, Siberia, Ural and Volga. These licenses will expire between September 2017 and April 2018 and we plan to file applications for renewal of all of our licenses prior to expiration.
We do not currently hold a GSM super-regional license for the Far East super-region of Russia, but we hold GSM licensesoperate fully digital overlay networks in a number of regionsmajor Russian cities. Our customers range from large multinational corporate groups and government clients to SMEs and high-end residential buildings in major cities throughout Russia.
We provide local access services by connecting the customers' premises to our own fiber network, international and domestic long distance services and VSAT services to customers located in remote areas. We provide internet access to both corporate and consumer customers through backbone networks and private line channels. We also provide corporate clients with IP address services, the ability to rent leased channels with different high-speed capacities and remote access to corporate information, databases and applications. We offer and deploy managed Wi-Fi networks based on IEEE 802.11b/g/n/ac wireless technology.
We also provide an increasing range of the Far East super-region. These licenses expire on various dates betweenother services, including virtual PSTN number, xDSL services, session initiation protocol (SIP) connection, financial information services, data center services, such as co-location, web hosting, audio conference and domain registration services. We offer to our corporate customers IPTV services, virtual PBX, certain Microsoft Office packages (including SaaS), web-videoconferencing services and sale, rental and technical support for telecommunications equipment.
We also provide Pay TV (cable TV) and IPTV services. As of December 31, 2017, we have more than 34,700 Pay TV customers and 1.11 million IPTV customers. In 2016, and 2021we launched FMC product services in all branches in Russia and we planfocused on further developing this in 2017. As of December 31, 2017, we had more than 877,390 FMC customers.
Our carrier and operator services division in Russia provides a range of carrier and operator services, including voice, internet and data transmission over our own networks and roaming services. Within the VEON group, we have interconnection agreements with international global data network operators who provide a one-stop shop concept for worldwide data network services for multinational companies. Under these interconnection agreements, we provide MPLS-based IP VPN, local, domestic
and international private lines, equipment and equipment maintenance in Russia. We also provide high-speed domestic and international channels to file applications for renewalinternational and Russian operators to sell excess backbone network capacity.
Distribution
We utilize a direct sales force in Moscow, operating both with fixed-line and mobile corporate customers and supported by specialists in technical sales support, marketing, customer service and end-user training. In addition, we employ a team of allregional sales managers and a dedicated sales force in each of our licenses prior to expiration.
In addition to the seven super-regional GSM licenses, we hold GSM licenses for the Kaliningrad region, the Orenburg region, and the Nenetskiy Autonomous Region. In totalregional branch offices, as well as having sales incentive plans with our GSM licenses cover approximately 96% of Russia’s population.regional partners.
3G LicensesCompetition
Our fixed-line telecommunications business marketed as "Beeline Business" competes principally on the basis of convergent services and bundles, installation time, network quality, geographical network reach, customer service, range of services offered and price. We face significant competition from other service providers. For voice services, our main competitors are the long distance carriers Rostelecom, TransTelecom and OJSC VimpelCom holds one of three UMTS licenses"Multiregional TransitTelecom." For data services, our main competitors are the long distance carriers Rostelecom, TransTelecom and MegaFon. Our main competitors in Russia. The license expires on May 21, 2017.
4G/LTE License
In July 2012, OJSC VimpelCom was awarded a mobile license, a data transmission license, a voice transmission license and a telematic license for the provision of 4G/LTE services in Russia. These licenses allow OJSC VimpelCom to provide services using radio-electronic devicesfixed-line broadband market in Russia via networks that use 4G/LTE standard equipment within any of the following frequency bands: 735-742.5/776-783.5 MHz;813.5-821/854.5-862 MHz; 2550-2560/2670-2680 MHz. Certain channels allocated to us in accordance with the licenses have restrictions on their use. To remove restrictions we have to perform certain organizational technical measures including, among others, radio frequency bands releasing spectrum conversion, refarmingare Rostelecom, MTS and reallocation between operators. The roll-out of the 4G/LTEits subsidiaries, Akado, ER-Telecom, NetbyNet and various local home network is using a phased approach based on a pre-defined schedule pursuant to the requirements of the license. Under the phased approach, OJSC VimpelCom launched 4G/LTE services as of June 1, 2013. OJSC VimpelCom was required to extend services to six regions in Russia by December 1, 2013 which condition was met. OJSC VimpelCom is then required to extend services to a specified number of additional regions in each year until December 1, 2019 when services must cover all of Russia.providers.
In addition, OJSC VimpelCom is required to comply with the following conditions among others under the terms of end-user internet penetration, the license: (i) invest at least RUB15 billion in each calendar year in the construction of its federal 4G/LTE network until the network is completed, which must occur before December 1, 2019; (ii) provide certain data transmission services to all secondary and higher educational institutions in specified areas; and (iii) provide interconnection capability to telecommunications operators that provide mobile services using virtual networks in any five regions in Russia not later than July 25, 2016.
See also “Item 3—Key Information—D. Risk Factors—Legal and Regulatory Risks—Our licenses may be suspended or revoked and we may be fined or penalized for alleged violations of law, regulations or license terms” and “—Our licenses are granted for specified periods and they may not be extended or replaced upon expiration,” and “Item 3—Key Information—D. Risk Factors—Risks Related to Our Industry—Our failure to keep pace with technological changes and evolving industry standards could harm our competitive position and, in turn, materially harm our business”
Competition—Mobile Business in Russia
In the decade prior to 2014, the Russian mobile telecommunications industry has grown rapidly due to increased demand by individuals and businesses. The high penetrationconsumer internet access business in Russia is saturated and end-user internet penetration is high. Competition for customers in Russia is intense and we expect it to increase in the future as a result of customers owning multiple SIM cards andwider market penetration, consolidation of the industry, the growth of mobile data SIM cards in various devices. Mobile data traffic growth iscurrent operators and the main driverappearance of mobile telecommunications growth, supported by improved service qualitynew technologies, products and coverage of mobile data networks and declining tariffs and costs of handsets and accessories, which have made mobile telecommunications services more affordable to the mass market customer segment. In addition, advertising, marketing and distribution activities, which have led to increased public awareness of, and access to, the mobile telecommunications market, contributed to the growth as well.
The table below indicates the estimated number of mobile customers, mobile penetration rates and annual customer growth rates in Russia.
Period | Customers (in millions) | Penetration Rate | Annual Customer Growth(1) | |||||||||
As of December 31, 2014 | 242.9 | 170.7 | % | (1.8 | )% | |||||||
As of December 31, 2013 | 247.4 | 173.5 | % | 5.7 | % | |||||||
As of December 31, 2012 | 234.2 | 163.8 | % | 2.0 | % | |||||||
Source: For customers, customer growth and penetration rates, Analysys Mason Research in 2014 and Informa Telecoms & Media in 2013 and 2012.© 2013 Informa Telecoms & Media. All rights reserved.
The Russian mobile telecommunications market is highly competitive. Analysys Mason Research estimates that the top three mobile operators, MTS, MegaFon and OJSC VimpelCom, collectively held approximately 84% of the mobile market in Russia as of December 31, 2014.services. As a result of increasing competition, mobileinternet providers are utilizing new marketing efforts including(for example, aggressive price promotions,promotions) in order to retain existing customers and attract new ones. Competition
Fixed-line Business in Pakistan
Our fixed-line business in Pakistan includes data, voice and VAS services over a wide range of access media, covering the major cities of Pakistan. The wired and wireless access services include FTTx, PMP (point to multipoint), point-to-point radios, VSAT, DSL & WiMax connecting more than 110 locations across Pakistan, providing data and voice connectivity to enterprise customers. The data services being provided to the enterprise customers include: dedicated internet access, VPN (virtual private networking), leased lines & fixed telephony.
We also offer services to domestic and international carriers, which include domestic and international leased lines, domestic and international MPLS, and IP transit services through our access network. Our long-haul fiber optic network covers more than 9,000 kilometers and, supplemented by wired and wireless networks, is spread across the major cities of Pakistan.
We provide the following services for corporate and individual business customers: high-speed internet access (including fiber optic lines and xDSL), telephony, and long distance and international long distance telephony on prepaid cards; telephone communication services, based on copper wires and the modern digital fiber optic network; dedicated lines of data transmission; and dedicated line access and fixed-line mobile convergence.
Distribution
We utilize a direct sales force in Pakistan for enterprise customers. This dedicated sales force has three channels dedicated to SMEs, large/key accounts and business-to-government. These channels are led by individual channel heads who further employ a team of regional sales managers in different
regions, which are further supported by a sales force, including team leads and key account managers. There is also a centralized telesales executive team led by a manager and a dedicated sales force for customers that are engaged in Russia is intense as a result of greater market penetration, consolidation in the industry, the growth of current operators and new technologies, products andreselling our services.
Competition
In Pakistan, our fixed-line business faces significant competition from other providers of fixed-line corporate services, carrier and operator services and consumer internet services. We compete with at least one other mobilebelieve that our main competitors for fixed-line corporate services are Pakistan Telecommunication Company Limited, or "PTCL," Multinet, Wateen, Supernet, Cybernet, Nexlinx and Nayatel. We believe that our main competitors for carrier and operator services are PTCL, Wateen, World Call, Wi-Tribe, and Telenor Pakistan. We believe that our main competitors for consumer internet services are PTCL, Wateen, World Call, Wi-Tribe and Qubee.
Fixed-line Business in each of our license areas,Ukraine
In Ukraine, we offer fixed-line and wireless internet services. We provide data and internet access services in many license areas we compete with two or more mobile operators. Competition is based primarily on local pricing plans, network coverage, quality of service, the level of customer service provided, brand identityalmost all metropolitan cities in Ukraine. We began providing fixed-line broadband services in Ukraine in 2008 and, the range of value-added and other customer services offered.
The following table shows our and our primary mobile competitors’ respective customer numbers in Russia as of December 31, 2014:2017, provided services in 116 cities in Ukraine (excluding cities in Crimea and the ATO zone). In connection with these services, we have been engaged in a project to install FTTB for fixed-line broadband services in approximately 41,000 residential buildings in 116 cities, providing over 55,600 access points.
Our fixed-line services include corporate internet access, VPN services, data center, contact center, fixed-line telephony and a number of VAS. Internet access services include connection to the internet via ADSL, symmetrical and Ethernet interfaces at speeds ranging from 256 kilobytes per second to 10 gigabytes per second. Fixed-line voice services are available in many of Ukraine's major cities.
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In November 2016, we launched FMC for an increasing range of mobile users in our fixed-line broadband internet base. We also offer a range of FTTB services tariffs for fixed-line broadband internet access targeted at different customer segments. We currently have 11 unlimited tariff plans with monthly fees, which offer different speeds up to 100 Mbps for active internet users. In addition, in 2015, we launched OTT TV services in partnership with Viasat.
Source: Analysys Mason Research for all companies except OJSC VimpelCom. Our joint carrier and operator services division in Ukraine provides local, international and intercity long distance voice traffic transmission services to Ukrainian fixed-line and mobile operators on the basis of our proprietary domestic long-distance/ILD network, as well as IP transit and data transmission services through our own domestic and international fiber optic backbone and IP/MPLS data transmission network. We derive most of our carrier and operator services revenue in Ukraine from voice call termination services to our own mobile network and voice transit to other local and international destinations.
MTSDistribution. One
Our company emphasizes high customer service quality and reliability for its corporate large accounts while at the same time focusing on the development of our primary competitorsits SME offerings. We sell to corporate customers through a direct sales force and various alternative distribution channels such as IT servicing organizations and business center owners, and to SME customers through dealerships, direct sales, own retail and agent networks. We use a customized pricing model for large accounts which includes service or tariff discounts, volume discounts, progressive discount schemes and volume lock pricing. We use standardized and campaign-based pricing for SME customers. Our residential marketing strategy is focused on attracting new customers. We offer several tariff plans, each one targeted at a different type of customer.
Competition
In the voice services market for business customers, we compete with Ukrtelecom, Datagroup, Farlep-Invest (Vega), and a number of other small operators. We were the third largest B2B internet provider in Russia is MTS. According to Analysys Mason Research,the country as of December 31, 2014, MTS had approximately 75.6 million customers2017, according to management's estimates. There is a high level of competition with more than 400 internet service providers in Russia, representing a market share of 31%. It has a greater share of the high value customer market and more frequency allocations than we do, which provides MTS with a potential advantageUkraine. Our main competitors in the quality of its GSM, UMTScorporate market for data services are also Ukrtelecom, Farlep-Invest (Vega) and HSPA services. MTS holds a 4G/LTE FDD license identical to ours, which it received in July 2012. In addition, MTS holds an 4G/LTE TDD licenseDatagroup. Our competitors for both the carrier and operator services and the voice and data services market include Datagroup, Ukrtelecom, and Farlep-Invest (Vega). Our main competitors for the Moscow region which provides MTS with a potential advantage in qualityprovision of its 4G/LTEconsumer internet services in the Moscow region. MTS is leading in number of retail stores which is an important competitive advantage but requires significant expenses for rent of outletsUkraine are Volia and personnel costs.
MegaFon. In additionUkrtelecom. From December 31, 2016 to MTS, our other primary competitor is MegaFon, the second largest mobile operator in Russia in terms ofDecember 31, 2017, we increased the number of our broadband customers in Ukraine (excluding customers in the ATO zone) by 1% from 811,910 to 823,840.
Fixed-line Business in Uzbekistan
In Uzbekistan, we provide a wide range of fixed-line services, such as network access, internet and hardware and software solutions, including configuration and maintenance. We provide the following services for corporate and individual business customers: high-speed internet access (including fiber optic lines and xDSL), telephony, and long distance and international long distance telephony on prepaid cards; telephone communication services, through our copper cable network and our modern digital fiber optic network; dedicated lines of data transmission; and dedicated line access and fixed-line mobile customers.convergence.
In 2012, Altimo sold its entire 25.1% stakeUzbekistan, we offer similar fixed-line broadband and wireless internet services as in MegaFon to a private investor. According to Analysys Mason Research, asRussia. See "—Fixed-line Business in Russia."
Distribution
One of December 31, 2014, MegaFon had approximately 70.2 million customers, representing aour priorities in Uzbekistan is the development of information and communications technology, which supports economic development in Uzbekistan. Our strategy includes maintaining our current market share of 29%. MegaFon holds GSM-900/1800, and UMTS licenses toposition by retaining our large corporate client customer base.
Competition
We operate in all regions of Russia. MegaFon holds an 4G/LTE FDD license identical to ours which it received in July 2012. In addition, MegaFon has an 4G/LTE TDD license for the Moscow region which provides MegaFon with a potential advantage in quality of its 4G/LTElarge independent fixed-line services in the Moscow region.
RT-Mobile. In August 2014, Rostelecom and Tele2 Russia completed their merger to form a new national mobile operator in Russia which will be operated as a joint venture, RT-Mobile. RT-Mobile is present in 64 regions of the country and owns licenses and spectrum in GSM-900/1800, and UMTS, and 4G/LTE FDD technology identical to ours, which it received in July 2012. The combined entity has around 36.4 million mobile customers as of December 31, 2014. New launches of RT-Mobile are also expected including launch in Moscow in the second half of 2015 according to Tele2 public statements. This could have a negative effect on VimpelCom,Megafon and MTS revenues and profitability as Moscow is one of the largest regional markets in Russia. However,RT-Mobile has no GSM frequencies in the region, which will hamper provision of mobile voice services.
Other Competitors in Russia. In addition to MTS, MegaFon and RT Mobile,Uzbekistan, where we compete with the state-owned provider, Uztelecom, as well as East Telecom, Sarkor Telecom, Sharq Telecom, TPS and EVO. There is a numberhigh level of competition in the capital city of Tashkent, but the fixed-line internet market in most of the other regions remains undeveloped.
Fixed-line Business in Armenia
Our subsidiary VEON Armenia provides a range of telecommunications services in Armenia, including PSTN-fixed and IP telephony, internet, data transmission and network access, domestic and international voice termination and TCP/IP international transit traffic services. We operate a nationwide network in Armenia and provide the following services for corporate and individual customers: local regional 2G telecommunications companies.telephony services; international and domestic long distance services; broadband access services (including ADSL, VDSL, LTE 450 and fiber optic lines); and VoIP services.
VEON Armenia is the Armenian incumbent operator offering countrywide wholesale services, such as leased line service and wholesale broadband services, as well as wholesale international voice termination and origination services for other local and international operators and service providers.
We offer PSTN-fixed and IP telephony services, as well as fixed-line broadband internet access based on ADSL and FTTB technologies, dial-up services and wireless internet access based on CDMA technology. In 2015, we launched FMC bundles, offering fixed internet, fixed TV and mobile services.
In 2017, we received permission from the Public Services Regulatory Commission of Armenia to include fixed voice services in our FMC bundles, which we plan to roll out in 2018.
MarketingDistribution
Our strategy includes focusing on customer retention and Distribution—MobileARPU growth by developing new services, including internet access through a fiber optic network with a guaranteed speed to corporate customers and government organizations.
Competition
We offer a broad range of fixed-line services to government, corporate and private customers. We believe we compete primarily with U!Com and Rostelcom in Armenia, which are primarily provide fixed internet and cable TV services.
Fixed-line Business in Kazakhstan
We focus on customer experience for large enterprises through offering high-quality services. Our main business clients are concentrated in the financial and oil and gas sectors, with a new focus on international companies. We provide the following services for corporate clients: high-speed internet access; local, long distance and international voice services over IP; local, intercity and international leased channels and IP VPN services; cloud services; and integrated corporate networks (including integrated network voice, data and other services). We use the following technologies: fiber optic lines (approximately 20,715 buildings are covered by our FTTB network), wireless technologies, satellite technologies, and the TV-Everywhere platform (which is provided through the vendor, Computer Telephony Integration).
In Kazakhstan, we offer similar fixed-line broadband and wireless internet services as in Russia. See "—Fixed-line Business in Russia." In 2017, we continued to increase our coverage and completed FTTB roll-out for an additional 459 buildings. We also updated the FMC product, by adding additional mobile bundles and video content from Amediateka. In addition, in October 2017 we launched an additional parental control service, which enables location services, and can limit access to internet sites and browsing time.
We divide our primary target customers in Russia into four groups:Distribution
We are focusing on customer base and revenue growth, which we aim to promote by expanding our transport infrastructure, developing unique products, strengthening our position in the market and enhancing our sales efforts and data services.
key/Competition
We provide internet, data transmission and traffic termination services in Kazakhstan, where we believe we compete primarily with state-owned provider Kazakhtelecom, KazTransCom, TransTelecom (owned by Kazakhstan Temir Zholy, the national accounts, for which monthly revenue fromrailway company), Astel (a leader in the provision of satellite services) and several other small local operators.
Interconnection Agreements
Our mobile and fixed-line businesses are dependent on interconnection services, exceeds US$20,000;which are required to complete calls that originate on our respective networks but terminate outside our respective networks, or that originate from outside our respective networks and terminate on our respective networks. In order to provide a local, domestic and international network, we have interconnection agreements in the markets in which we operate.
Russia
large accounts, for which monthly revenue fromWe have several interconnection agreements with mobile and fixed-line services exceeds US$2,000 or companies having high revenue potential;operators in Russia under which we provide traffic termination services. During 2017, our MTRs in Russia were broadly stable as compared to the 2016 and 2015 historical periods.
Pakistan
SME customers, for which monthly revenue fromWe have several interconnection agreements with mobile and fixed-line services is less than US$2,000;operators in Pakistan and in the territories of Azad Jammu and Kashmir ("AJK") and Gilgit-Baltistan, under which we provide traffic termination services. Our MTRs in 2017 in Pakistan were broadly stable as compared to the 2015 and 2016 historical periods.
mass market customers.
Customer Loyalty ProgramsAlgeria
We recognizehave several interconnection agreements with mobile, VoIP and fixed-line operators in Algeria under which we provide traffic termination services. The national incoming interconnect rate decreased for the need to continuously build and increase the loyalty of our customers. In Russia, our loyalty programs are designed to retain our existing customers, thereby reducing churn, and increasing customer spending in B2C.
In 2014 we continued to develop our national loyalty program “Happy Time” to increase its value and attractiveness to all prepaid B2C customers. As ofyear ended December 31, 2014, we had more than 3 million participants.
We continue2017 as compared to encourage our high value customers by providing them with rewards and benefits from Beeline and its partners. As ofthe year ended December 31, 2014,2016, and the outgoing interconnect rate also decreased over the same period. The movements in the historical MTRs for 2017, 2016 and 2015 have been favorable to our business, however, asymmetry continues to exist between OTA and one other operator.
Bangladesh
We have several interconnection agreements with ICX, IGW, mobile operators, IPTSP and fixed-line operators in Bangladesh under which we had more than 2 million customersprovide traffic termination services. For international incoming calls, MTR in 2017 was broadly stable as compared to the 2016 and 2015 historical periods.
Ukraine
We have several interconnection agreements with Premium-status.mobile and fixed-line operators in Ukraine under which we provide traffic termination services. The rates in 2017 for termination of national traffic to a mobile network and a fixed network on an intercity level decreased compared to the 2016 and 2015 historical periods.
Uzbekistan
We also launched a special financial product, Beeline card (basedhave several interconnection agreements with mobile and fixed-line operators in Uzbekistan under which we provide traffic termination services. During 2017, our MTRs in Uzbekistan were broadly stable as compared to the 2016 and 2015 historical periods.
On September 5, 2017, the State Committee of Uzbekistan on MasterCard), which provides cash backPrivatization, Demonopolization and Development of Competition ("State Committee of Uzbekistan") issued an injunction requiring Unitel LLC to implement equal mobile termination rates for useall national operators. Unitel LLC appealed this injunction and on January 15, 2018, the appellate division of the cardTashkent administrative court ruled in favor of the State Committee of Uzbekistan. Unitel LLC is currently engaged in discussions with the State Committee of Uzbekistan, other relevant regulators and national operators regarding the implementation of the injunction. Unitel LLC is also involved in litigation with UMS and Ucell in relation to unpaid mobile termination rates.
Others
We have several agreements with mobile and fixed-line operators in each of the countries in our "Others" category under which can be spent for ourwe provide traffic termination services. As
Table of December 31, 2014, we had more than 240,000 customers using a Beeline card.Contents
Licenses
Fixed-line Business in Russia
Description of Fixed-line Services in Russia
Business Operations in Russia
In Russia, we provide a wide range of telecommunicationtelecommunications and information technology and data center services, such as network access and hardware and software solutions, including configuration and maintenance, software as a service (“SaaS”)SaaS and an integrated managed service. Our services cover all major population centers in Russia. We operate a number of competitive local exchange carriers that own and operate fully digital overlay networks in a number of major Russian cities. Our services cover all major population centers in Russia.
Our customers range from large multinational corporate groups and government clients to small and medium enterprisesSMEs and high-end residential buildings in major cities throughout Russia.
We provide local access services by connecting the customers' premises to our own fiber network, international and domestic long distance services and VSAT services to customers located in remote areas. We provide internet access to both corporate and consumer customers through backbone networks and private line channels. We also provide corporate clients with IP address services, the ability to rent leased channels with different high-speed capacities and remote access to corporate information, databases and applications. We offer and deploy managed Wi-Fi networks based on IEEE 802.11b/g/n/ac wireless technology.
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We also provide an increasing range of other services, including virtual PSTN number, xDSL services, session initiation protocol (SIP) connection, financial information services, data center services, such as co-location, web hosting, audio conference and domain registration services. We offer to our corporate customers IPTV services, virtual PBX, certain Microsoft Office packages (including SaaS), web-videoconferencing services and sale, rental and technical support for telecommunications equipment. We also provide Pay TV (cable TV) and IPTV services. As of December 31, 2017, we have more than 34,700 Pay TV customers and 1.11 million IPTV customers. In 2016, we launched FMC product services in all branches in Russia and we focused on further developing this in 2017. As of December 31, 2017, we had more than 877,390 FMC customers.
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Wholesale Operations in Russia
Our carrier and operator services division in Russia provides a range of carrier and operator services, including voice, Internetinternet and data transmission over our own networks.
Voice Services. For international operators, including traditional incumbents, mobilenetworks and VoIP operators,roaming services. Within the VEON group, we provide call termination to fixed-line and mobile destinations in Russia, Ukraine, and the CIS and Baltic states. For Ukrainian and CIS operators, we provide call termination to Russian and international fixed-line and mobile destinations. For Russian operators we provide international, domestic, zonal and local voice call transmission services.
Internet Services. Our carrier and operator services division provides IP transit service to operators throughout the world. International operators require connectivity to the Russian Internet segment. In addition, our carrier and operator services division provides data center services to content providers.
Data Services. We offer three types of data services: private networks, local access, and domestic and international channels.
We have our own local network nodes in the majority of business and trade centers in the largest cities of Russia.
We have interconnection agreements with international global data network operators who provide a one-stop shop concept for worldwide data network services for multinational companies. Under these interconnection agreements, we provide MPLS-based IP VPN, local, domestic
and international private lines, equipment and equipment maintenance in Russia.
We also provide high-speed domestic and international channels to international and Russian operators to sell excess backbone network capacity.
Residential and FTTB Operations in RussiaDistribution
Fixed-line Broadband Internet Access. In Russia, we offer fixed-line broadband Internet access. One of our strategic goals is to develop broadband services based on the most up-to-date engineering solutions.
FTTB IPTV. Currently the Beeline TV product is run in seven out of eight macro regions. In 118 cities of the 37 regions, we provide IPTV service. As of December 31, 2014, we had more than 980,000 IPTV customers.
Wireless Broadband Internet Access. According to iKS Consulting and J’son & Partners Consulting, Beeline WiFi is the world’s largest metropolitan wireless network and includes the greater part of Moscow’s city center and many other areas of the city. As of December 31, 2014, we have installed more than 5,000 WiFi access nodes in Moscow. Our partners in providing WiFi services are, amongst others, Domodedovo and Sheremetyevo Airports, Department of Information Technology, McDonalds, Starbucks, Coffee-House, MEGA, IKEA, METRO, Afimoll trade center, Auchan and Burger King.
Licenses for Fixed-line Business in Russia
We have fixed-line, data and long distance licenses which are important to our fixed business in Russia, including licenses in respect of Local Communications Services (excluding local communications services using payphones and multiple access facilities), Local Communications Services using multiple access facilities, Leased Communications Circuits Services, Voice Communications Services in Data Transmission Networks, Telematic Services, Intra-zonal Communications Services, Data Transmission Services and Communications Services for the Purposes of Cable Broadcasting in the main cities of Moscow, St. Petersburg, Ekaterinburg, Nizhny Novgorod, Khabarovsk, Novosibirsk, Rostov-on-Don and Krasnodar. These licenses will expire between June 8, 2015 and December 31, 2019. In addition we have an International and National Communications Services license for the entire Russian Federation which will expire on December 13, 2019.
The following licenses expire in 2015:
Local Communications Services license (excluding local communications services using payphones and multiple access facilities) in Khabarovsk (October 31, 2015) and Krasnodar (October 1, 2015);
Local Communications Services using multiple access facilities in Ekaterinburg (July 20, 2015);
Leased Communications Circuits Services in St. Petersburg (June 8, 2015) and Khabarovsk (August 25, 2015);
Telematic Services in Moscow (November 21, 2015), St. Petersburg (November 21, 2015) and Krasnodar (September 14, 2015);
Intra-zonal Communications Services in Krasnodar (December 12, 2015); and
Data Transmission Services licenses in Khabarovsk (September 14, 2015) and Krasnodar (September 14, 2015).
We have filed or will file applications for renewal for all of our licenses that expire in 2015.
Competition—Fixed-Line Business in Russia
Business Operations
Our fixed-line telecommunications business marketed as “Beeline Business” competes principally on the basis of convergent services and bundles, installation time, network quality, geographical network reach, customer service, range of services offered and price. We face significant competition from other service providers, including:
Rostelecom, the state-controlled telecommunications company, for services in St. Petersburg and all of Russian regional cities;
MTS, for services to corporate customers and the SME market;
TransTelecom, owned by Russian Railways, for corporate data network services across Russia;
Orange Business, for corporate data network services, convergent mobile and fixed-line services;
MegaFon, which provides convergent mobile and fixed-line services.
Wholesale Operations
For voice services, our main competitors are the long distance carriers Rostelecom, TransTelecom and OJSC “Multiregional TransitTelecom.” For IP transit and capacity services, our main competitors are Rostelecom, TransTelecom and MegaFon. In wholesale data networking we also compete with Orange.
Residential and FTTB Operations
In terms of end-user Internet penetration, the consumer Internet access business in Russia is already saturated and end-user Internet penetration is high.
Competition for customers in Russia is intense and we expect it to increase in the future as a result of wider market penetration, consolidation of the industry, the growth of current operators and the appearance of new technologies, products and services. As a result of increasing competition, Internet providers are utilizing new marketing efforts (for example, aggressive price promotions) in order to retain existing customers and attract new ones.
Our main competitors in the fixed-line broadband market in Russia are Rostelecom, MTS and its subsidiaries, Acado, Er-Telecom, NetbyNet and various local home network providers. Competition is based primarily on network coverage, pricing plans, Internet connection speed, services quality, customer service level, brand identity and a range of value added and other customer services offered.
Marketing and Distribution—Fixed-Line Business in Russia
Business Operations
We utilize a direct sales force in Moscow, operating both with fixed-line and mobile corporate customers and supported by specialists in technical sales support, marketing, customer service and end-user training. In addition, we employ a team of regional sales managers and a dedicated sales force in each of our regional branch offices, as well as having sales incentive plans with our regional partners.
While pricingCompetition
Our fixed-line telecommunications business marketed as "Beeline Business" competes principally on the basis of convergent services and bundles, installation time, network quality, geographical network reach, customer service, range of services offered and price. We face significant competition remainsfrom other service providers. For voice services, our main competitors are the long distance carriers Rostelecom, TransTelecom and OJSC "Multiregional TransitTelecom." For data services, our main competitors are the long distance carriers Rostelecom, TransTelecom and MegaFon. Our main competitors in the fixed-line broadband market in Russia are Rostelecom, MTS and its subsidiaries, Akado, ER-Telecom, NetbyNet and various local home network providers.
In terms of end-user internet penetration, the consumer internet access business in Russia is saturated and end-user internet penetration is high. Competition for customers in Russia is intense and we expect it to increase in the future as a factor, especiallyresult of wider market penetration, consolidation of the industry, the growth of current operators and the appearance of new technologies, products and services. As a result of increasing competition, internet providers are utilizing new marketing efforts (for example, aggressive price promotions) in order to retain existing customers and attract new ones.
Fixed-line Business in Pakistan
Our fixed-line business in Pakistan includes data, voice and VAS services over a wide range of access media, covering the major cities of Pakistan. The wired and wireless access services include FTTx, PMP (point to multipoint), point-to-point radios, VSAT, DSL & WiMax connecting more than 110 locations across Pakistan, providing data and voice connectivity to enterprise customers. The data services being provided to the enterprise customers include: dedicated internet access, VPN (virtual private networking), leased lines & fixed telephony.
We also offer services to domestic and international carriers, which include domestic and international leased lines, domestic and international MPLS, and IP transit services through our access network. Our long-haul fiber optic network covers more than 9,000 kilometers and, supplemented by wired and wireless networks, is spread across the major cities of Pakistan.
We provide the following services for voicecorporate and individual business customers: high-speed internet access (including fiber optic lines and xDSL), telephony, and long distance and international long distance telephony on prepaid cards; telephone communication services, based on copper wires and the modern digital fiber optic network; dedicated lines of data transmission; and dedicated line access and fixed-line mobile convergence.
Distribution
We utilize a direct sales force in Pakistan for enterprise customers. This dedicated sales force has three channels dedicated to SMEs, large/key accounts and business-to-government. These channels are led by individual channel heads who further employ a team of regional sales managers in different
regions, which are further supported by a sales force, including team leads and key account managers. There is also a centralized telesales executive team led by a manager and a dedicated sales force for customers that are engaged in reselling our services.
Competition
In Pakistan, our fixed-line business faces significant competition from other providers of fixed-line corporate services, carrier and operator services and consumer internet services. We believe that our main competitors for fixed-line corporate services are Pakistan Telecommunication Company Limited, or "PTCL," Multinet, Wateen, Supernet, Cybernet, Nexlinx and Nayatel. We believe that our main competitors for carrier and operator services are PTCL, Wateen, World Call, Wi-Tribe, and Telenor Pakistan. We believe that our main competitors for consumer internet services are PTCL, Wateen, World Call, Wi-Tribe and Qubee.
Fixed-line Business in Ukraine
In Ukraine, we offer fixed-line and wireless internet services. We provide data and internet access services in almost all metropolitan cities in Ukraine. We began providing fixed-line broadband services in Ukraine in 2008 and, as of December 31, 2017, provided services in 116 cities in Ukraine (excluding cities in Crimea and the ATO zone). In connection with these services, we have been engaged in a project to install FTTB for fixed-line broadband services in approximately 41,000 residential buildings in 116 cities, providing over 55,600 access points.
Our fixed-line services include corporate internet access, VPN services, data center, contact center, fixed-line telephony and a number of VAS. Internet access services include connection to the internet via ADSL, symmetrical and Ethernet interfaces at speeds ranging from 256 kilobytes per second to 10 gigabytes per second. Fixed-line voice services are available in many corporate data networking customers place more value on network coverage, reliability and the ability to design, install and maintain LANs and WANs. These customers often require integrated solutions, including connections to offices locatedof Ukraine's major cities.
In November 2016, we launched FMC for an increasing range of mobile users in different cities. To meet these requests, we currentlyour fixed-line broadband internet base. We also offer a range of services aimed at providing installation and maintenance of customers’ equipment and local networks in Moscow and other regions. We currently provide high priority network support for a number of key clients, and we are actively working on new products, which we believe will allow us to provide a whole range of managed services.
Residential and FTTB Operations
Fixed-line Broadband Internet Access. We offer a wide range of FTTB services tariffs for fixed-line broadband internet access targeted at different customer segments. We currently have 11 unlimited tariff plans with monthly fees, which offer different speeds up to 100 Mbps for active internet users. In addition, in 2015, we launched OTT TV services in partnership with Viasat.
Our joint carrier and operator services division in Ukraine provides local, international and intercity long distance voice traffic transmission services to Ukrainian fixed-line and mobile operators on the basis of our proprietary domestic long-distance/ILD network, as well as IP transit and data transmission services through our own domestic and international fiber optic backbone and IP/MPLS data transmission network. We derive most of our carrier and operator services revenue in Ukraine from voice call termination services to our own mobile network and voice transit to other local and international destinations.
Distribution
Our company emphasizes high customer service quality and reliability for its corporate large accounts while at the same time focusing on the development of its SME offerings. We sell to corporate customers through a direct sales force and various alternative distribution channels such as IT servicing organizations and business center owners, and to SME customers through dealerships, direct sales, own retail and agent networks. We use a customized pricing model for large accounts which includes service or tariff discounts, volume discounts, progressive discount schemes and volume lock pricing. We use standardized and campaign-based pricing for SME customers. Our residential marketing strategy is focused on attracting new customers. We offer several tariff plans, each one targeted at a different type of customer.
Competition
In the voice services market for business customers, we compete with Ukrtelecom, Datagroup, Farlep-Invest (Vega), and a number of other small operators. We were the third largest B2B internet provider in the country as of December 31, 2017, according to management's estimates. There is a high level of competition with more than 400 internet service providers in Ukraine. Our main competitors in the corporate market for data services are also Ukrtelecom, Farlep-Invest (Vega) and Datagroup. Our competitors for both the carrier and operator services and the voice and data services market include Datagroup, Ukrtelecom, and Farlep-Invest (Vega). Our main competitors for the provision of consumer internet services in Ukraine are Volia and Ukrtelecom. From December 31, 2016 to December 31, 2017, we increased the number of our broadband customers in Ukraine (excluding customers in the ATO zone) by 1% from 811,910 to 823,840.
Fixed-line Business in Uzbekistan
In Uzbekistan, we provide a wide range of fixed-line services, such as network access, internet and hardware and software solutions, including configuration and maintenance. We provide the following services for corporate and individual business customers: high-speed internet access (including fiber optic lines and xDSL), telephony, and long distance and international long distance telephony on prepaid cards; telephone communication services, through our copper cable network and our modern digital fiber optic network; dedicated lines of data transmission; and dedicated line access and fixed-line mobile convergence.
In Uzbekistan, we offer similar fixed-line broadband and wireless internet services as in Russia. See "—Fixed-line Business in Russia."
Distribution
One of our priorities in Uzbekistan is the development of information and communications technology, which supports economic development in Uzbekistan. Our strategy includes maintaining our current market position by retaining our large corporate client customer base.
Competition
We operate large independent fixed-line services in Uzbekistan, where we compete with the state-owned provider, Uztelecom, as well as East Telecom, Sarkor Telecom, Sharq Telecom, TPS and EVO. There is a high level of competition in the capital city of Tashkent, but the fixed-line internet market in most of the other regions remains undeveloped.
Fixed-line Business in Armenia
Our subsidiary VEON Armenia provides a range of telecommunications services in Armenia, including PSTN-fixed and IP telephony, internet, data transmission and network access, domestic and international voice termination and TCP/IP international transit traffic services. We operate a nationwide network in Armenia and provide the following services for corporate and individual customers: local telephony services; international and domestic long distance services; broadband access services (including ADSL, VDSL, LTE 450 and fiber optic lines); and VoIP services.
VEON Armenia is the Armenian incumbent operator offering countrywide wholesale services, such as leased line service and wholesale broadband services, as well as wholesale international voice termination and origination services for other local and international operators and service providers.
We offer PSTN-fixed and IP telephony services, as well as fixed-line broadband internet access based on ADSL and FTTB IPTV.technologies, dial-up services and wireless internet access based on CDMA technology. In 2015, we launched FMC bundles, offering fixed internet, fixed TV serviceand mobile services.
In 2017, we received permission from the Public Services Regulatory Commission of Armenia to include fixed voice services in our FMC bundles, which we plan to roll out in 2018.
Distribution
Our strategy includes focusing on customer retention and ARPU growth by developing new services, including internet access through a fiber optic network with a guaranteed speed to corporate customers and government organizations.
Competition
We offer a broad range of fixed-line services to government, corporate and private customers. We believe we compete primarily with U!Com and Rostelcom in Armenia, which are primarily provide fixed internet and cable TV services.
Fixed-line Business in Kazakhstan
We focus on customer experience for large enterprises through offering high-quality services. Our main business clients are concentrated in the financial and oil and gas sectors, with a new focus on international companies. We provide the following services for corporate clients: high-speed internet access; local, long distance and international voice services over IP; local, intercity and international leased channels and IP VPN services; cloud services; and integrated corporate networks (including integrated network voice, data and other services). We use the following technologies: fiber optic lines (approximately 20,715 buildings are covered by our FTTB network), wireless technologies, satellite technologies, and the TV-Everywhere platform (which is provided on a monthly fee basis. STBs can be rented or bought by customers. We have launched the following value added services for TV: Video on Demand (with a library of more than 3,000 items) and the option to view the recording of popular TV programs. In Moscow we have launched Timeshift option allowing to rewind live channels without recording on STB. Most IPTV sales are carried out in bundles with home internet and Wi-Fi routers for 1 Russian ruble. Customers are offered to rent or buy additional STBs to watch their TV channel pack on another TV set or Wi-Fi bridges which helps to eliminate extra wires that extend through the apartment.vendor, Computer Telephony Integration).
In Kazakhstan, we offer similar fixed-line broadband and wireless internet services as in Russia. See "—Fixed-line Business in Russia." In 2017, we continued to increase our coverage and completed FTTB roll-out for an additional 459 buildings. We also updated the FMC product, by adding additional mobile bundles and video content from Amediateka. In addition, in October 2017 we launched an additional parental control service, which enables location services, and can limit access to internet sites and browsing time.
xDSL Services.Distribution For xDSL
We are focusing on customer base and revenue growth, which we aim to promote by expanding our transport infrastructure, developing unique products, strengthening our position in the market and enhancing our sales efforts and data services.
Competition
We provide internet, data transmission and traffic termination services in Kazakhstan, where we believe we compete primarily with state-owned provider Kazakhtelecom, KazTransCom, TransTelecom (owned by Kazakhstan Temir Zholy, the national railway company), Astel (a leader in the provision of satellite services) and several other small local operators.
Interconnection Agreements
Our mobile and fixed-line businesses are dependent on interconnection services, which are required to complete calls that originate on our company offers an unlimited tariff planrespective networks but terminate outside our respective networks, or that originate from outside our respective networks and tariff plans that dependterminate on traffic volumeour respective networks. In order to provide a local, domestic and connection speed.international network, we have interconnection agreements in the markets in which we operate.
Wireless Broadband Internet Access.Russia
We offer WiFi tariff plans that include unlimited usage plans and plans that charge by usage. We also offer special prices forhave several interconnection agreements with mobile and FTTB users.fixed-line operators in Russia under which we provide traffic termination services. During 2017, our MTRs in Russia were broadly stable as compared to the 2016 and 2015 historical periods.
Pakistan
We have several interconnection agreements with mobile and fixed-line operators in Pakistan and in the territories of Azad Jammu and Kashmir ("AJK") and Gilgit-Baltistan, under which we provide traffic termination services. Our MTRs in 2017 in Pakistan were broadly stable as compared to the 2015 and 2016 historical periods.
Algeria
We have several interconnection agreements with mobile, VoIP and fixed-line operators in Algeria under which we provide traffic termination services. The national incoming interconnect rate decreased for the year ended December 31, 2017 as compared to the year ended December 31, 2016, and the outgoing interconnect rate also decreased over the same period. The movements in the historical MTRs for 2017, 2016 and 2015 have been favorable to our business, however, asymmetry continues to exist between OTA and one other operator.
Bangladesh
We have several interconnection agreements with ICX, IGW, mobile operators, IPTSP and fixed-line operators in Bangladesh under which we provide traffic termination services. For international incoming calls, MTR in 2017 was broadly stable as compared to the 2016 and 2015 historical periods.
Ukraine
We have several interconnection agreements with mobile and fixed-line operators in Ukraine under which we provide traffic termination services. The rates in 2017 for termination of national traffic to a mobile network and a fixed network on an intercity level decreased compared to the 2016 and 2015 historical periods.
Uzbekistan
We have several interconnection agreements with mobile and fixed-line operators in Uzbekistan under which we provide traffic termination services. During 2017, our MTRs in Uzbekistan were broadly stable as compared to the 2016 and 2015 historical periods.
On September 5, 2017, the State Committee of Uzbekistan on Privatization, Demonopolization and Development of Competition ("State Committee of Uzbekistan") issued an injunction requiring Unitel LLC to implement equal mobile termination rates for all national operators. Unitel LLC appealed this injunction and on January 15, 2018, the appellate division of the Tashkent administrative court ruled in favor of the State Committee of Uzbekistan. Unitel LLC is currently engaged in discussions with the State Committee of Uzbekistan, other relevant regulators and national operators regarding the implementation of the injunction. Unitel LLC is also involved in litigation with UMS and Ucell in relation to unpaid mobile termination rates.
Others
We have several agreements with mobile and fixed-line operators in each of the countries in our "Others" category under which we provide traffic termination services.
Licenses
Pay TV (cable TV) Services.Mobile Telecommunications Licenses in Russia We offer two tariff plans: “Social”
GSM
PJSC VimpelCom holds super-regional GSM licenses (GSM900, GSM1800, GSM900/1800, UMTS 900 and 4G/LTE 1800 standards) for customers who need basic TVthe following seven out of eight super-regions in Russia: Moscow, Central and Central Black Earth, North Caucasus, North-West, Siberia, Ural and Volga. These licenses will expire between April 2018 and November 2022, and we plan to file applications for renewal of all our licenses prior to their expiration. PJSC VimpelCom does not currently hold a GSM super-regional license for the Far East super-region of Russia, but it holds GSM licenses in a number of regions of the Far East super-region. These licenses expire on various dates between 2019 and 2022, and we plan to file applications for renewal of all of our licenses prior to their expiration.
In addition to the seven super-regional GSM licenses, PJSC VimpelCom holds a GSM license for the Orenburg region, and in total, our GSM licenses cover approximately 97% of Russia's population.
3G
PJSC VimpelCom holds one of three 3G licenses in Russia. PJSC VimpelCom has extended its license until May 2022.
4G/LTE
In July 2012, PJSC VimpelCom was awarded a mobile license, a data transmission license, a voice transmission license and a telematic license for the provision of 4G/LTE services in Russia. These licenses allow PJSC VimpelCom to provide services using radio-electronic devices in Russia via networks that use 4G/LTE standard equipment within any of the following frequency bands: 735-742.5/776-783.5 MHz; 813.5-821/854.5-862 MHz; and 2550-2560/2670-2680 MHz. Certain channels which includes 10-12 TV channelsallocated to us in accordance with the licenses have restrictions on their use. To remove restrictions, we have to perform organizational technical measure field tests. The rollout of the 4G/LTE network is using a phased approach based on a pre-defined schedule pursuant to the requirements of the license.
PJSC VimpelCom holds the 4G/LTE 2600 licenses in 32 subjects of Russia. The licenses expire on April 15, 2026 and “Commercial,” which includes 45-55 TV channels.we plan to apply for renewal of these licenses prior to their expiration.
License fees
PJSC VimpelCom must pay an annual fee for the use of radio frequency spectrum. This fees were RUB 4,288 million and RUB 4,210 million for the years ended December 31, 2017 and 2016, respectively. Under Federal Law No. 126 FZ "On Communication" and license terms, PJSC VimpelCom is required to make universal service fund contributions in the amount equal to 1.2% of corporate revenues from provided communications services. Universal service fund contributions were RUB 2,369 million and RUB 2,336 million for the years ended December 31, 2017 and 2016, respectively. PJSC VimpelCom is also subject to certain other license fees on a case-by-case basis.
Mobile Telecommunications Licenses in Pakistan
2G
PMCL was awarded a 15-year 2G license in 1992. In 2007, PMCL renewed its 2G license for a further term of 15 years. As of December 31, 2014, we2017, PMCL had more than 72,000 cable TV customers.a balance of US$43.5 million to be paid to the PTA for the renewal of its 2G license. Such amount is payable in yearly installments of US$14.5 million, payable in December of each year, until December 2019. PMCL has two 15-year licenses for provision of cellular mobile services in AJK and Gilgit-Baltistan.
Fixed-line Telephony. We offer two telephony servicesTable of Contents
Further, Warid acquired a 15-year technology neutral license in 2004 for residential users: traditional time division multiplexing (also referredUS$291 million. US$145.5 million was paid upfront while the rest is expected to as TDM) accessiblebe paid in 180 Russian cities (which includes the citiesten equal annual installments starting with a four year grace period, with the possibilitylast payment being in May 2018. This license is up for renewal in 2019.
3G
In 2014, following a competitive bidding process, PMCL was awarded a 15-year license to operate a nationwide 3G telecommunications network in Pakistan for an aggregate initial spectrum fee of IP services)US$300.1 million, which was paid at the time PMCL acquired the license.
In addition, PMCL and its subsidiaries have other licenses, including LDI, WLL, local loop licenses, licenses to provide non-voice communication services, and licenses to provide class VAS in Pakistan, AJK and Gilgit-Baltistan. The licensees must also pay annual fees to the PTA and make universal service fund contributions and/or research and development fund contributions, as applicable, in a total amount equal to a percentage of the licensees' annual gross revenues (less certain allowed deductions) for such services.
4G/LTE
In June 2017, PCML was awarded a 15-year license to operate 4G/LTE (NGMS) telecommunications network in Pakistan for an aggregate initial spectrum fee of US$295 million and withholding tax of 10%, and VoIP-basedwhich was paid at the time PMCL acquired the license.
Warid (now merged with Jazz) acquired a 15-year technology neutral license in 2004 for US$291 million. US$145.5 million was paid upfront while the rest is being paid in ten equal annual installments starting with a four year grace period (the last payment is due in May 2018). This license is up for renewal in 2019. The same license was amended in December 2014 by PTA to allow Warid for providing 4G/LTE services in more than 80Pakistan.
License fees
Under the terms of its 2G, 3G and 4G/LTE licenses, as well as its license for services in AJK and Gilgit-Baltistan, PMCL must pay annual fees to the PTA and make universal service fund contributions and/or research and development fund contributions, as applicable (not all of the foregoing are applicable to all licenses), in a total amount equal to 2.5% of PMCL's annual gross revenues (less certain allowed deductions) for such services, supplemental to spectrum administrative fees.
PMCL's total license fees (annual license fees plus revenue sharing) in Pakistan (excluding the yearly installments noted above) were US$26.7 million, US$27.1 million and US$21.1 million for the years ended December 31, 2017, 2016 and 2015, respectively. PMCL's total spectrum administrative fee payments in Pakistan were US$1.5 million, which includes Warid's spectrum, for the year ended December 31, 2017, and were US$1.0 million for each of the years ended December 31, 2016 and 2015, which excludes Warid's spectrum.
Mobile Telecommunications Licenses in Algeria
2G
In 2001, OTA was awarded a 15-year license to operate a 2G telecommunications network for an aggregate fee of approximately US$737 million. The license expired in 2016, but was renewed for a five-year period at no additional cost (Decree 17-195 of June 11, 2017).
VSAT
In 2003, OTA acquired a VSAT data-voice license for an aggregate fee of US$2.05 million and renewed the license in 2014 for an additional period of five years, at no additional cost.
3G
In 2013, OTA was awarded a 15-year license to operate a 3G telecommunications network for an aggregate fee of approximately US$38 million, which was paid in full in 2013. Under the terms of its 3G license, OTA is required to pay an additional annual revenue sharing fee of 1% based on 3G revenues less interconnection costs.
4G/LTE
In 2016, Optimum was awarded a 15-year license to operate a 4G/LTE telecommunications network for an aggregate fee of US$36 million (based on then-current exchange rates), which was paid in full in 2016. Under the terms of its 4G/LTE license, Optimum is required to pay an additional annual revenue sharing fee of 1% based on 4G/LTE revenues less interconnection costs.
License fees
Under the terms of its 2G, 3G, 4G/LTE and VSAT licenses, OTA is required to pay revenue sharing allocations to the Algerian government and contributions for the universal service fund (3% of revenues less interconnection costs); management of the numbering plan (0.2% of revenues less interconnection costs); and research, training and standardization (0.3% of revenues less interconnection costs).
OTA's total license fees in Algeria were US$61.8 million, US$62.1 million and US$69.4 million for the years ended December 31, 2017, 2016 and 2015, respectively, of which US$28.1 million, US$25.9 million and US$25.7 million was related to spectrum charges, and US$33.7 million, US$36.2 million and US$43.7 million were related mainly to contributions made to the Universal Services of Telecommunications fund and to the number plan management over the same periods.
Mobile Telecommunications Licenses in Bangladesh
2G
In November 1996, BDCL was awarded a 15-year GSM license to establish, operate and maintain a digital mobile telephone network to provide 2G services throughout Bangladesh. The license was renewed in November 2011 for a further 15-year term.
3G
In September 19, 2013, following a competitive auction process, BDCL was awarded a 15-year license to use 5 MHz of technology neutral spectrum in 2100MHz band for 15 years and was also awarded a 3G license, for which it paid a total cost of BDT 8,677.4 million (inclusive of 5% VAT) (US$105 million as of December 31, 2017), including both a license acquisition fee and a spectrum assignment fee.
4G/LTE
On February 13, 2018, BDCL acquired a 4G/LTE license for US$1.2 million. BDCL also acquired the right to use 10.6MHz technology neutral of spectrum in 1800MHz (5.6) and 2100MHz (5) for US$324 million including VAT (33.34% of the fee has been considered as tariff value for 15% VAT).
Banglalink also converted 15MHz of existing 2G spectrum for the remaining tenure of it for US$ 36.75 million.
License fees
Under the terms of its 2G, 3G and 4G mobile licenses, BDCL is required to pay to the Bangladesh Telecommunication Regulatory Commission (i) an annual license fee of BDT 50.0 million (US$0.6 million as of December 31, 2017) for each mobile license; (ii) 5.5% of BDCL's annual audited gross revenue, as adjusted pursuant to the applicable guidelines; and (iii) 1% of its annual audited gross revenue (payable to Bangladesh's social obligation fund), as adjusted pursuant to the applicable guidelines. The annual license fees are payable in advance of each year, and the annual revenue sharing fees are each payable on a quarterly basis and reconciled at the end of each year.
BDCL's total license fees (annual license fees plus revenue sharing) in Bangladesh were equivalent to US$34.7 million, US$41.7 million and US$40.6 million for the years ended December 31, 2017, 2016 and 2015, respectively.
In addition to license fees, BDCL pays annual spectrum charges to the BTRC, calculated according to the size of BDCL's network, its frequencies, the number of its customers and its bandwidth. The annual spectrum charges are payable on a quarterly basis and reconciled at the end of each year. BDCL's annual spectrum charges were equivalent to US$9.0 million, US$9.8 million and US$9.9 million for the years ended December 31, 2017, 2016 and 2015, respectively.
Mobile Telecommunications Licenses in Ukraine
GSM
In Ukraine, Kyivstar holds GSM900 and GSM1800 cellular licenses to provide telecommunications services throughout the territory of Ukraine. These licenses were received on October 5, 2011 for a term of 15 years each and will expire on October 5, 2026.
3G
On February 25, 2015, after an auction process, Kyivstar was awarded one of three licenses to provide nationwide 3G services in the 2100 MHz band. The license was issued on April 1, 2015 and is valid for a period of 15 years (until April 1, 2030).
We have also obtained a range of national and regional radio frequency licenses for the use of radio frequency resources in the referred standards and in specified standards—radio-relay and WiMax.
Our network coverage is (except the Anti-Terrorist Operation zone where Kyivstar is not able to use and control its network): 91.46% of the 2G network; 18.7% of the 3G network; 9,864 localities covered by 2G network; and 25,484 localities covered by 3G network.
4G/LTE
Kyivstar secured 4G/LTE licenses and spectrum in two separate transactions in 2018. Following the auction held on January 31, 2018, Kyivstar acquired 15 MHz (paired) of contiguous frequency in the 2600 MHz band for UAH 0.9 billion (US$32 million as of December 31, 2017). In addition, on March 6, 2018, Kyivstar secured the following spectrum through auction in the 1800MHz band: 25MHz (paired) for UAH 1.325 billion (US$47 million as of December 31, 2017) and two lots of 5MHz (paired) for UAH 1.512 billion (US$54 million as of December 31, 2017).
Mobile Telecommunications Licenses in Uzbekistan
We hold a national license for GSM900/1800, 3G and 4G/LTE covering the entire territory of Uzbekistan. The most recent license was an extension granted in May 2016 for 15 years, is effective until August 7, 2031 and requires annual license fee payments.
Unitel LLC also has international communication services license valid until 2026 and for data transfer valid until 2019.
Mobile Telecommunications Licenses in Others
| Country | Licenses (as of December 31, 2017) | License Expiration | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | | | | | | | | | | | |
| Kazakhstan | Mobile services (GSM900/1800, UMTS/WCDMA2100, 4G/LTE800/1800) | Unlimited term | ||||||||||
| | | | | | | | | | | | | |
| Kyrgyzstan | Radio spectrum of 800 MHz for the entire territory of Kyrgyzstan (technology neutral) 796-801MHz/837-842MHz | September 28, 2025 | ||||||||||
Radio spectrum of 800 MHz for the entire territory of Kyrgyzstan (technology neutral) 791-796MHz/832-837MHz | December 27, 2026 | |||||||||||
Radio spectrum of 900 MHz, 1800 MHz and 2100 MHz for the entire territory of Kyrgyzstan (technology neutral) | October 30, 2019 | |||||||||||
National license for electric communication service activity | Unlimited term | |||||||||||
National license for base station transmission | December 3, 2019 | |||||||||||
National license for services on data traffic | Unlimited term | |||||||||||
| | | | | | | | | | | | | |
| Armenia | Network operation for the entire territory of Armenia | March 3, 2028 | ||||||||||
National licenses to use radio spectrum of 900 MHz, 1800 MHz and 2100 MHz for the entire territory of Armenia (technology neutral) | March 3, 2023 | |||||||||||
| | | | | | | | | | | | | |
| Tajikistan | GSM900/1800 | May 12, 2019 | ||||||||||
3G | July 13, 2020 | |||||||||||
Data services (with permission to use of 800 MHz frequency for 4G/LTE services) for the entire territory of Tajikistan | December 9, 2020 | |||||||||||
International call services | August 11, 2021 | |||||||||||
| | | | | | | | | | | | | |
| Georgia | GSM1800 10 MHz frequency | February 1, 2030 | ||||||||||
GSM900 5.49 MHz frequency | February 1, 2030 | |||||||||||
LTE 800 10 MHz frequency | February 1, 2030 | |||||||||||
10 MHz 3G frequency | December 29, 2031 | |||||||||||
| | | | | | | | | | | | | |
| Laos | 2G, for the entire territory of Laos | January 23, 2022 | ||||||||||
3G, for the entire territory of Laos | January 23, 2022 | |||||||||||
WLL, for the entire territory of Laos | January 23, 2022 | |||||||||||
ISP | Annual renewal | |||||||||||
| | | | | | | | | | | | | |
Fixed-line Business Licenses in Russia
We have fixed-line, data and long distance licenses which are important to our fixed business in Russia. These licenses will expire between April 17, 2018 and March 26, 2023.
We have filed, or will file, applications for renewal for all of our licenses that expire in 2018, which include: local communications services in St. Petersburg (May 23, 2018) and Krasnodar (April 18, 2018); leased communications circuits services in Moscow (August 28, 2018), Ekaterinburg, Nizhny Novgorod, Novosibirsk, Rostov-on-Don (November 12, 2018) and Krasnodar (April 17, 2018; August 18, 2018; November 12, 2018); data transmission services in Ekaterinburg (July 05, 2018) and Krasnodar (April 17, 2018); voice communications services in data transmission networks in Ekaterinburg (July 05, 2018) and Krasnodar (April 18, 2018); and telematic services in Ekaterinburg (July 05, 2018).
In addition, we have an International and National Communications Services license for the entire Russian cities. AllFederation which will expire on December 13, 2019.
Fixed-line Business Licenses in Pakistan
There are two main categories of licenses for provision of fixed line services offer fixed numberingin Pakistan. One type is Long Distance & International ("LDI") license and other is Local Loop ("LL") license. LDI License is meant for providing nationwide and international telecommunication services whereas LL license is for provision of services (fixed line and/or wireless local loop with limited mobility) within a telecom region for which license is awarded.
Fixed-line Business Licenses in Ukraine
We have competitive prices forinternational, long-distance and local zonal,communication licenses in place in Ukraine. Our international communication license expires on August 18, 2019; our long-distance communication license expires on August 18, 2019 and our local communication license expires on August 29, 2020. Each of the foregoing licenses are valid throughout Ukraine.
Fixed-line Business Licenses in Uzbekistan
We have a fixed-line license valid until 2021, a data license valid until 2021 and long distance licenses which are valid until 2029. These licenses require the payment of annual fees and cover services including local, long distance and domesticinternational communications, data transmission and internet.
Fixed-line Business Licenses in Armenia
We operate a nationwide fixed-line network in Armenia on the basis of a general (fixed and mobile) network operation license, expiring on March 3, 2028. We also have a license to use a 450MHz frequency band for the provision of fixed wireless voice telephony and broadband services in rural areas in Armenia, which expires on March 3, 2023.
Fixed-line Business Licenses in Kazakhstan
We have a long distance calls. As of December 31, 2014, we had approximately 170,686license which is important to our fixed line telephony customersbusiness in Russia.Kazakhstan. This license has an unlimited term, no license fee and covers services including long distance and international connection, traffic termination and transit.
Description of Operations of the Italy SegmentJoint Venture
Our We do not control the Italy segment consistsJoint Venture and therefore account for the Italy Joint Venture using the equity method and do not fully consolidate its results into our financial statements. We own a
50.0% share of the Italy Joint Venture with our joint venture partner, Hutchison. We include the following operational information for the Italy Joint Venture in this Annual Report on Form 20-F because we consider the Italy Joint Venture to be a significant part of our operations inbusiness. For more information, see "Explanatory Note—Presentation of Financial Information of the Italy underJoint Venture" and notes 5, 14 and 25 to our wholly owned subsidiary WIND Italy.audited consolidated financial statements for further information.
Mobile Business in Italy
Description of Mobile Services The Italy Joint Venture markets its mobile, internet, fixed-line voice and data offerings by employing a multibrand strategy for the "WIND" and "3" brands in Italy
Mobile Telecommunications Services
Intheir respective consumer markets together with the "WIND TRE BUSINESS" brand dedicated to the business segment. The Italy we primarily offer our mobile telecommunications services under two types of payment plans: postpaid and prepaid. As of December 31, 2014, approximately 7.0% of our customers in Italy were on postpaid plans and approximately 93.0% were on prepaid plans.
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Data and Value Added Service Offerings.In Italy, we provideJoint Venture provides a variety of mobile data services and value added servicesVAS for telephone and computer to ourits consumer and corporate customers.
WIND customers can choose between tied and untied portfolios. The tied offers are both prepaid and postpaid offers that bind customers for a specified period and include penalties if the customer leaves during the agreed period. The untied offers are only prepaid and do not bind customers for a specified period but allow them to use prepaid credit they have on their SIM card. "3" customers can choose between tied and untied prepaid portfolios and tied postpaid. For "3", the tied and untied offer portfolios include certain all-inclusive packages that include a smartphone purchase and certain other packages.
The Italy Joint Venture offers a variety of content and infotainment services. For example, the Italy Joint Venture has continuedrenewed its partnerships with Google and Microsoft for carrier billing (purchase of apps, games, music and other digital contents paying with phone credit) delivering several co-marketing initiatives with Google to encourage usage. In 2017, the Italy Joint Venture signed a partnership with Apple allowing payments via phone credit on iTunes, App Store, iBooks and Apple Music for both WIND and "3" customers. In 2017, "3" signed a partnership with Netflix, enabling "3" postpaid customers to have access to Netflix's on-demand entertainment streaming service, which is offered for free for the first three months on internet plans such as "3Cube".
Mobile bundles
its growth in mobile Internet services due to an increase in the number of smartphones and improvements to its own offerings of plans with The Italy Joint Venture offers bundle options, suited for both prepaid and postpaid customers, which include minutes of voice traffic, SMS, and mobile Internetinternet browsing for a fixed monthly fee. Specific bundles targeting younger and senior consumers are available. WIND provides data-friendly users with the opportunity to manage their own account via digital channels such as the web, mobile apps and social networks. In order to integrate the offer, WIND provides a selection of smartphones, tablets and new technological and interactive devices that can be purchased through installment payments and taking advantage of discounts.
In Italy, we offer the following data services and value added services:VEON platform
In November 2016, WIND released the VEON platform on both the Android and IOS digital stores. In July 2017, the Italy Joint Venture launched VEON 2.0, which introduces new functionalities, such as the channels functionality, whereby users can follow certain brands and receive news, promotions and offers. The app is available to everyone, but WIND's customers have additional advantages in terms of free data traffic and other rewards.
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International Roaming.Distribution Our mobile
For corporate customers in Italy, can use ourthe Italy Joint Venture uses different marketing strategies depending on the nature and size of a customer's business. For large corporate customers and SMEs, the Italy Joint Venture's marketing efforts are more customized and institutional in nature, and include
one-on-one meetings and presentations, local presentations and presentations at exhibitions. For the SOHO market, the Italy Joint Venture advertises in the professional and general press and uses airport billboards. The Italy Joint Venture sells consumer mobile products and services, including SMS, MMSSIM cards, scratch cards and data services where available, while roaming in other countries. Roaming coverage outside Italy is providedhandsets through our roaming agreements with approximately 488 international operators in 219 countriesa series of exclusive outlets, which as of December 31, 2014.2017 consisted of 1,635 total sales points (689 WIND brand sales points and 946 "3" brand sales points). The non-exclusive Italy Joint Venture sales network consists of 3,715 multi-brand dealers spread throughout the country. The Italy Joint Venture also sells a portion of its consumer services online through its websites.
Handset Offerings. We offer our customers in Italy a broad selection of handsets and Internet devices, which we source from a number of suppliers. The Italian market is a predominantly prepaid market and, as a result, mobile operators generally have provided limited handset subsidies, and only to higher value customers.
Mobile Telecommunications Licenses in ItalyCompetition
WIND Italy has a license to provide mobile telephone services in Italy using digital GSM 1800 and GSM 900 technology. This license expires in 2018 and thereafter may be renewed by the relevant authorities considering the technological evolution from GSM to UMTS. WIND Italy acquired a UMTS license in 2001, which is expected to expire in 2029, and thereafter may be renewed for an additional seven years by the relevant authorities. Pursuant to the terms of the UMTS license, WIND Italy has coverage in all Italian regional capitals.
WIND has been licensed LTE/4G spectrum consisting of two blocks of 800 MHz spectrum and four blocks 2600 MHz spectrum. The license is valid until 2029.
Both the National Regulatory Authority (Autorità per le Garanzie nelle Comunicazioni, or “AGCOM”) and the Communications Department of the Italian Ministry of Economic Development have been reviewing frequency assignments and implementing changes thereto in 2014. Any changes to the frequency assignments could lead to increased costs for WIND Italy to adopt equipment and avoid interference.
Competition—Mobile Business in Italy
The mobile telecommunicationtelecommunications market in Italy in which WINDthe Italy Joint Venture operates is characterized by high levels of competition among service providers. WINDCompetition intensified during 2017 and the Italy Joint Venture expects this market to remain competitive in the near term, and competition may be exacerbated by further consolidation and globalization of the telecommunications industry.
In the Italian mobile telecommunications market, Telecom Italia, operating under the “TIM” brand name, Vodafone Italy, operating under the “Vodafone” brand name, and Hutchison 3G, operating under the “3” brand name, are our principal competitors. Telecom Italia and Vodafone have well established positions Additionally, in the Italian mobile market and each has a greater market share than WIND Italy. Hutchison 3G has been aggressively seeking new customers throughfirst half of 2018, the use of handset subsidies, which are not customarily offeredFrench operator Iliad is expected to launch in the Italian market and heavily discounting its offering compared to WIND Italy. During 2014 the entire market reduced in size as a consequencenew mobile operator as a beneficiary of operators focusing on more robust pricing strategiesthe remedy package agreed with the European Commission for the completion of the Italy Joint Venture.
The following table shows the Italy Joint Venture's and less aggressive useits principal competitors' respective mobile customer numbers in Italy as of promotions.December 31, 2017:
Operator | Customers (in millions) | |||
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Telecom Italia | 30.8 | |||
Italy Joint Venture | 29.5 | |||
Vodafone Italy | 22.4 | |||
Source: Telecom Italia, as the incumbent in the market, has the advantage of longstanding relationships with Italian customers.Italy Joint Venture and Vodafone Italy is well positioned in the market and is perceived as having a technologically advanced and reliable network in the market. Certain of our competitors also benefit from greater levels of global advertising.
According to Analysys Mason, Research, the four network operators in Italy offeroffered mobile telecommunications services to approximately 89.672.9 million registered customers as of December 31, 2014,2017, representing a mobile penetration rate of approximately 146.6%122.0% of the Italian population.population compared to 81.7 million customers and a mobile penetration rate of approximately 136.6% in 2016.
Licenses
GSM1800 and GSM900
The Italy Joint Venture has a license to provide mobile telephone services in Italy using digital GSM1800 and GSM900 technology. This license is due to expire on June 30, 2018. In the Italian Budget Law 2017, the Italian government sets out the conditions and formal procedure to be followed by operators holding GSM spectrum rights of use wishing to extend such rights until December 31, 2029 and also obtain freedom to use such spectrum under a technology neutrality regime. The Italy Joint Venture is awaiting the related interministerial decree that concludes the procedure referred to in the aforementioned law.
3G
Both WIND and "3" acquired 3G licenses in 2001, which were initially expected to expire in 2021, but were extended to December 2029. In light of the authorization received from the Italian Ministry of Economic Development ("MISE") regarding the transfer of spectrum rights of use (7 blocks of 2x5MHz in 900, 1800, 2100 and 2600MHz bands) from WIND and "3" to the French operator, Iliad, the Italy Joint Venture will have to submit a request for the extension to the MISE for the 2100MHz
spectrum rights of use from December 2021 to December 2029. The extension to December 2029 is subject to compliance with the provisions of the Ministry of Economic Development issued in October 2016 and the payment of contributions, payable for the years 2022 to 2029.
4G/LTE
WIND and "3" have licenses for 4G/LTE spectrum rights of use in 800, 1800 and 2600 MHz bands. Such spectrum rights are due to expire in December 2029. The following is a list of mobile access spectrum blocks, on a band-by-band basis, which will be held by the Italy Joint Venture once the spectrum release to Iliad is completed: 800 Band—2 blocks of 2x5 MHz; 900 Band—2 blocks of 2x5 MHz; 1800 Band—4 blocks of 2x5 MHz; 2000 TDD Band 5+5 MHz; 2100 Band—4 blocks of 2x5 MHz; 2600 Band—4 blocks of 2x5 MHz; and 2600 TDD Band 15+15 MHz. All the frequency blocks indicated and held by Wind Tre S.p.A. will be contiguous in the respective bands according to the provision of the Ministry of January 9, 2018 which provides for the reallocation in 1800 MHz and 2100 MHz spectrum.
5G
On September 22, 2017, MISE formalised the award to Wind Tre S.p.A. and Open Fiber S. p. A. of a provisional authorization, for a four-year duration, to carry out the 5G pre-commercial trials in the spectrum portion 3.6 - 3.8 GHz in area 2—Prato and L'Aquila.
Equipment and operations
The Italy Joint Venture has a tower services agreement with Galata (a subsidiary of Cellnex) for an initial term of 15 years for the provision of a broad range of services on the sites. On July 4, 2017, the Italy Joint Venture sold all of its shares in Galata, which had comprised 10% of the shares of Galata, following the sale in March 2015 of 90% of its shares in Galata. As of December 31, 2014 there were 17 MVNO/ESPs providing services in2017, the Italian market, with an aggregate market shareItaly Joint Venture owned 287 radio centers (for all of which it owns the towers and equipment rooms, and for approximately 7%. Penetration is distorted by12 out of 287 it also owns the widespread use of multiple SIM cards by individual users. The market is mostly prepaid.
According to Analysys Mason Research, as of December 31, 2014,land where the radio centers are located), 586 towers, approximately 5,400 towers on rented locations, excluding MVNOs, Telecom Italia had a market share of 34.7%, followed by Vodafone with 31.1%, WIND Italy with 23.4% and Hutchison 3G with 10.7%.
Marketing and Distribution—Mobile Business in Italy
In Italy, we market our mobile, Internet, fixed-line voice and data offerings by employing a multibrand strategyroof top sites, on which antennas for radio coverage are installed (considering also the effect of the WIND and Infostrada brands in their respective markets. Each of the WIND and Infostrada brand logos incorporates the distinctive WIND logo, enabling cross-product brand identification. We also advertise our mobile, fixed-line and Internet products to consumers as the “Smart Fun” choice, emphasizing the quality, convenience and price of our products.
WIND Italy made strong developments on digital touch points (websites, Mobile sites, MyWIND App,self-care areas and social network) to improve the customer experience.
WIND Italy provides specific services to innovative startups and upcoming businesses by way of Wind Business Factor, which is a platform for business coaching and networking addressed to startups and new entrepreneurs.
For our corporate customers in Italy, we use different marketing strategies depending on the nature and size of a customer’s business. For large corporate customers and SMEs, our marketing efforts are more customized and institutional in nature, and include one-on-one meetings and presentations, local presentations and presentations at exhibitions. For the SOHO market, we advertise in the professional and general press and use airport billboards.
We sell consumer mobile products and services, including SIM cards, scratch cards, WIND branded and unbranded handsets through a significant number of points of sale. As of December 31, 2014, we had 159 WIND owned storesGalata towers transaction), and approximately 498 exclusive franchised outlets operating under the WIND name. WIND Italy also utilizes 1,015 non-exclusive points of sale, 910 electronic chain store outlets and approximately 4,6971,000 other points of sale in smaller towns managed by SPAL S.p.A., our largest distributor in Italy in terms of points of sale. We also sell a portion of our consumer services online through WIND website.
Sales to large corporate customers are made by a dedicated in-house corporate sales team, whereas sales to SMEs and SOHOs are undertaken by agents. In addition, we recently launched an online store aimed at business customers for the direct sale of mobile products and services known as “WIND Business Shop” on the WIND website.
Given the increasing importance of customer experience as a strategic element of differentiation in the market, WIND Italy has created a new function for the Customer Experience Development. This function’s objective is to ensure the continuous improvement of customer satisfaction, developing a customer experience model with the fundamental support of all business functions. The activity will be carried out using a methodology based on NPS (Net Promoter Score). This indicator is able to correlate the level of loyalty and growth and it is now used worldwide to assess the quality of customer experience. NPS is becoming increasingly central to WIND Italy’s strategy; in addition to being measured periodically through market research, NPS will be used as a tool for continuous monitoring of customer perception when interacting with WIND Italy. In this way, it will be possible to better assess the level of customer satisfaction and implement improvement actions.minor towers.
Mobile Telecommunications Licenses in Algeria
2G
In 2001, OTA was awarded a 15-year license to operate a 2G telecommunications network for an aggregate fee of approximately US$737 million. The license expired in 2016, but was renewed for a five-year period at no additional cost (Decree 17-195 of June 11, 2017).
VSAT
In 2003, OTA acquired a VSAT data-voice license for an aggregate fee of US$2.05 million and renewed the license in 2014 for an additional period of five years, at no additional cost.
3G
In 2013, OTA was awarded a 15-year license to operate a 3G telecommunications network for an aggregate fee of approximately US$38 million, which was paid in full in 2013. Under the terms of its 3G license, OTA is required to pay an additional annual revenue sharing fee of 1% based on 3G revenues less interconnection costs.
4G/LTE
In 2016, Optimum was awarded a 15-year license to operate a 4G/LTE telecommunications network for an aggregate fee of US$36 million (based on then-current exchange rates), which was paid in full in 2016. Under the terms of its 4G/LTE license, Optimum is required to pay an additional annual revenue sharing fee of 1% based on 4G/LTE revenues less interconnection costs.
License fees
Under the terms of its 2G, 3G, 4G/LTE and VSAT licenses, OTA is required to pay revenue sharing allocations to the Algerian government and contributions for the universal service fund (3% of revenues less interconnection costs); management of the numbering plan (0.2% of revenues less interconnection costs); and research, training and standardization (0.3% of revenues less interconnection costs).
OTA's total license fees in Algeria were US$61.8 million, US$62.1 million and US$69.4 million for the years ended December 31, 2017, 2016 and 2015, respectively, of which US$28.1 million, US$25.9 million and US$25.7 million was related to spectrum charges, and US$33.7 million, US$36.2 million and US$43.7 million were related mainly to contributions made to the Universal Services of Telecommunications fund and to the number plan management over the same periods.
Mobile Telecommunications Licenses in Bangladesh
2G
In November 1996, BDCL was awarded a 15-year GSM license to establish, operate and maintain a digital mobile telephone network to provide 2G services throughout Bangladesh. The license was renewed in November 2011 for a further 15-year term.
3G
In September 19, 2013, following a competitive auction process, BDCL was awarded a 15-year license to use 5 MHz of technology neutral spectrum in 2100MHz band for 15 years and was also awarded a 3G license, for which it paid a total cost of BDT 8,677.4 million (inclusive of 5% VAT) (US$105 million as of December 31, 2017), including both a license acquisition fee and a spectrum assignment fee.
4G/LTE
On February 13, 2018, BDCL acquired a 4G/LTE license for US$1.2 million. BDCL also acquired the right to use 10.6MHz technology neutral of spectrum in 1800MHz (5.6) and 2100MHz (5) for US$324 million including VAT (33.34% of the fee has been considered as tariff value for 15% VAT).
Banglalink also converted 15MHz of existing 2G spectrum for the remaining tenure of it for US$ 36.75 million.
License fees
Under the terms of its 2G, 3G and 4G mobile licenses, BDCL is required to pay to the Bangladesh Telecommunication Regulatory Commission (i) an annual license fee of BDT 50.0 million (US$0.6 million as of December 31, 2017) for each mobile license; (ii) 5.5% of BDCL's annual audited gross revenue, as adjusted pursuant to the applicable guidelines; and (iii) 1% of its annual audited gross revenue (payable to Bangladesh's social obligation fund), as adjusted pursuant to the applicable guidelines. The annual license fees are payable in advance of each year, and the annual revenue sharing fees are each payable on a quarterly basis and reconciled at the end of each year.
BDCL's total license fees (annual license fees plus revenue sharing) in Bangladesh were equivalent to US$34.7 million, US$41.7 million and US$40.6 million for the years ended December 31, 2017, 2016 and 2015, respectively.
In addition to license fees, BDCL pays annual spectrum charges to the BTRC, calculated according to the size of BDCL's network, its frequencies, the number of its customers and its bandwidth. The annual spectrum charges are payable on a quarterly basis and reconciled at the end of each year. BDCL's annual spectrum charges were equivalent to US$9.0 million, US$9.8 million and US$9.9 million for the years ended December 31, 2017, 2016 and 2015, respectively.
Mobile Telecommunications Licenses in Ukraine
GSM
In Ukraine, Kyivstar holds GSM900 and GSM1800 cellular licenses to provide telecommunications services throughout the territory of Ukraine. These licenses were received on October 5, 2011 for a term of 15 years each and will expire on October 5, 2026.
3G
On February 25, 2015, after an auction process, Kyivstar was awarded one of three licenses to provide nationwide 3G services in the 2100 MHz band. The license was issued on April 1, 2015 and is valid for a period of 15 years (until April 1, 2030).
We have also obtained a range of national and regional radio frequency licenses for the use of radio frequency resources in the referred standards and in specified standards—radio-relay and WiMax.
Our network coverage is (except the Anti-Terrorist Operation zone where Kyivstar is not able to use and control its network): 91.46% of the 2G network; 18.7% of the 3G network; 9,864 localities covered by 2G network; and 25,484 localities covered by 3G network.
4G/LTE
Kyivstar secured 4G/LTE licenses and spectrum in two separate transactions in 2018. Following the auction held on January 31, 2018, Kyivstar acquired 15 MHz (paired) of contiguous frequency in the 2600 MHz band for UAH 0.9 billion (US$32 million as of December 31, 2017). In addition, on March 6, 2018, Kyivstar secured the following spectrum through auction in the 1800MHz band: 25MHz (paired) for UAH 1.325 billion (US$47 million as of December 31, 2017) and two lots of 5MHz (paired) for UAH 1.512 billion (US$54 million as of December 31, 2017).
Mobile Telecommunications Licenses in Uzbekistan
We hold a national license for GSM900/1800, 3G and 4G/LTE covering the entire territory of Uzbekistan. The most recent license was an extension granted in May 2016 for 15 years, is effective until August 7, 2031 and requires annual license fee payments.
Unitel LLC also has international communication services license valid until 2026 and for data transfer valid until 2019.
Mobile Telecommunications Licenses in Others
| Country | Licenses (as of December 31, 2017) | License Expiration | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
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| Kazakhstan | Mobile services (GSM900/1800, UMTS/WCDMA2100, 4G/LTE800/1800) | Unlimited term | ||||||||||
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| Kyrgyzstan | Radio spectrum of 800 MHz for the entire territory of Kyrgyzstan (technology neutral) 796-801MHz/837-842MHz | September 28, 2025 | ||||||||||
Radio spectrum of 800 MHz for the entire territory of Kyrgyzstan (technology neutral) 791-796MHz/832-837MHz | December 27, 2026 | |||||||||||
Radio spectrum of 900 MHz, 1800 MHz and 2100 MHz for the entire territory of Kyrgyzstan (technology neutral) | October 30, 2019 | |||||||||||
National license for electric communication service activity | Unlimited term | |||||||||||
National license for base station transmission | December 3, 2019 | |||||||||||
National license for services on data traffic | Unlimited term | |||||||||||
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| Armenia | Network operation for the entire territory of Armenia | March 3, 2028 | ||||||||||
National licenses to use radio spectrum of 900 MHz, 1800 MHz and 2100 MHz for the entire territory of Armenia (technology neutral) | March 3, 2023 | |||||||||||
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| Tajikistan | GSM900/1800 | May 12, 2019 | ||||||||||
3G | July 13, 2020 | |||||||||||
Data services (with permission to use of 800 MHz frequency for 4G/LTE services) for the entire territory of Tajikistan | December 9, 2020 | |||||||||||
International call services | August 11, 2021 | |||||||||||
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| Georgia | GSM1800 10 MHz frequency | February 1, 2030 | ||||||||||
GSM900 5.49 MHz frequency | February 1, 2030 | |||||||||||
LTE 800 10 MHz frequency | February 1, 2030 | |||||||||||
10 MHz 3G frequency | December 29, 2031 | |||||||||||
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| Laos | 2G, for the entire territory of Laos | January 23, 2022 | ||||||||||
3G, for the entire territory of Laos | January 23, 2022 | |||||||||||
WLL, for the entire territory of Laos | January 23, 2022 | |||||||||||
ISP | Annual renewal | |||||||||||
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Fixed-line Business Licenses in Russia
We have fixed-line, data and long distance licenses which are important to our fixed business in Russia. These licenses will expire between April 17, 2018 and March 26, 2023.
We have filed, or will file, applications for renewal for all of our licenses that expire in 2018, which include: local communications services in St. Petersburg (May 23, 2018) and Krasnodar (April 18, 2018); leased communications circuits services in Moscow (August 28, 2018), Ekaterinburg, Nizhny Novgorod, Novosibirsk, Rostov-on-Don (November 12, 2018) and Krasnodar (April 17, 2018; August 18, 2018; November 12, 2018); data transmission services in Ekaterinburg (July 05, 2018) and Krasnodar (April 17, 2018); voice communications services in data transmission networks in Ekaterinburg (July 05, 2018) and Krasnodar (April 18, 2018); and telematic services in Ekaterinburg (July 05, 2018).
In addition, we have an International and National Communications Services license for the entire Russian Federation which will expire on December 13, 2019.
Fixed-line Business Licenses in Pakistan
There are two main categories of licenses for provision of fixed line services in Pakistan. One type is Long Distance & International ("LDI") license and other is Local Loop ("LL") license. LDI License is meant for providing nationwide and international telecommunication services whereas LL license is for provision of services (fixed line and/or wireless local loop with limited mobility) within a telecom region for which license is awarded.
Fixed-line Business Licenses in Ukraine
We have international, long-distance and local communication licenses in place in Ukraine. Our international communication license expires on August 18, 2019; our long-distance communication license expires on August 18, 2019 and our local communication license expires on August 29, 2020. Each of the foregoing licenses are valid throughout Ukraine.
Fixed-line Business Licenses in Uzbekistan
We have a fixed-line license valid until 2021, a data license valid until 2021 and long distance licenses which are valid until 2029. These licenses require the payment of annual fees and cover services including local, long distance and international communications, data transmission and internet.
Fixed-line Business Licenses in Armenia
We operate a nationwide fixed-line network in Armenia on the basis of a general (fixed and mobile) network operation license, expiring on March 3, 2028. We also have a license to use a 450MHz frequency band for the provision of fixed wireless voice telephony and broadband services in rural areas in Armenia, which expires on March 3, 2023.
Fixed-line Business Licenses in Kazakhstan
We have a long distance license which is important to our fixed business in Kazakhstan. This license has an unlimited term, no license fee and covers services including long distance and international connection, traffic termination and transit.
Description of Operations of the Italy Joint Venture
We do not control the Italy Joint Venture and therefore account for the Italy Joint Venture using the equity method and do not fully consolidate its results into our financial statements. We own a
50.0% share of the Italy Joint Venture with our joint venture partner, Hutchison. We include the following operational information for the Italy Joint Venture in this Annual Report on Form 20-F because we consider the Italy Joint Venture to be a significant part of our business. For more information, see "Explanatory Note—Presentation of Financial Information of the Italy Joint Venture" and notes 5, 14 and 25 to our audited consolidated financial statements for further information.
Mobile Business in Italy
Description of Fixed-line Services in The Italy
In Italy, we offer a wide range of Joint Venture markets its mobile, internet, fixed-line voice and Internet broadband services. We offer thesedata offerings by employing a multibrand strategy for the "WIND" and "3" brands in their respective consumer markets together with the "WIND TRE BUSINESS" brand dedicated to the business segment. The Italy Joint Venture provides a variety of mobile data services and VAS for telephone and computer to bothits consumer and corporate customers.
WIND customers undercan choose between tied and untied portfolios. The tied offers are both prepaid and postpaid offers that bind customers for a specified period and include penalties if the Infostrada brand.customer leaves during the agreed period. The untied offers are only prepaid and do not bind customers for a specified period but allow them to use prepaid credit they have on their SIM card. "3" customers can choose between tied and untied prepaid portfolios and tied postpaid. For "3", the tied and untied offer portfolios include certain all-inclusive packages that include a smartphone purchase and certain other packages.
Our fixed-line The Italy Joint Venture offers a variety of content and infotainment services. For example, the Italy Joint Venture has renewed its partnerships with Google and Microsoft for carrier billing (purchase of apps, games, music and other digital contents paying with phone credit) delivering several co-marketing initiatives with Google to encourage usage. In 2017, the Italy Joint Venture signed a partnership with Apple allowing payments via phone credit on iTunes, App Store, iBooks and Apple Music for both WIND and "3" customers. In 2017, "3" signed a partnership with Netflix, enabling "3" postpaid customers to have access to Netflix's on-demand entertainment streaming service, which is offered for free for the first three months on internet plans such as "3Cube".
Mobile bundles
The Italy Joint Venture offers bundle options, suited for both prepaid and postpaid customers, which include minutes of voice customer basetraffic, SMS, and mobile internet browsing for a fixed fee. Specific bundles targeting younger and senior consumers are available. WIND provides data-friendly users with the opportunity to manage their own account via digital channels such as the web, mobile apps and social networks. In order to integrate the offer, WIND provides a selection of smartphones, tablets and new technological and interactive devices that can be purchased through installment payments and taking advantage of discounts.
VEON platform
In November 2016, WIND released the VEON platform on both the Android and IOS digital stores. In July 2017, the Italy Joint Venture launched VEON 2.0, which introduces new functionalities, such as the channels functionality, whereby users can follow certain brands and receive news, promotions and offers. The app is available to everyone, but WIND's customers have additional advantages in terms of free data traffic and other rewards.
Distribution
For corporate customers in Italy, the Italy Joint Venture uses different marketing strategies depending on the nature and size of a customer's business. For large corporate customers and SMEs, the Italy Joint Venture's marketing efforts are more customized and institutional in nature, and include
one-on-one meetings and presentations, local presentations and presentations at exhibitions. For the SOHO market, the Italy Joint Venture advertises in the professional and general press and uses airport billboards. The Italy Joint Venture sells consumer mobile products and services, including SIM cards, scratch cards and handsets through a series of exclusive outlets, which as of December 31, 2017 consisted of 1,635 total sales points (689 WIND brand sales points and 946 "3" brand sales points). The non-exclusive Italy Joint Venture sales network consists of 3,715 multi-brand dealers spread throughout the country. The Italy Joint Venture also sells a portion of its consumer services online through its websites.
Competition
The mobile telecommunications market in Italy in which the Italy Joint Venture operates is characterized by high levels of competition among service providers. Competition intensified during 2017 and the Italy Joint Venture expects this market to remain competitive in the near term, and competition may be exacerbated by further consolidation and globalization of the telecommunications industry. Additionally, in the first half of 2018, the French operator Iliad is expected to launch in the Italian market as a new mobile operator as a beneficiary of the remedy package agreed with the European Commission for the completion of the Italy Joint Venture.
The following table shows the Italy Joint Venture's and its principal competitors' respective mobile customer numbers in Italy as of December 31, 2017:
Operator | Customers (in millions) | |||
|---|---|---|---|---|
Telecom Italia | 30.8 | |||
Italy Joint Venture | 29.5 | |||
Vodafone Italy | 22.4 | |||
Source: Telecom Italia, Italy Joint Venture and Vodafone Italy
According to Analysys Mason, the network operators in Italy offered mobile telecommunications services to approximately 2.872.9 million registered customers as of December 31, 2014. Our direct customers mainly comprise LLU customers.
WIND Italy offers voice and broadband Internet services to direct customers, renting from Telecom Italia the “last mile”2017, representing a mobile penetration rate of approximately 122.0% of the access network, whichItalian population compared to 81.7 million customers and a mobile penetration rate of approximately 136.6% in 2016.
Licenses
GSM1800 and GSM900
The Italy Joint Venture has a license to provide mobile telephone services in Italy using digital GSM1800 and GSM900 technology. This license is disconnected from Telecom Italia equipment and connecteddue to the WIND equipment in telephone exchanges.expire on June 30, 2018. In the areas whereItalian Budget Law 2017, the Italian government sets out the conditions and formal procedure to be followed by operators holding GSM spectrum rights of use wishing to extend such rights until December 31, 2029 and also obtain freedom to use such spectrum under a technology neutrality regime. The Italy Joint Venture is awaiting the related interministerial decree that concludes the procedure referred to in the aforementioned law.
3G
Both WIND Italy does not have direct accessand "3" acquired 3G licenses in 2001, which were initially expected to expire in 2021, but were extended to December 2029. In light of the network via LLU, customers can request wholesale services, though WIND Italy no longer actively markets such wholesale services.
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Licenses—Fixed-line Business in Italy
In Italy, our fixed-line services are provided pursuant to a 20-year license obtainedauthorization received from the Italian Ministry of Economic Development ("MISE") regarding the transfer of spectrum rights of use (7 blocks of 2x5MHz in 1998. This license expires900, 1800, 2100 and 2600MHz bands) from WIND and "3" to the French operator, Iliad, the Italy Joint Venture will have to submit a request for the extension to the MISE for the 2100MHz
spectrum rights of use from December 2021 to December 2029. The extension to December 2029 is subject to compliance with the provisions of the Ministry of Economic Development issued in 2018.October 2016 and the payment of contributions, payable for the years 2022 to 2029.
4G/LTE
WIND and "3" have licenses for 4G/LTE spectrum rights of use in 800, 1800 and 2600 MHz bands. Such spectrum rights are due to expire in December 2029. The following is a list of mobile access spectrum blocks, on a band-by-band basis, which will be held by the Italy Joint Venture once the spectrum release to Iliad is completed: 800 Band—2 blocks of 2x5 MHz; 900 Band—2 blocks of 2x5 MHz; 1800 Band—4 blocks of 2x5 MHz; 2000 TDD Band 5+5 MHz; 2100 Band—4 blocks of 2x5 MHz; 2600 Band—4 blocks of 2x5 MHz; and 2600 TDD Band 15+15 MHz. All the frequency blocks indicated and held by Wind Tre S.p.A. will be contiguous in the respective bands according to the provision of the Ministry of January 9, 2018 which provides for the reallocation in 1800 MHz and 2100 MHz spectrum.
5G
On September 22, 2017, MISE formalised the award to Wind Tre S.p.A. and Open Fiber S. p. A. of a provisional authorization, for a four-year duration, to carry out the 5G pre-commercial trials in the spectrum portion 3.6 - 3.8 GHz in area 2—Prato and L'Aquila.
Competition—Fixed-line Business in ItalyEquipment and operations
In The Italy Joint Venture has a tower services agreement with Galata (a subsidiary of Cellnex) for an initial term of 15 years for the Italian fixed-line voice market,provision of a broad range of services on the incumbent, Telecom Italia, maintains a dominant market position. Telecom Italia benefits from cost efficiencies inherentsites. On July 4, 2017, the Italy Joint Venture sold all of its shares in its existing telecommunications infrastructure overGalata, which it provides its fixed-line coverage. As the main Italian telecommunications provider, Telecom Italia also benefits from corporate and public sector customers, coupled with recognition and familiarity. Swisscom and Vodafone have entered the fixed-line Internet, voice and data markets by buying Fastweb S.p.A. and Tele2 (successively rebranded TeleTu), respectively. We expect that the fixed-line telecommunications market will remain competitive as a resulthad comprised 10% of the presenceshares of international competitors,Galata, following the introduction and growthsale in March 2015 of new technologies, products and services, the declining number90% of fixed-line customers due to continued fixed-line to mobile substitution, continued migration from narrowband (dial-up) to broadband usage and regulatory changes (for example,its shares in relation to LLU tariffs) in the Italian market, all of which may exert downward pressure on prices or otherwise cause our fixed-line customer base in Italy to contract, thereby impacting our revenue and profitability.
Four service providers, Telecom Italia, WIND Italy (with its brand Infostrada), Vodafone/TeleTu and Fastweb accounted for approximately 94% of the total broadband fixed services actually accessed in the Italian market as of December 31, 2014.
Based on our internal estimates, as of December 31, 2014, Telecom Italia had approximately 7.0 million broadband customers in Italy, representing a market share of approximately 50.3% of broadband retail connections, followed by WIND Italy with approximately 2.2 million broadband customers, representing a market share of approximately 15.9% of broadband retail connections, Fastweb with approximately 2.1 million active broadband customers, representing a market share of approximately 15.0% of broadband retail connections and by Vodafone/TeleTu, with approximately 1.8 million broadband customers representing a market share of approximately 12.7% of broadband retail connections. All other operators had in the aggregate approximately 0.85 million broadband customers, representing a market share of approximately 6.1% of broadband retail connections.
Marketing and Distribution—Fixed-line Business in Italy
In Italy, we market our fixed-line voice, broadband and data services primarily through WIND Italy’s “Infostrada” brand.
The main sales channels for fixed-line voice and broadband services are represented by the shops and the toll-free number 159. In the Internet access market for consumer customers, the “Infostrada” web portal is an important and growing distribution channel. In Italy, we utilize sales agencies, WIND Italy’s call centers and a direct sales force to target sales of fixed-line voice and Internet services to corporate customers. However, in 2013 and 2014, we have increasingly adopted pull sales channels which are more effective and efficient in order to increase the fixed business marginality.
We also offer bundled services in Italy that combine our mobile, Internet, fixed-line voice and data services with an integrated infrastructure and network coverage.
Description of Operations of the Algeria Segment
Our Algeria segment covers our operations in Algeria.
Mobile Business in Algeria
Description of Mobile Services in Algeria
In Algeria, we generally offer our customers mobile telecommunications services under postpaid and prepaid plans.Galata. As of December 31, 2014, we had2017, the following percentages of postpaid and prepaid customers:
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Call Completion Services and Value Added Services
In Algeria, we provideItaly Joint Venture owned 287 radio centers (for all of our customers voice services that include airtime charges from mobile postpaidwhich it owns the towers and prepaid customers, including monthly contract feesequipment rooms, and for predefined numberapproximately 12 out of voice traffic287 it also owns the land where the radio centers are located), 586 towers, approximately 5,400 towers on rented locations, excluding roof top sites, on which antennas for radio coverage are installed (considering also the effect of the Galata towers transaction), and roaming fees for airtime charges when customers travel abroad.
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Roaming
In Algeria our operations generally have active roaming agreements covering a number of countries in Europe, Asia, North America, South America, Australia and Africa. Our roaming arrangements generally cover all major roaming destinations, and include active roaming agreements with 432 GSM networks in 157 countries, GPRS roaming with 202 networks in 93 countries and CAMEL roaming through 152 operators in 81 countries.
Generally, each agreement with roaming partners provides that the operator hosting the roaming call sends us a bill for the roaming services used by our customer while on the host’s network. We pay the host operator for the roaming services and bill the amount due for the provision of roaming services on our customer’s monthly bill.
Interconnect
We have several interconnection agreements with mobile and fixed-line operators in Algeria under which we provide traffic termination services. These services represent termination of incoming voice and data traffic from a network of our competitors when their customers call or send data to our customers.approximately 1,000 other minor towers.
Sales of Equipment and Accessories
Handset offerings. In order to stimulate mobile phones and smart phones penetration, we offer to our customers a broad selection of handsets and Internet devices, which we source from a number of suppliers.
USB Modems. In Algeria, we generally offer our customers wireless Internet access through GPRS/EDGE and 3G networks using special Plug&Play-USB modems. In addition to providing Internet access, USB modems generally provide other functionalities such as balance top-up, tariff changing and easy management of other services in USB modem interfaces.
Mobile Telecommunications Licenses in Algeria
The key terms of our licenses in Algeria:
2G, 3G and VSAT licenses for the entire territory of Algeria and ISP authorization for the entire territory of Algeria.
The 2G license will expire on July 30, 2016. The 3G license will expire on December 2, 2028.
Competition—Mobile Business in AlgeriaUkraine
We operate in Ukraine with our operating company "Kyivstar" JSC and our brand, "Kyivstar." The Ukrainian mobile industrymarket operates on a 2G and 3G basis. As of December 31, 2017, approximately 90% of our customers in Algeria has grown rapidly overUkraine were on prepaid plans and approximately 10% of our customers in Ukraine were on postpaid plans. Kyivstar secured 4G/LTE licenses and spectrum in two separate transactions in 2018. Following the past ten years as a resultauction held on January 31, 2018, Kyivstar acquired 15 MHz (paired) of increased demand by individuals and newly created private businesses. Demandcontiguous frequency in the 2600 MHz band for mobile services is largely due to the expansion of the Algerian economy. Innovative services and declining tariffs have made mobile services more appealing to the mass-market-customer segment, while advertising, marketing and distribution activities, and improved service quality and coverage have led to increased public awareness of, and access to, the mobile telecommunications market.
According to Analysys Mason Research, there were approximately 44.4UAH 0.9 billion (US$32 million subscriptions in Algeria as of December 31, 2014, representing a penetration rate2017). In addition, on March 6, 2018, Kyivstar secured the following spectrum through auction in the 1800MHz band: 25MHz (paired) for UAH 1.325 billion (US$47 million as of approximately 113.4%December 31, 2017) and two lots of 5MHz (paired) for UAH 1.512 billion (US$54 million as of December 31, 2017).
In Algeria, there are threeTable of Contents
The table below presents the primary mobile operators: Djezzy, operating through our subsidiary Omnium Telecom Algeria SpA; Mobilis, a subsidiarytelecommunications services we offer in Ukraine.
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| Service | Description | |||||||
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| Voice | Includes airtime charges from mobile postpaid and prepaid customers, including monthly contract fees for a predefined amount of voice traffic and roaming fees for airtime charges when customers travel abroad. | |||||||
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| Internet and data access | Access is offered through GPRS/EDGE and 3G. | |||||||
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| Roaming | As of December 31, 2017, Kyivstar provided voice roaming on 463 networks in 188 countries, GPRS roaming on 400 networks in 164 countries and 3G roaming on 301 networks in 130 countries. | |||||||
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| VAS | Caller-ID; voicemail; call forwarding; conference calling; call blocking and call waiting. | |||||||
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| Messaging | SMS; MMS; voice messaging and SMS services (including information services such as news, weather, entertainment chats and friend finder). | |||||||
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| Content/infotainment | Voice services (including referral services); content downloadable to telephone (including music, pictures, games and video); and RBT. | |||||||
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| Mobile financial services | Mobile payment; banking card; trusted payment; banks notification and mobile insurance. | |||||||
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Mobile bundles
Kyivstar offers bundles including combinations of Algeria’s incumbent operator, Algérie Télécom;voice, SMS and Ooredoo. Algérie TélécomMMS, mobile data and OTT services.
VEON platform
The VEON platform, launched its Mobilis GSM network in April 1998Ukraine in 2017, offers Kyivstar customers the ability to communicate for free, even when out of credit, and was the only operator until the second GSM license was awarded to Djezzy in July 2001. OTA launched under the Djezzy brand in February 2002. Wataniya Telecom Algeria (renamed Ooredoo) was awarded theprovides third GSM license in December 2003. In December 2013, a 3G license was granted to all three operators. Competition is based primarily on local and international tariff prices, network coverage, quality of service, the level of customer service provided, brand identity and the range of value-added and other customer services offered.
In July, 2014, Djezzy launched 3Gparty products, offers, services and has since expanded servicescontent.
Distribution
Kyivstar's strategy is to 21 provinces acrossmaintain a leadership position by using the country, including Algiersfollowing distribution channels: distributors (41% of all connections), local chains (20%), national chains (11%), monobrand stores (17%), direct sales (7%) and active sales (5%). In order to avoid possible price pressure from core distributors, one of our strategic priorities is to invest in our own monobrand stores. As of December 31, 2017, the largest provinces in termsnumber of population.owned retail monobrand stores was 417 as compared to 393 stores as of December 31, 2016.
Customer growth in Algeria’s mobile market is expected to slow down, and the attention is expected to shift to maintaining or improving the average revenue per user, supported by data revenue growth after commercial launch of 3G networks.
Competition for customers in Algeria is intense as a result of greater market penetration and is focused on new technologies, products and services. As a result of increased competition, mobile providers are utilizing new marketing strategies, including aggressive price promotions, to retain existing customers and attract new ones.
The following table shows our and our competitors’primary mobile competitors' respective customer numbers in AlgeriaUkraine as of December 31, 2014:2017:
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Source: Analysys Mason Research for all companies except Djezzy.Mason.
Marketing and Distribution—Mobile Business in AlgeriaTable of Contents
Our postpaid plans are targeted at our business customers Kyivstar competes primarily with "VF Ukraine" JSC, operating under the Vodafone brand, which is 100% owned by MTS and include “Djezzy Classic” and “Business Control.” Our postpaid plans for residential customers include “Djezzy Classic” and “Djezzy Control.” Our prepaid plans for residential customers include “Djezzy Good” and “Djezzy Go.” In July 2014, Djezzy launchedoperates a number of commercial offers including Millennium 3G (a hybrid voice and data product) and data dongle promotions,GSM900/1800 network in Ukraine. Kyivstar also competes with "lifecell" LLC, as well as B2Bwith Trimob LLC, a 100% affiliate company of Ukrtelecom to provide services under a 3G license, and B2C 3G offers. Djezzy launched a new prepaid offer “Go”, which achieved encouraging uptake, at the end of December 2014. Djezzy also launched an unlimited postpaid offer “Infinity”, which was supported by OTT partnerships with WhatsApp, Opera Mini and the 3G “Be-Djezzy” applications. We sell our mobile telecommunication services through indirect channels (distributors) and through our “Djezzy” branded shops, of which there were 2,000, including 1,102 equipped with IT material and sales application,other small CDMA operators.
According to Analysys Mason, as of December 31, 2014. Our nine exclusive national distributors cover all the 48 Wilayas2017, there were approximately 58.2 million customers in Ukraine, representing a mobile penetration rate of approximately 137.4% compared to 59.0 million customers and are distributing our products through 66,831 authorized pointsa mobile penetration rate of sale. We also had a pool of more than 700 agents138.7% in a call center as of December 31, 2014. This pool of agents combines a series of insourced and outsourced agents that are directly managed by OTA management in three languages (Arabic, French and Amazigh).
Description of Operations of the Africa & Asia Segment
Our Africa & Asia segment covers our operations in Pakistan, Bangladesh and Laos.2016.
Mobile Business in Africa & AsiaUzbekistan
Description of Mobile Services in Africa & Asia
In Africa & Asia,Uzbekistan, we generallyoperate through our operating company, LLC "Unitel," and our brand, "Beeline." We offer our customers mobile telecommunications services under postpaid and prepaid plans. As of December 31, 2014,2017, approximately 98.4% of our customers in Uzbekistan were on prepaid plans and approximately 1.6% of our customers in Uzbekistan were on postpaid plans.
Our 3G/HSPA services were commercially launched in 2008, and the majority of the network was constructed in 2010. Our 4G/LTE services were commercially launched in 2014. Unitel was the first mobile operator to provide 4G/LTE services.
The table below presents the primary mobile telecommunications services we had the following percentages of contract and prepaid customers:offer in Uzbekistan.
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| Voice | Includes airtime charges from mobile postpaid and prepaid customers, including monthly contract fees for a predefined amount of voice traffic and roaming fees for airtime charges when customers travel abroad. GSM service is provided by Unitel in 2G and 3G networks throughout Uzbekistan. Call duration for one session is limited for 40 minutes. | |||||||
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| Internet and data access | Access is offered through GPRS/EDGE/3G/4G/LTE networks. | |||||||
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| Roaming | As of December 31, 2017, we had active roaming agreements with 484 GSM networks in 185 countries and provided GPRS roaming with 387 networks in 164 countries and CAMEL roaming through 263 networks in 116 countries. Generally, each agreement with roaming partners provides that the operator hosting the roaming call sends us a bill for the roaming services used by our customer while on the host's network. We pay the host operator for the roaming services and bill the amount due for the provision of roaming services on our customer's monthly bill. | |||||||
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| VAS | Caller-ID, voicemail, call forwarding, conference calling, call blocking and call waiting. | |||||||
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| Messaging | SMS, MMS, voice messaging and SMS services (including information services such as news, weather, entertainment chats and friend finder). | |||||||
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| Content/infotainment | Voice services (including referral services), content downloadable to telephone (including music, pictures, games and video), and RBT. | |||||||
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| Mobile financial services | Card to card transfer, bank card payments, trusted payment, our own payment system "Beepul", mobile transfer, loyalty program. | |||||||
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Mobile bundles
We offer bundled tariff plans, which may differ by types or volume of traffic, duration (daily, weekly, and monthly), region or charge type. Currently, we provide data bundles consisting of different
types of traffic volume, charge and duration and integrated bundles consisting of traditional voice with SMS and data traffic.
Distribution
In Uzbekistan, we offer a portfolio of tariffs and products for the prepaid system designed to cater to the needs of specific market segments, including mass-market customers, youth customers and high value contract customers. Further, we have the following four segments in our postpaid system: Large Accounts, Business to Government, SME and SOHO. As of December 31, 2017, our sales channels in Uzbekistan include 672 offices and monobrand stores, 644 exclusive stores and 1,125 multibrand stores.
Competition
The following table shows our and our primary mobile competitors' respective customers in Uzbekistan as of December 31, 2017:
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Source: Analysys Mason.
According to Analysys Mason, as of December 31, 2017, there were approximately 21.3 million mobile customers in Uzbekistan, representing a mobile penetration rate of approximately 65.5% compared to 20.6 million customers and a mobile penetration rate of 64.3% in 2016. The relatively low mobile penetration rate is primarily caused by the single-SIM profile of most Uzbek mobile customers.
Mobile Business in Others
In the countries in our "Others" category, we generally offer our customers mobile telecommunications services under prepaid and postpaid plans.
On October 27, 2017, we entered into an agreement to sell our operations in Laos. For more information, see "—Overview—Recent Developments—VEON to sell Laos operations."
As of December 31, 2017, we had the following percentages of prepaid and postpaid customers:
Payment Plan | Kazakhstan | Kyrgyzstan | Armenia | Tajikistan | Georgia | Laos | |||||||||||||
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Prepaid | 95.6 | % | 96 | % | 87.4 | % | 99.9 | % | 99.99 | % | 96.4 | % | |||||||
Postpaid | 4.4 | % | 4 | % | 12.6 | % | 0.1 | % | 0.01 | % | 3.6 | % | |||||||
Call Completion Servicescompletion and Value Added ServicesVAS
In Africa & Asia,the countries in our "Others" category, we provide alloffer the same call completion and VAS as in Russia (except for location based services).
3G and 4G/LTE
We have launched 3G services in each of the countries in our "Others" category, we hold 4G/LTE licenses in Tajikistan, we hold technology neutral licenses in Kazakhstan, Kyrgyzstan, Armenia, Georgia and Laos, and we have launched 4G/LTE services in Kazakhstan, Kyrgyzstan, Armenia and Georgia.
Roaming
In the countries in our "Others" category, we have roaming arrangements with a number of other networks, which vary by country of our customers voice services that include airtime charges from mobile postpaid and prepaid customers, including monthly contract fees for predefined numberoperation. The table below presents the material roaming agreements in each of voice traffic and roaming fees for airtime charges when customers travel abroad.the countries included in our "Others" category.
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Roaming
In Africa & Asia, our operations generally have active roaming agreements covering a number of countries in Europe, Asia, North America, South America, Australia and Africa. Our roaming arrangements vary according to the countries in which we operate, but generally cover all major roaming destinations.
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| GPRS roaming on 487networks in 171countries CAMEL roaming on 301networks in 113countries | |
Kyrgyzstan | Voice roaming on 424networks in 132countries GPRS roaming CAMEL roaming on 185networks in 83countries | |
Armenia | Voice roaming on 435networks in 179countries GPRS roaming on 344networks in 139countries CAMEL roaming 3G roaming on 295networks in 126countries 4G/LTE roaming on 52networks in 40countries | |
Tajikistan | ||
| 154 Voice roaming on 193networks in 93countries GPRS roaming on171 networks in 92countries CAMEL roaming on 123networks in 72countries | |
Georgia | Voice roaming on 190networks in 81countries GPRS roaming CAMEL roaming on 123networks in 59countries | |
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Generally, each agreement with roaming partners provides that the operator hosting the roaming call sends us a bill for the roaming services used by our customer while on the host’shost's network. We pay the host operator for the roaming services and bill the amount due for the provision of roaming services on our customer’scustomer's monthly bill.
InterconnectWireless internet services
We have several interconnection agreements withpromotional zero-zones for major local and international social networks in each of these countries (other than Laos) to lower the entry barrier for new data users and stimulate consumption for existing ones. We also focus on smartphone penetration growth in each of these countries as the major source of effective demand for our mobile and fixed-line operators in Africa and Asia under which we provide traffic terminationinternet services. These services represent termination of incoming voice and data traffic from a network of our competitors when their customers call or send data to our customers.
SalesVEON platform
The VEON platform was launched in Georgia in 2017, and is yet to be adopted in the other countries in the "Others" category. The VEON platform offers our customers in Georgia the ability to communicate for free, even when out of Equipmentcredit, and Accessoriesprovides third party products, offers, services and content.
Handset offerings. In order to stimulate mobile phones and smart phones penetration, we offer to our customers a broad selection of handsets and Internet devices, which we source from a number of suppliers.
USB Modems. In Africa & Asia, we generally offer our customers wireless Internet access through GPRS/EDGE and 3G networks using special Plug&Play-USB modems. In addition to providing Internet access, USB modems generally provide other functionalities such as balance top-up, tariff changing and easy management of other services in USB modem interfaces.
Mobile Telecommunications Licenses in Africa & AsiaDistribution
In Africa & Asia, We distribute our mobile telecommunications services are provided pursuant to licensesproducts in the countries in whichour "Others" category through owned monobranded stores, franchises and other distribution channels. As of December 31, 2017, we operate. The following is a summaryhad 200 total stores in Kazakhstan (inlcuding 14,707 other points of the key termssale), 6,487 stores in Kyrgyzstan, 77 stores in Armenia, 112 monobranded stores in Tajikistan (25 own shops and 87 franchises), 36 stores in Georgia and 16 stores in Laos (including approximately 3,200 other points of our licenses in Africa & Asia:
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Competition—Mobile Business in Africa & Asiasale).
PakistanCompetition
The Pakistani telecommunications sector has experienced significant growth over the past ten years due to a variety of reasons. The introduction of several new operators to the market has increased the level of competition and resulted in an overall drop in prices making it more affordable for consumers to own mobile phones. Additionally, the continuous investment in network expansion carried on by operators provided a higher percentage of the Pakistani population with access to mobile services as compared to before. The availability, affordability and ease of use of handsets also contributed to the growth of the overall mobile industry.Kazakhstan
Pakistan is mainly a 2G market. However, 3G is growing following its launch in 2014. Mobilink launched 3G services in 31 cities, reaching as the first operator 2 million 3G customers.
According to the Pakistan Telecommunications Authority, there were approximately 136 million customers in PakistanAnalysys Mason, as of December 31, 2014,2017, there were approximately 25.5 million customers in Kazakhstan, representing a mobile penetration rate of approximately 73.1% (inclusive141.2%, compared to 25.4 million customers and a mobile penetration rate of Azad
Jammu Kashmir and Northern Areas). The Pakistani mobile telecommunications market has five main operators: Mobilink, Telenor Pakistan, Ufone, Warid and Zong. Telenor Pakistan is a member of Telenor Group and has been operating commerciallyapproximately 142.5% in 2016. We held the second position in the market since 2005. Ufone is a member of the Etisalat Group and started operations in 2001. Warid Telecom is a wholly owned company of the Abu Dhabi Group and launched its cellular services in Pakistan in May 2005. Zong is wholly owned by China Mobile.2017, according to Analysys Mason.
The following table shows our and our competitors’ respective customer numbers in PakistanKyrgyzstan
According to Analysys Mason, as of December 31, 2014:
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Source: The Pakistan Telecommunications Authority.
Bangladesh
The mobile telecommunications industry was introduced late in Bangladesh. Since Grameenphone launched its GSM technology in 1997, the industry has grown rapidly. In the last decade the penetration increased from 0.8% in 2002 to 72.4% in 2014 according to the Bangladesh Telecommunications Regulatory Commission. Increased demand for mobile telecommunications services is largely due to the expansion of the economy of Bangladesh and a corresponding increase in disposable income, declining tariffs which have made mobile telecommunications services more affordable to the mass market customer segment, and improved service quality and coverage. Bangladesh is mainly a 2G market with prepaid customers. However, 3G usage is growing following the launch of 3G service in October 2013. The growing 3G network is expected to increase average revenue per user as the use of the Internet grows with improving data speed presenting a significant opportunity to grow market share in significant urban centers. At the end of 2014, 5.1% of Banglalink customers were using 3G data service.
According to the Bangladesh Telecommunications Regulatory Commission,2017, there were approximately 1207.1 million customers in BangladeshKyrgyzstan, representing a mobile penetration rate of approximately 116.5%, compared to 7.1 million customers and a mobile penetration rate of approximately 117.6% in 2016. We held the first position in the market in 2017, according to Analysys Mason.
Armenia
According to Analysys Mason, as of December 31, 2014,2017, there were approximately 3.6 million customers in Armenia, representing a mobile penetration rate of approximately 72.4%.
The119.1%, compared to 3.6 million customers and a mobile telecommunicationspenetration rate of approximately 117.5% in 2016. We held the second position in the market in Bangladesh is highly competitive. The top three mobile operators, Grameenphone, Banglalink and Robi, collectively held approximately 89.5% of the mobile market in Bangladesh2017, according to Analysys Mason.
Tajikistan
According to Analysys Mason, as of December 31, 20142017, there were approximately 8.6 million customers in Tajikistan, representing a mobile penetration rate of approximately 96.7%, compared to 9.3 million customers and a mobile penetration rate of approximately 106.7% in 2016. We held the fourth position in the market in 2017, according to the Bangladesh Telecommunications Regulatory Commission. In additionAnalysys Mason.
Georgia
According to Grameenphone and Robi, we also compete with Airtel, Citycell and Teletalk.
The following table shows our and our competitors’ respective customer numbers in BangladeshAnalysys Mason, as of December 31, 2014:2017, there were approximately 5.6 million customers in Georgia, representing a mobile penetration rate of approximately 140.7%, compared to 5.4 million customers and a mobile penetration rate of approximately 135.9% in 2016. We held the third position in the market in 2017, according to Analysys Mason.
Laos
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Source: The Bangladesh Telecommunications Regulatory Commission.
Laos
The Lao telecommunication market is strictly regulated by fixed price floors and limited promotion periods. VimpelCom Lao has been impacted by these regulations, resulting in a declining subscriber base.
According to Analysys Mason, as of December 31, 2017, there were approximately 4.75.6 million customers in Laos, asrepresenting a mobile penetration rate of December 31, 2014.
The Laoapproximately 78.4%, compared to 5.2 million customers and a mobile telecommunications market has four operators: Unitel; VimpelCom, operating through our subsidiary VimpelCom Lao Co.; Lao Telecom; and ETL. Unitel is a joint venture between Viettel Global Joint Stock Company (“Viettel Global”) and Lao Asia Telecom (“LAT”). Lao Telecom (“LTC”) is jointly owned bypenetration rate of approximately 74.7% in 2016. We held the Lao Government (51.0%) and Shinawatra International Public Company Limited (49.0%). ETL is 100% controlled by the Lao Government (via the Ministry of Communication, Transport, Post and Construction).
The following table shows our and our primary mobile competitors’ customer numbers in Laos as of December 31, 2014:
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Source: Analysys Mason Research for all companies except VimpelCom Lao Co.
Marketing and Distribution—Mobile Business in Africa & Asia
Below is a summary of our sales and distribution arrangementsthird position in the countriesmarket in which we operate:2017, according to Analysys Mason.
In Pakistan, we offer a portfolioDescription of tariffsOur Fixed-line Telecommunications and products designed to cater to the needs and requirements of specific market segments, including mass-market customers, youth customers, personal contract customers, SOHOs (with one to five employees), SMEs (with six to 50 employees) and enterprises (with more than 50 employees). We offer corporate customers several postpaid plan bundles, which include on-net minutes, variable discount for closed user groups and follow-up minutes based on bundle commitment. As of December 31, 2014 our sales channels include seven company stores, 21 business centers, a direct sales force of over 350 employees, 379 franchise stores, 73 contractual direct-selling representatives, and over 229,000 third party retailers.Internet Businesses
In Bangladesh, we offer our customers several national prepaid and postpaid tariff plans, focusing on mass, youth and B2B segments. We divide our primary target customers into five categories: high-value customers (for the top 20% of our high-ARPU-generating customers); public call offices (a telephone facility in a public place providing calling-card-based domestic and international telecommunications services), enterprises (for companies with 15 or more employees), SME accounts (for companies with one to 15 employees) and mass customers. We also offer specific-business value-addedfixed-lined telecommunications and internet services in Russia, Pakistan, Ukraine, Uzbekistan, Armenia and special pricing based on volume and contractual commitment, which include Fleet Tracking and Bulk SMS. We provide our large enterprise accounts with specialized customer service and enterprise relationship management. With rapid growth in 3G network, we are offering a wide range of 3G products which cater to the need of different segments to add information on current 3G offers. As of December 31, 2014, our sales and distribution channels include nine company stores, a direct sales force of 78 permanent employees (Zonal sales managers), 109 franchise stores, 52,048 retail SIM selling outlets, 198,437 top up selling outlets and 1,182 Banglalink service points.
In Laos, we offer pricing plans for contract, prepaid and Internet services for residential and corporate customers. Local price plans include plans for heavy users, handset packages and closed user groups for families and communities. Most tariffs are quoted in the local currency. We distribute our mobile services and products through 5 exclusive distributors and 79 promoters.
Fixed-line Business in Africa & Asia
Description of Fixed-Line Services in Africa & Asia
Our fixed-line business in Africa & Asia is limited to our operations in Pakistan.Kazakhstan. We do not offer fixed-line services in other countriesAlgeria, Bangladesh, Kyrgyzstan, Tajikistan, Laos or Georgia.
In Russia, Ukraine and Uzbekistan, we offer voice, data and internet services to corporations, operators and consumers using a metropolitan overlay network in which we operate in Africa & Asia.major cities. Our fixed-line business intelecommunications use inter-city fiber optic and satellite-based networks.
In Pakistan, includeswe offer internet data and value added services over a wide range of access media, covering major cities of Pakistan. However, we do not report customer numbers and other data on our fixed-line business in Pakistan, as we do with Russia, Ukraine and Uzbekistan, because the fixed-line business in Pakistan is not material to our overall business.
In Armenia and Kazakhstan, the fixed-line business offers range of services for B2O, B2B and B2C segments. In Armenia, our fixed-line business further offers a range of services, including PSTN-fixed and IP telephony, internet, data transmission and network access, domestic and international voice termination, IPLC and TCP/IP international transit, over our national networks.
Fixed-line Business in Russia
In Russia, we provide a wide range of telecommunications and information technology and data center services, such as network access and hardware and software solutions, including configuration and maintenance, SaaS and an integrated managed service. Our services cover all major population centers in Russia. We operate a number of competitive local exchange carriers that own and operate fully digital overlay networks in a number of major Russian cities. Our customers range from large multinational corporate groups and government clients to SMEs and high-end residential buildings in major cities throughout Russia.
We provide local access services by connecting the customers' premises to our own fiber network, international and domestic long distance services and VSAT services to customers located in remote areas. We provide internet access to both corporate and consumer customers through backbone networks and private line channels. We also provide corporate clients with IP address services, the ability to rent leased channels with different high-speed capacities and remote access to corporate information, databases and applications. We offer and deploy managed Wi-Fi networks based on IEEE 802.11b/g/n/ac wireless technology.
We also provide an increasing range of other services, including virtual PSTN number, xDSL services, session initiation protocol (SIP) connection, financial information services, data center services, such as co-location, web hosting, audio conference and domain registration services. We offer to our corporate customers IPTV services, virtual PBX, certain Microsoft Office packages (including SaaS), web-videoconferencing services and sale, rental and technical support for telecommunications equipment.
We also provide Pay TV (cable TV) and IPTV services. As of December 31, 2017, we have more than 34,700 Pay TV customers and 1.11 million IPTV customers. In 2016, we launched FMC product services in all branches in Russia and we focused on further developing this in 2017. As of December 31, 2017, we had more than 877,390 FMC customers.
Our carrier and operator services division in Russia provides a range of carrier and operator services, including voice, internet and data transmission over our own networks and roaming services. Within the VEON group, we have interconnection agreements with international global data network operators who provide a one-stop shop concept for worldwide data network services for multinational companies. Under these interconnection agreements, we provide MPLS-based IP VPN, local, domestic
and international private lines, equipment and equipment maintenance in Russia. We also provide high-speed domestic and international channels to international and Russian operators to sell excess backbone network capacity.
Distribution
We utilize a direct sales force in Moscow, operating both with fixed-line and mobile corporate customers and supported by specialists in technical sales support, marketing, customer service and end-user training. In addition, we employ a team of regional sales managers and a dedicated sales force in each of our regional branch offices, as well as having sales incentive plans with our regional partners.
Competition
Our fixed-line telecommunications business marketed as "Beeline Business" competes principally on the basis of convergent services and bundles, installation time, network quality, geographical network reach, customer service, range of services offered and price. We face significant competition from other service providers. For voice services, our main competitors are the long distance carriers Rostelecom, TransTelecom and OJSC "Multiregional TransitTelecom." For data services, our main competitors are the long distance carriers Rostelecom, TransTelecom and MegaFon. Our main competitors in the fixed-line broadband market in Russia are Rostelecom, MTS and its subsidiaries, Akado, ER-Telecom, NetbyNet and various local home network providers.
In terms of end-user internet penetration, the consumer internet access business in Russia is saturated and end-user internet penetration is high. Competition for customers in Russia is intense and we expect it to increase in the future as a result of wider market penetration, consolidation of the industry, the growth of current operators and the appearance of new technologies, products and services. As a result of increasing competition, internet providers are utilizing new marketing efforts (for example, aggressive price promotions) in order to retain existing customers and attract new ones.
Fixed-line Business in Pakistan
Our fixed-line business in Pakistan includes data, voice and VAS services over a wide range of access media, covering the major cities of Pakistan. The wired and wireless access services include FTTx, PMP (point to multipoint), point-to-point radios, VSAT, DSL & WiMax connecting more than 110 locations across Pakistan, providing data and voice connectivity to enterprise customers. The data services being provided to the enterprise customers include: dedicated internet access, VPN (virtual private networking), leased lines & fixed telephony.
We also offer services to domestic and international carriers, which include domestic and international leased lines, domestic and international MPLS, and IP transit services through our access network. Our long-haul fiber optic network covers more than 9,000 kilometers and, supplemented by wired and wireless networks, is spread across the major cities of Pakistan.
We provide the following services for corporate and individual business customers: high-speed internet access (including fiber optic lines and xDSL), telephony, and long distance and international long distance telephony on prepaid cards; telephone communication services, point-to-point leasedbased on copper wires and the modern digital fiber optic network; dedicated lines of data transmission; and dedicated Internet services through ourline access network, virtual private network, or “VPN,” services, value added services, such as web hosting, email hosting and domain registration, DSL and xDSL services, WiMax services, VSAT services, Metro Fiber, which provides last mile access to the enterprise sectors in Karachi, Lahore and Islamabad and P2P radios for connecting to our network.fixed-line mobile convergence.
Competition—Fixed-line Business in Africa & AsiaDistribution
We utilize a direct sales force in Pakistan for enterprise customers. This dedicated sales force has three channels dedicated to SMEs, large/key accounts and business-to-government. These channels are led by individual channel heads who further employ a team of regional sales managers in different
regions, which are further supported by a sales force, including team leads and key account managers. There is also a centralized telesales executive team led by a manager and a dedicated sales force for customers that are engaged in reselling our services.
Competition
In Pakistan, our fixed-line business faces significant competition from other providers of fixed-line corporate services, carrier and operator services and consumer internet services.
In Pakistan, We believe that our main competitors for fixed-line corporate services are Pakistan Telecommunication Corporation,Company Limited, or “PTCL,”"PTCL," Multinet, Wateen, Supernet, Cybernet, Nexlinx and Nayatel. OurWe believe that our main competitors for carrier and operator services are PTCL, Wateen, World Call, Wi-Tribe, and Telenor Pakistan. OurWe believe that our main competitors for consumer Internetinternet services are PTCL, Wateen, World Call, Wi-Tribe and Qubee.
Marketing and Distribution—Fixed-line Business in Africa & AsiaUkraine
In Ukraine, we offer fixed-line and wireless internet services. We provide data and internet access services in almost all metropolitan cities in Ukraine. We began providing fixed-line broadband services in Ukraine in 2008 and, as of December 31, 2017, provided services in 116 cities in Ukraine (excluding cities in Crimea and the ATO zone). In connection with these services, we have been engaged in a project to install FTTB for fixed-line broadband services in approximately 41,000 residential buildings in 116 cities, providing over 55,600 access points.
Our fixed-line services include corporate internet access, VPN services, data center, contact center, fixed-line telephony and a number of VAS. Internet access services include connection to the internet via ADSL, symmetrical and Ethernet interfaces at speeds ranging from 256 kilobytes per second to 10 gigabytes per second. Fixed-line voice services are available in many of Ukraine's major cities.
In November 2016, we launched FMC for an increasing range of mobile users in our fixed-line broadband internet base. We also offer a range of FTTB services tariffs for fixed-line broadband internet access targeted at different customer segments. We currently have 11 unlimited tariff plans with monthly fees, which offer different speeds up to 100 Mbps for active internet users. In addition, in 2015, we launched OTT TV services in partnership with Viasat.
Our joint carrier and operator services division in Ukraine provides local, international and intercity long distance voice traffic transmission services to Ukrainian fixed-line and mobile operators on the basis of our proprietary domestic long-distance/ILD network, as well as IP transit and data transmission services through our own domestic and international fiber optic backbone and IP/MPLS data transmission network. We derive most of our carrier and operator services revenue in Ukraine from voice call termination services to our own mobile network and voice transit to other local and international destinations.
Distribution
In Pakistan, we utilize Our company emphasizes high customer service quality and reliability for its corporate large accounts while at the same time focusing on the development of its SME offerings. We sell to corporate customers through a direct sales force and various alternative distribution channels such as IT servicing organizations and business center owners, and to SME customers through dealerships, direct sales, own retail and agent networks. We use a customized pricing model for large accounts which includes service or tariff discounts, volume discounts, progressive discount schemes and volume lock pricing. We use standardized and campaign-based pricing for SME customers. Our residential marketing strategy is focused on attracting new customers. We offer several tariff plans, each one targeted at a different type of customer.
Competition
In the voice services market for business customers, we compete with Ukrtelecom, Datagroup, Farlep-Invest (Vega), and a number of other small operators. We were the third largest B2B internet provider in the country as of December 31, 2017, according to management's estimates. There is a high level of competition with more than 400 internet service providers in Ukraine. Our main competitors in the corporate market for data services are also Ukrtelecom, Farlep-Invest (Vega) and Datagroup. Our competitors for both the carrier and operator services and the voice and data services market include Datagroup, Ukrtelecom, and Farlep-Invest (Vega). Our main competitors for the provision of consumer internet services in Ukraine are Volia and Ukrtelecom. From December 31, 2016 to December 31, 2017, we increased the number of our broadband customers in Ukraine (excluding customers in the ATO zone) by 1% from 811,910 to 823,840.
Fixed-line Business in Uzbekistan
In Uzbekistan, we provide a wide range of fixed-line services, such as network access, internet and hardware and software solutions, including configuration and maintenance. We provide the following services for corporate customers. We employ a team of regional sales managers in three different regions supported by dedicated sales force and account managers. For consumer DSL, we use direct sales channels, indirect sales channelsindividual business customers: high-speed internet access (including fiber optic lines and telesales. Our telesales operate in Lahore in Central Region with a team of telesales executives led by a sales manager. We offer WiMax services to the consumer market only in Karachi. Direct sales are supported by a dedicated sales force of business development officers. Indirect sales are supported by retail business development officers who offerxDSL), telephony, and long distance and international long distance telephony on prepaid cards; telephone communication services, through our franchise network.copper cable network and our modern digital fiber optic network; dedicated lines of data transmission; and dedicated line access and fixed-line mobile convergence.
In Uzbekistan, we offer similar fixed-line broadband and wireless internet services as in Russia. See "—Fixed-line Business in Russia."
Distribution
One of our priorities in Uzbekistan is the development of information and communications technology, which supports economic development in Uzbekistan. Our telesales channel also offers WiMaxstrategy includes maintaining our current market position by retaining our large corporate client customer base.
Competition
We operate large independent fixed-line services in Uzbekistan, where we compete with the state-owned provider, Uztelecom, as well as East Telecom, Sarkor Telecom, Sharq Telecom, TPS and EVO. There is a high level of competition in the capital city of Tashkent, but the fixed-line internet market in most of the other regions remains undeveloped.
Fixed-line Business in Armenia
Our subsidiary VEON Armenia provides a range of telecommunications services in Armenia, including PSTN-fixed and IP telephony, internet, data transmission and network access, domestic and international voice termination and TCP/IP international transit traffic services. We operate a nationwide network in Armenia and provide the following services for corporate and individual customers: local telephony services; international and domestic long distance services; broadband access services (including ADSL, VDSL, LTE 450 and fiber optic lines); and VoIP services.
VEON Armenia is the Armenian incumbent operator offering countrywide wholesale services, such as leased line service and wholesale broadband services, as well as wholesale international voice termination and origination services for other local and international operators and service providers.
We offer PSTN-fixed and IP telephony services, as well as fixed-line broadband internet access based on ADSL and FTTB technologies, dial-up services and wireless internet access based on CDMA technology. In 2015, we launched FMC bundles, offering fixed internet, fixed TV and mobile services.
In 2017, we received permission from the Public Services Regulatory Commission of Armenia to include fixed voice services in our FMC bundles, which we plan to roll out in 2018.
Distribution
Our strategy includes focusing on customer retention and ARPU growth by developing new services, including internet access through a fiber optic network with a guaranteed speed to corporate customers and government organizations.
Competition
We offer a broad range of fixed-line services to government, corporate and private customers. We believe we compete primarily with U!Com and Rostelcom in Armenia, which are primarily provide fixed internet and cable TV services.
DescriptionFixed-line Business in Kazakhstan
We focus on customer experience for large enterprises through offering high-quality services. Our main business clients are concentrated in the financial and oil and gas sectors, with a new focus on international companies. We provide the following services for corporate clients: high-speed internet access; local, long distance and international voice services over IP; local, intercity and international leased channels and IP VPN services; cloud services; and integrated corporate networks (including integrated network voice, data and other services). We use the following technologies: fiber optic lines (approximately 20,715 buildings are covered by our FTTB network), wireless technologies, satellite technologies, and the TV-Everywhere platform (which is provided through the vendor, Computer Telephony Integration).
In Kazakhstan, we offer similar fixed-line broadband and wireless internet services as in Russia. See "—Fixed-line Business in Russia." In 2017, we continued to increase our coverage and completed FTTB roll-out for an additional 459 buildings. We also updated the FMC product, by adding additional mobile bundles and video content from Amediateka. In addition, in October 2017 we launched an additional parental control service, which enables location services, and can limit access to internet sites and browsing time.
Distribution
We are focusing on customer base and revenue growth, which we aim to promote by expanding our transport infrastructure, developing unique products, strengthening our position in the market and enhancing our sales efforts and data services.
Competition
We provide internet, data transmission and traffic termination services in Kazakhstan, where we believe we compete primarily with state-owned provider Kazakhtelecom, KazTransCom, TransTelecom (owned by Kazakhstan Temir Zholy, the national railway company), Astel (a leader in the provision of Operationssatellite services) and several other small local operators.
Interconnection Agreements
Our mobile and fixed-line businesses are dependent on interconnection services, which are required to complete calls that originate on our respective networks but terminate outside our respective networks, or that originate from outside our respective networks and terminate on our respective networks. In order to provide a local, domestic and international network, we have interconnection agreements in the markets in which we operate.
Russia
We have several interconnection agreements with mobile and fixed-line operators in Russia under which we provide traffic termination services. During 2017, our MTRs in Russia were broadly stable as compared to the 2016 and 2015 historical periods.
Pakistan
We have several interconnection agreements with mobile and fixed-line operators in Pakistan and in the territories of Azad Jammu and Kashmir ("AJK") and Gilgit-Baltistan, under which we provide traffic termination services. Our MTRs in 2017 in Pakistan were broadly stable as compared to the 2015 and 2016 historical periods.
Algeria
We have several interconnection agreements with mobile, VoIP and fixed-line operators in Algeria under which we provide traffic termination services. The national incoming interconnect rate decreased for the year ended December 31, 2017 as compared to the year ended December 31, 2016, and the outgoing interconnect rate also decreased over the same period. The movements in the historical MTRs for 2017, 2016 and 2015 have been favorable to our business, however, asymmetry continues to exist between OTA and one other operator.
Bangladesh
We have several interconnection agreements with ICX, IGW, mobile operators, IPTSP and fixed-line operators in Bangladesh under which we provide traffic termination services. For international incoming calls, MTR in 2017 was broadly stable as compared to the 2016 and 2015 historical periods.
Ukraine
We have several interconnection agreements with mobile and fixed-line operators in Ukraine under which we provide traffic termination services. The rates in 2017 for termination of national traffic to a mobile network and a fixed network on an intercity level decreased compared to the 2016 and 2015 historical periods.
Uzbekistan
We have several interconnection agreements with mobile and fixed-line operators in Uzbekistan under which we provide traffic termination services. During 2017, our MTRs in Uzbekistan were broadly stable as compared to the 2016 and 2015 historical periods.
On September 5, 2017, the State Committee of Uzbekistan on Privatization, Demonopolization and Development of Competition ("State Committee of Uzbekistan") issued an injunction requiring Unitel LLC to implement equal mobile termination rates for all national operators. Unitel LLC appealed this injunction and on January 15, 2018, the appellate division of the Ukraine SegmentTashkent administrative court ruled in favor of the State Committee of Uzbekistan. Unitel LLC is currently engaged in discussions with the State Committee of Uzbekistan, other relevant regulators and national operators regarding the implementation of the injunction. Unitel LLC is also involved in litigation with UMS and Ucell in relation to unpaid mobile termination rates.
Others
We have several agreements with mobile and fixed-line operators in each of the countries in our "Others" category under which we provide traffic termination services.
Licenses
Mobile Telecommunications Licenses in Russia
GSM
PJSC VimpelCom holds super-regional GSM licenses (GSM900, GSM1800, GSM900/1800, UMTS 900 and 4G/LTE 1800 standards) for the following seven out of eight super-regions in Russia: Moscow, Central and Central Black Earth, North Caucasus, North-West, Siberia, Ural and Volga. These licenses will expire between April 2018 and November 2022, and we plan to file applications for renewal of all our licenses prior to their expiration. PJSC VimpelCom does not currently hold a GSM super-regional license for the Far East super-region of Russia, but it holds GSM licenses in a number of regions of the Far East super-region. These licenses expire on various dates between 2019 and 2022, and we plan to file applications for renewal of all of our licenses prior to their expiration.
In addition to the seven super-regional GSM licenses, PJSC VimpelCom holds a GSM license for the Orenburg region, and in total, our GSM licenses cover approximately 97% of Russia's population.
3G
PJSC VimpelCom holds one of three 3G licenses in Russia. PJSC VimpelCom has extended its license until May 2022.
4G/LTE
In July 2012, PJSC VimpelCom was awarded a mobile license, a data transmission license, a voice transmission license and a telematic license for the provision of 4G/LTE services in Russia. These licenses allow PJSC VimpelCom to provide services using radio-electronic devices in Russia via networks that use 4G/LTE standard equipment within any of the following frequency bands: 735-742.5/776-783.5 MHz; 813.5-821/854.5-862 MHz; and 2550-2560/2670-2680 MHz. Certain channels allocated to us in accordance with the licenses have restrictions on their use. To remove restrictions, we have to perform organizational technical measure field tests. The rollout of the 4G/LTE network is using a phased approach based on a pre-defined schedule pursuant to the requirements of the license.
PJSC VimpelCom holds the 4G/LTE 2600 licenses in 32 subjects of Russia. The licenses expire on April 15, 2026 and we plan to apply for renewal of these licenses prior to their expiration.
License fees
PJSC VimpelCom must pay an annual fee for the use of radio frequency spectrum. This fees were RUB 4,288 million and RUB 4,210 million for the years ended December 31, 2017 and 2016, respectively. Under Federal Law No. 126 FZ "On Communication" and license terms, PJSC VimpelCom is required to make universal service fund contributions in the amount equal to 1.2% of corporate revenues from provided communications services. Universal service fund contributions were RUB 2,369 million and RUB 2,336 million for the years ended December 31, 2017 and 2016, respectively. PJSC VimpelCom is also subject to certain other license fees on a case-by-case basis.
Mobile Telecommunications Licenses in Pakistan
2G
PMCL was awarded a 15-year 2G license in 1992. In 2007, PMCL renewed its 2G license for a further term of 15 years. As of December 31, 2017, PMCL had a balance of US$43.5 million to be paid to the PTA for the renewal of its 2G license. Such amount is payable in yearly installments of US$14.5 million, payable in December of each year, until December 2019. PMCL has two 15-year licenses for provision of cellular mobile services in AJK and Gilgit-Baltistan.
Further, Warid acquired a 15-year technology neutral license in 2004 for US$291 million. US$145.5 million was paid upfront while the rest is expected to be paid in ten equal annual installments starting with a four year grace period, with the last payment being in May 2018. This license is up for renewal in 2019.
3G
In 2014, following a competitive bidding process, PMCL was awarded a 15-year license to operate a nationwide 3G telecommunications network in Pakistan for an aggregate initial spectrum fee of US$300.1 million, which was paid at the time PMCL acquired the license.
In addition, PMCL and its subsidiaries have other licenses, including LDI, WLL, local loop licenses, licenses to provide non-voice communication services, and licenses to provide class VAS in Pakistan, AJK and Gilgit-Baltistan. The licensees must also pay annual fees to the PTA and make universal service fund contributions and/or research and development fund contributions, as applicable, in a total amount equal to a percentage of the licensees' annual gross revenues (less certain allowed deductions) for such services.
4G/LTE
In June 2017, PCML was awarded a 15-year license to operate 4G/LTE (NGMS) telecommunications network in Pakistan for an aggregate initial spectrum fee of US$295 million and withholding tax of 10%, which was paid at the time PMCL acquired the license.
Warid (now merged with Jazz) acquired a 15-year technology neutral license in 2004 for US$291 million. US$145.5 million was paid upfront while the rest is being paid in ten equal annual installments starting with a four year grace period (the last payment is due in May 2018). This license is up for renewal in 2019. The same license was amended in December 2014 by PTA to allow Warid for providing 4G/LTE services in Pakistan.
License fees
Under the terms of its 2G, 3G and 4G/LTE licenses, as well as its license for services in AJK and Gilgit-Baltistan, PMCL must pay annual fees to the PTA and make universal service fund contributions and/or research and development fund contributions, as applicable (not all of the foregoing are applicable to all licenses), in a total amount equal to 2.5% of PMCL's annual gross revenues (less certain allowed deductions) for such services, supplemental to spectrum administrative fees.
PMCL's total license fees (annual license fees plus revenue sharing) in Pakistan (excluding the yearly installments noted above) were US$26.7 million, US$27.1 million and US$21.1 million for the years ended December 31, 2017, 2016 and 2015, respectively. PMCL's total spectrum administrative fee payments in Pakistan were US$1.5 million, which includes Warid's spectrum, for the year ended December 31, 2017, and were US$1.0 million for each of the years ended December 31, 2016 and 2015, which excludes Warid's spectrum.
Mobile Business in Ukraine
Kyivstar Transformation program
Kyivstar experienced significant pressure We operate in Ukraine with our operating company "Kyivstar" JSC and our brand, "Kyivstar." The Ukrainian mobile market operates on results in 2014, due to the transition to lower priced bundled tariff plansa 2G and more conservative spending behavior by customers as a result of the challenging macro-economic and geopolitical environment. Kyivstar, during 2013, launched its transformation program with the aim to improve customer excellence and operational performance. The transformation was ongoing during 2014 and has been delivering positive results. Net Promoter Scores improved, particularly in network quality perception, but also due to attractive simplified tariff offerings focused on on-net, off-net, Internet and FTTB. As a result, Kyivstar reported the leading position in NPS and annualized churn improved during 2014.
Description of Mobile Services in Ukraine
Mobile Voice Services
3G basis. As of December 31, 2014,2017, approximately 9.1 %90% of our customers in Ukraine were on prepaid plans and approximately 10% of our customers in Ukraine were on postpaid plansplans. Kyivstar secured 4G/LTE licenses and approximately 90.9 %spectrum in two separate transactions in 2018. Following the auction held on January 31, 2018, Kyivstar acquired 15 MHz (paired) of contiguous frequency in the 2600 MHz band for UAH 0.9 billion (US$32 million as of December 31, 2017). In addition, on March 6, 2018, Kyivstar secured the following spectrum through auction in the 1800MHz band: 25MHz (paired) for UAH 1.325 billion (US$47 million as of December 31, 2017) and two lots of 5MHz (paired) for UAH 1.512 billion (US$54 million as of December 31, 2017).
The table below presents the primary mobile telecommunications services we offer in Ukraine.
| | | | | | | | | |
| Service | Description | |||||||
| | | | | | | | | |
| Voice | Includes airtime charges from mobile postpaid and prepaid customers, including monthly contract fees for a predefined amount of voice traffic and roaming fees for airtime charges when customers travel abroad. | |||||||
| | | | | | | | | |
| Internet and data access | Access is offered through GPRS/EDGE and 3G. | |||||||
| | | | | | | | | |
| Roaming | As of December 31, 2017, Kyivstar provided voice roaming on 463 networks in 188 countries, GPRS roaming on 400 networks in 164 countries and 3G roaming on 301 networks in 130 countries. | |||||||
| | | | | | | | | |
| VAS | Caller-ID; voicemail; call forwarding; conference calling; call blocking and call waiting. | |||||||
| | | | | | | | | |
| Messaging | SMS; MMS; voice messaging and SMS services (including information services such as news, weather, entertainment chats and friend finder). | |||||||
| | | | | | | | | |
| Content/infotainment | Voice services (including referral services); content downloadable to telephone (including music, pictures, games and video); and RBT. | |||||||
| | | | | | | | | |
| Mobile financial services | Mobile payment; banking card; trusted payment; banks notification and mobile insurance. | |||||||
| | | | | | | | | |
Mobile bundles
Kyivstar offers bundles including combinations of voice, SMS and MMS, mobile data and OTT services.
VEON platform
The VEON platform, launched in Ukraine in 2017, offers Kyivstar customers the ability to communicate for free, even when out of credit, and provides third party products, offers, services and content.
Distribution
Kyivstar's strategy is to maintain a leadership position by using the following distribution channels: distributors (41% of all connections), local chains (20%), national chains (11%), monobrand stores (17%), direct sales (7%) and active sales (5%). In order to avoid possible price pressure from core distributors, one of our customersstrategic priorities is to invest in Ukraine were on prepaid plans.
Call Completion and Value Added Services
In Ukraine, we offer the same call completion and value added services as in Russia. For a description of these services, see “Item 4—Information on the Company—Description of Operations of the Russia Segment—Mobile Business in Russia—Description of Mobile Services in Russia.”
Roaming
our own monobrand stores. As of December 31, 2014, Kyivstar provided voice roaming on 428 networks in 195 countries, GPRS roaming on 350 networks in 158 countries and 3G roaming on 208 networks in 102 countries.
Wireless Internet Access
In Ukraine, we provide our customers with wireless Internet access through GPRS/EDGE networks. The service2017, the number of owned retail monobrand stores was commercially launched in 2008. Customers receive a USB modem and SIM card with a pre-installed special Internet rate data plan.
Mobile Telecommunications Licenses in Ukraine
In Ukraine, Kyivstar holds 900 MHz GSM and 1,800 MHz GSM cellular licenses417 as compared to provide telecommunications services throughout the territory of Ukraine. These licenses were received on October 5, 2011 for a term of 15 years each and will expire on October 4, 2026.
On February 25, 2015, VimpelCom announced that Kyivstar has been awarded one of three licenses to provide nationwide 3G services in the 2100 Mhz band. The results of the auction have been approved by the National Commission for the State Regulation of Communications and Informatization of Ukraine. The license is valid for a period of 10 years.
We have also obtained a range of national and regional radio frequency licenses for use of radio frequency resource in the referred standards and in specified standards—RRL and WiMax. Our network covers approximately 98% of Ukraine’s population.
Competition—Mobile Business in Ukraine
According to Analysys Mason Research,393 stores as of December 31, 2014, there were approximately 62 million customers in Ukraine, representing a penetration rate of approximately 137.8 %. There are currently three mobile operators with national coverage in Ukraine: Kyivstar, Mobile TeleSystems—Ukraine (“MTS Ukraine”) and LLC Astelit.2016.
Competition
The following table shows our and our primary mobile competitors’competitors' respective customer numbers in Ukraine as of December 31, 2014:2017:
Operator | Customers (in millions) | ||||||||
|---|---|---|---|---|---|---|---|---|---|
Kyivstar | |||||||||
| |||||||||
| |||||||||
Source: Analysys Mason Research for all companies except Kyivstar.Mason.
Kyivstar and MTS Ukraine
Kyivstar competes primarily with MTS Ukraine,"VF Ukraine" JSC, operating under the Vodafone brand, which is 100% owned by MTS and operates aGSM-900/ GSM900/1800 network in Ukraine.
Other Competitors in Ukraine
Kyivstar also competes with Astelit, which operates throughout Ukraine. Kyivstar also competes with "lifecell" LLC, as well as with Trimob LLC, a 100% affiliate company which was separated fromof Ukrtelecom to provide services under a 3G license, and with other small CDMA players.operators.
According to Analysys Mason, as of December 31, 2017, there were approximately 58.2 million customers in Ukraine, representing a mobile penetration rate of approximately 137.4% compared to 59.0 million customers and a mobile penetration rate of 138.7% in 2016.
Marketing and Distribution—Mobile Business in UkraineUzbekistan
In Uzbekistan, we operate through our operating company, LLC "Unitel," and our brand, "Beeline." We offer our customers mobile telecommunications services under postpaid and prepaid plans. As of December 31, 2017, approximately 98.4% of our customers in Uzbekistan were on prepaid plans and approximately 1.6% of our customers in Uzbekistan were on postpaid plans.
Our 3G/HSPA services were commercially launched in 2008, and the majority of the network was constructed in 2010. Our 4G/LTE services were commercially launched in 2014. Unitel was the first mobile operator to provide 4G/LTE services.
The table below presents the primary mobile telecommunications services we offer in Uzbekistan.
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| Voice | Includes airtime charges from mobile postpaid and prepaid customers, including monthly contract fees for a predefined amount of voice traffic and roaming fees for airtime charges when customers travel abroad. GSM service is provided by Unitel in 2G and 3G networks throughout Uzbekistan. Call duration for one session is limited for 40 minutes. | |||||||
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| Internet and data access | Access is offered through GPRS/EDGE/3G/4G/LTE networks. | |||||||
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| Roaming | As of December 31, 2017, we had active roaming agreements with 484 GSM networks in 185 countries and provided GPRS roaming with 387 networks in 164 countries and CAMEL roaming through 263 networks in 116 countries. Generally, each agreement with roaming partners provides that the operator hosting the roaming call sends us a bill for the roaming services used by our customer while on the host's network. We pay the host operator for the roaming services and bill the amount due for the provision of roaming services on our customer's monthly bill. | |||||||
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| VAS | Caller-ID, voicemail, call forwarding, conference calling, call blocking and call waiting. | |||||||
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| Messaging | SMS, MMS, voice messaging and SMS services (including information services such as news, weather, entertainment chats and friend finder). | |||||||
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| Content/infotainment | Voice services (including referral services), content downloadable to telephone (including music, pictures, games and video), and RBT. | |||||||
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| Mobile financial services | Card to card transfer, bank card payments, trusted payment, our own payment system "Beepul", mobile transfer, loyalty program. | |||||||
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Mobile bundles
We offer bundled tariff plans, which may differ by types or volume of traffic, duration (daily, weekly, and monthly), region or charge type. Currently, we provide data bundles consisting of different
types of traffic volume, charge and duration and integrated bundles consisting of traditional voice with SMS and data traffic.
Distribution
In Ukraine,Uzbekistan, we offer severala portfolio of tariffs and products for the prepaid system designed to cater to the needs of specific market segments, including mass-market customers, youth customers and high value contract customers. Further, we have the following four segments in our postpaid system: Large Accounts, Business to Government, SME and SOHO. As of December 31, 2017, our sales channels in Uzbekistan include 672 offices and monobrand stores, 644 exclusive stores and 1,125 multibrand stores.
Competition
The following table shows our and our primary mobile competitors' respective customers in Uzbekistan as of December 31, 2017:
Operator | Customers (in millions) | |||
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LLC "Unitel" | 9.7 | |||
Ucell | 8.6 | |||
UMS | 1.8 | |||
UzMobile | 0.8 | |||
Perfectum | 0.3 | |||
Source: Analysys Mason.
According to Analysys Mason, as of December 31, 2017, there were approximately 21.3 million mobile customers in Uzbekistan, representing a mobile penetration rate of approximately 65.5% compared to 20.6 million customers and a mobile penetration rate of 64.3% in 2016. The relatively low mobile penetration rate is primarily caused by the single-SIM profile of most Uzbek mobile customers.
Mobile Business in Others
In the countries in our "Others" category, we generally offer our customers mobile telecommunications services under prepaid and contract tariff plans,postpaid plans.
On October 27, 2017, we entered into an agreement to sell our operations in Laos. For more information, see "—Overview—Recent Developments—VEON to sell Laos operations."
As of December 31, 2017, we had the following percentages of prepaid and postpaid customers:
Payment Plan | Kazakhstan | Kyrgyzstan | Armenia | Tajikistan | Georgia | Laos | |||||||||||||
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Prepaid | 95.6 | % | 96 | % | 87.4 | % | 99.9 | % | 99.99 | % | 96.4 | % | |||||||
Postpaid | 4.4 | % | 4 | % | 12.6 | % | 0.1 | % | 0.01 | % | 3.6 | % | |||||||
Call completion and VAS
In the countries in our "Others" category, we offer the same call completion and VAS as in Russia (except for location based services).
3G and 4G/LTE
We have launched 3G services in each one targeted atof the countries in our "Others" category, we hold 4G/LTE licenses in Tajikistan, we hold technology neutral licenses in Kazakhstan, Kyrgyzstan, Armenia, Georgia and Laos, and we have launched 4G/LTE services in Kazakhstan, Kyrgyzstan, Armenia and Georgia.
Roaming
In the countries in our "Others" category, we have roaming arrangements with a different typenumber of customer.other networks, which vary by country of our operation. The table below presents the material roaming agreements in each of the countries included in our "Others" category.
Country | Roaming Agreements (as of December 31, 2017) | |
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| Kazakhstan | Voice roaming on 612networks in 196countries GPRS roaming on 487networks in 171countries CAMEL roaming on 301networks in 113countries | |
Kyrgyzstan | Voice roaming on 424networks in 132countries GPRS roaming on 250networks in 99countries CAMEL roaming on 185networks in 83countries | |
Armenia | Voice roaming on 435networks in 179countries GPRS roaming on 344networks in 139countries CAMEL roaming on 239networks in 105countries 3G roaming on 295networks in 126countries 4G/LTE roaming on 52networks in 40countries | |
Tajikistan | 3G roaming on 154networks in 87countries Voice roaming on 193networks in 93countries GPRS roaming on171 networks in 92countries CAMEL roaming on 123networks in 72countries | |
Georgia | Voice roaming on 190networks in 81countries GPRS roaming on 180networks in 70countries CAMEL roaming on 123networks in 59countries | |
Laos | Voice roaming on 415networks in 140countries GPRS roaming on 241networks in 80countries CAMEL roaming on 60networks in 35countries |
Generally, each agreement with roaming partners provides that the operator hosting the roaming call sends us a bill for the roaming services used by our customer while on the host's network. We pay the host operator for the roaming services and bill the amount due for the provision of roaming services on our customer's monthly bill.
We divide our primary target customers into two large groups:Wireless internet services
We have promotional zero-zones for major local and international social networks in each of these countries (other than Laos) to lower the entry barrier for new data users and stimulate consumption for existing ones. We also focus on smartphone penetration growth in each of these countries as the major source of effective demand for our mobile internet services.
VEON platform
The VEON platform was launched in Georgia in 2017, and is yet to be adopted in the other countries in the "Others" category. The VEON platform offers our customers in Georgia the ability to communicate for free, even when out of credit, and provides third party products, offers, services and content.
B2B (subdivided into SMETable of Contents
Distribution
We distribute our products in the countries in our "Others" category through owned monobranded stores, franchises and other distribution channels. As of December 31, 2017, we had 200 total stores in Kazakhstan (inlcuding 14,707 other points of sale), 6,487 stores in Kyrgyzstan, 77 stores in Armenia, 112 monobranded stores in Tajikistan (25 own shops and 87 franchises), 36 stores in Georgia and 16 stores in Laos (including approximately 3,200 other points of sale).
Competition
Kazakhstan
According to Analysys Mason, as of December 31, 2017, there were approximately 25.5 million customers in Kazakhstan, representing a mobile penetration rate of approximately 141.2%, compared to 25.4 million customers and LE customers);a mobile penetration rate of approximately 142.5% in 2016. We held the second position in the market in 2017, according to Analysys Mason.
Kyrgyzstan
According to Analysys Mason, as of December 31, 2017, there were approximately 7.1 million customers in Kyrgyzstan, representing a mobile penetration rate of approximately 116.5%, compared to 7.1 million customers and a mobile penetration rate of approximately 117.6% in 2016. We held the first position in the market in 2017, according to Analysys Mason.
Armenia
According to Analysys Mason, as of December 31, 2017, there were approximately 3.6 million customers in Armenia, representing a mobile penetration rate of approximately 119.1%, compared to 3.6 million customers and a mobile penetration rate of approximately 117.5% in 2016. We held the second position in the market in 2017, according to Analysys Mason.
Tajikistan
According to Analysys Mason, as of December 31, 2017, there were approximately 8.6 million customers in Tajikistan, representing a mobile penetration rate of approximately 96.7%, compared to 9.3 million customers and a mobile penetration rate of approximately 106.7% in 2016. We held the fourth position in the market in 2017, according to Analysys Mason.
Georgia
According to Analysys Mason, as of December 31, 2017, there were approximately 5.6 million customers in Georgia, representing a mobile penetration rate of approximately 140.7%, compared to 5.4 million customers and a mobile penetration rate of approximately 135.9% in 2016. We held the third position in the market in 2017, according to Analysys Mason.
Laos
According to Analysys Mason, as of December 31, 2017, there were approximately 5.6 million customers in Laos, representing a mobile penetration rate of approximately 78.4%, compared to 5.2 million customers and a mobile penetration rate of approximately 74.7% in 2016. We held the third position in the market in 2017, according to Analysys Mason.
Description of Our Fixed-line Telecommunications and Internet Businesses
We also offer fixed-lined telecommunications and internet services in Russia, Pakistan, Ukraine, Uzbekistan, Armenia and Kazakhstan. We do not offer fixed-line services in Algeria, Bangladesh, Kyrgyzstan, Tajikistan, Laos or Georgia.
In Russia, Ukraine and Uzbekistan, we offer voice, data and internet services to corporations, operators and consumers using a metropolitan overlay network in major cities. Our fixed-line telecommunications use inter-city fiber optic and satellite-based networks.
In Pakistan, we offer internet and value added services over a wide range of access media, covering major cities of Pakistan. However, we do not report customer numbers and other data on our fixed-line business in Pakistan, as we do with Russia, Ukraine and Uzbekistan, because the fixed-line business in Pakistan is not material to our overall business.
In Armenia and Kazakhstan, the fixed-line business offers range of services for B2O, B2B and B2C (mass market)segments. In Armenia, our fixed-line business further offers a range of services, including PSTN-fixed and IP telephony, internet, data transmission and network access, domestic and international voice termination, IPLC and TCP/IP international transit, over our national networks.
Fixed-line Business in Russia
In Russia, we provide a wide range of telecommunications and information technology and data center services, such as network access and hardware and software solutions, including configuration and maintenance, SaaS and an integrated managed service. Our services cover all major population centers in Russia. We operate a number of competitive local exchange carriers that own and operate fully digital overlay networks in a number of major Russian cities. Our customers range from large multinational corporate groups and government clients to SMEs and high-end residential buildings in major cities throughout Russia.
We provide local access services by connecting the customers' premises to our own fiber network, international and domestic long distance services and VSAT services to customers located in remote areas. We provide internet access to both corporate and consumer customers through backbone networks and private line channels. We also provide corporate clients with IP address services, the ability to rent leased channels with different high-speed capacities and remote access to corporate information, databases and applications. We offer and deploy managed Wi-Fi networks based on IEEE 802.11b/g/n/ac wireless technology.
We also provide an increasing range of other services, including virtual PSTN number, xDSL services, session initiation protocol (SIP) connection, financial information services, data center services, such as co-location, web hosting, audio conference and domain registration services. We offer to our corporate customers IPTV services, virtual PBX, certain Microsoft Office packages (including SaaS), web-videoconferencing services and sale, rental and technical support for telecommunications equipment.
We also provide Pay TV (cable TV) and IPTV services. As of December 31, 2017, we have more than 34,700 Pay TV customers and 1.11 million IPTV customers. In 2016, we launched FMC product services in all branches in Russia and we focused on further developing this in 2017. As of December 31, 2017, we had more than 877,390 FMC customers.
Our carrier and operator services division in Russia provides a range of carrier and operator services, including voice, internet and data transmission over our own networks and roaming services. Within the VEON group, we have interconnection agreements with international global data network operators who provide a one-stop shop concept for worldwide data network services for multinational companies. Under these interconnection agreements, we provide MPLS-based IP VPN, local, domestic
and international private lines, equipment and equipment maintenance in Russia. We also provide high-speed domestic and international channels to international and Russian operators to sell excess backbone network capacity.
Distribution
We utilize a direct sales force in Moscow, operating both with fixed-line and mobile corporate customers and supported by specialists in technical sales support, marketing, customer service and end-user training. In addition, we employ a team of regional sales managers and a dedicated sales force in each of our regional branch offices, as well as having sales incentive plans with our regional partners.
Competition
Our fixed-line telecommunications business marketed as "Beeline Business" competes principally on the basis of convergent services and bundles, installation time, network quality, geographical network reach, customer service, range of services offered and price. We face significant competition from other service providers. For voice services, our main competitors are the long distance carriers Rostelecom, TransTelecom and OJSC "Multiregional TransitTelecom." For data services, our main competitors are the long distance carriers Rostelecom, TransTelecom and MegaFon. Our main competitors in the fixed-line broadband market in Russia are Rostelecom, MTS and its subsidiaries, Akado, ER-Telecom, NetbyNet and various local home network providers.
In terms of end-user internet penetration, the consumer internet access business in Russia is saturated and end-user internet penetration is high. Competition for customers in Russia is intense and we expect it to increase in the future as a result of wider market penetration, consolidation of the industry, the growth of current operators and the appearance of new technologies, products and services. As a result of increasing competition, internet providers are utilizing new marketing efforts (for example, aggressive price promotions) in order to retain existing customers and attract new ones.
Fixed-line Business in Pakistan
Our fixed-line business in Pakistan includes data, voice and VAS services over a wide range of access media, covering the major cities of Pakistan. The Ukrainian mobile market operates primarilywired and wireless access services include FTTx, PMP (point to multipoint), point-to-point radios, VSAT, DSL & WiMax connecting more than 110 locations across Pakistan, providing data and voice connectivity to enterprise customers. The data services being provided to the enterprise customers include: dedicated internet access, VPN (virtual private networking), leased lines & fixed telephony.
We also offer services to domestic and international carriers, which include domestic and international leased lines, domestic and international MPLS, and IP transit services through our access network. Our long-haul fiber optic network covers more than 9,000 kilometers and, supplemented by wired and wireless networks, is spread across the major cities of Pakistan.
We provide the following services for corporate and individual business customers: high-speed internet access (including fiber optic lines and xDSL), telephony, and long distance and international long distance telephony on prepaid plans. To attract more contract customers, we have differentiated our service levelscards; telephone communication services, based on copper wires and the modern digital fiber optic network; dedicated lines of data transmission; and dedicated line access and fixed-line mobile convergence.
Distribution
We utilize a direct sales force in Pakistan for enterprise customers. This dedicated sales force has three channels dedicated to provide higher customer service to our contract customers, such as direct access to customer service agents onSMEs, large/key accounts and business-to-government. These channels are led by individual channel heads who further employ a team of regional sales managers in different
regions, which are further supported by a sales force, including team leads and key account managers. There is also a centralized telesales executive team led by a manager and a dedicated contract customer service line,sales force for customers that are engaged in addition toreselling our initiatives to increase the flexibility and accessibility of the payment methods offered to contract customers. Kyivstar further simplified its offerings by introducing new tariff plans in 2014 focused on on-net, off-net, Internet and FTTB.services.
Customer Loyalty ProgramsCompetition
In Ukraine, to promote brand loyalty we use “Kyivstar club” program, providing a monthly bonus, which is a percentagePakistan, our fixed-line business faces significant competition from other providers of the amount spent by the customer’s usage per monthfixed-line corporate services, carrier and the length of time the customer has been a Kyivstar customer. In 2015 weoperator services and consumer internet services. We believe that our main competitors for fixed-line corporate services are planning to introduce new loyalty programsPakistan Telecommunication Company Limited, or "PTCL," Multinet, Wateen, Supernet, Cybernet, Nexlinx and Nayatel. We believe that aim to stimulate gross adds in SME segmentour main competitors for carrier and in the LE segment weoperator services are planning to offer individual discountsPTCL, Wateen, World Call, Wi-Tribe, and Telenor Pakistan. We believe that our main competitors for clientsconsumer internet services are PTCL, Wateen, World Call, Wi-Tribe and pricing.Qubee.
Fixed-line Business in Ukraine
Description of Fixed-line Services in In Ukraine,
Business Operations
We have constructed we offer fixed-line and own a 44,634 kilometer fiber optic network, including 24,917 kilometers within cities, 15,188 kilometers and 9,729 kilometers local FOL for FTTB, which is interconnected to the local PSTN in Kyiv, to other major metropolitan areas in Ukraine and to our gateway.wireless internet services. We provide data and Internetinternet access services in almost all metropolitan cities in Ukraine. We began providing fixed-line broadband services in Ukraine in 2008 and, as of December 31, 2017, provided services in 116 cities in Ukraine (excluding cities in Crimea and the ATO zone). In connection with these services, we have been engaged in a project to install FTTB for fixed-line broadband services in approximately 41,000 residential buildings in 116 cities, providing over 55,600 access points.
Our fixed-line services include corporate Internetinternet access, VPN services, data center, contact center, fixed-line telephony and a number of value added services.VAS. Internet access services include connection to the Internetinternet via ADSL, symmetrical and ethernetEthernet interfaces at speeds ranging from 256 kbpskilobytes per second to 10 Gbps.gigabytes per second. Fixed-line voice services are available in 30many of Ukraine's major citiescities.
In November 2016, we launched FMC for an increasing range of Ukraine.
As of December 31, 2014, we ownedmobile users in total 44,634 kilometers of fiber optic cable (including Backbone and MAN) that satisfies almost all our needs in terms of transmission network capabilities with a negligible level of leased capacity still being needed.
Local Access Services. We provide local access services to corporate customers by connecting their premises to our fiber optic network, which interconnects to the local PSTN in 30 major Ukrainian cities.
International and Domestic Long Distance Services. We provide outgoing international voice services to business customers through our international gateway and direct interconnections with major international carriers. DLD services are primarily provided through our own intercity transmission network and through interconnection with Ukrtelecom’s and other operators’ networks.fixed-line broadband internet base. We also hold an international license that enables usoffer a range of FTTB services tariffs for fixed-line broadband internet access targeted at different customer segments. We currently have 11 unlimited tariff plans with monthly fees, which offer different speeds up to provide international voice and data100 Mbps for active internet users. In addition, in 2015, we launched OTT TV services to our business and corporate customers.in partnership with Viasat.
Dedicated Internet and Data Services. We provide a VPN service that has an integrated voice and data ISDN connection, frame relay, broadband digital customer line and dedicated Internet services.
Information Services. We provide telecommunications services to financial and banking companies, such as S.W.I.F.T., access to processing centers, news services to companies such as Reuters, as well as conduits to airline reservation systems in Ukraine. Our data center provides server co-location and hosting services for news agencies and financial and entertainment services providers.
Mass Market Services. We offer telephone and Internet broadband access services (through FTTB or ADSL) for mass market customers.
Wholesale Operations
Our joint carrier and operator services division in Ukraine provides local, international and intercity long distance voice traffic transmission services to Ukrainian fixed-line and mobile operators on the basis of our proprietary DLD/domestic long-distance/ILD network, as well as IP transit and data transmission services through our own domestic and international fiber optic backbone and IP/MPLS data transmission network.
We derive most of our carrier and operator services revenue in Ukraine from voice call termination services to our own mobile network and voice transit to other local and international destinations.
Residential and FTTB OperationsDistribution
In Ukraine, we offer the fixed-line and wireless Internet services. We began providing fixed-line broadband services in Ukraine in 2008 and as of December 31, 2014 provided services in 130 cities in Ukraine. In connection with this service, we have been engaged in a project to install FTTB for fixed-line broadband services in approximately 45,076 residential buildings in 130 cities, providing over 60,953 access points.
Licenses for Fixed-line Business in Ukraine
The table below sets forth the principal terms of the licenses which are important to our fixed-line business in Ukraine.
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Competition—Fixed-line Business in Ukraine
Business Operations
In the voice services market for business customers, we compete with Ukrtelecom, Datagroup, Vega, and a number of other small operators. There is a high level of competition with more than 2,000 ISPs in Ukraine. Our main competitors in the corporate market for data services are Ukrtelecom, Volia, Vega and Datagroup.
Wholesale Operations
In Ukraine, carrier and operator services market competitors include Datagroup, Ukrtelecom, and Vega.
Consumer Internet Services
Our main competitors for provision of consumer Internet services in Ukraine are Volia and Ukrtelecom. From December 31, 2013 to December 31, 2014, we increased the number of broadband customers in Ukraine by 10% from 761,532 to 813,286.
Marketing and Distribution—Fixed-line Business in Ukraine
Business Operations
Our company emphasizes high customer service quality and reliability for its corporate large accounts while at the same time focusing on the development of its SME offerings. We sell to corporate customers through a direct sales force and various alternative distribution channels such as IT servicing organizations and business center owners, and to the SME customers through dealerships, direct sales, own retail and agent networks.
We use a customized pricing model for large accounts which includes among other things, service or tariff discounts, volume discounts, progressive discount schemes and volume lock pricing. We use standardized and campaign-based pricing for SME customers.
Fixed-line services have significant potential considering positive difference in market share and brand preference for the B2B market. Fixed-line services are used as an effective tool to acquire, develop and retain corporate large accounts, especially in financial, agricultural and retail sectors.
Residential and FTTB Operations and operator services in Ukraine
Our residential marketing strategy is focused on attracting new customers. We offer several tariff plans, each one targeted at a different type of customer. In 2014 our consumer fixed-line Internet services business was supported by BTL activities, including a leaflets distribution, in areas where the service is provided.
Fixed-line Broadband Internet Access. We offer a wide rangeTable of FTTB services tariffs targeted at different customer segments. There are four unlimited tariff plans with monthly fees, which offer different speeds up to 100 Mbps for active Internet users.
Description of Operations of the CIS Segment
Mobile Business in the CISContents
Description of Mobile Services in the CISCompetition
Mobile Voice Services
As of December 31, 2014, approximately 2% of our customers in the CIS were on postpaid plans and approximately 98% of our customers in the CIS were on prepaid plans.
Call Completion and Value Added Services. In the CIS,voice services market for business customers, we offer the same call completioncompete with Ukrtelecom, Datagroup, Farlep-Invest (Vega), and value added services as in Russia (except for location based services). For a description of these services, see “—Description of Operations of the Russia Segment—Mobile Business in Russia—Description of Mobile Services in Russia.”
Roaming. In the CIS, we have roaming arrangements with a number of other networks, which vary by country of our operations.
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Mobile Internet Services
small operators. We have partnered with Opera Software to offer a “Beeline” branded version ofwere the Opera Mini browser under a framework agreement in all CIS BU countries. We have promotional zero-zones for major local and international social networks in CIS countries to lower the entry barrier for new data-users and stimulate consumption for existing ones. We also focus on smartphone penetration growth in our countries as the major source of effective demand for our mobilethird largest B2B internet services.
In Kazakhstan, we provide customers with wireless Internet access over GPRS/EDGE/UMTS networks. Our UMTS/HSPA network was commercially launched in January 2011. The wireless Internet services that we offer include small screen Internet (data services and options in regular voice price plans) and large screen Internet (special Internet price plans bundled with USB modem or without a modem for PC and note/netbooks).
In Uzbekistan, we provide customers with wireless Internet access over GPRS/EDGE/UMTS/4G/LTE networks. The UMTS/HSPA services were commercially launched in 2008 and the majority of the network was constructed in 2010. In September 2014, we launched 4G/LTE in Tashkent. We provide Internet services both for smartphones and feature phones as well as for USB dongles and tablet computers. We focus on small screen users and we have begun to integrate mobile services of popular social networks. Devices provided are locked for the Beeline network so that they only work within our network.
In Armenia, we provide customers with wireless Internet access over GSM/GPRS/EDGE/UMTS networks. UMTS services were commercially launched in 2009. For small screen customers, we launched data bundles for Internet access for a daily fee with unlimited data usage and a limit on speed only after a certain amount of usage per day, and began to integrate mobile services of popular social networks, including, Odnoklassniki and Facebook. USB modems were commercially launched in July 2009. Customers receive a USB modem and a SIM card with a pre-installed special Internet rate data plan.
In Tajikistan, USB modems were launched in January 2008. We provide our customers with wireless Internet access via GSM/EDGE and UMTS networks. We provide Internet services for smartphones and feature phones as well as for USB dongles. In 2014, the usage of non-voice 3G/GPRS services increased due to a balanced set of new Internet tariffs that Tacom offered. In addition, we have offered entry level monthly and daily Internet options for our customers in Tajikistan.
In Georgia, we provide our customers with wireless Internet access through EDGE and 4G networks. Beeline in Georgia participatedprovider in the tender for 4G/LTE license, which was awarded in January 2015. Our 4G network in Georgia was launched in February 2015. The license is valid for 15 years.
In Kyrgyzstan, we provide our customers with wireless Internet access through GPRS/EDGE/UMTS/HSPA+ networks. Our UMTS/HSPA+ network in Kyrgyzstan was launched in December 2010. USB modems were commercially launched for prepaid and contract customers in November 2009. We launched attractive internet options to promote data usage during idle hours and spread the network load in Kyrgyzstan in 2014. Kyrgyzstan was successful in branded smartphone distribution in 2014 therefore increasing data user base.
Mobile Telecommunications Licenses in the CIS
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On December 29, 2014, Mobitel won the tender for the 4G license conducted by the Georgian National Communications Commission. The license was obtained on January 29, 2015 and remains valid for 15 years. Under the terms of the license, Mobitel has certain specific rollout criteria and by February 1, 2020 the Mobitel 4G network should cover 90% of the villages and cities in Georgia. The commercial launch of LTE was announced on February 1, 2015.
Competition—Mobile Business in the CIS
Kazakhstan
According to Analysys Mason Research, there were approximately 27.7 million customers in Kazakhstancountry as of December 31, 2014, representing2017, according to management's estimates. There is a penetration ratehigh level of approximately 159.5%.
The following table shows ourcompetition with more than 400 internet service providers in Ukraine. Our main competitors in the corporate market for data services are also Ukrtelecom, Farlep-Invest (Vega) and our primary mobile competitors’ respective customer numbersDatagroup. Our competitors for both the carrier and operator services and the voice and data services market include Datagroup, Ukrtelecom, and Farlep-Invest (Vega). Our main competitors for the provision of consumer internet services in Kazakhstan as ofUkraine are Volia and Ukrtelecom. From December 31, 2014:
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Source: Analysys Mason Research for all companies except KaR-Tel.
Uzbekistan
According2016 to Analysys Mason Research, as of December 31, 2014, there were approximately 20.1 million2017, we increased the number of our broadband customers in Uzbekistan, representing a penetration rate of approximately 65.5%. The relatively low penetration rate is caused by the single-SIM profile of Uzbekistan mobile subscribers.
The following table shows our and our primary mobile competitors’ respectiveUkraine (excluding customers in Uzbekistan as of December 31, 2014:
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Source: Analysys Mason Research for all companies except Unitel.
MTS re-entered the market in a joint venture with a government controlled entity in December 2014. MTS owns a 50.01% stake and the government 49.99%.
Armenia
AccordingATO zone) by 1% from 811,910 to Analysys Mason Research, as of December 31, 2014, there were approximately 3.6 million customers in Armenia, representing a penetration rate of approximately 120.5%.
The following table shows our and our primary mobile competitors’ respective customers in Armenia as of December 31, 2014:
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Source: Analysys Mason Research for all companies except ArmenTel.
Tajikistan
According to Analysys Mason Research, as of December 31, 2014, there were approximately 10.2 million customers in Tajikistan, representing a penetration rate of approximately 121.7%.
The following table shows our and our primary mobile competitors’ respective customers in Tajikistan as of December 31, 2014:
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Source: Analysys Mason Research for all companies except Tacom.
Georgia
According to Analysys Mason Research, as of December 31, 2014, there were approximately 5.7 million customers in Georgia, representing a penetration rate of approximately 132.3%.
The following table shows our and our primary mobile competitors’ respective customers in Georgia as of December 31, 2014:
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Source: Analysys Mason Research for all companies except Mobitel.
Kyrgyzstan
According to Analysys Mason Research, as of December 31, 2014, there were approximately 7.0 million customers in Kyrgyzstan, representing a penetration rate of approximately 124.8%
The following table shows our and our primary mobile competitors’ respective customers in Kyrgyzstan as of December 31, 2014:
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Source: Analysys Mason Research for all companies except Sky Mobile.
Marketing and Distribution—Mobile Business in the CIS
All our mobile operations in CIS divide their primary target customers into five large groups:
large account corporate customers (business market);
SME customers (business market);
high ARPU customers (consumer market);
youth segment (consumer market); and
mass market customers.
In Kazakhstan we offer a wide pricing portfolio which contains nationwide and regional tariff plans and add-ons for consumer and business segments. During 2014 the pricing portfolio for the consumer segment has been expanded by a new integrated bundle line.
In Uzbekistan, we offer several U.S. dollar-based prepaid and postpaid tariff plans, each one targeted at a different type of customer.
In Armenia, we offer several Armenian dram-based prepaid and contract tariff plans, each one targeted at a different type of customer. As of December, 2014, 15.3% of the ArmenTel customer base used postpaid plans.
In Tajikistan, we offer several Tajik somoni-based prepaid and postpaid tariff plans, each one targeted at a different type of customer.
In Georgia, we offer four Georgian lari-based prepaid tariff plans and two contract-based postpaid tariff plans for our SME and large account corporate customers.
In Kyrgyzstan, we offer seven Kyrgyz som-based price plans for our mass market customers and three price plans for SME and large account customers.
Customer Loyalty Programs
We have loyalty programs in each of the CIS countries in which we operate. These programs are based on various principles with the main target to increase the lifetime and ARPU of our customers. As of December 31, 2014, we had more than 7.1 million customers participating in these programs in the CIS.823,840.
Fixed-line Business in the CISUzbekistan
Description of Fixed-line Services in CIS
Business Operations
Kazakhstan.We focus on small and medium businesses, offering services including high-quality, high-speed Internet, fixed-line voice and data transmission. We also offer specialized services for multi-national corporations and financial institutions. We provide the following services for corporate customers:
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local, long-distance, international fixed-line voice services (including traditional telephony, IP and session initiation protocol (“SIP”) telephony);
local, intercity and international channels (including leased lines and IP VPN through fiber optic, wireless, WiMax and satellite technologies); and
organizational services for integrated corporate networks (including integrated network voice and data services).
Uzbekistan. We In Uzbekistan, we provide a largewide range of telecommunicationfixed-line services, available on the Uzbek market, such as network access, internet and hardware and software solutions, including configuration and maintenance. Our company has its own basic fiber-optical digital network in the cities of Tashkent, Samarkand, Bukhara, Zarafshan and Uchkuduk, which is longer than 340 kilometers, and copper cables, which are longer than 240 kilometers, that allow users to connect and to render services practically in any region of Uzbekistan. We provide the following services for corporate and individual business customers:
high-speed Internetinternet access (including fiber optic lines and xDSL), telephony, and long distance and international long distance telephony on prepaid cards;
telephone communication services, based onthrough our copper wirescable network and theour modern digital fiber optic network;
dedicated lines of data transmission; and
dedicated line access and fixed-line mobile convergence.
In Uzbekistan, we offer similar fixed-line broadband and wireless internet services as in Russia. See "—Fixed-line Business in Russia."
Armenia.Distribution
One of our priorities in Uzbekistan is the development of information and communications technology, which supports economic development in Uzbekistan. Our companystrategy includes maintaining our current market position by retaining our large corporate client customer base.
Competition
We operate large independent fixed-line services in Uzbekistan, where we compete with the state-owned provider, Uztelecom, as well as East Telecom, Sarkor Telecom, Sharq Telecom, TPS and EVO. There is an integrated providera high level of competition in the capital city of Tashkent, but the fixed-line internet market in most of the other regions remains undeveloped.
Fixed-line Business in Armenia
Our subsidiary VEON Armenia provides a large range of telecommunicationtelecommunications services available on the Armenian market, such asin Armenia, including PSTN-fixed and IP telephony, Internet,internet, data transmission and network access, as well as domestic and international voice termination and TCP/IP (transmission control protocol/Internet protocol) international transit traffic services. We operate a national network. Wenationwide network in Armenia and provide the following services for corporate and individual customers:
local telephony services;
international and domestic long distance services;
dedicated Internet and data broadband access services (including ADSL, VDSL, LTE 450 and fiber optic lines); and VoIP services.
VEON Armenia is the Armenian incumbent operator offering countrywide wholesale services, such as leased line service and wholesale broadband services, as well as wholesale international voice termination and origination services for other local and international operators and service providers.
We offer PSTN-fixed and IP telephony services, as well as fixed-line broadband internet access based on ADSL and FTTB technologies, dial-up services and wireless internet access based on CDMA technology. In 2015, we launched FMC bundles, offering fixed internet, fixed TV and mobile services.
In 2017, we received permission from the Public Services Regulatory Commission of Armenia to include fixed voice over IP services.services in our FMC bundles, which we plan to roll out in 2018.
Wholesale OperationsDistribution
Our strategy includes focusing on customer retention and ARPU growth by developing new services, including internet access through a fiber optic network with a guaranteed speed to corporate customers and government organizations.
Competition
We offer a broad range of fixed-line services to government, corporate and private customers. We believe we compete primarily with U!Com and Rostelcom in Armenia, which are primarily provide fixed internet and cable TV services.
Fixed-line Business in Kazakhstan
We focus on customer experience for large enterprises through offering high-quality services. Our main business clients are concentrated in the financial and oil and gas sectors, with a new focus on international companies. We provide the following services for corporate clients: high-speed internet access; local, long distance and international voice services over IP; local, intercity and international leased channels and IP VPN services; cloud services; and integrated corporate networks (including integrated network voice, data and other services). We use the following technologies: fiber optic lines (approximately 20,715 buildings are covered by our FTTB network), wireless technologies, satellite technologies, and the TV-Everywhere platform (which is provided through the vendor, Computer Telephony Integration).
In Kazakhstan, we offer similar fixed-line broadband and wireless internet services as in Russia. See "—Fixed-line Business in Russia." In 2017, we continued to increase our coverage and completed FTTB roll-out for an additional 459 buildings. We also updated the FMC product, by adding additional mobile bundles and video content from Amediateka. In addition, in October 2017 we launched an additional parental control service, which enables location services, and can limit access to internet sites and browsing time.
Distribution
We are focusing on customer base and revenue growth, which we aim to promote by expanding our transport infrastructure, developing unique products, strengthening our position in the market and enhancing our sales efforts and data services.
Competition
We provide internet, data transmission and traffic termination services in Kazakhstan, where we believe we compete primarily with state-owned provider Kazakhtelecom, KazTransCom, TransTelecom (owned by Kazakhstan Temir Zholy, the national railway company), Astel (a leader in the provision of satellite services) and several other small local operators.
Interconnection Agreements
Our mobile and fixed-line businesses are dependent on interconnection services, which are required to complete calls that originate on our respective networks but terminate outside our respective networks, or that originate from outside our respective networks and terminate on our respective networks. In order to provide a local, domestic and international network, we have interconnection agreements in the markets in which we operate.
Russia.
We have several interconnection agreements with mobile and fixed-line operators in KazakhstanRussia under which KaR-Tel provideswe provide traffic termination services. During 2017, our MTRs in Russia were broadly stable as compared to the 2016 and 2015 historical periods.
Pakistan
We have several interconnection agreements with mobile and fixed-line operators in Pakistan and in the territories of Azad Jammu and Kashmir ("AJK") and Gilgit-Baltistan, under which we provide traffic termination services. Our subsidiary, TNS-Plus, has internationalMTRs in 2017 in Pakistan were broadly stable as compared to the 2015 and 2016 historical periods.
Algeria
We have several interconnection agreements with mobile, VoIP and fixed-line operators in Russia, UzbekistanAlgeria under which we provide traffic termination services. The national incoming interconnect rate decreased for the year ended December 31, 2017 as compared to the year ended December 31, 2016, and Kyrgyzstanthe outgoing interconnect rate also decreased over the same period. The movements in the historical MTRs for 2017, 2016 and provides international voice traffic transit2015 have been favorable to our business, however, asymmetry continues to exist between OTA and international line rental services for Kazakh and international operators.one other operator.
Uzbekistan.Bangladesh
We have several interconnection agreements with Uztelecom, the incumbentICX, IGW, mobile operators, IPTSP and fixed-line services provider in Uzbekistan, through which all national and international traffic is routed, and other operators in Uzbekistan.Bangladesh under which we provide traffic termination services. For international incoming calls, MTR in 2017 was broadly stable as compared to the 2016 and 2015 historical periods.
Armenia.Ukraine Our subsidiary ArmenTel is the Armenian incumbent
We have several interconnection agreements with mobile and fixed-line operator. ArmenTel operatesoperators in Ukraine under which we provide traffic termination services. The rates in 2017 for termination of national traffic to a nationalmobile network and local networks in every city of Armenia. In Armenia, we provide domestica fixed network on an intercity level decreased compared to the 2016 and international voice termination, intercity and local leased channels and IP transit.2015 historical periods.
Tajikistan.UzbekistanIn Tajikistan, we
We have several interconnection agreements with mobile and fixed-line operators in Uzbekistan under which we provide traffic termination services. During 2017, our MTRs in Uzbekistan were broadly stable as compared to the 2016 and 2015 historical periods.
On September 5, 2017, the State Committee of Uzbekistan on Privatization, Demonopolization and Development of Competition ("State Committee of Uzbekistan") issued an injunction requiring Unitel LLC to implement equal mobile termination rates for all national operators. Unitel LLC appealed this injunction and on January 15, 2018, the appellate division of the Tashkent administrative court ruled in favor of the State Committee of Uzbekistan. Unitel LLC is currently engaged in discussions with the State Committee of Uzbekistan, other relevant regulators and national operators regarding the implementation of the injunction. Unitel LLC is also involved in litigation with UMS and Ucell in relation to unpaid mobile termination rates.
Others
We have several agreements with mobile and fixed-line operators in each of the countries in our "Others" category under which we provide traffic termination services.
Licenses
Mobile Telecommunications Licenses in Russia
GSM
PJSC VimpelCom holds super-regional GSM licenses (GSM900, GSM1800, GSM900/1800, UMTS 900 and 4G/LTE 1800 standards) for the following seven out of eight super-regions in Russia: Moscow, Central and Central Black Earth, North Caucasus, North-West, Siberia, Ural and Volga. These licenses will expire between April 2018 and November 2022, and we plan to file applications for renewal of all our licenses prior to their expiration. PJSC VimpelCom does not currently hold a GSM super-regional license for the Far East super-region of Russia, but it holds GSM licenses in a number of regions of the Far East super-region. These licenses expire on various dates between 2019 and 2022, and we plan to file applications for renewal of all of our licenses prior to their expiration.
In addition to the seven super-regional GSM licenses, PJSC VimpelCom holds a GSM license for the Orenburg region, and in total, our GSM licenses cover approximately 97% of Russia's population.
3G
PJSC VimpelCom holds one of three 3G licenses in Russia. PJSC VimpelCom has extended its license until May 2022.
4G/LTE
In July 2012, PJSC VimpelCom was awarded a mobile license, a data transmission license, a voice transmission license and a telematic license for the provision of 4G/LTE services in Russia. These licenses allow PJSC VimpelCom to provide services using radio-electronic devices in Russia via networks that use 4G/LTE standard equipment within any of the following frequency bands: 735-742.5/776-783.5 MHz; 813.5-821/854.5-862 MHz; and 2550-2560/2670-2680 MHz. Certain channels allocated to us in accordance with the licenses have restrictions on their use. To remove restrictions, we have to perform organizational technical measure field tests. The rollout of the 4G/LTE network is using a phased approach based on a pre-defined schedule pursuant to the requirements of the license.
PJSC VimpelCom holds the 4G/LTE 2600 licenses in 32 subjects of Russia. The licenses expire on April 15, 2026 and we plan to apply for renewal of these licenses prior to their expiration.
License fees
PJSC VimpelCom must pay an annual fee for the use of radio frequency spectrum. This fees were RUB 4,288 million and RUB 4,210 million for the years ended December 31, 2017 and 2016, respectively. Under Federal Law No. 126 FZ "On Communication" and license terms, PJSC VimpelCom is required to make universal service fund contributions in the amount equal to 1.2% of corporate revenues from provided communications services. Universal service fund contributions were RUB 2,369 million and RUB 2,336 million for the years ended December 31, 2017 and 2016, respectively. PJSC VimpelCom is also subject to certain other license fees on a case-by-case basis.
Mobile Telecommunications Licenses in Pakistan
2G
PMCL was awarded a 15-year 2G license in 1992. In 2007, PMCL renewed its 2G license for a further term of 15 years. As of December 31, 2017, PMCL had a balance of US$43.5 million to be paid to the PTA for the renewal of its 2G license. Such amount is payable in yearly installments of US$14.5 million, payable in December of each year, until December 2019. PMCL has two 15-year licenses for provision of cellular mobile services in AJK and Gilgit-Baltistan.
Further, Warid acquired a 15-year technology neutral license in 2004 for US$291 million. US$145.5 million was paid upfront while the rest is expected to be paid in ten equal annual installments starting with a four year grace period, with the last payment being in May 2018. This license is up for renewal in 2019.
3G
In 2014, following a competitive bidding process, PMCL was awarded a 15-year license to operate a nationwide 3G telecommunications network in Pakistan for an aggregate initial spectrum fee of US$300.1 million, which was paid at the time PMCL acquired the license.
In addition, PMCL and its subsidiaries have other licenses, including LDI, WLL, local operators.loop licenses, licenses to provide non-voice communication services, and licenses to provide class VAS in Pakistan, AJK and Gilgit-Baltistan. The licensees must also pay annual fees to the PTA and make universal service fund contributions and/or research and development fund contributions, as applicable, in a total amount equal to a percentage of the licensees' annual gross revenues (less certain allowed deductions) for such services.
4G/LTE
In June 2017, PCML was awarded a 15-year license to operate 4G/LTE (NGMS) telecommunications network in Pakistan for an aggregate initial spectrum fee of US$295 million and withholding tax of 10%, which was paid at the time PMCL acquired the license.
Warid (now merged with Jazz) acquired a 15-year technology neutral license in 2004 for US$291 million. US$145.5 million was paid upfront while the rest is being paid in ten equal annual installments starting with a four year grace period (the last payment is due in May 2018). This license is up for renewal in 2019. The same license was amended in December 2014 by PTA to allow Warid for providing 4G/LTE services in Pakistan.
License fees
Under the interconnection agreements, we provide voice call termination to our own network. We also have a license to provide international communications in Tajikistan which allows our subsidiary there to interconnect with OJSC VimpelCom directly.
Georgia.In Georgia, our subsidiary Mobitel has interconnection agreements with ArmenTelterms of its 2G, 3G and OJSC VimpelCom, and four agreements with local operators. Under these agreements Mobitel provides voice call termination to its own network.
Kyrgyzstan. In Kyrgyzstan, we have interconnection agreements with all local operators. Under the interconnection agreements, we provide voice call termination to our own network. We also have a license to provide international communications in Kyrgyzstan which allows our subsidiary there to interconnect with OJSC VimpelCom directly.
Residential and FTTB Operations
In Kazakhstan, we offer the same spectrum of fixed-line broadband and wireless Internet access as in Russia. For more information, see “—Description of Operations of the Russia Segment—Fixed-line Business in Russia.” In Kazakhstan, we launched a co-branded version of Opera Software’s Opera Mini web browser and offer unlimited browsing services to our customers. We also launched various mobile Facebook services and have plans to launch others.
In Uzbekistan and Armenia, we offer the same spectrum of fixed-line broadband and wireless Internet access as in Russia. For more information, see “—Description of Operations of the Russia Segment—Fixed-line Business in Russia.” In Armenia, we offer PSTN-fixed and IP telephony services,4G/LTE licenses, as well as fixed-line broadband Internet accessits license for services in AJK and Gilgit-Baltistan, PMCL must pay annual fees to the PTA and make universal service fund contributions and/or research and development fund contributions, as applicable (not all of the foregoing are applicable to all licenses), in a total amount equal to 2.5% of PMCL's annual gross revenues (less certain allowed deductions) for such services, supplemental to spectrum administrative fees.
PMCL's total license fees (annual license fees plus revenue sharing) in Pakistan (excluding the yearly installments noted above) were US$26.7 million, US$27.1 million and US$21.1 million for the years ended December 31, 2017, 2016 and 2015, respectively. PMCL's total spectrum administrative fee payments in Pakistan were US$1.5 million, which includes Warid's spectrum, for the year ended December 31, 2017, and were US$1.0 million for each of the years ended December 31, 2016 and 2015, which excludes Warid's spectrum.
Mobile Telecommunications Licenses in Algeria
2G
In 2001, OTA was awarded a 15-year license to operate a 2G telecommunications network for an aggregate fee of approximately US$737 million. The license expired in 2016, but was renewed for a five-year period at no additional cost (Decree 17-195 of June 11, 2017).
VSAT
In 2003, OTA acquired a VSAT data-voice license for an aggregate fee of US$2.05 million and renewed the license in 2014 for an additional period of five years, at no additional cost.
3G
In 2013, OTA was awarded a 15-year license to operate a 3G telecommunications network for an aggregate fee of approximately US$38 million, which was paid in full in 2013. Under the terms of its 3G license, OTA is required to pay an additional annual revenue sharing fee of 1% based on ADSL technology and dial-up services and wireless Internet access3G revenues less interconnection costs.
4G/LTE
In 2016, Optimum was awarded a 15-year license to operate a 4G/LTE telecommunications network for an aggregate fee of US$36 million (based on then-current exchange rates), which was paid in full in 2016. Under the terms of its 4G/LTE license, Optimum is required to pay an additional annual revenue sharing fee of 1% based on CDMA technology.4G/LTE revenues less interconnection costs.
Licenses—License fees
Under the terms of its 2G, 3G, 4G/LTE and VSAT licenses, OTA is required to pay revenue sharing allocations to the Algerian government and contributions for the universal service fund (3% of revenues less interconnection costs); management of the numbering plan (0.2% of revenues less interconnection costs); and research, training and standardization (0.3% of revenues less interconnection costs).
OTA's total license fees in Algeria were US$61.8 million, US$62.1 million and US$69.4 million for the years ended December 31, 2017, 2016 and 2015, respectively, of which US$28.1 million, US$25.9 million and US$25.7 million was related to spectrum charges, and US$33.7 million, US$36.2 million and US$43.7 million were related mainly to contributions made to the Universal Services of Telecommunications fund and to the number plan management over the same periods.
Mobile Telecommunications Licenses in Bangladesh
2G
In November 1996, BDCL was awarded a 15-year GSM license to establish, operate and maintain a digital mobile telephone network to provide 2G services throughout Bangladesh. The license was renewed in November 2011 for a further 15-year term.
3G
In September 19, 2013, following a competitive auction process, BDCL was awarded a 15-year license to use 5 MHz of technology neutral spectrum in 2100MHz band for 15 years and was also awarded a 3G license, for which it paid a total cost of BDT 8,677.4 million (inclusive of 5% VAT) (US$105 million as of December 31, 2017), including both a license acquisition fee and a spectrum assignment fee.
4G/LTE
On February 13, 2018, BDCL acquired a 4G/LTE license for US$1.2 million. BDCL also acquired the right to use 10.6MHz technology neutral of spectrum in 1800MHz (5.6) and 2100MHz (5) for US$324 million including VAT (33.34% of the fee has been considered as tariff value for 15% VAT).
Banglalink also converted 15MHz of existing 2G spectrum for the remaining tenure of it for US$ 36.75 million.
License fees
Under the terms of its 2G, 3G and 4G mobile licenses, BDCL is required to pay to the Bangladesh Telecommunication Regulatory Commission (i) an annual license fee of BDT 50.0 million (US$0.6 million as of December 31, 2017) for each mobile license; (ii) 5.5% of BDCL's annual audited gross revenue, as adjusted pursuant to the applicable guidelines; and (iii) 1% of its annual audited gross revenue (payable to Bangladesh's social obligation fund), as adjusted pursuant to the applicable guidelines. The annual license fees are payable in advance of each year, and the annual revenue sharing fees are each payable on a quarterly basis and reconciled at the end of each year.
BDCL's total license fees (annual license fees plus revenue sharing) in Bangladesh were equivalent to US$34.7 million, US$41.7 million and US$40.6 million for the years ended December 31, 2017, 2016 and 2015, respectively.
In addition to license fees, BDCL pays annual spectrum charges to the BTRC, calculated according to the size of BDCL's network, its frequencies, the number of its customers and its bandwidth. The annual spectrum charges are payable on a quarterly basis and reconciled at the end of each year. BDCL's annual spectrum charges were equivalent to US$9.0 million, US$9.8 million and US$9.9 million for the years ended December 31, 2017, 2016 and 2015, respectively.
Mobile Telecommunications Licenses in Ukraine
GSM
In Ukraine, Kyivstar holds GSM900 and GSM1800 cellular licenses to provide telecommunications services throughout the territory of Ukraine. These licenses were received on October 5, 2011 for a term of 15 years each and will expire on October 5, 2026.
3G
On February 25, 2015, after an auction process, Kyivstar was awarded one of three licenses to provide nationwide 3G services in the 2100 MHz band. The license was issued on April 1, 2015 and is valid for a period of 15 years (until April 1, 2030).
We have also obtained a range of national and regional radio frequency licenses for the use of radio frequency resources in the referred standards and in specified standards—radio-relay and WiMax.
Our network coverage is (except the Anti-Terrorist Operation zone where Kyivstar is not able to use and control its network): 91.46% of the 2G network; 18.7% of the 3G network; 9,864 localities covered by 2G network; and 25,484 localities covered by 3G network.
4G/LTE
Kyivstar secured 4G/LTE licenses and spectrum in two separate transactions in 2018. Following the auction held on January 31, 2018, Kyivstar acquired 15 MHz (paired) of contiguous frequency in the 2600 MHz band for UAH 0.9 billion (US$32 million as of December 31, 2017). In addition, on March 6, 2018, Kyivstar secured the following spectrum through auction in the 1800MHz band: 25MHz (paired) for UAH 1.325 billion (US$47 million as of December 31, 2017) and two lots of 5MHz (paired) for UAH 1.512 billion (US$54 million as of December 31, 2017).
Mobile Telecommunications Licenses in Uzbekistan
We hold a national license for GSM900/1800, 3G and 4G/LTE covering the entire territory of Uzbekistan. The most recent license was an extension granted in May 2016 for 15 years, is effective until August 7, 2031 and requires annual license fee payments.
Unitel LLC also has international communication services license valid until 2026 and for data transfer valid until 2019.
Mobile Telecommunications Licenses in Others
| Country | Licenses (as of December 31, 2017) | License Expiration | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
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| Kazakhstan | Mobile services (GSM900/1800, UMTS/WCDMA2100, 4G/LTE800/1800) | Unlimited term | ||||||||||
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| Kyrgyzstan | Radio spectrum of 800 MHz for the entire territory of Kyrgyzstan (technology neutral) 796-801MHz/837-842MHz | September 28, 2025 | ||||||||||
Radio spectrum of 800 MHz for the entire territory of Kyrgyzstan (technology neutral) 791-796MHz/832-837MHz | December 27, 2026 | |||||||||||
Radio spectrum of 900 MHz, 1800 MHz and 2100 MHz for the entire territory of Kyrgyzstan (technology neutral) | October 30, 2019 | |||||||||||
National license for electric communication service activity | Unlimited term | |||||||||||
National license for base station transmission | December 3, 2019 | |||||||||||
National license for services on data traffic | Unlimited term | |||||||||||
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| Armenia | Network operation for the entire territory of Armenia | March 3, 2028 | ||||||||||
National licenses to use radio spectrum of 900 MHz, 1800 MHz and 2100 MHz for the entire territory of Armenia (technology neutral) | March 3, 2023 | |||||||||||
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| Tajikistan | GSM900/1800 | May 12, 2019 | ||||||||||
3G | July 13, 2020 | |||||||||||
Data services (with permission to use of 800 MHz frequency for 4G/LTE services) for the entire territory of Tajikistan | December 9, 2020 | |||||||||||
International call services | August 11, 2021 | |||||||||||
| | | | | | | | | | | | | |
| Georgia | GSM1800 10 MHz frequency | February 1, 2030 | ||||||||||
GSM900 5.49 MHz frequency | February 1, 2030 | |||||||||||
LTE 800 10 MHz frequency | February 1, 2030 | |||||||||||
10 MHz 3G frequency | December 29, 2031 | |||||||||||
| | | | | | | | | | | | | |
| Laos | 2G, for the entire territory of Laos | January 23, 2022 | ||||||||||
3G, for the entire territory of Laos | January 23, 2022 | |||||||||||
WLL, for the entire territory of Laos | January 23, 2022 | |||||||||||
ISP | Annual renewal | |||||||||||
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Fixed-line Business Licenses in CISRussia
We have fixed-line, data and long distance licenses which are important to our fixed business in Uzbekistan, Armenia, Tajikistan and Kyrgyzystan in respect of Local Communications Services, International and National Telematic Services Data Transmission Services and Communications Services.Russia. These licenses will expire between August 4, 2015April 17, 2018 and March 26, 2023.
We have filed, or will file, applications for renewal for all of our licenses that expire in 2018, which include: local communications services in St. Petersburg (May 23, 2018) and Krasnodar (April 18, 2018); leased communications circuits services in Moscow (August 28, 2018), Ekaterinburg, Nizhny Novgorod, Novosibirsk, Rostov-on-Don (November 12, 2018) and Krasnodar (April 17, 2018; August 18, 2018; November 12, 2018); data transmission services in Ekaterinburg (July 05, 2018) and Krasnodar (April 17, 2018); voice communications services in data transmission networks in Ekaterinburg (July 05, 2018) and Krasnodar (April 18, 2018); and telematic services in Ekaterinburg (July 05, 2018).
In addition, we have an International and National Communications Services license for the entire Russian Federation which will expire on December 13, 2019.
Fixed-line Business Licenses in Pakistan
There are two main categories of licenses for provision of fixed line services in Pakistan. One type is Long Distance & International ("LDI") license and other is Local Loop ("LL") license. LDI License is meant for providing nationwide and international telecommunication services whereas LL license is for provision of services (fixed line and/or wireless local loop with limited mobility) within a telecom region for which license is awarded.
Fixed-line Business Licenses in Ukraine
We have international, long-distance and local communication licenses in place in Ukraine. Our international communication license expires on August 18, 2019; our long-distance communication license expires on August 18, 2019 and our local communication license expires on August 29, 2020. Each of the foregoing licenses are valid throughout Ukraine.
Fixed-line Business Licenses in Uzbekistan
We have a fixed-line license valid until 2021, a data license valid until 2021 and long distance licenses which are valid until 2029. These licenses require the payment of annual fees and cover services including local, long distance and international communications, data transmission and internet.
Fixed-line Business Licenses in Armenia
We operate a nationwide fixed-line network in Armenia on the basis of a general (fixed and mobile) network operation license, expiring on March 3, 2029.2028. We also have a license to use a 450MHz frequency band for the provision of fixed wireless voice telephony and broadband services in rural areas in Armenia, which expires on March 3, 2023.
Fixed-line Business Licenses in Kazakhstan
We have a long distance license which is important to our fixed business in Kazakhstan. This license has an unlimited term, no license fee and covers services including long distance and international connection, traffic termination and transit.
Description of Operations of the Italy Joint Venture
We do not control the Italy Joint Venture and therefore account for the Italy Joint Venture using the equity method and do not fully consolidate its results into our financial statements. We own a
50.0% share of the Italy Joint Venture with our joint venture partner, Hutchison. We include the following operational information for the Italy Joint Venture in this Annual Report on Form 20-F because we consider the Italy Joint Venture to be a significant part of our business. For more information, see "Explanatory Note—Presentation of Financial Information of the Italy Joint Venture" and notes 5, 14 and 25 to our audited consolidated financial statements for further information.
Mobile Business in Italy
The Italy Joint Venture markets its mobile, internet, fixed-line voice and data offerings by employing a multibrand strategy for the "WIND" and "3" brands in their respective consumer markets together with the "WIND TRE BUSINESS" brand dedicated to the business segment. The Italy Joint Venture provides a variety of mobile data services and VAS for telephone and computer to its consumer and corporate customers.
WIND customers can choose between tied and untied portfolios. The tied offers are both prepaid and postpaid offers that bind customers for a specified period and include penalties if the customer leaves during the agreed period. The untied offers are only prepaid and do not bind customers for a specified period but allow them to use prepaid credit they have on their SIM card. "3" customers can choose between tied and untied prepaid portfolios and tied postpaid. For "3", the tied and untied offer portfolios include certain all-inclusive packages that include a smartphone purchase and certain other packages.
The Italy Joint Venture offers a variety of content and infotainment services. For example, the Italy Joint Venture has renewed its partnerships with Google and Microsoft for carrier billing (purchase of apps, games, music and other digital contents paying with phone credit) delivering several co-marketing initiatives with Google to encourage usage. In 2017, the Italy Joint Venture signed a partnership with Apple allowing payments via phone credit on iTunes, App Store, iBooks and Apple Music for both WIND and "3" customers. In 2017, "3" signed a partnership with Netflix, enabling "3" postpaid customers to have access to Netflix's on-demand entertainment streaming service, which is offered for free for the first three months on internet plans such as "3Cube".
Competition—Mobile bundles
The Italy Joint Venture offers bundle options, suited for both prepaid and postpaid customers, which include minutes of voice traffic, SMS, and mobile internet browsing for a fixed fee. Specific bundles targeting younger and senior consumers are available. WIND provides data-friendly users with the opportunity to manage their own account via digital channels such as the web, mobile apps and social networks. In order to integrate the offer, WIND provides a selection of smartphones, tablets and new technological and interactive devices that can be purchased through installment payments and taking advantage of discounts.
VEON platform
In November 2016, WIND released the VEON platform on both the Android and IOS digital stores. In July 2017, the Italy Joint Venture launched VEON 2.0, which introduces new functionalities, such as the channels functionality, whereby users can follow certain brands and receive news, promotions and offers. The app is available to everyone, but WIND's customers have additional advantages in terms of free data traffic and other rewards.
Distribution
For corporate customers in Italy, the Italy Joint Venture uses different marketing strategies depending on the nature and size of a customer's business. For large corporate customers and SMEs, the Italy Joint Venture's marketing efforts are more customized and institutional in nature, and include
one-on-one meetings and presentations, local presentations and presentations at exhibitions. For the SOHO market, the Italy Joint Venture advertises in the professional and general press and uses airport billboards. The Italy Joint Venture sells consumer mobile products and services, including SIM cards, scratch cards and handsets through a series of exclusive outlets, which as of December 31, 2017 consisted of 1,635 total sales points (689 WIND brand sales points and 946 "3" brand sales points). The non-exclusive Italy Joint Venture sales network consists of 3,715 multi-brand dealers spread throughout the country. The Italy Joint Venture also sells a portion of its consumer services online through its websites.
Competition
The mobile telecommunications market in Italy in which the Italy Joint Venture operates is characterized by high levels of competition among service providers. Competition intensified during 2017 and the Italy Joint Venture expects this market to remain competitive in the near term, and competition may be exacerbated by further consolidation and globalization of the telecommunications industry. Additionally, in the first half of 2018, the French operator Iliad is expected to launch in the Italian market as a new mobile operator as a beneficiary of the remedy package agreed with the European Commission for the completion of the Italy Joint Venture.
The following table shows the Italy Joint Venture's and its principal competitors' respective mobile customer numbers in Italy as of December 31, 2017:
Operator | Customers (in millions) | |||
|---|---|---|---|---|
Telecom Italia | 30.8 | |||
Italy Joint Venture | 29.5 | |||
Vodafone Italy | 22.4 | |||
Source: Telecom Italia, Italy Joint Venture and Vodafone Italy
According to Analysys Mason, the network operators in Italy offered mobile telecommunications services to approximately 72.9 million registered customers as of December 31, 2017, representing a mobile penetration rate of approximately 122.0% of the Italian population compared to 81.7 million customers and a mobile penetration rate of approximately 136.6% in 2016.
Licenses
GSM1800 and GSM900
The Italy Joint Venture has a license to provide mobile telephone services in Italy using digital GSM1800 and GSM900 technology. This license is due to expire on June 30, 2018. In the Italian Budget Law 2017, the Italian government sets out the conditions and formal procedure to be followed by operators holding GSM spectrum rights of use wishing to extend such rights until December 31, 2029 and also obtain freedom to use such spectrum under a technology neutrality regime. The Italy Joint Venture is awaiting the related interministerial decree that concludes the procedure referred to in the aforementioned law.
3G
Both WIND and "3" acquired 3G licenses in 2001, which were initially expected to expire in 2021, but were extended to December 2029. In light of the authorization received from the Italian Ministry of Economic Development ("MISE") regarding the transfer of spectrum rights of use (7 blocks of 2x5MHz in 900, 1800, 2100 and 2600MHz bands) from WIND and "3" to the French operator, Iliad, the Italy Joint Venture will have to submit a request for the extension to the MISE for the 2100MHz
spectrum rights of use from December 2021 to December 2029. The extension to December 2029 is subject to compliance with the provisions of the Ministry of Economic Development issued in October 2016 and the payment of contributions, payable for the years 2022 to 2029.
4G/LTE
WIND and "3" have licenses for 4G/LTE spectrum rights of use in 800, 1800 and 2600 MHz bands. Such spectrum rights are due to expire in December 2029. The following is a list of mobile access spectrum blocks, on a band-by-band basis, which will be held by the Italy Joint Venture once the spectrum release to Iliad is completed: 800 Band—2 blocks of 2x5 MHz; 900 Band—2 blocks of 2x5 MHz; 1800 Band—4 blocks of 2x5 MHz; 2000 TDD Band 5+5 MHz; 2100 Band—4 blocks of 2x5 MHz; 2600 Band—4 blocks of 2x5 MHz; and 2600 TDD Band 15+15 MHz. All the frequency blocks indicated and held by Wind Tre S.p.A. will be contiguous in the respective bands according to the provision of the Ministry of January 9, 2018 which provides for the reallocation in 1800 MHz and 2100 MHz spectrum.
5G
On September 22, 2017, MISE formalised the award to Wind Tre S.p.A. and Open Fiber S. p. A. of a provisional authorization, for a four-year duration, to carry out the 5G pre-commercial trials in the spectrum portion 3.6 - 3.8 GHz in area 2—Prato and L'Aquila.
Equipment and operations
The Italy Joint Venture has a tower services agreement with Galata (a subsidiary of Cellnex) for an initial term of 15 years for the provision of a broad range of services on the sites. On July 4, 2017, the Italy Joint Venture sold all of its shares in Galata, which had comprised 10% of the shares of Galata, following the sale in March 2015 of 90% of its shares in Galata. As of December 31, 2017, the Italy Joint Venture owned 287 radio centers (for all of which it owns the towers and equipment rooms, and for approximately 12 out of 287 it also owns the land where the radio centers are located), 586 towers, approximately 5,400 towers on rented locations, excluding roof top sites, on which antennas for radio coverage are installed (considering also the effect of the Galata towers transaction), and approximately 1,000 other minor towers.
Fixed-line Business in the CISItaly
Business Operations
Kazakhstan.We operate an Internet service provider in Kazakhstan, where we compete primarily with state-owned provider Kazakhtelecom, KazTransCom, owned by TeliaSonera, TransTelecom, owned by In Italy, the Kazakhstan Temir Zholy (a railway company), Astel (a leader in the provision of satellite services) and several other small operators in the regions.
Uzbekistan. We operate large independent fixed-line services in Uzbekistan, where we offerItaly Joint Venture offers a full spectrum of integrated telecommunication services. In Uzbekistan, we compete with the state-owned provider, Uztelecom, East Telecom, Sarkor Telecom, Sharq Telecom and EVO. There is a high level of competition in the capital city of Tashkent. The fixed-line Internet market in the regions remains undeveloped.
Armenia. We are the largest fixed-line services operator in Armenia, where we offer a broad spectrumwide range of fixed-line voice and internet broadband services. The Italy Joint Venture offers these services to government,both consumer and corporate customers under the Infostrada brand (our fixed-line voice, broadband and private customers across Armenia. There are more than 14 active operatorsdata services brand in Armenia.Italy). The largest operators are U!Com, “Armenian Datacom Company” CJSC, GNC-Alfa and CrossNet.
Marketing and Distribution—Fixed-line Business in CIS
Kazakhstan. We are focusing our development in Kazakhstan onItaly Joint Venture's fixed-line voice customer base in Italy consisted of approximately 2.7 million customers as of December 31, 2017.
The Italy Joint Venture offers both DSL and revenue growth,Fiber through bundled offerings. For LLU customers only, the Italy Joint Venture continues to offer the ADSL Vera concept that allows a variable maximum download speed up to 20 Mbps. Both WIND and "3" launched two different offers in September 2017 in order to reinforce convergent positioning and address different target customers. For SME customers, the Italy Joint Venture offers a new fixed portfolio "Office", which we aim to promote by expanding our transport infrastructure, strengthening our positionoffers mono and multi-lines, in ADSL, FTTC and FTTH. "Smart Office" offers a virtual IP PBX solution.
Throughout Italy, the market, developing our sales effortsItaly Joint Venture provides PSTN, ISDN and VoIP fixed-line voice services, data services.
Uzbekistan.In Uzbekistan, our strategy includes maintaining our current market position by retaining our large corporate clients customer base.
Armenia.In Armenia, our strategy includes focusing on customer retentionservices, VAS and ARPU growth by developing newconnectivity services including Internet access through a fiber optic network with a guaranteed speed to corporate customers, including large corporate customers, SMEs and government organizations.SOHOs. The Italy Joint Venture also offers large corporate customers national toll free and shared toll. The Italy Joint Venture's offerings are tailored for SOHO customers and
include tariff plans with unlimited internet access, voice calls on VoIP technology and a combined service for renting, running, and maintaining telephone switchboards.
Distribution
The distribution strategy is based on the concept of omnichannel (shops, web or telephone), following the needs of the customer who independently chooses the most appropriate sales channel. In terms of performance, the most important sales channel is retail (mono-brand and multi-brand stores) which, through integrated and converging offers, continue to grow in productivity. The Italy Joint Venture utilize sales agencies, call centers and a direct sales force to target sales of fixed-line voice and internet services to corporate customers.
Competition
In the Italian fixed-line voice market, the incumbent operator, Telecom Italia, maintains a dominant market position. Swisscom and Vodafone have entered the fixed-line internet, voice and data markets by buying Fastweb S.p.A. and Tele2 (successively rebranded TeleTu), respectively. We expect that the fixed-line telecommunications market will remain competitive as a result of the presence of international competitors, with the introduction and growth of new technologies, products and services.
Licenses
Fixed-line services are provided pursuant to several 20-year licenses obtained from the Italian Ministry of Economic Development in 1998. Such licenses would have expired in 2018, but in December 2017, the Italy Joint Venture applied for the renewal of such licenses, and in January 2018 was granted a renewal until 2038.
Equipment and operations
The Italy Joint Venture has an integrated network infrastructure providing high capacity transmission capabilities and extensive coverage throughout Italy. The Italy Joint Venture mobile and fixed-line networks are supported by over 35,926 kilometers of fiber optic cable backbone in Italy and 6,786 kilometers of fiber optic cable MANs, as of December 31, 2017. As of December 31, 2017, the Italy Joint Venture had 1,958 LLU sites for direct customer connections (approximately 70% of the population is covered).
The Italy Joint Venture offers voice and broadband internet services to direct customers by renting from Telecom Italia the "last mile" of the access network. In the areas where the Italy Joint Venture does not have direct access to the network via LLU, customers can request wholesale services though the Italy Joint Venture. The Italy Joint Venture offers broadband mainly to direct customers, so long as the line is ADSL or ADSL 2+ capable. In April 2016, WIND signed a strategic and commercial partnership with Open Fiber ("OF") (formerly Enel Open Fiber) with the aim of re-enforcing its ability to offer ultra-broadband services in the fixed-line market. The Italy Joint Venture, during 2017, extended the original agreement, which was already active in 13 cities, to additional 258 Italian cities (for a total of 271). As of December 31, 2017, OF reached approximately 2.4 million of homes in Italy.
Regulatory
For a description of the regulation ofcertain laws and government regulations to which our main telecommunications businesses are subject, see "Exhibit 99.2—Regulation of Telecommunications."
Litigation Developments
For a discussion of developments regarding legal or arbitration proceedings which may have, or have had in the recent past, significant effects on our financial position or profitability, see Notes 22 (Provisions) and 26 (Risks, commitments, contingencies and uncertainties) to our audited consolidated financial statements included elsewhere in this Annual Report on Form 20-F.
Seasonality
Our mobile telecommunications business is subject to certain seasonal effects. Generally, revenue from our contract and prepaid tariff plans tends to increase during the December holiday season, and then decrease in January and February. Mobile revenue is also higher in the summer months, when roaming revenue increases significantly as customers tend to travel more during these months. Guest roaming revenue on our networks also increasestends to increase in thisthe summer period.
Our fixed-line telecommunications business is also subject to certain seasonal effects. Among the influencing factors areis the number of working days during periods andin a given period, as well as periods of vacations. Generally, our revenue from our fixed-line telecommunications business is lower when there are fewer working days in thea period or a greater number of customers are on vacation, such as during the December holiday season and in the summer months.
EquipmentProperty, Plants and OperationsEquipment
Information Technology
We devote considerable resources to the development and improvement of our IT systems. As part of our continuous IT innovation process, we engage with third parties in order to develop and implement IT technologies across our infrastructure. In June 2016, we entered into a large-scale global software partnership with Ericsson. Under this partnership, Ericsson will develop, implement, and operate, over a seven-year period, new business support systems for the majority of our operating companies. Business support systems make up the core of our IT infrastructure and include billing, charging, care and provisioning systems.
We have also implemented a threat and risk-based cyber security strategy, which we believe enables us to identify potential threats that may impact our business and, consequently, may aid us in the implementation of the requisite security measures to address such threats.
Intellectual Property
We rely on a combination of trademarks, service marks and domain name registrations, copyright protection and contractual restrictions to establish and protect our technologies, brand name, logos, marketing designs and internet domain names. We have registered and applied to register certain trademarks and service marks in connection with our telecommunications and digital businesses in accordance with the laws of our operating companies. Our registered trademarks and service marks include our brand name, logos and certain advertising features. Our copyrights are principally in the area of computer software for service applications developed in connection with our mobile and fixed-line network platform, our VEON platform and for the language and designs we use in marketing and advertising our communication services. For a discussion of the risks associated with new technology, see "Item 3—Key Information—D. Risk Factors—Risks Related to the Industry—Our intellectual property rights are costly and difficult to protect, and we cannot guarantee that the steps we have taken to protect our intellectual property rights will be adequate" and "Item 3—Key Information—D. Risk Factors—Legal and Regulatory Risks—New intellectual property laws or regulations may require us to invest substantial resources in compliance or may be unclear."
Buildings
The primary elements of our material tangible fixed assets are our networks, as discussed in "—Mobile Telecommunications Equipment and Operations" and"—Fixed-line Telecommunications Equipment and Operations."
The buildings housing our head offices in Amsterdam and London are leased. Our global headquarters activities are hosted in Amsterdam. Our London office covers strategic, commercial and digital activities.
In Russia, we own a number of buildings in Moscow, including 26,517 square meters at 10, Ulitsa 8 Marta, 14,984 square meters on Lesnoryadsky Pereulok, a leased administrative building at 4, Krasnoproletarskaya Street and a portion of a building on Ulitsa 1st Tverskaya Yamskaya. We use these buildings for a variety of functions, including administrative officers, technical centers, warehouses, operating facilities, main switches for our networks and IT centers. We also own office buildings in some of our regional license areas and lease space on an as-needed basis.
In Pakistan, our subsidiary PMCL owns a number of properties consisting of over 28,000 square meters in Karachi, Lahore, Faisalabad and Islamabad. These properties are used for PMCL's operations and include data centers, office buildings and switching stations. PMCL also owns bare land of 104,517 square meters and leases properties across Pakistan, AJK and Gilgit-Baltistan, including its headquarters and BTS sites. In addition, Warid owns a number of properties totaling 21,686 square meters that are mostly used for master switching centers, technical installations and data centers.
In Ukraine, our subsidiary, "Kyivstar" JSC, owns a series of buildings consisting of 34,067 square meters at Degtyarivska, 53 in Kyiv. We use these buildings for offices, call centers, switching centers and a print center. In addition, we own a number of buildings throughout Ukraine consisting of over 62,258 square meters that we use as office space, switching centers, call centers, sales centers, data centers and storage units.
In Uzbekistan, we own 13 buildings consisting of approximately 27,052 square meters, which are used as administrative offices, technical centers and switching centers. In addition, we lease properties across Uzbekistan that we use for offices, sales centers, warehouses, archive centers, switching centers and parking.
Telecommunications Equipment and Operations
Mobile Telecommunications Network Infrastructurenetwork infrastructure
GSM, 3G and 4G/LTE and LTE Advanced technologies are based on “openopen 3GPP standards,” which means that standard compliant equipment and software from any supplier can be added to expand the initial network. Our GSM/GPRS/EDGE/UMTS/3G/HSPA/4G/LTE/LTE-ALTE Advanced networks, which use mainly Ericsson, Huawei, Alcatel-Lucent,ZTE, Nokia, Cisco Systems, and ZTE equipment, are integrated wireless networks of radio base station equipment, circuit and packet core equipment and digital wireless switches connected by fixed microwave transmission links, fiber optic cable links and leased lines. We manage all major suppliers centrally to achievebenefit from the benefits ofgroup's purchasing scale ofand monitor the Group and ensure that we receive on an ongoing basis the best commercial terms possible.across the group. We make supplier selection decisionsselect suppliers based mainly on compliance with technical and functional requirements and total cost of ownership, seeking to optimize network operations and provide the best value and experience to our customers.cost.
Site Procurement and Maintenance
We enter into agreements for the location of base stations in the form of either leases or cooperation agreements that provide us with the use of certain spaces for our base stations and equipment. Under these leases or cooperation agreements, we typically have the right to use premises located in attics or on top floors of buildings for base stations, space on roofs of buildings for radio units and antennas or space on greenfield landsuch property to place our towers and equipment shelters.
New Technology
We continue to move toward a high-speed broadband connection environment deploying new technologies in fixed-line and mobile networks. We are also introducingparty to certain network managed services agreements to maintain our networks and infrastructure. For example, in 2017, in Russia we entered into agreements with Huawei Technologies Co. Ltd. and Nokia Solutions and Networks LLC,
covering managed services across Russia for optimized network planning, consolidation of outsourced managed services, network building, operations, support and maintenance.
We also enter into agreements with other operators for radio network sharing, where we either share the passive equipment, physical site and towers or combine the operation of the radio equipment with other operators. Network sharing brings not only substantial savings on site rentals and maintenance costs but also on investments in equipment for the rollout of new network technologies aiming to improve customer experience, optimize network usage and increase investment efficiency, such as step-by-step migration to new Radio Access technologies and next generation architecture.base stations. In certain countriesRussia, we have implemented key technologiesagreements with MTS and MegaFon in different regions and for different technology combinations, respectively. In Kazakhstan, we have a network sharing agreement with Kcell Joint Stock Company pursuant to improve voice quality, such as tandem free operation (“TFO”), transcorder free operation (“TrFO”), Adaptive Multi-Rate (“AMR”), HD Voice codecs and Voice over which the two operators will undertake joint planning of a combined 4G/LTE (“VoLTE”). TFO and TrFO are technologies that remove voice transcoding operations during the call so the voice quality can be improved and resources in media gateways can be saved. AMR is the technology to dynamically adapt the coding rate to the radio conditionsnetwork in order to delivergenerate greater cost efficiencies and a significantly accelerated roll-out of 4G/LTE across the optimum voice quality. HD Voice is a set of high definition codecs that provide high-definition voice quality during the call. VoLTE is the technology to enable Voice calls over LTE network with higher voice quality and lower call setup times. These technologies are being implementedcountry.
Fixed-lined infrastructure
Our infrastructure in commercial networks in Group operational companies after testing to ensure the qualityeach of the network.countries in which we provide fixed-line services supports our mobile businesses as well as our fixed-line businesses.
In the areaRussia, our fixed infrastructure consists of data services we have successfully launched Data Traffic Management systems that provide the unique possibility to increase customer perception of mobile broadband services and at the same time more efficiently utilize network resources. We are continuing to extend the functionality of DTM infrastructure to further stretch the possibilities of data services monetization and improve the customer experience, including with Mobile Toolbar and Fair Usage Policy for data services.
We are investing in radio access technologies that will ensure a high level of quality of two primary parts—our broadband services in the future, such as 3G/HSPA+, 4G/LTE, at the same time using the possibilities to optimize investments by rolling out Single-RAN network. We have acquired new spectrum in several operating companies
to boost our networks capacity and enable the launch of new Radio Access Networks Technologies enhancing the network capacity and spectral efficiency, recently including 3G on 2100MHz in Algeria, 3G on 2100MHz in Pakistan and LTE on 800MHz in Georgia.
We have successfully conducted several laboratory tests and pilots of technologies that improve the customer experience and network efficiency. We commercially launched the 4G/LTE Carrier Aggregation in Moscow (providing top speeds exceeding 100 Mbps on the 4G/LTE network), and completed a successful lab testing of the VoLTE service, while continuing the SON (Self Optimized Network) pilot in Russia and Uzbekistan, which yielded highly positive results.
In order to comply with Russian MNP regulations, we have launched MNP process in December 2013.
In order to comply with the requirements of the 4G/LTE licenses that OJSC VimpelCom was awarded in Russia in July 2012, OJSC VimpelCom has launched 4G/LTE services in 46 regions in the Russian Federation in 2014. OJSC VimpelCom is currently expanding and improving its access and transport network in other regions of Russia to comply with further requirements, as further described in “—Description of Operations of the Russia Segment—Mobile Business in Russia—Mobile Telecommunications Licenses in Russia—4G/LTE License”. We also have launched 4G/LTE services in Uzbekistan and three pilot 4G/LTE networks in CIS countries. In Georgia, we successfully launched commercial 4 G/LTE on February 1, 2015.
In Italy, WIND is continuing to invest in research initiatives for new technologies and broadband services in both the fixed-line and mobile sectors, with a particular focus on “green” aspects and the opportunity coming from the “Big Data” approach. As confirmation of WIND’s commitment to technology and service innovation, the Financed Projects team—established in 2008 and based in Ivrea—is devoted to monitoring, studying and testing technological and business trends from a medium/long term perspective, in cooperation with internal business and technology functions, to follow the innovation opportunities aligned with WIND’s strategy. The team developed relationships with leading national and international universities and research institutions,co-sponsoring new ideas and participating in EU development initiatives. In 2014, the team was involved in research projects on: (i) “Big Data” approach to extract information from mobile network traffic in order to identify patterns and to develop predictive models for traffic planning, touristic flows forecast and development of new applications related to sustainable mobility; (ii) solutions for security and privacy management for data; and (iii) environmentally friendly ICT solutions (“green ICT”), with a specific focus on green data centers.
As of December 31, 2014, WIND’s LTEfixed core network infrastructure consisted of four MME Mobility Management Entities, two HSS Home Subscriber Servers, four PDN GW PDN Gateways, and four S GW Serving Gateway sites in 4G/LTE technology to further enhance its indoor data service coverage and to allow WIND to offer superior data download and upload speeds based on 4G/LTE.
To support rapidly growing data traffic, we have installed dense wavelength division multiplexing, or “DWDM”, equipment on our backbone in several operating companies. We are also implementing an expansion of our IP backbone network to support movement to an all-IP network architecture.
For a discussion of the risks associated with new technology, please see the section of this Annual Report on Form 20-F entitled “Item 3—Key Information—D. Risk Factors—Risks Related to Our Industry—Our failure to keep pace with technological changes and evolving industry standards could harm our competitive position and, in turn, materially harm our business.”
Fixed-line Telecommunications Equipment and Operations
Fixed-line Telecommunications Network Infrastructure
Russia
network. Our transport network carriesis designed and is continually developed to carry voice, data and Internetinternet traffic of mobile network, FTTB and our fixed-line customers. The backbonecustomers, of our transport network is an optical cable network. The Big European Ring (mainwhich the main technologies are fiber ring)optics and a few rings in Central, Ural, Siberian, South and North Caucus regions connect the major cities in the Western part of Russia and the Eastern part up to and including Siberia. We also lease capacity from Rostelecom and Transtelcom to reach the Far-Eastern part of Russia. The two chords links provide additional protection and capacity for the Big European Ring. The total length of our Intercity optical cable network reaches 43,526 kilometers. We use satellite technology to connect remote Russian sites where on-land communications are not available. There are protected optical lines connecting Moscow and St. Petersburg, and which pass to Stockholm, London and Frankfurt. Two independent optical lines connect our optical networks in Russia and Ukraine. Three cross-boundary lines to Kazakhstan provide reliable connections to Kazakh, Uzbek and other Asian telecommunication operators.
We have built the interregional (also called “zone”) transport networks that connect our sites in small towns and the countryside. The total length of localmicrowave links. Our fiber cables is 43,662 kilometers and the total length of our zonal fiber cables is 46,840 kilometers. These networks are constructed in more than 220 cities, which provide our customers with IP VPN services, voice services and access to Internet.
Our fixed-line voice network has the following three levels: local, regional and federal. The local voice networks, constructed in 180 cities, provide customers with fixed-line voice services. Our local network in Moscow is integrated into the telephone network and connected to 142 transit and local nodes of urban telephone network (“UTN”). We have completed construction of zone networks in 52 Russian regions, which helps us to minimize payments to incumbent local operators for voice transit. Our federal transitoptics network consists of eight international transit exchanges, 14 intercity communications transit exchanges installed in eachlines, domestic main lines, zonal and local. All of the federal districtsnetworks are connected and share resources where required. Our primary vendors of Russia,active optical equipment are Cisco, Juniper, Huawei, Ciena and connection points (access nodes) located in each region of Russia. TheECI. Microwave technology is mainly used to provide access to the final destination (base station or client). We use modern, high capacity (150+ Mbps) microwaves from leading telecommunications vendors such as Ericsson, Huawei, Nec and Aviat. We use a three tiered architecture for our fixed core network provides mobile(voice) to ensure correct and fixed-line customers with long-distance voice servicesefficient traffic management and minimizes our costs of traffic.
FTTB
Our company isanswer business demands: local, zonal and federal. We are also rolling out FTTB networks in Russia, Ukraine and the CIS. Technically, FTTB offers higher transmission speed, more bandwidth and better security compared to all existing xDSL and otherquasi-broadband solutions.networks. In Russia, where the local loop has not been unbundled and the quality of copper lines is generally poor, construction of fiber networks helps to create alternative high quality access to customers’ apartments.
customers' residences. As of December 31, 2014,2017, we had approximately 2.26more than 2.2 million customers connected to our FTTB network in Russia. The network operatesRussia, operating in 139144 cities across Russia (130) and the CIS (9). We have the largest FTTB network in Moscow and the core broadband market in Russia.
Italy
In Italy, we have an integrated network infrastructure providing high capacity transmission capabilities and extensive coverage throughout Italy. Our mobile and fixed-line networks are supported by over 21,744 kilometers of fiber optic cable backbone in Italy and 4,995 kilometers of fiber optic cable MANs as of December 31, 2014. Our network in Italy uses a common system platform, which is referred to as the “intelligent network,” for bothUkraine, our mobile and fixed-line networks.
As of December 31, 2014 we had 1,458 LLU sites for direct customer connections (around 62% of the population is covered), and had interconnections with the incumbent operator in order to offer voice and data services to the rest of the population.
IP Network, based on MPLS hierarchical backbone and connected to main national and international operators, is developed in all of Italy and it is able to offer fixed and mobile broadband services to consumer and corporate customers.
WIND Internet network access is implemented by an all-IP network, with over 50 POPs, for direct (xDSL) and indirect Internet access services, as well as VPN (xDSL, Fiber Optics). The IP nodes access network consists of 53 BRAS for consumer services and 64 Edge Routers for Business application, located in POPs to ensure optimal coverage of the national territory.
WIND has signed a commercial agreement with Metroweb to enable WIND to provide customers in Milan with access to fiber through fiber to the home technology. Beginning in 2013, WIND began to offer high speed services in fiber to the home technology under this contract in Milan, where it marketed offers in fiber optic technology which allows the end user to reach download speeds of up to 100 Mbps and upload speeds of up to 10 Mbps.
Ukraine
Our transport network is designed to provide a full spectrumrange of telecommunicationtelecommunications services for corporate and enterprise customers, including: Private Leasing Channel,including private leasing channel, voice, IP voice, L2VPN, IP VPN, and Internetinternet access.
Our transport network is based on our optical cable network utilizing DWDM, SDH and IP/MPLS equipment. The DWDM and SDH networks connect all the main regional and mid-sized cities of Ukraine. All our DWDM and SDH optical networks are fully ring-protected (except for secondary towns) and can be self-healing which is necessary to ensure uptime of the transmission network.self-healing. Our core IP/MPLS network is fully mesh-protected meaning that the recovery mechanisms which provide different levels of protection or restoration against different failure modes are available for network uptime. Itand connects all the main regional cities of Ukraine. TheAs of December 31, 2017, the total length of our fiber optic cables is 19,717 kilometers.
Our interregional44,415 kilometers, including 20,301 kilometers between cities, 15,194 kilometers inside cities, and metro transport networks are based on our optical cable and microwave systems utilizing SDH, PDH, Ethernet and IP/MPLS technologies. We have deployed metro SDH and IP/MPLS optical networks in more than 138 cities of Ukraine. The total length of fiber cables constructed within the cities is 24,917 kilometers.
Our IP/MPLS data network carries mobile network and FTTB IP traffic, allowing us to provide L2VPN, IP VPN and Internet services. We have interconnections with major European and Russian ISPs in a number of cities.
We also have the separate fixed-line network of Golden Telecom Ukraine (“GTU”).
In the future we plan to merge Kyivstar’s and GTU’s fixed-line networks for local, long-distance and international transit voice services.
Kazakhstan
Our subsidiaries TNS-Plus LLP and 2Day Telecom LLP provide a wide spectrum of fixed-line telecommunications services, including Internet access, ADSL, FTTB, WiFi, WiMax, VoIP, VPN and VSAT. TNS-Plus owns more than 11,9708,920 kilometers of fiber optic main lines across Kazakhstan,local FOL for FTTB, which are based on Ericsson SDHis connected to the local PSTN in Kyiv, to other major metropolitan areas in Ukraine, and Huawei SDH/DWDM equipment. As of December 31, 2014, we had approximately 200,656 customers connected via FTTB technology in Kazakhstan.to our gateway.
In Uzbekistan,
Our subsidiary Buzton’s our joint venture's (Buzton) network provides international telephony and Internetinternet access through JSC Uzbektelecom. Buzton’sBuzton's network consists of 117107 nodes situated throughout Uzbekistan. The main technologies
We have our own basic fiber optic digital network in the cities of our access networks are ADSL 15,176Tashkent, Zarafshan, Samarqand, Bukhara, Navoiy and Uchkuduk, covering more than 426 kilometers with connection to 30,476 FTTB ports, and FTTB 30,720 ports.copper cables, providing services through 14,920 ADSL ports, that allow users to connect and to access services in nearly all regions of Uzbekistan. Our main line in Tashkent is based on fiber optic equipment. The network also includes long-leased channels and local fiber optic networks in Tashkent, Zarafshan and Uchkuduk.
ArmeniaTable of Contents
ArmenTel’s In Armenia, our fixed-line infrastructure covers all districts of Armenia with a full set of equipment, (internationalincluding international gateway, digital-analog exchanges, Internetremote access telephone nodes, MSANs, internet protocol digital customer line access multiplexers, (“DSLAMs”),fiber and copper wire access network,networks, fiber optic backbone network and data network). Itsaccess network. Our network consists of 223,520210,000 ADSL ports, 10,656 VDSL ports, 2,033 buildings provided with FTTB fiber access and 169167 Central Offices (telephone exchanges, MSANs, remote nodes), of which 130141 are digital. Our companyVEON Armenia also provides interconnection with international operators and national mobile and fixed-line operators in Armenia. ArmenTel’sVEON Armenia's CDMA Wireless Local Loop network is used to provide fixed-line telephone services to rural customers.
Intellectual Property
We relycustomers but it will be replaced by a 4G/LTE solution on a combination450 MHz spectrum.
In Kazakhstan, our subsidiaries TNS-Plus LLP and KaR-Tell LLP provide a wide range of trademarks, service marksfixed-line telecommunications services, including internet access, ADSL, FTTB, Wi-Fi, WiMax, VoIP, VPN and domain name registrations, copyright protection and contractual restrictions to establish and protect our technologies, brand name, logos, marketing designs and Internet domain names. We have registered and applied to register certain trademarks and service marks in connection with our mobile telecommunications businesses. We have also registered and applied to register certain trademarks and service marks with the World Intellectual Property Organization in order to protect them.
Our registered trademarks and service marks include our brand name, logos and certain advertising features. Our copyrightsVSAT. TNS-Plus owns more than 13,671 kilometers of fiber optic main lines across Kazakhstan, which are principally in the area of computer software for service applications developed in connection with our mobile and fixed-line network platform. We have copyrights to some of the designs we use in marketing and advertising our mobile services.
Properties
In Russia we own a series of five buildings consisting of approximately 26,000 square meters at 10, Ulitsa 8 Marta in Moscow. We use these buildings as an administrative office, technical center, warehouse and operating facility. In addition, we own a series of five buildingsbased on Lesnoryadsky Pereulok in Moscow, constituting approximately 15,360 square meters, that are used as an administrative office, warehouse and operating facility. These buildings also house the main switches for our Moscow 3G/GSM network and our main and reserve IT centers. We have other offices at 4, Krasnoproletarskaya Street, in the center of Moscow. These consist of three leased administrative buildings of approximately 32,400 square meters. We own a portion of a building in the center of Moscow on Ulitsa 1st Tverskaya Yamskaya consisting of approximately 3,000 square meters that we use as a customer service center, administrative and sales office. We also own office buildings in some of our regional license areas and lease space on an as-needed basis.
In Italy, asHuawei SDH/DWDM equipment. As of December 31, 2014,2017, we owned certain sites where somehad approximately 660,854 customers connected via FTTB technology across 29 cities in Kazakhstan.
Corporate Social Responsibility
We have a long-term corporate responsibility strategy, consisting of two main elements: maintaining the trust of our telecommunications network equipment is located, including 287 radio centers (for all ofstakeholders by behaving in a responsible and sustainable way, which represents our "license to operate" initiatives; and creating shared value in our communities through our products and services, which represents our "license to grow" initiatives. We are committed to investing in the markets in which we ownoperate and continue to seek opportunities to leverage our technology, commercial expertise, and the towerscommitment of our employees for the betterment of our communities.
Our approach to the identification, management and rooms for equipment,evaluation of corporate responsibility is guided by three main factors:
In Ukraine,plan how best to improve our subsidiary Kyivstar owns a series of buildings consisting of 34,068 square meters at Degtyarivska, 53 in Kyiv.business. We use these buildings as offices, print-centers, call centers and switching centers. In addition, we ownfollow a number of buildings throughout Ukraine consistingmulti-stakeholder defined standards and guidelines. Our reporting meets Global Reporting Initiative standards at the "core" level, follows the guidance in the AA1000 Accountability Principles Standard and is influenced by the guidance issued by the International Integrated Reporting Council. Several of over 90,000 square meters thatour markets have adopted International Organization for Standardization standards, and the social accountability standard;
Our corporate responsibility program is overseen by our corporate responsibility team, which reports to our Group Chief Corporate & Public Affairs Officer who, in turn, reports to the Chief Executive Officer. The team has access to the top operational committee for issue-by-issue decisions.
In Pakistan, We are accountable to our subsidiary PMCL owns a numberstakeholders and customers through the publication of properties consistingour annual Corporate Responsibility report, which is published each year. We also share periodic updates with internal stakeholders, including members of over 28,000 square meters, in Karachi, Lahore and Islamabad. The properties are all associated with its operations and include call centers, data centers, office buildings and switching stations.
For a description of certain telecommunications equipment that we own, please see “—Equipment and Operations—Mobile Telecommunications Equipment and Operations—Mobile Telecommunications Network Infrastructure” and “—Equipment and Operations—Fixed-line Telecommunications Equipment and Operations—Fixed-line Telecommunications Network Infrastructure” above.management, to inform them about key corporate responsibility related developments.
Disclosure of Activities under Section 13(r) of the Securities Exchange Act of 1934
Under Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012, which added Section 13(r) to the Securities Exchange Act, of 1934, as amended, or the “Exchange Act,” we are required to disclose whether we or any of our affiliates are knowingly engaged in certain activities, transactions or dealings relating to Iran or certain designated individuals or entities. Disclosure is required even when the activities were conducted outside the United States by non-U.S. entities – entities—including non-U.S. entities that are not otherwise owned or controlled by U.S. entities or persons – persons—and even when such activities were conducted in compliance with applicable law.
VEON
The following information is disclosed pursuant to Section 13(r). of the Exchange Act. None of these activities involved our U.S. affiliates.
Our Armenian subsidiary, ArmenTel, and Telecommunications Company of Iran, or “TCI,” an Iranian Government-owned company, have an agreement for the provision of voice services, which has been in place since 2003. Under the agreement, ArmenTel sends direct traffic to TCI and TCI sends both direct and transit traffic to ArmenTel. We (including ArmenTel) did not provide any telecommunications equipment or technology to TCI. However, in 2013 ArmenTel has discontinued providing voice services under the agreement. During 2014, there was no gross revenue received from these activities involving TCI and no net profits.
In 2001, our Russian subsidiary, OJSC VimpelCom, began providing telecommunications services, including mobile and fixed line services, to the Embassy of Iran in Moscow. The gross revenue for these services in 2014 was approximately US$14,842.63 and net profits were approximately US$8,800.94. OJSC VimpelCom VEON intends to continue the services to the Embassy of Iran.
In 2008, our Tajikistan subsidiary, LLC Tacom, began providing telecommunications services to the Embassy of Iran in Dushanbe. The gross revenue for these services in 2014 was approximately US$7,383 and net profits were approximately US$5,533. LLC Tacom intends to continue the services to the Embassy of Iran.agreements.
In 2014, our Kyrgyzstan subsidiary, Sky Mobile LLC, began providing mobile telecommunications services to the Embassy of Iran in Biskek. The gross revenue for these services in 2014 was approximately US$1,953 and net profits were approximately US$900. Sky Mobile LLC intends to continue the services to the Embassy of Iran.
Telenor
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Telenor ASA may be deemed an affiliate based on its indirect share ownership in us through Telenor East and the officers of theEast. Telenor ASA group who are on our board. Telenor East has provided us with the information included below relevant to Section 13(r). of the Exchange Act. This information relates solely to activities conducted by the Telenor ASAgroup subsidiaries and does not relate to any activities conducted by us. We are not representing the accuracy or completeness of such information and undertake no obligation to correct or update this information.
Various Telenor subsidiaries of Telenor ASA are party tohave entered into roaming agreements and interconnection agreements with Iranian telecommunicationtelecommunications companies. Pursuant to those roaming agreements, the Telenor subsidiaries’subsidiaries' customers are able to roam in the particular Iranian network (outbound roaming) and customers of such Iranian operators are able to roam in the relevant subsidiaries’subsidiaries' network (inbound roaming). For outbound roaming, Telenor subsidiaries pay the relevant Iranian operator roaming fees for use of its network by Telenor subsidiaries’subsidiaries' customers, and for inbound roaming the relevant Iranian operator pays the relevant Telenor subsidiarysubsidiaries' roaming fees for use of its network by the Iranian operator’sits customers.
The Telenor subsidiaries of Telenor ASA identified below were party to the following roaming agreements and interconnection agreements with Iranian telecommunicationtelecommunications companies in 2014:2017, which Telenor and its subsidiaries intend to continue:
(1)
(2) MCI, net expenses of €17,234 to MTN Irancell and net expenses of €3,685 to Rightel.
(3) the roaming agreement with MTN Irancell.
(4) Rightel of US$4,388.
(5)
(6)
(7) agreement.
(8) Telenor Pakistan (Private) Ltd., a Pakistani subsidiary, has roaming agreements with MCI, MTN Irancell and Taliya.Rightel. During 2014, Telenor Pakistan (Private) Ltd. recorded net revenues and net expenses related to these roaming agreements of (i) $14,199 in net revenues from MCI, (ii) $5,445 in net revenues from Irancell, and (iii) $21 in net expenses to Taliya.
(9) Total Access Communications Plc. (“dtac”), a Thai subsidiary, has roaming agreements with MCI and Irancell. During 2014, dtac recorded net revenues and net expenses related to these roaming agreements of $107,671.11 in net revenues from MCI and $11,583.92 in net expenses to Irancell.
(10) Telenor Global Services AS, a Norwegian subsidiary, has two interconnection agreements with MCI. During 2014, Telenor Global Services AS2017, DiGi.Com Bhd recorded net revenues of $32,860€17,042 related to these interconnection agreements.MCI, net expenses of US$2,285 related to MTN Irancell and net revenues of US$327 related to Rightel.
ITEM 4A. UNRESOLVED STAFF COMMENTS
Telenor ASA’s subsidiaries identified above intend to continue these agreements. None.
Legal Proceedings ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
Current Legal Proceedings
For details of current legal proceedings, please see Note 26 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 20-F. For details of the investigations by the SEC, DOJ and OM, please also see “Item 3—Key Information—D. Risk Factors—Risks Related to Our Business—We are subject to investigations by the SEC, DOJ and OM, and are conducting an internal investigation. We are unable to predict the duration, scope or results of these investigations or their impact on us.”
Concluded Legal Proceedings
For details of concluded legal proceedings, please see Note 26 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 20-F.
None.
The following discussion and analysis should be read in conjunction with our audited consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 20-F. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of numerous factors, including the risks discussed in “Item"Item 3—Key Information—D. Risk Factors.”Factors."
Our audited consolidated financial statements included elsewhere in this Annual Report on Form 20-F are prepared in accordance with IFRS, as issued by the IASB.
Overview
Our total operating revenue was US$19,627 million for the year ended December 31, 2014, compared to US$22,546 million for the year ended December 31, 2013. Our operating profit was US$2,586 million for the year ended December 31, 2014, compared to US$346 million for the year ended December 31, 2013. The loss for the year attributable to the owners of the parent was US$647 million for the year ended December 31, 2014, compared to a loss of US$2,625 million for the year ended December 31, 2013.
We use the U.S. dollar as our reporting currency. The functional currencies of our group are the Russian ruble in Russia, the Euro in Italy, the Algerian dinar in Algeria, the Pakistani rupee in Pakistan, the Bangladeshi taka in Bangladesh, the Ukrainian hryvnia in Ukraine, the Kazakh tenge in the Republic of Kazakhstan, the Armenian dram in the Republic of Armenia, the Georgian lari in Georgia, the Kyrgyz som in Kyrgyzstan, the Lao Kip in Laos and the U.S. dollar in Tajikistan. During 2014 we changed the functional currency of our operations in Uzbekistan from the U.S. dollar to the Uzbek som.
Due to the significant fluctuation of the non-U.S. dollar functional currencies against the U.S. dollar in the periods covered by this discussion and analysis, changes in our consolidated operating results in functional currencies differ from changes in our operating results in reporting currencies during some of these periods. In
the following discussion and analysis, we have indicated our operating results in functional currencies and the devaluation or appreciation of functional currencies where it is material to explaining our operating results. For more information about exchange rates relating to our functional currencies, see “—Certain Factors Affecting our Financial Position and Results of Operations—Foreign Currency Translation” below.
Basis of Presentation of Financial Results
VimpelCom Ltd. maintains its records and prepares its statutory financial statements in accordance with Dutch law and tax legislation. Our subsidiaries outside of the Netherlands record and prepare their statutory financial statements in accordance with local accounting principles and tax legislation and in accordance with IFRS, if applicable. Our audited consolidated financial statements have been prepared in accordance with IFRS, as issued by the IASB. They differ from our financial statements issued for statutory purposes that are prepared on a stand-alone legal entity basis (unconsolidated) in accordance with IFRS, as endorsed by the European Union. The principal differences relate to:
consolidation procedures and business combinations; and
investments in subsidiaries that are stated at net asset value.
Our audited consolidated financial statements set forth elsewhere in this Annual Report on Form 20-F include the accounts of VimpelComVEON Ltd. and its consolidated subsidiaries. All inter-company accounts and transactions have been eliminated. We have used the equity method of accounting for companies in which we have significant influence. Generally, this represents voting stock ownershiprights of at least 20.0% and not more than 50.0%.
We and our subsidiaries paid taxes computed on income reported for local statutory tax purposes. We based this computation on local statutory tax rules, which differ substantially from IFRS. Certain items that are capitalized under IFRS are recognized under local statutory accounting principles as an expense in the year paid. In contrast, numerouscertain expenses reported in the financial statements prepared under IFRS are not tax deductible under local legislation. As a consequence, our effective tax chargerate was different under local tax rulesIFRS from the statutory rate.
Recent Accounting Pronouncements
VEON Ltd. is required to adopt the new accounting standards IFRS 9 Financial Instruments and IFRS 15 Revenue from Contracts with Customers, effective from January 1, 2018, and IFRS 16 Leases, effective for the financial years from January 1, 2019. The transitional impacts on total equity upon adoption of IFRS 9 and IFRS 15 as of January 1, 2018 are expected to result in a decrease of US$48 million and an increase of US$99 million, respectively. We have yet to assess the impact of IFRS 16, which may be material, to the consolidated income statement and consolidated financial position upon adoption in 2019. Such impact is under IFRS.analysis as of the date of this Annual Report on Form 20-F. For discussion on the impact this could have on our operations, see "Item 3—Key Information—D. Risk Factors—Risks Related to Our Business—Adoption of new accounting standards could affect reported results and financial position." See Note 3 to our audited consolidated financial statements for a discussion of new accounting pronouncements not yet adopted by the company.
Reportable Segments
We present our reportable segments based on economic environments and stages of development in different geographical areas, requiring different investment and marketing strategies. Accordingly,
As of December 31, 2017, our reportable segments consist of the sixeight following segments:
Russia;
Italy;
Algeria;
Africa & Asia;
Ukraine; Russia, Pakistan, Algeria, Bangladesh, Ukraine, Uzbekistan, the Italy Joint Venture and
CIS.
The Russia HQ (transactions related to management activities within the group in Amsterdam and London). Since January 1, 2017, management has also included the Italy Joint Venture as a reportable segment includes alldue to its increased contribution to our overall financial results fromand position. We do not control the Italy Joint Venture and therefore account for the Italy Joint Venture using the equity method and do not fully consolidate its results into our financial statements. See "—Further Information Regarding the Results of Operations of the Italy Joint Venture" for certain limited financial information regarding the results of operations in Russia. Theof the Italy segment includes all results from our operations in Italy. The Algeria segment includes all results from our operations in Algeria. The Africa & Asia segment includes operating results from our operations in Pakistan, Bangladesh and Laos. We include mobile customersJoint Venture, which we present because we consider the Italy Joint Venture to be a significant part of our equity investee in Zimbabwe (accounted at cost) inbusiness. For the Africa & Asia reporting segment. The Ukraine segment includes the operating results of our operations in Ukraine. The CIS segment includes the operating results of all operations in Kazakhstan, Tajikistan, Uzbekistan, Georgia, Armenia and Kyrgyzstan. Although Georgia is no longer a memberfinancial statements of the CIS, consistent with our historic reporting practice,
Italy Joint Venture we continue to include Georgia in our CIS reporting segment. Starting January 1, 2014, we disclose Algeria operations as a separate segment since the adjusted EBITDA during 2014 in Algeria exceeded 10% of the total group adjusted EBITDA. For more information on our reportable segments, please see Note 7 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 20-F.
Factors Affecting Comparability of Prior Periods
Our selected operating and financial data, audited consolidated financial statements and related notes included elsewherehave filed in this Annual Report on Form 20-F pursuant to Rule 3-09 of Regulation S-X, see "Exhibit 99.3—Consolidated financial statements of VIP-CKH Luxembourg S.à.r.l for the years ended December 31, 2017 and 2016." For more information on the financial presentation of the Italy Joint Venture, see "Explanatory Note—Presentation of Financial Information of the Italy Joint Venture" and notes 5, 14 and 25 to our audited consolidated financial statements.
The "Others" category is not a reportable segment but only a reconciling between our eight reportable segments and our total revenue and Adjusted EBITDA. "Others" represents our operations in Kazakhstan, Kyrgyzstan, Armenia, Tajikistan, Georgia and Laos as well as intercompany eliminations and costs relating to centrally managed operations monitored outside of VEON's headquarters. In October 2017, VEON announced the sale of its operations in Laos to the Government of the Lao People's Democratic Republic. Transfer of ownership of VEON's operations in Laos is subject to the satisfaction of certain conditions, including receipt of necessary corporate and regulatory approvals, and is expected to complete in 2018.
Key Developments and Trends
The following key developments and trends reflect management's assessment of factors which are anticipated to have a material effect on the company's financial condition and results of operations. For a list of most important recent events in the development of our business, see "Item 4—Information on the Company—Overview—Key Developments."
Customer and revenue growth
In 2017, our total operating revenue excluding currency impact increased by 4% while our mobile customer base increased 1% to 210.5 million as of December 31, 2017, compared to 207.5 million as of December 31, 2016. In 2018, we expect to continue to face challenging macroeconomic environments, particularly in Algeria, and intense competition in our markets. Nonetheless, despite very high penetration rates throughout our markets, we continue to see opportunities for revenue growth and to expand our customer base from increasing usage of data, content and other value added services.
VEON and GTH sell their Pakistan tower business for US$940 million
On August 30, 2017, VEON and GTH announced that their subsidiary in Pakistan, Jazz, signed an agreement for the sale of its tower business, with a portfolio of approximately 13,000 telecommunications towers, for approximately US$940 million, subject to certain adjustments, to Tanzanite Tower Private Limited, a tower operating company owned by edotco Group Sdn. Bhd. and Dawood Hercules Corporation. The completion of the transaction is subject to the satisfaction or waiver of certain conditions including receipt of customary regulatory approvals.
Impact of currency regime developments in Uzbekistan
In September 2017, the government of Uzbekistan announced the liberalization of its currency exchange rules and the following discussion and analysis reflect the contributionresetting of the operators we acquiredofficial exchange rate at 8,100 Uzbek som per U.S. dollar, which represented nearly a halving of the value of the Uzbek som to the U.S. dollar. On December 22, 2017, VEON announced that its subsidiary, PJSC VimpelCom, had successfully repatriated a net amount of approximately US$200 million from their respective datesUnitel. The currency conversion to US$200 million resulted in a foreign currency exchange loss of acquisition or consolidation.approximately US$49 million. In addition, the Uzbek som results of Unitel are now being translated into U.S. dollars at a higher exchange rate.
New Group CFO and CEO of Russia
During 2017 and 2018, we had changes to the composition of our board and to the group's key management roles.
On September 15, 2017, the company announced that Trond Westlie would be joining VEON as Group Chief Financial Officer and that VEON's current Group CFO, Andrew Davies, decided to step down from his role after four successful years. Mr. Westlie is an experienced financial executive having been CFO of AP Moller-Maersk from 2010 to 2016 and CFO of Telenor ASA from 2005 to 2009. He previously served as a member of VEON's supervisory board and chairman of our audit and risk committee between July 2014 and August 2016. Mr. Westlie joined VEON on October 2, 2017 and assumed his duties as CFO on November 9, 2017. Mr. Davies will continue as a board member of the Italy Joint Venture.
Vasyl Latsanych was appointed as Chief Executive Officer of our Russian operations, PJSC VimpelCom, effective January 10, 2018. Vasyl spent over 16 years in telecoms, most of which was with the MTS Group in a number of senior roles. His most recent role was as Group Vice President for Strategy and Marketing, where he was responsible for MTS's commercial and strategic initiatives and led a significant customer experience transformation, as well as digital development.
VEON to sell Laos operations
On October 27, 2017, VimpelCom Laos, a subsidiary of the company, entered into a sale and purchase agreement for the sale of its operations in Laos to the Government of Laos. Under the agreement, VimpelCom Laos will transfer its 78% interest in VimpelCom Lao Co. Limited to the Government of Laos, the minority shareholder, in exchange for purchase consideration of US$22 million. The transaction is subject to customary closing conditions and is expected to be completed in the first half of 2018.
Factors Affecting Comparability of Financial Position and Results of Operations
The comparability of our financial position and results among the periods presented below is affected by dispositionsa number of the operators we sold from their respective dates of disposals or deconsolidation. On September 16, 2014, wefactors. Our financial position and GTH completed the sale of all of our debt and equity interest in the Globalive group of companies in Canada, including Globalive Wireless Management Corp., the operator of the Wind Mobile cellular telephony service in Canada (“Wind Canada”). On October 17, 2014, we completed the sale of our entire indirect 100.0% stake in Telecel Globe that held our interest in subsidiaries operating in Burundi and Central African Republic. As a consequence of the abovementioned dispositions we stopped including results of our debt and equity interestoperations for the three years ended December 31, 2017 as reflected in Wind Canada from September 16, 2014, and our operations in Burundi and Central African Republic from October 17, 2014. For more information regarding our acquisitions and dispositions, see “—Liquidity and Capital Resources—Acquisitions and Dispositions” and Note 6 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 20-F. In addition,20-F have been influenced by various factors, including those listed below. For a discussion of the key developments and trends, commitments or events that are likely to have a material effect on April 19, 2013, we completed the sale of our entire indirect stake in Sotelco Ltd. in Cambodia to our local partner, and as a consequence, we stopped including the results of our operationsoperation for the current financial year, see "—Key Developments and Trends." We may also be subject to certain fines or compliance costs that are paid and accounted for in Cambodia from such date.a particular fiscal year in connection with certain legal or administrative proceedings. For more information on the regulatory environment in which we operate, see "Exhibit 99.2—Regulation of Telecommunications."
Pakistan Merger and Other Acquisitions and Dispositions
We do not provide comparable financial information for periods preceding the date on which we acquired, consolidated or commenced operations in a particular country or segment, or following the date of disposition.
Recent Developmentsdisposal unless required by IFRS. In general, our selected operating and Trends
The mobile markets in Russia, Italy, Ukraine, Algeria, Kazakhstan, Armenia, Georgia and Kyrgyzstan have reached mobile penetration rates exceeding 100.0% in each market. As a result, we will focus less on customer market share growth and more on revenue market share growth in each of these markets. The key components of our growth strategy in these markets will be to increase our share of the high value customer market, increase usage of value added services and improve customer loyalty. Our management expects revenue growth in these markets to come primarily from an increase in usage of voice andfinancial data, traffic among our customers.
The remaining mobile markets in which we operate, particularly Pakistan, Bangladesh and Uzbekistan, are still in a phase of rapid customer growth with penetration rates substantially lower than in our other markets. In these markets, our management expects revenue growth to come primarily from customer growth in the short term and increasing usage of voice and data traffic in the medium term.
Our management expects revenue growth in our mobile business to come primarily from data services and in our fixed-line business from broadband as well as business and corporate services.
Investigations
The SEC, DOJ and Dutch investigations, as well as our own investigations, are continuing, and we have cooperated, and continue to cooperate, with the authorities in these investigations. We are also exploring the prospect of resolving the company’s potential liabilities arising from the facts established in the investigations. We expect to continue incurring costs related to the investigations, primarily professional fees and expenses, which may be significant. These costs relate to responding to requests for information and testimony in connection with the investigations and in conducting our internal investigation, and we cannot predict at this time the ultimate amount of all such costs. We are unable to predict the duration, scope or results of the ongoing investigations or how the results of these investigations or any resolutions may impact our company’s business,
results of operations or financial condition. No provision relating to the investigations has been recorded in our company’s audited consolidated financial statements included elsewhere in this Annual Report on Form 20-F. For detailsand related notes and the following discussion and analysis reflect the contribution of the investigationsoperators we acquired from their respective dates of acquisition or consolidation and therefore such acquisitions affect the comparability of data between periods.
For example, the acquisition of 100% of Warid's voting shares by the SEC, DOJour subsidiary, GTH, and OM, please see “Item 3—Key Information—D. Risk Factors—Risks Related to Our Business—We are subject to investigations by the SEC, DOJ and OM, and are conducting an internal investigation. We are unable to predict the duration, scope or resultsour subsequent consolidation of these investigations or theirWarid's financials starting from July 1, 2016 has a particularly strong impact on us”comparability. For more information regarding our acquisitions and dispositions, see Note 265 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 20-F.incorporated herein.
Change in functional currency for UzbekistanEconomic Trends
Historically the functional currency of our As a global telecommunications company with operations in Uzbekistan for accounting purposes has been the U.S. dollar as opposed to the local currency the Uzbek som. During 2014a number of markets, we concluded that the Uzbek som should be the functional currency for Unitel as it more clearly drives the economics within the Uzbek Telecom industry. The impact of change in functional currency was not material and accounted for in 2014.
Algeria Transaction and Settlement
On January 30, 2015, we together with our 51.9% owned subsidiary GTH completed the saleare affected by GTH of a non-controlling 51% interest in OTA to the Fonds National d’Investissement, the Algerian National Investment Fund (“FNI”), for a purchase consideration of US$2.6 billion. Immediately prior to the closing of the transaction, OTA distributed to its shareholders a dividend in respect of the financial years 2008-2013 of approximately US$1.9 billion. The total dividends and proceeds paid to GTH at closing of the transaction amounted to approximately US$3.8 billion, net of all taxes and after the settlement of all outstanding disputes between the parties and the payment of associated fines.
Shortly prior to closing of the transaction and in order to facilitate the closing, OTA contributed its operations, referred to as the Contribution, to Optimum Telecom Algeria S.p.A. (“Optimum”), a wholly-owned subsidiary of OTA.
Shareholders Agreement
GTH and the FNI along with VimpelCom, OTA and Optimum entered into a shareholders agreement at closing of the transaction to govern the relationship of GTH and the FNI as shareholders in OTA and the operations of Optimum.
Pursuant to the shareholders agreement, we and GTH will continue to fully consolidate OTA. GTH has the right to appoint board members representing a simple majority of the votes on the boards of each of OTA and Optimum and will retain control over each of OTA and Optimum. Certain enumerated strategic decisions are subject to a supermajority vote of the respective boards (including the affirmative vote of at least one director representing GTH and the FNI). OTA will pay future dividends to its shareholders out of available free cash flow, targeting a pay-out ratio of not less than 42.5% of consolidated net income. Declaration of dividends above 42.5% of consolidated net income are subject to a super majority vote of the respective boards.
Transfers of the parties’ respective shareholdings in OTA are not permitted during the first seven years following the closing of the transaction other than to certain affiliates. Following such seven year period, transfer by GTH of its OTA shares to a third party shall be subject to a right of first refusal in favor of the FNI and transfer by the FNI of its OTA shares to a third party shall be subject to a tag along right in favor of GTH. Furthermore, GTH has an option to sell all (and not less than all) of its OTA shares to the FNI at the then fair market value. GTH’s option is exercisable solely at its discretion during the three month period between July 1, 2021 and September 30, 2021 as well as at any time upon occurrence of certain events (including, generally, change of control of the FNI, material breach of the shareholders agreement by the FNI, loss of VimpelCom’s ability to consolidate OTA, the taking of certain actions in Algeria against GTH or OTA, failure by OTA to pay a
minimum dividend or imposition of certain tax assessments). Concurrently, the FNI has an option to buy from GTH all (and not less than all) of GTH’s OTA shares at the then fair market value. The FNI’s option is exercisable solely at its discretion during the three month period between October 1, 2021 and December 31, 2021 as well as at any time upon the occurrence of certain events (including, generally, change in VimpelCom’s indirect control of OTA, insolvency of GTH or VimpelCom or material breach of the shareholders agreement by GTH). GTH and the FNI have agreed to meet not later than November 30, 2019 to discuss, among other matters, their intentions regarding the exercise of their discretionary put and call options, whether to continue their relationship following the exercise periods for such options and other possible solutions to enable liquidity of their respective interests in OTA.
Settlement of Disputes
The foreign exchange and import restrictions put in place by the Bank of Algeria against OTA on April 15, 2010 were lifted on closing, following the payment (with no admission of wrongdoing or liability) by OTA to the Algerian Treasury of the fine of DZD99 billion (approximately US$1.1 billion). At closing of the transaction, OTA definitively discontinued (with no admission of wrongdoing or liability) all pending related proceedings.
At closing of the transaction, OTA definitively discontinued (with no admission of wrongdoing or liability) all pending proceedings relating to the disputes with the Algerian tax administration relating to tax reassessments for the years 2004 to 2009. OTA has written off the related tax receivable on its balance sheet.
Upon closing of the transaction, GTH terminated its international arbitration against the Algerian State initiated on April 12, 2012 and the parties to the arbitration settled the arbitration and all claims relating thereto.
Credit Facilities
Shortly prior to closing of the transaction, OTA and Optimum established credit facilities with a syndicate of Algerian and international banks in an aggregate amount of DZD82 billion (approximately US$0.9 billion). For more information on these credit facilities, see “—Liquidity and Capital Resources—Financing Activities.”
Agreement with OTA’s Minority Shareholder Cevital
Pursuant to an amended Framework Agreement between GTH and Cevital S.p.A., or Cevital, a minority shareholder in OTA, following the closing of the transaction, Cevital continues to be a shareholder in OTA and holds 3.43% of the share capital of OTA. At closing of the transaction, the existing OTA shareholder arrangements to which Cevital was a party were terminated and Cevital dismissed all pending litigation against OTA in settlement for a dinar payment by OTA equating to approximately US$50 million plus Cevital’s entitled share of the approximately US$1.9 billion pre-closing dividend paid by OTA to its shareholders.
For more information, see Notes 6, 26 and 27 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 20-F.
Network and Tower Sharing Agreements
In late 2014 our wholly owned subsidiary, OJSC VimpelCom, entered into an agreement with MTS for joint planning, development and operation of 4G/LTE networks in 36 regions of Russia. Under the terms of the agreement, between 2014 and 2016 MTS will build and operate 4G/LTE base stations in 19 regions and OJSC VimpelCom will build and operate 4G/LTE base stations in 17 regions of Russia. Within the first seven years of the project, OJSC VimpelCom and MTS plan to share base stations, platforms, infrastructure and resources of the transportation network, with each operator maintaining its own core network.
In February 2015 our wholly owned subsidiary, Wind Italy, entered into a definitive agreement for the sale of 90% of the shares of Wind Italy’s wholly owned subsidiary Galata to Abertis Telecom for a total cash
consideration of €693 million (approximately US$737 million as of March 12, 2015). Galata is a tower business consisting of 7,377 towers together with the relevant functions, employees and related contracts. Upon the transaction closing, which is expected to occur in the near future, Abertis Telecom will own 90% of the share capital of Galata while Wind Italy will retain a 10% stake. Wind Italy has a Tower Services Agreement for an initial term of 15 years with Galata for the provision of a broad range of services on the contributed sites and sites subsequently built by Galata hosting Wind Italy equipment.
VimpelCom Amsterdam B.V. cash tender offer for OJSC VimpelCom and VimpelCom Holdings B.V. U.S. dollar notes
On March 2, 2015, VimpelCom Amsterdam B.V. announced that it commencedinternational economic developments. Unfavorable economic conditions may impact a cash tender offer for up to US$2,100 million aggregate principal amountsignificant number of our customers, including their spending patterns, both in terms of the outstanding U.S. dollar notes issued by VimpelCom Holdings B.V.products they subscribe for and loan participation notes issued by VIP Finance Irelandusage levels. As a result, it may be more difficult for us to attract new customers, more likely that customers will downgrade or disconnect their services and UBS (Luxembourg) SAmore difficult for us to maintain ARPUs at existing levels. The current difficult economic environment and any future downturns in the sole purposeeconomies of funding loansmarkets in which we operate or may operate in the future could also, among other things, increase our costs, prevent us from executing our strategies, hurt our liquidity or to OJSC VimpelCom. The total outstanding amount of these bonds is US$6,700 million. The tender offer expires on March 30, 2015 and settlement is expected to take place on April 2, 2015.meet unexpected financial requirements. For more information regarding this tender offer, including the results of the early tender period, see “—Liquidityeconomic trends and Capital Resources—Financing Activities—Recent Financing Activities.”
Macroeconomic and Political Risks Concerning Russia and Ukraine
Low oil prices, together with the impact of economic sanctions resulting from the current situation in Ukraine and the consequent devaluation of the Russian ruble, are negatively impacting the Russian economic outlook. In 2014, the significant depreciation of the ruble against the U.S. dollar in particular negatively impacted our results of operations and resulted in a foreign currency exchange loss in 2014. In addition, the devaluation of the Ukrainian hryvnia negatively impacted revenues in our Ukraine segment and our results of operations in 2014, and the National Bank of Ukraine’s decision in February 2015 to suspend its interventions to support the Ukrainian hryvnia has resulted in further devaluation in 2015. Furthermore, the current situation in Ukraine along with the response to the situation by the governments of Russia, the United States, the European Union and other countries have the potential to adverselyhow they affect our business in Russia and Ukraine, markets in which we have significant operations. For more information,operations, see “Item 3.D—"Item 3—Key Information—D. Risk Factors—Risks Related to our Business—We are exposed to foreign currency exchange loss and currency fluctuation and convertibility risks”, “—Risks Related to Our Markets—The international economic environment could cause our business to decline”decline."
Inflation
Inflation affects the purchasing power of our mass market customers, as well as corporate clients. The Russian, Ukrainian, Kazakh, Uzbek and “—Algerian currencies, for example, have experienced significant inflation levels in recent years, which has caused the relative values of those currencies to decline. Although the inflation rates have broadly stabilized, economic and political developments may cause inflation rates to rise once again.
The table below shows the inflation rates for the years ended December 31, 2017, 2016 and 2015, and the source of the inflation rates.
| | December 31, | | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
Country | 2017 | 2016 | 2015 | Source | |||||||
Russia | 2.5 | % | 5.4 | % | 12.9 | % | The Russian Federal State Statistics Service | ||||
Pakistan | 4.6 | % | 3.7 | % | 3.2 | % | The Pakistan Bureau of Statistics | ||||
Algeria | 4.6 | % | 7.0 | % | 4.4 | % | The National Statistics Office of Algeria | ||||
Bangladesh | 5.8 | % | 5.0 | % | 6.1 | % | The Central Bank of Bangladesh | ||||
Ukraine | 13.7 | % | 12.4 | % | 43.3 | % | The State Statistics Committee of Ukraine | ||||
Uzbekistan | 12.7% | (1) | 8.0 | % | 9.1 | % | The International Monetary Fund | ||||
Foreign Currency Translation
Our audited consolidated financial statements are presented in U.S. dollars. Amounts included in these financial statements were presented in accordance with IAS 21, using the current rate method of currency translation with the U.S. dollar as the reporting currency. The functional currencies of our
group are the Russian ruble in Russia, the Pakistani rupee in Pakistan, the Algerian dinar in Algeria, the Bangladeshi taka in Bangladesh, the Ukrainian hryvnia in Ukraine, the Uzbek som in Uzbekistan.
Our results of operations are affected by increases or decreases in the value of the U.S. dollar or our functional currencies. A higher average exchange rate correlates to a weaker functional currency. We have listed below the relevant exchange rates for each of our countries of operation for the years ended December 31, 2017, 2016 and 2015. These should not be construed as a representation that such currency will in the future be convertible into U.S. dollars or other foreign currency at the exchange rate shown, or at any other exchange rates.
The table below shows functional currencies and official exchange rates as of December 31, 2017, 2016 and 2015 as well as comparison of average exchange rates for 2017 versus 2016 and 2016 versus 2015.
| | | Exchange rates as of December 31, local currency per one US$ | | | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | Average rate 2017 vs. 2016 | Average rate 2016 vs. 2015 | |||||||||||||||
Country | Functional Currency | 2017 | 2016 | 2015 | ||||||||||||||
Russia | Russian ruble—RUB | 57.60 | 60.66 | 72.88 | (13.0 | )% | 10.0 | % | ||||||||||
Pakistan | Pakistani rupee—PKR | 110.70 | 104.37 | 104.73 | 0.6 | % | 1.9 | % | ||||||||||
Algeria | Algerian dinar—DZD | 114.76 | 110.40 | 107.10 | 1.4 | % | 9.0 | % | ||||||||||
Bangladesh | Bangladeshi taka—BDT | 82.69 | 78.92 | 78.25 | 3.1 | % | 0.6 | % | ||||||||||
Ukraine | Ukrainian hryvnia—UAH | 28.07 | 27.19 | 24.00 | 4.1 | % | 17.0 | % | ||||||||||
Uzbekistan | Uzbek som—UZS | 8,120 | 3,231 | 2,809 | 72.7 | % | 15.5 | % | ||||||||||
Foreign Currency Controls and Currency Restrictions
We are subject to certain currency restrictions and local regulations that impact our ability to extract cash from some of our operating companies. For example, in Uzbekistan, in September 2017, the government of Uzbekistan liberalized the country's currency exchange rules and reset the official exchange rate at 8,100 Uzbek som per U.S. dollar, which represented nearly a halving of the value of the Uzbek som to the U.S. dollar. On December 22, 2017, VEON successfully repatriated US$200 million from Uzbekistan. There are certain other restrictions in place to prevent currency outflow in Uzbekistan, but we do not expect that they will have a material impact on our operations. For more information on the Uzbek government's recent decision to liberalize its currency, see "—Key Developments and Trends—Impact of Currency Regime Developments in Uzbekistan."
In Ukraine, Kyivstar can only partially expatriate dividends to VEON Ltd. because of restrictions imposed by the National Bank of Ukraine in 2014 to regulate money, credit and currency in Ukraine. Although several of these restrictions were substantially softened and partially abolished, certain restrictions remain in place in order to prevent any negative impact of currency outflow on the financial market. However, we do not expect that these restrictions will have a material impact on our operations. For more information on how our operations can be affected by certain currency risks, see "Item 3—Key Information—D. Risk Factors—Risks Related to Our Markets—Business—We are exposed to foreign currency exchange loss and currency fluctuation and translation risks."
Our operations may be adverselyability to extract cash from operating companies is also affected by ongoing developmentscertain regulatory hurdles and restrictions. For example, in Ukraine.”some of our markets, strict foreign exchange regulations are in place and foreign currency financing agreements must be registered or approved by state authorities. In addition, some central banks closely control foreign exchange transactions and international transfers of funds. For more information on how our operations can be affected by certain regulatory controls and restrictions of foreign currencies, see "Item 3—Key Information—D. Risk Factors—Risks Related to our Markets—The banking systems in many countries in which we operate remain underdeveloped, there are a
limited number of creditworthy banks in these countries with which we can conduct business and currency control requirements restrict activities in certain markets in which we have operations."
For more information about risks related to currency exchange rate fluctuations, see "Item 11—Quantitative and Qualitative Disclosures About Market Risk" and Notes 4 and 17 to our audited consolidated financial statements.
Tax
Our results of operations are also impacted by changes with respect to the tax regimes to which we are subject. For example, we expect our results of operations to be affected by: (i) a new finance law in Algeria that came into effect in 2017 that increased VAT from 7% to 19% on data services and from 17% to 19% on voice services, and increased taxes on recharges from 5% to 7%; (ii) an increase in the corporate income tax rate in Uzbekistan up to 48%; and (iii) revised interpretations of SIM tax regulations in Bangladesh and Pakistan.
Certain Performance Indicators
The following discussion analyzes certain operating data, including Adjusted EBITDA, mobile and broadband customer data, mobile MOU,customers, mobile ARPU, mobile data customers and mobile churn rates,fixed-line broadband customers that are not included in our financial statements. We provide this operating data because it is regularly reviewed by our management and ourmanagement. Our management believes it is useful in evaluating our performance from period to period as set out below. Our management believes that presenting information about mobile and broadband customers, mobile MOU and mobile ARPU is useful in assessing the usage and acceptance of our mobile and broadband products and services, and that presenting our mobile churn rate is useful in assessing our ability to retain mobile customers.services. This operating data is unaudited.
Mobile Customer DataAdjusted EBITDA
Adjusted EBITDA is a non-IFRS financial measure. We offer both postpaidcalculate Adjusted EBITDA as (loss)/profit before tax before depreciation, amortization, loss from disposal of non-current assets and prepaid servicesimpairment loss, financial expenses and costs, net foreign exchange gain/(loss) and share of associates and joint ventures. The measure includes certain non-operating losses and gains mainly represented by litigation provisions for all of its segments except for Russia. Our Adjusted EBITDA may be used to mobile customers. Asevaluate our performance against other telecommunications companies that provide EBITDA. See "Explanatory Note—Non-IFRS Financial Measures—Adjusted EBITDA" for more information on how we calculate Adjusted EBITDA.
The following table shows our Adjusted EBITDA and reconciliation of Adjusted EBITDA to (loss)/profit before tax, the most directly comparable IFRS financial measure, for the years ended December 31, 2014, the number of our mobile customers reached approximately 222 million.2017, 2016 and 2015.
| | Year ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2017 | 2016 | 2015 | |||||||
| | (in millions of U.S. dollars) | |||||||||
Adjusted EBITDA | 3,587 | 3,232 | 2,875 | |||||||
Depreciation | (1,454 | ) | (1,439 | ) | (1,550 | ) | ||||
Amortization | (537 | ) | (497 | ) | (517 | ) | ||||
Impairment loss | (66 | ) | (192 | ) | (245 | ) | ||||
Loss on disposals of non-current assets | (24 | ) | (20 | ) | (39 | ) | ||||
Finance costs | (935 | ) | (830 | ) | (829 | ) | ||||
Finance income | 95 | 69 | 52 | |||||||
Other non-operating (losses)/gains | (97 | ) | (82 | ) | (42 | ) | ||||
Shares of (loss)/profit of associates and joint ventures | (412 | ) | 48 | 14 | ||||||
Impairment of associates and joint ventures accounted for using the equity method | (110 | ) | (99 | ) | — | |||||
Net foreign exchange (loss)/gain | (71 | ) | 157 | (314 | ) | |||||
(Loss) / profit before tax | (24 | ) | 347 | (595 | ) | |||||
Mobile Customers
Mobile customers are generally customers in the registered customer base as of a given measurement date who engaged in a revenue generating activity at any time during the three months prior to thesuch measurement date. Such activity includes any incoming and outgoing calls, customer fee accruals, debits related to service, outgoing SMS and MMS, data transmission and receipt sessions, but does not include incoming calls, SMS and MMS or abandoned calls. Our total number of mobile customers also
includes customers using mobile Internetinternet service via USB modems. For our business in Italy, prepaid mobile customers are counted in our customer base if they have activated our SIM card in the last twelve months (with respect to new customers) or if they have recharged their mobile telephone credit in the last twelve monthsmodems and have not requested that their SIM card be deactivated and have not switched to another telecommunications operator via mobile number portability during this period (with respect to our existing customers), unless a fraud event has occurred. Postpaid customers in Italy are counted in our customer base if they have an active contract unless a fraud event has occurred or the subscription is deactivated due to payment default or because they have requested and obtained through mobile number portability a switch to another telecommunications operator. We include mobile customers of our equity investee in Zimbabwe (accounted at cost), in the Africa & Asia reporting segment. These figures are also included in our total customer data.FMC.
The following table indicates our mobile customer figures (in millions), as well as our prepaid mobile customers as a percentage of our total mobile customer base,in millions for the periods indicated:
| As of December 31, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
Russia | 57.2 | 56.5 | 56.1 | |||||||||
Italy | 21.6 | 22.3 | 21.6 | |||||||||
Algeria(1) | 18.4 | 17.6 | 16.7 | |||||||||
Africa & Asia(2) | 71.6 | 69.4 | 64.9 | |||||||||
Ukraine(1) | 26.2 | 25.8 | 25.1 | |||||||||
CIS | 26.5 | 25.4 | 24.2 | |||||||||
Total number of mobile customers | 221.6 | 216.9 | 208.6 | |||||||||
Percentage of prepaid customers | 94.3 | % | 92.4 | % | 96.2 | % | ||||||
| | As of December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2017 | 2016 | 2015 | |||||||
Russia | 58.2 | 58.3 | 59.8 | |||||||
Pakistan | 53.6 | 51.6 | 36.2 | |||||||
Algeria | 15.0 | 16.3 | 17.0 | |||||||
Bangladesh | 31.3 | 30.4 | 32.3 | |||||||
Ukraine | 26.5 | 26.1 | 25.4 | |||||||
Uzbekistan | 9.7 | 9.5 | 9.9 | |||||||
Others(1) | 16.2 | 15.3 | 15.7 | |||||||
Total number of mobile customers(2) | 210.5 | 207.5 | 196.3 | |||||||
| | | | | | | | | | | |
Mobile MOU measures the monthly average minutes of voice service use per mobile customer. We generally calculate mobile MOU by dividing the total number of minutes of usageIncludes operations in Kazakhstan, Kyrgyzstan, Armenia, Tajikistan, Georgia and Laos for incoming and outgoing calls during the relevant period (excluding guest roamers) by the average number of mobile customers during the period and dividing by the number of months in that period.all periods. For our business in Italy, we calculate mobile MOU as the suma discussion of the total traffic (in minutes) in a certain period divided by the average numbertreatment of customersour "Others" category for the period (the average of each month’s average number of customers (calculated as the average of the total numberperiods discussed in this Annual Report on Form 20-F, see"—Reportable Segments."
Our management does not analyze mobile MOU on a segment level in the Africa & Asia and CIS segments but rather on a country basis.
Mobile ARPU
Mobile ARPU measures the monthly average revenue per mobile user. We generally calculate mobile ARPU by dividing our mobile service revenue during the relevant period including(including data revenue, roaming revenue, MFS and interconnect revenue, but excluding revenue from connection fees,
sales of handsets and accessories and other non-service revenue,revenue) by the average number of our mobile customers during the period and dividing by the number of months in that period. For Italy, we define
The following table indicates our mobile ARPU asin US$ for the measure of the sum of our mobile revenue in the period divided by the average number of mobile customers in the period (the average of eachperiods indicated:
month’s average number of mobile customers (calculated as the average of the total number of mobile customers at the beginning of the month and the total number of mobile customers at the end of the month)) divided by the number of months in that period.
Our management does not analyze mobile ARPU on a segment level in Africa & Asia and CIS segments but rather on a country basis.
| | For the year ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2017 | 2016 | 2015 | |||||||
Russia | 5.5 | 4.6 | 5.1 | |||||||
Pakistan | 2.2 | 2.3 | 2.1 | |||||||
Algeria | 4.8 | 5.1 | 6.0 | |||||||
Bangladesh | 1.5 | 1.6 | 1.6 | |||||||
Ukraine | 1.8 | 1.7 | 1.8 | |||||||
Uzbekistan | 4.4 | 5.6 | 5.7 | |||||||
Mobile Churn RateData Customers
We generally define our mobile churn rate as the total number of churned Mobile data customers are mobile customers over the reported period expressed as a percentage of the average of our mobile customer base at the starting date and at the ending date of the period. The total number of churned mobile customers is calculated as the difference between the number of new customers who have engaged in a revenue generating activity induring the reported period andthree months prior to the change inmeasurement date as a result of activities including USB modem Internet access using 2.5G/3G/4G/LTE/HSPA+ technologies. For Algeria, mobile data customers are 3G customers who have performed at least one mobile data event on the mobile customer base between3G network during the starting date and the ending date of the reported period. Migration between prepaid and postpaid forms of payment and between tariff plans may technically be recorded as churn, which contributes toprevious four months.
The following table indicates our mobile churn rate even though we do not lose those customers. For our businessdata customer figures in Italy, mobile churn is defined asmillions for the rate at which customers are disconnected from our network, or are removed from our customer base due to inactivity, fraud or payment default. In Italy, our mobile churn is calculated by dividing the total number of customer disconnections (including customers who disconnect and reactivate with us at a later stage with a different SIM card) for a given period by the average number of customers for that period (calculated as the average of each month’s average number of customers (calculated as the average of the total number of customers at the beginning of the month and the total number of customers at the end of the month)) divided by the number of months in that period.periods indicated:
| | As of December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2017 | 2016 | 2015 | |||||||
Russia | 38.4 | 36.6 | 34.3 | |||||||
Pakistan | 28.5 | 25.1 | 16.8 | |||||||
Algeria | 7.2 | 7.0 | 4.1 | |||||||
Bangladesh | 16.9 | 14.9 | 14.0 | |||||||
Ukraine | 12.5 | 11.2 | 12.0 | |||||||
Uzbekistan | 5.0 | 4.6 | 4.7 | |||||||
Others | 9.1 | 7.9 | 7.8 | |||||||
Total number of mobile data customers | 117.6 | 107.3 | 93.7 | |||||||
| | | | | | | | | | | |
Fixed-Line Broadband Customers
Broadband Fixed broadband customers are generallyfixed customers in the registered customer base who were engaged in a revenue generating activity using fixed broadband Internet access in the three-month period prior to the measurement date. In Russia and Ukraine, such activity includes monthly Internetinternet access using FTTB, xDSL and WiFi technologies, as well as mobile Internet access via USB modems using GPRS/3G/HSDPAWi-Fi technologies. In Italy, we measure fixed
The following table indicates our fixed-line broadband customers based onin millions for the numberperiods indicated:
| | As of December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2017 | 2016 | 2015 | |||||||
Russia | 2.2 | 2.2 | 2.2 | |||||||
Ukraine | 0.8 | 0.8 | 0.8 | |||||||
Others | 0.4 | 0.3 | 0.4 | |||||||
Total number of fixed-line broadband customers | 3.4 | 3.3 | 3.4 | |||||||
| | | | | | | | | | | |
Results of Operations
Consolidated results
The financial results for 2015 reflect the classification of our Historical WIND Business as a discontinued operation. Our financial results for 2016 include the 10 months ended October 31, 2016 with our Historical WIND Business classified as a discontinued operation and the two months ended December 31, 2016 with the Italy Joint Venture accounted for as an equity investment. For the year ended December 31, 2017, the Italy Joint Venture is accounted for as an equity investment.
| Years ended December 31, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
| (In millions of US dollars, except per share amounts) | ||||||||||||
Service revenue | 18,725 | 21,529 | 22,122 | |||||||||
Sale of equipment and accessories | 519 | 725 | 677 | |||||||||
Other revenue | 383 | 292 | 262 | |||||||||
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Total operating revenue | 19,627 | 22,546 | 23,061 | |||||||||
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Operating expenses | ||||||||||||
Service costs | 4,381 | 5,133 | 5,439 | |||||||||
Cost of equipment and accessories | 551 | 780 | 693 | |||||||||
Selling, general and administrative expenses | 6,725 | 8,373 | 7,161 | |||||||||
Depreciation | 2,839 | 3,050 | 2,926 | |||||||||
Amortization | 1,479 | 1,791 | 2,080 | |||||||||
Impairment loss | 992 | 2,973 | 386 | |||||||||
Loss on disposals of non-current assets | 74 | 100 | 205 | |||||||||
Total operating expenses | 17,041 | 22,200 | 18,890 | |||||||||
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| |||||||
Operating profit | 2,586 | 346 | 4,171 | |||||||||
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| |||||||
Finance costs | 2,026 | 2,150 | 2,029 | |||||||||
Finance income | (54 | ) | (91 | ) | (154 | ) | ||||||
Other non-operating losses/(gains) | 152 | 172 | 75 | |||||||||
Shares of loss/(profit) of associates and joint ventures accounted for using the equity method | 38 | 159 | 9 | |||||||||
Net foreign exchange (gain)/ loss | 605 | (20 | ) | (70 | ) | |||||||
(Loss)/profit before tax | (181 | ) | (2,024 | ) | 2,282 | |||||||
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Income tax expense | 722 | 2,064 | 906 | |||||||||
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(Loss)/profit for the year | (903 | ) | (4,088 | ) | 1,376 | |||||||
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Attributable to: | ||||||||||||
The owners of the parent | (647 | ) | (2,625 | ) | 1,539 | |||||||
Non-controlling interest | (256 | ) | (1,463 | ) | (163 | ) | ||||||
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| (903 | ) | (4,088 | ) | 1,376 | ||||||||
| | Year ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2017 | 2016 | 2015 | |||||||
| | (in millions of U.S. dollars, except per share amounts and as indicated) | |||||||||
Consolidated income statements data: | ||||||||||
Service revenue | 9,105 | 8,553 | 9,313 | |||||||
Sale of equipment and accessories | 244 | 184 | 190 | |||||||
Other revenue | 125 | 148 | 103 | |||||||
| | | | | | | | | | | |
Total operating revenue | 9,474 | 8,885 | 9,606 | |||||||
| | | | | | | | | | | |
Operating expenses | ||||||||||
Service costs | (1,879 | ) | (1,769 | ) | (1,937 | ) | ||||
Cost of equipment and accessories | (260 | ) | (216 | ) | (231 | ) | ||||
Selling, general and administrative expenses | (3,748 | ) | (3,668 | ) | (4,563 | ) | ||||
Depreciation | (1,454 | ) | (1,439 | ) | (1,550 | ) | ||||
Amortization | (537 | ) | (497 | ) | (517 | ) | ||||
Impairment loss | (66 | ) | (192 | ) | (245 | ) | ||||
Loss on disposals of non-current assets | (24 | ) | (20 | ) | (39 | ) | ||||
Total operating expenses | (7,968 | ) | (7,801 | ) | (9,082 | ) | ||||
| | | | | | | | | | | |
Operating profit | 1,506 | 1,084 | 524 | |||||||
Finance costs | (935 | ) | (830 | ) | (829 | ) | ||||
Finance income | 95 | 69 | 52 | |||||||
Other non-operating losses | (97 | ) | (82 | ) | (42 | ) | ||||
Share of (loss) / gain of associates and joint ventures | (412 | ) | 48 | 14 | ||||||
Impairment of associates and joint ventures | (110 | ) | (99 | ) | — | |||||
Net foreign exchange (loss)/ gain | (71 | ) | 157 | (314 | ) | |||||
(Loss)/profit before tax | (24 | ) | 347 | (595 | ) | |||||
| | | | | | | | | | | |
Income tax expense | (472 | ) | (635 | ) | (220 | ) | ||||
| | | | | | | | | | | |
Loss for the year from continuing operations | (496 | ) | (288 | ) | (815 | ) | ||||
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Profit after tax for the period from discontinued operations | — | 920 | 262 | |||||||
Profit on disposal of discontinued operations, net of tax | — | 1,788 | — | |||||||
Profit after tax for the period from discontinued operations | — | 2,708 | 262 | |||||||
(Loss)/profit for the year | (496 | ) | 2,420 | (553 | ) | |||||
Attributable to: | ||||||||||
The owners of the parent (continuing operations) | (483 | ) | (380 | ) | (917 | ) | ||||
The owners of the parent (discontinued operations) | — | 2,708 | 262 | |||||||
Non-controlling interest | (13 | ) | 92 | 102 | ||||||
| | | | | | | | | | | |
| (496 | ) | 2,420 | (553 | ) | ||||||
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Loss per share from continuing operations | ||||||||||
Basic, loss for the year attributable to ordinary equity holders | (0.28 | ) | (0.22 | ) | (0.52 | ) | ||||
Diluted, loss for the year attributable to ordinary equity holders | (0.28 | ) | (0.22 | ) | (0.52 | ) | ||||
Earnings per share from discontinued operations | ||||||||||
Basic, profit for the year attributable to ordinary equity holders | — | 1.55 | 0.15 | |||||||
Diluted, profit for the year attributable to ordinary equity holders | — | 1.55 | 0.15 | |||||||
Weighted average number of common shares (millions) | 1,749 | 1,749 | 1,748 | |||||||
Dividends declared per share | 0.28 | 0.23 | 0.035 | |||||||
Total Operating Revenue
The table below shows total operating revenue in each of our reportable segments, with the exception of the Italy Joint Venture, for the periods indicated.
| | Year ended December 31, | Year ended December 31, | |||||||||||||||||
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| | 2017 | 2016 | 2015 | 2017 | 2016 | 2015 | |||||||||||||
| | in millions of U.S. dollars | (percentage of total operating revenue) | |||||||||||||||||
Russia | 4,729 | 4,097 | 4,583 | 50 | % | 46 | % | 48 | % | ||||||||||
Pakistan | 1,525 | 1,295 | 1,014 | 16 | % | 15 | % | 11 | % | ||||||||||
Algeria | 915 | 1,040 | 1,273 | 10 | % | 12 | % | 13 | % | ||||||||||
Bangladesh | 574 | 621 | 604 | 6 | % | 7 | % | 6 | % | ||||||||||
Ukraine | 622 | 586 | 622 | 7 | % | 7 | % | 6 | % | ||||||||||
Uzbekistan | 513 | 663 | 711 | 5 | % | 7 | % | 7 | % | ||||||||||
HQ(1) | — | 10 | — | — | 0 | % | — | ||||||||||||
Others(2) | 596 | 573 | 799 | 6 | % | 6 | % | 8 | % | ||||||||||
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Total | 9,474 | 8,885 | 9,606 | 100 | % | 100 | % | 100 | % | ||||||||||
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Our consolidated total operating revenue increased by 7% to US$9,474 million during 2017 compared to US$8,885 million during 2016 primarily as a result of the strengthening of the Russian ruble and full year of Warid consolidation. The increase was partially offset by a decrease in Uzbekistan due to the liberalization of its currency exchange rules resulting in a devaluation of local currency, a decrease in Algeria due to a difficult macroeconomic environment and strong competitive environment and a decrease in Bangladesh due to aggressive price competition in the market and network availability issues.
Our consolidated total operating revenue decreased by 8% to US$8,885 million during 2016 compared to US$9,606 million during 2015 primarily due to a decrease of total operating revenue of 11% in Russia, 18% in Algeria, 6% in Ukraine and 7% in Uzbekistan, the decrease in the average exchange rate from the Russian ruble to the U.S. dollar in Russia in 2016 (despite the increase of the spot exchange rate at December 31, 2016 as compared to December 31, 2015) and the depreciation of functional currencies against the U.S. dollar in Algeria, Ukraine and Uzbekistan. The decrease was partially offset by an increase of total operating revenue of 28% in Pakistan, due to double-digit growth in Mobilink coupled with the consolidation of Warid following July 1, 2016 and 3% in Bangladesh.
The discussion of revenue by reportable segments includes intersegment revenue. Our management assesses the performance of each reportable segment on this basis because it believes the inclusion of intersegment revenue better reflects the true performance of each segment on a stand-alone basis.
Adjusted EBITDA
The table below shows for the periods indicated the following consolidated statement of operations data expressed as a percentage of consolidated total operating revenue:
| Years ended December 31, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
Service revenue | 95.4 | % | 95.5 | % | 95.9 | % | ||||||
Sale of equipment and accessories | 2.6 | % | 3.2 | % | 2.9 | % | ||||||
Other revenue | 2.0 | % | 1.3 | % | 1.1 | % | ||||||
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Total operating revenue | 100.0 | % | 100.0 | % | 100.0 | % | ||||||
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Service costs | 22.3 | % | 22.8 | % | 23.6 | % | ||||||
Cost of equipment and accessories | 2.8 | % | 3.5 | % | 3.0 | % | ||||||
Selling, general and administrative expenses | 34.3 | % | 37.1 | % | 31.1 | % | ||||||
Depreciation | 14.5 | % | 13.5 | % | 12.7 | % | ||||||
Amortization | 7.5 | % | 7.9 | % | 9.0 | % | ||||||
Impairment loss | 5.1 | % | 13.2 | % | 1.7 | % | ||||||
Loss on disposals of non-current assets | 0.4 | % | 0.4 | % | 0.9 | % | ||||||
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Total operating expenses | 86.8 | % | 98.5 | % | 81.9 | % | ||||||
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Operating profit | 13.2 | % | 1.5 | % | 18.1 | % | ||||||
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Finance costs | 10.3 | % | 9.5 | % | 8.8 | % | ||||||
Finance income | (0.3 | %) | (0.4 | %) | (0.7 | %) | ||||||
Other non-operating losses/(gains) | 0.8 | % | 0.8 | % | 0.3 | % | ||||||
Shares of loss/(profit) of associates and joint ventures accounted for using the equity method | 0.2 | % | 0.7 | % | 0.0 | % | ||||||
Net foreign exchange (gain)/loss | 3.1 | % | (0.1 | %) | (0.3 | %) | ||||||
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Profit/(loss) before tax | (0.9 | %) | (9 | %) | 9.9 | % | ||||||
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Income tax expense | 3.7 | % | 9.2 | % | 3.9 | % | ||||||
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Profit/(loss) for the year | (4.6 | %) | (18.1 | %) | 6.0 | % | ||||||
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The owners of the parent | (3.3 | %) | (11.6 | %) | 6.7 | % | ||||||
Non(controlling interest | (1.3 | %) | (6.5 | %) | (0.7 | %) | ||||||
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The tables below show for the periods indicated selected information about the results of operationsAdjusted EBITDA in each of our reportable segments.segments, with the exception of the Italy Joint Venture. Adjusted EBITDA is a non-IFRS financial
measure. For more information regarding our segments,on how we calculate Adjusted EBITDA and for the reconciliation of Adjusted EBITDA to (loss)/profit before tax, the most directly comparable IFRS financial measure, for the years ended December 31, 2017, 2016 and 2015, see "Explanatory Note—Non-IFRS Financial Measures—Adjusted EBITDA" and Note 7 to our audited consolidated financial statements included elsewhereherein.
| | Year ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2017 | 2016 | 2015 | |||||||
| | (in millions of U.S. dollars) | |||||||||
Russia | 1,788 | 1,574 | 1,825 | |||||||
Pakistan | 703 | 507 | 409 | |||||||
Algeria | 426 | 547 | 684 | |||||||
Bangladesh | 233 | 267 | 242 | |||||||
Ukraine | 347 | 306 | 292 | |||||||
Uzbekistan | 261 | 395 | 437 | |||||||
HQ(1) | (325 | ) | (421 | ) | (1,291 | ) | ||||
Others(2) | 154 | 57 | 277 | |||||||
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Total | 3,587 | 3,232 | 2,875 | |||||||
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20-F, see "
| Year ended December 31, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
| (In millions of US dollars) | ||||||||||||
Russia | 7,459 | 9,109 | 9,190 | |||||||||
Italy | 6,155 | 6,618 | 6,982 | |||||||||
Algeria | 1,692 | 1,796 | 1,843 | |||||||||
Africa & Asia | 1,668 | 1,710 | 1,880 | |||||||||
Ukraine | 1,062 | 1,610 | 1,676 | |||||||||
CIS | 1,873 | 1,946 | 1,755 | |||||||||
Intersegment and other | (281 | ) | (243 | ) | (265 | ) | ||||||
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Total | 19,627 | 22,546 | 23,061 | |||||||||
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The following table showsreconciliation with the percentagehistorical "HQ and Others" segment data. For a discussion of the treatment of our "Others" category and our operations in Kazakhstan for each of the periods discussed in this Annual Report on Form 20-F, see "—Reportable Segments."
Our total Adjusted EBITDA increased by 11% to US$ 3,587 million during 2017 compared to US$3,232 million during 2016, primarily due to the increase in total operating revenue representeddiscussed above partially offset by each reportable segment’sthe increase in service costs and selling, general and administrative expenses.
Our total Adjusted EBITDA increased by 12% to US$3,232 million during 2016 compared to US$2,875 million during 2015, primarily due to a US$900 million provision with respect to agreements with the SEC, DOJ and OM, included in operating expenses for 2015, that was not included in our consolidated total operating expenses for 2016. The increase was partially offset by a decrease in revenue from external customers (excluding intersegment revenue) for each reportable segment for the periods indicated:
| Year ended December 31, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
Russia | 37.5 | % | 40.0 | % | 39.5 | % | ||||||
Italy | 31.3 | % | 29.3 | % | 30.3 | % | ||||||
Algeria | 8.6 | % | 8.0 | % | 7.9 | % | ||||||
Africa & Asia | 8.5 | % | 7.5 | % | 8.2 | % | ||||||
Ukraine | 5.0 | % | 6.8 | % | 6.9 | % | ||||||
CIS | 9.1 | % | 8.3 | % | 7.2 | % | ||||||
Other revenue and adjustments | — | 0.1 | % | — | ||||||||
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Total | 100.0 | % | 100.0 | % | 100.0 | % | ||||||
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Segmentation of Adjusted EBITDA
| Year ended December 31, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
| (In millions of US dollars) | ||||||||||||
Russia | 2,980 | 3,815 | 3,878 | |||||||||
Italy | 2,416 | 2,598 | 2,658 | |||||||||
Algeria | 857 | (212 | ) | 1,047 | ||||||||
Africa & Asia | 579 | 617 | 691 | |||||||||
Ukraine | 484 | 781 | 859 | |||||||||
CIS | 912 | 856 | 813 | |||||||||
Other (including HQ) | (258 | ) | (195 | ) | (178 | ) | ||||||
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Total | 7,970 | 8,260 | 9,768 | |||||||||
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Revenue
During the three years ended December 31, 2014, we generated revenue from providing voice, data and other telecommunication services through a range of traditional and broadband mobile and fixed technologies, as well as selling equipment and accessories.during 2016.
Service Revenue
Our service revenue included revenue from airtime charges from postpaid and prepaid customers, monthly contract fees, time charges from customers online using Internet services, interconnect fees from other mobile and fixed-line operators, roaming charges and charges for value added services such as messaging, data and infotainment. Roaming revenue includes both revenue from our customers who roam outside of their home country networks and revenue from other wireless carriers for roaming by their customers on our network. Roaming revenue does not include revenue from our own customers roaming while traveling across Russian regions within our network (so called “intranet roaming”).
Sales of Equipment and Accessories and Other Revenue
We sold mobile handsets, equipment and accessories to our customers. Our other revenue included, among other things, revenue arising from the settlement of commercial disputes, penalties charged to suppliers and rental of base station sites.
Expenses
Total Operating Expenses
During the three years ended December 31, 2014, we had two categories of Our consolidated total operating expenses directly attributableincreased by 2% to our revenue:US$7,968 million during 2017 compared to US$7,801 million during 2016. The increase was primarily due to increases in service costs and the costs of equipment and accessories.
Service Costs
Service costs included interconnection and traffic costs, channel rental costs, telephone line rental costs, roaming expenses and charges for connection to special lines for emergencies.
Costs of Equipment and Accessories
Our costscost of equipment and accessories sold represented the amount that was payable for these goods, net of VAT. We purchased handsets, equipment and accessories from third party manufacturers for resale to our customers for use on our networks.
In addition to service costs and the costs of equipment and accessories, during the three years ended December 31, 2014, our operating expenses included:
Selling, General and Administrative Expenses
OurUS$154 million, in selling, general and administrative expenses include:of US$80 million as a result of increased personnel costs and in amortization expenses of US$40 million partially as a result of accelerated amortization of brand names in Pakistan and the acquisition of a 4G/LTE license in Pakistan in 2017. The increase was partially offset by a decrease in impairment losses of US$126 million.
Our consolidated total operating expenses decreased by 14% to US$7,801 million during 2016 compared to US$9,082 million during 2015. The decrease was primarily due to a US$900 million provision with respect to agreements with the SEC, DOJ and OM, included in operating expenses for the year ended December 31, 2015, that was not included in our consolidated total operating expenses
dealers’ commissions;
salaries and outsourcing costs, including related social contributions required by law;
marketing and advertising expenses;
repair and maintenance expenses;
rent, including lease payments for base station sites;
utilities;
provision for doubtful accounts;
stock price-based compensation expenses;
litigation provisions; and
other miscellaneous expenses, such as insurance, operating taxes, license fees, and accounting, audit and legal fees.
Depreciation and Amortization ExpenseTable of Contents
for 2016. We depreciated the capitalizedalso saw decreases in service costs and cost of our tangible assets, which consisted mainlyequipment and accessories of telecommunications equipment including softwareUS$183 million, in impairment losses of US$53 million and buildings that we owned. We amortized our intangible assets, which consisted primarily of telecommunications licenses, telephone line capacity for local numbers and customer relations acquireda decrease in business combinations. We expect depreciation and amortization expenses of US$131 million for the year ended December 31, 2016 as compared to the year ended December 31, 2015.
Depreciation expenses
Our consolidated depreciation expenses increased by 1% to US$1,454 million in 2017 compared to US$1,439 million in 2016. The increase was primarily the result of appreciation of the Russian ruble.
Our consolidated depreciation expenses decreased by 7% to US$1,439 million in line with growth2016 compared to US$1,550 million in 2015. The decrease was primarily the result of depreciation of our capital expenditures.functional currencies against the U.S. dollar, partially offset by accelerated depreciation due to the equipment swap in Ukraine and Pakistan.
Amortization expenses
Our consolidated amortization expenses increased by 8% to US$537 million in 2017 compared to US$497 million in 2016 primarily due to the accelerated amortization of brand names in Pakistan and the acquisition of a 4G/LTE license in Pakistan in 2017.
Our consolidated amortization expenses decreased by 4% to US$497 million in 2016 compared to US$517 million in 2015. The decrease was primarily the result of depreciation of our functional currencies against the U.S. dollar.
Impairment Lossloss
Impairment loss represents losses from Our consolidated impairment amounted to US$66 million in 2017 primarily related to goodwill impairment in Armenia of US$34 million and in Kyrgyzstan of US$17 million and an asset impairment of long-livedUS$15 million in connection with our transformation strategy and commitment to network modernization.
Our consolidated impairment loss in 2016 amounted to US$192 million primarily related to goodwill impairment in Kyrgyzstan of US$49 million; goodwill, property, equipment and intangible assets includingimpairment in Tajikistan of US$76 million; property, equipment and intangible assets impairment in Georgia for US$29 million and an asset impairment of US$30 million in connection with our transformation strategy and commitment to network modernization.
The impairment loss in 2015 primarily related to goodwill as well as investmentsimpairment in associates.Ukraine of US$51 million and in Armenia of US$44 million.
For further information on our impairment loss, see Note 10 of our audited consolidated financial statements.
Loss on Disposalsdisposals of Non-current Assetsnon-current assets
Loss Our consolidated loss on disposals of non-current assets amounted to US$24 million in 2017 compared to US$20 million in 2016. Our consolidated loss on disposals of non-current assets amounted to US$39 million in 2015. The disposal of non-current assets representsrelates to the ongoing maintenance of network and ongoing network modernization projects.
Operating Profit
Our consolidated operating profit increased by 39% to US$ 1,506 million in 2017 compared to US$1,084 million in 2016 due to the increase of total operating revenue partially offset by the increase of total operating expenses discussed above.
Our consolidated operating profit increased by 107% to US$1,084 million in 2016 compared to US$524 million in 2015 due to one-off provision recorded with respect to agreements with the SEC, DOJ and OM, included in operating expenses for the year ended December 31, 2015.
Non-operating Profits and Losses
Finance costs
Our consolidated finance costs increased by 13% to US$935 million in 2017 compared to US$830 million in 2016. The increase was mainly due the revaluation of the put option liability for Warid in Pakistan.
Our consolidated finance costs were broadly stable and amounted to US$830 million in 2016 compared to US$829 million in 2015.
Finance income
Our consolidated finance income increased by 38% to US$95 million in 2017 compared to US$69 million in 2016, primarily due to increased interest from bank deposits.
Our consolidated finance income increased by 33% to US$69 million for the year ended December 31, 2016 compared to US$52 million for the year ended December 31, 2015, primarily due to increased interest from bank deposits.
Other non-operating losses
We recorded US$97 million in other non-operating losses during 2017 compared to US$82 million in losses during 2016, an increase of 18%. The change was primarily due to early redemption fees of US$124 million recorded as part of the refinancing activities during 2017, partially offset by a decrease of losses from disposalrevaluation of non-currentfair value of derivative contracts in 2017.
We recorded US$82 million in other non-operating losses during 2016 compared to US$42 million in losses during 2015, an increase of 95%. The change was primarily due to the negative fair value change of foreign exchange contracts by US$120 million in 2016, partially offset by the increased fair value of investments in financial assets when they are sold or written off.by US$21 million and the increased fair value of embedded derivatives by US$12 million.
Shares of (loss)/profit of associates and joint ventures
We recorded a loss of US$412 million from our investments in associates and joint ventures in 2017 compared to a profit of US$48 million in 2016. For more information on the Italy Joint Venture, see "Explanatory Note—Presentation of Financial Information of the Italy Joint Venture."
The decrease in the portion of the Italy Joint Venture's earnings/(losses) that represents our direct share, from a loss of US$390 million in 2017 to a profit of US$59 million in 2016, reflects: (i) a decline in mobile service revenue primarily due to aggressive competition, which resulted in a decreased customer base; (ii) accelerated depreciation of network assets related to a network modernization project; (iii) loss on early redemption of bonds; (iv) one-off integration costs of EUR 266 million and (v) a decline in mobile consumer premises equipment revenue primarily due to lower volume of gross additions and a more selective mobile customer scoring.
In 2016, we recorded a profit of US$48 million from our investments in associates and joint ventures in 2016 compared to a profit of US$14 million in 2015. This was mainly driven by profit from the Italy Joint Venture of US$59 million.
| | Year ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2017 | 2016 | 2015 | |||||||
| | (in millions of U.S. dollars) | |||||||||
Italy Joint Venture | (390 | ) | 59 | — | ||||||
Euroset | (22 | ) | (10 | ) | 18 | |||||
Other | — | (1 | ) | (4 | ) | |||||
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Total | (412 | ) | 48 | 14 | ||||||
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For further discussion of the results of operations our Italy Joint Venture, see"—Further Information Regarding the Results of Operations of the Italy Joint Venture."
Impairment of associates and joint ventures
We recorded US$110 million in impairment of associates and joint ventures during 2017 compared to US$99 million during 2016. The impairments during both 2017 and 2016 were recorded in respect of the investment in Euroset, due to continued operational underperformance of the joint venture.
Net foreign exchange (loss)/gain
We recorded a loss of US$71 million from foreign currency exchange in 2017 compared to a gain of US$157 million from foreign currency exchange in 2016. This was primarily driven by appreciation of Russian ruble and depreciation of Uzbek som, Bangladeshi taka and Pakistani rupee against the U.S. dollar in 2017.
We recorded a gain of US$157 million from foreign currency exchange in 2016 compared to a loss of US$314 million from foreign currency exchange in 2015. This trend was primarily driven by the appreciation of the Russian ruble against the U.S. dollar in 2016 compared to the depreciation of the Russian ruble against the U.S. dollar in 2015.
Finance CostsIncome Tax Expense
The statutory income tax rates during the years ended December 31, 2017, 2016 and 2015 were as follows:
| | Year ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2017 | 2016 | 2015 | |||||||
Russia | 20.0 | % | 20.0 | % | 20.0 | % | ||||
Pakistan | 30.0 | % | 31.0 | % | 32.0 | % | ||||
Algeria | 26.0 | % | 26.0 | % | 26.0 | % | ||||
Bangladesh | 45.0 | % | 45.0 | % | 45.0 | % | ||||
Ukraine | 18.0 | % | 18.0 | % | 18.0 | % | ||||
Uzbekistan | 50.0 | % | 50.0 | % | 7.5 | % | ||||
Uzbekistan subnational tax | 3.3 | % | 3.3 | % | 3.3 | % | ||||
Luxembourg | 27.08 | % | 22.47 | % | 22.47 | % | ||||
Netherlands | 25.0 | % | 25.0 | % | 25.0 | % | ||||
Italy | 24.0 | % | 27.5 | % | 27.5 | % | ||||
Italy regional tax | 3.9 | % | 3.9 | % | 4.8 | % | ||||
Our consolidated income tax expense decreased by 26% to US$472 million in 2017 compared to US$635 million in 2016. The decrease in income taxes was primarily driven by losses in Uzbekistan due to significant devaluation of Uzbek som (as a result of which a deferred tax asset has been recognized for this foreign exchange loss expected to be used within 4 years) and decreased incomes taxes in Russia due to additional losses resulting from revised tax return filings and one-off expenses.
Our consolidated income tax expense increased by 189% to US$635 million in 2016 compared to US$220 million in 2015. The increase in income taxes was primarily due to an increase in tax rate in Uzbekistan from 7.5% to 50% and higher profits in countries with higher nominal tax rates. Furthermore, our Historical WIND Business has tax losses, for which a deferred tax asset has been recognized of approximately US$95 million. As a result of the Italy Joint Venture, we will no longer be able to offset these losses against future profits of the Italy Joint Venture. As a consequence, the deferred tax asset of US$95 million was written down. In addition, in 2015 we decreased the provisions for future withholding taxes on intercompany dividends by US$200 million.
For information regarding our income tax, see Note 12 to our audited consolidated financial statements.
Loss for the year from continuing operations
In 2017, our consolidated loss for the period from continuing operations was US$496 million, compared to US$288 million of loss in 2016, primarily as a result of a loss from the Italy Joint Venture, increased financial costs and net foreign exchange losses recognized during 2017, partially offset by increased operating profit and decreased income tax expenses.
In 2016, our consolidated loss for the period from continuing operations was US$288 million, compared to US$815 million of loss in 2015, primarily as a result of the US$900 million provision with respect to agreements with the SEC, DOJ and OM, included in operating expenses for 2015, that was not included in our consolidated total operating expenses for 2016, and for the other reasons described above.
Profit for the year from discontinued operations
In 2016, our consolidated profit after tax for the period from discontinued operations, which was comprised primarily of our Historical WIND Business, was US$2,708 million, compared to US$262 million of profit in 2015. The completion of the Italy Joint Venture transaction resulted in a non-cash gain on disposal of US$1,788 million, which was the difference between the book value of the deconsolidated Italian operations and the fair value of the investment in the new joint venture recorded on the balance sheet.
(Loss)/profit for the Year
In 2017, the consolidated loss for the period was US$483 million compared to a profit of US$2,328 million in 2016. The change was mainly due to the gain recognized in 2016 on the disposal of the discontinued operation and other factors as discussed above.
In 2016, the consolidated profit for the period was US$2,328 million compared to a loss of US$655 million in 2015. The increase was mainly due to the gain recognized in 2016 on the disposal of the discontinued operation and other factors as discussed above.
(Loss)/profit for the Year Attributable to Non-controlling Interest
Our loss for the period attributable to non-controlling interest was US$13 million in 2017 compared to a profit of US$92 million in 2016 as a result of loss for the year recognized by GTH in 2017 as compared to a profit recognized by GTH in 2016.
Our profit for the period attributable to non-controlling interest was US$92 million in 2016 compared to a profit of US$102 million, a decrease of 9.8%, in 2015 as a result of decreased profit for the year in Kazakhstan and Kyrgyzstan, partially offset by increased profit by GTH.
Russia
Results of operations in US$
| | Year ended December 31, | '16 - '17 | '15 - '16 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| in millions of U.S. dollars (except as indicated) | 2017 | 2016 | 2015 | % change | |||||||||
Total operating revenue | 4,729 | 4,097 | 4,583 | 15% | (11)% | ||||||||
Mobile service revenue | 3,843 | 3,276 | 3,624 | 17% | (10)% | ||||||||
—of which FMC | 87 | 23 | — | 271% | — | ||||||||
—of which mobile data | 1,012 | 778 | 719 | 30% | 8% | ||||||||
Fixed-line service revenue | 673 | 665 | 789 | 1% | (16)% | ||||||||
Sales of equipment, accessories and other | 213 | 156 | 170 | 37% | (8)% | ||||||||
Operating expenses | 2,941 | 2,523 | 2,758 | 17% | (9)% | ||||||||
Adjusted EBITDA | 1,788 | 1,574 | 1,825 | 14% | (14)% | ||||||||
Adjusted EBITDA margin | 38 | % | 38 | % | 40 | % | (0.6p.p.) | (1.4p.p.) | |||||
Results of operations in RUB
| | Year ended December 31, | '16 - '17 | '15 - '16 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| in millions of RUB (except as indicated) | 2017 | 2016 | 2015 | % change | |||||||||
Total operating revenue | 275,887 | 273,003 | 277,241 | 1% | (2)% | ||||||||
Mobile service revenue | 224,186 | 218,192 | 219,031 | 3% | 0% | ||||||||
—of which FMC | 5,064 | 1,496 | — | 238% | — | ||||||||
—of which mobile data | 59,041 | 51,773 | 43,581 | 14% | 19% | ||||||||
Fixed-line service revenue | 39,271 | 44,418 | 47,748 | –12% | (7)% | ||||||||
Sales of equipment, accessories and other | 12,430 | 10,393 | 10,462 | 20% | (1)% | ||||||||
Operating expenses | 171,545 | 168,213 | 167,096 | 2% | 1% | ||||||||
Adjusted EBITDA | 104,342 | 104,790 | 110,145 | 0% | (5)% | ||||||||
Adjusted EBITDA margin | 38 | % | 38 | % | 40 | % | (0.6p.p.) | (1.3p.p.) | |||||
Certain Performance Indicators
| | Year ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2017 | 2016 | 2015 | |||||||
Mobile | ||||||||||
Customers in millions | 58.2 | 58.3 | 59.8 | |||||||
Mobile ARPU in US$ | 5.5 | 4.6 | 5.1 | |||||||
Mobile ARPU in RUB | 319 | 306 | 310 | |||||||
Mobile data customers | 38.4 | 36.6 | 34.3 | |||||||
Fixed-Line | ||||||||||
Broadband customers in millions | 2.2 | 2.2 | 2.2 | |||||||
Year Ended December 31, 2017 Compared to Year Ended December 31, 2016
Mobile revenue
Our total operating revenue in Russia increased by 15% to US$4,729 million in 2017 compared to US$4,097 million in 2016 due to the strengthening of the Russian ruble.
In functional currency terms, total operating revenue in Russia increased by 1% due to increases in service revenue and revenue from sale of equipment and accessories. The 14% growth of mobile data revenue is due to increased penetration of smartphones and customer migration to bundled tariff plans with higher data allowance. We also recorded increased MFS revenue and VAS revenue. This growth was partially offset by a decrease in mobile voice and fixed-line revenue. The mobile voice revenue decrease is due to substitution of voice calls by data-based services and customer migration to new data centric tariff plans. The fixed-line revenue decrease was driven by the reduction of low-marginal wholesale traffic, the effect of the strengthening of the Russian ruble on foreign currency contracts and growing penetration of FMC services in the customer base.
Adjusted EBITDA
Our Russia Adjusted EBITDA increased by 14% to US$1,788 million in 2017 compared to US$1,574 million in 2016 due to the Russian ruble strengthening. In functional currency terms, our Russia Adjusted EBITDA was broadly stable in 2017.
Certain performance indicators
As of December 31, 2017, we had 58.2 million mobile customers in Russia, including 0.8 million FMC customers, representing a decrease of 0.3% from 58.3 million mobile customers as of December 31, 2016, due to the temporary impact of distribution channels reorganization.
In 2017, our mobile ARPU in Russia increased by 19% to US$5.5 compared to US$4.6 in 2016, primarily as a result of foreign exchange effects. In functional currency terms, mobile ARPU in Russia increased by 4%, due to continued efforts to simplify tariff plans, successful customer base management and increase in penetration of bundled offerings.
As of December 31, 2017, we had 38.4 million mobile data customers, representing an increase of 5% from 36.6 million mobile data customers as of December 31, 2016. The increase was mainly due to the increased smartphone penetration in Russia.
The fixed line broadband customers are mainly represented by FTTB customers. As of December 31, 2017, we had 2.2 million fixed line customers in Russia, including 0.8 million FMC customers, representing an increase of 3% from 2.2 million fixed-line customers as of December 31, 2016. The increase was a result of increased sales and churn improvement.
Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
Mobile revenue
Our total operating revenue in Russia decreased by 11% to US$4,097 million in 2016 compared to US$4,583 million in 2015 mainly due to the weakening of the average exchange rate from Russian ruble to the U.S. dollar in 2016, particularly in the first half of the year. In functional currency terms, total operating revenue in Russia decreased by 2% due to decreased fixed-line service revenue, mainly driven by a change in B2B fixed-line contracts from U.S. dollar to Russian ruble and lower B2C revenue. This was partially offset by an increase in mobile data revenue of 19% as a result of increased smartphone penetration, growth in mobile data customers, customer traffic growth and active bundle promotion. The increase in mobile data revenue was partially offset by lower voice and roaming revenue due to an average price per minute reduction as existing customers continued to migrate to the
company's current price plans. Mobile service revenue was stable, driven by strong growth in mobile data revenue.
Adjusted EBITDA
Our Russia Adjusted EBITDA decreased by 14% to US$1,574 million in 2016 compared to US$1,825 million in 2015, mainly due to the decrease in the average exchange rate from Russian ruble to the U.S. dollar during 2016, particularly in the first half of the year. In functional currency terms, our Russia Adjusted EBITDA decreased by 5% in 2016 compared to previous year, primarily as a result of a revenue decrease, as discussed above, and negative foreign exchange effect on roaming and interconnect costs, which are incurred interestin U.S. dollars.
Certain performance indicators
As of December 31, 2016, we had approximately 58.3 million mobile customers in Russia, including 0.6 million FMC customers, representing a decrease of 3% from approximately 59.8 million mobile customers as of December 31, 2015, which we believe was due to the lower number of seasonal workers during 2016 as a result of the macroeconomic developments in the country and increased churn, reflecting the increased competition in the market.
In 2016, our mobile ARPU in Russia decreased by 10% to US$4.6 compared to US$5.1 in 2015, primarily as a result of foreign exchange effects. In functional currency terms, mobile ARPU in Russia decreased by 1%, due to lower voice and roaming revenue attributed to an average price per minute reduction as existing customers migrated to new price plans, partially offset by an increase in mobile data revenue.
As of December 31, 2016, we had approximately 36.6 million mobile data customers, representing an increase of 7% from approximately 34.3 million mobile data customers as of December 31, 2015. The increase was mainly due to the increased smartphone penetration in the customer base as a result of device promotions.
The fixed-line broadband customers are mainly represented by FTTB customers. As of December 31, 2016, we had approximately 2.2 million fixed-line customers in Russia, including 0.5 million FMC customers, compared to approximately 2.2 million fixed-line customers as of December 31, 2015.
Pakistan
On July 1, 2016, VEON Ltd., together with its subsidiary GTH, acquired 100% of the voting shares in Warid, a mobile telecommunications provider. VEON Ltd. consolidated Warid financials in the Pakistan segment starting from July 1, 2016, which affects comparability among the periods provided below. For more information regarding our acquisitions and dispositions, see Note 5 to our audited consolidated financial statements incorporated herein.
Results of operations in US$
| | Year ended December 31, | '16 - '17 | '15 - '16 | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| in millions of U.S. dollars (except as indicated) | 2017 | 2016 | 2015 | % change | ||||||||||||
Total operating revenue | 1,525 | 1,295 | 1,014 | 18 | % | 28 | % | |||||||||
Mobile service revenue | 1,418 | 1,217 | 960 | 17 | % | 27 | % | |||||||||
—of which mobile data | 225 | 155 | 86 | 45 | % | 81 | % | |||||||||
Sales of equipment, accessories and other | 107 | 78 | 54 | 37 | % | 45 | % | |||||||||
Operating expenses | 822 | 788 | 605 | 4 | % | 30 | % | |||||||||
Adjusted EBITDA | 703 | 507 | 409 | 39 | % | 24 | % | |||||||||
Adjusted EBITDA margin | 46 | % | 39 | % | 40 | % | 7.0p. | p. | (1.2p. | p.) | ||||||
Results of operations in PKR
| | Year ended December 31, | '16 - '17 | '15 - '16 | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| in millions of PKR (except as indicated) | 2017 | 2016 | 2015 | % change | ||||||||||||
Total operating revenue | 160,679 | 135,602 | 104,181 | 18 | % | 30 | % | |||||||||
Mobile service revenue | 149,393 | 127,414 | 98,649 | 17 | % | 29 | % | |||||||||
—of which mobile data | 23,743 | 16,248 | 8,812 | 46 | % | 84 | % | |||||||||
Sales of equipment, accessories and other | 11,286 | 8,188 | 5,532 | 38 | % | 48 | % | |||||||||
Operating expenses | 86,583 | 82,539 | 62,137 | 5 | % | 33 | % | |||||||||
Adjusted EBITDA | 74,096 | 53,063 | 42,044 | 40 | % | 26 | % | |||||||||
Adjusted EBITDA margin | 46 | % | 39 | % | 40 | % | 7.0p. | p. | (1.2p. | p.) | ||||||
Certain Performance Indicators
| | Year ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2017 | 2016 | 2015 | |||||||
Mobile | ||||||||||
Customers in millions | 53.6 | 51.6 | 36.2 | |||||||
Mobile ARPU in US$ | 2.2 | 2.3 | 2.1 | |||||||
Mobile ARPU in PKR | 236 | 241 | 219 | |||||||
Mobile data customers in millions | 28.5 | 25.1 | 16.8 | |||||||
Year Ended December 31, 2017 Compared to Year Ended December 31, 2016
Mobile revenue
In 2017, our Pakistan total operating revenue increased by 18% to US$1,525 million compared to US$1,295 million in 2016, as a result of the Pakistan Merger increased data revenues, supported by customer growth. In functional currency terms, our Pakistan total operating revenue increased by 18%.
Adjusted EBITDA
Our Pakistan Adjusted EBITDA increased by 39% to US$703 million in 2017 compared to US$507 million in 2016 primarily due to the Pakistan Merger, higher revenue, synergy effect over operating expenses and a positive impact from a release of historic SIM tax accruals. In functional currency terms, our Pakistan Adjusted EBITDA increased by 40%.
Certain performance indicators
As of December 31, 2017, we had 53.6 million customers in Pakistan, representing an increase of 4% from 51.6 million customers as of December 31, 2016, primarily driven by continued increase of customer acquisition combined with lower churn through focus on price simplicity and efficient distribution channel management.
In 2017, our mobile ARPU in Pakistan was US$2.20, or PKR 236. Our 2016 mobile ARPU figures in Pakistan are not comparable as 2016 mobile ARPU consists of 6 months of Mobilink mobile ARPU and 6 months of Jazz, while 2017 mobile ARPU is derived only from Jazz figures.
As of December 31, 2017, we had 28.5 million mobile data customers in Pakistan, representing an increase of 13% from 25.1 million mobile data customers as of December 31, 2016. The increase was due to customer base migration to bundled tariff plans and continued network expansion.
Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
Mobile revenue
Our Pakistan total operating revenue increased by 28% to US$1,295 million in 2016 compared to US$1,014 million in 2015, primarily as a result of the Pakistan Merger on July 1, 2016. In functional currency terms, total operating revenue in Pakistan increased by 30% as a result of the Pakistan Merger and an increase in voice, interconnect, SMS and data revenues supported by customer growth. Our data revenue grew by 81% as a result of the Pakistan Merger, successful data monetization initiatives, data device promotions and 3G network expansion. In addition, mobile financial services revenue grew by 46% in functional currency terms in 2016 as compared to 2015 due to an increase in the number of transactions and an increase in sales by our agents. Our Pakistan segment sales of equipment and accessories and other revenue increased by 45%, primarily driven by network sharing activities.
Adjusted EBITDA
Our Adjusted EBITDA in Pakistan increased by 24% to US$507 million in 2016 compared to US$409 million in 2015. In functional currency terms, our Adjusted EBITDA increased by 26% in 2016 compared to the previous year, primarily due to the Pakistan Merger, higher revenue, as discussed above, performance transformation initiatives and a decrease in network costs. This increase was partially offset by integration costs.
Certain performance indicators
As of December 31, 2016, we had approximately 51.6 million customers in Pakistan, representing an increase from 36.2 million customers as of December 31, 2015, primarily as a result of the Pakistan Merger in July 1, 2016 and simplification of tariffs, resulting in higher gross additions.
In 2016, our mobile ARPU in Pakistan increased by 8% to US$2.3 compared to US$2.1 in 2015. In functional currency terms, mobile ARPU in Pakistan increased in 2016 by 10% compared to 2015, mainly due to data revenue growth and changes in customer pricing.
As of December 31, 2016, we had approximately 25.1 million mobile data customers in Pakistan, representing an increase of approximately 50% from the approximately 16.8 million mobile data customers as of December 31, 2015. The increase was mainly due to the Pakistan Merger on July 1, 2016, the 3G expansion and increased smartphone penetration in the customer base.
Algeria
Results of operations in US$
| | Year ended December 31, | '16 - '17 | '15 - '16 | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| in millions of U.S. dollars (except as indicated) | 2017 | 2016 | 2015 | % change | ||||||||||||
Total operating revenue | 915 | 1,040 | 1,273 | (12 | )% | (18 | )% | |||||||||
Mobile service revenue | 898 | 1,031 | 1,259 | (13 | )% | (18 | )% | |||||||||
—of which mobile data | 113 | 76 | 46 | 55 | % | 65 | % | |||||||||
Sales of equipment, accessories and other | 17 | 9 | 14 | 80 | % | (36 | )% | |||||||||
Operating expenses | 489 | 493 | 589 | (1 | )% | (16 | )% | |||||||||
Adjusted EBITDA | 426 | 547 | 684 | (22 | )% | (20 | )% | |||||||||
Adjusted EBITDA margin | 47 | % | 53 | % | 54 | % | (6.1p. | p.) | (1.1p. | p.) | ||||||
Results of operations in DZD
| | Year ended December 31, | '16 - '17 | '15 - '16 | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| in millions of DZD (except as indicated) | 2017 | 2016 | 2015 | % change | ||||||||||||
Total operating revenue | 101,457 | 113,727 | 127,552 | (11 | )% | (11 | )% | |||||||||
Mobile service revenue | 99,588 | 112,706 | 126,078 | (12 | )% | (11 | )% | |||||||||
—of which mobile data | 12,586 | 8,006 | 4,648 | 57 | % | 78 | % | |||||||||
Sales of equipment, accessories and other | 1,869 | 1,021 | 1,474 | 83 | % | (31 | )% | |||||||||
Operating expenses | 54,301 | 53,929 | 58,998 | 1 | % | (9 | )% | |||||||||
Adjusted EBITDA | 47,156 | 59,798 | 68,554 | (21 | )% | (13 | )% | |||||||||
Adjusted EBITDA margin | 46 | % | 53 | % | 54 | % | (6.1p. | p.) | (1.2p. | p.) | ||||||
Certain Performance Indicators
| | Year ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2017 | 2016 | 2015 | |||||||
Mobile | ||||||||||
Customers in millions | 15.0 | 16.3 | 17.0 | |||||||
Mobile ARPU in US$ | 4.8 | 5.1 | 6.0 | |||||||
Mobile ARPU in DZD | 529 | 562 | 603 | |||||||
Mobile data customers | 7.2 | 7.0 | 4.1 | |||||||
Year Ended December 31, 2017 Compared to Year Ended December 31, 2016
Mobile revenue
Our Algeria total operating revenue decreased by 12% to US$915 million in 2017 compared to US$1,040 million in 2016 due to a difficult macroeconomic environment and strong competitive environment. Total operating revenue for the full year 2017 was also affected by a new finance law, effective from January 2017, which increased VAT from 7% to 19% on data services and from 17% to 19% on voice services, and increased taxes on recharges from 5% to 7%. These taxes and recharges were not passed on to customers. In addition, revenue was negatively affected by customer churn, caused by competitive pressure in the market. The competitive pressure also resulted in a rate decrease by Djezzy. Data revenue growth, however, remained strong due to higher usage and an increase in data customers as a result of the rollout of 3G and 4G/LTE networks.
In functional currency terms, total operating revenue in Algeria decreased by 11%.
Adjusted EBITDA
Our Algeria Adjusted EBITDA decreased by 22% to US$426 million in 2017 compared to US$547 million in 2016 primarily due to the decrease in total operating revenues, as discussed above, along with increased personnel costs.
In functional currency terms, our Algeria Adjusted EBITDA decreased by 21%.
Certain performance indicators
Customers in our Algeria segment decreased by 8% to 15.0 million as of December 31, 2017 compared to 16.3 million customers as of December 31, 2016. The decrease was mainly due to competitive pressure in the market.
In 2017, our mobile ARPU in Algeria decreased by 7% to US$4.8 compared to US$5.1 in 2016. In functional currency terms, our mobile ARPU in Algeria decreased by 6%, mainly due to aggressive price competition and rate decrease by Djezzy.
As of December 31, 2017, we had approximately 7.2 million mobile data customers in Algeria, representing an increase of 3% from the 7.0 million mobile data customers as of December 31, 2016. The increase was mainly due to the acceleration of 4G/LTE network deployment and increased smartphone penetration.
Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
Mobile revenue
Our Algeria total operating revenue decreased by 18% to US$1,040 million in 2016 compared to US$1,273 million in 2015 partly due to the depreciation of the Algerian dinar against the U.S. dollar. In functional currency terms, total operating revenue in Algeria decreased by 11% due to a change in customer billing terms, the required migration of customers from legacy tariffs, aggressive price competition and distribution challenges as compared to 2015. Our data revenue increased due to increased data usage in terms of amount of megabytes used and number of data users, primarily as a result of the revived 3G roll-out following the lifting of governmental restrictions in November 2015. Our segment sales of equipment and accessories and other revenue decreased by 36% due in part to the depreciation of the Algerian dinar against the U.S. dollar, partially offset by more affordable device promotions launched during 2016.
Adjusted EBITDA
Our Algeria Adjusted EBITDA decreased by 20% to US$547 million in 2016 compared to US$684 million in 2015. In functional currency terms, our Algeria Adjusted EBITDA decreased by 13% in 2016 compared to the previous year, primarily due to a decrease in total revenues, as discussed above, partially offset by a decrease in operating expenses due to commercial and other general and administrative expense cost optimization and headcount reduction as a result of our performance transformation program. In addition to the decrease in revenue, our Adjusted EBITDA in Algeria was negatively impacted by costs in relation to structural measures to improve performance and stabilize our customer base, including distribution transformation and monobrand roll-out, acceleration of our 4G/LTE network deployment and promotion of micro-campaigns with tailored services to increase satisfaction, data monetization activities and smartphone promotions, coupled with bundle offers.
Certain performance indicators
Customers in our Algeria segment decreased to approximately 16.3 million as of December 31, 2016 compared to 17.0 million customers as of December 31, 2015. The 4% decrease was mainly due
to the combined impact of historic 3G coverage shortfalls, changes in customer billing terms, required migration and distribution challenges.
In 2016, our mobile ARPU in Algeria decreased by 15% to US$5.1 compared to US$6.0 in 2015. In functional currency terms, our mobile ARPU in Algeria decreased by 7%, mainly due to aggressive price competition and high-value customer churn.
As of December 31, 2016, we had approximately 7.0 million mobile data customers in Algeria, representing an increase of approximately 69% from the approximately 4.1 million mobile data customers in Algeria as of December 31, 2015. The increase was mainly due to the rapid 3G expansion during the last twelve months.
Bangladesh
Results of operations in US$
| | Year ended December 31, | '16 - '17 | '15 - '16 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| in millions of U.S. dollars (except as indicated) | 2017 | 2016 | 2015 | % change | |||||||||
Total operating revenue | 574 | 621 | 604 | (7)% | 3% | ||||||||
Mobile service revenue | 557 | 606 | 596 | (8)% | 2% | ||||||||
of which mobile data | 78 | 63 | 42 | 25% | 50% | ||||||||
Sales of equipment, accessories and other | 17 | 15 | 8 | 15% | 76% | ||||||||
Operating expenses | 341 | 354 | 362 | (3)% | (2)% | ||||||||
Adjusted EBITDA | 233 | 267 | 242 | (13)% | 10% | ||||||||
Adjusted EBITDA margin | 41 | % | 43 | % | 40 | % | (2.5p.p.) | 3.0p.p. | |||||
Results of operations in BDT
| | Year ended December 31, | '16 - '17 | '15 - '16 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| in millions of BDT (except as indicated) | 2017 | 2016 | 2015 | % change | |||||||||
Total operating revenue | 46,471 | 48,687 | 47,114 | (5)% | 3% | ||||||||
Mobile service revenue | 45,072 | 47,506 | 46,448 | (5)% | 2% | ||||||||
—of which mobile data | 6,308 | 4,909 | 3,247 | 29% | 51% | ||||||||
Sales of equipment, accessories and other | 1,399 | 1,181 | 666 | 18% | 77% | ||||||||
Operating expenses | 27,630 | 27,723 | 28,243 | 0% | (2)% | ||||||||
Adjusted EBITDA | 18,841 | 20,964 | 18,871 | (10)% | 11% | ||||||||
Adjusted EBITDA margin | 41 | % | 43 | % | 40 | % | (2.5p.p.) | 3.0p.p. | |||||
Certain Performance Indicators
| | Year ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2017 | 2016 | 2015 | |||||||
Mobile | ||||||||||
Customers in millions | 31.3 | 30.4 | 32.3 | |||||||
Mobile ARPU in US$ | 1.5 | 1.6 | 1.6 | |||||||
Mobile ARPU in BDT | 121 | 126 | 122 | |||||||
Mobile data customers in million | 16.9 | 14.9 | 14.0 | |||||||
Year Ended December 31, 2017 Compared to Year Ended December 31, 2016
Mobile revenue
Our Bangladesh total operating revenue decreased by 7% to US$574 million in 2017 compared to US$621 million in 2016. The main operational focus in 2017 was on restoring network availability and addressing the 3G gap vis-à-vis the competition, and on customer acquisition following the completion of the government-mandated SIM re-verification program. In 2017, total operating revenue in Bangladesh was impacted by aggressive price competition in the market and network availability.
In functional currency terms, total operating revenue in Bangladesh decreased by 5%.
Adjusted EBITDA
Our Bangladesh Adjusted EBITDA decreased by 13% to US$233 million in 2017 compared to US$267 million in 2016 due to lower revenue, as discussed above, and higher network costs, partially offset by lower personnel costs.
In functional currency terms, our Bangladesh Adjusted EBITDA decreased by 10%.
Certain performance indicators
Customers in our Bangladesh segment increased to 31.3 million as of December 31, 2017 compared to 30.4 million customers as of December 31, 2016. The 3% increase was mainly due to intensive acquisition and retention campaigns.
In 2017, our mobile ARPU in Bangladesh decreased by 7% to US$1.5 as compared to 2016. In functional currency terms, mobile ARPU in Bangladesh decreased in 2017 by 4% mainly due to aggressive pricing in the market and lower traffic due to network availability.
As of December 31, 2017, we had 16.9 million mobile data customers in Bangladesh, representing an increase of 13% from the 14.9 million mobile data customers as of December 31, 2016, mainly due to increased smart-phone penetration.
Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
Mobile revenue
Our Bangladesh total operating revenue increased by 3% to US$621 million in 2016 compared to US$604 million in 2015. In functional currency terms, total operating revenue in Bangladesh increased by 3% due to an increase in voice revenue driven by higher MOU and a significant increase in data revenue. The increase was partially offset by the imposition of an incremental 2% supplementary duty on recharges from June 2016, which is in addition to the additional 1% surcharge from March 2016. The main operational focus during 2016 was the SIM re-verification process. This government-mandated initiative started in December 2015 and required each mobile phone operator to verify all customers using fingerprints in order to ensure authentic registration, proper accountability and enhanced security and resulted in 3.8 million SIM cards being blocked by Banglalink. This program contributed to a slowdown of acquisition activity across the market, which affected revenue trends in 2016. In functional currency terms, our segment service revenue from data increased by 51%, primarily driven by an increase in active data users and data usage as a result of expanding 3G coverage and smartphone penetration. In functional currency terms, our Bangladesh segment sales of equipment and accessories and other revenue increased by 77% primarily as a result of higher handset sales in order to increase smartphone penetration.
Adjusted EBITDA
Our Bangladesh Adjusted EBITDA increased by 10% to US$267 million in 2016 compared to US$242 million in 2015. In functional currency terms, our Bangladesh Adjusted EBITDA increased by 11% in 2016 compared to the same period in the previous year, primarily due to increased revenue, as discussed above, and the implementation of performance transformation initiatives, in particular headcount reduction and a decrease in commercial costs.
Certain performance indicators
As of December 31, 2016, we had approximately 30.4 million customers in Bangladesh, representing a decrease from 32.3 million customers as of December 31, 2015, which was primarily due to an introduction of government mandated identity verification procedures of the end of 2015, which resulted in a slowdown of customer growth across the market and the blocking of unverified SIMs in 2016.
In 2016, our mobile ARPU in Bangladesh did not change and was US$1.6. In functional currency terms, mobile ARPU in Bangladesh increased in 2016 by 3% to BDT 126 compared to BDT 122 in 2015, mainly due to high growth in data revenue.
As of December 31, 2016, we had approximately 14.9 million mobile data customers in Bangladesh, representing a decrease of approximately 7% from the approximately 14.0 million mobile data customers as of December 31, 2015. The decrease is due to the blocking of unverified SIMs, discussed above, while active data users increased mainly due to the 3G expansion and increased smartphone penetration.
Ukraine
Results of operations in US$
| | Year ended December 31, | '16 - '17 | '15 - '16 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| in millions of U.S. dollars (except as indicated) | 2017 | 2016 | 2015 | % change | |||||||||
Total operating revenue | 622 | 586 | 622 | 6% | (6)% | ||||||||
Mobile service revenue | 577 | 542 | 576 | 6% | (6)% | ||||||||
—of which mobile data | 154 | 99 | 66 | 62% | 49% | ||||||||
Fixed-line service revenue | 43 | 41 | 45 | 3% | (8)% | ||||||||
Sales of equipment, accessories and other | 2 | 3 | 1 | 20% | 46% | ||||||||
Operating expenses | 275 | 280 | 330 | (1)% | (15)% | ||||||||
Adjusted EBITDA | 347 | 306 | 292 | 13% | 5% | ||||||||
Adjusted EBITDA margin | 56 | % | 52 | % | 47 | % | 3.4p.p. | 5.3p.p. | |||||
Results of operations in UAH
| | Year ended December 31, | '16 - '17 | '15 - '16 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| in millions of UAH (except as indicated) | 2017 | 2016 | 2015 | % change | |||||||||
Total operating revenue | 16,542 | 14,960 | 13,475 | 11% | 11% | ||||||||
Mobile service revenue | 15,338 | 13,851 | 12,475 | 11% | 11% | ||||||||
—of which mobile data | 4,103 | 2,429 | 1,442 | 69% | 75% | ||||||||
Fixed-line service revenue | 1,132 | 1,052 | 967 | 8% | 9% | ||||||||
Sales of equipment, accessories and other | 72 | 57 | 33 | 26% | 71% | ||||||||
Operating expenses | 7,321 | 7,149 | 7,143 | 2% | 0% | ||||||||
Adjusted EBITDA | 9,221 | 7,811 | 6,332 | 18% | 23% | ||||||||
Adjusted EBITDA margin | 56 | % | 52 | % | 47 | % | 3.5p.p. | 5.2p.p. | |||||
Certain Performance Indicators
| | Year ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2017 | 2016 | 2015 | |||||||
Mobile | ||||||||||
Customers in millions | 26.5 | 26.1 | 25.4 | |||||||
Mobile ARPU in US$ | 1.8 | 1.7 | 1.8 | |||||||
Mobile ARPU in UAH | 48 | 44 | 40 | |||||||
Mobile data customers (million) | 12.5 | 11.2 | 12.0 | |||||||
Fixed-line | ||||||||||
Broadband customers (millions) | 0.8 | 0.8 | 0.8 | |||||||
Year Ended December 31, 2017 Compared to Year Ended December 31, 2016
Mobile revenue
Our Ukraine total operating revenue increased by 6% to US$622 million in 2017 compared to US$586 million in 2016. The increase was primarily due to strong growth in mobile service revenue, driven by successful commercial activities stimulated by the continued 3G roll-out and increased penetration of data-centric tariffs, continued strong growth of mobile data customers and data consumption. The increase was partially decreased by devaluation of Ukrainian hryvnia during 2017.
In functional currency terms, our Ukraine total operating revenue in 2017 increased by 11%.
Adjusted EBITDA
Our Ukraine Adjusted EBITDA increased by 13% to US$347 million in 2017 compared to US$306 million in 2016.
In functional currency terms, our Ukraine Adjusted EBITDA increased by 18% in 2017 compared to the previous year, primarily due to higher revenues, as discussed above, and lower interconnection costs partially offset by the increase in roaming costs, commercial costs driven by higher customer acquisition and structural operating expenses, such as license and frequency fees.
Certain performance indicators
As of December 31, 2017, we had approximately 26.5 million mobile customers in Ukraine compared to 26.1 million mobile customers as of December 31, 2016, representing an increase of 2%, as a result of increased gross additions and improved churn.
In 2017, our mobile ARPU in Ukraine increased by 4% to US$1.8 compared to 2016. In functional currency terms, mobile ARPU in Ukraine increased in 2017 by 8% to UAH 48 compared to UAH 44 in 2016 driven by higher revenue as described above.
As of December 31, 2017, we had 0.8 million fixed line broadband customers in Ukraine, which was broadly stable compared to December 31, 2016.
Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
Mobile revenue
Our Ukraine total operating revenue decreased by 6% to US$586 million in 2016 compared to US$622 million in 2015, primarily due to the depreciation of the Ukrainian hryvnia against the U.S. dollar. In functional currency terms, our Ukraine total operating revenue in 2016 increased 11% compared to 2015 despite a challenging social, political and macroeconomic environment. The increase was primarily due to strong growth in mobile data revenue, as a result of continued 3G roll-out, increased smartphone penetration and data-oriented tariff plans. It was also driven by repricing initiatives for our mobile and fixed-line services; and increased fixed-line revenue as a result of improved quality of the customer base. This increase was partially offset by a decline in interconnection fees, as a result of a decrease in the volume of international incoming traffic, and a decrease in SMS messaging.
Adjusted EBITDA
Our Ukraine Adjusted EBITDA increased by 5% to US$306 million in 2016 compared to US$292 million in 2015. In functional currency terms, our Ukraine Adjusted EBITDA increased by 23% in 2016 compared to the previous year primarily due to higher revenues, as discussed above, and lower interconnect and technological maintenance costs, which were partially offset by an increase in frequency fees, roaming costs, inflation on rent and utilities and the negative effect of the depreciation of the Ukrainian hryvnia on our vendor financing agreements, loansoperating expenses, caused by higher roaming costs, denominated in U.S. dollars.
Certain performance indicators
As of December 31, 2016, we had approximately 26.1 million mobile customers in Ukraine compared to 25.4 million mobile customers as of December 31, 2015, representing an increase of 3%, as a result of successful sales activities and improved churn following enhanced customer based management initiatives.
In 2016, our mobile ARPU in Ukraine decreased by 6% to US$1.7 compared to US$1.8 in 2015, primarily due to devaluation of the Ukrainian hryvnia. In functional currency terms, mobile ARPU in Ukraine increased in 2016 by 11% compared to 2015 mainly due to repricing initiatives and newly introduced tariffs.
As of December 31, 2016, we had approximately 0.8 million fixed-line broadband customers in Ukraine, which was broadly stable compared to December 31, 2015.
Uzbekistan
Results of operations in US$
| | Year ended December 31, | '16 - '17 | '15 - '16 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| in millions of U.S. dollars (except as indicated) | 2017 | 2016 | 2015 | % change | |||||||||
Total operating revenue | 513 | 663 | 711 | (23)% | (7)% | ||||||||
Mobile service revenue | 509 | 659 | 704 | (23)% | (6)% | ||||||||
—of which mobile data | 128 | 152 | 136 | (16)% | 12% | ||||||||
Fixed-line service revenue | 3 | 4 | 5 | (26)% | (15)% | ||||||||
Sales of equipment, accessories and other | 1 | — | 2 | 174% | (86)% | ||||||||
Operating expenses | 252 | 268 | 274 | (6)% | (2)% | ||||||||
Adjusted EBITDA | 261 | 395 | 437 | (34)% | (10)% | ||||||||
Adjusted EBITDA margin | 51 | % | 60 | % | 61 | % | (8.7p.p.) | (1.9p.p.) | |||||
Results of operations in UZS
| | Year ended December 31, | '16 - '17 | '15 - '16 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| in billions of UZS (except as indicated) | 2017 | 2016 | 2015 | % change | |||||||||
Total operating revenue | 2,342 | 1,967 | 1,829 | 19% | 8% | ||||||||
Mobile service revenue | 2,323 | 1,953 | 1,811 | 19% | 8% | ||||||||
—of which mobile data | 585 | 452 | 348 | 29% | 30% | ||||||||
Fixed-line service revenue | 15 | 13 | 13 | 14% | (2)% | ||||||||
Sales of equipment, accessories and other | 4 | 1 | 4 | 484% | (84)% | ||||||||
Operating expenses | 1,182 | 794 | 705 | 49% | 13% | ||||||||
Adjusted EBITDA | 1,160 | 1,173 | 1,124 | (1)% | 4% | ||||||||
Adjusted EBITDA margin | 50 | % | 60 | % | 61 | % | (10.1p.p.) | (1.8p.p.) | |||||
Certain Performance Indicators
| | Year ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2017 | 2016 | 2015 | |||||||
Mobile | ||||||||||
Customers in millions | 9.7 | 9.5 | 9.9 | |||||||
Mobile ARPU in US$ | 4.4 | 5.6 | 5.7 | |||||||
Mobile ARPU in UZS | 20,126 | 16,664 | 14,709 | |||||||
Mobile data customers in millions | 5.0 | 4.6 | 4.7 | |||||||
Year Ended December 31, 2017 Compared to Year Ended December 31, 2016
Mobile revenue
In 2017, our Uzbekistan total operating revenue decreased by 23% to US$513 million compared to US$663 million in 2016. In Uzbekistan, our tariff plans were pegged to the U.S. dollar until September 5, 2017. Since September 5, 2017, our tariff plans are denominated in UZS, which negatively impacted our total operating revenue. For further information, see "—Key Developments and Trends—Impact of currency regime developments in Uzbekistan."
In functional currency terms, our Uzbekistan total operating revenue increased by 19%, mainly as a result of the increased tariffs in Uzbek som resulting from banks, bonds, capital leasesthe appreciation of U.S. dollar against the local currency and successful marketing activities, together with increased mobile data revenue, interconnect services and value added services. Mobile data revenue increased by 29% during the
period, driven by additional investment in 3G and LTE networks, data centric bundled offerings with increased smartphone penetration.
Adjusted EBITDA
In 2017, our Uzbekistan Adjusted EBITDA decreased by 34% to US$261 million compared to US$395 million in 2016, primarily due to significant customer tax growth and local currency devaluation.
In functional currency terms, in 2017, our Uzbekistan Adjusted EBITDA decreased by 1% compared to 2016, primarily due higher interconnect costs as a result of both higher off-net usage and a negative currency effect together with increases in content costs, commercial costs and structural opex, mainly due to higher taxes and other borrowings netregulatory driven expenses.
Certain performance indicators
As of amounts capitalized.December 31, 2017, we had 9.7 million mobile customers in our Uzbekistan segment compared to 9.5 million mobile customers as of December 31, 2016, which, on an unrounded basis was largely stable.
In 2017, our mobile ARPU in Uzbekistan decreased by 22% to US$4.4 compared to US$5.6 in 2016. In functional currency terms, mobile ARPU in Uzbekistan increased by 21% to UZS 20,126 in 2017 compared to UZS 16,664 in 2016 mainly due to the reasons described above with respect to total operating revenue.
As of December 31, 2017, we had 5.0 million mobile data customers in Uzbekistan compared to 4.6 million mobile data customers as of December 31, 2016, representing an increase of 10% primarily due to data network strengthening, increased penetration of smartphones and bundled offerings.
Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
Mobile revenue
Our interest bearing liabilities carry both fixed and floating interest rates. On2016, our borrowings with a floating interest rate,Uzbekistan total operating revenue decreased by 7% to US$663 million compared to US$711 million in 2015. In Uzbekistan, all of our tariff plans are denominated in U.S. dollars. In functional currency terms, our Uzbekistan total operating revenue increased by 8%, due to the interest rate is linked to LIBOR, EURIBOR, AB SEK, MosPRIME, KIBOR, Bangladeshi T-Bill or Rendistato. Our interest expense dependsdepreciation of the Uzbek som. The decrease on a combinationU.S. dollar basis, was primarily driven by a revamp of prevailing interest ratestariff plans by Unitel in order improve competitiveness in the new environment following the reentry of MTS to the market and the amountentry of a new operator, UzMobile. This was partially offset by increased fees derived from the termination of calls from other operators' networks and increased smartphone penetration and promotions.
Adjusted EBITDA
In 2016, our Uzbekistan Adjusted EBITDA decreased by 10% to US$395 million compared to US$437 million in 2015, primarily due to the decrease in revenue, as discussed above, and increased structural operating expenses. Structural operating expenses were affected by increased customer-based taxes, which doubled in 2016, and higher business costs. In functional currency terms, our Uzbekistan Adjusted EBITDA increased by 4% in 2016 compared to 2015 because of the devaluation of the Uzbek som.
Certain performance indicators
As of December 31, 2016, we had approximately 9.5 million mobile customers in our Uzbekistan segment, representing a decrease of 4% compared to approximately 9.9 million mobile customers as of
December 31, 2015. The decrease in our customer base in Uzbekistan was primarily due to the reentry of MTS to the market and the entry of a new operator, UzMobile.
In 2016, our mobile ARPU in Uzbekistan decreased by 1% to US$5.6 compared to US$5.7 in 2015. In functional currency terms, mobile ARPU in Uzbekistan increased by 13% to UZS16,664 in 2016 compared to UZS 14,709 in 2015 mainly because Beeline Uzbekistan price plans are denominated in U.S. dollars and the Uzbek som depreciated. We also had growth in mobile data revenue, driven by a higher data usage driven by increased smartphone penetration and promotions.
As of December 31, 2016, we had approximately 4.6 million mobile data customers in Uzbekistan compared to approximately 4.7 million mobile data customers as of December 31, 2015, representing a decrease of 2% primarily due to the reentry of MTS to the market and the entry of, UzMobile.
HQ
Our HQ Adjusted EBITDA increased by 23% to negative US$325 million in 2017, compared to negative US$421 million in 2016, primarily due to lower performance transformation costs and a one-off gain of $106 million recognized due to an adjustment to a vendor agreement.
Our HQ Adjusted EBITDA increased by US$870 million to negative US$421 million in 2016 compared to negative US$1,291 million in 2015, primarily due to the US$900 million provision with respect to agreements with the SEC, DOJ and OM, included in operating expenses for the year ended December 31, 2015, that was not included in our consolidated total operating expenses for 2016.
Further Information Regarding the Results of Operations of the Italy Joint Venture
We present below certain supplemental information regarding the results of operations of the Italy Joint Venture because we consider the Italy Joint Venture to be a significant part of our outstandingbusiness. For more information on the financial presentation of the Italy Joint Venture, see "Explanatory Note—Presentation of Financial Information of the Italy Joint Venture" and notes 5, 14 and 25 to our audited consolidated financial statements.
The tables below set forth 100% of the financial data and certain performance indicators of the Italy Joint Venture for the years ended December 31, 2017 and 2016 and not only the 50% effective interest bearing liabilities. Ofthat is included in our interest bearing liabilities, 93%consolidated financial statements through the equity method of accounting. For more information regarding each of the line items provided below, see the financial statements of the Italy Joint Venture, which we have fixed ratesfiled in this Annual Report on Form 20-F pursuant to Rule 3-09 of Regulation S-X, "Exhibit 99.3—Consolidated financial statements of VIP-CKH Luxembourg S.à.r.l for the years ended December 31, 2017 and 7% have floating rates.2016" and the Notes thereto.
The financial data of the Italy Joint Venture presented below for the year ended December 31, 2016 consists of: (i) the sum of the results of our Historical WIND Business and H3G S.p.A. prior to the merger of the two businesses on November 5, 2016 and (ii) the Italy Joint Venture's results from November 5, 2016 to December 31, 2016. The annual financial data of the Italy Joint Venture presented below for the year ended December 31, 2016 is unaudited.
Results of operations in EUR
| | Year ended December 31, | | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | '16 - '17 | |||||||||
| | | 2016 (combined) | ||||||||
| in millions of EUR (except as indicated) | 2017 | % change | ||||||||
Revenue (service and CPE/HS) | 6,023 | 6,292 | (4.3 | )% | ||||||
Other revenue | 159 | 183 | (13.3 | )% | ||||||
Total revenue | 6,182 | 6,475 | (4.5 | )% | ||||||
EBITDA before integration costs | 2,211 | 2,184 | 1.2 | % | ||||||
Integration costs | (266 | ) | (60 | ) | — | |||||
EBITDA | 1,945 | 2,124 | (8.4 | )% | ||||||
Depreciation & amortization and reversal of impairment losses/(impairment losses) on non-current assets | (3,357 | ) | (3,301 | ) | (1.7 | )% | ||||
Gains (losses) on disposal of non current assets | (2.0 | ) | (1.7 | ) | 19.0 | % | ||||
EBIT | (1,414 | ) | (1,179 | ) | 19.9 | % | ||||
Finance income and foreign exchange gains/(losses), net | 121 | 489 | (75.2 | )% | ||||||
Finance expenses | (1,412 | ) | (619 | ) | — | |||||
EBT | (2,705 | ) | (1,309 | ) | — | |||||
Income Tax | 85 | (40 | ) | — | ||||||
Net Result | (2,620 | ) | (1,349 | ) | — | |||||
The following supplemental analysis of results of operations for the year ended December 31, 2017 compared to the year ended December 31, 2016 is presented to enhance readers' understanding of the results of operations of the Italy Joint Venture for the most recent fiscal year.
Revenue
The Italy Joint Venture's revenue decreased by 4% from EUR 6,292 million during the year ended December 31, 2016 to EUR 6,023 million during the year ended December 31, 2017, driven by a decrease in mobile service revenue and mobile consumer premises equipment ("CPE") revenue. The mobile service revenue decrease was primarily due to continuing aggressive competition in the market and the impact from the new EU roaming regulation. The mobile CPE revenue decrease was primarily due to lower volume of gross additions and a more selective mobile customer scoring.
Mobile internet revenue increased by 13% from EUR 1,329 million during the year ended December 31, 2016 to EUR 1,508 million during the year ended December 31, 2017, driven by a stable data customer base, data ARPU growth and an increase in data usage to approximately 3.5 GB per customer per month. Fixed-line service revenue in 2017 was broadly stable as compared to 2016.
EBITDA
EBITDA decreased by 8% from EUR 2,124 during the year ended December 31, 2016 to EUR 1,945 year-on-year in 2017 mainly due to the decrease in revenue and one-off integration costs of EUR 266 million, partially offset by operational synergies of EUR 167 million.
Depreciation & amortization
The Italy Joint Venture's depreciation and amortization increased from EUR 3,301 million for the year ended December 31, 2016 to EUR 3,357 million for the year ended December 31, 2017 primarily due to accelerated depreciation of network assets related to a network modernization project and to be offered to Iliad and the write-offs of divested frequencies in 2016.
Finance Income
Finance income represents income earned on cash deposited in banks and on loans provided to other parties.
Other Non-operating (Gains)/Losses
Our other non-operating (gains)/losses primarily includedecreased from EUR 489 million for the effect of change of fair value of derivatives not designated as hedges and other assets when fair value assessment is required under IFRS, results of disposal of our investments and other non-operating activities.
Shares of (Profit)/Loss of Associates and Joint Ventures Accounted for Using the Equity Method
Shares of (profit)/ loss of associates and joint ventures accounted for using the equity method represent our share in profit and loss of our joint ventures and associates accounted for using the equity method, primarily represented by Euroset.
Net Foreign Exchange Loss/(Income)
The functional currencies of our group are the Russian ruble in Russia, the Euro in Italy, the Algerian dinar in Algeria, the Pakistani rupee in Pakistan, the Bangladeshi taka in Bangladesh, the Ukrainian hryvnia in Ukraine, the Kazakh tenge in the Republic of Kazakhstan, the Uzbek som in Uzbekistan, the Armenian dram in the Republic of Armenia, the Georgian lari in Georgia, the Kyrgyz som in Kyrgyzstan, the Lao Kip in Laos and the U.S. dollar in Tajikistan. Monetary assets and liabilities denominated in foreign currencies are translated into our respective functional currencies on the relevant balance sheet date. We record changes in the values of such assets and liabilities as a result of exchange rate changes in our results of operations under the line item net foreign exchange (loss)/gain.
Income Tax Expense
The statutory income tax rate in Russia, Kazakhstan, Laos and Armenia in 2014, 2013 and 2012 was 20.0%. The statutory income tax rate in Ukraine was 18% in 2014, 19.0% in 2013 and 21% in 2012. The statutory income tax rate in Georgia was 15.0% in 2014, 2013 and 2012. The statutory income tax rate in Kyrgyzstan in 2014, 2013 and 2012 was 10.0%. In Uzbekistan, the income tax rate was 8.0% in 2014 (7.5% from January 1, 2015) and 9.0% in 2013 and 2012 (and 8% subnational tax). The statutory income tax rate in Luxembourg was 22.47% in 2014 and 22.05% in 2013 and 2012 (and 6.75% subnational tax). The statutory income tax rate in the Netherlands and Tajikistan was 25.0% in 2014, 2013 and 2012. The Egyptian tax rate increased from 25% in 2013 and 2012 to 30% in 2014. In Algeria the statutory income tax rate was 23% in 2014 and 25% in 2013 and 2012. The statutory income tax rate in Italy was 27.5% in 2014, 2013 (and 4.55% in 2014 and 4.58% in 2013 as subnational tax) and in 2012. The statutory income tax rate in Pakistan was 33% in 2014 (35% from January 1, 2015), 34% in 2013 and 35% in 2012. The statutory income tax rate in Bangladesh was 45.0% in 2014, 2013 and 2012.
Year Endedyear ended December 31, 2014 Compared2016 to Year Ended DecemberEUR 121 million for the year ended 31, 2013
Total Operating Revenue
Our consolidated total operating revenue decreased by 12.9% to US$19,627 million during 2014 from US$22,546 million during 2013 primarily due to depreciation of the functional currencies of our operations, lower sale of equipment and accessories, as well as the impact of operational performance and macroeconomic developments in Russia, Ukraine and Pakistan, the rolling effect from the 2013 price competition in Italy and the delayed 3G launch in Algeria. The discussion of revenue by reportable segments includes intersegment revenue. Our management assesses the performance of each reportable segment on this basis because it believes the inclusion of intersegment revenue better reflects the true performance of each segment on a stand-alone basis.
Total Operating Expenses
Our consolidated total operating expenses decreased by 23.2% to US$17,041 million during 2014 from US$22,200 million during 2013, and represented 86.8% and 98.5% of total operating revenue in 2014 and 2013, respectively. This decrease was primarily due to depreciation of the functional currencies of our operations, a decrease in service costs of US$752m, decrease in selling, general and administrative expenses of US$1,648m and lower impairment losses of US$1,981m.
Service Costs
Our consolidated service costs decreased by 14.7% to US$4,381 million during 2014 from US$5,133 million during 2013. As a percentage of consolidated total operating revenue, our service costs decreased to 22.3% during 2014 from 22.8% during 2014. The decrease in absolute terms was primarily due to the overall decrease in revenue and the depreciation of the functional currencies of our operations.
Cost of Equipment and Accessories
Our consolidated cost of equipment and accessories decreased by 29.4% to US$551 million in 2014 from US$780 million in 2013. This decrease was2017 primarily due to decreased sales of equipment and accessories in Russia and Italy.positive derivatives fair market valuations as compared to 2016.
Selling, General and Administrative ExpensesFinance expenses
Our consolidated selling, general and administrative Finance expenses decreased by 19.7%increased from EUR 619 million for the year ended December 31, 2016 to US$6,725EUR 1,412 million during 2014 from US$8,373 million during 2013. This decrease wasfor the year ended December 31, 2017, primarily due to the depreciation of the functional currencies of our operations, operational excellence programs, partly offset by increase in frequency fees and higher network costs. In addition, in 2013 a provision was recorded for the Bank of Algeria claim, while in 2014 a provision was recorded for the litigation settlement with Cevital. As a percentage of consolidated total operating revenue, our consolidated selling, general and administrative expenses decreased to 34.3% in 2014 from 37.1% in 2013.
Adjusted EBITDA and Adjusted EBITDA Margin
Our consolidated adjusted EBITDA decreased by 3.5% to US$7,970 million during 2014 from US$8,260 million during 2013, primarily due to an overall decrease in revenue offset by lower service costs, lower selling, general and administrative expenses.
Depreciation and Amortization Expenses
Our consolidated depreciation and amortization expenses decreased by 10.8% to US$4,318 million in 2014 from US$4,841 million in 2013. The decrease was primarily the result of depreciation of the functional currencies in 2014, accelerated depreciation of network equipment in Pakistan in 2013 due to network modernization and lower amortization in Italy and Algeria due to a reduction in the chargeaccrued interest on customer relationships recognized as part of Wind Telecom acquisition only partially offset by increased depreciation as a result of accelerated roll out of our 3G network and the roll out of a 4G/LTE network in Russia.
Impairment Loss
Our consolidated impairment loss was US$992 million in 2014 in comparison with US$2,973 million in 2013. The impairment loss in 2014 primarily related to impairment of goodwill related to Ukraine of US$767 million, in Pakistan of US$163 million, and goodwill and other assets in Laos, Georgia, Bangladesh, Burundi and Central African Republic of US$172 million which was partly offset by an impairment release as a result of the sale of our debt and equity interest in Wind Canada of US$110 million. The impairment loss in 2013 primarily related to impairment of goodwill related to Ukraine of US$2,085 million, in Laos of US$25 million and in Armenia of US$20 million, and impairment of the 4G/LTE telecommunication license in Uzbekistan of US$30 million. In addition, in 2013 we impaired our shareholder loans to Wind Canada in the amount of US$764 million.
Loss on Disposals of Non-current Assets
Our consolidated loss on disposals of non-current assets decreased by 26.0% to US$74 million during 2014 from US$100 million during 2013 primarily due to lower equipment write-offs during 2014 in our Russia segment.
Operating Profit
Our consolidated operating profit increased to US$2,586 million in 2014 from US$346 million in 2013 due to the above mentioned impacts, primarily due to lower impairment losses in 2014 and a one-off charge for the Bank of Algeria claim in 2013. Our consolidated operating profit as a percentage of total operating revenue in 2014 increased to 13.2% from 1.5% in 2013.
Other Non-operating Profits and Losses
Finance Costs and Finance Income
Our consolidated finance costs decreased by 5.8% to US$2,026 million in 2014 from US$2,150 million in 2013, primarily due to the refinancing of our debt in Italy at a lower interest rate. Our consolidated finance income decreased by 40.7% to US$54 million in 2014 from US$91 million in 2013, primarily due to lower interest earned on deposits and interest income from loans to Wind Canada that were fully impaired in 2013.
Other Non-operating Losses/(Gains)
We recorded US$152 million in other non-operating loss during 2014 compared to US$172 million in losses during 2013. The change was primarily due to losses recognized in 2014 from the refinancing of our debt in Italy of US$148 million, change in fair value of embedded derivatives of US$149 million offset by the positive movement in fair value of other derivatives of US$114 million while in 2013 we had losses recorded for provisions net of indemnity claims of US$100 million, positive revaluation of our embedded derivatives in Italy of US$71 million offset by losses from ineffective portion of hedges of US$119 million and negative revaluation of options over non-controlling interest of US$46 million.
Shares of Loss/(Profit) of Associates and Joint Ventures Accounted for Using the Equity Method
We recorded a loss of US$38 million from our equity in associates in 2014 compared to a loss of US$159 million in 2013. The change was primarily due to lower losses from our investment in Wind Canada in 2014 due to full impairment of the loans in 2013.
Net Foreign Exchange (Gain)/Loss
We recorded a loss of US$605 million from foreign currency exchange in 2014 compared to US$20 million foreign currency exchange gain in 2013. The loss in 2014 was primarily due to revaluation of our U.S. dollar financial liabilities primarily due to depreciation of the Russian ruble to the U.S. dollar in 2014 as opposed to the gain in 2013 due to appreciation of the Euro to the U.S. dollar in 2013 and revaluation of our U.S. dollar financial assets due to depreciation of the Russian ruble to the U.S. dollar in 2013.
Income Tax Expense
Our consolidated income tax expense decreased by 65.0% to US$722 million in 2014 from US$2,064 million in 2013. The decrease in income taxes was primarily due to lower profits in Russia in 2014 and one off charges of withholding taxes over the accumulated earnings in our subsidiaries in Russia, CIS and Algeria as a result of an anticipated dividend distribution, accrual of provisions on uncertain income tax positions and awrite-off of the tax receivable in Algeria in the amount of US$551 million as part of the settlement with the Algerian government recorded in 2013.
Profit for the Year Attributable to the Owners of the Parent
In 2014, the consolidated loss for the year attributable to the owners of the parent was US$647 million compared to US$2,625 million of loss in 2013. The movement was due to losses for the year as a result of abovementioned factors, primarily lower impairment losses in 2014 and a one-off charge for the Bank of Algeria claim in 2013.
Profit for the Year Attributable to Non-controlling Interest
Our loss for the year attributable to non-controlling interest was US$256 million in 2014 compared to a loss of US$1,463 million in 2013, due to lower net losses in our consolidated subsidiaries that are not wholly owned by us. This primarily relates to GTH and its losses related to the Algerian transaction in 2013.
Year Ended December 31, 2013 Compared to Year Ended December 31, 2012
Total Operating Revenue
Our consolidated total operating revenue decreased by 2.2% to US$22,546 million during 2013 from US$23,061 million during 2012 primarily due to depreciation of the functional currencies of our operations as well as negative trends in our major markets. The discussion of revenue by reportable segments includes intersegment revenue. Our management assesses the performance of each reportable segment on this basis because it believes the inclusion of intersegment revenue better reflects the true performance of each segment on a stand-alone basis.
Total Operating Expenses
Our consolidated total operating expenses increased by 17.5% to US$22,200 million during 2013 from US$18,890 million during 2012, and represented 98.5% and 81.9% of total operating revenue in 2013 and 2012, respectively. This increase was primarily due to impairment of goodwill in Ukraine and loan receivables due from Canada during 2013 partially offset by a decrease in services costs and selling, general and administrative expenses in line with the overall decrease in revenue as well as a decrease in amortization due to reduction in the amortization rate of intangibles acquired in the Wind Telecom transaction in 2011.
Service Costs
Our consolidated service costs decreased by 5.6% to US$5,133 million during 2013 from US$5,439 million during 2012. As a percentage of consolidated total operating revenue, our service costs decreased to 22.8% during 2013 from 23.6% during 2012. The decrease was primarily due to our efforts in increasing profitability of our services across our major markets.
Cost of Equipment and Accessories
Our consolidated cost of equipment and accessories increased by 12.6% to US$780 million in 2013 from US$693 million in 2012. This increase was primarily due to increased sales in Italy, which was partially offset by a decrease in other segments.
Selling, General and Administrative Expenses
Our consolidated selling, general and administrative expenses increased by 16.9% to US$8,373 million during 2013 from US$7,161 million during 2012. This increase was primarily due to a provision recorded for the Bank of Algeria claim and increased expenses in Russia due to the accelerated roll-out of our 3G network and network quality improvement, partially offset by the overall decrease in total operating revenue. As a percentage of consolidated total operating revenue, our consolidated selling, general and administrative expenses increased to 37.1% in 2013 from 31.1% in 2012.
Adjusted EBITDA and Adjusted EBITDA Margin
Our consolidated adjusted EBITDA decreased by 15.4% to US$8,260 million during 2013 from US$9,768 million during 2012, primarily due to an overall decrease in revenue, a provision recorded for the Bank of Algeria claim and increased expenses in Russia due to accelerated roll-out of our 3G network and network quality improvement.
Depreciation and Amortization Expenses
Our consolidated depreciation and amortization expenses decreased by 3% to US$4,841 million in 2013 from US$5,006 million in 2012. The decrease was primarily the result of a decrease in amortization due to
reduction in amortization rate of intangibles acquired in the Wind Telecom transaction in 2011, partially offset by an increase in depreciation as a result of accelerated roll out of our 3G network and the roll out of a 4G/LTE network in Russia and accelerated depreciation of network equipment in Pakistan due to network modernization.
Impairment Loss
Our consolidated impairment loss was US$2,973 million in 2013 in comparison with US$386 million in 2012. The impairment loss in 2013 primarily related to impairment of goodwill related to Ukraine of US$2,085 million, in Laos of US$25 million and in Armenia of US$20 million and impairment of the 4G/LTE telecommunication license in Uzbekistan of US$30 million. In addition, in 2013 we impaired our shareholder loans to Wind Canada in the amount of US$764 million. The impairment loss of US$386 million in 2012 primarily related to impairment of our shareholder loans to Wind Canada of US$344 million.
Loss on Disposals of Non-current Assets
Our consolidated loss on disposals of non-current assets decreased by 51.2% to US$100 million during 2013 from US$205 million during 2012 primarily due to lower equipment write-offs during 2013 in our Russia and Ukraine segments.
Operating Profit
Our consolidated operating profit decreased by 91.7% to US$346 million in 2013 from US$4,171 million in 2012 due to the above mentioned impacts, primarily impairment losses and a one-off charge for the Bank of Algeria claim. Our consolidated operating profit as a percentage of total operating revenue in 2013 decreased to 1.5% from 18.1% in 2012.
Other Non-operating Profits and Losses
Finance Costs and Finance Income
Our consolidated finance costs increased by 6% to US$2,150 million in 2013 from US$2,029 million in 2012, primarily due to the interest capitalization stopped in Italy due to the launch of 4G/LTE. Our consolidated finance income decreased by 40.9% to US$91 million in 2013 from US$154 million in 2012, primarily due to lower interest earned on deposits.
Other Non-operating Losses/(Gains)
We recorded US$172 million in other non-operating loss during 2013 compared to US$75 million in losses during 2012. The change was primarily due to income recorded during 2013 for indemnity claims, positive revaluation of our embedded derivatives in Italy offset by losses from ineffective portion of hedges and negative revaluation of options over non-controlling interest. Losses in 2012 mainly consisted of one-off charges fornon-income tax provisions.
Shares of Loss/(Profit) of Associates and Joint Ventures Accounted for Using the Equity Method
We recorded a loss of US$159 million from our equity in associates in 2013 compared to a loss of US$9 million in 2012. The change was primarily due to an decrease in income from Euroset coupled with an increase in losses from Wind Canada.
Net Foreign Exchange (Gain)/Loss
We recorded a gain of US$20 million from foreign currency exchange in 2013 compared to a US$70 million foreign currency exchange loss in 2012. The gain was primarily due to revaluation of our U.S. dollar financial liabilities due to appreciation of the Euro to the U.S. dollar in 2013 and revaluation of our U.S. dollar financial assets due to depreciation of the Russian ruble to the U.S. dollar in 2013.
Income Tax Expense
Our consolidated income tax expense increased by 127.8% to US$2,064 million in 2013 from US$906 million in 2012. The increase in income taxes was primarily due to one off charges of withholding taxes over the accumulated earnings in our subsidiaries in Russia, CIS and Algeria as a result of an anticipated dividend distribution, accrual of provisions on uncertain income tax positions and a write-off of the tax receivable in Algeria in the amount of US$551 million as part of the settlement with the Algerian government.
Profit for the Year Attributable to the Owners of the Parent
In 2013, the consolidated loss for the year attributable to the owners of the parent was US$2,625 million compared to US$1,539 million of profit in 2012. The movement was due to losses for the year as a result of abovementioned factors, primarily impairment losses and a one-off charge for the Bank of Algeria claim.
Profit for the Year Attributable to Non-controlling Interest
Our loss for the year attributable to non-controlling interest was US$1,463 million in 2013 compared to a loss of US$163 million in 2012, due to higher net losses in our consolidated subsidiaries that are not wholly owned by us. This primarily relates to GTH and its losses related to the Algerian transaction.
Russia
Results of operations in US$
| Year ended December 31, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
| (In millions of US dollars) | ||||||||||||
Service revenue | 7,249 | 8,745 | 8,815 | |||||||||
Sale of equipment and accessories | 197 | 350 | 358 | |||||||||
Other revenue | 14 | 15 | 16 | |||||||||
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Total operating revenue | 7,459 | 9,109 | 9,190 | |||||||||
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|
|
|
| |||||||
Operating expenses | ||||||||||||
Service costs | 2,073 | 2,434 | 2,502 | |||||||||
Cost of equipment and accessories | 221 | 381 | 323 | |||||||||
Selling, general and administrative expenses | 2,185 | 2,479 | 2,485 | |||||||||
|
|
|
|
|
| |||||||
Adjusted EBITDA | 2,980 | 3,815 | 3,878 | |||||||||
Results of operations in RUB
| Year ended December 31, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
| (In millions of RUB) | ||||||||||||
Service revenue | 273,502 | 278,432 | 273,795 | |||||||||
Sale of equipment and accessories | 7,881 | 11,016 | 11,075 | |||||||||
Other revenue | 516 | 462 | 504 | |||||||||
|
|
|
|
|
| |||||||
Total operating revenue | 281,898 | 289,910 | 285,375 | |||||||||
|
|
|
|
|
| |||||||
Operating expenses | ||||||||||||
Service costs | 78,579 | 77,491 | 77,722 | |||||||||
Cost of equipment and accessories | 8,747 | 12,032 | 10,044 | |||||||||
Selling, general and administrative expenses | 82,636 | 78,965 | 77,130 | |||||||||
|
|
|
|
|
| |||||||
Adjusted EBITDA | 111,935 | 121,422 | 120,478 | |||||||||
Certain Performance Indicators
| Year ended December 31, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
Mobile | ||||||||||||
Customers (end of the period in millions) | 57.2 | 56.5 | 56.1 | |||||||||
ARPU in USD | 8.6 | 10.6 | 10.8 | |||||||||
ARPU in RUB | 323 | 338 | 336 | |||||||||
MOU | 304 | 291 | 276 | |||||||||
Annual churn (as a percentage) | 60.1 | 63.9 | 63.2 | |||||||||
Fixed | ||||||||||||
Broadband customers (end of the period in millions) | 2.3 | 2.3 | 2.3 | |||||||||
Year Ended December 31, 2014 Compared to Year Ended December 31, 2013
Our total operating revenue in Russia decreased by 18.1% to US$7,459 million during 2014 from US$9,109 million during 2013 mainly due to the negative effect of the depreciation of the ruble against the US dollar. In functional currency terms, total operating revenue in Russia decreased by 2.8% due to the measures taken to eliminate unrequested services from content providers to our customers. Our Russia total operating revenue consists primarily of mobile services and fixed-line services.
Our mobile total operating revenue in Russia decreased by 19.4% to US$6,071 million during 2014 from US$7,536 million during 2013. In functional currency terms, our mobile service revenue decreased by 3.3%.
During 2014, we generated US$3,095 million of our service revenue from airtime charges from mobile postpaid and prepaid customers, including monthly contract fees and roaming fees and roaming fees received from other mobile services operators for providing roaming services to their customers, or 51.0% of the total mobile operating revenue in our Russia segment, compared to US$3,923 million, or 52.1% of the total mobile operating revenue in 2013. In U.S. dollars terms, the 21.1% decrease in voice service revenue in the Russia segment was due to decreased ARPU, caused by natural APPM deterioration and roaming decline. In functional currency terms, our voice service revenue decreased by 7.0%.
During 2014, we generated US$1,820 million of our service revenue from value added services, including data revenue, or 30.0% of the total mobile operating revenue in our Russia segment, compared to US$2,099 million, or 27.9% of the total mobile operating revenue in 2013. In U.S. dollars terms, the decrease was 13.3%, while in functional currency terms, our Russia segment service revenue from value added services, including data revenue, increased by 3.2% during 2014 compared to 2013. Such a low growth in functional currency terms is primarily due to decrease of value added services related to the measures taken to eliminate unrequested services from content providers to our customers.
During 2014, we generated US$961 million of our service revenue from interconnect, or 15.8% of the total mobile operating revenue in our Russia segment, compared to US$1,171 million, or 15.5% of the total mobile operating revenue, in 2013. In U.S. dollars terms, the decrease was 17.9%, while in functional currency terms, our Russia segment service revenue from interconnect decreased by 2.7% during 2014 compared to 2013, primarily due to a decreased volume of incoming traffic from other operators.
Our mobile total operating revenue in our Russia segment also included revenue from sales of equipment and accessories and other revenue. During 2014, revenue from sales of equipment and accessories and other revenue decreased by 43.2% to US$195 million, or 3.2% of the total mobile operating revenue in our Russia
segment in 2014, from US$344 million, or 4.6% of the total mobile operating revenue in our Russia segment in 2013. In functional currency terms, our Russia segment sales of equipment and accessories decreased by 27.7% during 2014 compared to 2013, primarily as a result of decreased sales of devices (such as iPhones).
During 2014, revenue from our fixed-line services in Russia decreased by 11.7% to US$1,388 million from US$1,572 million in 2013. Our revenue from fixed-line services in Russia in 2014 consisted of US$549 million generated from business operations, US$489 million generated from wholesale operations and US$349 million generated from residential and FTTB operations. In functional currency terms, our total operating revenue from our Russia fixed-line services increased by 5.1% during 2014 compared to 2013, primarily due to favorable impact of RUR/USD exchange rate in fixed-line contracts based on U.S. dollar terms.
Our Russia adjusted EBITDA decreased by 21.9% to US$2,980 million during 2014 from US$3,815 million during 2013. In functional currency terms, our Russia adjusted EBITDA decreased by 7.8%, primarily as a result of the negative effect of the depreciation of the ruble against the US dollar on roaming, interconnect costs and structural OPEX, while network related costs also increased as a result of the recent accelerated high-speed data network roll out. In functional currency terms, adjusted EBITDA margin in 2014 in our Russia segment was 39.7%, which is 2.2 percentage points below adjusted EBITDA margin in 2013. The decrease was primarily due to the negative effect of the depreciation of the ruble against the US dollar on costs and the increase in network related costs.
As of December 31, 2014, we had approximately 57.2 million mobile customers in Russia, representing an increase of 1.2% from approximately 56.5 million mobile customersoutstanding as of December 31, 2013. Our2017 and expenses incurred in connection with a refinancing transaction, consisting of call premia and derivatives unwinding.
Certain Performance Indicators
The Italy Joint Venture's total mobile customer growth in Russia in 2014 was mainly due to the reduction in churn, which was caused by activity to improve customer loyalty and quality of sales as well as the investments made in our high-speed data network.
In 2014, our mobile ARPU in Russiacustomers decreased by 19.1% to US$8.6 from US$10.6 in 2013, primarily as a result of depreciation of the Russian ruble against the U.S. dollar. In functional currency terms, mobile ARPU in Russia decreased by 4.3% in 2014 compared to 2013, due to decreased voice revenue and as a result of the measures taken to reject spam and unrequested services from content providers.
In 2014, our mobile MOU in Russia increased by 4.3% to 304 from 291 in 2013, primarily as a result of consistent promotion of bundled and on-net oriented offers.
In 2014, our mobile churn rate in Russia decreased to 60.1% compared to 63.9% in 2013 continued improvements in customer perception during 2014.
The fixed-line broadband customers are mainly represented by FTTB customers. As of December 31, 2014 and December 31, 2013, we had approximately 2.3 million fixed-line customers in Russia. The number did not change significantly due to our focus on high-value customers and limited expansion in other segments.
As of December 31, 2014, we had also approximately 3.7 million mobile broadband customers using USB modems in Russia, representing an increase of approximately 16.5% over the approximately 3.1 million mobile broadband customers as of December 31, 2013. The increase was mainly due to our sales efforts in the USB modem market.
Year Ended December 31, 2013 Compared to Year Ended December 31, 2012
Our total operating revenue in Russia decreased by 0.9% to US$9,109 million during 2013 from US$9,190 million during 2012 due to depreciation of the Russian ruble against the US dollar. In functional currency terms total operating revenue in Russia increased by 1.6%. Our Russia total operating revenue consists primarily of mobile services and fixed-line services.
Our mobile total operating revenue in Russia decreased by 1.2% to US$7,536 million during 2013 from US$7,630 million during 2012.
During 2013, we generated US$3,923 million of our service revenue from airtime charges from mobile postpaid and prepaid customers, including monthly contract fees and roaming fees and roaming fees received from other mobile services operators for providing roaming services to their customers, or 52.1% of the total mobile operating revenue in our Russia segment, compared to US$4,173 million, or 54.7% of the total mobile operating revenue, in 2012. In U.S. dollars terms, the 6.0% decrease in voice service revenue in the Russia segment was due to decreasing revenue from service voice as a result of APPM decline and decrease in content revenue. In functional currency terms, our voice service revenue decreased by 3.7%.
During 2013, we generated US$2,099 million of our service revenue from value added services, including data revenue, or 27.9% of the total mobile operating revenue in our Russia segment, compared to US$1,951 million, or 25.6% of the total mobile operating revenue, in 2012. In U.S. dollars terms, the increase was 7.6%, while in functional currency terms, our Russia segment service revenue from value added services, including data revenue, increased by 10.4% during 2013 compared to 2012, primarily due to an increase in mobile customers using Internet access and overall consumption of Internet services due to increasing demand for data.
During 2013, we generated US$1,171 million of our service revenue from interconnect, or 15.5% of the total mobile operating revenue in our Russia segment, compared to US$1,152 million, or 15.1% of the total mobile operating revenue, in 2012. In U.S. dollars terms, the increase was 1.6%, while in functional currency terms, our Russia segment service revenue from interconnect increased by 4.1% during 2013 compared to 2012, primarily due to an increase in tariffs for international operators.
Our mobile total operating revenue in our Russia segment also included revenue from sales of equipment and accessories and other revenue. During 2013, revenue from sales of equipment and accessories and other revenue decreased by 2.6% to US$344 million from US$353 million during 2012 and increased to 4.6% of the total mobile operating revenue in our Russia segment in 2013. In functional currency terms, our Russia segment sales of equipment and accessories decreased by 0.9% during 2013 compared to 2012, primarily as a result of a decrease in sales due to our focus on higher marginal services.
During 2013, revenue from our fixed-line services in Russia increased by 0.8% to US$1,572 million from US$1,560 million in 2012. Our revenue from fixed-line services in Russia in 2013 consisted of US$631 million generated from business operations, US$525 million generated from wholesale operations and US$416 million generated from residential and FTTB operations. In functional currency terms, our total operating revenue from our Russia fixed-line services increased by 3.3% during 2013 compared to 2012, primarily due to increase of volume in international traffic termination and increase of tariffs.
Our Russia adjusted EBITDA decreased by 1.6% to US$3,815 million during 2013 from US$3,878 million during 2012. In functional currency terms, our Russia adjusted EBITDA increased by 0.8%, primarily as a result of improved gross margin, mainly offset by increase in sales, general and administrative expenses due to accelerated roll-out of our 3G network and network quality improvement. In functional currency terms, adjusted EBITDA margin in 2013 in our Russia segment was 41.9%, which is 0.3 percentage points below adjusted EBITDA margin in 2012. The decrease was primarily due to an increase in sales, general and administrative expenses due to accelerated roll-out of our 3G network and network quality improvement.
As of December 31, 2013, we had approximately 56.5 million mobile customers in Russia, representing an increase of 0.7% from approximately 56.1 million mobile customers as of December 31, 2012. Our mobile customer growth in Russia in 2013 was mainly due to focusing our sales efforts on regaining customer market share to improve revenue market share.
In 2013, our mobile ARPU in Russia decreased by 1.9% to US$10.6 from US$10.8 in 2012, primarily as a result of depreciation of the Russian ruble against the U.S. dollar. In functional currency terms, mobile ARPU in Russia increased by 0.5% in 2013 compared to 2012, due to increased revenue from data as a result of promoting our mobile Internet services.
In 2013, our mobile MOU in Russia increased by 5.5% to 291 from 276 in 2012, primarily as a result of consistent promotion of bundled and on-net oriented offers.
In 2013, our mobile churn rate in Russia marginally increased to 63.9% compared to 63.2% in 2012 due to the higher churn rate in lower-ARPU customers that comprised a slightly bigger portion of our customer base.
The fixed-line broadband customers are mainly represented by FTTB customers. As of December 31, 2013 and December 31, 2012, we had approximately 2.3 million fixed-line customers in Russia. The number did not change significantly due to our focus on high-value customers and limited expansion in other segments.
As of December 31, 2013, we had also approximately 3.1 million mobile broadband customers using USB modems in Russia, representing an increase of approximately 18.1% over the approximately 2.7 million mobile broadband customers as of December 31, 2012. The increase was mainly due to our sales efforts in the USB modem market and active promotion of offers based on unlimited Internet usage.
Italy
Results of operations in US$
| Year ended December 31, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
| (In millions of US dollars) | ||||||||||||
Service revenue | 5,536 | 6,096 | 6,507 | |||||||||
Sale of equipment and accessories | 301 | 318 | 255 | |||||||||
Other revenue | 318 | 204 | 220 | |||||||||
|
|
|
|
|
| |||||||
Total operating revenue | 6,155 | 6,618 | 6,982 | |||||||||
|
|
|
|
|
| |||||||
Operating expenses | ||||||||||||
Service costs | 1,454 | 1,560 | 1,787 | |||||||||
Cost of equipment and accessories | 299 | 342 | 291 | |||||||||
Selling, general and administrative expenses | 1,986 | 2,118 | 2,246 | |||||||||
|
|
|
|
|
| |||||||
Adjusted EBITDA | 2,416 | 2,598 | 2,658 | |||||||||
Results of operations in EUR
| Year ended December 31, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
| (In millions of EUR) | ||||||||||||
Service revenue | 4,166 | 4,577 | 5,063 | |||||||||
Sale of equipment and accessories | 227 | 252 | 198 | |||||||||
Other revenue | 240 | 154 | 165 | |||||||||
|
|
|
|
|
| |||||||
Total operating revenue | 4,633 | 4,983 | 5,427 | |||||||||
|
|
|
|
|
| |||||||
Operating expenses | ||||||||||||
Service costs | 1,093 | 1,175 | 1,388 | |||||||||
Cost of equipment and accessories | 225 | 258 | 227 | |||||||||
Selling, general and administrative expenses | 1,495 | 1,595 | 1,744 | |||||||||
|
|
|
|
|
| |||||||
Adjusted EBITDA | 1,820 | 1,955 | 2,068 | |||||||||
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| |||||||
Certain Performance Indicators
| Year ended December 31, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
Mobile | ||||||||||||
Customers (end of period in millions) | 21.6 | 22.3 | 21.6 | |||||||||
ARPU in USD | 14.6 | 16.3 | 18.5 | |||||||||
ARPU in EUR | 11.3 | 12.3 | 14.4 | |||||||||
MOU | 264 | 237 | 207 | |||||||||
Annual churn (in percentage) | 31.4 | 36.6 | 35.2 | |||||||||
Fixed | ||||||||||||
Broadband customers (end of period in millions) | 2.2 | 2.2 | 2.2 | |||||||||
Year Ended December 31, 2014 Compared to Year Ended December 31, 2013
Our Italy total operating revenue was US$6,155 million during 2014, representing a decrease of 7.0% compared to US$6,618 million in 2013. In local currency terms, the total operating revenue also declined by 7.0%.
In our Italy segment, total operating revenue from services was US$5,536 million during 2014, representing a decrease of 9.2% compared to US$6,096 million in 2013. The decrease in service revenue in our Italy segment was mainly due to a decrease in voice services affected by the difficult macroeconomic situation and the contraction of the market.
During 2014, we generated US$4,837 million of our service revenue from mobile and fixed-line telecommunication services, including revenue from, among others, traffic, roaming revenue from our customers travelling abroad, fees and contributions from our mobile and fixed-line (including Internet) businesses, or 87.4% of our total operating revenue from services in our Italy segment, which decreased by 9.6% from US$5,352 million of revenue in 2013, or 88.0% of our total operating revenue from services in our Italy segment, in 2013. The decrease was mainly due to a difficult macroeconomic situation and the contraction of the market which was partially offset by WIND’s ability to maintain a stable mobile customer base and revenue from the development of new offers dedicated to internet navigation on mobile phones.
During 2014, we generated US$506 million of our service revenue from interconnection traffic, relating to incoming calls from other operators’ networks to our mobile and fixed-line networks, or 9.1% of our total operating revenue from services in our Italy segment, representing a decrease of 4.6% compared to US$530 of revenue in 2013, or 8.7% of the total operating revenue from services in 2013. The decrease is due to the effect of the reduction of unit tariffs set by AGCOM.
During 2014, we generated US$145 million of our service revenue from other types of services, which mainly relate to leased lines and access fees charged to telecom operators and penalties charged to mobile and fixed-line customers, or 2.6% of our total operating revenue from services in our Italy segment, representing a decrease of 8.9% compared to US$159 in 2013, or 2.6% of our total operating revenue from services. The decrease compared to 2013 is mainly due to lower revenue from co-marketing activities.
Our total operating revenue in our Italy segment also included revenue from sales of equipment, mainly relating to the sale of SIM cards, mobile and fixed-line phones and related accessories. During 2014, revenue from sales of equipment was US$301 million, representing a decrease of 5.3% from US$318 million in 2013 primarily due to the decrease in the sale of mobile telephone handsets which is only partially offset by a shift of sales towards higher priced devices.
During 2014, we generated US$318 million of our revenue in our Italy segment from the settlement of commercial disputes and penalties charged to suppliers, representing an increase of 55.9% from US$204 million in 2013. The increase was mainly due to the revisions of estimates made in previous years and to the effects related to the higher proceeds from settlement of disputes with some suppliers.
Our Italy adjusted EBITDA decreased by 7.0% to US$2,416 million during 2014 from US$2,598 million during 2013, primarily due to lower revenue, compensated by lower selling, general and administrative expenses as a result of our cost efficiency project initiatives and tight cost control measures. In functional currency terms, adjusted EBITDA margin in 2014 in our Italy segment was 39.3%, which is 0.3 percentage points above the adjusted EBITDA margin in 2013.
As of December 31, 2014, we had approximately 21.6 million customers in Italy representing a decrease of 3.1% from approximately 22.3 million customers as of December 31, 2013. Our mobile customer decrease in 2014 was mainly due to lower gross additions in the market coming from the more rational approach to promotions developed in 2014 by the main three operators.
In 2014, our mobile ARPU in Italy decreased by 8.3% to EUR 11.3 from EUR 12.3 in 2013 primarily as a result of a decline in voice revenue due to the cannibalization following high competition on prices in 2013.
In 2014, our mobile MOU in Italy increased by 11.5 % to 264 from 237 in 2013, primarily due to the continued promotion of bundle offers which include minutes of voice traffic, SMS and mobile Internet connectivity.
In 2014, our mobile churn rate in Italy decreased to 31.4% compared to 36.6% in 2013 as a consequence of the more rational approach to promotions developed in 2014 by the main three operators.
As of December 31, 2014, and 2013 we had approximately 2.2 million fixed-line broadband customers in Italy. The number did not change due to the new strategy focused on higher margin customers and less expensive pull sales channels.
As of December 31, 2014, we had approximately 10.2 million mobile broadband customers in Italy, representing an increase of approximately 22.9% over the approximately 8.3 million mobile broadband customers as of December 31, 2013. The increase was mainly driven by WIND’s new campaigns based on “All Inclusive” package offerings coupled with value for money plans and the increased diffusion in the market of smartphones.
Year Ended December 31, 2013 Compared to Year Ended December 31, 2012
Our Italy total operating revenue was US$6,618 million during 2013, representing a decrease of 5.2% compared to US$6,982 million in 2012.
In our Italy segment, total operating revenue from services was US$6,096 million during 2013, representing a decrease of 6.3% compared to US$6,507 million in 2012. The decrease in service revenue in our Italy segment was mainly due to a decrease in interconnection revenue as a result of MTR cuts, and a decrease in telephone services, the effect of which was partially offset by the increase in the revenue from equipment sales.
During 2013, we generated US$5,352 million of our service revenue from mobile and fixed-line telecommunication services, including revenue from, among others, traffic, roaming revenue from our customers travelling abroad, fees and contributions from our mobile and fixed-line (including Internet) businesses, or 87.8% of our total operating revenue from services in our Italy segment, which decreased by 2.7% from US$5,501 million of revenue, or 84.5% of our total operating revenue from services in our Italy segment, in 2012. The decrease was mainly due to a difficult macroeconomic situation and the contraction of the market. The decrease was in part offset by an increase in our mobile customer base and the development of offers dedicated to internet navigation on mobile phones.
During 2013, we generated US$530 million of our service revenue from interconnection traffic, relating to incoming calls from other operators’ networks to our mobile and fixed-line networks, or 8.7% of our total operating revenue from services in our Italy segment, representing a decrease of 32.6% compared to US$786 of revenue, or 12.1% of the total operating revenue from service, in 2012. The decrease is primarily due to the effect of the reduction of unit tariffs set by AGCOM.
During 2013, we generated US$55 million of our service revenue from international roaming, relating to calls made by customers of foreign mobile network operators while travelling in Italy, or 0.9% of our total operating revenue from services in our Italy segment. In 2012, we generated US$57 million from international roaming, or 0.9% of total operating revenue from services in our Italy segment. In 2013 international roaming revenue fell mainly as a result of the general reduction in tariffs, only partially offset by an increase in international roaming volume.
During 2013, we generated US$159 million of our service revenue from other types of services, which mainly relate to rental to third parties of advertising space on our internet portal, leased lines and access fees charged to telecom operators and penalties charged to their mobile and fixed-line customers, or 2.6% of our total operating revenue from services in our Italy segment, representing a decrease of 2.5% compared to US$163 in 2012, or 2.5% of our total operating revenue from services. The decrease compared to 2012 is mainly due to lower revenue from rental from other operators (colocation) due to the netting of the amount with the related cost.
Our total operating revenue in our Italy segment also included revenue from sales, mainly relating to the sale of SIM cards, mobile and fixed-line phones and related accessories. During 2013, revenue from sales increased to US$318 million, or 24.6%, from US$255 million in 2012 primarily due to the increase in sale of mobile telephone handsets and a shift of sales towards higher priced devices.
During 2013, we generated US$204 million of our revenue in our Italy segment from the settlement of commercial disputes and penalties charged to suppliers, representing a decrease of 7.2% from US$220 million in 2012. The decrease was mainly due to the revisions of estimates made in previous years and to the effects related to the lower proceeds from settlement of disputes with some suppliers.
Our Italy adjusted EBITDA decreased by 2.3% to US$2,598 million during 2013 from US$2,658 million during 2012, primarily due to lower revenue, partially compensated by lower selling, general and administrative expenses as a result of our cost efficiency project initiatives and tight cost control measures. In functional currency terms, adjusted EBITDA margin in 2013 in our Italy segment was 39.0%, which is 0.9 percentage points above the adjusted EBITDA margin in 2012, primarily due to our cost efficiency project initiatives and tight cost control measures.
As of December 31, 2013, we had approximately 22.3 million customers in Italy representing an increase of 3.0% over approximately 21.6 million customers as of December 31, 2012. Our mobile customer increase in 2013 was mainly due to continued development of innovative options and related promotions, enhancing our perception in the market as a value for money operator, focusing on transparency and simplicity, improving our brand recognition and maintaining strong customer service. These efforts were further supported by the availability of MNP and a continued increase in penetration of smartphones and data services.
In 2013, our mobile ARPU in Italy decreased by 11.9% to US$16.3 from US$18.5 in 2012 primarily as a result of a decline in voice revenue due to strong competition on pricing and regulations reducing mobile termination rates, which decrease was partially offset by appreciation of the Euro against the U.S. dollar. In functional currency terms, mobile ARPU in Italy decreased by 14.5% in 2013 compared to 2012.
In 2013, our mobile MOU in Italy increased by 14.4 % to 237 from 207 in 2012, primarily due to the continued promotion of bundle offers which include minutes of voice traffic, SMS and mobile Internet connectivity.
In 2013, our mobile churn rate in Italy marginally increased to 36.6% compared to 35.2% in 2012 due to the strong competition in the market and regulatory requirements to ensure a relatively shorter time needed to transfer a mobile number under the MNP regulation.
As of December 31, 2013 and 2012 we had approximately 2.2 million fixed-line broadband customers in Italy. The number did not change due to the new strategy focused on higher margin customers and less expensive pull sales channels.
As of December 31, 2013, we had approximately 8.3 million mobile broadband customers in Italy, representing an increase of approximately 50.9% over the approximately 5.5 million mobile broadband customers as of December 31, 2012. The increase was mainly driven by WIND’s renewed campaigns based on “All Inclusive” package offerings coupled with value for money plans and the increased diffusion in the market of smartphones.
Algeria
Results of operations in US$
| Year ended December 31, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
| (In millions of US dollars) | ||||||||||||
Service revenue | 1,678 | 1,790 | 1,841 | |||||||||
Sale of equipment and accessories | 12 | 6 | 2 | |||||||||
Other revenue | 2 | — | — | |||||||||
|
|
|
|
|
| |||||||
Total operating revenue | 1,692 | 1,796 | 1,843 | |||||||||
|
|
|
|
|
| |||||||
Operating expenses | ||||||||||||
Service costs | 328 | 346 | 351 | |||||||||
Cost of equipment and accessories | 12 | 6 | 2 | |||||||||
Selling, general and administrative expenses | 495 | 1,656 | 443 | |||||||||
|
|
|
|
|
| |||||||
Adjusted EBITDA | 857 | (212 | ) | 1,047 | ||||||||
Results of operations in DZD
| Year ended December 31, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
| (In billions of DZD) | ||||||||||||
Service revenue | 135 | 143 | 136 | |||||||||
Sale of equipment and accessories | 1 | — | — | |||||||||
Other revenue | — | — | — | |||||||||
|
|
|
|
|
| |||||||
Total operating revenue | 136 | 143 | 136 | |||||||||
|
|
|
|
|
| |||||||
Operating expenses | ||||||||||||
Service costs | 26 | 28 | 27 | |||||||||
Cost of equipment and accessories | 1 | — | — | |||||||||
Selling, general and administrative expenses | 40 | 130 | 36 | |||||||||
|
|
|
|
|
| |||||||
Adjusted EBITDA | 69 | (15 | ) | 73 | ||||||||
Certain Performance Indicators
| Year ended December 31, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
Mobile* | ||||||||||||
Customers (end of the period in millions) | 18.4 | 17.6 | 16.7 | |||||||||
ARPU in USD | 7.8 | 8.4 | 9.0 | |||||||||
ARPU in DZD | 629 | 693 | 707 | |||||||||
MOU | 194 | 216 | 274 | |||||||||
Annual churn (as a percentage) | 23.6 | 31.6 | 29.5 | |||||||||
Year Ended December 31, 2014 Compared to Year Ended December 31, 2013
Our Algeria total operating revenue decreased to US$1,692 million during 2014, representing a decrease of 5.8% from US$1,796 million during 2013. Our Algeria total operating revenue consists of revenue from providing mobile services. Our revenue was negatively impacted by the delayed commercial launch of our 3G network and adverse regulatory actions.
During 2014, we generated US$1,442 million of our service revenue from airtime charges from mobile contract and prepaid customers, including monthly contract fees and roaming fees, and roaming fees received from other mobile service operators for providing roaming services to their customers, or 85.2 % of our total operating revenue in our Algeria segment, compared to US$1,563 million, or 87.0% of the total operating revenue in our Algeria segment, in 2013. The decrease in revenue in our Algeria segment was primarily due to the delayed roll out of our 3G network compared to that of our competitors.
During 2014, we generated US$120 million of our service revenue from interconnect fees, or 7.1% of the total operating revenue in our Algeria segment, compared to US$126 million, or 7.0 % of the total operating revenue in our Algeria segment, in 2013. The decrease during 2014 compared to 2013 was due to lower traffic terminated on our network.
During 2014, we generated US$102 million of our service revenue from value added services, including data revenue, or 6.0% of the total operating revenue in our Algeria segment, compared to US$92 million, or 5.1% of the total operating revenue in our Algeria segment, in 2013. The increase in 2014 compared to 2013 was due to the launch of the 3G network and our efforts to promote data tariff plans.
Our total operating revenue in our Algeria segment also includes revenue from sales of equipment and accessories and other revenue. During 2014, revenue from sales of equipment and accessories and other revenue was US$14 million, whereas in 2013 revenue from sales of equipment and accessories and other revenue was US$6 million.
Our Algeria adjusted EBITDA increased to US$857 million during 2014 from negative US$212 million during 2013, primarily due to a one-off charge in 2013 for the Bank of Algeria claim of US$1,266 million in 2013 as part of the settlement with the Algerian government, a one off charge in 2014 of US$50 million related to litigation settlement with Cevital, increased network maintenance expenses due to the roll out of our 3G network and an overall decrease in revenue.
As of December 31, 2014, we had approximately 18.4 million customers in our Algeria segment, in comparison with 17.6 million customers in 2013. The 4.6% increase is due to our sales efforts to maintain customer market share and increased penetration on the market.
We did not have broadband customers in Algeria as of December 31, 2014.
In 2014, our mobile ARPU in Algeria decreased by 9.1% to US$7.8 from US$8.4 in 2013. The decrease is mainly due to the inability to attract high value customers and promote corporate offers, as a result of limited network capacity due to limitations from the government coupled with actions of our competitors in the market.
In 2014, our mobile MOU in Algeria decreased by 10.2% to 194 from 216 in 2013 mainly due to customer growth in customer segments with lower usage patterns.
In 2014, our mobile churn rate in Algeria decreased to 23.6% compared to 31.6% in 2013 due to an adjustment in our customer base number in 2013 because of a technical issue.
Year Ended December 31, 2013 Compared to Year Ended December 31, 2012
Our Algeria total operating revenue decreased to US$1,796 million during 2013, representing a decrease of 2.5% from US$1,842 million during 2012. Our Algeria total operating revenue consists of revenue from providing mobile services. Our revenue was impacted by adverse regulatory actions.
During 2013, we generated US$1,563 million of our service revenue from airtime charges from mobile contract and prepaid customers, including monthly contract fees and roaming fees, and roaming fees received from other mobile service operators for providing roaming services to their customers, or 87.0 % of our total operating revenue in our Algeria segment, compared to US$1,601 million, or 86.9% of the total operating revenue in our Algeria segment, in 2012. The decrease in revenue in our Algeria segment was primarily due to the adverse regulatory actions.
During 2013, we generated US$126 million of our service revenue from interconnect fees, or 7.0% of the total operating revenue in our Algeria segment, compared to US$142 million, or 7.7 % of the total operating revenue in our Algeria segment, in 2012. The decrease during 2013 compared to 2012 was due to a decrease in international incoming traffic as well as MTR cuts.
During 2013, we generated US$92 million of our service revenue from value added services, including data revenue, or 5.1% of the total operating revenue in our Algerian segment, compared to US$89 million, or 4.9% of the total operating revenue in our Algeria segment, in 2012.
Our total operating revenue in our Algeria segment also includes revenue from sales of equipment and accessories and other revenue. During 2013, revenue from sales of equipment and accessories and other revenue was US$6 million, whereas in 2012 revenue from sales of equipment and accessories and other revenue was US$2 million.
Our Algerian adjusted EBITDA decreased to negative US$212 million during 2013 from US$1047 million during 2012, primarily due to a one-off charge for the Bank of Algeria claim of US$1,266 million in 2013 as part of the settlement with the Algerian government slightly offset by cost control and operational excellence program.
As of December 31, 2013, we had approximately 17.6 million customers in our Algerian segment, in comparison with 16.7 million customers in 2012. The 5.4% increase is due to our sales efforts to maintain customer market share and increased penetration in the market.
In 2013, our mobile ARPU in Algeria decreased by 6.5% to US$8.4 from US$9.0 in 2012. The decrease is mainly due to the inability to attract high value customers and promote corporate offers, as a result of limited network capacity due to limitations from the government coupled with actions of our competitors in the market.
In 2013, our mobile MOU in Algeria decreased by 21.1% to 216 from 274 in 2012 mainly due to customer growth in customer segments with lower usage patterns
In 2013, our mobile churn rate in Algeria increased to 31.6% compared to 29.5% in 2012 due to the effect of actions from various governmental authorities.
Africa & Asia
Results of operations
| Year ended December 31, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
| (In millions of US dollars) | ||||||||||||
Service revenue | 1,619 | 1,645 | 1,840 | |||||||||
Sale of equipment and accessories | 2 | 4 | 16 | |||||||||
Other revenue | 47 | 61 | 24 | |||||||||
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| |||||||
Total operating revenue | 1,668 | 1,710 | 1,880 | |||||||||
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| |||||||
Operating expenses | ||||||||||||
Service costs | 277 | 291 | 344 | |||||||||
Cost of equipment and accessories | 4 | 7 | 14 | |||||||||
Selling, general and administrative expenses | 808 | 795 | 831 | |||||||||
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| |||||||
Adjusted EBITDA | 579 | 617 | 691 | |||||||||
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Segmentation of Total operating revenue
| Year ended December 31, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
| (In millions of US dollars) | ||||||||||||
Pakistan | 1,010 | 1,066 | 1,132 | |||||||||
Bangladesh | 563 | 504 | 554 | |||||||||
Other and eliminations(1) | 95 | 140 | 194 | |||||||||
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| |||||||
Total | 1,668 | 1,710 | 1,880 | |||||||||
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| |||||||
Segmentation of Adjusted EBITDA
| Year ended December 31, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
| (In millions of US dollars) | ||||||||||||
Pakistan | 386 | 443 | 488 | |||||||||
Bangladesh | 219 | 187 | 192 | |||||||||
Other and eliminations(1) | (26 | ) | (13 | ) | 11 | |||||||
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| |||||||
Total | 579 | 617 | 691 | |||||||||
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| |||||||
For a presentation of certain performance indicators for each of our countries of operation within the Africa & Asia segment, see “Item 3. Key Information—A. Selected Financial Data—Selected Operating Data.”
Year Ended December 31, 2014 Compared to Year Ended December 31, 2013
Our Africa & Asia total operating revenue decreased to US$1,668 million during 2014, representing a decrease of 2.5% from US$1,710 million during 2013. Our Africa & Asia total operating revenue consists of revenue from providing mobile services. In September 2014, we sold our subsidiaries in Burundi and Central African Republic. In 2013, we sold our subsidiary in Cambodia.
During 2014, we generated US$1,059 million of our revenue from airtime charges from mobile contract and prepaid customers, including monthly contract fees and roaming fees, and roaming fees received from other mobile service operators for providing roaming services to their customers, or 63.5 % of our total operating revenue in our Africa & Asia segment, compared to US$1,079 million, or 63.1% of the total operating revenue in our Africa & Asia segment, in 2013. The decrease in revenue in our Africa & Asia segment was primarily due to the sale of Burundi and Central African Republic and lower revenue in Pakistan which was only partially offset by increased revenue in Bangladesh. Revenue in Pakistan was lower due to competitive pressure.
During 2014, we generated US$199 million of our revenue from interconnect fees, or 11.9% of the total operating revenue in our Africa & Asia segment, compared to US$226 million, or 13.2 % of the total operating revenue in our Africa & Asia segment, in 2013. The decrease in 2014 compared to 2013 was due to a decline in interconnect revenue in Pakistan as a result of lower International Clearing House (“ICH”) revenues because of industry-wide steady decline in incoming international traffic after ICH implementation.
During 2014, we generated US$254 million of our revenue from value added services, including data revenue, or 15.2% of the total operating revenue in our Africa & Asia segment, compared to US$242 million, or 14.2% of the total operating revenue in our Africa & Asia segment, in 2013. The increase in 2014 compared to 2013 was due to an increase in data revenue in both Pakistan and Bangladesh partially offset by lower VAS revenue in Pakistan.
During 2014, we generated US$107 million of our revenue from other services, or 6.4% of the total operating revenue in our Africa & Asia segment, compared to US$98 million, or 5.7% of total operating revenue in the Africa & Asia segment, in 2013. These revenue are primarily generated by other services such as leasing lines, DSL and wireless internet in Pakistan.
Our total operating revenue in our Africa & Asia segment also includes revenue from sales of equipment and accessories and other revenue. During 2014, revenue from sales of equipment and accessories and other revenue was US$49 million, whereas in 2013 revenue from sales of equipment and accessories and other revenue was US$65 million.
Our Africa & Asia adjusted EBITDA decreased to US$579 million during 2014 from US$617 million during 2013, primarily due to the lower revenue.
As of December 31, 2014, we had approximately 71.6 million customers in our Africa & Asia segment (including Zimbabwe (accounted at cost) in the amount of 2.2 million customers), in comparison with 69.4 million customers (including Zimbabwe (accounted at cost) in the amount of 2.6 million customers) in 2013.
We did not have a significant number of broadband customers in Africa & Asia as of December 31, 2013.
Pakistan
In 2014, our mobile ARPU in Pakistan decreased by 8.7% to US$2.1 from US$2.3 in 2013 mainly due to adverse regulatory changes imposing additional taxes on customers and negative macroeconomic conditions. In functional currency terms, ARPU decreased in 2014 by 10.9% compared to 2013 mainly due to lower VAS services and decreased tariffs.
In 2014, our mobile MOU in Pakistan increased 5.3% to 238 from 226 in 2013 mainly due to active promotion of on-net oriented offers at competitive prices.
In 2014, our mobile churn rate in Pakistan increased to 26% compared to 23% in 2013 due to delay in network modernization and an aggressive pricing in the market.
Bangladesh
In 2014, our mobile ARPU in Bangladesh remained at US$1.5 from 2013, as lower prices per minute of use were offset by higher MOU.
In 2014, our mobile MOU in Bangladesh increased by 7.2% to 197 from 184 in 2013 mainly due to disconnection of suspected high usage customers pursuant to regulator directives, as well as lower usage as a result of political instability throughout 2013.
In 2014, our mobile churn rate in Bangladesh decreased to 21.6% compared to 22.3% in 2013 mainly due to our efforts in customer retention.
Year Ended December 31, 2013 Compared to Year Ended December 31, 2012
Our Africa & Asia total operating revenue decreased to US$1,710 million during 2013, representing a decrease of 9.0% from US$1,880 million during 2012. Our Africa & Asia total operating revenue consists of revenue from providing mobile services.
During 2013, we generated US$1,059 million of our revenue from airtime charges from mobile contract and prepaid customers, including monthly contract fees and roaming fees, and roaming fees received from other mobile service operators for providing roaming services to their customers, or 63.1% of our total operating revenue in our Africa & Asia segment, compared to US$1,340 million, or 71.3% of the total operating revenue in our Africa & Asia segment, in 2012. The decrease in revenue in our Africa & Asia segment was primarily due to depreciation of functional currency in Pakistan, regulatory measures and unstable macro situations in major markets.
During 2013, we generated US$226 million of our revenue from interconnect fees, or 13.2% of the total operating revenue in our Africa & Asia segment, compared to US$226 million, or 12.0% of the total operating revenue in our Africa & Asia segment in 2012.
During 2013, we generated US$242 million of our revenue from value added services, including data revenue, or 14.2% of the total operating revenue in our Africa & Asia segment, compared to US$218 million, or 11.6% of the total operating revenue in our Africa & Asia segment, in 2012. The increase in 2013 compared to 2012 was due to increasing demand for data services as a result of an increase in smartphone penetration offset by devaluation of local currencies.
During 2013, we generated US$98 million of our revenue from other services, or 5.7% of the total operating revenue in our Africa & Asia segment, compared to US$56 million, or 3.0% of total operating revenue in the Africa & Asia segment, in 2012. This revenue is primarily generated by fixed line services such as leasing lines, DSL and wireless internet in Pakistan.
Our total operating revenue in our Africa & Asia segment also includes revenue from sales of equipment and accessories and other revenue. During 2013, revenue from sales of equipment and accessories and other revenue was US$65 million, whereas in 2012 revenue from sales of equipment and accessories and other revenue was US$40 million.
Our Africa & Asia adjusted EBITDA decreased by 10.7% to US$617 million during 2013 from US$691 million during 2012, primarily due to decrease in service revenue. Adjusted EBITDA margin in 2013 in our Africa & Asia segment was 36.1%, which is 0.7 percentage points lower than the adjusted EBITDA margin in 2012.
As of December 31, 2013, we had approximately 69.4 million customers in our Africa & Asia segment (including Zimbabwe (accounted at cost) in the amount of 2.6 million customers), in comparison with 64.9 million customers (including Zimbabwe (accounted at cost) in the amount of 2.6 million customers) in 2012. The 6.9% increase is due to continued customer acquisition in Bangladesh and Pakistan as a result of further market penetration and expansion of our mobile network coverage despite disconnection of VOIP customers in Bangladesh.
We did not have a significant amount of broadband customers in Africa & Asia as of December 31, 2013.
Pakistan
In 2013, our mobile ARPU in Pakistan decreased by 10.8% to US$2.3 from US$2.6 in 2012 mainly due to negative currency translation impact, adverse regulatory changes imposing additional taxes on customers and negative macroeconomic conditions. In functional currency terms, ARPU decreased in 2013 by 4.5% compared to 2012.
In 2013, our mobile MOU in Pakistan increased by 5.6% to 226 from 214 in 2012 mainly due to active promotion of on-net oriented offers.
In 2013, our mobile churn rate in Pakistan decreased to 23.0% compared to 25.2% in 2012 due to an increased focus on customer experience management and continuous reactivation offers supported by relatively lower sales in the beginning of the year due to regulatory restrictions.
Bangladesh
In 2013, our mobile ARPU in Bangladesh decreased by 16.2% to US$1.5 from US$1.8 in 2012 mainly due to self-regulated disconnection of suspected high paid customers pursuant to regulator directives and lower usage as a result of political instability throughout 2013 further impacted by lower price per minute of use.
In 2013, our mobile MOU in Bangladesh decreased by 14.7% to 184 from 216 in 2012 mainly due to disconnection of suspected high usage customers pursuant to regulator directives and lower usage as a result of political instability throughout 2013.
In 2013, our mobile churn rate in Bangladesh decreased to 22.3% compared to 25.2% in 2012 mainly due to our efforts in customer retention and high disconnections of suspected VoIP users in 2012.
Ukraine
Results of operations in US$
| Year ended December 31, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
| (In millions of US dollars) | ||||||||||||
Service revenue | 1,059 | 1,587 | 1,645 | |||||||||
Sale of equipment and accessories | 1 | 22 | 29 | |||||||||
Other revenue | 1 | 1 | 2 | |||||||||
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|
|
| |||||||
Total operating revenue | 1,062 | 1,610 | 1,676 | |||||||||
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| |||||||
Operating expenses | ||||||||||||
Service costs | 180 | 287 | 293 | |||||||||
Cost of equipment and accessories | 4 | 27 | 33 | |||||||||
Selling, general and administrative expenses | 394 | 516 | 491 | |||||||||
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| |||||||
Adjusted EBITDA | 484 | 781 | 859 | |||||||||
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Results of operations in UAH
| Year ended December 31, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
| (In millions of UAH) | ||||||||||||
Service revenue | 12,206 | 12,681 | 13,147 | |||||||||
Sale of equipment and accessories | 7 | 178 | 235 | |||||||||
Other revenue | 18 | 12 | 13 | |||||||||
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| |||||||
Total operating revenue | 12,231 | 12,871 | 13,395 | |||||||||
|
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|
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| |||||||
Operating expenses | ||||||||||||
Service costs | 2,075 | 2,295 | 2,341 | |||||||||
Cost of equipment and accessories | 41 | 214 | 267 | |||||||||
Selling, general and administrative expenses | 4,589 | 4,123 | 3,975 | |||||||||
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|
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| |||||||
Adjusted EBITDA | 5,526 | 6,239 | 6,811 | |||||||||
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Certain Performance Indicators
| Year ended December 31, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
Mobile* | ||||||||||||
Customers (end of the period in millions) | 26.2 | 25.8 | 25.1 | |||||||||
ARPU in USD | 3.1 | 4.7 | 5.2 | |||||||||
ARPU in UAH | 35.6 | 37.5 | 41.3 | |||||||||
MOU | 508 | 501 | 513 | |||||||||
Annual churn as a percentage | 24.9 | 35.3 | 29.8 | |||||||||
Fixed-line | ||||||||||||
Broadband customers (end of the period in millions) | 0.8 | 0.8 | 0.6 | |||||||||
Year Ended December 31, 2014 Compared to Year Ended December 31, 2013
Our Ukraine total operating revenue decreased by 34.1% to US$1,062 million during 2014 from US$1,610 million during 2013, due to economic downturn weighed down by discontinued operations in Crimea,
conflict in Eastern Ukraine and heavy currency devaluation and ARPU erosion with customers optimizing their spend due to the economic crisis. In functional currency terms, our Ukraine total operating revenue in 2014 was 5% lower compared to 2013.
During 2014, our revenue from mobile services in our Ukraine segment decreased by 34.0% to US$972 million from US$1,472 million during 2013, primarily due to the Ukrainian hryvnia devaluation, Crimea customers inactivation and the disrupted tourist season.
During 2014, we generated US$539 million of our service revenue from airtime charges from mobile postpaid and prepaid customers, including monthly contract fees and roaming fees, and roaming fees received from other mobile services operators for providing roaming services to their customers, or 55.5% of the total mobile operating revenue in our Ukraine segment, compared to US$869 million, or 59.0% of the total mobile operating revenue in 2013. The 37.9% decrease was primarily due to currency devaluation, growth of second SIM penetration with low ARPU and decrease of roaming as result of inflation, and the harsh economic situation.
During 2014, we generated US$211 million of our service revenue from value added services including data revenue, or 21.7% of the total mobile operating revenue in our Ukraine segment, compared to US$316 million, or 21.4% of the total mobile operating revenue, in 2013. The 33.3% decrease in our service revenue was primarily due to currency devaluation.
During 2014, we generated US$218 million of our service revenue from interconnect, or 22.4% of the total mobile operating revenue in our Ukraine segment, compared to US$261 million, or 17.7% of the total mobile operating revenue, in 2013. The 16% decrease was primarily due to the impact of the Ukrainian hryvnia devaluation as well as traffic decline from national and international operators.
During 2014, we generated US$2 million of other service revenue, or 0.2% of the total mobile operating revenue in our Ukraine segment, compared to US$3 million generated in 2013, or 0.2% of the total mobile operating revenue, in 2013.
Our Ukraine total mobile operating revenue also included revenue from sales of equipment and accessories and other revenue. During 2014, revenue from sales of equipment and accessories and other revenue decreased to US$2 million, or 0.2% of the total mobile operating revenue in our Ukraine segment, from US$24 million, or 1.6% of the total mobile operating revenue in our Ukraine segment, in 2013. The decrease was due to a reduction in low margin handset sales in 2014.
Our revenue from fixed-line services in Ukraine decreased by 35.2% to US$89 million in 2014 from US$138 million in 2013, primarily due to the impact of the Ukrainian hryvnia devaluation. Our revenue from fixed-line services in 2014 consisted of US$34 million generated from business operations, US$16 million generated from wholesale operations and US$39 million generated from residential and FTTB operations. Revenue from business operations decreased by 31.7% from US$50 million, revenue from residential and FTTB operations decreased by 24.1% from US$52 million in 2013, and revenue from wholesale operations decreased by 55.9% from US$36 million in 2013. Wholesale revenue decreased primarily due to planned reduction in low margin transit activity and the impact of the currency devaluation. Revenue from residential and FTTB decreased due to the Ukrainian hryvnia devaluation.
Our Ukraine adjusted EBITDA decreased by 38.0% to US$484 million during 2014 from US$781 million during 2013, In functional currency terms, adjusted EBITDA margin in our Ukraine segment in 2014 was 45.2%, which is 3.3percentage points lower than in 2013 primarily due to lower mobile service revenue, network and IT and other general and administrative cost due to double increase in frequency fee, currency devaluation and inflation, partially compensated by decreased service costs and sales and marketing costs.
As of December 31, 2014, we had approximately 26.2 million mobile customers in Ukraine, in comparison with approximately 25.8 million mobile customers as of December 31, 2013. The increase of our customer base by 1.8% was mainly due to attractive retail offers and churn reduction campaigns in late 2014 and extra gross adds in the East partially offset by disconnections of customers in Crimea due to the shut down of the network.
In 2014, our mobile ARPU in Ukraine decreased by 34.3% to US$3.1 from US$4.7 in 2013 primarily due to a continued shift in customer base whereby the proportion of high-value and mid-value customers decreased from 2013, as well as an accelerated multi SIM adoption in the East.
In 2014, our mobile MOU in Ukraine increased by 1.4% to 508 from 501 in 2013, mainly due to higher usage within bundle offers.
Our mobile churn rate in Ukraine in 2014 decreased to 24.9% compared to 35.3% in 2013 as a result of successful Customer Relationship Management (“CRM”) program implementation that offset the negative effect of extra churn of inactive customers in Crimea.
As of December 31, 2014, we had approximately 0.8 million fixed-line broadband customers in Ukraine, compared to approximately 0.831.3 million as of December 31, 2013. The increase of 6.8% was due2016 to our sales efforts towards promotion of broadband Internet.
Year Ended December 31, 2013 Compared to Year Ended December 31, 2012
Our Ukraine total operating revenue decreased by 3.9% to US$1,610 million during 2013 from US$1,676 million during 2012, due to a decline in mobile revenue.
During 2013, our revenue from mobile services in our Ukraine segment decreased by 5.1% to US$1,472 million from US$1,551 million during 2012, primarily due to a decrease in both revenue from sales of equipment and voice revenue mobile.
During 2013, we generated US$869 million of our service revenue from airtime charges from mobile postpaid and prepaid customers, including monthly contract fees and roaming fees, and roaming fees received from other mobile services operators for providing roaming services to their customers, or 59.0% of the total mobile operating revenue in our Ukraine segment, compared to US$940 million, or 60.6% of the total mobile operating revenue, in 2012. The 7.5% decrease was primarily due to the high level of reconnections of high value existing customers to retail offers in early 2013.
During 2013, we generated US$316 million of our service revenue from value added services including data revenue, or 21.4% of the total mobile operating revenue in our Ukraine segment, compared to US$285 million, or 18.4% of the total mobile operating revenue, in 2012. The 10.7% increase in our value added service revenue was primarily due to an increase in the number of mobile customers and overall growth in the use of Internet and messaging services.
During 2013, we generated US$261 million of our service revenue from interconnect, or 17.7% of the total mobile operating revenue in our Ukraine segment, compared to US$293 million, or 18.9% of the total mobile operating revenue, in 2012. The 11% decrease was primarily due to traffic decline from other national and international operators.
During 2013, we generated US$3 million of other service revenue, or 0.2% of the total mobile operating revenue in our Ukraine segment, which is consistent with US$3 million generated in 2012, or 0.2% of the total mobile operating revenue in 2012.
Our Ukraine total mobile operating revenue also included revenue from sales of equipment and accessories and other revenue. During 2013, revenue from sales of equipment and accessories and other revenue decreased to
US$24 million, or 1.6% of the total mobile operating revenue in our Ukraine segment, from US$31 million, or 2.0% of the total mobile operating revenue in our Ukraine segment in 2012. The decrease was due to a reduction in low margin handset sales in 2013 as a result of our focus on higher margins.
Our revenue from fixed-line services in Ukraine increased by 10.7% to US$138 million in 2013 from US$125 million in 2012, primarily due to an increase in the residential and FTTB revenue. Our revenue from fixed-line services in 2013 consisted of US$50 million generated from business operations, US$36 million generated from wholesale operations and US$52 million generated from residential and FTTB operations. Revenue from business operations increased by 4.5% from US$48 million, revenue from residential and FTTB operations increased by 46.9% from US$35 million in 2012, while revenue from wholesale operations decreased by 12.9% from US$41 million in 2012. Wholesale revenue decreased primarily due to a lower volume of international traffic. Revenue from business operations increased due to an increase in the number of customers with high ARPU. Revenue from residential and FTTB increased due to growth in the FTTB customer base.
Our Ukraine adjusted EBITDA decreased by 9.2% to US$781 million during 2013 from US$859 million during 2012. In functional currency terms, adjusted EBITDA margin in our Ukraine segment in 2013 was 48.5%, which is 2.8 percentage points lower than in 2012 primarily due to lower mobile service revenue, partially compensated by decreased selling, general and administrative costs.
As of December 31, 2013, we had approximately 25.8 million mobile customers in Ukraine, in comparison with approximately 25.1 million mobile customers as of December 31, 2012. The increase of our customer base by 2.8% was mainly due to attractive retail offers and churn reduction campaigns in late 2013.
In 2013, our mobile ARPU in Ukraine decreased by 9.2% to US$4.7 from US$5.2 in 2012 primarily due to a continued shift in customer base whereby the proportion of high-value and mid-value customers decreased, mainly as a result of the introduction of bundled tariff plans in 2012.
In 2013, our mobile MOU in Ukraine decreased by 2.3% to 501 from 513 in 2012, mainly due to lower usage.
Our mobile churn rate in Ukraine in 2013 increased to 35.3% compared to 29.8% in 2012 due to increased churn driven by aggressive pricing actions in early 2013 coupled by the seasonal offer in the summer period which led to a higher churn in late 2013.
As of December 31, 2013, we had approximately 0.8 million fixed-line broadband customers in Ukraine, compared to approximately 0.629.5 million as of December 31, 2012. The increase of 24.3% was due to our sales efforts towards promotion of broadband Internet.
CIS
Results of operations in US$
| Year ended December 31, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
| (In millions of US dollars) | ||||||||||||
Service revenue | 1,865 | 1,935 | 1,736 | |||||||||
Sale of equipment and accessories | 7 | 9 | 18 | |||||||||
Other revenue | 1 | 2 | 1 | |||||||||
|
|
|
|
|
| |||||||
Total operating revenue | 1,873 | 1,946 | 1,755 | |||||||||
|
|
|
|
|
| |||||||
Operating expenses | ||||||||||||
Service costs | 355 | 432 | 400 | |||||||||
Cost of equipment and accessories | 12 | 17 | 29 | |||||||||
Selling, general and administrative expenses | 596 | 640 | 513 | |||||||||
|
|
|
|
|
| |||||||
Adjusted EBITDA | 912 | 856 | 813 | |||||||||
Segmentation of Total Operating Revenue
| Year ended December 31, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
| (In millions of US dollars) | ||||||||||||
Kazakhstan | 755 | 839 | 829 | |||||||||
Uzbekistan | 718 | 673 | 464 | |||||||||
Kyrgyzstan | 178 | 192 | 161 | |||||||||
Armenia | 138 | 145 | 158 | |||||||||
Tajikistan | 142 | 148 | 108 | |||||||||
Georgia | 79 | 88 | 78 | |||||||||
Other and eliminations(1) | (137 | ) | (139 | ) | (43 | ) | ||||||
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| |||||||
Total | 1,873 | 1,946 | 1,755 | |||||||||
|
|
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| |||||||
Segmentation of Adjusted EBITDA
| Year ended December 31, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
| (In millions of US dollars) | ||||||||||||
Kazakhstan | 349 | 390 | 394 | |||||||||
Uzbekistan | 461 | 347 | 253 | |||||||||
Kyrgyzstan | 90 | 97 | 91 | |||||||||
Armenia | 46 | 57 | 63 | |||||||||
Tajikistan | 62 | 74 | 52 | |||||||||
Georgia | 20 | 27 | 21 | |||||||||
Other and eliminations(1) | (116 | ) | (136 | ) | (61 | ) | ||||||
|
|
|
|
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| |||||||
Total | 912 | 856 | 813 | |||||||||
|
|
|
|
|
| |||||||
For a presentation of certain performance indicators for each of our countries of operation, see “Item 3. Key Information—A. Selected Financial Data—Selected Operating Data.”
Year Ended December 31, 2014 Compared to Year Ended December 31, 2013
Our CIS total operating revenue decreased by 3.7% to US$1,873 during 2014 from US$1,946 million during 2013. Our CIS total operating revenue consists of revenue from providing mobile services as well as fixed-line services.
In our CIS segment, revenue from mobile services decreased by 4.8% to US$1,700 million during 2014 from US$1,785 million during 2013, due to depreciation of the functional currencies in our operations, while in local currencies our CIS segment continued to deliver solid performance, supported by strong results in Kazakhstan and Uzbekistan.
During 2014, we generated US$1,067 million of our service revenue from airtime charges in the CIS segment from mobile contract and prepaid customers, including monthly contract fees and roaming fees, and roaming fees received from other mobile service operators for providing roaming services to their customers, or 62.7% of the total mobile operating revenue in our CIS segment, compared to US$1,148 million, or 64.3% of the total mobile operating revenue, in 2013. The 7.0% decrease during 2014 compared to 2013 was mainly due to currency devaluation in Kazakhstan, Armenia and Kyrgyzstan.
During 2014, we generated US$224 million of our mobile service revenue from interconnect fees in our CIS segment, or 13.2% of the total mobile operating revenue in our CIS segment, compared to US$269 million, or 15.1% of the total mobile operating revenue in our CIS segment, in 2013. The 16.3% decrease in 2014 compared to 2013 was due to currency devaluation in Kazakhstan, Armenia and Kyrgyzstan, as well as an MTR rate decrease of 15% in Kazakhstan.
During 2014, we generated US$409 million of our mobile service revenue in our CIS segment from value added services, including data revenue, or 24.0% of the total mobile operating revenue in our CIS segment, compared to US$356 million, or 20.0% of the total mobile operating revenue in the CIS segment, in 2013. The 14.6% increase in 2014 compared to 2013 was primarily due to significant increase of data revenue in all CIS markets through usage stimulation and data quality perception improvement that is in line with our group’s mobile data growth strategy.
Our CIS total mobile operating revenue also included revenue from sales of equipment and accessories and other revenue. During 2014, revenue from sales of equipment and accessories and other revenue in our CIS segment decreased to US$8 million from US$11 during 2013 following the companies’ value agenda to focus on data revenue development.
Our CIS total operating revenue from fixed-line services increased by 2.3% to US$167 million in 2014 from US$163 million in 2013. The increase was primarily due to an increase in revenue from wholesale operations in Kazakhstan. In 2014, US$38 million of CIS fixed-line revenue was generated from our business operations, US$52 million from wholesale operations and US$77 million from residential and FTTB operations. Revenue from business operations, residential and FTTB operations wholesale operations decreased by 5.5% and 13.0% in comparison with 2013, respectively, while revenue from wholesale operations increased by 50.0% in comparison with 2013. Revenue from business operations decreased primarily due to a decrease in Armenia. Wholesale operations revenue increased primarily due to an increase wholesale operations revenue in Kazakhstan and Armenia. Residential and FTTB revenue decreased primarily due to a decrease in Kazakhstan and Armenia.
Our CIS adjusted EBITDA increased by 6% to US$912 million during 2014 from US$856 million during 2013. Our CIS adjusted EBITDA margin was 48.7% in 2014, which was 4.7 percentage points higher than in 2013 primarily due to cost reduction measures as part of our ongoing operational excellence program.
As of December 31, 2014, we had approximately 26.5 million mobile customers in our CIS segment, representing an increase of 4.3% from approximately 25.4 million mobile customers as of December 31, 2013. The increase in our customer base in the CIS was a result of stable mobile customers base growth in all CIS markets.
As of December 31, 2014, we had approximately 14.1 million broadband customers in the CIS, consisting of approximately 13.8 million mobile broadband and 0.4 million fixed-line broadband customers, compared to approximately 13.3 million mobile broadband customers and approximately 0.4 million fixed-line broadband customers as of December 31, 2013. The increase was mainly due to an increase of mobile data users in line with our strategy in Kazakhstan and Uzbekistan markets as a result of active promotion of bundles and data usage offers, and an increase of fixed-line broadband users in Kazakhstan as a result of our sales efforts in this market.
Kazakhstan
In 2014, our mobile ARPU in Kazakhstan decreased by 6.3% to US$5.8 from US$7.1 in 2013, primarily due to depreciation of the Kazakhstan tenge against the U.S. dollar. In functional currency term, mobile ARPU decreased by 3% due to a decline in voice revenue that was not fully compensated by Internet usage revenue following the implementation of bundled tariff plans.
In 2014, our mobile MOU in Kazakhstan increased by 6.6% to 309 from 290 in 2013, primarily due to promotion of bundled offers.
In 2014, our mobile churn rate in Kazakhstan increased to 50.5% compared to 48.6% in 2013 due to increased competition.
Uzbekistan
In 2014, our mobile ARPU in Uzbekistan increased by 6.2% to US$5.6 from US$5.3 in 2013, primarily due to traffic monetization activities and favorable market conditions.
In 2014, our mobile MOU in Uzbekistan increased by 10.9% to 523 from 471 in 2013 primarily due to promotion of bundle offers.
In 2014, our mobile churn rate in Uzbekistan decreased to 48.1% compared to 53.5% in 2013 due to price increasing activities of our main competitor Ucell during first half of the year and on-net promotion actions of Beeline.
Kyrgyzstan
In 2014, our mobile ARPU in Kyrgyzstan decreased by 15.7% to US$5.5 from US$6.6 in 2013, primarily as a result of devaluation of local currency against the U.S.dollar. In functional currency terms, mobile ARPU in Kyrgyzstan slightly increased by 0.2% in 2014 compared to 2013 due to APPM erosion as a result of the promotion of bundles.
In 2014, our mobile MOU in Kyrgyzstan increased by 10.4% to 293 from 265 in 2013 primarily due to the promotion of bundle offers focused on increasing on-net MOU.
In 2014, our mobile churn rate in Kyrgyzstan slightly increased to 65.7% compared to 65.6% in 2013 and remained high due to the high number of labor migrants.
Armenia
In 2014, our mobile ARPU in Armenia decreased by 6.7% to US$6.6 from US$7.1 in 2013 primarily as a result of devaluation of the Armenian dram against the U.S. dollar. In functional currency terms, mobile ARPU in Armenia decreased by 4.2% in 2014 compared to 2013 due to aggressive customers acquisition and on-net price abatement.
In 2014, our mobile MOU in Armenia increased by 10.2% to 374 from 339 in 2013, primarily due to the promotion of on-net bundles and unlimited offers.
In 2014, our mobile churn rate in Armenia decreased to 43.9% compared to 62.6% in 2013 due to our focus on high-quality customers.
Tajikistan
In 2014, our mobile ARPU in Tajikistan increased by 7.4% to US$9.23 from US$10.0 in 2013, primarily due to price erosion caused by a highly competitive market with decreasing prices and a declining level of international interconnect revenue in the last quarter of 2014.
In 2014, our mobile MOU in Tajikistan increased by 5.9% to 286 from 270 in 2013 primarily supported by an increased level of local on-net traffic2017 due to continuing promotion of price plans in the first three quarters of 2014 and an increased level of local off-net traffic due to the promotion of an off-net price plan launched in August of 2014.
In 2014, our mobile churn rate in Tajikistan decreased to 77.1% compared to 77.9% in 2013 due to the lower number of labor migrants in 2014 compared to 2013.
Georgia
In 2014, our mobile ARPU in Georgia decreased by 22.4% to US$4.9 from US$6.3 in 2013 primarily as a result of devaluation of the local currency against the U.S. dollar. In functional currency terms, mobile ARPU in Georgia decreased by 12.7% in 2014 compared to 2013 due to an adverse market trend of reducing prices as well as the technological gap (absence of 3G technology).
In 2014, our mobile MOU in Georgia decreased by 6.5% to 228 from 244 in 2013 primarily due to the high quantity of low-usage customers seeking low cost services in accordance with the company’s positioning and voice traffic partly migrated to OTT services.
In 2014, our mobile churn rate in Georgia decreased to 69.7% compared to 74.0% in 2013 due to the acquisition and the retention of high quality customers in a competitive market environment.
Year Ended December 31, 2013 Compared to Year Ended December 31, 2012
Our CIS total operating revenue increased by 11.0% to US$1,946 during 2013 from US$1,755 million during 2012. Our CIS total operating revenue consists of revenue from providing mobile services as well as fixed-line services.
In our CIS segment, revenue from mobile services increased by 10.6% to US$1,773 million during 2013 from US$1,603 million during 2012.
During 2013, we generated US$1,148 million of our service revenue from airtime charges in the CIS segment from mobile contract and prepaid customers, including monthly contract fees and roaming fees, and roaming fees received from other mobile service operators for providing roaming services to their customers, or 64.3% of the total mobile operating revenue in our CIS segment, compared to US$1,045 million, or 65.2% of the total mobile operating revenue, in 2012. The 9.9% increase during 2013 compared to 2012 was mainly due to customers base growth in the Kazakhstan and Uzbekistan markets.
During 2013, we generated US$269 million of our mobile service revenue from interconnect fees in our CIS segment, or 15.1% of the total mobile operating revenue in our CIS segment, compared to US$280 million, or 17.5% of the total mobile operating revenue in our CIS segment, in 2012. The 3.4% decrease in 2013 compared to 2012 was primarily due to MTR cuts of 15% in Kazakhstan, which were effective beginning in 2013.
During 2013, we generated US$356 million of our mobile service revenue in our CIS segment from value added services, including data revenue, or 20.0% of the total mobile operating revenue in our CIS segment, compared to US$260 million, or 16.2% of the total mobile operating revenue in the CIS segment, in 2012. The 37.1% increase in 2013 compared to 2012 was primarily due to significant increase of data revenue in all CIS markets through usage stimulation and data quality perception improvement that is in line with our group’s mobile data growth strategy.
Our CIS total mobile operating revenue also included revenue from sales of equipment and accessories and other revenue. During 2013, revenue from sales of equipment and accessories and other revenue in our CIS segment decreased to US$11 million from US$18 million during 2012 following the companies’ value agenda to focus on data revenue development.
Our CIS total operating revenue from fixed-line services increased by 7.3% to US$163 million in 2013 from US$152 million in 2012. The increase was primarily due to an increase in residential and FTTB revenue in Kazakhstan. In 2013, US$40 million of CIS fixed-line revenue was generated from our business operations, US$35 million from wholesale operations and US$88 million from residential and FTTB operations. Revenue from business operations and wholesale operations decreased by 2.4% and 8.1% in comparison with 2012, respectively, while revenue from residential and FTTB operations increased by 20.8% in comparison with 2012. Revenue from business operations revenue decreased primarily due to a decrease in Armenia that was partly offset by an increase in Kazakhstan. Revenue from wholesale operations decreased primarily due to a decrease in traffic termination revenue in Tajikistan as a result of decreased traffic volume with Russia. Residential and FTTB revenue increased primarily as a result of FTTB development in Kazakhstan.
Our CIS adjusted EBITDA increased by 5.3% to US$856 million during 2013 from US$813 million during 2012. Our CIS adjusted EBITDA margin was 44.0% in 2013, which is 2.3 percentage points lower than in 2012 primarily due to write off of fixed assets to operating expenses in Uzbekistan, partially offset by cost reduction measures as part of our ongoing operational excellence program.
As of December 31, 2013, we had approximately 25.4 million mobile customers in our CIS segment, representing an increase of 5.2% from approximately 24.2 million mobile customers as of December 31, 2012. The increase in our customer base in the CIS was a result of stable mobile customers base growth in all CIS markets except for Armenia where the customer base decreased due to growingaggressive competition in the market.market, more selective mobile customer scoring and harmonization of customer base definition between the WIND and "3" brands.
As of Fixed-line ARPU increased slightly from EUR 27.6 per month during the year ended December 31, 2013, we had approximately 13.7 million2016 to EUR 27.9 per month during the year ended December 31, 2017, driven by broadband customershigh value customer base growth.
Mobile ARPU and our fixed-line customer base were broadly stable in the CIS, consisting of approximately 13.3 million mobile broadband and 0.4 million fixed-line broadband customers,2017 as compared to approximately 12.0 million mobile broadband customers and approximately 0.3 million fixed-line broadband customers as of December 31, 2012. The increase was mainly due to an increase of mobile data users in line with our strategy in Kazakhstan and Uzbekistan markets as a result of active promotion of bundles and data usage offers and an increase of fixed-line broadband users in Kazakhstan as a result of our sales efforts in this market.2016.
Kazakhstan
In 2013, our mobile ARPU in Kazakhstan decreased by 6.3% to US$7.1 from US$7.6 in 2012, primarily due to a decline in voice revenue that was not fully compensated by Internet usage revenue following the implementation of bundled tariff plans.
In 2013, our mobile MOU in Kazakhstan increased by 36.2% to 290 from 213 in 2012, primarily due to promotion of bundled offers.
In 2013, our mobile churn rate in Kazakhstan decreased to 48.6% compared to 55.8% in 2012 due to a new ARPU based commission scheme implemented for dealers which positively impacted the quality of acquired customers.
Uzbekistan
In 2013, our mobile ARPU in Uzbekistan increased by 14.5% to US$5.3 from US$4.6 in 2012, primarily due to our efforts in promoting offers with higher price per minute that became possible in the two-player market conditions as a result of the network closure of a competitor by the Uzbekistan authorities in 2012.
In 2013, our mobile MOU in Uzbekistan slightly decreased by 0.5% to 471 from 474 in 2012 primarily due to continued transition of customers to data services.
In 2013, our mobile churn rate in Uzbekistan decreased to 53.5% compared to 55.1% in 2012 as a result of our efforts directed towards retaining and attracting more loyal customers.
Kyrgyzstan
In 2013, our mobile ARPU in Kyrgyzstan increased by 18.7% to US$6.6 from US$5.5 in 2012, primarily due to an increased level of international interconnect revenue as a result of incoming traffic, mobile termination rates growth and our efforts in promoting mobile data services.
In 2013, our mobile MOU in Kyrgyzstan decreased by 2.3% to 265 from 272 in 2012 primarily due to the continuous increase in our prices following the market trend.
In 2013, our mobile churn rate in Kyrgyzstan marginally decreased to 65.6% compared to 66.1% in 2012 due to churn prevention measures such as loyalty programs.
Armenia
In 2013, our mobile ARPU in Armenia increased by 4.1% to US$7.1 from US$6.8 in 2012, primarily as a result of the appreciation of the Armenian dram against the U.S. dollar. In functional currency terms, mobile ARPU in Armenia increased by 1.5% in 2013 compared to 2012 which reflected our efforts in promoting the right mix of on-net and off-net oriented price plans and data stimulating offers.
In 2013, our mobile MOU in Armenia increased by 26.1% to 339 from 269 in 2012, primarily due to the promotion of on-net and off-net oriented price plans with higher usage.
In 2013, our mobile churn rate in Armenia decreased to 62.6% compared to 83.9% in 2012 due to improved sales efforts directed toward higher quality customers and targeted marketing campaigns.
Tajikistan
In 2013, our mobile ARPU in Tajikistan increased by 16.6% to US$10.0 from US$8.6 in 2012, primarily due to the increased level of international interconnect revenue and increase in mobile data revenue.
In 2013, our mobile MOU in Tajikistan increased by 12.2% to 270 from 241 in 2012 primarily due to the increased level of international incoming traffic from Russia, continuing promotion of bundled price plans and launching of on-net oriented offers in 2013.
In 2013, our mobile churn rate in Tajikistan increased to 77.9% compared to 72.7% in 2012 due to the increased competition and a higher proportion of lower-ARPU customers with a high churn rate.
Georgia
In 2013, our mobile ARPU in Georgia decreased by 5.1% to US$6.3 from US$6.7 in 2012, primarily due to a decrease in prices as a result of competition.
In 2013, our mobile MOU in Georgia increased by 3.0% to 244 from 237 in 2012 primarily due to the promoting higher usage tariffs.
In 2013, our mobile churn rate in Georgia decreased to 74.0% compared to 79.1% in 2012 due our efforts in customer retention.
Liquidity and Capital Resources
Consolidated Cash Flow SummaryWorking Capital
The following table shows our cash flows for the years ended December 31, 2014, 2013 and 2012 (in millions of U.S. dollars):
| Year ended December 31, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
Consolidated Cash Flow | ||||||||||||
Net cash flows from operating activities | 5,279 | 6,351 | 7,257 | |||||||||
Net cash flows used in investing activities | (3,977 | ) | (4,213 | ) | (4,008 | ) | ||||||
Net cash flows from/(used in) financing activities | 1,329 | (2,575 | ) | (587 | ) | |||||||
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Net increase/(decrease) in cash and cash equivalents | 2,631 | (437 | ) | 2,662 | ||||||||
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Net foreign exchange difference | (743 | ) | (58 | ) | (38 | ) | ||||||
During the years ended December 31, 2014, 2013 and 2012, we generated positive cash flow from our operating activities and negative cash flow from investing activities. Cash flow used in financing activities was positive during 2014 and negative during 2013 and 2012. The positive cash flow from financing activities during 2014 was mostly due to an increase in cash flows from new loans and bonds issued during 2014, partially offset by repayments of our existing facilities and dividend payments to our shareholders and non-controlling interest. The negative cash flow used in financing activities during 2013 was mostly due to payments of dividends to equity holders partially financed by conversion of preferred shares into ordinary shares. The negative cash flow used in financing activities during 2012 was mostly due to repayments of our existing debt facilities, which exceeded new borrowings.
As of December 31, 2014, we had negative We define working capital of US$938 million, compared to negative working capital of US$2,815 million as of December 31, 2013. Working capital is defined as current assets less current liabilities. The change in our working capital as of December 31, 2014 compared to December 31, 2013 was mainly due to an increase in cash and cash equivalents to finance repayment of borrowings, decrease in trade payables and provisions due to currency translation and our efforts to manage trade receivables in 2014. Our working capital is monitored on a regular basis by management. Our management expects to repay our debt as it becomes due from our operating cash flows or through additional borrowings. Current financial liability payments are split during the twelve-month period following December 31, 2014, and the majority of our current financial liabilities will become due fairly evenly during the year 2015. Our management expects to make these payments as they become due. Although we have a negative working capital, our management believes that our cash balances and available credit facilities are sufficient to meet our present requirements.
As of December 31, 2017, we had negative working capital of US$732 million, compared to negative working capital of US$2,007 million as of December 31, 2016. The change in our working capital as of December 31, 2017 compared to December 31, 2016 was primarily due to decreased current financial liabilities as a result of repayment of borrowings; decreased trade and other payables, primarily as a result of payment for long-term assets; increased other current financial assets as a result of cash collateral placed with Citibank N.A. New York in connection with the MTO that is restricted in use. This was partially offset by decreased cash and cash equivalents and increased other current liabilities.
As of December 31, 2016, we had negative working capital of US$2,007 million, compared to negative working capital of US$156 million as of December 31, 2015. The change in our working capital as of December 31, 2016 compared to December 31, 2015 was primarily due to increased current financial liabilities, mainly as a result of GTH Finance B.V.'s newly-issued senior notes; increased other liabilities, mainly due to the Pakistan Merger; decreased current financial assets, mainly due to maturing term deposits at banks; decreased cash and cash equivalents, mainly due to investments in property and equipment, and the utilization of income tax advances against current income tax liabilities. This was partially offset by the decreased provision with the respect to the agreements with the SEC, DOJ and OM, increased trade and other receivables and an increase in other assets, mainly due to the Warid consolidation.
Operating ActivitiesConsolidated Cash Flow Summary
The following table shows our cash flows as of and for the years ended December 31, 2017, 2016 and 2015 (in millions of U.S. dollars):
| | As of and for the year ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2017 | 2016 | 2015 | |||||||
| | (in millions of U.S. dollars) | |||||||||
Cash flow data: | ||||||||||
Net cash from/(used in) operating activities | 2,475 | 1,875 | 2,033 | |||||||
from continued operations | 2,475 | 1,192 | 1,104 | |||||||
from discontinued operations | — | 683 | 929 | |||||||
Net cash from/(used in) investing activities | (3,016 | ) | (2,671 | ) | (2,634 | ) | ||||
| | | | | | | | | | | |
from continued operations | (3,016 | ) | (2,022 | ) | (2,494 | ) | ||||
from discontinued operations | — | (649 | ) | (140 | ) | |||||
| | | | | | | | | | | |
Net cash from/(used in) financing activities | (733 | ) | (126 | ) | (1,439 | ) | ||||
from continued operations | (733 | ) | (106 | ) | (732 | ) | ||||
from discontinued operations | — | (20 | ) | (707 | ) | |||||
| | | | | | | | | | | |
Operating activities
During 2014,2017, net cash flows from operating activities wereincreased to US$5,2792,475 million a 16.9% decrease over thefrom US$6,3511,875 million ofin 2016. The increase in net cash flows from operating activities during 2013.was primarily due to lower payments related to provisions, lower investment in working capital and increased operating profit, partially offset by no cash inflow from discontinued operations in 2017 as compared to positive cash flow from discontinued operations in 2016.
During 2016, net cash flows from operating activities decreased to US$1,875 million from US$2,033 million in 2015 The decrease in net cash flows from operating activities was primarily due to lowerhigher payments for the provision for losses, higher investment in working capital and decreased cash generatedflows from discontinued operations, partially offset by our operations impacted by local currencies devaluation partially offsetincreased operating profit and lower income tax payments due to lower profits earned.
During 2013, netpayment. The cash flowsflow from our operating activities werein 2016 was impacted primarily by the payment of US$6,351 million, a 12.5% decrease over the US$7,257795 million of netfines and disgorgements in relation to agreements with the SEC, DOJ and OM, related legal costs of US$24 million as of December 31, 2016, and US$255 million cash flowsoutflow related to the performance transformation program. The cash flow from our operating activities during 2012. The decrease in net cash flows from operating activities2015 was primarily due to lower adjusted EBITDA and negative trade working capital movements offsetimpacted by movements in provisions as a resultthe completion of the sale by GTH of a one-off charge fornon-controlling 51% interest in OTA to the BankFonds National d'Investissement, resulting in payments to the bank of Algeria claim.of US$1.1 billion, payments to Cevital of US$50 million, and withholding tax of US$243 million related to the pre-closing dividend.
Investing Activitiesactivities
Our investing activities included payments related to the purchase of equipment, frequency permissions and licenses, capitalized customer acquisition costs, software and other assets as a part of the ongoing development of
our mobile networks and fixed-line business. For information regarding our acquisitions and dispositions, see Note 5 to our audited consolidated financial statements.
During 2017, our total payments for purchases of property and equipment, intangible assets, software and other assets were US$2,037 million compared to US$1,651 million during 2016. The increase was primarily due to increased capital expenditures in Pakistan as a result of full year consolidation of Warid, partially offset by decreased capital expenditures in Uzbekistan, Algeria and HQ. No cash flow from investing activities from discontinued operation was recorded in 2017. In 2014,addition, a cash balance of US$987 million was pledged as collateral for the MTO for the purchase of
shares of GTH. For further details, see "Item 4—Information on the Company—Overview—Recent Developments—VEON Holdings B.V. submits cash tender offer in relation to GTH" and to the Notes 5 and 17 to our audited consolidated financial statements.
During 2016, our total payments for purchases of property and equipment, intangible assets, software and other assets were approximately US$4,4891,651 million compared to US$3,9552,207 million during 2013.2015. The increasedecrease was primarily due to increasedecreased capital expenditures in Russia, functional currency depreciation against the U.S. dollar in Ukraine and decreased capital expenditures.expenditures in Pakistan due to network modernization completed in 2015. This decrease was partially offset by prepayments for inventory made in Uzbekistan. In addition, we received net proceedsrecorded a decrease from the disposal of discontinued operations of US$332325 million, we received US$19 million from our deposits and otherbank deposit accounts, paid US$87 million for purchased financial assets US$110 million as the proceeds from sale of all of our debt and equity interest in Wind Canada, net cash ofrecorded US$69 million from disposal of our subsidiaries, offset by US$23649 million of cash outflows for loans grantedfrom discontinued operations during 2014. See also “Acquisitions2016. The cash flow from our investing activities in 2015 was impacted primarily by cash capital expenditures driven network investments, cash receipts from investments in financial assets, a deposit of US$361 million with financial institutions and Dispositions” below.
During 2013, our total payments for purchasesUS$140 million of property and equipment, intangible assets, software and other assets were approximately US$3,955 million compared to US$3,886 million in 2012. The increase was primarily due to an increase in capital expenditures. In addition, we invested cash on deposits of US$316 million partially offset by withdrawals during 2013, granted loans to our associates of US$118 million and received net proceedsoutflows from disposals of our subsidiaries of US$83 million.discontinued operations.
Acquisitions and DispositionsFinancing activities
Our significant acquisitions and dispositions for the year ended December 31, 2014 are summarized below.
On September 16, 2014, we and GTH entered into and closed a sale and purchase agreement to sell all of our debt and equity interest in Wind Canada to a consortium of investors for CAD 135 million with the proceeds going to VimpelCom in repayment of part of the debt owed to VimpelCom.
On October 17, 2014, we signed and closed a sale and purchase agreement to dispose of GTH’s entire interest in Telecel Globe Limited, which held our operations in Central African Republic and Burundi for US$65 million subject to certain post-closing adjustments.
Financing Activities
During 2014,2017, we repaid approximately US$15,3225,948 million of indebtedness and raised approximately US$16,7386,193 million. As of December 31, 2014,2017, the principal amounts of our external indebtedness for bank loans, bonds, equipment financing and loans from others amounted to US$11.1 billion, compared to US$10.5 billion as of December 31, 2016. The increase in the principal amounts of our external indebtedness is mainly the result of foreign exchange revaluation, GTH share buyback and premiums paid to repurchase our bonds.
During 2016, we repaid approximately US$1,816 million of indebtedness and raised approximately US$1,882 million. As of December 31, 2016, the principal amounts of our external indebtedness for bank loans, bonds, equipment financing and loans from others amounted to approximately US$26.410.5 billion, compared to US$27.59.5 billion as of December 31, 2013.2015. The decrease ofincrease in the principal amounts of our external indebtedness is mainly the result of currency exchange effects.the issuance of US$1.2 billion of bonds by GTH Finance B.V.
During 2013,2015, we repaid approximately US$5,4874,840 million of indebtedness and raised approximately US$5,5872,052 million. As of December 31, 2015, the principal amounts of our external indebtedness for bank loans, bonds, equipment financing, and loans from others amounted to approximately US$9.5 billion.
The following table provides a summary of our outstanding indebtedness with an outstanding principal balance exceeding US$30.0 million as of December 31, 2014.2017 and 2016.
| | | | | | | Principal amount outstanding (in millions of US$) | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Borrower | Type of debt | Guarantor | Currency | Interest rate | Maturity | 2017 | 2016 | ||||||||||
VEON Holdings | Loans | None | RUB | 8.75% - 10.0% | 2022 | 2,474 | — | ||||||||||
VEON Holdings | Notes | 2016: PJSC VimpelCom 2017: None | US$ | 5.2% - 5.95% | 2019 - 2023 | 1,554 | 1,554 | ||||||||||
VEON Holdings | Notes | None | US$ | 3,95% - 4,95% | 2021 - 2024 | 1,500 | — | ||||||||||
VEON Holdings | Loans | None | EUR | 3mEURIBOR + 1.9% - 2.75% | 2022 | 752 | — | ||||||||||
VEON Holdings | Notes | PJSC VimpelCom | US$ | 7.5% | 2022 | 628 | 1,629 | ||||||||||
VEON Holdings | Syndicated loan (RCF) | None | US$ | 1mLIBOR + 2.25% | 2018 | 250 | — | ||||||||||
VIP Finance Ireland | Eurobonds | None | US$ | 7.748% - 9.1% | 2018 - 2021 | 543 | 1,150 | ||||||||||
VEON Holdings | Notes | None | RUB | 9.0% | 2018 | 208 | 198 | ||||||||||
GTH Finance B.V. | Notes | VEON Holdings B.V. | US$ | 6.25% - 7.25% | 2020 - 2023 | 1,200 | 1,200 | ||||||||||
PMCL | Loans | None | PKR | 6mKIBOR + 0.35% - 0.8% | 2020 - 2022 | 379 | 166 | ||||||||||
PMCL | Loan | Exportkreditnämnden (The Swedish Export Credit Agency) | US$ | 6mLIBOR + 1.9% | 2020 | 212 | 231 | ||||||||||
Banglalink Digital Communications Ltd. | Senior Notes | None | US$ | 8.6% | 2019 | 300 | 300 | ||||||||||
Omnium Telecom Algeria SpA | Syndicated loan | None | DZD | Bank of Algeria re-discount rate + 2.0% | 2019 | — | 340 | ||||||||||
VEON Amsterdam | Loan | None | US$ | 1mLIBOR + 3.3% | 2017 | — | 1,000 | ||||||||||
PJSC VimpelCom | Loan | None | RUB | 12.75% | 2017 - 2018 | — | 1,021 | ||||||||||
PJSC VimpelCom | Ruble Bonds | None | RUB | 10.0% - 11.9% | 2017 | 19 | 660 | ||||||||||
| Other loans | 1,084 | 1,040 | |||||||||||||||
| | | | | | | | | | | | | | | | | | |
| Total bank loans and bonds | 11,103 | 10,489 | |||||||||||||||
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Many of the agreements relating to this indebtedness contain various covenants, including change of controlfinancial covenants relating to our financial performance or financial condition, as well as negative pledges, compliance with laws requirements, and restrictions on mergers, acquisitions and financial covenants.certain asset disposals. In addition, certain of these agreements subject certain of our subsidiaries to restrictions on their ability to pay dividends, make loans or repay debts to us. WIND Italy Group indebtedness is paid from cash flow generatedOur financing agreements have various customary events of default which can be triggered by WIND Italy businesses,events including non-payment, breach of applicable covenants, loss of certain mobile licenses, non-payment cross-default, cross-acceleration, certain judgment defaults, certain material adverse events and VimpelCom Ltd. and other memberscertain insolvency events. Some of our financing agreements also contain "change of control" provisions that may allow the lenders to cancel the facility and/or to require us to make a prepayment if a person or group of persons (with limited exclusions) acquire beneficial or legal ownership of, or control over more than 50.0% of, the VimpelCom Group have no obligationsvoting share capital, or in certain cases of VEON Ltd., ceases to make any payments on any WIND Italy Group indebtedness.control more than 50.0% of the borrower's voting share capital.
For additional information on thisour outstanding indebtedness, please refer to the notessee Note 17 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 20-F.statements. For information relating to our financing activities in 2017, and outstanding indebtednessthe period subsequent to December 31, 2014,2017, see “—Recent Financing Activities” below.Note 17 and Note 27, respectively, to our audited consolidated financial statements. For a description of some of the risks associated with certain of our indebtedness, please refer to the sections of this Annual Report on Form 20-F entitled “Itemsee "Item 3—Key Information—D. Risk Factors—Risks Related to Our Business—Substantial leverageamounts of indebtedness and debt service obligations could materially decrease our cash flow, adversely affect our business and financial condition and prevent us from raising additional capital,”capital."
Cash and “—We may not be ableDeposits Subject to raise additional capital.”Currency and Contractual Restrictions
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Borrower Type of debt/lender Interest rate Maturity Guarantor Security Syndicated loan via MCB Bank Limited (Secured) Syndicated loan via MCB Bank Limited (Secured) Loan from Habib Bank Limited (Secured) Loan from United Bank Limited (Secured) Outstanding
debt
(in millions)
date WIND Acquisition Finance S.A. Senior Notes 7.375% US$2,800.0 April 23, 2021 Wind Telecomunicazioni S.p.A. Shares in WIND Telecomunicazioni S.p.A. (2nd priority) WIND Acquisition Finance S.A. Senior Secured Notes 4.00% US$2,540.5
(€2,100.0) July 15, 2020 Wind Telecomunicazioni S.p.A. Shares in WIND Telecomunicazioni S.p.A. and Wind Acquisition Finance S.A. WIND Acquisition Finance S.A. Senior Secured Notes 4.75% US$1,900.0 July 15, 2020 Wind Telecomunicazioni S.p.A. Shares in WIND Telecomunicazioni S.p.A. and Wind Acquisition Finance S.A. WIND Acquisition Finance S.A. Senior Secured Notes 3 month
EURIBOR plus 4.00% US$695.6
(€575.0) July 15, 2020 Wind Telecomunicazioni S.p.A. Shares in WIND Telecomunicazioni S.p.A. and Wind Acquisition Finance S.A. Pakistan Mobile Communications Limited (“PMCL”) 6 month
KIBOR plus 1.25% US$59.7
(PKR6,000.0) November 28, 2017 None Shares in PMCL PMCL 6 month KIBOR plus 1.25% US$69.6
(PKR7,000.0) May 16, 2019 None Shares in PMCL PMCL 6 month KIBOR plus 1.15% US$44.8
(PKR4,500.0) May 16, 2019 None Shares in PMCL PMCL 6 month KIBOR plus 1.10% US$39.8
(PKR4,000.0) May 16, 2021 None Shares in PMCL Banglalink Digital Communications Ltd. (“Banglalink”) Senior Notes 8.625% US$300.0 May 6, 2019 None None Banglalink Facility Eastern Bank Limited 9.00%-10.00% US$32.1
(BDT2,500.0) May 31, 2016 None None Banglalink Facility Standard Chartered Bank 8.25%-8.50% US$44.9
(BDT3,500.0) April 29, 2016 None None OTA Loan from Hermes 3 months LIBOR + 0.9% US$46.6 November 14, 2014(6) VimpelCom Amsterdam B.V. Deposits VimpelCom Amsterdam B.V. Other loans, equipment financing and capital lease obligations – – US$469 – – –
WIND Italy owedAs of December 31, 2017, our cash and deposit balances were equal to hedging banksUS$1,374 million. US$444 million (32% of total group cash and deposits) were denominated in U.S. dollars and approximately €296.0 million for deferred repayment55% of the fair value of the derivatives instruments (on termination and close out) which were hedging the WIND Italy obligations that were repaid through the two financings completedU.S. dollar denominated cash was held in November 2010 (as set out in the table above). The obligation is payable in semi-annual installments and matures in September 2016. The amount outstandingVEON's headquarter entities.
In addition, as of December 31, 2014, was approximately €37.12017, funds worth US$987 million (approximately US$44.8 millionwere pledged as of December 31, 2014).
VimpelCom Amsterdam B.V. financing
On December 20, 2012, VimpelCom Amsterdam B.V. entered into a term loan facility in an amount up to US$500.0 million with China Development Bank Corporation as lender, bearing interest at a rate of 6-month LIBOR plus a margin of 3.30%, to finance equipment purchasescollateral for the MTO by subsidiaries of VimpelCom Amsterdam B.V. from Huawei Technologies Company Limited and its affiliates. On May 31, 2013, September 25, 2013, January 28, 2014, March 26, 2014, June 20, 2014, September 22, 2014 and December 18, 2014, VimpelCom Amsterdam B.V. drew down US$41 million, US$62 million, US$104 million, US$71 million, US$65 million, US$57 million and US$99 million respectively under this facility. OJSC VimpelCom has guaranteed VimpelCom Amsterdam B.V.’s payment obligations under this facility.
On March 28, 2013, VimpelCom Amsterdam B.V. signed a facility agreement with HSBC Bank plc for an U.S. dollar denominated Swedish export credit facility supported by EKN, for a total principal amount of US$500 million, of which US$270 million was committed. The purpose of the facility is to finance equipment and services provided to the subsidiaries of VimpelCom Amsterdam B.V. by Ericsson on a reimbursement basis. The committed facility bears interest at a rate of 1.72%. On October 4, 2013, February 26, 2014 and October 9, 2014, VimpelCom Amsterdam B.V. drew down US$87 million, US$105 million and US$78 million respectively under this facility. OJSC VimpelCom has guaranteed VimpelCom Amsterdam B.V.’s payment obligations under this facility.
On each of April 2, 2014 and April 18, 2014, VimpelCom Amsterdam B.V. signed a credit facility agreement with OAO “Alfa-Bank”, each for a total principal amount of US$500 million (each an “Alfa-Bank Credit Facility”). Each Alfa-Bank Credit Facility has a three-year term, bears interest at a rate of LIBOR plus 3.25% per annum (subject to adjustments in accordance with the terms of the agreement) and is guaranteed by VimpelComVEON Holdings B.V. On April 3, 2014 and April 23, 2014, VimpelCom Amsterdam B.V. drew down US$500 million and US$500 milliontherefore classified as restricted funds under other financial assets. For further details, see "Item 4—Information on the respective Alfa-Bank Credit Facilities.
On April 7, 2014, VimpelCom Amsterdam B.V. signed a revolving credit facility agreement with several international banks for a total principal amount of US$1,650 million, with an option to increase the principal amount of the facility by up to US$150 million within 6 months after the date of signing (the “2014 RCF”), which increase was executed on October 3, 2014. The 2014 RCF has a three year tenor, bears interest at a rate of LIBOR plus 2.95% per annum (subject to adjustments in accordance with the terms of the agreement) and is guaranteed by VimpelComCompany—Overview—Recent Developments—VEON Holdings B.V. On April 23, 2014, VimpelCom Amsterdam B.V. drew down US$1,000 million under the 2014 RCF which was repaid on June 30, 2014, and on September 8, 2014, VimpelCom Amsterdam B.V. drew down US$500 million under this facility which was repaid on February 5, 2015.
On April 16, 2014, and with effect as from April 25, 2014, VimpelCom cancelled the existing US$225 million and €205 million (approximately US$283 million as of April 25, 2014) revolving credit facility that VimpelCom Amsterdam B.V., as borrower, had entered into with a syndicate of lenders in 2011.
OJSC VimpelCom financing
On April 30, 2014, OJSC VimpelCom signed a loan facility agreement with CISCO Systems Finance International. The loan is a Russian ruble-denominated equipment financing facility for a total amount of RUB 1,500 million (approximately US$42 million as of April 30, 2014). The purpose of the facility is to finance
equipment purchased by OJSC VimpelCom from CISCO on a reimbursement basis. The facility bears interest at a rate of 8.85%. The facility was drawn on May 7, 2014 and July 9, 2014 in an amount of RUB 1,312 million (approximately US$37 million as of May 7, 2014) and RUB 188 million (approximately US$5 million as of July 9, 2014) respectively.
On May 30, 2014, OJSC VimpelCom entered into a credit facility agreement with OJSC Sberbank for the amount of RUB 25,000 million (approximately US$722 million as of May 30, 2014). The facility currently bears interest at a rate of 10.75% (subject to adjustments in accordance with the terms of the agreement). On September 29, 2014, October 13, 2014 and November 10, 2014, OJSC VimpelCom drew down RUB 2,500 million (approximately US$65 million as of September 29, 2014), RUB 10,000 million (approximately US$249 million as of October 13, 2014) and RUB 12,500 million (approximately US$261 million as of November 10, 2014), respectively. On March 2, 2015, Sberbank informed OJSC VimpelCom of an increase in the rate of interest for this facility with effect from June 1, 2015. For more information, see “—Recent Financing Activities—OJSC VimpelCom.”
On May 30, 2014, OJSC VimpelCom entered into a revolving credit facility with OJSC Sberbank for the amount of RUB 15,000 million (approximately US$433 million as of May 30, 2014). The facility currently bears interest at a rate of MosPrime plus 2.1% (subject to adjustments in accordance with the terms of the agreement). On July 2, 2014, OJSC VimpelCom drew down an amount of RUB 8,000 million (approximately US$234 million as of July 2, 2014) under this facility, which was repaid on September 29, 2014. The revolving credit facility with OJSC Sberbank that OJSC Vimpelcom had previously entered into on December 1, 2011 was terminated on June 23, 2014.
WAF Bonds
On April 23, 2014, Wind Acquisition Finance S.A., or “WAF,” issued €1,750 million (approximately US$2,418 million as of April 23, 2014) 7.00% Euro denominated Senior Notes due 2021 and US$2,800 million 7.375% U.S. dollar denominated Senior Notes due 2021 (together, the “2021 Notes”). The 2021 Notes are guaranteed by its parent Wind Telecomunicazioni S.p.A. The US$2,800 million U.S. dollar denominated tranche of the Senior Notes are hedged with cross currency interest rate swaps to EUR for an amount of €2,030 million (approximately US$2,805 million as of April 23, 2014). The maturity date of the 2021 Notes and the related cross currency interest rate swaps is April 23, 2021. Pursuant to the cross currency interest rate swaps, WAF receives a fixed USD rate of 7.375% and pays a fixed EUR rate equal to an average 6.4364% on €1,450 million (approximately US$2,004 million as of April 23, 2014) principal amount and a floating EUR rate equal to 6 months Euribor plus on average 5.0688% on €580 million (approximately US$801 million as of April 23, 2014) principal amount.
Pursuant to an Offer to Purchase by WAF of all amounts outstanding under its 11.75% Senior Notes due 2017 using a portion of the proceeds of its offering of 2021 Notes, of the €1,250 million (approximately US$1,727 million as of April 23, 2014) and US$2,000 million outstanding, notes for amounts of €1,084 million (approximately US$1,498 million as of April 23, 2014) and US$1,890 million were tendered and settled on April 23, 2014 and notes for amounts of €0.6 million (approximately US$1 million as of May 9, 2014) and US$3.2 million were tendered and settled on May 9, 2014. The remaining outstanding notes were called as per July 15, 2014. On April 23, 2014, funds have been placed in escrow accounts to fulfil those payments. The cross currency interest rate swaps related to the US$2,000 million 11.75% Senior Notes due 2017 have been restructured to become part of the aforementioned cross currency interest rate swaps related to the 2021 Notes.
Pursuant to an Offer to Purchase by Wind Acquisition Holdings Finance S.A. of all amounts outstanding under its 12.25% Senior Notes due 2017 using (indirectly) a portion of the proceeds of the offering of 2021 Notes by WAF, as well as a €500 million (approximately US$691 million as of April 17, 2014) indirect cash injection from VimpelCom, which was settled on April 17, 2014, of the €528 million (approximately US$730 million as of April 23, 2014) and US$1,015 million outstanding, notes for amounts of €468 million (approximately US$647
million as of April 23, 2014) and US$976 million were tendered and settled on April 23, 2014 and notes for amounts of €0.75 million (approximately US$1 million as of May 9, 2014) and US$0.015 million were tendered and settled on May 9, 2014. The remaining outstanding notes were called as per July 15, 2014. On April 23, 2014, funds have been placed in escrow accounts to fulfil those payments.
On July 10, 2014, WAF issued €2,100 million (approximately US$2,858 million as of July 10, 2014) 4.00% Euro denominated Senior Secured Notes due 2020, €575 million (approximately US$783 million as of July 10, 2014) 6 month Euribor + 4.00% Euro denominated Senior Secured Notes due 2020 and US$1,900 4.75% U.S. dollar denominated Senior Notes due 2020 (together, the “2020 Notes”). The 2020 Notes are guaranteed by Wind Telecomunicazioni S.p.A. The US$1,900 U.S. dollar denominated Senior Notes are hedged with cross currency interest rate swaps to EUR for an amount of €1,413 million (approximately US$1,923 million as of July 10, 2014). The maturity date of the 2020 Notes and the related cross currency interest rate swaps is 15 July 2020. Pursuant to these cross currency interest rate swaps, WAF receives a fixed USD rate of 4.75% and pays a fixed EUR rate equal to on average 4.3474% on €984 million (approximately US$1,339 million as of July 10, 2014) principal amount and a floating EUR rate equal to 6 months Euribor plus 4.00% on €429 million (approximately US$584 million as of July 10, 2014) principal amount.
WAF issued an Offer to Purchase all amounts outstanding under its €1,950 million (approximately US$2,654 million as of July 10, 2014) 7.375% Euro Senior Secured Notes due 2018 and under its US$1,700 million 7.25% U.S. dollar Senior Secured Notes due 2018 using a portion of the proceeds of its offering of 2020 Notes. Of the outstanding amounts of €1,950 million (approximately US$2,654 million as of July 10, 2014) and US$1,700 million, notes for amounts of €1,645 (approximately US$2,238 million as of July 10, 2014) million and US$1,449 were tendered and settled on July 10, 2014. The remaining outstanding notes were called and settled on July 25, 2014. On July 10, 2014, funds have been placed in escrow accounts to fulfil those payments. Further proceeds have been used to repay portions of the Senior Facility Agreement on July 10, 2014 for €573 million (approximately US$780 million as of July 10, 2014). The cross currency interest rate swaps related to the US$1,700 million 7.25% Senior Notes due 2018 have been restructured to become part of the aforementioned cross currency interest rate swaps related to the 2020 Notes.
WIND Senior Facility Agreement consent
Related to the aforementioned refinancing transaction, Wind Telecomunicazioni S.p.A. on March 19, 2014 requested, and on April 3, 2014 was granted, consent from the lenders in the Senior Facility Agreement (“SFA”) to enable, among other matters, a re-leveraging of Wind Telecomunicazioni S.p.A. and upstream loan to its parent Wind Acquisition Holdings Finance S.p.A., the adjustment of financial covenant ratios, an extension of the tenors of the term loan and revolving credit facilities, settlement of an outstanding intercompany loan with Wind Telecom S.p.A., and modification of the change of control definition, in exchange for a consent fee and an increase of the interest margin by 0.25%.
Banglalink Notes
On May 6, 2014, our Bangladesh subsidiary Banglalink issued US$300 million 8.625% senior notes due 2019 (the “BDC Notes”). The BDC Notes were issued at a re-offer price of 99.008%, with a re-offer yield to maturity of 8.875% and a term of five years. Interest is payable semi-annually.
In May 2014, Banglalink repaid all amounts outstanding under its December 17, 2013 bridge facility from Standard Chartered Bank.
Also, in May and June 2014, Banglalink repaid 13.5% senior BDT notes and three other smaller facilities in an aggregate principal amount of US$43 million, each of which had been subject to a common terms agreement dated June 13, 2007, as amended, and related intercreditor and security agreements.
PMCL Facilities
On May 16, 2014, Pakistan Mobile Communications Ltd. (“PMCL”) drew under several facilities for an amount of PKR 22,000 million (approximately US$223 million as of May 16, 2014). The interest rate varies from 3 month or 6 month KIBOR plus 1.00%-1.25% and the loans will mature in May 2021.
VimpelCom Holdings B.V. Facility
On November 19, 2014, VimpelCom Holdings B.V. entered into an US$1,000 million term loan facility agreement with China Development Bank Corporation and Bank of China Limited as lenders, bearing interest at a rate of LIBOR plus a margin of 3.06%, to finance equipment purchases by subsidiaries of VimpelCom Ltd. from Huawei Technologies Co. Ltd, its subsidiaries and its affiliates. VimpelCom Amsterdam B.V. has guaranteed the payment obligations under this facility. The facility is available for a period of three years and has a total tenor of eight years.
Omnium Telecom Algeria SpA Facility
On December 16, 2014, OTA signed a term loan facility agreement with several Algerian and international banks for a total principal amount of DZD 50,000 million (approximately US$583 million as of December 16, 2014). The maturity date of the facility is September 30, 2019. It bears interest at the Bank of Algeria Re-Discount Rate plus 2.0% per annum (subject to adjustments in accordance with the terms of the agreement) and is unguaranteed. On January 28, 2015, the facility was fully drawn.
Optimum Telecom Algérie SpA Facility
On December 16, 2014, Optimum signed a term loan facility agreement with several Algerian and international banks for a total principal amount of DZD 32,000 million (approximately US$373 million as of December 16, 2014). The maturity date of the facility is September 30, 2019 and bears interest at a rate of Bank of Algeria Re-Discount Rate plus 1.5% per annum (subject to adjustments in accordance with the terms of the agreement) and is unguaranteed. The facility is not yet drawn.
We may from time to time seek to purchase our outstanding debt through cash purchases and/or exchanges for new debt securities in open market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.
Recent Financing Activities
VimpelCom Amsterdam B.V.submits cash tender offer for OJSC VimpelCom and VimpelCom Holdings B.V. U.S. dollar notesin relation to GTH
On March 2, 2015, VimpelCom Amsterdam B.V. announced that it commenced a cash tender offer for up to US$2,100 million aggregate principal amount of the outstanding U.S. dollar notes issued by VimpelCom Holdings B.V. and loan participation notes issued by VIP Finance Ireland and UBS (Luxemboug) S.A. for the sole purpose of funding loans to OJSC Vimpelcom. The total outstanding amount of these bonds is US$6,700 million. The tender offer expires on March 30, 2015 and settlement is expected to take place on April 2, 2015.
The Early Tender period expired on March 13, 2015, and at that date, bonds were validly tendered and will be accepted for the following amounts:
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OJSC VimpelCom
On March 2, 2015, Sberbank informed OJSC VimpelCom of an increase in fixed interest rates (from between 9.00% and 10.75% to between 14.50% and 16.25% with effect from June 1, 2015) in accordance with the terms of the credit facility agreements between OJSC VimpelCom and Sberbank. The increase in interest rates would apply to three loans from Sberbank with a total principal amount outstanding of RUB 89,060 million (approximately US$1,454 million as of March 2, 2015). The actual amount of any increase in interest rates is subject to discussion between the parties.
On March 5, 2015, OJSC VimpelCom announced a new coupon rate (annual interest of 10.00%) on its RUB bonds for RUB 25,000 million (approximately US$404 million as of March 5, 2015) maturing on March 8, 2022 (subject to an investor put option at March 17, 2015, which option was exercised for 99% of the outstanding principal amount) and for RUB 10,000 million (approximately US$162 million as of March 5, 2015) maturing on March 14, 2022 (subject to an investor put option at March 23, 2015 of which the preliminary results are that all investors have exercised this option, subject to final confirmation on March 26, 2015). The new coupon rate of 10.00% is applicable to next four coupon periods (next two years).
WIND refinancing
On March 12, 2015, WIND Telecomunicazioni S.p.A. and Wind Acquisition Finance S.A. announced the refinancing transaction of the existing Senior Facility Agreement (“SFA”) with an outstanding principal amount of €1,782 million (approximately US$1,895 million as of March 12, 2015)" and the existing Revolving Credit Facility of €600 million (approximately US$638 million as of March 12, 2015), under which €200 million
(approximately US$213 million as of March 12, 2015) was drawn as of that date. The settlement will take place on March 30, 2015. The existing SFA will be partially prepaid by applying €500 million (approximately US$532 million as of March 12, 2015) of the proceeds from the sale of a 90% stake in its tower subsidiary Galata to Abertis Telecom for €693 million (approximately US$737 million as of March 12, 2015). Furthermore, €775 million (approximately US$824 million as of March 12, 2015) Senior Secured Notes will be issued by Wind Acquisition Finance S.A.5 and €700 million (approximately US$744 million as of March 12, 2015) will be borrowed under a term loan as part of the new amended and restated SFA.
The new Senior Secured Notes to be issued by Wind Acquisition Finance S.A. are €375 million (approximately US$399 million as of March 12, 2015) 4.00% Euro denominated Senior Secured Notes due 2020, issued at a price of 101.25% and €400 million (approximately US$425 million as of March 12, 2015) 3 month Euribor + 4.125% Euro denominated Senior Secured Notes due 2020 (together, the “2020 Notes”). The 2020 Notes are guaranteed by Wind Telecomunicazioni S.p.A. The maturity date of the 2020 Notes is July 15, 2020.
The term loan under the amended and restated SFA bears interest at a rate of EURIBOR + 4.25% and the maturity date is November 26, 2019. In addition, a new Revolving Credit Facility (“RCF”) is agreed with a group of banks under the amended and restated SFA for a total amount of €400 million (approximately US$425 million as of March 12, 2015). Any future drawdowns under this RCF will bear interest at a rate of EURIBOR + 4.25% and the maturity date is November 26, 2019. The amended and restated SFA will no longer have maintenance-based financial covenants. In the event that more than 35% of the RCF commitments are drawn, the Total Net Debt/EBITDA ratio at the quarterly testing period must be below 7.25x based on the consolidated numbers for WIND Telecomunicazioni S.p.A.
Cash subject to currency restrictions
As of December 31, 2014, the cash balances in Algeria of US$2,732 million, Uzbekistan of US$532 million and Ukraine of US$116 million were restricted from repatriation due to local government or central bank regulations. As part of the closing of the transaction and settlement with the Algerian Government on January 30, 2015, the foreign exchange and import restrictions put in place by the Bank of Algeria against OTA on April 15, 2010 were lifted. For more information, please see the section of this Annual Report on Form 20-F entitled “Item 5—Recent Trends and Developments—Algeria Transaction and Settlement” and note 5, 6, 26 and 2717 to our audited consolidated financial statements included elsewherestatements.
On September 2, 2017, the Government of Uzbekistan announced the liberalization of currency exchange rules, effective from September 5, 2017. The Central Bank of Uzbekistan set the official exchange rate of 8,100 Uzbek som per U.S. dollar, which represented nearly a halving of the value of the Uzbek som to the U.S. dollar. On December 22, 2017, VEON announced that its subsidiary, PJSC VimpelCom, had successfully repatriated a net amount of approximately US$200 million from Unitel.
For more information about the currency restrictions in this Annual Reportour countries of operation, see "—Factors Affecting Comparability of Financial Position and Results of Operations—Foreign Currency Controls and Currency Restrictions" and Notes 18 and 26 to our audited consolidated financial statements.
For a description of certain risks associated with restrictions in our countries of operation relating to our ability to pay dividends, make loans or repay debts, see "Item 3—Key Information—D. Risk Factors—Risks Related to Our Business—We are exposed to foreign currency exchange loss and currency fluctuation and translation risks," "Item 3—Key Information—D. Risk Factors—Risks Related to Our Business—As a holding company, VEON Ltd. depends on Form 20-F.the performance of its subsidiaries and their ability to pay dividends, and may therefore be affected by changes in exchange controls and currency restrictions in the countries in which its subsidiaries operate" and "Item 3—Key Information—D. Risk Factors—Risks Related to Our Markets—The banking systems in many countries in which we operate remain underdeveloped, there are a limited number of creditworthy banks in these countries with which we can conduct business and currency control requirements restrict activities in certain markets in which we have operations."
Earnings subjectSubject to indefinite investmentIndefinite Investment
During 2014,2017, we recorded a deferred tax liability of US$598116 million relating to the tax effect of our undistributed profits that will be distributed in the foreseeable future, primarily in relation to our Russian, Algerian and AlgerianPakistani operations. The undistributed earnings of our foreign subsidiaries (outside the Netherlands) which are indefinitely invested and that will not be distributed in the foreseeable future, amounted to approximately US$6,5636,833 million as of December 31, 2014.2017. For more information, please see Note 1312 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 20-F.statements.
Future Liquidity and Capital RequirementsForeign Currency Translation
Telecommunications service providers require significant amounts Our audited consolidated financial statements are presented in U.S. dollars. Amounts included in these financial statements were presented in accordance with IAS 21, using the current rate method of capital to construct networks and attract customers. Incurrency translation with the foreseeable future,U.S. dollar as the reporting currency. The functional currencies of our further expansion will require significant investment activity, including
group are the purchaseRussian ruble in Russia, the Pakistani rupee in Pakistan, the Algerian dinar in Algeria, the Bangladeshi taka in Bangladesh, the Ukrainian hryvnia in Ukraine, the Uzbek som in Uzbekistan.
Our results of equipment and possiblyoperations are affected by increases or decreases in the acquisition of other companies.
Our capital expenditures include purchases of new licenses, equipment, new construction, upgrades, software, other long lived assets and related reasonable costs incurred prior to intended usevalue of the noncurrent assets, accounted at the earliest event of advance paymentU.S. dollar or delivery. Long-lived assets acquired in business combinations are not included in capital expenditures. During 2014, our capital expenditures were approximately
US$4,256 million compared to approximately US$4,306 million during 2013 and approximately US$4,284 million during 2012. The decrease in capital expenditures in 2014 compared to 2013 was duefunctional currencies. A higher average exchange rate correlates to a decrease in investments in Russia, Italy andweaker functional currency. We have listed below the CIS due to slow down in 4G/LTE network roll out, offset by the further roll out of the mobile networks in Algeria, Bangladesh and Pakistan and acquisitionrelevant exchange rates for each of our 3G license in Pakistan.
The increase in capital expenditures in 2013 compared to 2012 was mainly due to our investments in future growth, e.g. the further roll outcountries of the mobile networks in Russia, Bangladesh, Pakistan and the CIS and acquisition of 3G licenses in Bangladesh and Algeria.
Our management expects our total capital expenditures (excluding acquisitions and paymentsoperation for licenses) in 2015 to be approximately 20% of our 2015 consolidated total operating revenue. We expect that our capital expenditures in 2015 will mainly consist of the maintenance of our existing networks as well as the increase of capacity due to data traffic growth and 3G and 4G/LTE roll outs. In the years ended December 31, 2014, 20132017, 2016 and 2012,2015. These should not be construed as a representation that such currency will in the future be convertible into U.S. dollars or other foreign currency at the exchange rate shown, or at any other exchange rates.
The table below shows functional currencies and official exchange rates as of December 31, 2017, 2016 and 2015 as well as comparison of average exchange rates for 2017 versus 2016 and 2016 versus 2015.
| | | Exchange rates as of December 31, local currency per one US$ | | | ||||||||||||||
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| | | Average rate 2017 vs. 2016 | Average rate 2016 vs. 2015 | |||||||||||||||
Country | Functional Currency | 2017 | 2016 | 2015 | ||||||||||||||
Russia | Russian ruble—RUB | 57.60 | 60.66 | 72.88 | (13.0 | )% | 10.0 | % | ||||||||||
Pakistan | Pakistani rupee—PKR | 110.70 | 104.37 | 104.73 | 0.6 | % | 1.9 | % | ||||||||||
Algeria | Algerian dinar—DZD | 114.76 | 110.40 | 107.10 | 1.4 | % | 9.0 | % | ||||||||||
Bangladesh | Bangladeshi taka—BDT | 82.69 | 78.92 | 78.25 | 3.1 | % | 0.6 | % | ||||||||||
Ukraine | Ukrainian hryvnia—UAH | 28.07 | 27.19 | 24.00 | 4.1 | % | 17.0 | % | ||||||||||
Uzbekistan | Uzbek som—UZS | 8,120 | 3,231 | 2,809 | 72.7 | % | 15.5 | % | ||||||||||
Foreign Currency Controls and Currency Restrictions
We are subject to certain currency restrictions and local regulations that impact our capital expenditures were 21.7%, 19.1% and 17.9%ability to extract cash from some of our consolidated total operating revenue, respectively. The actual amountcompanies. For example, in Uzbekistan, in September 2017, the government of Uzbekistan liberalized the country's currency exchange rules and reset the official exchange rate at 8,100 Uzbek som per U.S. dollar, which represented nearly a halving of the value of the Uzbek som to the U.S. dollar. On December 22, 2017, VEON successfully repatriated US$200 million from Uzbekistan. There are certain other restrictions in place to prevent currency outflow in Uzbekistan, but we do not expect that they will have a material impact on our operations. For more information on the Uzbek government's recent decision to liberalize its currency, see "—Key Developments and Trends—Impact of Currency Regime Developments in Uzbekistan."
In Ukraine, Kyivstar can only partially expatriate dividends to VEON Ltd. because of restrictions imposed by the National Bank of Ukraine in 2014 to regulate money, credit and currency in Ukraine. Although several of these restrictions were substantially softened and partially abolished, certain restrictions remain in place in order to prevent any negative impact of currency outflow on the financial market. However, we do not expect that these restrictions will have a material impact on our operations. For more information on how our operations can be affected by certain currency risks, see "Item 3—Key Information—D. Risk Factors—Risks Related to Our Business—We are exposed to foreign currency exchange loss and currency fluctuation and translation risks."
Our ability to extract cash from operating companies is also affected by certain regulatory hurdles and restrictions. For example, in some of our capital expenditures (excluding acquisitions) for 2015 will dependmarkets, strict foreign exchange regulations are in place and foreign currency financing agreements must be registered or approved by state authorities. In addition, some central banks closely control foreign exchange transactions and international transfers of funds. For more information on market developmenthow our operations can be affected by certain regulatory controls and restrictions of foreign currencies, see "Item 3—Key Information—D. Risk Factors—Risks Related to our performance.Markets—The banking systems in many countries in which we operate remain underdeveloped, there are a
limited number of creditworthy banks in these countries with which we can conduct business and currency control requirements restrict activities in certain markets in which we have operations."
For more information about risks related to currency exchange rate fluctuations, see "Item 11—Quantitative and Qualitative Disclosures About Market Risk" and Notes 4 and 17 to our audited consolidated financial statements.
Tax
Our management anticipates that the funds necessary to meet our current capital requirements and those to be incurred in the foreseeable future (includingresults of operations are also impacted by changes with respect to any possible acquisitions) will come from:the tax regimes to which we are subject. For example, we expect our results of operations to be affected by: (i) a new finance law in Algeria that came into effect in 2017 that increased VAT from 7% to 19% on data services and from 17% to 19% on voice services, and increased taxes on recharges from 5% to 7%; (ii) an increase in the corporate income tax rate in Uzbekistan up to 48%; and (iii) revised interpretations of SIM tax regulations in Bangladesh and Pakistan.
Certain Performance Indicators
cash we currently hold;
The following discussion analyzes certain operating cash flows;
export credit agency guaranteed financing;
borrowings under bank financings,data, including credit lines currently available to us;
syndicated loan facilities;Adjusted EBITDA, mobile customers, mobile ARPU, mobile data customers and
debt financings from international and local capital markets.
fixed-line broadband customers that are not included in our financial statements. We provide this operating data because it is regularly reviewed by our management. Our management believes it is useful in evaluating our performance from period to period and in assessing the usage and acceptance of our mobile and broadband products and services. This operating data is unaudited.
Adjusted EBITDA
Adjusted EBITDA is a non-IFRS financial measure. We calculate Adjusted EBITDA as (loss)/profit before tax before depreciation, amortization, loss from disposal of non-current assets and impairment loss, financial expenses and costs, net foreign exchange gain/(loss) and share of associates and joint ventures. The measure includes certain non-operating losses and gains mainly represented by litigation provisions for all of its segments except for Russia. Our Adjusted EBITDA may be used to evaluate our performance against other telecommunications companies that funds fromprovide EBITDA. See "Explanatory Note—Non-IFRS Financial Measures—Adjusted EBITDA" for more information on how we calculate Adjusted EBITDA.
The following table shows our Adjusted EBITDA and reconciliation of Adjusted EBITDA to (loss)/profit before tax, the most directly comparable IFRS financial measure, for the years ended December 31, 2017, 2016 and 2015.
| | Year ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2017 | 2016 | 2015 | |||||||
| | (in millions of U.S. dollars) | |||||||||
Adjusted EBITDA | 3,587 | 3,232 | 2,875 | |||||||
Depreciation | (1,454 | ) | (1,439 | ) | (1,550 | ) | ||||
Amortization | (537 | ) | (497 | ) | (517 | ) | ||||
Impairment loss | (66 | ) | (192 | ) | (245 | ) | ||||
Loss on disposals of non-current assets | (24 | ) | (20 | ) | (39 | ) | ||||
Finance costs | (935 | ) | (830 | ) | (829 | ) | ||||
Finance income | 95 | 69 | 52 | |||||||
Other non-operating (losses)/gains | (97 | ) | (82 | ) | (42 | ) | ||||
Shares of (loss)/profit of associates and joint ventures | (412 | ) | 48 | 14 | ||||||
Impairment of associates and joint ventures accounted for using the equity method | (110 | ) | (99 | ) | — | |||||
Net foreign exchange (loss)/gain | (71 | ) | 157 | (314 | ) | |||||
(Loss) / profit before tax | (24 | ) | 347 | (595 | ) | |||||
Mobile Customers
Mobile customers are generally customers in the registered customer base as of a given measurement date who engaged in a revenue generating activity at any time during the three months prior to such measurement date. Such activity includes any outgoing calls, customer fee accruals, debits related to service, outgoing SMS and MMS, data transmission and receipt sessions, but does not include incoming calls, SMS and MMS or abandoned calls. Our total number of these sources will be sufficient to meetmobile customers also includes customers using mobile internet service via USB modems and FMC.
The following table indicates our projected capital requirementsmobile customer figures in millions for the next twelve months. Asperiods indicated:
| | As of December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2017 | 2016 | 2015 | |||||||
Russia | 58.2 | 58.3 | 59.8 | |||||||
Pakistan | 53.6 | 51.6 | 36.2 | |||||||
Algeria | 15.0 | 16.3 | 17.0 | |||||||
Bangladesh | 31.3 | 30.4 | 32.3 | |||||||
Ukraine | 26.5 | 26.1 | 25.4 | |||||||
Uzbekistan | 9.7 | 9.5 | 9.9 | |||||||
Others(1) | 16.2 | 15.3 | 15.7 | |||||||
Total number of mobile customers(2) | 210.5 | 207.5 | 196.3 | |||||||
| | | | | | | | | | | |
Mobile ARPU
Mobile ARPU measures the monthly average revenue per mobile user. We generally calculate mobile ARPU by dividing our mobile service revenue during the relevant period (including data revenue, roaming revenue, MFS and interconnect revenue, but excluding revenue from connection fees,
sales of handsets and accessories and other non-service revenue) by the average number of our mobile customers during the period and dividing by the number of months in that period.
The following table indicates our mobile ARPU in US$ for the periods indicated:
| | For the year ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2017 | 2016 | 2015 | |||||||
Russia | 5.5 | 4.6 | 5.1 | |||||||
Pakistan | 2.2 | 2.3 | 2.1 | |||||||
Algeria | 4.8 | 5.1 | 6.0 | |||||||
Bangladesh | 1.5 | 1.6 | 1.6 | |||||||
Ukraine | 1.8 | 1.7 | 1.8 | |||||||
Uzbekistan | 4.4 | 5.6 | 5.7 | |||||||
Mobile Data Customers
Mobile data customers are mobile customers who have engaged in revenue generating activity during the three months prior to the measurement date as a result of activities including USB modem Internet access using 2.5G/3G/4G/LTE/HSPA+ technologies. For Algeria, mobile data customers are 3G customers who have performed at least one mobile data event on the 3G network during the previous four months.
The following table indicates our mobile data customer figures in millions for the periods indicated:
| | As of December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2017 | 2016 | 2015 | |||||||
Russia | 38.4 | 36.6 | 34.3 | |||||||
Pakistan | 28.5 | 25.1 | 16.8 | |||||||
Algeria | 7.2 | 7.0 | 4.1 | |||||||
Bangladesh | 16.9 | 14.9 | 14.0 | |||||||
Ukraine | 12.5 | 11.2 | 12.0 | |||||||
Uzbekistan | 5.0 | 4.6 | 4.7 | |||||||
Others | 9.1 | 7.9 | 7.8 | |||||||
Total number of mobile data customers | 117.6 | 107.3 | 93.7 | |||||||
| | | | | | | | | | | |
Fixed-Line Broadband Customers
Fixed broadband customers are fixed customers in the registered customer base who were engaged in a revenue generating activity using fixed broadband Internet access in the three-month period prior to the measurement date. In Russia and Ukraine, such activity includes monthly internet access using FTTB, xDSL and Wi-Fi technologies.
The following table indicates our fixed-line broadband customers in millions for the periods indicated:
| | As of December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2017 | 2016 | 2015 | |||||||
Russia | 2.2 | 2.2 | 2.2 | |||||||
Ukraine | 0.8 | 0.8 | 0.8 | |||||||
Others | 0.4 | 0.3 | 0.4 | |||||||
Total number of fixed-line broadband customers | 3.4 | 3.3 | 3.4 | |||||||
| | | | | | | | | | | |
Results of Operations
Consolidated results
The financial results for 2015 reflect the classification of our Historical WIND Business as a discontinued operation. Our financial results for 2016 include the 10 months ended October 31, 2016 with our Historical WIND Business classified as a discontinued operation and the two months ended December 31, 2016 with the Italy Joint Venture accounted for as an equity investment. For the year ended December 31, 2017, the Italy Joint Venture is accounted for as an equity investment.
| | Year ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2017 | 2016 | 2015 | |||||||
| | (in millions of U.S. dollars, except per share amounts and as indicated) | |||||||||
Consolidated income statements data: | ||||||||||
Service revenue | 9,105 | 8,553 | 9,313 | |||||||
Sale of equipment and accessories | 244 | 184 | 190 | |||||||
Other revenue | 125 | 148 | 103 | |||||||
| | | | | | | | | | | |
Total operating revenue | 9,474 | 8,885 | 9,606 | |||||||
| | | | | | | | | | | |
Operating expenses | ||||||||||
Service costs | (1,879 | ) | (1,769 | ) | (1,937 | ) | ||||
Cost of equipment and accessories | (260 | ) | (216 | ) | (231 | ) | ||||
Selling, general and administrative expenses | (3,748 | ) | (3,668 | ) | (4,563 | ) | ||||
Depreciation | (1,454 | ) | (1,439 | ) | (1,550 | ) | ||||
Amortization | (537 | ) | (497 | ) | (517 | ) | ||||
Impairment loss | (66 | ) | (192 | ) | (245 | ) | ||||
Loss on disposals of non-current assets | (24 | ) | (20 | ) | (39 | ) | ||||
Total operating expenses | (7,968 | ) | (7,801 | ) | (9,082 | ) | ||||
| | | | | | | | | | | |
Operating profit | 1,506 | 1,084 | 524 | |||||||
Finance costs | (935 | ) | (830 | ) | (829 | ) | ||||
Finance income | 95 | 69 | 52 | |||||||
Other non-operating losses | (97 | ) | (82 | ) | (42 | ) | ||||
Share of (loss) / gain of associates and joint ventures | (412 | ) | 48 | 14 | ||||||
Impairment of associates and joint ventures | (110 | ) | (99 | ) | — | |||||
Net foreign exchange (loss)/ gain | (71 | ) | 157 | (314 | ) | |||||
(Loss)/profit before tax | (24 | ) | 347 | (595 | ) | |||||
| | | | | | | | | | | |
Income tax expense | (472 | ) | (635 | ) | (220 | ) | ||||
| | | | | | | | | | | |
Loss for the year from continuing operations | (496 | ) | (288 | ) | (815 | ) | ||||
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Profit after tax for the period from discontinued operations | — | 920 | 262 | |||||||
Profit on disposal of discontinued operations, net of tax | — | 1,788 | — | |||||||
Profit after tax for the period from discontinued operations | — | 2,708 | 262 | |||||||
(Loss)/profit for the year | (496 | ) | 2,420 | (553 | ) | |||||
Attributable to: | ||||||||||
The owners of the parent (continuing operations) | (483 | ) | (380 | ) | (917 | ) | ||||
The owners of the parent (discontinued operations) | — | 2,708 | 262 | |||||||
Non-controlling interest | (13 | ) | 92 | 102 | ||||||
| | | | | | | | | | | |
| (496 | ) | 2,420 | (553 | ) | ||||||
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Loss per share from continuing operations | ||||||||||
Basic, loss for the year attributable to ordinary equity holders | (0.28 | ) | (0.22 | ) | (0.52 | ) | ||||
Diluted, loss for the year attributable to ordinary equity holders | (0.28 | ) | (0.22 | ) | (0.52 | ) | ||||
Earnings per share from discontinued operations | ||||||||||
Basic, profit for the year attributable to ordinary equity holders | — | 1.55 | 0.15 | |||||||
Diluted, profit for the year attributable to ordinary equity holders | — | 1.55 | 0.15 | |||||||
Weighted average number of common shares (millions) | 1,749 | 1,749 | 1,748 | |||||||
Dividends declared per share | 0.28 | 0.23 | 0.035 | |||||||
Total Operating Revenue
The table below shows total operating revenue in each of our reportable segments, with the exception of the Italy Joint Venture, for the periods indicated.
| | Year ended December 31, | Year ended December 31, | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2017 | 2016 | 2015 | 2017 | 2016 | 2015 | |||||||||||||
| | in millions of U.S. dollars | (percentage of total operating revenue) | |||||||||||||||||
Russia | 4,729 | 4,097 | 4,583 | 50 | % | 46 | % | 48 | % | ||||||||||
Pakistan | 1,525 | 1,295 | 1,014 | 16 | % | 15 | % | 11 | % | ||||||||||
Algeria | 915 | 1,040 | 1,273 | 10 | % | 12 | % | 13 | % | ||||||||||
Bangladesh | 574 | 621 | 604 | 6 | % | 7 | % | 6 | % | ||||||||||
Ukraine | 622 | 586 | 622 | 7 | % | 7 | % | 6 | % | ||||||||||
Uzbekistan | 513 | 663 | 711 | 5 | % | 7 | % | 7 | % | ||||||||||
HQ(1) | — | 10 | — | — | 0 | % | — | ||||||||||||
Others(2) | 596 | 573 | 799 | 6 | % | 6 | % | 8 | % | ||||||||||
| | | | | | | | | | | | | | | | | | | | |
Total | 9,474 | 8,885 | 9,606 | 100 | % | 100 | % | 100 | % | ||||||||||
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Our consolidated total operating revenue increased by 7% to US$9,474 million during 2017 compared to US$8,885 million during 2016 primarily as a result of the strengthening of the Russian ruble and full year of Warid consolidation. The increase was partially offset by a decrease in Uzbekistan due to the liberalization of its currency exchange rules resulting in a devaluation of local currency, a decrease in Algeria due to a difficult macroeconomic environment and strong competitive environment and a decrease in Bangladesh due to aggressive price competition in the market and network availability issues.
Our consolidated total operating revenue decreased by 8% to US$8,885 million during 2016 compared to US$9,606 million during 2015 primarily due to a decrease of total operating revenue of 11% in Russia, 18% in Algeria, 6% in Ukraine and 7% in Uzbekistan, the decrease in the average exchange rate from the Russian ruble to the U.S. dollar in Russia in 2016 (despite the increase of the spot exchange rate at December 31, 2016 as compared to December 31, 2015) and the depreciation of functional currencies against the U.S. dollar in Algeria, Ukraine and Uzbekistan. The decrease was partially offset by an increase of total operating revenue of 28% in Pakistan, due to double-digit growth in Mobilink coupled with the consolidation of Warid following July 1, 2016 and 3% in Bangladesh.
The discussion of revenue by reportable segments includes intersegment revenue. Our management assesses the performance of each reportable segment on this basis because it believes the inclusion of intersegment revenue better reflects the true performance of each segment on a stand-alone basis.
Adjusted EBITDA
The table below shows for the periods indicated Adjusted EBITDA in each of our reportable segments, with the exception of the Italy Joint Venture. Adjusted EBITDA is a non-IFRS financial
measure. For more information on how we calculate Adjusted EBITDA and for the reconciliation of Adjusted EBITDA to (loss)/profit before tax, the most directly comparable IFRS financial measure, for the years ended December 31, 2017, 2016 and 2015, see "Explanatory Note—Non-IFRS Financial Measures—Adjusted EBITDA" and Note 7 to our audited consolidated financial statements included herein.
| | Year ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2017 | 2016 | 2015 | |||||||
| | (in millions of U.S. dollars) | |||||||||
Russia | 1,788 | 1,574 | 1,825 | |||||||
Pakistan | 703 | 507 | 409 | |||||||
Algeria | 426 | 547 | 684 | |||||||
Bangladesh | 233 | 267 | 242 | |||||||
Ukraine | 347 | 306 | 292 | |||||||
Uzbekistan | 261 | 395 | 437 | |||||||
HQ(1) | (325 | ) | (421 | ) | (1,291 | ) | ||||
Others(2) | 154 | 57 | 277 | |||||||
| | | | | | | | | | | |
Total | 3,587 | 3,232 | 2,875 | |||||||
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Our total Adjusted EBITDA increased by 11% to US$ 3,587 million during 2017 compared to US$3,232 million during 2016, primarily due to the increase in total operating revenue discussed above partially offset by the increase in service costs and selling, general and administrative expenses.
Our total Adjusted EBITDA increased by 12% to US$3,232 million during 2016 compared to US$2,875 million during 2015, primarily due to a US$900 million provision with respect to agreements with the SEC, DOJ and OM, included in operating expenses for 2015, that was not included in our consolidated total operating expenses for 2016. The increase was partially offset by a decrease in revenue during 2016.
Total Operating Expenses
Our consolidated total operating expenses increased by 2% to US$7,968 million during 2017 compared to US$7,801 million during 2016. The increase was primarily due to increases in service costs and cost of equipment and accessories of US$154 million, in selling, general and administrative expenses of US$80 million as a result of increased personnel costs and in amortization expenses of US$40 million partially as a result of accelerated amortization of brand names in Pakistan and the acquisition of a 4G/LTE license in Pakistan in 2017. The increase was partially offset by a decrease in impairment losses of US$126 million.
Our consolidated total operating expenses decreased by 14% to US$7,801 million during 2016 compared to US$9,082 million during 2015. The decrease was primarily due to a US$900 million provision with respect to agreements with the SEC, DOJ and OM, included in operating expenses for the year ended December 31, 2015, that was not included in our consolidated total operating expenses
for 2016. We also saw decreases in service costs and cost of equipment and accessories of US$183 million, in impairment losses of US$53 million and a decrease in depreciation and amortization expenses of US$131 million for the year ended December 31, 2016 as compared to the year ended December 31, 2015.
Depreciation expenses
Our consolidated depreciation expenses increased by 1% to US$1,454 million in 2017 compared to US$1,439 million in 2016. The increase was primarily the result of appreciation of the Russian ruble.
Our consolidated depreciation expenses decreased by 7% to US$1,439 million in 2016 compared to US$1,550 million in 2015. The decrease was primarily the result of depreciation of our functional currencies against the U.S. dollar, partially offset by accelerated depreciation due to the equipment swap in Ukraine and Pakistan.
Amortization expenses
Our consolidated amortization expenses increased by 8% to US$537 million in 2017 compared to US$497 million in 2016 primarily due to the accelerated amortization of brand names in Pakistan and the acquisition of a 4G/LTE license in Pakistan in 2017.
Our consolidated amortization expenses decreased by 4% to US$497 million in 2016 compared to US$517 million in 2015. The decrease was primarily the result of depreciation of our functional currencies against the U.S. dollar.
Impairment loss
Our consolidated impairment amounted to US$66 million in 2017 primarily related to goodwill impairment in Armenia of US$34 million and in Kyrgyzstan of US$17 million and an asset impairment of US$15 million in connection with our transformation strategy and commitment to network modernization.
Our consolidated impairment loss in 2016 amounted to US$192 million primarily related to goodwill impairment in Kyrgyzstan of US$49 million; goodwill, property, equipment and intangible assets impairment in Tajikistan of US$76 million; property, equipment and intangible assets impairment in Georgia for US$29 million and an asset impairment of US$30 million in connection with our transformation strategy and commitment to network modernization.
The impairment loss in 2015 primarily related to goodwill impairment in Ukraine of US$51 million and in Armenia of US$44 million.
For further information on our impairment loss, see Note 10 of our audited consolidated financial statements.
Loss on disposals of non-current assets
Our consolidated loss on disposals of non-current assets amounted to US$24 million in 2017 compared to US$20 million in 2016. Our consolidated loss on disposals of non-current assets amounted to US$39 million in 2015. The disposal of non-current assets relates to the ongoing maintenance of network and ongoing network modernization projects.
Operating Profit
Our consolidated operating profit increased by 39% to US$ 1,506 million in 2017 compared to US$1,084 million in 2016 due to the increase of total operating revenue partially offset by the increase of total operating expenses discussed above.
Our consolidated operating profit increased by 107% to US$1,084 million in 2016 compared to US$524 million in 2015 due to one-off provision recorded with respect to agreements with the SEC, DOJ and OM, included in operating expenses for the year ended December 31, 2015.
Non-operating Profits and Losses
Finance costs
Our consolidated finance costs increased by 13% to US$935 million in 2017 compared to US$830 million in 2016. The increase was mainly due the revaluation of the put option liability for Warid in Pakistan.
Our consolidated finance costs were broadly stable and amounted to US$830 million in 2016 compared to US$829 million in 2015.
Finance income
Our consolidated finance income increased by 38% to US$95 million in 2017 compared to US$69 million in 2016, primarily due to increased interest from bank deposits.
Our consolidated finance income increased by 33% to US$69 million for the year ended December 31, 2016 compared to US$52 million for the year ended December 31, 2015, primarily due to increased interest from bank deposits.
Other non-operating losses
We recorded US$97 million in other non-operating losses during 2017 compared to US$82 million in losses during 2016, an increase of 18%. The change was primarily due to early redemption fees of US$124 million recorded as part of the refinancing activities during 2017, partially offset by a decrease of losses from revaluation of fair value of derivative contracts in 2017.
We recorded US$82 million in other non-operating losses during 2016 compared to US$42 million in losses during 2015, an increase of 95%. The change was primarily due to the negative fair value change of foreign exchange contracts by US$120 million in 2016, partially offset by the increased fair value of investments in financial assets by US$21 million and the increased fair value of embedded derivatives by US$12 million.
Shares of (loss)/profit of associates and joint ventures
We recorded a loss of US$412 million from our investments in associates and joint ventures in 2017 compared to a profit of US$48 million in 2016. For more information on the Italy Joint Venture, see "Explanatory Note—Presentation of Financial Information of the Italy Joint Venture."
The decrease in the portion of the Italy Joint Venture's earnings/(losses) that represents our direct share, from a loss of US$390 million in 2017 to a profit of US$59 million in 2016, reflects: (i) a decline in mobile service revenue primarily due to aggressive competition, which resulted in a decreased customer base; (ii) accelerated depreciation of network assets related to a network modernization project; (iii) loss on early redemption of bonds; (iv) one-off integration costs of EUR 266 million and (v) a decline in mobile consumer premises equipment revenue primarily due to lower volume of gross additions and a more selective mobile customer scoring.
In 2016, we recorded a profit of US$48 million from our investments in associates and joint ventures in 2016 compared to a profit of US$14 million in 2015. This was mainly driven by profit from the Italy Joint Venture of US$59 million.
| | Year ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2017 | 2016 | 2015 | |||||||
| | (in millions of U.S. dollars) | |||||||||
Italy Joint Venture | (390 | ) | 59 | — | ||||||
Euroset | (22 | ) | (10 | ) | 18 | |||||
Other | — | (1 | ) | (4 | ) | |||||
| | | | | | | | | | | |
Total | (412 | ) | 48 | 14 | ||||||
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
For further discussion of the results of operations our Italy Joint Venture, see"—Further Information Regarding the Results of Operations of the Italy Joint Venture."
Impairment of associates and joint ventures
We recorded US$110 million in impairment of associates and joint ventures during 2017 compared to US$99 million during 2016. The impairments during both 2017 and 2016 were recorded in respect of the investment in Euroset, due to continued operational underperformance of the joint venture.
Net foreign exchange (loss)/gain
We recorded a loss of US$71 million from foreign currency exchange in 2017 compared to a gain of US$157 million from foreign currency exchange in 2016. This was primarily driven by appreciation of Russian ruble and depreciation of Uzbek som, Bangladeshi taka and Pakistani rupee against the U.S. dollar in 2017.
We recorded a gain of US$157 million from foreign currency exchange in 2016 compared to a loss of US$314 million from foreign currency exchange in 2015. This trend was primarily driven by the appreciation of the Russian ruble against the U.S. dollar in 2016 compared to the depreciation of the Russian ruble against the U.S. dollar in 2015.
Income Tax Expense
The statutory income tax rates during the years ended December 31, 2017, 2016 and 2015 were as follows:
| | Year ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2017 | 2016 | 2015 | |||||||
Russia | 20.0 | % | 20.0 | % | 20.0 | % | ||||
Pakistan | 30.0 | % | 31.0 | % | 32.0 | % | ||||
Algeria | 26.0 | % | 26.0 | % | 26.0 | % | ||||
Bangladesh | 45.0 | % | 45.0 | % | 45.0 | % | ||||
Ukraine | 18.0 | % | 18.0 | % | 18.0 | % | ||||
Uzbekistan | 50.0 | % | 50.0 | % | 7.5 | % | ||||
Uzbekistan subnational tax | 3.3 | % | 3.3 | % | 3.3 | % | ||||
Luxembourg | 27.08 | % | 22.47 | % | 22.47 | % | ||||
Netherlands | 25.0 | % | 25.0 | % | 25.0 | % | ||||
Italy | 24.0 | % | 27.5 | % | 27.5 | % | ||||
Italy regional tax | 3.9 | % | 3.9 | % | 4.8 | % | ||||
Our consolidated income tax expense decreased by 26% to US$472 million in 2017 compared to US$635 million in 2016. The decrease in income taxes was primarily driven by losses in Uzbekistan due to significant devaluation of Uzbek som (as a result of which a deferred tax asset has been recognized for this foreign exchange loss expected to be used within 4 years) and decreased incomes taxes in Russia due to additional losses resulting from revised tax return filings and one-off expenses.
Our consolidated income tax expense increased by 189% to US$635 million in 2016 compared to US$220 million in 2015. The increase in income taxes was primarily due to an increase in tax rate in Uzbekistan from 7.5% to 50% and higher profits in countries with higher nominal tax rates. Furthermore, our Historical WIND Business has tax losses, for which a deferred tax asset has been recognized of approximately US$95 million. As a result of the Italy Joint Venture, we will no longer be able to offset these losses against future profits of the Italy Joint Venture. As a consequence, the deferred tax asset of US$95 million was written down. In addition, in 2015 we decreased the provisions for future withholding taxes on intercompany dividends by US$200 million.
For information regarding our income tax, see Note 12 to our audited consolidated financial statements.
Loss for the year from continuing operations
In 2017, our consolidated loss for the period from continuing operations was US$496 million, compared to US$288 million of loss in 2016, primarily as a result of a loss from the Italy Joint Venture, increased financial costs and net foreign exchange losses recognized during 2017, partially offset by increased operating profit and decreased income tax expenses.
In 2016, our consolidated loss for the period from continuing operations was US$288 million, compared to US$815 million of loss in 2015, primarily as a result of the US$900 million provision with respect to agreements with the SEC, DOJ and OM, included in operating expenses for 2015, that was not included in our consolidated total operating expenses for 2016, and for the other reasons described above.
Profit for the year from discontinued operations
In 2016, our consolidated profit after tax for the period from discontinued operations, which was comprised primarily of our Historical WIND Business, was US$2,708 million, compared to US$262 million of profit in 2015. The completion of the Italy Joint Venture transaction resulted in a non-cash gain on disposal of US$1,788 million, which was the difference between the book value of the deconsolidated Italian operations and the fair value of the investment in the new joint venture recorded on the balance sheet.
(Loss)/profit for the Year
In 2017, the consolidated loss for the period was US$483 million compared to a profit of US$2,328 million in 2016. The change was mainly due to the gain recognized in 2016 on the disposal of the discontinued operation and other factors as discussed above.
In 2016, the consolidated profit for the period was US$2,328 million compared to a loss of US$655 million in 2015. The increase was mainly due to the gain recognized in 2016 on the disposal of the discontinued operation and other factors as discussed above.
(Loss)/profit for the Year Attributable to Non-controlling Interest
Our loss for the period attributable to non-controlling interest was US$13 million in 2017 compared to a profit of US$92 million in 2016 as a result of loss for the year recognized by GTH in 2017 as compared to a profit recognized by GTH in 2016.
Our profit for the period attributable to non-controlling interest was US$92 million in 2016 compared to a profit of US$102 million, a decrease of 9.8%, in 2015 as a result of decreased profit for the year in Kazakhstan and Kyrgyzstan, partially offset by increased profit by GTH.
Russia
Results of operations in US$
| | Year ended December 31, | '16 - '17 | '15 - '16 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| in millions of U.S. dollars (except as indicated) | 2017 | 2016 | 2015 | % change | |||||||||
Total operating revenue | 4,729 | 4,097 | 4,583 | 15% | (11)% | ||||||||
Mobile service revenue | 3,843 | 3,276 | 3,624 | 17% | (10)% | ||||||||
—of which FMC | 87 | 23 | — | 271% | — | ||||||||
—of which mobile data | 1,012 | 778 | 719 | 30% | 8% | ||||||||
Fixed-line service revenue | 673 | 665 | 789 | 1% | (16)% | ||||||||
Sales of equipment, accessories and other | 213 | 156 | 170 | 37% | (8)% | ||||||||
Operating expenses | 2,941 | 2,523 | 2,758 | 17% | (9)% | ||||||||
Adjusted EBITDA | 1,788 | 1,574 | 1,825 | 14% | (14)% | ||||||||
Adjusted EBITDA margin | 38 | % | 38 | % | 40 | % | (0.6p.p.) | (1.4p.p.) | |||||
Results of operations in RUB
| | Year ended December 31, | '16 - '17 | '15 - '16 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| in millions of RUB (except as indicated) | 2017 | 2016 | 2015 | % change | |||||||||
Total operating revenue | 275,887 | 273,003 | 277,241 | 1% | (2)% | ||||||||
Mobile service revenue | 224,186 | 218,192 | 219,031 | 3% | 0% | ||||||||
—of which FMC | 5,064 | 1,496 | — | 238% | — | ||||||||
—of which mobile data | 59,041 | 51,773 | 43,581 | 14% | 19% | ||||||||
Fixed-line service revenue | 39,271 | 44,418 | 47,748 | –12% | (7)% | ||||||||
Sales of equipment, accessories and other | 12,430 | 10,393 | 10,462 | 20% | (1)% | ||||||||
Operating expenses | 171,545 | 168,213 | 167,096 | 2% | 1% | ||||||||
Adjusted EBITDA | 104,342 | 104,790 | 110,145 | 0% | (5)% | ||||||||
Adjusted EBITDA margin | 38 | % | 38 | % | 40 | % | (0.6p.p.) | (1.3p.p.) | |||||
Certain Performance Indicators
| | Year ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2017 | 2016 | 2015 | |||||||
Mobile | ||||||||||
Customers in millions | 58.2 | 58.3 | 59.8 | |||||||
Mobile ARPU in US$ | 5.5 | 4.6 | 5.1 | |||||||
Mobile ARPU in RUB | 319 | 306 | 310 | |||||||
Mobile data customers | 38.4 | 36.6 | 34.3 | |||||||
Fixed-Line | ||||||||||
Broadband customers in millions | 2.2 | 2.2 | 2.2 | |||||||
Year Ended December 31, 2017 Compared to Year Ended December 31, 2016
Mobile revenue
Our total operating revenue in Russia increased by 15% to US$4,729 million in 2017 compared to US$4,097 million in 2016 due to the strengthening of the Russian ruble.
In functional currency terms, total operating revenue in Russia increased by 1% due to increases in service revenue and revenue from sale of equipment and accessories. The 14% growth of mobile data revenue is due to increased penetration of smartphones and customer migration to bundled tariff plans with higher data allowance. We also recorded increased MFS revenue and VAS revenue. This growth was partially offset by a decrease in mobile voice and fixed-line revenue. The mobile voice revenue decrease is due to substitution of voice calls by data-based services and customer migration to new data centric tariff plans. The fixed-line revenue decrease was driven by the reduction of low-marginal wholesale traffic, the effect of the strengthening of the Russian ruble on foreign currency contracts and growing penetration of FMC services in the customer base.
Adjusted EBITDA
Our Russia Adjusted EBITDA increased by 14% to US$1,788 million in 2017 compared to US$1,574 million in 2016 due to the Russian ruble strengthening. In functional currency terms, our Russia Adjusted EBITDA was broadly stable in 2017.
Certain performance indicators
As of December 31, 2017, we had US$4,10458.2 million availablemobile customers in Russia, including 0.8 million FMC customers, representing a decrease of 0.3% from 58.3 million mobile customers as of December 31, 2016, due to us underthe temporary impact of distribution channels reorganization.
In 2017, our mobile ARPU in Russia increased by 19% to US$5.5 compared to US$4.6 in 2016, primarily as a result of foreign exchange effects. In functional currency terms, mobile ARPU in Russia increased by 4%, due to continued efforts to simplify tariff plans, successful customer base management and increase in penetration of bundled offerings.
As of December 31, 2017, we had 38.4 million mobile data customers, representing an increase of 5% from 36.6 million mobile data customers as of December 31, 2016. The increase was mainly due to the increased smartphone penetration in Russia.
The fixed line broadband customers are mainly represented by FTTB customers. As of December 31, 2017, we had 2.2 million fixed line customers in Russia, including 0.8 million FMC customers, representing an increase of 3% from 2.2 million fixed-line customers as of December 31, 2016. The increase was a result of increased sales and churn improvement.
Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
Mobile revenue
Our total operating revenue in Russia decreased by 11% to US$4,097 million in 2016 compared to US$4,583 million in 2015 mainly due to the weakening of the average exchange rate from Russian ruble to the U.S. dollar in 2016, particularly in the first half of the year. In functional currency terms, total operating revenue in Russia decreased by 2% due to decreased fixed-line service revenue, mainly driven by a change in B2B fixed-line contracts from U.S. dollar to Russian ruble and lower B2C revenue. This was partially offset by an increase in mobile data revenue of 19% as a result of increased smartphone penetration, growth in mobile data customers, customer traffic growth and active bundle promotion. The increase in mobile data revenue was partially offset by lower voice and roaming revenue due to an average price per minute reduction as existing credit lines.customers continued to migrate to the
company's current price plans. Mobile service revenue was stable, driven by strong growth in mobile data revenue.
Adjusted EBITDA
Our Russia Adjusted EBITDA decreased by 14% to US$1,574 million in 2016 compared to US$1,825 million in 2015, mainly due to the decrease in the average exchange rate from Russian ruble to the U.S. dollar during 2016, particularly in the first half of the year. In functional currency terms, our Russia Adjusted EBITDA decreased by 5% in 2016 compared to previous year, primarily as a result of a revenue decrease, as discussed above, and negative foreign exchange effect on roaming and interconnect costs, which are incurred in U.S. dollars.
Certain performance indicators
As of December 31, 2016, we had approximately 58.3 million mobile customers in Russia, including 0.6 million FMC customers, representing a decrease of 3% from approximately 59.8 million mobile customers as of December 31, 2015, which we believe was due to the lower number of seasonal workers during 2016 as a result of the macroeconomic developments in the country and increased churn, reflecting the increased competition in the market.
In 2016, our mobile ARPU in Russia decreased by 10% to US$4.6 compared to US$5.1 in 2015, primarily as a result of foreign exchange effects. In functional currency terms, mobile ARPU in Russia decreased by 1%, due to lower voice and roaming revenue attributed to an average price per minute reduction as existing customers migrated to new price plans, partially offset by an increase in mobile data revenue.
As of December 31, 2016, we had approximately 36.6 million mobile data customers, representing an increase of 7% from approximately 34.3 million mobile data customers as of December 31, 2015. The increase was mainly due to the increased smartphone penetration in the customer base as a result of device promotions.
The fixed-line broadband customers are mainly represented by FTTB customers. As of December 31, 2016, we had approximately 2.2 million fixed-line customers in Russia, including 0.5 million FMC customers, compared to approximately 2.2 million fixed-line customers as of December 31, 2015.
Pakistan
On July 1, 2016, VEON Ltd., together with its subsidiary GTH, acquired 100% of the voting shares in Warid, a mobile telecommunications provider. VEON Ltd. consolidated Warid financials in the Pakistan segment starting from July 1, 2016, which affects comparability among the periods provided below. For more information regarding our acquisitions and dispositions, see Note 5 to our audited consolidated financial statements incorporated herein.
Results of operations in US$
| | Year ended December 31, | '16 - '17 | '15 - '16 | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| in millions of U.S. dollars (except as indicated) | 2017 | 2016 | 2015 | % change | ||||||||||||
Total operating revenue | 1,525 | 1,295 | 1,014 | 18 | % | 28 | % | |||||||||
Mobile service revenue | 1,418 | 1,217 | 960 | 17 | % | 27 | % | |||||||||
—of which mobile data | 225 | 155 | 86 | 45 | % | 81 | % | |||||||||
Sales of equipment, accessories and other | 107 | 78 | 54 | 37 | % | 45 | % | |||||||||
Operating expenses | 822 | 788 | 605 | 4 | % | 30 | % | |||||||||
Adjusted EBITDA | 703 | 507 | 409 | 39 | % | 24 | % | |||||||||
Adjusted EBITDA margin | 46 | % | 39 | % | 40 | % | 7.0p. | p. | (1.2p. | p.) | ||||||
Results of operations in PKR
| | Year ended December 31, | '16 - '17 | '15 - '16 | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| in millions of PKR (except as indicated) | 2017 | 2016 | 2015 | % change | ||||||||||||
Total operating revenue | 160,679 | 135,602 | 104,181 | 18 | % | 30 | % | |||||||||
Mobile service revenue | 149,393 | 127,414 | 98,649 | 17 | % | 29 | % | |||||||||
—of which mobile data | 23,743 | 16,248 | 8,812 | 46 | % | 84 | % | |||||||||
Sales of equipment, accessories and other | 11,286 | 8,188 | 5,532 | 38 | % | 48 | % | |||||||||
Operating expenses | 86,583 | 82,539 | 62,137 | 5 | % | 33 | % | |||||||||
Adjusted EBITDA | 74,096 | 53,063 | 42,044 | 40 | % | 26 | % | |||||||||
Adjusted EBITDA margin | 46 | % | 39 | % | 40 | % | 7.0p. | p. | (1.2p. | p.) | ||||||
Certain Performance Indicators
| | Year ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2017 | 2016 | 2015 | |||||||
Mobile | ||||||||||
Customers in millions | 53.6 | 51.6 | 36.2 | |||||||
Mobile ARPU in US$ | 2.2 | 2.3 | 2.1 | |||||||
Mobile ARPU in PKR | 236 | 241 | 219 | |||||||
Mobile data customers in millions | 28.5 | 25.1 | 16.8 | |||||||
Year Ended December 31, 2017 Compared to Year Ended December 31, 2016
Mobile revenue
In 2017, our Pakistan total operating revenue increased by 18% to US$1,525 million compared to US$1,295 million in 2016, as a result of the Pakistan Merger increased data revenues, supported by customer growth. In functional currency terms, our Pakistan total operating revenue increased by 18%.
Adjusted EBITDA
Our Pakistan Adjusted EBITDA increased by 39% to US$703 million in 2017 compared to US$507 million in 2016 primarily due to the Pakistan Merger, higher revenue, synergy effect over operating expenses and a positive impact from a release of historic SIM tax accruals. In functional currency terms, our Pakistan Adjusted EBITDA increased by 40%.
Certain performance indicators
As of December 31, 2017, we had 53.6 million customers in Pakistan, representing an increase of 4% from 51.6 million customers as of December 31, 2016, primarily driven by continued increase of customer acquisition combined with lower churn through focus on price simplicity and efficient distribution channel management.
In 2017, our mobile ARPU in Pakistan was US$2.20, or PKR 236. Our 2016 mobile ARPU figures in Pakistan are not comparable as 2016 mobile ARPU consists of 6 months of Mobilink mobile ARPU and 6 months of Jazz, while 2017 mobile ARPU is derived only from Jazz figures.
As of December 31, 2017, we had 28.5 million mobile data customers in Pakistan, representing an increase of 13% from 25.1 million mobile data customers as of December 31, 2016. The increase was due to customer base migration to bundled tariff plans and continued network expansion.
Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
Mobile revenue
Our Pakistan total operating revenue increased by 28% to US$1,295 million in 2016 compared to US$1,014 million in 2015, primarily as a result of the Pakistan Merger on July 1, 2016. In functional currency terms, total operating revenue in Pakistan increased by 30% as a result of the Pakistan Merger and an increase in voice, interconnect, SMS and data revenues supported by customer growth. Our data revenue grew by 81% as a result of the Pakistan Merger, successful data monetization initiatives, data device promotions and 3G network expansion. In addition, mobile financial services revenue grew by 46% in functional currency terms in 2016 as compared to 2015 due to an increase in the number of transactions and an increase in sales by our agents. Our Pakistan segment sales of equipment and accessories and other revenue increased by 45%, primarily driven by network sharing activities.
Adjusted EBITDA
Our Adjusted EBITDA in Pakistan increased by 24% to US$507 million in 2016 compared to US$409 million in 2015. In functional currency terms, our Adjusted EBITDA increased by 26% in 2016 compared to the previous year, primarily due to the Pakistan Merger, higher revenue, as discussed above, performance transformation initiatives and a decrease in network costs. This increase was partially offset by integration costs.
Certain performance indicators
As of December 31, 2016, we had approximately 51.6 million customers in Pakistan, representing an increase from 36.2 million customers as of December 31, 2015, primarily as a result of the Pakistan Merger in July 1, 2016 and simplification of tariffs, resulting in higher gross additions.
In 2016, our mobile ARPU in Pakistan increased by 8% to US$2.3 compared to US$2.1 in 2015. In functional currency terms, mobile ARPU in Pakistan increased in 2016 by 10% compared to 2015, mainly due to data revenue growth and changes in customer pricing.
As of December 31, 2016, we had approximately 25.1 million mobile data customers in Pakistan, representing an increase of approximately 50% from the approximately 16.8 million mobile data customers as of December 31, 2015. The increase was mainly due to the Pakistan Merger on July 1, 2016, the 3G expansion and increased smartphone penetration in the customer base.
Algeria
Results of operations in US$
| | Year ended December 31, | '16 - '17 | '15 - '16 | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| in millions of U.S. dollars (except as indicated) | 2017 | 2016 | 2015 | % change | ||||||||||||
Total operating revenue | 915 | 1,040 | 1,273 | (12 | )% | (18 | )% | |||||||||
Mobile service revenue | 898 | 1,031 | 1,259 | (13 | )% | (18 | )% | |||||||||
—of which mobile data | 113 | 76 | 46 | 55 | % | 65 | % | |||||||||
Sales of equipment, accessories and other | 17 | 9 | 14 | 80 | % | (36 | )% | |||||||||
Operating expenses | 489 | 493 | 589 | (1 | )% | (16 | )% | |||||||||
Adjusted EBITDA | 426 | 547 | 684 | (22 | )% | (20 | )% | |||||||||
Adjusted EBITDA margin | 47 | % | 53 | % | 54 | % | (6.1p. | p.) | (1.1p. | p.) | ||||||
Results of operations in DZD
| | Year ended December 31, | '16 - '17 | '15 - '16 | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| in millions of DZD (except as indicated) | 2017 | 2016 | 2015 | % change | ||||||||||||
Total operating revenue | 101,457 | 113,727 | 127,552 | (11 | )% | (11 | )% | |||||||||
Mobile service revenue | 99,588 | 112,706 | 126,078 | (12 | )% | (11 | )% | |||||||||
—of which mobile data | 12,586 | 8,006 | 4,648 | 57 | % | 78 | % | |||||||||
Sales of equipment, accessories and other | 1,869 | 1,021 | 1,474 | 83 | % | (31 | )% | |||||||||
Operating expenses | 54,301 | 53,929 | 58,998 | 1 | % | (9 | )% | |||||||||
Adjusted EBITDA | 47,156 | 59,798 | 68,554 | (21 | )% | (13 | )% | |||||||||
Adjusted EBITDA margin | 46 | % | 53 | % | 54 | % | (6.1p. | p.) | (1.2p. | p.) | ||||||
Certain Performance Indicators
| | Year ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2017 | 2016 | 2015 | |||||||
Mobile | ||||||||||
Customers in millions | 15.0 | 16.3 | 17.0 | |||||||
Mobile ARPU in US$ | 4.8 | 5.1 | 6.0 | |||||||
Mobile ARPU in DZD | 529 | 562 | 603 | |||||||
Mobile data customers | 7.2 | 7.0 | 4.1 | |||||||
Year Ended December 31, 2017 Compared to Year Ended December 31, 2016
Mobile revenue
Our Algeria total operating revenue decreased by 12% to US$915 million in 2017 compared to US$1,040 million in 2016 due to a difficult macroeconomic environment and strong competitive environment. Total operating revenue for the full year 2017 was also affected by a new finance law, effective from January 2017, which increased VAT from 7% to 19% on data services and from 17% to 19% on voice services, and increased taxes on recharges from 5% to 7%. These taxes and recharges were not passed on to customers. In addition, revenue was negatively affected by customer churn, caused by competitive pressure in the market. The competitive pressure also resulted in a rate decrease by Djezzy. Data revenue growth, however, remained strong due to higher usage and an increase in data customers as a result of the rollout of 3G and 4G/LTE networks.
In functional currency terms, total operating revenue in Algeria decreased by 11%.
Adjusted EBITDA
Our Algeria Adjusted EBITDA decreased by 22% to US$426 million in 2017 compared to US$547 million in 2016 primarily due to the decrease in total operating revenues, as discussed above, along with increased personnel costs.
In functional currency terms, our Algeria Adjusted EBITDA decreased by 21%.
Certain performance indicators
Customers in our Algeria segment decreased by 8% to 15.0 million as of December 31, 2017 compared to 16.3 million customers as of December 31, 2016. The decrease was mainly due to competitive pressure in the market.
In 2017, our mobile ARPU in Algeria decreased by 7% to US$4.8 compared to US$5.1 in 2016. In functional currency terms, our mobile ARPU in Algeria decreased by 6%, mainly due to aggressive price competition and rate decrease by Djezzy.
As of December 31, 2017, we had approximately 7.2 million mobile data customers in Algeria, representing an increase of 3% from the 7.0 million mobile data customers as of December 31, 2016. The increase was mainly due to the acceleration of 4G/LTE network deployment and increased smartphone penetration.
Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
Mobile revenue
Our Algeria total operating revenue decreased by 18% to US$1,040 million in 2016 compared to US$1,273 million in 2015 partly due to the depreciation of the Algerian dinar against the U.S. dollar. In functional currency terms, total operating revenue in Algeria decreased by 11% due to a change in customer billing terms, the required migration of customers from legacy tariffs, aggressive price competition and distribution challenges as compared to 2015. Our data revenue increased due to increased data usage in terms of amount of megabytes used and number of data users, primarily as a result of the revived 3G roll-out following the lifting of governmental restrictions in November 2015. Our segment sales of equipment and accessories and other revenue decreased by 36% due in part to the depreciation of the Algerian dinar against the U.S. dollar, partially offset by more affordable device promotions launched during 2016.
Adjusted EBITDA
Our Algeria Adjusted EBITDA decreased by 20% to US$547 million in 2016 compared to US$684 million in 2015. In functional currency terms, our Algeria Adjusted EBITDA decreased by 13% in 2016 compared to the previous year, primarily due to a decrease in total revenues, as discussed above, partially offset by a decrease in operating expenses due to commercial and other general and administrative expense cost optimization and headcount reduction as a result of our performance transformation program. In addition to the decrease in revenue, our Adjusted EBITDA in Algeria was negatively impacted by costs in relation to structural measures to improve performance and stabilize our customer base, including distribution transformation and monobrand roll-out, acceleration of our 4G/LTE network deployment and promotion of micro-campaigns with tailored services to increase satisfaction, data monetization activities and smartphone promotions, coupled with bundle offers.
Certain performance indicators
Customers in our Algeria segment decreased to approximately 16.3 million as of December 31, 2016 compared to 17.0 million customers as of December 31, 2015. The 4% decrease was mainly due
to the combined impact of historic 3G coverage shortfalls, changes in customer billing terms, required migration and distribution challenges.
In 2016, our mobile ARPU in Algeria decreased by 15% to US$5.1 compared to US$6.0 in 2015. In functional currency terms, our mobile ARPU in Algeria decreased by 7%, mainly due to aggressive price competition and high-value customer churn.
As of December 31, 2016, we had approximately 7.0 million mobile data customers in Algeria, representing an increase of approximately 69% from the approximately 4.1 million mobile data customers in Algeria as of December 31, 2015. The increase was mainly due to the rapid 3G expansion during the last twelve months.
Bangladesh
Results of operations in US$
| | Year ended December 31, | '16 - '17 | '15 - '16 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| in millions of U.S. dollars (except as indicated) | 2017 | 2016 | 2015 | % change | |||||||||
Total operating revenue | 574 | 621 | 604 | (7)% | 3% | ||||||||
Mobile service revenue | 557 | 606 | 596 | (8)% | 2% | ||||||||
of which mobile data | 78 | 63 | 42 | 25% | 50% | ||||||||
Sales of equipment, accessories and other | 17 | 15 | 8 | 15% | 76% | ||||||||
Operating expenses | 341 | 354 | 362 | (3)% | (2)% | ||||||||
Adjusted EBITDA | 233 | 267 | 242 | (13)% | 10% | ||||||||
Adjusted EBITDA margin | 41 | % | 43 | % | 40 | % | (2.5p.p.) | 3.0p.p. | |||||
Results of operations in BDT
| | Year ended December 31, | '16 - '17 | '15 - '16 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| in millions of BDT (except as indicated) | 2017 | 2016 | 2015 | % change | |||||||||
Total operating revenue | 46,471 | 48,687 | 47,114 | (5)% | 3% | ||||||||
Mobile service revenue | 45,072 | 47,506 | 46,448 | (5)% | 2% | ||||||||
—of which mobile data | 6,308 | 4,909 | 3,247 | 29% | 51% | ||||||||
Sales of equipment, accessories and other | 1,399 | 1,181 | 666 | 18% | 77% | ||||||||
Operating expenses | 27,630 | 27,723 | 28,243 | 0% | (2)% | ||||||||
Adjusted EBITDA | 18,841 | 20,964 | 18,871 | (10)% | 11% | ||||||||
Adjusted EBITDA margin | 41 | % | 43 | % | 40 | % | (2.5p.p.) | 3.0p.p. | |||||
Certain Performance Indicators
| | Year ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2017 | 2016 | 2015 | |||||||
Mobile | ||||||||||
Customers in millions | 31.3 | 30.4 | 32.3 | |||||||
Mobile ARPU in US$ | 1.5 | 1.6 | 1.6 | |||||||
Mobile ARPU in BDT | 121 | 126 | 122 | |||||||
Mobile data customers in million | 16.9 | 14.9 | 14.0 | |||||||
Year Ended December 31, 2017 Compared to Year Ended December 31, 2016
Mobile revenue
Our Bangladesh total operating revenue decreased by 7% to US$574 million in 2017 compared to US$621 million in 2016. The main operational focus in 2017 was on restoring network availability and addressing the 3G gap vis-à-vis the competition, and on customer acquisition following the completion of the government-mandated SIM re-verification program. In 2017, total operating revenue in Bangladesh was impacted by aggressive price competition in the market and network availability.
In functional currency terms, total operating revenue in Bangladesh decreased by 5%.
Adjusted EBITDA
Our Bangladesh Adjusted EBITDA decreased by 13% to US$233 million in 2017 compared to US$267 million in 2016 due to lower revenue, as discussed above, and higher network costs, partially offset by lower personnel costs.
In functional currency terms, our Bangladesh Adjusted EBITDA decreased by 10%.
Certain performance indicators
Customers in our Bangladesh segment increased to 31.3 million as of December 31, 2017 compared to 30.4 million customers as of December 31, 2016. The 3% increase was mainly due to intensive acquisition and retention campaigns.
In 2017, our mobile ARPU in Bangladesh decreased by 7% to US$1.5 as compared to 2016. In functional currency terms, mobile ARPU in Bangladesh decreased in 2017 by 4% mainly due to aggressive pricing in the market and lower traffic due to network availability.
As of December 31, 2017, we had 16.9 million mobile data customers in Bangladesh, representing an increase of 13% from the 14.9 million mobile data customers as of December 31, 2016, mainly due to increased smart-phone penetration.
Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
Mobile revenue
Our Bangladesh total operating revenue increased by 3% to US$621 million in 2016 compared to US$604 million in 2015. In functional currency terms, total operating revenue in Bangladesh increased by 3% due to an increase in voice revenue driven by higher MOU and a significant increase in data revenue. The increase was partially offset by the imposition of an incremental 2% supplementary duty on recharges from June 2016, which is in addition to the additional 1% surcharge from March 2016. The main operational focus during 2016 was the SIM re-verification process. This government-mandated initiative started in December 2015 and required each mobile phone operator to verify all customers using fingerprints in order to ensure authentic registration, proper accountability and enhanced security and resulted in 3.8 million SIM cards being blocked by Banglalink. This program contributed to a slowdown of acquisition activity across the market, which affected revenue trends in 2016. In functional currency terms, our segment service revenue from data increased by 51%, primarily driven by an increase in active data users and data usage as a result of expanding 3G coverage and smartphone penetration. In functional currency terms, our Bangladesh segment sales of equipment and accessories and other revenue increased by 77% primarily as a result of higher handset sales in order to increase smartphone penetration.
Adjusted EBITDA
Our Bangladesh Adjusted EBITDA increased by 10% to US$267 million in 2016 compared to US$242 million in 2015. In functional currency terms, our Bangladesh Adjusted EBITDA increased by 11% in 2016 compared to the same period in the previous year, primarily due to increased revenue, as discussed above, and the implementation of performance transformation initiatives, in particular headcount reduction and a decrease in commercial costs.
Certain performance indicators
As of December 31, 2016, we had approximately 30.4 million customers in Bangladesh, representing a decrease from 32.3 million customers as of December 31, 2015, which was primarily due to an introduction of government mandated identity verification procedures of the end of 2015, which resulted in a slowdown of customer growth across the market and the blocking of unverified SIMs in 2016.
In 2016, our mobile ARPU in Bangladesh did not change and was US$1.6. In functional currency terms, mobile ARPU in Bangladesh increased in 2016 by 3% to BDT 126 compared to BDT 122 in 2015, mainly due to high growth in data revenue.
As of December 31, 2016, we had approximately 14.9 million mobile data customers in Bangladesh, representing a decrease of approximately 7% from the approximately 14.0 million mobile data customers as of December 31, 2015. The decrease is due to the blocking of unverified SIMs, discussed above, while active data users increased mainly due to the 3G expansion and increased smartphone penetration.
Ukraine
Results of operations in US$
| | Year ended December 31, | '16 - '17 | '15 - '16 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| in millions of U.S. dollars (except as indicated) | 2017 | 2016 | 2015 | % change | |||||||||
Total operating revenue | 622 | 586 | 622 | 6% | (6)% | ||||||||
Mobile service revenue | 577 | 542 | 576 | 6% | (6)% | ||||||||
—of which mobile data | 154 | 99 | 66 | 62% | 49% | ||||||||
Fixed-line service revenue | 43 | 41 | 45 | 3% | (8)% | ||||||||
Sales of equipment, accessories and other | 2 | 3 | 1 | 20% | 46% | ||||||||
Operating expenses | 275 | 280 | 330 | (1)% | (15)% | ||||||||
Adjusted EBITDA | 347 | 306 | 292 | 13% | 5% | ||||||||
Adjusted EBITDA margin | 56 | % | 52 | % | 47 | % | 3.4p.p. | 5.3p.p. | |||||
Results of operations in UAH
| | Year ended December 31, | '16 - '17 | '15 - '16 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| in millions of UAH (except as indicated) | 2017 | 2016 | 2015 | % change | |||||||||
Total operating revenue | 16,542 | 14,960 | 13,475 | 11% | 11% | ||||||||
Mobile service revenue | 15,338 | 13,851 | 12,475 | 11% | 11% | ||||||||
—of which mobile data | 4,103 | 2,429 | 1,442 | 69% | 75% | ||||||||
Fixed-line service revenue | 1,132 | 1,052 | 967 | 8% | 9% | ||||||||
Sales of equipment, accessories and other | 72 | 57 | 33 | 26% | 71% | ||||||||
Operating expenses | 7,321 | 7,149 | 7,143 | 2% | 0% | ||||||||
Adjusted EBITDA | 9,221 | 7,811 | 6,332 | 18% | 23% | ||||||||
Adjusted EBITDA margin | 56 | % | 52 | % | 47 | % | 3.5p.p. | 5.2p.p. | |||||
Certain Performance Indicators
| | Year ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2017 | 2016 | 2015 | |||||||
Mobile | ||||||||||
Customers in millions | 26.5 | 26.1 | 25.4 | |||||||
Mobile ARPU in US$ | 1.8 | 1.7 | 1.8 | |||||||
Mobile ARPU in UAH | 48 | 44 | 40 | |||||||
Mobile data customers (million) | 12.5 | 11.2 | 12.0 | |||||||
Fixed-line | ||||||||||
Broadband customers (millions) | 0.8 | 0.8 | 0.8 | |||||||
Year Ended December 31, 2017 Compared to Year Ended December 31, 2016
Mobile revenue
Our Ukraine total operating revenue increased by 6% to US$622 million in 2017 compared to US$586 million in 2016. The increase was primarily due to strong growth in mobile service revenue, driven by successful commercial activities stimulated by the continued 3G roll-out and increased penetration of data-centric tariffs, continued strong growth of mobile data customers and data consumption. The increase was partially decreased by devaluation of Ukrainian hryvnia during 2017.
In functional currency terms, our Ukraine total operating revenue in 2017 increased by 11%.
Adjusted EBITDA
Our Ukraine Adjusted EBITDA increased by 13% to US$347 million in 2017 compared to US$306 million in 2016.
In functional currency terms, our Ukraine Adjusted EBITDA increased by 18% in 2017 compared to the previous year, primarily due to higher revenues, as discussed above, and lower interconnection costs partially offset by the increase in roaming costs, commercial costs driven by higher customer acquisition and structural operating expenses, such as license and frequency fees.
Certain performance indicators
As of December 31, 2017, we had approximately 26.5 million mobile customers in Ukraine compared to 26.1 million mobile customers as of December 31, 2016, representing an increase of 2%, as a result of increased gross additions and improved churn.
In 2017, our mobile ARPU in Ukraine increased by 4% to US$1.8 compared to 2016. In functional currency terms, mobile ARPU in Ukraine increased in 2017 by 8% to UAH 48 compared to UAH 44 in 2016 driven by higher revenue as described above.
As of December 31, 2017, we had 0.8 million fixed line broadband customers in Ukraine, which was broadly stable compared to December 31, 2016.
Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
Mobile revenue
Our Ukraine total operating revenue decreased by 6% to US$586 million in 2016 compared to US$622 million in 2015, primarily due to the depreciation of the Ukrainian hryvnia against the U.S. dollar. In functional currency terms, our Ukraine total operating revenue in 2016 increased 11% compared to 2015 despite a challenging social, political and macroeconomic environment. The increase was primarily due to strong growth in mobile data revenue, as a result of continued 3G roll-out, increased smartphone penetration and data-oriented tariff plans. It was also driven by repricing initiatives for our mobile and fixed-line services; and increased fixed-line revenue as a result of improved quality of the customer base. This increase was partially offset by a decline in interconnection fees, as a result of a decrease in the volume of international incoming traffic, and a decrease in SMS messaging.
Adjusted EBITDA
Our Ukraine Adjusted EBITDA increased by 5% to US$306 million in 2016 compared to US$292 million in 2015. In functional currency terms, our Ukraine Adjusted EBITDA increased by 23% in 2016 compared to the previous year primarily due to higher revenues, as discussed above, and lower interconnect and technological maintenance costs, which were partially offset by an increase in frequency fees, roaming costs, inflation on rent and utilities and the negative effect of the depreciation of the Ukrainian hryvnia on our operating expenses, caused by higher roaming costs, denominated in U.S. dollars.
Certain performance indicators
As of December 31, 2016, we had approximately 26.1 million mobile customers in Ukraine compared to 25.4 million mobile customers as of December 31, 2015, representing an increase of 3%, as a result of successful sales activities and improved churn following enhanced customer based management initiatives.
In 2016, our mobile ARPU in Ukraine decreased by 6% to US$1.7 compared to US$1.8 in 2015, primarily due to devaluation of the Ukrainian hryvnia. In functional currency terms, mobile ARPU in Ukraine increased in 2016 by 11% compared to 2015 mainly due to repricing initiatives and newly introduced tariffs.
As of December 31, 2016, we had approximately 0.8 million fixed-line broadband customers in Ukraine, which was broadly stable compared to December 31, 2015.
Uzbekistan
Results of operations in US$
| | Year ended December 31, | '16 - '17 | '15 - '16 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| in millions of U.S. dollars (except as indicated) | 2017 | 2016 | 2015 | % change | |||||||||
Total operating revenue | 513 | 663 | 711 | (23)% | (7)% | ||||||||
Mobile service revenue | 509 | 659 | 704 | (23)% | (6)% | ||||||||
—of which mobile data | 128 | 152 | 136 | (16)% | 12% | ||||||||
Fixed-line service revenue | 3 | 4 | 5 | (26)% | (15)% | ||||||||
Sales of equipment, accessories and other | 1 | — | 2 | 174% | (86)% | ||||||||
Operating expenses | 252 | 268 | 274 | (6)% | (2)% | ||||||||
Adjusted EBITDA | 261 | 395 | 437 | (34)% | (10)% | ||||||||
Adjusted EBITDA margin | 51 | % | 60 | % | 61 | % | (8.7p.p.) | (1.9p.p.) | |||||
Results of operations in UZS
| | Year ended December 31, | '16 - '17 | '15 - '16 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| in billions of UZS (except as indicated) | 2017 | 2016 | 2015 | % change | |||||||||
Total operating revenue | 2,342 | 1,967 | 1,829 | 19% | 8% | ||||||||
Mobile service revenue | 2,323 | 1,953 | 1,811 | 19% | 8% | ||||||||
—of which mobile data | 585 | 452 | 348 | 29% | 30% | ||||||||
Fixed-line service revenue | 15 | 13 | 13 | 14% | (2)% | ||||||||
Sales of equipment, accessories and other | 4 | 1 | 4 | 484% | (84)% | ||||||||
Operating expenses | 1,182 | 794 | 705 | 49% | 13% | ||||||||
Adjusted EBITDA | 1,160 | 1,173 | 1,124 | (1)% | 4% | ||||||||
Adjusted EBITDA margin | 50 | % | 60 | % | 61 | % | (10.1p.p.) | (1.8p.p.) | |||||
Certain Performance Indicators
| | Year ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2017 | 2016 | 2015 | |||||||
Mobile | ||||||||||
Customers in millions | 9.7 | 9.5 | 9.9 | |||||||
Mobile ARPU in US$ | 4.4 | 5.6 | 5.7 | |||||||
Mobile ARPU in UZS | 20,126 | 16,664 | 14,709 | |||||||
Mobile data customers in millions | 5.0 | 4.6 | 4.7 | |||||||
Year Ended December 31, 2017 Compared to Year Ended December 31, 2016
Mobile revenue
In 2017, our Uzbekistan total operating revenue decreased by 23% to US$513 million compared to US$663 million in 2016. In Uzbekistan, our tariff plans were pegged to the U.S. dollar until September 5, 2017. Since September 5, 2017, our tariff plans are denominated in UZS, which negatively impacted our total operating revenue. For further information, see "—Key Developments and Trends—Impact of currency regime developments in Uzbekistan."
In functional currency terms, our Uzbekistan total operating revenue increased by 19%, mainly as a result of the increased tariffs in Uzbek som resulting from the appreciation of U.S. dollar against the local currency and successful marketing activities, together with increased mobile data revenue, interconnect services and value added services. Mobile data revenue increased by 29% during the
period, driven by additional investment in 3G and LTE networks, data centric bundled offerings with increased smartphone penetration.
Adjusted EBITDA
In 2017, our Uzbekistan Adjusted EBITDA decreased by 34% to US$261 million compared to US$395 million in 2016, primarily due to significant customer tax growth and local currency devaluation.
In functional currency terms, in 2017, our Uzbekistan Adjusted EBITDA decreased by 1% compared to 2016, primarily due higher interconnect costs as a result of both higher off-net usage and a negative currency effect together with increases in content costs, commercial costs and structural opex, mainly due to higher taxes and other regulatory driven expenses.
Certain performance indicators
As of December 31, 2017, we had 9.7 million mobile customers in our Uzbekistan segment compared to 9.5 million mobile customers as of December 31, 2016, which, on an unrounded basis was largely stable.
In 2017, our mobile ARPU in Uzbekistan decreased by 22% to US$4.4 compared to US$5.6 in 2016. In functional currency terms, mobile ARPU in Uzbekistan increased by 21% to UZS 20,126 in 2017 compared to UZS 16,664 in 2016 mainly due to the reasons described above with respect to total operating revenue.
As of December 31, 2017, we had 5.0 million mobile data customers in Uzbekistan compared to 4.6 million mobile data customers as of December 31, 2016, representing an increase of 10% primarily due to data network strengthening, increased penetration of smartphones and bundled offerings.
Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
Mobile revenue
Our 2016, our Uzbekistan total operating revenue decreased by 7% to US$663 million compared to US$711 million in 2015. In Uzbekistan, all of our tariff plans are denominated in U.S. dollars. In functional currency terms, our Uzbekistan total operating revenue increased by 8%, due to the depreciation of the Uzbek som. The decrease on a U.S. dollar basis, was primarily driven by a revamp of tariff plans by Unitel in order improve competitiveness in the new environment following the reentry of MTS to the market and the entry of a new operator, UzMobile. This was partially offset by increased fees derived from the termination of calls from other operators' networks and increased smartphone penetration and promotions.
Adjusted EBITDA
In 2016, our Uzbekistan Adjusted EBITDA decreased by 10% to US$395 million compared to US$437 million in 2015, primarily due to the decrease in revenue, as discussed above, and increased structural operating expenses. Structural operating expenses were affected by increased customer-based taxes, which doubled in 2016, and higher business costs. In functional currency terms, our Uzbekistan Adjusted EBITDA increased by 4% in 2016 compared to 2015 because of the devaluation of the Uzbek som.
Certain performance indicators
As of December 31, 2016, we had approximately 9.5 million mobile customers in our Uzbekistan segment, representing a decrease of 4% compared to approximately 9.9 million mobile customers as of
December 31, 2015. The decrease in our customer base in Uzbekistan was primarily due to the reentry of MTS to the market and the entry of a new operator, UzMobile.
In 2016, our mobile ARPU in Uzbekistan decreased by 1% to US$5.6 compared to US$5.7 in 2015. In functional currency terms, mobile ARPU in Uzbekistan increased by 13% to UZS16,664 in 2016 compared to UZS 14,709 in 2015 mainly because Beeline Uzbekistan price plans are denominated in U.S. dollars and the Uzbek som depreciated. We also had growth in mobile data revenue, driven by a higher data usage driven by increased smartphone penetration and promotions.
As of December 31, 2016, we had approximately 4.6 million mobile data customers in Uzbekistan compared to approximately 4.7 million mobile data customers as of December 31, 2015, representing a decrease of 2% primarily due to the reentry of MTS to the market and the entry of, UzMobile.
HQ
Our HQ Adjusted EBITDA increased by 23% to negative US$325 million in 2017, compared to negative US$421 million in 2016, primarily due to lower performance transformation costs and a one-off gain of $106 million recognized due to an adjustment to a vendor agreement.
Our HQ Adjusted EBITDA increased by US$870 million to negative US$421 million in 2016 compared to negative US$1,291 million in 2015, primarily due to the US$900 million provision with respect to agreements with the SEC, DOJ and OM, included in operating expenses for the year ended December 31, 2015, that was not included in our consolidated total operating expenses for 2016.
Further Information Regarding the Results of Operations of the Italy Joint Venture
We present below certain supplemental information regarding the results of operations of the Italy Joint Venture because we consider the Italy Joint Venture to be a significant part of our business. For more information on the financial presentation of the Italy Joint Venture, see "Explanatory Note—Presentation of Financial Information of the Italy Joint Venture" and notes 5, 14 and 25 to our audited consolidated financial statements.
The tables below set forth 100% of the financial data and certain performance indicators of the Italy Joint Venture for the years ended December 31, 2017 and 2016 and not only the 50% effective interest that is included in our consolidated financial statements through the equity method of accounting. For more information regarding each of the line items provided below, see the financial statements of the Italy Joint Venture, which we have filed in this Annual Report on Form 20-F pursuant to Rule 3-09 of Regulation S-X, "Exhibit 99.3—Consolidated financial statements of VIP-CKH Luxembourg S.à.r.l for the years ended December 31, 2017 and 2016" and the Notes thereto.
The financial data of the Italy Joint Venture presented below for the year ended December 31, 2016 consists of: (i) the sum of the results of our Historical WIND Business and H3G S.p.A. prior to the merger of the two businesses on November 5, 2016 and (ii) the Italy Joint Venture's results from November 5, 2016 to December 31, 2016. The annual financial data of the Italy Joint Venture presented below for the year ended December 31, 2016 is unaudited.
Results of operations in EUR
| | Year ended December 31, | | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | '16 - '17 | |||||||||
| | | 2016 (combined) | ||||||||
| in millions of EUR (except as indicated) | 2017 | % change | ||||||||
Revenue (service and CPE/HS) | 6,023 | 6,292 | (4.3 | )% | ||||||
Other revenue | 159 | 183 | (13.3 | )% | ||||||
Total revenue | 6,182 | 6,475 | (4.5 | )% | ||||||
EBITDA before integration costs | 2,211 | 2,184 | 1.2 | % | ||||||
Integration costs | (266 | ) | (60 | ) | — | |||||
EBITDA | 1,945 | 2,124 | (8.4 | )% | ||||||
Depreciation & amortization and reversal of impairment losses/(impairment losses) on non-current assets | (3,357 | ) | (3,301 | ) | (1.7 | )% | ||||
Gains (losses) on disposal of non current assets | (2.0 | ) | (1.7 | ) | 19.0 | % | ||||
EBIT | (1,414 | ) | (1,179 | ) | 19.9 | % | ||||
Finance income and foreign exchange gains/(losses), net | 121 | 489 | (75.2 | )% | ||||||
Finance expenses | (1,412 | ) | (619 | ) | — | |||||
EBT | (2,705 | ) | (1,309 | ) | — | |||||
Income Tax | 85 | (40 | ) | — | ||||||
Net Result | (2,620 | ) | (1,349 | ) | — | |||||
The following supplemental analysis of results of operations for the year ended December 31, 2017 compared to the year ended December 31, 2016 is presented to enhance readers' understanding of the results of operations of the Italy Joint Venture for the most recent fiscal year.
Revenue
The Italy Joint Venture's revenue decreased by 4% from EUR 6,292 million during the year ended December 31, 2016 to EUR 6,023 million during the year ended December 31, 2017, driven by a decrease in mobile service revenue and mobile consumer premises equipment ("CPE") revenue. The mobile service revenue decrease was primarily due to continuing aggressive competition in the market and the impact from the new EU roaming regulation. The mobile CPE revenue decrease was primarily due to lower volume of gross additions and a more selective mobile customer scoring.
Mobile internet revenue increased by 13% from EUR 1,329 million during the year ended December 31, 2016 to EUR 1,508 million during the year ended December 31, 2017, driven by a stable data customer base, data ARPU growth and an increase in data usage to approximately 3.5 GB per customer per month. Fixed-line service revenue in 2017 was broadly stable as compared to 2016.
EBITDA
EBITDA decreased by 8% from EUR 2,124 during the year ended December 31, 2016 to EUR 1,945 year-on-year in 2017 mainly due to the decrease in revenue and one-off integration costs of EUR 266 million, partially offset by operational synergies of EUR 167 million.
Depreciation & amortization
The Italy Joint Venture's depreciation and amortization increased from EUR 3,301 million for the year ended December 31, 2016 to EUR 3,357 million for the year ended December 31, 2017 primarily due to accelerated depreciation of network assets related to a network modernization project and to be offered to Iliad and the write-offs of divested frequencies in 2016.
Finance Income
Finance income decreased from EUR 489 million for the year ended December 31, 2016 to EUR 121 million for the year ended 31, 2017 primarily due to decreased positive derivatives fair market valuations as compared to 2016.
Finance expenses
Finance expenses increased from EUR 619 million for the year ended December 31, 2016 to EUR 1,412 million for the year ended December 31, 2017, primarily due to accrued interest on financial liabilities outstanding as of December 31, 2017 and expenses incurred in connection with a refinancing transaction, consisting of call premia and derivatives unwinding.
Certain Performance Indicators
The Italy Joint Venture's total mobile customers decreased by 5.8% from 31.3 million as of December 31, 2016 to 29.5 million as of December 31, 2017 due to continuing aggressive competition in the market, more selective mobile customer scoring and harmonization of customer base definition between the WIND and "3" brands.
Fixed-line ARPU increased slightly from EUR 27.6 per month during the year ended December 31, 2016 to EUR 27.9 per month during the year ended December 31, 2017, driven by broadband high value customer base growth.
Mobile ARPU and our fixed-line customer base were broadly stable in 2017 as compared to 2016.
Liquidity and Capital Resources
Working Capital
We define working capital as current assets less current liabilities. Our working capital is monitored on a regular basis by management. Our management expects positiveto repay our debt as it becomes due from our operating cash flows or through additional borrowings. Although we have a negative working capital, our management believes that our cash balances and available credit facilities are sufficient to meet our present requirements.
As of December 31, 2017, we had negative working capital of US$732 million, compared to negative working capital of US$2,007 million as of December 31, 2016. The change in our working capital as of December 31, 2017 compared to December 31, 2016 was primarily due to decreased current financial liabilities as a result of repayment of borrowings; decreased trade and other payables, primarily as a result of payment for long-term assets; increased other current financial assets as a result of cash collateral placed with Citibank N.A. New York in connection with the MTO that is restricted in use. This was partially offset by decreased cash and cash equivalents and increased other current liabilities.
As of December 31, 2016, we had negative working capital of US$2,007 million, compared to negative working capital of US$156 million as of December 31, 2015. The change in our working capital as of December 31, 2016 compared to December 31, 2015 was primarily due to increased current financial liabilities, mainly as a result of GTH Finance B.V.'s newly-issued senior notes; increased other liabilities, mainly due to the Pakistan Merger; decreased current financial assets, mainly due to maturing term deposits at banks; decreased cash and cash equivalents, mainly due to investments in property and equipment, and the utilization of income tax advances against current income tax liabilities. This was partially offset by the decreased provision with the respect to the agreements with the SEC, DOJ and OM, increased trade and other receivables and an increase in other assets, mainly due to the Warid consolidation.
Consolidated Cash Flow Summary
The following table shows our cash flows as of and for the years ended December 31, 2017, 2016 and 2015 (in millions of U.S. dollars):
| | As of and for the year ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2017 | 2016 | 2015 | |||||||
| | (in millions of U.S. dollars) | |||||||||
Cash flow data: | ||||||||||
Net cash from/(used in) operating activities | 2,475 | 1,875 | 2,033 | |||||||
from continued operations | 2,475 | 1,192 | 1,104 | |||||||
from discontinued operations | — | 683 | 929 | |||||||
Net cash from/(used in) investing activities | (3,016 | ) | (2,671 | ) | (2,634 | ) | ||||
| | | | | | | | | | | |
from continued operations | (3,016 | ) | (2,022 | ) | (2,494 | ) | ||||
from discontinued operations | — | (649 | ) | (140 | ) | |||||
| | | | | | | | | | | |
Net cash from/(used in) financing activities | (733 | ) | (126 | ) | (1,439 | ) | ||||
from continued operations | (733 | ) | (106 | ) | (732 | ) | ||||
from discontinued operations | — | (20 | ) | (707 | ) | |||||
| | | | | | | | | | | |
Operating activities
During 2017, net cash flows from operating activities increased to US$2,475 million from US$1,875 million in 2016. The increase in net cash flows from operating activities was primarily due to lower payments related to provisions, lower investment in working capital and increased operating profit, partially offset by no cash inflow from discontinued operations will continuein 2017 as compared to provide uspositive cash flow from discontinued operations in 2016.
During 2016, net cash flows from operating activities decreased to US$1,875 million from US$2,033 million in 2015 The decrease in net cash flows from operating activities was primarily due to higher payments for the provision for losses, higher investment in working capital and decreased cash flows from discontinued operations, partially offset by increased operating profit and lower income tax payment. The cash flow from our operating activities in 2016 was impacted primarily by the payment of US$795 million of fines and disgorgements in relation to agreements with internal sourcesthe SEC, DOJ and OM, related legal costs of funds.US$24 million as of December 31, 2016, and US$255 million cash outflow related to the performance transformation program. The availabilitycash flow from our operating activities in 2015 was impacted by the completion of external financing is difficultthe sale by GTH of a non-controlling 51% interest in OTA to predict because it depends on many factors, including the successFonds National d'Investissement, resulting in payments to the bank of Algeria of US$1.1 billion, payments to Cevital of US$50 million, and withholding tax of US$243 million related to the pre-closing dividend.
Investing activities
Our investing activities included payments related to the purchase of equipment, frequency permissions and licenses, capitalized customer acquisition costs, software and other assets as a part of the ongoing development of our operations, contractual restrictions, availability of guarantees from export credit agencies, the financial position of internationalmobile networks and local banks, the willingness of international banks to lendfixed-line business. For information regarding our acquisitions and dispositions, see Note 5 to our companiesaudited consolidated financial statements.
During 2017, our total payments for purchases of property and equipment, intangible assets, software and other assets were US$2,037 million compared to US$1,651 million during 2016. The increase was primarily due to increased capital expenditures in Pakistan as a result of full year consolidation of Warid, partially offset by decreased capital expenditures in Uzbekistan, Algeria and HQ. No cash flow from investing activities from discontinued operation was recorded in 2017. In addition, a cash balance of US$987 million was pledged as collateral for the MTO for the purchase of
shares of GTH. For further details, see "Item 4—Information on the Company—Overview—Recent Developments—VEON Holdings B.V. submits cash tender offer in relation to GTH" and to the Notes 5 and 17 to our audited consolidated financial statements.
During 2016, our total payments for purchases of property and equipment, intangible assets, software and other assets were approximately US$1,651 million compared to US$2,207 million during 2015. The decrease was primarily due to decreased capital expenditures in Russia, functional currency depreciation against the U.S. dollar in Ukraine and decreased capital expenditures in Pakistan due to network modernization completed in 2015. This decrease was partially offset by prepayments for inventory made in Uzbekistan. In addition, we recorded a decrease from the disposal of discontinued operations of US$325 million, we received US$19 million from bank deposit accounts, paid US$87 million for purchased financial assets and recorded US$649 million of cash outflows from discontinued operations during 2016. The cash flow from our investing activities in 2015 was impacted primarily by cash capital expenditures driven network investments, cash receipts from investments in financial assets, a deposit of US$361 million with financial institutions and US$140 million of cash outflows from discontinued operations.
Financing activities
During 2017, we repaid US$5,948 million of indebtedness and raised approximately US$6,193 million. As of December 31, 2017, the principal amounts of our external indebtedness for bank loans, bonds, equipment financing and loans from others amounted to US$11.1 billion, compared to US$10.5 billion as of December 31, 2016. The increase in the principal amounts of our external indebtedness is mainly the result of foreign exchange revaluation, GTH share buyback and premiums paid to repurchase our bonds.
During 2016, we repaid approximately US$1,816 million of indebtedness and raised approximately US$1,882 million. As of December 31, 2016, the principal amounts of our external indebtedness for bank loans, bonds, equipment financing and loans from others amounted to approximately US$10.5 billion, compared to US$9.5 billion as of December 31, 2015. The increase in the principal amounts of our external indebtedness is mainly the result of the issuance of US$1.2 billion of bonds by GTH Finance B.V.
During 2015, we repaid approximately US$4,840 million of indebtedness and raised approximately US$2,052 million. As of December 31, 2015, the principal amounts of our external indebtedness for bank loans, bonds, equipment financing, and loans from others amounted to approximately US$9.5 billion.
The following table provides a summary of our outstanding indebtedness with an outstanding principal balance as of December 31, 2017 and 2016.
| | | | | | | Principal amount outstanding (in millions of US$) | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Borrower | Type of debt | Guarantor | Currency | Interest rate | Maturity | 2017 | 2016 | ||||||||||
VEON Holdings | Loans | None | RUB | 8.75% - 10.0% | 2022 | 2,474 | — | ||||||||||
VEON Holdings | Notes | 2016: PJSC VimpelCom 2017: None | US$ | 5.2% - 5.95% | 2019 - 2023 | 1,554 | 1,554 | ||||||||||
VEON Holdings | Notes | None | US$ | 3,95% - 4,95% | 2021 - 2024 | 1,500 | — | ||||||||||
VEON Holdings | Loans | None | EUR | 3mEURIBOR + 1.9% - 2.75% | 2022 | 752 | — | ||||||||||
VEON Holdings | Notes | PJSC VimpelCom | US$ | 7.5% | 2022 | 628 | 1,629 | ||||||||||
VEON Holdings | Syndicated loan (RCF) | None | US$ | 1mLIBOR + 2.25% | 2018 | 250 | — | ||||||||||
VIP Finance Ireland | Eurobonds | None | US$ | 7.748% - 9.1% | 2018 - 2021 | 543 | 1,150 | ||||||||||
VEON Holdings | Notes | None | RUB | 9.0% | 2018 | 208 | 198 | ||||||||||
GTH Finance B.V. | Notes | VEON Holdings B.V. | US$ | 6.25% - 7.25% | 2020 - 2023 | 1,200 | 1,200 | ||||||||||
PMCL | Loans | None | PKR | 6mKIBOR + 0.35% - 0.8% | 2020 - 2022 | 379 | 166 | ||||||||||
PMCL | Loan | Exportkreditnämnden (The Swedish Export Credit Agency) | US$ | 6mLIBOR + 1.9% | 2020 | 212 | 231 | ||||||||||
Banglalink Digital Communications Ltd. | Senior Notes | None | US$ | 8.6% | 2019 | 300 | 300 | ||||||||||
Omnium Telecom Algeria SpA | Syndicated loan | None | DZD | Bank of Algeria re-discount rate + 2.0% | 2019 | — | 340 | ||||||||||
VEON Amsterdam | Loan | None | US$ | 1mLIBOR + 3.3% | 2017 | — | 1,000 | ||||||||||
PJSC VimpelCom | Loan | None | RUB | 12.75% | 2017 - 2018 | — | 1,021 | ||||||||||
PJSC VimpelCom | Ruble Bonds | None | RUB | 10.0% - 11.9% | 2017 | 19 | 660 | ||||||||||
| Other loans | 1,084 | 1,040 | |||||||||||||||
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| Total bank loans and bonds | 11,103 | 10,489 | |||||||||||||||
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Many of the agreements relating to this indebtedness contain various covenants, including financial covenants relating to our financial performance or financial condition, as well as negative pledges, compliance with laws requirements, and restrictions on mergers, acquisitions and certain asset disposals. In addition, certain of these agreements subject certain of our subsidiaries to restrictions on their ability to pay dividends, make loans or repay debts to us. Our financing agreements have various customary events of default which can be triggered by events including non-payment, breach of applicable covenants, loss of certain mobile licenses, non-payment cross-default, cross-acceleration, certain judgment defaults, certain material adverse events and certain insolvency events. Some of our financing agreements also contain "change of control" provisions that may allow the lenders to cancel the facility and/or to require us to make a prepayment if a person or group of persons (with limited exclusions) acquire beneficial or legal ownership of, or control over more than 50.0% of, the voting share capital, or in certain cases of VEON Ltd., ceases to control more than 50.0% of the borrower's voting share capital.
For additional information on our outstanding indebtedness, see Note 17 to our audited consolidated financial statements. For information relating to our financing activities in 2017, and the liquidityperiod subsequent to December 31, 2017, see Note 17 and Note 27, respectively, to our audited consolidated financial statements. For a description of international and local capital markets. The actual amountsome of debt financing that we will need to raise will be influenced bythe risks associated with certain of our financing needs, the actual pace of traffic growth over the period, network construction, our acquisition plans and our ability to continue revenue growth and stabilize ARPU. For related risks,indebtedness, see “Item"Item 3—Key Information—D. Risk Factors—Risks Related to Our Business—Substantial leverageamounts of indebtedness and debt service obligations could materially decrease our cash flow, adversely affect our business and financial condition and prevent us from raising additional capital,” and “—We may not be able to raise additional capital.”"
Cash and Deposits Subject to Currency and Contractual ObligationsRestrictions
As of December 31, 2014, we had2017, our cash and deposit balances were equal to US$1,374 million. US$444 million (32% of total group cash and deposits) were denominated in U.S. dollars and approximately 55% of the following contractual obligations, including long-term debt arrangements, equipment financing, capital leases,U.S. dollar denominated cash was held in VEON's headquarter entities.
In addition, as of December 31, 2017, funds worth US$987 million were pledged as a collateral for the MTO by VEON Holdings B.V. and commitments for future paymentstherefore classified as restricted funds under non-cancellable lease arrangementsother financial assets. For further details, see "Item 4—Information on the Company—Overview—Recent Developments—VEON Holdings B.V. submits cash tender offer in relation to GTH" and purchase obligations. We expect to meet our payment requirements under these obligations with cash flows from our operationsthe Notes 5 and other financing arrangements. For information relating17 to our outstanding indebtedness subsequentaudited consolidated financial statements.
On September 2, 2017, the Government of Uzbekistan announced the liberalization of currency exchange rules, effective from September 5, 2017. The Central Bank of Uzbekistan set the official exchange rate of 8,100 Uzbek som per U.S. dollar, which represented nearly a halving of the value of the Uzbek som to the U.S. dollar. On December 31, 2014, see “—Financing Activities” above.
| Payments due by period (in millions of U.S. dollars) | ||||||||||||||||||||
| Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | ||||||||||||||||
Contractual Obligations(1) | ||||||||||||||||||||
Bank loans and bonds(2) | 32,650 | 3,947 | 6,355 | 6,835 | 15,513 | |||||||||||||||
Equipment financing(2) | 1,135 | 290 | 386 | 275 | 184 | |||||||||||||||
Loans from others(2) | 652 | 149 | 156 | 34 | 313 | |||||||||||||||
Non-cancellable lease obligations | 774 | 209 | 223 | 142 | 200 | |||||||||||||||
Purchase obligations(3) | 691 | 691 | — | — | — | |||||||||||||||
Other long-term liabilities | 1 | 1 | — | — | — | |||||||||||||||
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Total | 35,903 | 5,287 | 7,120 | 7,286 | 16,210 | |||||||||||||||
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Other than the debt obligations described above under “—Financing Activities,” we have not had any material changes outside the ordinary coursesuccessfully repatriated a net amount of our business in the specified contractual obligations.approximately US$200 million from Unitel.
Certain For more information about the currency restrictions in our countries of operation, see "—Factors Affecting OurComparability of Financial Position and Results of Operations
Our financial positionOperations—Foreign Currency Controls and results of operations for the three years ended December 31, 2014 as reflected inCurrency Restrictions" and Notes 18 and 26 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 20-F have been influenced by the following additional factors:
Inflationstatements.
Russia has experienced periods For a description of high levelscertain risks associated with restrictions in our countries of inflation since the early 1990s. Please alsooperation relating to our ability to pay dividends, make loans or repay debts, see “Item"Item 3—Key Information—D. Risk Factors—Risks Related to Our Markets—Sustained periodsBusiness—We are exposed to foreign currency exchange loss and currency fluctuation and translation risks," "Item 3—Key Information—D. Risk Factors—Risks Related to Our Business—As a holding company, VEON Ltd. depends on the performance of high inflationits subsidiaries and their ability to pay dividends, and may materially harm our business.” Inflation affectstherefore be affected by changes in exchange controls and currency restrictions in the purchasing powercountries in which its subsidiaries operate" and "Item 3—Key Information—D. Risk Factors—Risks Related to Our Markets—The banking systems in many countries in which we operate remain underdeveloped, there are a limited number of creditworthy banks in these countries with which we can conduct business and currency control requirements restrict activities in certain markets in which we have operations."
Earnings Subject to Indefinite Investment
During 2017, we recorded a deferred tax liability of US$116 million relating to the tax effect of our mass market customers,undistributed profits that will be distributed in the foreseeable future, primarily in relation to our Russian, Algerian and Pakistani operations. The undistributed earnings of our foreign subsidiaries (outside the Netherlands) which are indefinitely invested and will not be distributed in the foreseeable future, amounted to approximately US$6,833 million as well as corporate clients. For the years endedof December 31, 2014, 2013 and 2012, Russia’s inflation rates were 11.4%, 6.5% and 6.6% respectively, as provided by the Russian Federal State Statistics Service.2017. For Italy, inflation was-0.1%, 0.6% and 2.4% for the years ended December 31, 2014, 2013 and 2012 respectively, as provided by the Italian National Institute for Statistics. For the years ended December 31, 2014 (except otherwise stated), 2013 and 2012, inflation rates in Ukraine were 24.9%, 0.5% and -0.2% respectively, as provided by the State Statistics Committee of Ukraine, in Kazakhstan 7.4%, 4.8% and 6.0% respectively, as provided by the Agency of Statistics of the Republic of Kazakhstan, in Uzbekistan 11.0%, 10.2% and 10.4% respectively, as provided by the
International Monetary Fund, in Armenia 4.6%, 5.6% and 3.2% respectively, as provided by the National Statistical Service of the Republic of Armenia, in Tajikistan were 8.4%, 3.7% and 6.4% respectively, as provided by the International Monetary Fund, in Georgia were 2.0%, 2.4% and -1.4% respectively, as provided by the Ministry of Economic Development of the Republic of Georgia, in Kyrgyzstan 7.4% (September 30, 2014), 4.0% and 7.5% respectively, as provided by the International Monetary Fund, in Algeria were 5.3%, 1.2% and 9.1% respectively, as provided by the Central Bank of Algeria, in Pakistan were 4.3%, 9.2% and 7.9% respectively, as provided by the Pakistan Bureau of Statistics, in Bangladesh were 6.1%, 7.4% and 7.1% respectively, as provided by the Central Bank of Bangladesh, and in Laos were 3.1% (September 30, 2014), 6.6% and 4.7% respectively, as provided by the International Monetary Fund.more information, see Note 12 to our audited consolidated financial statements.
Recent Accounting Pronouncements VEON Ltd. is required to adopt the new accounting standards IFRS 9 Financial Instruments and IFRS 15 Revenue from Contracts with Customers, effective from January 1, 2018, and IFRS 16 Leases, effective for the financial years from January 1, 2019. The transitional impacts on total equity upon adoption of IFRS 9 and IFRS 15 as of January 1, 2018 are expected to result in a decrease of US$48 million and an increase of US$99 million, respectively. We have yet to assess the impact of IFRS 16, which may be material, to the consolidated income statement and consolidated financial position upon adoption in 2019. Such impact is under analysis as of the date of this Annual Report on Form 20-F. For discussion on the impact this could have on our operations, see "Item 3—Key Information—D. Risk Factors—Risks Related to Our Business—Adoption of new accounting standards could affect reported results and financial position." See Note 3 to our audited consolidated financial statements for a discussion of new accounting pronouncements not yet adopted by the company. Reportable Segments We present our reportable segments based on economic environments and stages of development in different geographical areas, requiring different investment and marketing strategies. As of December 31, 2017, our reportable segments consist of the eight following segments: Russia, Pakistan, Algeria, Bangladesh, Ukraine, Uzbekistan, the Italy Joint Venture and HQ (transactions related to management activities within the group in Amsterdam and London). Since January 1, 2017, management has also included The "Others" category is not a reportable segment but only a reconciling between our eight reportable segments and our total revenue and Adjusted EBITDA. "Others" represents our operations in Key Developments and Trends The following key developments and trends reflect management's assessment of factors which are anticipated to have a material effect on the company's financial condition and results of operations. For a list of most important recent events in the development of our business, see "Item 4—Information on the Company—Overview—Key Developments." Customer and revenue growth In 2017, our total operating revenue excluding currency impact increased by 4% while our mobile customer base increased 1% to 210.5 million as of December 31, 2017, compared to 207.5 million as of December 31, 2016. In 2018, we expect to continue to face challenging macroeconomic environments, particularly in Algeria, and intense competition in our markets. Nonetheless, despite very high penetration rates throughout our markets, we continue to see opportunities for revenue growth and to expand our customer base from increasing usage of data, content and other value added services. VEON and GTH sell their Pakistan tower business for US$940 million On August 30, 2017, VEON and GTH announced that their subsidiary in Pakistan, Jazz, signed an agreement for the sale of its tower business, with Impact of currency In September 2017, the government of Uzbekistan announced the liberalization of its currency exchange rules and the resetting of the official exchange rate at 8,100 Uzbek som per U.S. dollar, which represented nearly a halving of the value of the Uzbek som to the U.S. New Group CFO and CEO of Russia On September 15, 2017, the company announced that Trond Westlie would be joining VEON as Group Chief Financial Officer and that VEON's current Group CFO, Andrew Davies, decided to step down from his role after four successful years. Mr. Westlie is Vasyl Latsanych was Foreign Currency Translationelsewherethe Italy Joint Venture as a reportable segment due to its increased contribution to our overall financial results and position. We do not control the Italy Joint Venture and therefore account for the Italy Joint Venture using the equity method and do not fully consolidate its results into our financial statements. See "—Further Information Regarding the Results of Operations of the Italy Joint Venture" for certain limited financial information regarding the results of operations of the Italy Joint Venture, which we present because we consider the Italy Joint Venture to be a significant part of our business. For the financial statements of the Italy Joint Venture we have filed in this Annual Report on Form 20-F are presented in U.S. dollars. Amounts included in thesepursuant to Rule 3-09 of Regulation S-X, see "Exhibit 99.3—Consolidated financial statements were presentedof VIP-CKH Luxembourg S.à.r.l for the years ended December 31, 2017 and 2016." For more information on the financial presentation of the Italy Joint Venture, see "Explanatory Note—Presentation of Financial Information of the Italy Joint Venture" and notes 5, 14 and 25 to our audited consolidated financial statements.accordanceKazakhstan, Kyrgyzstan, Armenia, Tajikistan, Georgia and Laos as well as intercompany eliminations and costs relating to centrally managed operations monitored outside of VEON's headquarters. In October 2017, VEON announced the sale of its operations in Laos to the Government of the Lao People's Democratic Republic. Transfer of ownership of VEON's operations in Laos is subject to the satisfaction of certain conditions, including receipt of necessary corporate and regulatory approvals, and is expected to complete in 2018.IAS21,a portfolio of approximately 13,000 telecommunications towers, for approximately US$940 million, subject to certain adjustments, to Tanzanite Tower Private Limited, a tower operating company owned by edotco Group Sdn. Bhd. and Dawood Hercules Corporation. The Effectscompletion of Changes in Foreign Exchange Rates, using the current rate methodtransaction is subject to the satisfaction or waiver of certain conditions including receipt of customary regulatory approvals.translation withregime developments in Uzbekistandollar asdollar. On December 22, 2017, VEON announced that its subsidiary, PJSC VimpelCom, had successfully repatriated a net amount of approximately US$200 million from Unitel. The currency conversion to US$200 million resulted in a foreign currency exchange loss of approximately US$49 million. In addition, the reporting currency. The current rate method assumes that assets and liabilities measured in the functional currencyUzbek som results of Unitel are now being translated into U.S. dollars at a higher exchange rates prevailing on the balance sheet date; whereas revenue, expenses, gains and losses are translated into U.S. dollars at historical exchange rates prevailing on the transaction dates. We translate income statement amounts using the average exchange rates for the period. Translation adjustments resulting from the process of translating financial statements into U.S. dollars are reported in accumulated other comprehensive income, a separate component of equity.rate.The national currency During 2017 and 2018, we had changes to the composition of Russiaour board and to the group's key management roles.the Russian ruble. We have determined that the functional currency for Russia is the Russian ruble. Asan experienced financial executive having been CFO of December 31,AP Moller-Maersk from 2010 to 2016 and CFO of Telenor ASA from 2005 to 2009. He previously served as a member of VEON's supervisory board and chairman of our audit and risk committee between July 2014 2013 and 2012, the official Central Bank of Russia Russian ruble-U.S. dollar exchange rates were 56.26, 32.73August 2016. Mr. Westlie joined VEON on October 2, 2017 and 30.37 Russian rubles per U.S. dollar, respectively. During 2014, the average Russian ruble-U.S. dollar exchange rate was 20.6% higher than the average Russian ruble-U.S. dollar exchange rate during 2013. The increaseassumed his duties as CFO on November 9, 2017. Mr. Davies will continue as a board member of the average Russian ruble-U.S. dollar exchange rate during 2014 compared to 2013 is limited by the fact that the large part of the Russian ruble depreciation against the U.S. dollar occurred in the fourth quarter of 2014, during which period the Russian ruble depreciated 42.8% against the U.S. dollar. During 2013, the average Russian ruble-U.S. dollar exchange rateItaly Joint Venture.2.4 % higher than the average Russian ruble-U.S. dollar exchange rate during 2012.ItalyWe have determined that the functional currency of WIND Italy is the Euro. As of December 31, 2014, 2013 and 2012, the Euro-U.S. dollar exchange rate was 0.83, 0.73 and 0.76 Euro per U.S. dollar respectively,appointed as provided by Bloomberg Finance L.P. During 2014 the average Euro-U.S. dollar exchange rate was 0.1% higher than the average Euro-U.S. dollar exchange rate during 2013. During 2013 the average Euro-U.S. dollar exchange rate was 3.2% lower than the average Euro-U.S. dollar exchange rate during 2012.UkraineThe national currency of Ukraine is the Ukrainian hryvnia. We have determined that the functional currencyChief Executive Officer of our subsidiaryRussian operations, PJSC VimpelCom, effective January 10, 2018. Vasyl spent over 16 years in Ukraine istelecoms, most of which was with the Ukrainian hryvnia,MTS Group in a number of senior roles. His most recent role was as it reflects the economic substance of the underlying eventsGroup Vice President for Strategy and circumstances of the company. The Ukrainian hryvnia is notMarketing, where he was responsible for MTS's commercial and strategic initiatives and led a convertible currency outside Ukraine. As of December 31, 2014, 2013 and 2012, the official National Bank of Ukraine hryvnia-U.S. dollar exchange rates were 15.77, 7.99 and 7.99 Ukrainian hryvnia per U.S. dollar, respectively. During 2014 the average Ukrainian hryvnia-U.S. dollar NBU exchange rate was 49.0% higher than the average Ukrainian hryvnia-U.S. dollar NBU exchange rate during 2013. During 2013 the average Ukrainian hryvnia-U.S. dollar NBU exchange rate was 0.0% higher than the average Ukrainian hryvnia-U.S. dollar NBU exchange rate during 2012.
AlgeriaVEON to sell Laos operations
The national currency of Algeria is the Algerian dinar. As of December 31, 2014, 2013 and 2012, the Algerian dinar-U.S. dollar exchange rate was 87.92, 78.38 and 78.94 Algerian dinar per U.S. dollar respectively, as provided by Bloomberg Finance L.P. During 2014, the average Algerian dinar-U.S. dollar exchange rate was 1.2% higher than the average Algerian dinar-U.S. dollar exchange rate during 2013. During 2013, the average Algerian dinar-U.S. dollar exchange rate was 2.3% higher than the average Algerian dinar-U.S. dollar exchange rate during 2012.
Africa & Asia
Pakistan
The national currency of Pakistan is the Pakistani rupee. As of December 31, 2014, 2013 and 2012 the Pakistani rupee-U.S. dollar exchange rate was 100.52, 105.33 and 97.14 Pakistani rupee per U.S. dollar respectively, as provided by Bloomberg Finance L.P. During 2014 the average Pakistani rupee-U.S. dollar exchange rate was 0.5 % lower than the average Pakistani rupee-U.S. dollar exchange rate during 2013. During 2013 the average Pakistani rupee-U.S. dollar exchange rate was 8.8 % higher than the average Pakistani rupee-U.S. dollar exchange rate during 2012.
Bangladesh
The national currency of Bangladesh is the Bangladeshi taka. As of December 31, 2014, 2013 and 2012, the Bangladeshi taka-U.S. dollar exchange rate was 77.93, 77.67 and 79.78 Bangladeshi taka per U.S. dollar respectively, as provided by Bloomberg Finance L.P. During 2014 the average Bangladeshi taka-U.S. dollar exchange rate was 0.7 % lower than the average Bangladeshi taka-U.S. dollar exchange rate during 2013. During 2013 the average Bangladeshi taka-U.S. dollar exchange rate was 4.6 % lower than the average Bangladeshi taka-U.S. dollar exchange rate during 2012.
CIS
Kazakhstan
The national currency of the Republic of Kazakhstan is the Kazakh tenge. We have determined that the functional currency of our On October 27, 2017, VimpelCom Laos, a subsidiary in Kazakhstan is the Kazakh tenge, as it reflects the economic substance of the underlying events and circumstances of the company. The Kazakh tenge is not a convertible currency outside Kazakhstan. As of December 31, 2014, 2013 and 2012, the official National Bank of Kazakhstan tenge-U.S. dollar exchange rates were 182.35, 153.61 and 150.74 Kazakh tenge per U.S. dollar, respectively. During 2014 the average Kazakh tenge-U.S. dollar exchange rate was 17.7% higher than the average Kazakh tenge-U.S. dollar exchange rate during 2013. During 2013 the average Kazakh tenge-U.S. dollar exchange rate was 2.0% higher than the average Kazakh tenge-U.S. dollar exchange rate during 2012.
Uzbekistan
The national currency of Uzbekistan is the Uzbek som. Historically the functional currency of our operations in Uzbekistan has been the U.S. dollar as opposed to the Uzbek som. During 2014, we concluded that the Uzbek som should be the functional currency for Uzbekistan as it more clearly reflects the economic substance of the underlying events and circumstances of the company. The change did not have material impact on our operations. The Uzbek som is not a convertible currency outside Uzbekistan. As of December 31, 2014, 2013 and 2012, the official Central Bank of the Republic of Uzbekistan som-U.S. dollar exchange rates were 2,422.40, 2,202.20 and 1,984.00 Uzbek som per U.S. dollar, respectively. During 2014 the average Uzbek som-U.S. dollar exchange rate was 10.3% higher than the average Uzbek som-U.S. dollar exchange rate during 2013. During 2013 the average Uzbek som-U.S. dollar exchange rate was 10.9% higher than the average Uzbek som-U.S. dollar exchange rate during 2012.
Tajikistan
The national currency of Tajikistan is the Tajik somoni. The Tajik somoni is not a convertible currency outside Tajikistan. We have determined that the functional currency of our subsidiary in Tajikistan is the U.S. dollar, as it reflects the economic substance of the underlying events and circumstances of the company, becauseentered into a sale and purchase agreement for the company generates mostsale of its revenue from international traffic termination whichoperations in Laos to the Government of Laos. Under the agreement, VimpelCom Laos will transfer its 78% interest in VimpelCom Lao Co. Limited to the Government of Laos, the minority shareholder, in exchange for purchase consideration of US$22 million. The transaction is pricedsubject to customary closing conditions and paidis expected to be completed in the U.S. dollars. In addition substantial partfirst half of capital expenditures is purchased from international suppliers2018.
Factors Affecting Comparability of Financial Position and priced and paid in the U.S. dollars.Results of Operations
Armenia
The national currency of Armenia is the Armenian dram. We have determined that the functional currencycomparability of our subsidiary in Armeniafinancial position and results among the periods presented below is the Armenian dram, as it reflects the economic substance of the underlying events and circumstances of the company. The Armenian dram is not a convertible currency outside Armenia. As of December 31, 2014, 2013 and 2012, the official Central Bank of Armenia Armenian dram—U.S. dollar exchange rates were 474,97, 405.64 and 403.58 Armenian drams per U.S. dollar, respectively. During 2014 the average Armenian dram-U.S. dollar exchange rate was 1.5% higher than the average Armenian dram—U.S. dollar exchange rate during 2013. During 2013 the average Armenian dram-U.S. dollar exchange rate was 1.9% higher than the average Armenian dram—U.S. dollar exchange rate during 2012.
Georgia
The national currency of Georgia is the Georgian lari. We have determined that the functional currency of our subsidiary in Georgia is the Georgian lari, as it reflects the economic substance of the underlying events and circumstances of the company. The Georgian lari is not a convertible currency outside Georgia. As of December 31, 2014, 2013 and 2012, the official National Bank of Georgia Georgian lari-U.S. dollar exchange rates were 1.86, 1.74 and 1.66 lari per U.S. dollar, respectively. During 2014, the average Georgian lari-U.S. dollar exchange rate was 6.2% higher than the average Georgian lari-U.S. dollar exchange rate during 2013. During 2013, the average Georgian lari-U.S. dollar exchange rate was 0.7% higher than the average Georgian lari-U.S. dollar exchange rate during 2012.
Kyrgyzstan
The national currency of Kyrgyzstan is the Kyrgyz som. We have determined that the functional currency of our subsidiary in Kyrgyzstan is the Kyrgyz som, as it reflects the economic substance of the underlying events and circumstances of the company. The Kyrgyz som is not a convertible currency outside Kyrgyzstan. As of December 31, 2014, 2013 and 2012, the official National Bank of the Kyrgyz Republic Kyrgyz som-U.S. dollar exchange rate were 58.89, 49.25 and 47.40 som per U.S. dollar, respectively. During 2014, the average Kyrgyz som-U.S. dollar exchange rate was 10.8% higher than the average Kyrgyz som-U.S. dollar exchange rate during 2013. During 2013, the average Kyrgyz som-U.S. dollar exchange rate was 3.1% higher than the average Kyrgyz som-U.S. dollar exchange rate during 2012.
Conversion of foreign currencies that are not convertible outside the applicable country to U.S. dollars or other foreign currency should not be construed as a representation that such currency amounts have been, could be, or will be in the future, convertible into U.S. dollars or other foreign currency at the exchange rate shown, or at any other exchange rates.
We have implementedaffected by a number of risk management activities to minimize currency riskfactors. Our financial position and exposureresults of operations for the three years ended December 31, 2017 as reflected in certain of the countriesour audited consolidated financial statements included in which we operate, as further described in the section of this Annual Report on Form 20-F entitled “Item 11—Quantitativehave been influenced by various factors, including those listed below. For a discussion of the key developments and Qualitative Disclosures About Market Risk.”trends, commitments or events that are likely to have a material effect on our results of operation for the current financial year, see "—Key Developments and Trends." We may also be subject to certain fines or compliance costs that are paid and accounted for in a particular fiscal year in connection with certain legal or administrative proceedings. For more information on the regulatory environment in which we operate, see "Exhibit 99.2—Regulation of Telecommunications."
Critical Accounting PoliciesTable of Contents
Please refer toPakistan Merger and Other Acquisitions and Dispositions
We do not provide comparable financial information for periods preceding the date on which we acquired, consolidated or commenced operations in a particular country or segment, or following the date of disposal unless required by IFRS. In general, our selected operating and financial data, audited consolidated financial statements and related notes 3 and 4the following discussion and analysis reflect the contribution of the operators we acquired from their respective dates of acquisition or consolidation and therefore such acquisitions affect the comparability of data between periods.
For example, the acquisition of 100% of Warid's voting shares by our subsidiary, GTH, and our subsequent consolidation of Warid's financials starting from July 1, 2016 has a particularly strong impact on comparability. For more information regarding our acquisitions and dispositions, see Note 5 to our audited consolidated financial statements included elsewhereincorporated herein.
Economic Trends
As a global telecommunications company with operations in this Annual Report on Form 20-F.a number of markets, we are affected by a broad range of international economic developments. Unfavorable economic conditions may impact a significant number of our customers, including their spending patterns, both in terms of the products they subscribe for and usage levels. As a result, it may be more difficult for us to attract new customers, more likely that customers will downgrade or disconnect their services and more difficult for us to maintain ARPUs at existing levels. The current difficult economic environment and any future downturns in the economies of markets in which we operate or may operate in the future could also, among other things, increase our costs, prevent us from executing our strategies, hurt our liquidity or to meet unexpected financial requirements. For more information regarding economic trends and how they affect our operations, see "Item 3—Key Information—D. Risk Factors—Risks Related to Our Markets—The international economic environment could cause our business to decline."
Inflation
Inflation affects the purchasing power of our mass market customers, as well as corporate clients. The Russian, Ukrainian, Kazakh, Uzbek and Algerian currencies, for example, have experienced significant inflation levels in recent years, which has caused the relative values of those currencies to decline. Although the inflation rates have broadly stabilized, economic and political developments may cause inflation rates to rise once again.
The table below shows the inflation rates for the years ended December 31, 2017, 2016 and 2015, and the source of the inflation rates.
| | December 31, | | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
Country | 2017 | 2016 | 2015 | Source | |||||||
Russia | 2.5 | % | 5.4 | % | 12.9 | % | The Russian Federal State Statistics Service | ||||
Pakistan | 4.6 | % | 3.7 | % | 3.2 | % | The Pakistan Bureau of Statistics | ||||
Algeria | 4.6 | % | 7.0 | % | 4.4 | % | The National Statistics Office of Algeria | ||||
Bangladesh | 5.8 | % | 5.0 | % | 6.1 | % | The Central Bank of Bangladesh | ||||
Ukraine | 13.7 | % | 12.4 | % | 43.3 | % | The State Statistics Committee of Ukraine | ||||
Uzbekistan | 12.7% | (1) | 8.0 | % | 9.1 | % | The International Monetary Fund | ||||
Recent Accounting Pronouncements Reportable Segments We present our reportable segments based on economic environments and stages of development in different geographical areas, requiring different investment and marketing strategies. As of December 31, 2017, our reportable segments consist of the eight following segments: Russia, Pakistan, Algeria, Bangladesh, Ukraine, Uzbekistan, the Italy Joint Venture and HQ (transactions related to management activities within the group in Amsterdam and London). Since January 1, 2017, management has also included The "Others" category is not a reportable segment but only a reconciling between our eight reportable segments and our total revenue and Adjusted EBITDA. "Others" represents our operations in Kazakhstan, Kyrgyzstan, Armenia, Tajikistan, Georgia and Laos as well as intercompany eliminations and costs relating to centrally managed operations monitored outside of VEON's headquarters. In October 2017, VEON announced the sale of its operations in Laos to the Government of the Lao People's Democratic Republic. Transfer of ownership of VEON's operations in Laos is subject to the satisfaction of certain conditions, including receipt of necessary corporate and regulatory approvals, and is expected to complete in 2018. Customer and revenue growth In 2017, our total operating revenue excluding currency impact increased by 4% while our mobile customer base increased 1% to 210.5 million as of December 31, 2017, compared to 207.5 million as of December 31, 2016. In 2018, we expect to continue to face challenging macroeconomic environments, particularly in Algeria, and intense competition in our markets. Nonetheless, despite very high penetration rates throughout our markets, we continue to see opportunities for revenue growth and to expand our customer base from increasing usage of data, content and other value added services. VEON and GTH sell their Pakistan tower business for US$940 million On August 30, 2017, VEON and GTH announced that their subsidiary in Pakistan, Jazz, signed an agreement for the sale of its tower business, with a portfolio of approximately 13,000 telecommunications towers, for approximately US$940 million, subject to certain adjustments, to Tanzanite Tower Private Limited, a tower operating company owned by edotco Group Sdn. Bhd. and Dawood Hercules Corporation. The completion of the transaction is subject to the satisfaction or waiver of certain conditions including receipt of customary regulatory approvals. Impact of currency regime developments in Uzbekistan In September 2017, the government of Uzbekistan announced the liberalization of its currency exchange rules and the resetting of the official exchange rate at 8,100 Uzbek som per U.S. dollar, which represented nearly a halving of the value of the Uzbek som to the U.S. dollar. On December 22, 2017, VEON announced that its subsidiary, PJSC VimpelCom, had successfully repatriated a net amount of approximately US$200 million from Unitel. The currency conversion to US$200 million resulted in a foreign currency exchange loss of approximately US$49 million. In addition, the Uzbek som results of Unitel are now being translated into U.S. dollars at a higher exchange rate. New Group CFO and CEO of Russia During 2017 and 2018, we had changes to the composition of our board and to the group's key management roles. On September 15, 2017, the company announced that Trond Westlie would be joining VEON as Group Chief Financial Officer and that VEON's current Group CFO, Andrew Davies, decided to step down from his role after four successful years. Mr. Westlie is an experienced financial executive having been CFO of AP Moller-Maersk from 2010 to 2016 and CFO of Telenor ASA from 2005 to 2009. He previously served as a member of VEON's supervisory board and chairman of our audit and risk committee between July 2014 and August 2016. Mr. Westlie joined VEON on October 2, 2017 and assumed his duties as CFO on November 9, 2017. Mr. Davies will continue as a board member of the Italy Joint Venture. Vasyl Latsanych was appointed as Chief Executive Officer of our Russian operations, PJSC VimpelCom, effective January 10, 2018. Vasyl spent over 16 years in telecoms, most of which was with the MTS Group in a number of senior roles. His most recent role was as Group Vice President for Strategy and Marketing, where he was responsible for MTS's commercial and strategic initiatives and led a significant customer experience transformation, as well as digital development. VEON to sell Laos operations On October 27, 2017, VimpelCom Laos, a subsidiary of the company, entered into Factors Affecting Comparability of Financial Position and Results of Operations The comparability of our financial position and results among the periods presented below is affected by a number of factors. Our financial position and results of operations for the three years ended December 31, 2017 as reflected in our audited consolidated financial statements included in this Annual Report on Form 20-F We do not provide comparable financial information for periods preceding the date on which we acquired, consolidated or commenced operations in a particular country or segment, or following the date of disposal unless required by IFRS. In general, our selected operating and financial data, audited consolidated financial statements and related notes and the following discussion and analysis reflect the contribution of the operators we acquired from their respective dates of acquisition or consolidation and therefore such acquisitions affect the comparability of data between periods. For example, the acquisition of 100% of Warid's voting shares by our subsidiary, GTH, and our subsequent consolidation of Warid's financials starting from July 1, 2016 has a particularly strong impact on comparability. For more information regarding our acquisitions and dispositions, see Note 5 to our audited consolidated financial statements incorporated herein. Economic Trends As a global telecommunications company with operations in a number of markets, we are affected by a broad range of international economic developments. Unfavorable economic conditions may impact a significant number of our customers, including their spending patterns, both in terms of the products they subscribe for and usage levels. As a result, it may be more difficult for us to attract new customers, more likely that customers will downgrade or disconnect their services and more difficult for us to maintain ARPUs at existing levels. The current difficult economic environment and any future downturns in the economies of markets in which we operate or may operate in the future could also, among other things, increase our costs, prevent us from executing our strategies, hurt our liquidity or to meet unexpected financial requirements. For more information regarding economic trends and how they affect our operations, see "Item 3—Key Information—D. Risk Factors—Risks Related to Our Markets—The international economic environment could cause our business to decline." Inflation Inflation affects the purchasing power of our mass market customers, as well as corporate clients. The Russian, Ukrainian, Kazakh, Uzbek and Algerian currencies, for example, have experienced significant inflation levels in recent years, which has caused the relative values of those currencies to decline. Although the inflation rates have broadly stabilized, economic and political developments may cause inflation rates to rise once again. The table below shows the inflation rates for the years ended December 31, 2017, 2016 and 2015, and the source of the inflation rates. Russia Pakistan Algeria Bangladesh Ukraine Uzbekistan Foreign Currency Translation Our audited consolidated financial statements are presented in U.S. dollars. Amounts included in these financial statements were presented in accordance with IAS 21, using the current rate method of currency translation with the U.S. dollar as the reporting currency. The functional currencies of our group are the Russian ruble in Russia, the Pakistani rupee in Pakistan, the Algerian dinar in Algeria, the Bangladeshi taka in Bangladesh, the Ukrainian hryvnia in Ukraine, the Uzbek som in Uzbekistan. Our results of operations are affected by increases or decreases in the value of the U.S. dollar or our functional currencies. A higher average exchange rate correlates to a weaker functional currency. We have listed below the relevant exchange rates for each of our countries of operation for the years ended December 31, 2017, 2016 and 2015. These should not be construed as a representation that such currency will in the future be convertible into U.S. dollars or other foreign currency at the exchange rate shown, or at any other exchange rates. The table below shows functional currencies and official exchange rates as of December 31, 2017, 2016 and 2015 as well as comparison of average exchange rates for 2017 versus 2016 and 2016 versus 2015. Russia Pakistan Algeria Bangladesh Ukraine Uzbekistan Foreign Currency Controls and Currency Restrictions We are subject to certain currency restrictions and local regulations that impact our ability to extract cash from some of our operating companies. For example, in Uzbekistan, in September 2017, the government of Uzbekistan liberalized the country's currency exchange rules and reset the official exchange rate at 8,100 Uzbek som per U.S. dollar, which represented nearly a halving of the value of the Uzbek som to the U.S. dollar. On December 22, 2017, VEON successfully repatriated US$200 million from Uzbekistan. There are certain other restrictions in place to prevent currency outflow in Uzbekistan, but we do not expect that they will have a material impact on our operations. For more information on the Uzbek government's recent decision to liberalize its currency, see "—Key Developments and Trends—Impact of Currency Regime Developments in Uzbekistan." In Ukraine, Kyivstar can only partially expatriate dividends to VEON Ltd. because of restrictions imposed by the National Bank of Ukraine in 2014 to regulate money, credit and currency in Ukraine. Although several of these restrictions were substantially softened and partially abolished, certain restrictions remain in place in order to prevent any negative impact of currency outflow on the financial market. However, we do not expect that these restrictions will have a material impact on our operations. For more information on how our operations can be affected by certain currency risks, see "Item 3—Key Information—D. Risk Factors—Risks Related to Our Business—We are exposed to foreign currency exchange loss and currency fluctuation and translation risks." Our ability to extract cash from operating companies is also affected by certain regulatory hurdles and restrictions. For example, in some of our markets, strict foreign exchange regulations are in place and foreign currency financing agreements must be registered or approved by state authorities. In addition, some central banks closely control foreign exchange transactions and international transfers of funds. For more information on how our operations can be affected by certain regulatory controls and restrictions of foreign currencies, see "Item 3—Key Information—D. Risk Factors—Risks Related to our Markets—The banking systems in many countries in which we operate remain underdeveloped, there are a limited number of creditworthy banks in these countries with which we can conduct business and currency control requirements restrict activities in certain markets in which we have operations." For more information about risks related to currency exchange rate fluctuations, see "Item 11—Quantitative and Qualitative Disclosures About Market Risk" and Notes 4 and 17 to our audited consolidated financial statements. Tax Our results of operations are also impacted by changes with respect to the tax regimes to which we are subject. For example, we expect our results of operations to be affected by: (i) a new finance law in Algeria that came into effect in 2017 that increased VAT from 7% to 19% on data services and from 17% to 19% on voice services, and increased taxes on recharges from 5% to 7%; (ii) an increase in the corporate income tax rate in Uzbekistan up to 48%; and (iii) revised interpretations of SIM tax regulations in Bangladesh and Pakistan. Certain Performance Indicators The following discussion analyzes certain operating data, including Adjusted EBITDA, mobile customers, mobile ARPU, mobile data customers and fixed-line broadband customers that are not included in our financial statements. We provide this operating data because it is regularly reviewed by our management. Our management believes it is useful in evaluating our performance from period to period and in assessing the usage and acceptance of our mobile and broadband products and services. This operating data is unaudited. Adjusted EBITDA Adjusted EBITDA is a non-IFRS financial measure. We calculate Adjusted EBITDA as (loss)/profit before tax before depreciation, amortization, loss from disposal of non-current assets and impairment loss, financial expenses and costs, net foreign exchange gain/(loss) and share of associates and joint ventures. The measure includes certain non-operating losses and gains mainly represented by litigation provisions for all of its segments except for Russia. Our Adjusted EBITDA may be used to evaluate our performance against other telecommunications companies that provide EBITDA. See "Explanatory Note—Non-IFRS Financial Measures—Adjusted EBITDA" for more information on how we calculate Adjusted EBITDA. The following table shows our Adjusted EBITDA and reconciliation of Adjusted EBITDA to (loss)/profit before tax, the most directly comparable IFRS financial measure, for the years ended December 31, 2017, 2016 and 2015. Adjusted EBITDA Depreciation Amortization Impairment loss Loss on disposals of non-current assets Finance costs Finance income Other non-operating (losses)/gains Shares of (loss)/profit of associates and joint ventures Impairment of associates and joint ventures accounted for using the equity method Net foreign exchange (loss)/gain (Loss) / profit before tax Mobile Customers Mobile customers are generally customers in the registered customer base as of a given measurement date who engaged in a revenue generating activity at any time during the three months prior to such measurement date. Such activity includes any outgoing calls, customer fee accruals, debits related to service, outgoing SMS and MMS, data transmission and receipt sessions, but does not include incoming calls, SMS and MMS or abandoned calls. Our total number of mobile customers also includes customers using mobile internet service via USB modems and FMC. The following table indicates our mobile customer figures in millions for the periods indicated: Russia Pakistan Algeria Bangladesh Ukraine Uzbekistan Others(1) Total number of mobile customers(2) Mobile ARPU Mobile ARPU measures the monthly average revenue per mobile user. We generally calculate mobile ARPU by dividing our mobile service revenue during the relevant period (including data revenue, roaming revenue, MFS and interconnect revenue, but excluding revenue from connection fees, sales of handsets and accessories and other non-service revenue) by the average number of our mobile customers during the period and dividing by the number of months in that period. The following table indicates our mobile ARPU in US$ for the periods indicated: Russia Pakistan Algeria Bangladesh Ukraine Uzbekistan Mobile Data Customers Mobile data customers are mobile customers who have engaged in revenue generating activity during the three months prior to the measurement date as a result of activities including USB modem Internet access using 2.5G/3G/4G/LTE/HSPA+ technologies. For Algeria, mobile data customers are 3G customers who have performed at least one mobile data event on the 3G network during the previous four months. The following table indicates our mobile data customer figures in millions for the periods indicated: Russia Pakistan Algeria Bangladesh Ukraine Uzbekistan Others Total number of mobile data customers Fixed-Line Broadband Customers Fixed broadband customers are fixed customers in the registered customer base who were engaged in a revenue generating activity using fixed broadband Internet access in the three-month period prior to the measurement date. In Russia and Ukraine, such activity includes monthly internet access using FTTB, xDSL and Wi-Fi technologies. The following table indicates our fixed-line broadband customers in millions for the periods indicated: Russia Ukraine Others Total number of fixed-line broadband customers Results of Operations Consolidated results The financial results for 2015 reflect the classification of our Historical WIND Business as a discontinued operation. Our financial results for 2016 include the 10 months ended October 31, 2016 with our Historical WIND Business classified as a discontinued operation and the two months ended December 31, 2016 with the Italy Joint Venture accounted for as an equity investment. For the year ended December 31, 2017, the Italy Joint Venture is accounted for as an equity investment. Consolidated income statements data: Service revenue Sale of equipment and accessories Other revenue Total operating revenue Operating expenses Service costs Cost of equipment and accessories Selling, general and administrative expenses Depreciation Amortization Impairment loss Loss on disposals of non-current assets Total operating expenses Operating profit Finance costs Finance income Other non-operating losses Share of (loss) / gain of associates and joint ventures Impairment of associates and joint ventures Net foreign exchange (loss)/ gain (Loss)/profit before tax Income tax expense Loss for the year from continuing operations Profit after tax for the period from discontinued operations Profit on disposal of discontinued operations, net of tax Profit after tax for the period from discontinued operations (Loss)/profit for the year Attributable to: The owners of the parent (continuing operations) The owners of the parent (discontinued operations) Non-controlling interest Loss per share from continuing operations Basic, loss for the year attributable to ordinary equity holders Diluted, loss for the year attributable to ordinary equity holders Earnings per share from discontinued operations Basic, profit for the year attributable to ordinary equity holders Diluted, profit for the year attributable to ordinary equity holders Weighted average number of common shares (millions) Dividends declared per share Total Operating Revenue The table below shows total operating revenue in each of our reportable segments, with the exception of the Italy Joint Venture, for the periods indicated. Russia Pakistan Algeria Bangladesh Ukraine Uzbekistan HQ(1) Others(2) Total Our consolidated total operating revenue increased by 7% to US$9,474 million during 2017 compared to US$8,885 million during 2016 primarily as a result of the strengthening of the Russian ruble and full year of Warid consolidation. The increase was partially offset by a decrease in Uzbekistan due to the liberalization of its currency exchange rules resulting in a devaluation of local currency, a decrease in Algeria due to a difficult macroeconomic environment and strong competitive environment and a decrease in Bangladesh due to aggressive price competition in the market and network availability issues. Our consolidated total operating revenue decreased by 8% to US$8,885 million during 2016 compared to US$9,606 million during 2015 primarily due to a decrease of total operating revenue of 11% in Russia, 18% in Algeria, 6% in Ukraine and 7% in Uzbekistan, the decrease in the average exchange rate from the Russian ruble to the U.S. dollar in Russia in 2016 (despite the increase of the spot exchange rate at December 31, 2016 as compared to December 31, 2015) and the depreciation of functional currencies against the U.S. dollar in Algeria, Ukraine and Uzbekistan. The decrease was partially offset by an increase of total operating revenue of 28% in Pakistan, due to double-digit growth in Mobilink coupled with the consolidation of Warid following July 1, 2016 and 3% in Bangladesh. The discussion of revenue by reportable segments includes intersegment revenue. Our management assesses the performance of each reportable segment on this basis because it believes the inclusion of intersegment revenue better reflects the true performance of each segment on a stand-alone basis. Adjusted EBITDA The table below shows for the periods indicated Adjusted EBITDA in each of our reportable segments, with the exception of the Italy Joint Venture. Adjusted EBITDA is a non-IFRS financial measure. For more information on how we calculate Adjusted EBITDA and for the reconciliation of Adjusted EBITDA to (loss)/profit before tax, the most directly comparable IFRS financial measure, for the years ended December 31, 2017, 2016 and 2015, see "Explanatory Note—Non-IFRS Financial Measures—Adjusted EBITDA" and Note 7 to our audited consolidated financial statements included herein. Russia Pakistan Algeria Bangladesh Ukraine Uzbekistan HQ(1) Others(2) Total Our total Adjusted EBITDA increased by 11% to US$ 3,587 million during 2017 compared to US$3,232 million during 2016, primarily due to the increase in total operating revenue discussed above partially offset by the increase in service costs and selling, general and administrative expenses. Our total Adjusted EBITDA increased by 12% to US$3,232 million during 2016 compared to US$2,875 million during 2015, primarily due to a US$900 million provision with respect to agreements with the SEC, DOJ and OM, included in operating expenses for 2015, that was not included in our consolidated total operating expenses for 2016. The increase was partially offset by a decrease in revenue during 2016. Total Operating Expenses Our consolidated total operating expenses increased by 2% to US$7,968 million during 2017 compared to US$7,801 million during 2016. The increase was primarily due to increases in service costs and cost of equipment and accessories of US$154 million, in selling, general and administrative expenses of US$80 million as a result of increased personnel costs and in amortization expenses of US$40 million partially as a result of accelerated amortization of brand names in Pakistan and the acquisition of a 4G/LTE license in Pakistan in 2017. The increase was partially offset by a decrease in impairment losses of US$126 million. Our consolidated total operating expenses decreased by 14% to US$7,801 million during 2016 compared to US$9,082 million during 2015. The decrease was primarily due to a US$900 million provision with respect to agreements with the SEC, DOJ and OM, included in operating expenses for the year ended December 31, 2015, that was not included in our consolidated total operating expenses for 2016. We also saw decreases in service costs and cost of equipment and accessories of US$183 million, in impairment losses of US$53 million and a decrease in depreciation and amortization expenses of US$131 million for the year ended December 31, 2016 as compared to the year ended December 31, 2015. Depreciation expenses Our consolidated depreciation expenses increased by 1% to US$1,454 million in 2017 compared to US$1,439 million in 2016. The increase was primarily the result of appreciation of the Russian ruble. Our consolidated depreciation expenses decreased by 7% to US$1,439 million in 2016 compared to US$1,550 million in 2015. The decrease was primarily the result of depreciation of our functional currencies against the U.S. dollar, partially offset by accelerated depreciation due to the equipment swap in Ukraine and Pakistan. Amortization expenses Our consolidated amortization expenses increased by 8% to US$537 million in 2017 compared to US$497 million in 2016 primarily due to the accelerated amortization of brand names in Pakistan and the acquisition of a 4G/LTE license in Pakistan in 2017. Our consolidated amortization expenses decreased by 4% to US$497 million in 2016 compared to US$517 million in 2015. The decrease was primarily the result of depreciation of our functional currencies against the U.S. dollar. Impairment loss Our consolidated impairment amounted to US$66 million in 2017 primarily related to goodwill impairment in Armenia of US$34 million and in Kyrgyzstan of US$17 million and an asset impairment of US$15 million in connection with our transformation strategy and commitment to network modernization. Our consolidated impairment loss in 2016 amounted to US$192 million primarily related to goodwill impairment in Kyrgyzstan of US$49 million; goodwill, property, equipment and intangible assets impairment in Tajikistan of US$76 million; property, equipment and intangible assets impairment in Georgia for US$29 million and an asset impairment of US$30 million in connection with our transformation strategy and commitment to network modernization. The impairment loss in 2015 primarily related to goodwill impairment in Ukraine of US$51 million and in Armenia of US$44 million. For further information on our impairment loss, see Note 10 of our audited consolidated financial statements. Loss on disposals of non-current assets Our consolidated loss on disposals of non-current assets amounted to US$24 million in 2017 compared to US$20 million in 2016. Our consolidated loss on disposals of non-current assets amounted to US$39 million in 2015. The disposal of non-current assets relates to the ongoing maintenance of network and ongoing network modernization projects. Operating Profit Our consolidated operating profit increased by 39% to US$ 1,506 million in 2017 compared to US$1,084 million in 2016 due to the increase of total operating revenue partially offset by the increase of total operating expenses discussed above. Our consolidated operating profit increased by 107% to US$1,084 million in 2016 compared to US$524 million in 2015 due to one-off provision recorded with respect to agreements with the SEC, DOJ and OM, included in operating expenses for the year ended December 31, 2015. Non-operating Profits and Losses Finance costs Our consolidated finance costs increased by 13% to US$935 million in 2017 compared to US$830 million in 2016. The increase was mainly due the revaluation of the put option liability for Warid in Pakistan. Our consolidated finance costs were broadly stable and amounted to US$830 million in 2016 compared to US$829 million in 2015. Finance income Our consolidated finance income increased by 38% to US$95 million in 2017 compared to US$69 million in 2016, primarily due to increased interest from bank deposits. Our consolidated finance income increased by 33% to US$69 million for the year ended December 31, 2016 compared to US$52 million for the year ended December 31, 2015, primarily due to increased interest from bank deposits. Other non-operating losses We recorded US$97 million in other non-operating losses during 2017 compared to US$82 million in losses during 2016, an increase of 18%. The change was primarily due to early redemption fees of US$124 million recorded as part of the refinancing activities during 2017, partially offset by a decrease of losses from revaluation of fair value of derivative contracts in 2017. We recorded US$82 million in other non-operating losses during 2016 compared to US$42 million in losses during 2015, an increase of 95%. The change was primarily due to the negative fair value change of foreign exchange contracts by US$120 million in 2016, partially offset by the increased fair value of investments in financial assets by US$21 million and the increased fair value of embedded derivatives by US$12 million. Shares of (loss)/profit of associates and joint ventures We recorded a loss of US$412 million from our investments in associates and joint ventures in 2017 compared to a profit of US$48 million in 2016. For more information on the Italy Joint Venture, see "Explanatory Note—Presentation of Financial Information of the Italy Joint Venture." The decrease in the portion of the Italy Joint Venture's earnings/(losses) that represents our direct share, from a loss of US$390 million in 2017 to a profit of US$59 million in 2016, reflects: (i) a decline in mobile service revenue primarily due to aggressive competition, which resulted in a decreased customer base; (ii) accelerated depreciation of network assets related to a network modernization project; (iii) loss on early redemption of bonds; (iv) one-off integration costs of EUR 266 million and (v) a decline in mobile consumer premises equipment revenue primarily due to lower volume of gross additions and a more selective mobile customer scoring. In 2016, we recorded a profit of US$48 million from our investments in associates and joint ventures in 2016 compared to a profit of US$14 million in 2015. This was mainly driven by profit from the Italy Joint Venture of US$59 million. Italy Joint Venture Euroset Other Total For further discussion of the results of operations our Italy Joint Venture, see"—Further Information Regarding the Results of Operations of the Italy Joint Venture." Impairment of associates and joint ventures We recorded US$110 million in impairment of associates and joint ventures during 2017 compared to US$99 million during 2016. The impairments during both 2017 and 2016 were recorded in respect of the investment in Euroset, due to continued operational underperformance of the joint venture. Net foreign exchange (loss)/gain We recorded a loss of US$71 million from foreign currency exchange in 2017 compared to a gain of US$157 million from foreign currency exchange in 2016. This was primarily driven by appreciation of Russian ruble and depreciation of Uzbek som, Bangladeshi taka and Pakistani rupee against the U.S. dollar in 2017. We recorded a gain of US$157 million from foreign currency exchange in 2016 compared to a loss of US$314 million from foreign currency exchange in 2015. This trend was primarily driven by the appreciation of the Russian ruble against the U.S. dollar in 2016 compared to the depreciation of the Russian ruble against the U.S. dollar in 2015. Income Tax Expense The statutory income tax rates during the years ended December 31, 2017, 2016 and 2015 were as follows: Russia Pakistan Algeria Bangladesh Ukraine Uzbekistan Uzbekistan subnational tax Luxembourg Netherlands Italy Italy regional tax Our consolidated income tax expense decreased by 26% to US$472 million in 2017 compared to US$635 million in 2016. The decrease in income taxes was primarily driven by losses in Uzbekistan due to significant devaluation of Uzbek som (as a result of which a deferred tax asset has been recognized for this foreign exchange loss expected to be used within 4 years) and decreased incomes taxes in Russia due to additional losses resulting from revised tax return filings and one-off expenses. Our consolidated income tax expense increased by 189% to US$635 million in 2016 compared to US$220 million in 2015. The increase in income taxes was primarily due to an increase in tax rate in Uzbekistan from 7.5% to 50% and higher profits in countries with higher nominal tax rates. Furthermore, our Historical WIND Business has tax losses, for which a deferred tax asset has been recognized of approximately US$95 million. As a result of the Italy Joint Venture, we will no longer be able to offset these losses against future profits of the Italy Joint Venture. As a consequence, the deferred tax asset of US$95 million was written down. In addition, in 2015 we decreased the provisions for future withholding taxes on intercompany dividends by US$200 million. For information regarding our income tax, see Note 12 to our audited consolidated financial statements. Loss for the year from continuing operations In 2017, our consolidated loss for the period from continuing operations was US$496 million, compared to US$288 million of loss in 2016, primarily as a result of a loss from the Italy Joint Venture, increased financial costs and net foreign exchange losses recognized during 2017, partially offset by increased operating profit and decreased income tax expenses. In 2016, our consolidated loss for the period from continuing operations was US$288 million, compared to US$815 million of loss in 2015, primarily as a result of the US$900 million provision with respect to agreements with the SEC, DOJ and OM, included in operating expenses for 2015, that was not included in our consolidated total operating expenses for 2016, and for the other reasons described above. Profit for the year from discontinued operations In 2016, our consolidated profit after tax for the period from discontinued operations, which was comprised primarily of our Historical WIND Business, was US$2,708 million, compared to US$262 million of profit in 2015. The completion of the Italy Joint Venture transaction resulted in a non-cash gain on disposal of US$1,788 million, which was the difference between the book value of the deconsolidated Italian operations and the fair value of the investment in the new joint venture recorded on the balance sheet. (Loss)/profit for the Year In 2017, the consolidated loss for the period was US$483 million compared to a profit of US$2,328 million in 2016. The change was mainly due to the gain recognized in 2016 on the disposal of the discontinued operation and other factors as discussed above. In 2016, the consolidated profit for the period was US$2,328 million compared to a loss of US$655 million in 2015. The increase was mainly due to the gain recognized in 2016 on the disposal of the discontinued operation and other factors as discussed above. (Loss)/profit for the Year Attributable to Non-controlling Interest Our loss for the period attributable to non-controlling interest was US$13 million in 2017 compared to a profit of US$92 million in 2016 as a result of loss for the year recognized by GTH in 2017 as compared to a profit recognized by GTH in 2016. Our profit for the period attributable to non-controlling interest was US$92 million in 2016 compared to a profit of US$102 million, a decrease of 9.8%, in 2015 as a result of decreased profit for the year in Kazakhstan and Kyrgyzstan, partially offset by increased profit by GTH. Russia Results of operations in US$ Total operating revenue Mobile service revenue —of which FMC —of which mobile data Fixed-line service revenue Sales of equipment, accessories and other Operating expenses Adjusted EBITDA Adjusted EBITDA margin Results of operations in RUB Total operating revenue Mobile service revenue —of which FMC —of which mobile data Fixed-line service revenue Sales of equipment, accessories and other Operating expenses Adjusted EBITDA Adjusted EBITDA margin Certain Performance Indicators Mobile Customers in millions Mobile ARPU in US$ Mobile ARPU in RUB Mobile data customers Fixed-Line Broadband customers in millions Year Ended December 31, 2017 Compared to Year Ended December 31, 2016 Mobile revenue Our total operating revenue in Russia increased by 15% to US$4,729 million in 2017 compared to US$4,097 million in 2016 due to the strengthening of the Russian ruble. In functional currency terms, total operating revenue in Russia increased by 1% due to increases in service revenue and revenue from sale of equipment and accessories. The 14% growth of mobile data revenue is due to increased penetration of smartphones and customer migration to bundled tariff plans with higher data allowance. We also recorded increased MFS revenue and VAS revenue. This growth was partially offset by a decrease in mobile voice and fixed-line revenue. The mobile voice revenue decrease is due to substitution of voice calls by data-based services and customer migration to new data centric tariff plans. The fixed-line revenue decrease was driven by the reduction of low-marginal wholesale traffic, the effect of the strengthening of the Russian ruble on foreign currency contracts and growing penetration of FMC services in the customer base. Adjusted EBITDA Our Russia Adjusted EBITDA increased by 14% to US$1,788 million in 2017 compared to US$1,574 million in 2016 due to the Russian ruble strengthening. In functional currency terms, our Russia Adjusted EBITDA was broadly stable in 2017. Certain performance indicators As of December 31, 2017, we had 58.2 million mobile customers in Russia, including 0.8 million FMC customers, representing a decrease of 0.3% from 58.3 million mobile customers as of December 31, 2016, due to the temporary impact of distribution channels reorganization. In 2017, our mobile ARPU in Russia increased by 19% to US$5.5 compared to US$4.6 in 2016, primarily as a result of foreign exchange effects. In functional currency terms, mobile ARPU in Russia increased by 4%, due to continued efforts to simplify tariff plans, successful customer base management and increase in penetration of bundled offerings. As of December 31, 2017, we had 38.4 million mobile data customers, representing an increase of 5% from 36.6 million mobile data customers as of December 31, 2016. The increase was mainly due to the increased smartphone penetration in Russia. The fixed line broadband customers are mainly represented by FTTB customers. As of December 31, 2017, we had 2.2 million fixed line customers in Russia, including 0.8 million FMC customers, representing an increase of 3% from 2.2 million fixed-line customers as of December 31, 2016. The increase was a result of increased sales and churn improvement. Year Ended December 31, 2016 Compared to Year Ended December 31, 2015 Mobile revenue Our total operating revenue in Russia decreased by 11% to US$4,097 million in 2016 compared to US$4,583 million in 2015 mainly due to the weakening of the average exchange rate from Russian ruble to the U.S. dollar in 2016, particularly in the first half of the year. In functional currency terms, total operating revenue in Russia decreased by 2% due to decreased fixed-line service revenue, mainly driven by a change in B2B fixed-line contracts from U.S. dollar to Russian ruble and lower B2C revenue. This was partially offset by an increase in mobile data revenue of 19% as a result of increased smartphone penetration, growth in mobile data customers, customer traffic growth and active bundle promotion. The increase in mobile data revenue was partially offset by lower voice and roaming revenue due to an average price per minute reduction as existing customers continued to migrate to the company's current price plans. Mobile service revenue was stable, driven by strong growth in mobile data revenue. Adjusted EBITDA Our Russia Adjusted EBITDA decreased by 14% to US$1,574 million in 2016 compared to US$1,825 million in 2015, mainly due to the decrease in the average exchange rate from Russian ruble to the U.S. dollar during 2016, particularly in the first half of the year. In functional currency terms, our Russia Adjusted EBITDA decreased by 5% in 2016 compared to previous year, primarily as a result of a revenue decrease, as discussed above, and negative foreign exchange effect on roaming and interconnect costs, which are incurred in U.S. dollars. Certain performance indicators As of December 31, 2016, we had approximately 58.3 million mobile customers in Russia, including 0.6 million FMC customers, representing a decrease of 3% from approximately 59.8 million mobile customers as of December 31, 2015, which we believe was due to the lower number of seasonal workers during 2016 as a result of the macroeconomic developments in the country and increased churn, reflecting the increased competition in the market. In 2016, our mobile ARPU in Russia decreased by 10% to US$4.6 compared to US$5.1 in 2015, primarily as a result of foreign exchange effects. In functional currency terms, mobile ARPU in Russia decreased by 1%, due to lower voice and roaming revenue attributed to an average price per minute reduction as existing customers migrated to new price plans, partially offset by an increase in mobile data revenue. As of December 31, 2016, we had approximately 36.6 million mobile data customers, representing an increase of 7% from approximately 34.3 million mobile data customers as of December 31, 2015. The increase was mainly due to the increased smartphone penetration in the customer base as a result of device promotions. The fixed-line broadband customers are mainly represented by FTTB customers. As of December 31, 2016, we had approximately 2.2 million fixed-line customers in Russia, including 0.5 million FMC customers, compared to approximately 2.2 million fixed-line customers as of December 31, 2015. Pakistan On July 1, 2016, VEON Ltd., together with its subsidiary GTH, acquired 100% of the voting shares in Warid, a mobile telecommunications provider. VEON Ltd. consolidated Warid financials in the Pakistan segment starting from July 1, 2016, which affects comparability among the periods provided below. For more information regarding our acquisitions and dispositions, see Note 5 to our audited consolidated financial statements incorporated herein. Results of operations in US$ Total operating revenue Mobile service revenue —of which mobile data Sales of equipment, accessories and other Operating expenses Adjusted EBITDA Adjusted EBITDA margin Results of operations in PKR Total operating revenue Mobile service revenue —of which mobile data Sales of equipment, accessories and other Operating expenses Adjusted EBITDA Adjusted EBITDA margin Certain Performance Indicators Mobile Customers in millions Mobile ARPU in US$ Mobile ARPU in PKR Mobile data customers in millions Year Ended December 31, 2017 Compared to Year Ended December 31, 2016 Mobile revenue In 2017, our Pakistan total operating revenue increased by 18% to US$1,525 million compared to US$1,295 million in 2016, as a result of the Pakistan Merger increased data revenues, supported by customer growth. In functional currency terms, our Pakistan total operating revenue increased by 18%. Adjusted EBITDA Our Pakistan Adjusted EBITDA increased by 39% to US$703 million in 2017 compared to US$507 million in 2016 primarily due to the Pakistan Merger, higher revenue, synergy effect over operating expenses and a positive impact from a release of historic SIM tax accruals. In functional currency terms, our Pakistan Adjusted EBITDA increased by 40%. Certain performance indicators As of December 31, 2017, we had 53.6 million customers in Pakistan, representing an increase of 4% from 51.6 million customers as of December 31, 2016, primarily driven by continued increase of customer acquisition combined with lower churn through focus on price simplicity and efficient distribution channel management. In 2017, our mobile ARPU in Pakistan was US$2.20, or PKR 236. Our 2016 mobile ARPU figures in Pakistan are not comparable as 2016 mobile ARPU consists of 6 months of Mobilink mobile ARPU and 6 months of Jazz, while 2017 mobile ARPU is derived only from Jazz figures. As of December 31, 2017, we had 28.5 million mobile data customers in Pakistan, representing an increase of 13% from 25.1 million mobile data customers as of December 31, 2016. The increase was due to customer base migration to bundled tariff plans and continued network expansion. Year Ended December 31, 2016 Compared to Year Ended December 31, 2015 Mobile revenue Our Pakistan total operating revenue increased by 28% to US$1,295 million in 2016 compared to US$1,014 million in 2015, primarily as a result of the Pakistan Merger on July 1, 2016. In functional currency terms, total operating revenue in Pakistan increased by 30% as a result of the Pakistan Merger and an increase in voice, interconnect, SMS and data revenues supported by customer growth. Our data revenue grew by 81% as a result of the Pakistan Merger, successful data monetization initiatives, data device promotions and 3G network expansion. In addition, mobile financial services revenue grew by 46% in functional currency terms in 2016 as compared to 2015 due to an increase in the number of transactions and an increase in sales by our agents. Our Pakistan segment sales of equipment and accessories and other revenue increased by 45%, primarily driven by network sharing activities. Adjusted EBITDA Our Adjusted EBITDA in Pakistan increased by 24% to US$507 million in 2016 compared to US$409 million in 2015. In functional currency terms, our Adjusted EBITDA increased by 26% in 2016 compared to the previous year, primarily due to the Pakistan Merger, higher revenue, as discussed above, performance transformation initiatives and a decrease in network costs. This increase was partially offset by integration costs. Certain performance indicators As of December 31, 2016, we had approximately 51.6 million customers in Pakistan, representing an increase from 36.2 million customers as of December 31, 2015, primarily as a result of the Pakistan Merger in July 1, 2016 and simplification of tariffs, resulting in higher gross additions. In 2016, our mobile ARPU in Pakistan increased by 8% to US$2.3 compared to US$2.1 in 2015. In functional currency terms, mobile ARPU in Pakistan increased in 2016 by 10% compared to 2015, mainly due to data revenue growth and changes in customer pricing. As of December 31, 2016, we had approximately 25.1 million mobile data customers in Pakistan, representing an increase of approximately 50% from the approximately 16.8 million mobile data customers as of December 31, 2015. The increase was mainly due to the Pakistan Merger on July 1, 2016, the 3G expansion and increased smartphone penetration in the customer base. Algeria Results of operations in US$ Total operating revenue Mobile service revenue —of which mobile data Sales of equipment, accessories and other Operating expenses Adjusted EBITDA Adjusted EBITDA margin Results of operations in DZD Total operating revenue Mobile service revenue —of which mobile data Sales of equipment, accessories and other Operating expenses Adjusted EBITDA Adjusted EBITDA margin Certain Performance Indicators Mobile Customers in millions Mobile ARPU in US$ Mobile ARPU in DZD Mobile data customers Year Ended December 31, 2017 Compared to Year Ended December 31, 2016 Mobile revenue Our Algeria total operating revenue decreased by 12% to US$915 million in 2017 compared to US$1,040 million in 2016 due to a difficult macroeconomic environment and strong competitive environment. Total operating revenue for the full year 2017 was also affected by a new finance law, effective from January 2017, which increased VAT from 7% to 19% on data services and from 17% to 19% on voice services, and increased taxes on recharges from 5% to 7%. These taxes and recharges were not passed on to customers. In addition, revenue was negatively affected by customer churn, caused by competitive pressure in the market. The competitive pressure also resulted in a rate decrease by Djezzy. Data revenue growth, however, remained strong due to higher usage and an increase in data customers as a result of the rollout of 3G and 4G/LTE networks. In functional currency terms, total operating revenue in Algeria decreased by 11%. Adjusted EBITDA Our Algeria Adjusted EBITDA decreased by 22% to US$426 million in 2017 compared to US$547 million in 2016 primarily due to the decrease in total operating revenues, as discussed above, along with increased personnel costs. In functional currency terms, our Algeria Adjusted EBITDA decreased by 21%. Certain performance indicators Customers in our Algeria segment decreased by 8% to 15.0 million as of December 31, 2017 compared to 16.3 million customers as of December 31, 2016. The decrease was mainly due to competitive pressure in the market. In 2017, our mobile ARPU in Algeria decreased by 7% to US$4.8 compared to US$5.1 in 2016. In functional currency terms, our mobile ARPU in Algeria decreased by 6%, mainly due to aggressive price competition and rate decrease by Djezzy. As of December 31, 2017, we had approximately 7.2 million mobile data customers in Algeria, representing an increase of 3% from the 7.0 million mobile data customers as of December 31, 2016. The increase was mainly due to the acceleration of 4G/LTE network deployment and increased smartphone penetration. Year Ended December 31, 2016 Compared to Year Ended December 31, 2015 Mobile revenue Our Algeria total operating revenue decreased by 18% to US$1,040 million in 2016 compared to US$1,273 million in 2015 partly due to the depreciation of the Algerian dinar against the U.S. dollar. In functional currency terms, total operating revenue in Algeria decreased by 11% due to a change in customer billing terms, the required migration of customers from legacy tariffs, aggressive price competition and distribution challenges as compared to 2015. Our data revenue increased due to increased data usage in terms of amount of megabytes used and number of data users, primarily as a result of the revived 3G roll-out following the lifting of governmental restrictions in November 2015. Our segment sales of equipment and accessories and other revenue decreased by 36% due in part to the depreciation of the Algerian dinar against the U.S. dollar, partially offset by more affordable device promotions launched during 2016. Adjusted EBITDA Our Algeria Adjusted EBITDA decreased by 20% to US$547 million in 2016 compared to US$684 million in 2015. In functional currency terms, our Algeria Adjusted EBITDA decreased by 13% in 2016 compared to the previous year, primarily due to a decrease in total revenues, as discussed above, partially offset by a decrease in operating expenses due to commercial and other general and administrative expense cost optimization and headcount reduction as a result of our performance transformation program. In addition to the decrease in revenue, our Adjusted EBITDA in Algeria was negatively impacted by costs in relation to structural measures to improve performance and stabilize our customer base, including distribution transformation and monobrand roll-out, acceleration of our 4G/LTE network deployment and promotion of micro-campaigns with tailored services to increase satisfaction, data monetization activities and smartphone promotions, coupled with bundle offers. Certain performance indicators Customers in our Algeria segment decreased to approximately 16.3 million as of December 31, 2016 compared to 17.0 million customers as of December 31, 2015. The 4% decrease was mainly due to the combined impact of historic 3G coverage shortfalls, changes in customer billing terms, required migration and distribution challenges. In 2016, our mobile ARPU in Algeria decreased by 15% to US$5.1 compared to US$6.0 in 2015. In functional currency terms, our mobile ARPU in Algeria decreased by 7%, mainly due to aggressive price competition and high-value customer churn. As of December 31, 2016, we had approximately 7.0 million mobile data customers in Algeria, representing an increase of approximately 69% from the approximately 4.1 million mobile data customers in Algeria as of December 31, 2015. The increase was mainly due to the rapid 3G expansion during the last twelve months. Bangladesh Results of operations in US$ Total operating revenue Mobile service revenue of which mobile data Sales of equipment, accessories and other Operating expenses Adjusted EBITDA Adjusted EBITDA margin Results of operations in BDT Total operating revenue Mobile service revenue —of which mobile data Sales of equipment, accessories and other Operating expenses Adjusted EBITDA Adjusted EBITDA margin Certain Performance Indicators Mobile Customers in millions Mobile ARPU in US$ Mobile ARPU in BDT Mobile data customers in million Year Ended December 31, 2017 Compared to Year Ended December 31, 2016 Mobile revenue Our Bangladesh total operating revenue decreased by 7% to US$574 million in 2017 compared to US$621 million in 2016. The main operational focus in 2017 was on restoring network availability and addressing the 3G gap vis-à-vis the competition, and on customer acquisition following the completion of the government-mandated SIM re-verification program. In 2017, total operating revenue in Bangladesh was impacted by aggressive price competition in the market and network availability. In functional currency terms, total operating revenue in Bangladesh decreased by 5%. Adjusted EBITDA Our Bangladesh Adjusted EBITDA decreased by 13% to US$233 million in 2017 compared to US$267 million in 2016 due to lower revenue, as discussed above, and higher network costs, partially offset by lower personnel costs. In functional currency terms, our Bangladesh Adjusted EBITDA decreased by 10%. Certain performance indicators Customers in our Bangladesh segment increased to 31.3 million as of December 31, 2017 compared to 30.4 million customers as of December 31, 2016. The 3% increase was mainly due to intensive acquisition and retention campaigns. In 2017, our mobile ARPU in Bangladesh decreased by 7% to US$1.5 as compared to 2016. In functional currency terms, mobile ARPU in Bangladesh decreased in 2017 by 4% mainly due to aggressive pricing in the market and lower traffic due to network availability. As of December 31, 2017, we had 16.9 million mobile data customers in Bangladesh, representing an increase of 13% from the 14.9 million mobile data customers as of December 31, 2016, mainly due to increased smart-phone penetration. Year Ended December 31, 2016 Compared to Year Ended December 31, 2015 Mobile revenue Our Bangladesh total operating revenue increased by 3% to US$621 million in 2016 compared to US$604 million in 2015. In functional currency terms, total operating revenue in Bangladesh increased by 3% due to an increase in voice revenue driven by higher MOU and a significant increase in data revenue. The increase was partially offset by the imposition of an incremental 2% supplementary duty on recharges from June 2016, which is in addition to the additional 1% surcharge from March 2016. The main operational focus during 2016 was the SIM re-verification process. This government-mandated initiative started in December 2015 and required each mobile phone operator to verify all customers using fingerprints in order to ensure authentic registration, proper accountability and enhanced security and resulted in 3.8 million SIM cards being blocked by Banglalink. This program contributed to a slowdown of acquisition activity across the market, which affected revenue trends in 2016. In functional currency terms, our segment service revenue from data increased by 51%, primarily driven by an increase in active data users and data usage as a result of expanding 3G coverage and smartphone penetration. In functional currency terms, our Bangladesh segment sales of equipment and accessories and other revenue increased by 77% primarily as a result of higher handset sales in order to increase smartphone penetration. Adjusted EBITDA Our Bangladesh Adjusted EBITDA increased by 10% to US$267 million in 2016 compared to US$242 million in 2015. In functional currency terms, our Bangladesh Adjusted EBITDA increased by 11% in 2016 compared to the same period in the previous year, primarily due to increased revenue, as discussed above, and the implementation of performance transformation initiatives, in particular headcount reduction and a decrease in commercial costs. Certain performance indicators As of December 31, 2016, we had approximately 30.4 million customers in Bangladesh, representing a decrease from 32.3 million customers as of December 31, 2015, which was primarily due to an introduction of government mandated identity verification procedures of the end of 2015, which resulted in a slowdown of customer growth across the market and the blocking of unverified SIMs in 2016. In 2016, our mobile ARPU in Bangladesh did not change and was US$1.6. In functional currency terms, mobile ARPU in Bangladesh increased in 2016 by 3% to BDT 126 compared to BDT 122 in 2015, mainly due to high growth in data revenue. As of December 31, 2016, we had approximately 14.9 million mobile data customers in Bangladesh, representing a decrease of approximately 7% from the approximately 14.0 million mobile data customers as of December 31, 2015. The decrease is due to the blocking of unverified SIMs, discussed above, while active data users increased mainly due to the 3G expansion and increased smartphone penetration. Ukraine Results of operations in US$ Total operating revenue Mobile service revenue —of which mobile data Fixed-line service revenue Sales of equipment, accessories and other Operating expenses Adjusted EBITDA Adjusted EBITDA margin Results of operations in UAH Total operating revenue Mobile service revenue —of which mobile data Fixed-line service revenue Sales of equipment, accessories and other Operating expenses Adjusted EBITDA Adjusted EBITDA margin Certain Performance Indicators Mobile Customers in millions Mobile ARPU in US$ Mobile ARPU in UAH Mobile data customers (million) Fixed-line Broadband customers (millions) Year Ended December 31, 2017 Compared to Year Ended December 31, 2016 Mobile revenue Our Ukraine total operating revenue increased by 6% to US$622 million in 2017 compared to US$586 million in 2016. The increase was primarily due to strong growth in mobile service revenue, driven by successful commercial activities stimulated by the continued 3G roll-out and increased penetration of data-centric tariffs, continued strong growth of mobile data customers and data consumption. The increase was partially decreased by devaluation of Ukrainian hryvnia during 2017. In functional currency terms, our Ukraine total operating revenue in 2017 increased by 11%. Adjusted EBITDA Our Ukraine Adjusted EBITDA increased by 13% to US$347 million in 2017 compared to US$306 million in 2016. In functional currency terms, our Ukraine Adjusted EBITDA increased by 18% in 2017 compared to the previous year, primarily due to higher revenues, as discussed above, and lower interconnection costs partially offset by the increase in roaming costs, commercial costs driven by higher customer acquisition and structural operating expenses, such as license and frequency fees. Certain performance indicators As of December 31, 2017, we had approximately 26.5 million mobile customers in Ukraine compared to 26.1 million mobile customers as of December 31, 2016, representing an increase of 2%, as a result of increased gross additions and improved churn. In 2017, our mobile ARPU in Ukraine increased by 4% to US$1.8 compared to 2016. In functional currency terms, mobile ARPU in Ukraine increased in 2017 by 8% to UAH 48 compared to UAH 44 in 2016 driven by higher revenue as described above. As of December 31, 2017, we had 0.8 million fixed line broadband customers in Ukraine, which was broadly stable compared to December 31, 2016. Year Ended December 31, 2016 Compared to Year Ended December 31, 2015 Mobile revenue Our Ukraine total operating revenue decreased by 6% to US$586 million in 2016 compared to US$622 million in 2015, primarily due to the depreciation of the Ukrainian hryvnia against the U.S. dollar. In functional currency terms, our Ukraine total operating revenue in 2016 increased 11% compared to 2015 despite a challenging social, political and macroeconomic environment. The increase was primarily due to strong growth in mobile data revenue, as a result of continued 3G roll-out, increased smartphone penetration and data-oriented tariff plans. It was also driven by repricing initiatives for our mobile and fixed-line services; and increased fixed-line revenue as a result of improved quality of the customer base. This increase was partially offset by a decline in interconnection fees, as a result of a decrease in the volume of international incoming traffic, and a decrease in SMS messaging. Adjusted EBITDA Our Ukraine Adjusted EBITDA increased by 5% to US$306 million in 2016 compared to US$292 million in 2015. In functional currency terms, our Ukraine Adjusted EBITDA increased by 23% in 2016 compared to the previous year primarily due to higher revenues, as discussed above, and lower interconnect and technological maintenance costs, which were partially offset by an increase in frequency fees, roaming costs, inflation on rent and utilities and the negative effect of the depreciation of the Ukrainian hryvnia on our operating expenses, caused by higher roaming costs, denominated in U.S. dollars. Certain performance indicators As of December 31, 2016, we had approximately 26.1 million mobile customers in Ukraine compared to 25.4 million mobile customers as of December 31, 2015, representing an increase of 3%, as a result of successful sales activities and improved churn following enhanced customer based management initiatives. In 2016, our mobile ARPU in Ukraine decreased by 6% to US$1.7 compared to US$1.8 in 2015, primarily due to devaluation of the Ukrainian hryvnia. In functional currency terms, mobile ARPU in Ukraine increased in 2016 by 11% compared to 2015 mainly due to repricing initiatives and newly introduced tariffs. As of December 31, 2016, we had approximately 0.8 million fixed-line broadband customers in Ukraine, which was broadly stable compared to December 31, 2015. Uzbekistan Results of operations in US$ Total operating revenue Mobile service revenue —of which mobile data Fixed-line service revenue Sales of equipment, accessories and other Operating expenses Adjusted EBITDA Adjusted EBITDA margin Results of operations in UZS Total operating revenue Mobile service revenue —of which mobile data Fixed-line service revenue Sales of equipment, accessories and other Operating expenses Adjusted EBITDA Adjusted EBITDA margin Certain Performance Indicators Mobile Customers in millions Mobile ARPU in US$ Mobile ARPU in UZS Mobile data customers in millions Year Ended December 31, 2017 Compared to Year Ended December 31, 2016 Mobile revenue In 2017, our Uzbekistan total operating revenue decreased by 23% to US$513 million compared to US$663 million in 2016. In Uzbekistan, our tariff plans were pegged to the U.S. dollar until September 5, 2017. Since September 5, 2017, our tariff plans are denominated in UZS, which negatively impacted our total operating revenue. For further information, see "—Key Developments and Trends—Impact of currency regime developments in Uzbekistan." In functional currency terms, our Uzbekistan total operating revenue increased by 19%, mainly as a result of the increased tariffs in Uzbek som resulting from the appreciation of U.S. dollar against the local currency and successful marketing activities, together with increased mobile data revenue, interconnect services and value added services. Mobile data revenue increased by 29% during the period, driven by additional investment in 3G and LTE networks, data centric bundled offerings with increased smartphone penetration. Adjusted EBITDA In 2017, our Uzbekistan Adjusted EBITDA decreased by 34% to US$261 million compared to US$395 million in 2016, primarily due to significant customer tax growth and local currency devaluation. In functional currency terms, in 2017, our Uzbekistan Adjusted EBITDA decreased by 1% compared to 2016, primarily due higher interconnect costs as a result of both higher off-net usage and a negative currency effect together with increases in content costs, commercial costs and structural opex, mainly due to higher taxes and other regulatory driven expenses. Certain performance indicators As of December 31, 2017, we had 9.7 million mobile customers in our Uzbekistan segment compared to 9.5 million mobile customers as of December 31, 2016, which, on an unrounded basis was largely stable. In 2017, our mobile ARPU in Uzbekistan decreased by 22% to US$4.4 compared to US$5.6 in 2016. In functional currency terms, mobile ARPU in Uzbekistan increased by 21% to UZS 20,126 in 2017 compared to UZS 16,664 in 2016 mainly due to the reasons described above with respect to total operating revenue. As of December 31, 2017, we had 5.0 million mobile data customers in Uzbekistan compared to 4.6 million mobile data customers as of December 31, 2016, representing an increase of 10% primarily due to data network strengthening, increased penetration of smartphones and bundled offerings. Year Ended December 31, 2016 Compared to Year Ended December 31, 2015 Mobile revenue Our 2016, our Uzbekistan total operating revenue decreased by 7% to US$663 million compared to US$711 million in 2015. In Uzbekistan, all of our tariff plans are denominated in U.S. dollars. In functional currency terms, our Uzbekistan total operating revenue increased by 8%, due to the depreciation of the Uzbek som. The decrease on a U.S. dollar basis, was primarily driven by a revamp of tariff plans by Unitel in order improve competitiveness in the new environment following the reentry of MTS to the market and the entry of a new operator, UzMobile. This was partially offset by increased fees derived from the termination of calls from other operators' networks and increased smartphone penetration and promotions. Adjusted EBITDA In 2016, our Uzbekistan Adjusted EBITDA decreased by 10% to US$395 million compared to US$437 million in 2015, primarily due to the decrease in revenue, as discussed above, and increased structural operating expenses. Structural operating expenses were affected by increased customer-based taxes, which doubled in 2016, and higher business costs. In functional currency terms, our Uzbekistan Adjusted EBITDA increased by 4% in 2016 compared to 2015 because of the devaluation of the Uzbek som. Certain performance indicators As of December 31, 2016, we had approximately 9.5 million mobile customers in our Uzbekistan segment, representing a decrease of 4% compared to approximately 9.9 million mobile customers as of December 31, 2015. The decrease in our customer base in Uzbekistan was primarily due to the reentry of MTS to the market and the entry of a new operator, UzMobile. In 2016, our mobile ARPU in Uzbekistan decreased by 1% to US$5.6 compared to US$5.7 in 2015. In functional currency terms, mobile ARPU in Uzbekistan increased by 13% to UZS16,664 in 2016 compared to UZS 14,709 in 2015 mainly because Beeline Uzbekistan price plans are denominated in U.S. dollars and the Uzbek som depreciated. We also had growth in mobile data revenue, driven by a higher data usage driven by increased smartphone penetration and promotions. As of December 31, 2016, we had approximately 4.6 million mobile data customers in Uzbekistan compared to approximately 4.7 million mobile data customers as of December 31, 2015, representing a decrease of 2% primarily due to the reentry of MTS to the market and the entry of, UzMobile. HQ Our HQ Adjusted EBITDA increased by 23% to negative US$325 million in 2017, compared to negative US$421 million in 2016, primarily due to lower performance transformation costs and a one-off gain of $106 million recognized due to an adjustment to a vendor agreement. Our HQ Adjusted EBITDA increased by US$870 million to negative US$421 million in 2016 compared to negative US$1,291 million in 2015, primarily due to the US$900 million provision with respect to agreements with the SEC, DOJ and OM, included in operating expenses for the year ended December 31, 2015, that was not included in our consolidated total operating expenses for 2016. Further Information Regarding the Results of Operations of the Italy Joint Venture We present below certain supplemental information regarding the results of operations of the Italy Joint Venture because we consider the Italy Joint Venture to be a significant part of our business. For more information on the financial presentation of the Italy Joint Venture, see "Explanatory Note—Presentation of Financial Information of the Italy Joint Venture" and notes 5, 14 and 25 to our audited consolidated financial statements. The tables below set forth 100% of the financial data and certain performance indicators of the Italy Joint Venture for the years ended December 31, 2017 and 2016 and not only the 50% effective interest that is included in our consolidated financial statements through the equity method of accounting. For more information regarding each of the line items provided below, see the financial statements of the Italy Joint Venture, which we have filed in this Annual Report on Form 20-F pursuant to Rule 3-09 of Regulation S-X, "Exhibit 99.3—Consolidated financial statements of VIP-CKH Luxembourg S.à.r.l for the years ended December 31, 2017 and 2016" and the Notes thereto. The financial data of the Italy Joint Venture presented below for the year ended December 31, 2016 consists of: (i) the sum of the results of our Historical WIND Business and H3G S.p.A. prior to the merger of the two businesses on November 5, 2016 and (ii) the Italy Joint Venture's results from November 5, 2016 to December 31, 2016. The annual financial data of the Italy Joint Venture presented below for the year ended December 31, 2016 is unaudited. Results of operations in EUR Revenue (service and CPE/HS) Other revenue Total revenue EBITDA before integration costs Integration costs EBITDA Depreciation & amortization and reversal of impairment losses/(impairment losses) on non-current assets Gains (losses) on disposal of non current assets EBIT Finance income and foreign exchange gains/(losses), net Finance expenses EBT Income Tax Net Result The following supplemental analysis of results of operations for the year ended December 31, 2017 compared to the year ended December 31, 2016 is presented to enhance readers' understanding of the results of operations of the Italy Joint Venture for the most recent fiscal year. Revenue The Italy Joint Venture's revenue decreased by 4% from EUR 6,292 million during the year ended December 31, 2016 to EUR 6,023 million during the year ended December 31, 2017, driven by a decrease in mobile service revenue and mobile consumer premises equipment ("CPE") revenue. The mobile service revenue decrease was primarily due to continuing aggressive competition in the market and the impact from the new EU roaming regulation. The mobile CPE revenue decrease was primarily due to lower volume of gross additions and a more selective mobile customer scoring. Mobile internet revenue increased by 13% from EUR 1,329 million during the year ended December 31, 2016 to EUR 1,508 million during the year ended December 31, 2017, driven by a stable data customer base, data ARPU growth and an increase in data usage to approximately 3.5 GB per customer per month. Fixed-line service revenue in 2017 was broadly stable as compared to 2016. EBITDA EBITDA decreased by 8% from EUR 2,124 during the year ended December 31, 2016 to EUR 1,945 year-on-year in 2017 mainly due to the decrease in revenue and one-off integration costs of EUR 266 million, partially offset by operational synergies of EUR 167 million. Depreciation & amortization The Italy Joint Venture's depreciation and amortization increased from EUR 3,301 million for the year ended December 31, 2016 to EUR 3,357 million for the year ended December 31, 2017 primarily due to accelerated depreciation of network assets related to a network modernization project and to be offered to Iliad and the write-offs of divested frequencies in 2016. Finance Income Finance income decreased from EUR 489 million for the year ended December 31, 2016 to EUR 121 million for the year ended 31, 2017 primarily due to decreased positive derivatives fair market valuations as compared to 2016. Finance expenses Finance expenses increased from EUR 619 million for the year ended December 31, 2016 to EUR 1,412 million for the year ended December 31, 2017, primarily due to accrued interest on financial liabilities outstanding as of December 31, 2017 and expenses incurred in connection with a refinancing transaction, consisting of call premia and derivatives unwinding. Certain Performance Indicators The Italy Joint Venture's total mobile customers decreased by 5.8% from 31.3 million as of December 31, 2016 to 29.5 million as of December 31, 2017 due to continuing aggressive competition in the market, more selective mobile customer scoring and harmonization of customer base definition between the WIND and "3" brands. Fixed-line ARPU increased slightly from EUR 27.6 per month during the year ended December 31, 2016 to EUR 27.9 per month during the year ended December 31, 2017, driven by broadband high value customer base growth. Mobile ARPU and our fixed-line customer base were broadly stable in 2017 as compared to 2016. Liquidity and Capital Resources Working Capital We define working capital as current assets less current liabilities. Our working capital is monitored on a regular basis by management. Our management expects to repay our debt as it becomes due from our operating cash flows or through additional borrowings. Although we have a negative working capital, our management believes that our cash balances and available credit facilities are sufficient to meet our present requirements. As of December 31, 2017, we had negative working capital of US$732 million, compared to negative working capital of US$2,007 million as of December 31, 2016. The change in our working capital as of December 31, 2017 compared to December 31, 2016 was primarily due to decreased current financial liabilities as a result of repayment of borrowings; decreased trade and other payables, primarily as a result of payment for long-term assets; increased other current financial assets as a result of cash collateral placed with Citibank N.A. New York in connection with the MTO that is restricted in use. This was partially offset by decreased cash and cash equivalents and increased other current liabilities. As of December 31, 2016, we had negative working capital of US$2,007 million, compared to negative working capital of US$156 million as of December 31, 2015. The change in our working capital as of December 31, 2016 compared to December 31, 2015 was primarily due to increased current financial liabilities, mainly as a result of GTH Finance B.V.'s newly-issued senior notes; increased other liabilities, mainly due to the Pakistan Merger; decreased current financial assets, mainly due to maturing term deposits at banks; decreased cash and cash equivalents, mainly due to investments in property and equipment, and the utilization of income tax advances against current income tax liabilities. This was partially offset by the decreased provision with the respect to the agreements with the SEC, DOJ and OM, increased trade and other receivables and an increase in other assets, mainly due to the Warid consolidation. Consolidated Cash Flow Summary The following table shows our cash flows as of and for the years ended December 31, 2017, 2016 and 2015 (in millions of U.S. dollars): Cash flow data: Net cash from/(used in) operating activities from continued operations from discontinued operations Net cash from/(used in) investing activities from continued operations from discontinued operations Net cash from/(used in) financing activities from continued operations from discontinued operations Operating activities During 2017, net cash flows from operating activities increased to US$2,475 million from US$1,875 million in 2016. The increase in net cash flows from operating activities was primarily due to lower payments related to provisions, lower investment in working capital and increased operating profit, partially offset by no cash inflow from discontinued operations in 2017 as compared to positive cash flow from discontinued operations in 2016. During 2016, net cash flows from operating activities decreased to US$1,875 million from US$2,033 million in 2015 The decrease in net cash flows from operating activities was primarily due to higher payments for the provision for losses, higher investment in working capital and decreased cash flows from discontinued operations, partially offset by increased operating profit and lower income tax payment. The cash flow from our operating activities in 2016 was impacted primarily by the payment of US$795 million of fines and disgorgements in relation to agreements with the SEC, DOJ and OM, related legal costs of US$24 million as of December 31, 2016, and US$255 million cash outflow related to the performance transformation program. The cash flow from our operating activities in 2015 was impacted by the completion of the sale by GTH of a non-controlling 51% interest in OTA to the Fonds National d'Investissement, resulting in payments to the bank of Algeria of US$1.1 billion, payments to Cevital of US$50 million, and withholding tax of US$243 million related to the pre-closing dividend. Investing activities Our investing activities included payments related to the purchase of equipment, frequency permissions and licenses, capitalized customer acquisition costs, software and other assets as a part of the ongoing development of our mobile networks and fixed-line business. For information regarding our acquisitions and dispositions, see Note 5 to our audited consolidated financial statements. During 2017, our total payments for purchases of property and equipment, intangible assets, software and other assets were US$2,037 million compared to US$1,651 million during 2016. The increase was primarily due to increased capital expenditures in Pakistan as a result of full year consolidation of Warid, partially offset by decreased capital expenditures in Uzbekistan, Algeria and HQ. No cash flow from investing activities from discontinued operation was recorded in 2017. In addition, a cash balance of US$987 million was pledged as collateral for the MTO for the purchase of shares of GTH. For further details, see "Item 4—Information on the Company—Overview—Recent Developments—VEON Holdings B.V. submits cash tender offer in relation to GTH" and to the Notes 5 and 17 to our audited consolidated financial statements. During 2016, our total payments for purchases of property and equipment, intangible assets, software and other assets were approximately US$1,651 million compared to US$2,207 million during 2015. The decrease was primarily due to decreased capital expenditures in Russia, functional currency depreciation against the U.S. dollar in Ukraine and decreased capital expenditures in Pakistan due to network modernization completed in 2015. This decrease was partially offset by prepayments for inventory made in Uzbekistan. In addition, we recorded a decrease from the disposal of discontinued operations of US$325 million, we received US$19 million from bank deposit accounts, paid US$87 million for purchased financial assets and recorded US$649 million of cash outflows from discontinued operations during 2016. The cash flow from our investing activities in 2015 was impacted primarily by cash capital expenditures driven network investments, cash receipts from investments in financial assets, a deposit of US$361 million with financial institutions and US$140 million of cash outflows from discontinued operations. Financing activities During 2017, we repaid US$5,948 million of indebtedness and raised approximately US$6,193 million. As of December 31, 2017, the principal amounts of our external indebtedness for bank loans, bonds, equipment financing and loans from others amounted to US$11.1 billion, compared to US$10.5 billion as of December 31, 2016. The increase in the principal amounts of our external indebtedness is mainly the result of foreign exchange revaluation, GTH share buyback and premiums paid to repurchase our bonds. During 2016, we repaid approximately US$1,816 million of indebtedness and raised approximately US$1,882 million. As of December 31, 2016, the principal amounts of our external indebtedness for bank loans, bonds, equipment financing and loans from others amounted to approximately US$10.5 billion, compared to US$9.5 billion as of December 31, 2015. The increase in the principal amounts of our external indebtedness is mainly the result of the issuance of US$1.2 billion of bonds by GTH Finance B.V. During 2015, we repaid approximately US$4,840 million of indebtedness and raised approximately US$2,052 million. As of December 31, 2015, the principal amounts of our external indebtedness for bank loans, bonds, equipment financing, and loans from others amounted to approximately US$9.5 billion. The following table provides a summary of our outstanding indebtedness with an outstanding principal balance as of December 31, 2017 and 2016. VEON Holdings VEON Holdings VEON Holdings VEON Holdings VEON Holdings VEON Holdings VIP Finance Ireland VEON Holdings GTH Finance B.V. PMCL PMCL Banglalink Digital Communications Ltd. Omnium Telecom Algeria SpA VEON Amsterdam PJSC VimpelCom PJSC VimpelCom Many of the agreements relating to this indebtedness contain various covenants, including financial covenants relating to our financial performance or financial condition, as well as negative pledges, compliance with laws requirements, and restrictions on mergers, acquisitions and certain asset disposals. In addition, certain of these agreements subject certain of our subsidiaries to restrictions on their ability to pay dividends, make loans or repay debts to us. Our financing agreements have various customary events of default which can be triggered by events including non-payment, breach of applicable covenants, loss of certain mobile licenses, non-payment cross-default, cross-acceleration, certain judgment defaults, certain material adverse events and certain insolvency events. Some of our financing agreements also contain "change of control" provisions that may allow the lenders to cancel the facility and/or to require us to make a prepayment if a person or group of persons (with limited exclusions) acquire beneficial or legal ownership of, or control over more than 50.0% of, the voting share capital, or in certain cases of VEON Ltd., ceases to control more than 50.0% of the borrower's voting share capital. For additional information on our outstanding indebtedness, see Note 17 to our audited consolidated financial statements. For information relating to our financing activities in 2017, and the period subsequent to December 31, 2017, see Note 17 and Note 27, respectively, to our audited consolidated financial statements. For a description of some of the risks associated with certain of our indebtedness, see "Item 3—Key Information—D. Risk Factors—Risks Related to Our Business—Substantial amounts of indebtedness and debt service obligations could materially decrease our cash flow, adversely affect our business and financial condition and prevent us from raising additional capital." Cash and Deposits Subject to Currency and Contractual Restrictions As of December 31, 2017, our cash and deposit balances were equal to US$1,374 million. US$444 million (32% of total group cash and deposits) were denominated in U.S. dollars and approximately 55% of the U.S. dollar denominated cash was held in VEON's headquarter entities. In addition, as of December 31, 2017, funds worth US$987 million were pledged as a collateral for the MTO by VEON Holdings B.V. and therefore classified as restricted funds under other financial assets. For further details, see "Item 4—Information on the Company—Overview—Recent Developments—VEON Holdings B.V. submits cash tender offer in relation to GTH" and the Notes 5 and 17 to our audited consolidated financial statements. On September 2, 2017, the Government of Uzbekistan announced the liberalization of currency exchange rules, effective from September 5, 2017. The Central Bank of Uzbekistan set the official exchange rate of 8,100 Uzbek som per U.S. dollar, which represented nearly a halving of the value of the Uzbek som to the U.S. dollar. On December 22, 2017, VEON announced that its subsidiary, PJSC VimpelCom, had successfully repatriated a net amount of approximately US$200 million from Unitel. For more information about the currency restrictions in our countries of operation, see "—Factors Affecting Comparability of Financial Position and Results of Operations—Foreign Currency Controls and Currency Restrictions" and Notes 18 and 26 to our audited consolidated financial statements. For a description of certain risks associated with restrictions in our countries of operation relating to our ability to pay dividends, make loans or repay debts, see "Item 3—Key Information—D. Risk Factors—Risks Related to Our Business—We are exposed to foreign currency exchange loss and currency fluctuation and translation risks," "Item 3—Key Information—D. Risk Factors—Risks Related to Our Business—As a holding company, VEON Ltd. depends on the performance of its subsidiaries and their ability to pay dividends, and may therefore be affected by changes in exchange controls and currency restrictions in the countries in which its subsidiaries operate" and "Item 3—Key Information—D. Risk Factors—Risks Related to Our Markets—The banking systems in many countries in which we operate remain underdeveloped, there are a limited number of creditworthy banks in these countries with which we can conduct business and currency control requirements restrict activities in certain markets in which we have operations." Earnings Subject to Indefinite Investment During 2017, we recorded a deferred tax liability of US$116 million relating to the tax effect of our undistributed profits that will be distributed in the foreseeable future, primarily in relation to our Russian, Algerian and Pakistani operations. The undistributed earnings of our foreign subsidiaries (outside the Netherlands) which are indefinitely invested and will not be distributed in the foreseeable future, amounted to approximately US$6,833 million as of December 31, 2017. For more information, see Note 12 to our audited consolidated financial statements. Future Liquidity and Capital Requirements Telecommunications service providers require significant amounts of capital to construct networks and attract customers. In the foreseeable future, our further expansion will require significant investment activity, including the purchase of equipment and possibly the acquisition of other companies. Our capital expenditures include purchases of new licenses, equipment, new construction, upgrades, software, other long-lived assets and related reasonable costs incurred prior to intended use of the noncurrent assets, accounted at the earliest event of advance payment or delivery. Long-lived assets acquired in business combinations are not included in capital expenditures. During 2017, our capital expenditures remained stable with US$1,791 million in 2017 compared to US$1,741 million in 2016. During 2016, our capital expenditures were US$1,741 million compared to US$2,034 million in 2015, in each case, excluding capital expenditures in Italy. The decrease in capital expenditures was primarily due to functional currency depreciation against the U.S. dollar and efficiencies reached by the performance transformation program. We expect that our capital expenditures in 2018 will mainly consist of the maintenance of our existing networks as well as the increase of capacity due to data traffic growth and 3G and 4G/LTE deployment, in particular in relation to the new 4G/LTE license in Pakistan, Bangladesh and Ukraine and investments in fixed-line networks in Russia. Our management anticipates that the funds necessary to meet our current capital requirements and those to be incurred in the foreseeable future (including with respect to any possible acquisitions) will come from: cash we currently hold; operating cash flows; export credit agency guaranteed financing; borrowings under bank financings, including credit lines currently available to us; syndicated loan facilities; and debt financings from international and local capital markets. Our management expects positive cash flows from operations will continue to provide us with internal sources of funds. The availability of external financing is difficult to predict because it depends on many factors, including the success of our operations, contractual restrictions, availability of guarantees from export credit agencies, the financial position of international and local banks, the willingness of international banks to lend to our companies and the liquidity of international and local capital markets. The actual amount of debt financing that we will need to raise will be influenced by our financing needs, the actual pace of traffic growth over the period, network construction, our acquisition plans and our ability to continue revenue growth and stabilize ARPU. See "Item 3—Key Information—D. Risk Factors—Risks Related to Our Business—Substantial amounts of indebtedness and debt service obligations could materially decrease our cash flow, adversely affect our business and financial condition and prevent us from raising additional capital" and "Item 3—Key Information—D. Risk Factors—Risks Related to Our Business—We may not be able to raise additional capital, or we may only be able to raise additional capital at significantly increased costs." We had an undrawn amount of US$2,185 million and US$2,330 million under existing credit facilities (excluding credit facilities in Italy Joint Venture) as of December 31, 2017 and March 1, 2018, respectively. For more information on our existing undrawn credit facilities, see Note 4 to our audited consolidated financial statements. Our future cash needs are subject to significant uncertainties. For instance, we are exposed to the impact of future exchange rates on our U.S. dollar denominated debt obligations and future requirements for U.S. dollar denominated capital expenditures, which are generally funded by functional currency cash flows of our subsidiaries. Remittances from our subsidiaries may also be restricted by local regulations or subject to material taxes when remitted. In addition, we have recently had material cash outflows with respect to the agreements with the SEC, DOJ and OM. Despite these uncertainties, we believe that our cash flows from operations and other sources of funds described above will be sufficient to meet our short-term and foreseeable long-term cash requirements. Contractual Obligations As of December 31, 2017, we had the following contractual obligations in relation to our continuing operations, including long-term debt arrangements, equipment financing, capital leases, and commitments for future payments under non-cancellable lease arrangements and purchase obligations. We expect to meet our payment requirements under these obligations with cash flows from our operations and other financing arrangements. For information relating to our outstanding indebtedness subsequent to December 31, 2017, see Note 27 to our audited consolidated financial statements. Contractual Obligations(1) Bank loans and bonds(2) Non-cancellable lease obligations Purchase obligations(3) Total Other than the debt obligations described in "—Consolidated Cash Flow Summary—Financing Activities" and in Note 27 to our audited consolidated financial statements, we have not had any material changes outside the ordinary course of our business in the specified contractual obligations. Research and Development We now have the capacity to launch 4G/LTE in each of our reportable segments. We have acquired new spectrum in several operating companies to boost our network capacity, enhance spectral efficiency and enable the launch of new Radio Access Networks Technologies. For example, we have migrated old solutions for fixed wireless replacement to 4G/LTE solutions in the 450 MHz band in Armenia. In Russia, we are working closely with a number of vendors to undertake joint research and testing of technologies, with a focus on 5G, LTE Advanced Pro and LTE-unlicensed technology. For a discussion of the risks associated with new technology, see "Item 3—Key Information—D. Risk Factors—Risks Related to the Industry—Our failure to keep pace with technological changes and evolving industry standards could harm our competitive position and, in turn, materially harm our business." Off-Balance Sheet Arrangements We did not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors. Related Party Transactions We have entered into transactions with related parties and affiliates. See "Item 7—Major Shareholders and Related Party Transactions—B. Related Party Transactions" and Note 25 to our audited consolidated financial statements. ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES A. Directors and Senior Management As of March 1, Mikhail M. Fridman Andrei Gusev Gunnar Holt Sir Julian Horn-Smith Jørn P. Jensen Guy Laurence Alexey Reznikovich Alexander Pertsovsky The members of our current supervisory board were elected at the Please refer VEON Ltd. is required to noteadopt the new accounting standards IFRS 9 Financial Instruments and IFRS 15 Revenue from Contracts with Customers, effective from January 1, 2018, and IFRS 16 Leases, effective for the financial years from January 1, 2019. The transitional impacts on total equity upon adoption of IFRS 9 and IFRS 15 as of January 1, 2018 are expected to result in a decrease of US$48 million and an increase of US$99 million, respectively. We have yet to assess the impact of IFRS 16, which may be material, to the consolidated income statement and consolidated financial position upon adoption in 2019. Such impact is under analysis as of the date of this Annual Report on Form 20-F. For discussion on the impact this could have on our operations, see "Item 3—Key Information—D. Risk Factors—Risks Related to Our Business—Adoption of new accounting standards could affect reported results and financial position." See Note 3 to our audited consolidated financial statements for a discussion of new accounting pronouncements not yet adopted by the company.elsewherethe Italy Joint Venture as a reportable segment due to its increased contribution to our overall financial results and position. We do not control the Italy Joint Venture and therefore account for the Italy Joint Venture using the equity method and do not fully consolidate its results into our financial statements. See "—Further Information Regarding the Results of Operations of the Italy Joint Venture" for certain limited financial information regarding the results of operations of the Italy Joint Venture, which we present because we consider the Italy Joint Venture to be a significant part of our business. For the financial statements of the Italy Joint Venture we have filed in this Annual Report on Form 20-F.20-F pursuant to Rule 3-09 of Regulation S-X, see "Exhibit 99.3—Consolidated financial statements of VIP-CKH Luxembourg S.à.r.l for the years ended December 31, 2017 and 2016." For more information on the financial presentation of the Italy Joint Venture, see "Explanatory Note—Presentation of Financial Information of the Italy Joint Venture" and notes 5, 14 and 25 to our audited consolidated financial statements.Related Party TransactionsKey Developments and TrendsWe The following key developments and trends reflect management's assessment of factors which are anticipated to have a material effect on the company's financial condition and results of operations. For a list of most important recent events in the development of our business, see "Item 4—Information on the Company—Overview—Key Developments."transactions with related partiesa sale and affiliates. Please seepurchase agreement for the sectionsale of its operations in Laos to the Government of Laos. Under the agreement, VimpelCom Laos will transfer its 78% interest in VimpelCom Lao Co. Limited to the Government of Laos, the minority shareholder, in exchange for purchase consideration of US$22 million. The transaction is subject to customary closing conditions and is expected to be completed in the first half of 2018.entitled “Item 7—Major Shareholdershave been influenced by various factors, including those listed below. For a discussion of the key developments and Related Party Transactions—B. Related Party Transactions.”trends, commitments or events that are likely to have a material effect on our results of operation for the current financial year, see "—Key Developments and Trends." We may also be subject to certain fines or compliance costs that are paid and accounted for in a particular fiscal year in connection with certain legal or administrative proceedings. For more information on the regulatory environment in which we operate, see "Exhibit 99.2—Regulation of Telecommunications."Off-balancePakistan Merger and Other Acquisitions and Dispositions December 31, 2017 2016 2015 Source 2.5 % 5.4 % 12.9 % The Russian Federal State Statistics Service 4.6 % 3.7 % 3.2 % The Pakistan Bureau of Statistics 4.6 % 7.0 % 4.4 % The National Statistics Office of Algeria 5.8 % 5.0 % 6.1 % The Central Bank of Bangladesh 13.7 % 12.4 % 43.3 % The State Statistics Committee of Ukraine 12.7% (1) 8.0 % 9.1 % The International Monetary Fund Exchange rates as of
December 31, local
currency per one US$ Average
rate
2017 vs.
2016 Average
rate
2016 vs.
2015 Functional Currency 2017 2016 2015 Russian ruble—RUB 57.60 60.66 72.88 (13.0 )% 10.0 % Pakistani rupee—PKR 110.70 104.37 104.73 0.6 % 1.9 % Algerian dinar—DZD 114.76 110.40 107.10 1.4 % 9.0 % Bangladeshi taka—BDT 82.69 78.92 78.25 3.1 % 0.6 % Ukrainian hryvnia—UAH 28.07 27.19 24.00 4.1 % 17.0 % Uzbek som—UZS 8,120 3,231 2,809 72.7 % 15.5 % Year ended December 31, 2017 2016 2015 (in millions of U.S. dollars) 3,587 3,232 2,875 (1,454 ) (1,439 ) (1,550 ) (537 ) (497 ) (517 ) (66 ) (192 ) (245 ) (24 ) (20 ) (39 ) (935 ) (830 ) (829 ) 95 69 52 (97 ) (82 ) (42 ) (412 ) 48 14 (110 ) (99 ) — (71 ) 157 (314 ) (24 ) 347 (595 ) As of December 31, 2017 2016 2015 58.2 58.3 59.8 53.6 51.6 36.2 15.0 16.3 17.0 31.3 30.4 32.3 26.5 26.1 25.4 9.7 9.5 9.9 16.2 15.3 15.7 210.5 207.5 196.3 For the year ended
December 31, 2017 2016 2015 5.5 4.6 5.1 2.2 2.3 2.1 4.8 5.1 6.0 1.5 1.6 1.6 1.8 1.7 1.8 4.4 5.6 5.7 As of December 31, 2017 2016 2015 38.4 36.6 34.3 28.5 25.1 16.8 7.2 7.0 4.1 16.9 14.9 14.0 12.5 11.2 12.0 5.0 4.6 4.7 9.1 7.9 7.8 117.6 107.3 93.7 As of December 31, 2017 2016 2015 2.2 2.2 2.2 0.8 0.8 0.8 0.4 0.3 0.4 3.4 3.3 3.4 Year ended December 31, 2017 2016 2015 (in millions of U.S. dollars,
except per share amounts
and as indicated) 9,105 8,553 9,313 244 184 190 125 148 103 9,474 8,885 9,606 (1,879 ) (1,769 ) (1,937 ) (260 ) (216 ) (231 ) (3,748 ) (3,668 ) (4,563 ) (1,454 ) (1,439 ) (1,550 ) (537 ) (497 ) (517 ) (66 ) (192 ) (245 ) (24 ) (20 ) (39 ) (7,968 ) (7,801 ) (9,082 ) 1,506 1,084 524 (935 ) (830 ) (829 ) 95 69 52 (97 ) (82 ) (42 ) (412 ) 48 14 (110 ) (99 ) — (71 ) 157 (314 ) (24 ) 347 (595 ) (472 ) (635 ) (220 ) (496 ) (288 ) (815 ) — 920 262 — 1,788 — — 2,708 262 (496 ) 2,420 (553 ) (483 ) (380 ) (917 ) — 2,708 262 (13 ) 92 102 (496 ) 2,420 (553 ) (0.28 ) (0.22 ) (0.52 ) (0.28 ) (0.22 ) (0.52 ) — 1.55 0.15 — 1.55 0.15 1,749 1,749 1,748 0.28 0.23 0.035 Year ended December 31, Year ended
December 31, 2017 2016 2015 2017 2016 2015 in millions of U.S. dollars (percentage of total
operating revenue) 4,729 4,097 4,583 50 % 46 % 48 % 1,525 1,295 1,014 16 % 15 % 11 % 915 1,040 1,273 10 % 12 % 13 % 574 621 604 6 % 7 % 6 % 622 586 622 7 % 7 % 6 % 513 663 711 5 % 7 % 7 % — 10 — — 0 % — 596 573 799 6 % 6 % 8 % 9,474 8,885 9,606 100 % 100 % 100 % Year ended December 31, 2017 2016 2015 (in millions of U.S. dollars) 1,788 1,574 1,825 703 507 409 426 547 684 233 267 242 347 306 292 261 395 437 (325 ) (421 ) (1,291 ) 154 57 277 3,587 3,232 2,875 Year ended December 31, 2017 2016 2015 (in millions of U.S. dollars) (390 ) 59 — (22 ) (10 ) 18 — (1 ) (4 ) (412 ) 48 14 Year ended December 31, 2017 2016 2015 20.0 % 20.0 % 20.0 % 30.0 % 31.0 % 32.0 % 26.0 % 26.0 % 26.0 % 45.0 % 45.0 % 45.0 % 18.0 % 18.0 % 18.0 % 50.0 % 50.0 % 7.5 % 3.3 % 3.3 % 3.3 % 27.08 % 22.47 % 22.47 % 25.0 % 25.0 % 25.0 % 24.0 % 27.5 % 27.5 % 3.9 % 3.9 % 4.8 % Year ended December 31, '16 - '17 '15 - '16 in millions of U.S. dollars (except as indicated) 2017 2016 2015 % change 4,729 4,097 4,583 15% (11)% 3,843 3,276 3,624 17% (10)% 87 23 — 271% — 1,012 778 719 30% 8% 673 665 789 1% (16)% 213 156 170 37% (8)% 2,941 2,523 2,758 17% (9)% 1,788 1,574 1,825 14% (14)% 38 % 38 % 40 % (0.6p.p.) (1.4p.p.) Year ended December 31, '16 - '17 '15 - '16 in millions of RUB (except as indicated) 2017 2016 2015 % change 275,887 273,003 277,241 1% (2)% 224,186 218,192 219,031 3% 0% 5,064 1,496 — 238% — 59,041 51,773 43,581 14% 19% 39,271 44,418 47,748 –12% (7)% 12,430 10,393 10,462 20% (1)% 171,545 168,213 167,096 2% 1% 104,342 104,790 110,145 0% (5)% 38 % 38 % 40 % (0.6p.p.) (1.3p.p.) Year ended December 31, 2017 2016 2015 58.2 58.3 59.8 5.5 4.6 5.1 319 306 310 38.4 36.6 34.3 2.2 2.2 2.2 Year ended December 31, '16 - '17 '15 - '16 in millions of U.S. dollars
(except as indicated) 2017 2016 2015 % change 1,525 1,295 1,014 18 % 28 % 1,418 1,217 960 17 % 27 % 225 155 86 45 % 81 % 107 78 54 37 % 45 % 822 788 605 4 % 30 % 703 507 409 39 % 24 % 46 % 39 % 40 % 7.0p. p. (1.2p. p.) Year ended December 31, '16 - '17 '15 - '16 in millions of PKR
(except as indicated) 2017 2016 2015 % change 160,679 135,602 104,181 18 % 30 % 149,393 127,414 98,649 17 % 29 % 23,743 16,248 8,812 46 % 84 % 11,286 8,188 5,532 38 % 48 % 86,583 82,539 62,137 5 % 33 % 74,096 53,063 42,044 40 % 26 % 46 % 39 % 40 % 7.0p. p. (1.2p. p.) Year ended
December 31, 2017 2016 2015 53.6 51.6 36.2 2.2 2.3 2.1 236 241 219 28.5 25.1 16.8 Year ended December 31, '16 - '17 '15 - '16 in millions of U.S. dollars
(except as indicated) 2017 2016 2015 % change 915 1,040 1,273 (12 )% (18 )% 898 1,031 1,259 (13 )% (18 )% 113 76 46 55 % 65 % 17 9 14 80 % (36 )% 489 493 589 (1 )% (16 )% 426 547 684 (22 )% (20 )% 47 % 53 % 54 % (6.1p. p.) (1.1p. p.) Year ended December 31, '16 - '17 '15 - '16 in millions of DZD
(except as indicated) 2017 2016 2015 % change 101,457 113,727 127,552 (11 )% (11 )% 99,588 112,706 126,078 (12 )% (11 )% 12,586 8,006 4,648 57 % 78 % 1,869 1,021 1,474 83 % (31 )% 54,301 53,929 58,998 1 % (9 )% 47,156 59,798 68,554 (21 )% (13 )% 46 % 53 % 54 % (6.1p. p.) (1.2p. p.) Year ended
December 31, 2017 2016 2015 15.0 16.3 17.0 4.8 5.1 6.0 529 562 603 7.2 7.0 4.1 Year ended December 31, '16 - '17 '15 - '16 in millions of U.S. dollars
(except as indicated) 2017 2016 2015 % change 574 621 604 (7)% 3% 557 606 596 (8)% 2% 78 63 42 25% 50% 17 15 8 15% 76% 341 354 362 (3)% (2)% 233 267 242 (13)% 10% 41 % 43 % 40 % (2.5p.p.) 3.0p.p. Year ended December 31, '16 - '17 '15 - '16 in millions of BDT
(except as indicated) 2017 2016 2015 % change 46,471 48,687 47,114 (5)% 3% 45,072 47,506 46,448 (5)% 2% 6,308 4,909 3,247 29% 51% 1,399 1,181 666 18% 77% 27,630 27,723 28,243 0% (2)% 18,841 20,964 18,871 (10)% 11% 41 % 43 % 40 % (2.5p.p.) 3.0p.p. Year ended
December 31, 2017 2016 2015 31.3 30.4 32.3 1.5 1.6 1.6 121 126 122 16.9 14.9 14.0 Year ended
December 31, '16 - '17 '15 - '16 in millions of U.S. dollars (except as indicated) 2017 2016 2015 % change 622 586 622 6% (6)% 577 542 576 6% (6)% 154 99 66 62% 49% 43 41 45 3% (8)% 2 3 1 20% 46% 275 280 330 (1)% (15)% 347 306 292 13% 5% 56 % 52 % 47 % 3.4p.p. 5.3p.p. Year ended December 31, '16 - '17 '15 - '16 in millions of UAH (except as indicated) 2017 2016 2015 % change 16,542 14,960 13,475 11% 11% 15,338 13,851 12,475 11% 11% 4,103 2,429 1,442 69% 75% 1,132 1,052 967 8% 9% 72 57 33 26% 71% 7,321 7,149 7,143 2% 0% 9,221 7,811 6,332 18% 23% 56 % 52 % 47 % 3.5p.p. 5.2p.p. Year ended
December 31, 2017 2016 2015 26.5 26.1 25.4 1.8 1.7 1.8 48 44 40 12.5 11.2 12.0 0.8 0.8 0.8 Year ended
December 31, '16 - '17 '15 - '16 in millions of U.S. dollars (except as indicated) 2017 2016 2015 % change 513 663 711 (23)% (7)% 509 659 704 (23)% (6)% 128 152 136 (16)% 12% 3 4 5 (26)% (15)% 1 — 2 174% (86)% 252 268 274 (6)% (2)% 261 395 437 (34)% (10)% 51 % 60 % 61 % (8.7p.p.) (1.9p.p.) Year ended December 31, '16 - '17 '15 - '16 in billions of UZS (except as indicated) 2017 2016 2015 % change 2,342 1,967 1,829 19% 8% 2,323 1,953 1,811 19% 8% 585 452 348 29% 30% 15 13 13 14% (2)% 4 1 4 484% (84)% 1,182 794 705 49% 13% 1,160 1,173 1,124 (1)% 4% 50 % 60 % 61 % (10.1p.p.) (1.8p.p.) Year ended December 31, 2017 2016 2015 9.7 9.5 9.9 4.4 5.6 5.7 20,126 16,664 14,709 5.0 4.6 4.7 Year ended
December 31, '16 - '17 2016
(combined) in millions of EUR (except as indicated) 2017 % change 6,023 6,292 (4.3 )% 159 183 (13.3 )% 6,182 6,475 (4.5 )% 2,211 2,184 1.2 % (266 ) (60 ) — 1,945 2,124 (8.4 )% (3,357 ) (3,301 ) (1.7 )% (2.0 ) (1.7 ) 19.0 % (1,414 ) (1,179 ) 19.9 % 121 489 (75.2 )% (1,412 ) (619 ) — (2,705 ) (1,309 ) — 85 (40 ) — (2,620 ) (1,349 ) — As of and for the year ended
December 31, 2017 2016 2015 (in millions of U.S. dollars) 2,475 1,875 2,033 2,475 1,192 1,104 — 683 929 (3,016 ) (2,671 ) (2,634 ) (3,016 ) (2,022 ) (2,494 ) — (649 ) (140 ) (733 ) (126 ) (1,439 ) (733 ) (106 ) (732 ) — (20 ) (707 ) Principal
amount
outstanding
(in millions
of US$) Type of debt Guarantor Currency Interest rate Maturity 2017 2016 Loans None RUB 8.75% - 10.0% 2022 2,474 — Notes 2016: PJSC VimpelCom 2017: None US$ 5.2% - 5.95% 2019 - 2023 1,554 1,554 Notes None US$ 3,95% - 4,95% 2021 - 2024 1,500 — Loans None EUR 3mEURIBOR + 1.9% - 2.75% 2022 752 — Notes PJSC VimpelCom US$ 7.5% 2022 628 1,629 Syndicated loan (RCF) None US$ 1mLIBOR + 2.25% 2018 250 — Eurobonds None US$ 7.748% - 9.1% 2018 - 2021 543 1,150 Notes None RUB 9.0% 2018 208 198 Notes VEON Holdings B.V. US$ 6.25% - 7.25% 2020 - 2023 1,200 1,200 Loans None PKR 6mKIBOR + 0.35% - 0.8% 2020 - 2022 379 166 Loan Exportkreditnämnden (The Swedish Export Credit Agency) US$ 6mLIBOR + 1.9% 2020 212 231 Senior Notes None US$ 8.6% 2019 300 300 Syndicated loan None DZD Bank of Algeria re-discount rate + 2.0% 2019 — 340 Loan None US$ 1mLIBOR + 3.3% 2017 — 1,000 Loan None RUB 12.75% 2017 - 2018 — 1,021 Ruble Bonds None RUB 10.0% - 11.9% 2017 19 660 Other loans 1,084 1,040 Total bank loans and bonds 11,103 10,489 Payments due by period (in millions of U.S. dollars) Total Less than
1 year 1 - 3 years 3 - 5 years More than
5 years 13,735 1,862 4,141 4,958 2,774 466 70 151 78 167 861 595 266 — — 15,062 2,527 4,558 5,036 2,941 ITEM 6.Directors, Senior Management and Employees2015,2018, the members of our supervisory board were as follows:Age(1) Position Alexey M. ReznikovichUrsula Burns 4659 Chairman of Supervisory Boardsupervisory board Mikhail M. FridmanStan Chudnovsky 50DirectorGennady Gazin50Alternate DirectorAndrei Gusev42DirectorSir Julian Horn-Smith66DirectorKjell-Morten Johnsen 47 Director Ole Bjørn Sjulstad 53 Director Morten Karlsen SørbyGennady Gazin 55Alternate DirectorTrond Ø Westlie 53 Director (1)As of March 1, 2015.45 Director 63 Director 69 Director 53 Director 56 Director 49 Director 49 Alternate Director (Alexey Reznikovich) June 28, 2014July 24, 2017 annual general meeting of shareholders in accordance with our bye-laws except for Mr. Gazin and Mr. Sørby who were appointed to serve as alternate directors on our supervisory board in place of Leonid R. Novoselsky and Jon Fredrik Baksaas, respectively, in accordance with our bye-laws. The members of our current supervisory board will serve until the next annual general meeting, unless any members are removed from office or their offices are vacated in accordance with our bye-laws.
As of March 1, 2015,2018, the members of our management board were as follows:follows. On February 15, 2018, Jon Eddy and Mikhail Gerchuk stepped down from their roles as Head of Emerging Markets and Head of Eurasia, respectively.
Name | Age(1) | Position | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 54 | Group Chief Executive Officer | ||||||||
| 56 | Group Chief Financial Officer | ||||||||
| 50 | |||||||||
| Group General Counsel | ||||||||||
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| 45 | |||||||||
| ||||||||||
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| ||||||||||
| ||||||||||
| Group Chief Technology Officer | |||||||||
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| 47 | Group | ||||||||
| Chief Corporate & Public Affairs Officer | ||||||||||
| 48 | Group Chief | ||||||||
Jacky Simmonds | 54 | Group Chief People Officer | ||||||||
| 50 | Group Chief Compliance Officer | ||||||||
Kjell Morten Johnsen | 50 | Head of | |||
Peter Chernyshov | 49 | Head of Eurasia & CEO of Ukraine | |||
Aamir Hafeez Ibrahim | 49 | Head of Emerging Markets & CEO of Pakistan | |||
Vasyl Latsanych | 45 | CEO of Russia | |||
Matthieu Galvani | 48 | CEO of Algeria | |||
Erik Aas | 51 | CEO of Bangladesh | |||
Oleksandr Komarov | 45 | CEO of Kazakhstan |
Supervisory Board
Alexey M. ReznikovichUrsula Burns has been Chairman of the VimpelComVEON Ltd. supervisory board since December 2012 and a director of VimpelCom Ltd. since April 2010. He also serves asJuly 2017. Ms. Burns is chairman of VimpelCom Ltd.’sour compensation committee. Mr. Reznikovich was a member ofMs. Burns brings extensive international experience to the board of directors of OJSC VimpelCom from May 2002 until April 2010. Mr. Reznikovich hasrole having served as Managing Partner of LetterOne Telecom since June 2014. Prior to joining LetterOne Telecom, he was Chief Executive Officer of LLC Altimo from April 2005 to May 2014Chairman and Chief Executive Officer of Altimo Holdings InvestmentsXerox Corporation (2009 - 2016). During her tenure as CEO, she helped the company transform from June 2006a global leader in document technology to May 2014. He has beenthe world's most diversified business services company serving enterprises and governments of all sizes. Most recently in 2016, she led Xerox through a membersuccessful separation into two independent, publicly traded companies. Ms. Burns also regularly appears on Fortune's and Forbes' list of the supervisoryworld's most powerful women, and is a board director of American Express, Nestlé, Exxon Mobile and Uber. U.S. President Barack Obama appointed Ms. Burns to help lead the White House national program on Science, Technology, Engineering and Math (STEM) from 2009-2016, and she served as chair of the Alfa Group Consortium since 2002, with overall responsibility for business development and management supervision of the Group’s assets. Mr. Reznikovich was a director of Golden TelecomPresident's Export Council from May 2007 until February 2008. In 2001, Mr. Reznikovich founded EMAX, a new business venture to develop Internet centers in Russia and2015-2016 after service as vice chair from 2010-2015.
Stan Chudnovsky has been a director of EMAXVEON Ltd. since August 2016. Mr. Chudnovsky is Head of Product for Messaging at Facebook. Before joining Facebook, Mr. Chudnovsky was Vice President of Growth, Global Strategy and of CAFEMAX, an Internet café chain, since February 2001. From December 1998 to 2000, Mr. ReznikovichSpecial Operations at PayPal after a company he co-founded, IronPearl, was a partner at McKinsey & Co.acquired. Prior to his time at McKinsey,this, Mr. Reznikovich worked at Procter & Gamble in Italy and TransworldChudnovsky was involved in the United States. He graduated from the Economics Facultyestablishment of Tickle Inc., one of the Moscow State Universityfirst social media companies, and received an M.B.A. from Georgetown Universitygrew it to become one of the largest websites in the United Statesworld by 2003. Mr. Chudnovsky has a strong background as an entrepreneur, having co-founded several other successful internet companies including Jiff, NFX, Ooga Labs, and Wonderhill. He has served on a number of corporate boards, including Goodreads and Zinch. Originally from INSEADMoscow, Mr. Chudnovsky earned engineering degrees in France.Russia.
Mikhail M. Fridman has been a director of VimpelComVEON Ltd. since April 2010. Mr. Fridman was a member of the board of directors of OJSC VimpelCom from July 2001 until April 2010. He currently serves as a member of the board of directors of OJSCJSC Alfa-Bank, ABH Holdings S.A as well as Chairman of the supervisory boardsSupervisory Boards of the Alfa Group Consortium and Director of LetterOne Holdings S.A.SA and LetterOne Investment Holdings SA. Mr. Fridman also serves as a member of the supervisory boardSupervisory Board of X5 Retail GroupRETAIL GROUP N.V. and DEA Deutsche Erdoel A.G. He is a member of the Public Chamber of the Russian Federation. Since 1989, Mr. Fridman has taken an active role in managing the Alfa Group, which includes Alfa Finance Holdings S.A. (Alfa Bank, Alfa Capital Holdings Limited and Medpoint Limited), Altimo and X5 Retail Group N.V. In 1988, Mr. Fridman co-founded the Alfa-Foto cooperative. From 1986 until 1988, Mr. Fridman served as an engineer at Elektrostal Metallurgical Works. Mr. Fridman graduated with honors from the Faculty of Non-Ferrous Metals of the Moscow Institute of Steel and Alloys in 1986.1986 and in 1989, together with his partners, founded the Alfa Group Consortium.
Gennady Gazin has been an alternate director of VimpelComVEON Ltd. since October 2014.2014 and a director of VEON Ltd. since June 2015. Mr. Gazin is serving as a chairman of VimpelComVEON Ltd.’s's nominating and corporate governance committee and as a member of our audit and risk committee. He served as chairman of its special committee overseeing the internal investigation and the company’scompany's response to the inquiries by various authorities and as a member ofuntil its finance and strategy committee and audit committee, in each case as an alternate director for Mr. Novoselsky.dissolution on August 3, 2016. Mr. Gazin currently serves as Vice-Chairman of the Boardan Affiliate Partner at Studio Moderna (a multi-channel and direct to consumer retailer in Central & Eastern Europe), Director at Interpipe (a producer of pipes and railroad wheels),Lindsay Goldberg, a New York based private equity firm; Director at GeoAlliance, (anan oil and gas production company)company; and Chairman of the Board at Genesis Philanthropy Group. From 2007 to 2012, Mr. Gazin served as CEO of EastOne, an international investment advisory group. Prior to EastOne, Mr. Gazin worked at McKinsey and Company’s& Company's New York and Moscow offices for 14 years, during which time he was an active member of the Telecommunications practice and also served as the Senior Partner responsible for McKinsey’sMcKinsey's CIS practice. Mr. Gazin started his professional career as a systems and telecommunications engineer at Bell Communications Research/Tellcordia and General Dynamics in the USA. Mr. Gazin received a bachelor’sbachelor's degree in Electrical Engineering from Cornell University in 1987, a master’smaster's degree in Electrical Engineering from Stanford University in 1988 and an MBAM.B.A. from the Wharton School of Business at the University of Pennsylvania (USA) in 1993.
Andrei Gusevhas been a director of VimpelComVEON Ltd. since April 2014. Mr. Gusev is serving as a chairman of VimpelComVEON Ltd.’s's finance and strategy committee, chairman of its business review committee and as a member of its nominating and corporate governance committee and compensation committee. Mr. Gusev is a senior partner at LetterOne Telecom (UK) LLP, joining in 2014, and was a managing director at Altimo from 2013 to 2014. Mr. Gusev was Chief Executive Officer of X5 Retail Group N.V. from 2011 to 2012 and prior to that, from 2006 to 2010, served as its Director of Business Development and M&A. From 2001 to 2005, Mr. Gusev served as Managing Director of the Alfa Group with overall responsibility for investment planning. Prior to that, Mr. Gusev worked at Bain & Company and Deloitte Consulting. Mr. Gusev received an M.B.A. from the Wharton School at the University of Pennsylvania in 2000 and a diploma with honors from the Department of Applied Mathematics and Computer Science at Lomonosov Moscow State University in 19941994.
Gunnar Holt has been a director of VEON Ltd. since June 2015. Mr. Holt is serving as a member of VEON Ltd.'s audit and risk committee and of its nominating and corporate governance committee. Mr. Holt was a Senior Advisor at Telenor ASA from 2006 to 2017 and previously served as Group Finance Director. From 1995 to 1999, he worked at Aker ASA and Aker RGI ASA, serving as Executive Vice President and CFO. From 1986 to 1995, he held various leadership positions in the Aker Group, including Deputy President of Norwegian Contractors AS, Executive Vice President and Chief Financial Officer of Aker Oil and Gas Technology AS, President of Aker Eiendom AS, and Finance and Accounting Director of Aker Norcem AS. From 1978 to 1986, he served as Executive Officer and Special Advisor in the Norwegian Ministry of Petroleum and Energy. Mr. Holt holds a Doctor of Business Administration degree and Advanced Postgraduate Diploma in Management Consultancy from Henley Management Collage, Brunel University, in the United Kingdom; an M.B.A. from the Wharton School atUniversity of Queensland in Australia, and an M.B.A. in finance from the University of Pennsylvania in 2000.Wisconsin. He also received a Diplomøkonom from The Norwegian School of Management. Mr. Holt has served on a number of corporate boards.
Sir Julian Horn-Smith has been a director of VimpelComVEON Ltd. since July 2014. Sir Julian is servingserved as a member of VimpelComVEON Ltd.’s's special committee overseeing the internal investigation and the company’scompany's response to the inquiries by various authorities anduntil its dissolution on August 3, 2016. Sir Julian is active in the global telecommunications sector as a member of its business review committee.Senior Advisor to UBS Investment Bank, in London and Senior Advisor to CVC (Telecoms and Media). He also serves as an advisor to LetterOne. Sir Julian previously served as Senior Advisor to the Etisalat Group board from 2011 to 2014. Sir Julian was a member of the founding management team of Vodafone Group Plc. He retired from Vodafone in July 2006, where he held a number of senior positions, including Deputy Chief Executive Officer and member of the board. Sir Julian remains in the global telecom sectorHe currently serves as a Senior Advisor to UBS Investment Bank, in London, Senior Advisor to CVC (Telecoms and Media) and a member of the board of Digicel, (aa Caribbean Central America and Asia Pacific Operator).operator. Sir Julian is also a memberChairman of the board of Martin Dawes Systems (Software) and an advisor to Alix Partners (Consulting).eBuilder, based in Sweden. He is a Pro Chancellor at Bath University and chairs the University’sUniversity's School of Management Advisory Board. He is a Trustee for the Hope for Tomorrow Charity and is the Founder and Co-Chair of The TATLIDiL Conference (British and Turkish Conference). During his career in international telecommunications, Sir Julian has served as Senior Advisor to the Etisalat Group board from 2011 to 2014 and as Chair of both the Mannesmann Supervisory and Management boards, as well as a Director on a number of
company boards, including Lloyds Banking Group plc, Smiths Group, China Mobile, eAccess in Japan, De la Rue plc, Verizon Wireless and SFR in France. Sir Julian earned a Bachelor of Science in economics from University of London University in 1970 and a Master of Science from University of Bath University in the United Kingdom in 1979.
Kjell-Morten JohnsenJørn P. Jensen has been a director of VimpelComVEON Ltd. since June 2011.August 2016. Mr. JohnsenJensen is a memberchairman of VimpelCom Ltd.’s compensationour audit and risk committee. In September 2017, Mr. Johnsen served as a member of OJSC VimpelCom’s board of directors from June 2007 until May 2013. Mr. JohnsenJensen was appointed Executive Vice President and Head of Telenor’s European Operations in May 2012. From March 2009 to May 2012, Mr. Johnsen wasas Chief ExecutiveFinancial Officer of Telenor Serbia. Before his appointment in Serbia, Mr. Johnsen served as Senior Vice President of Telenor Central & Eastern EuropeDyson Ltd., and Head of Telenor Russia from February 2006. From 2001 to 2006, Mr. Johnsen worked as Vice President of Telenor Networks with responsibility for Telenor ASA’s fixed-line activities in Russia and the CIS. From 1996 to 2000, Mr. Johnsen worked with Norsk Hydro, where he held executive positions both as country manager in Ukraine and as manager at the regional headquarters for the CIS, Africa and Latin America, which was based in Paris. Mr. Johnsen serves as a Director of Tøvarious entities forming part of the Dyson Group. Mr. Jensen has been a Invest ASDirector of Danske Bank A/S since March 2012, and LinWi Invest AS (each an investment company)is also a Director of Green Mobility A/S. Mr. Jensen has previously held senior roles, including Deputy Chief Executive Officer and Group Chief Financial Officer, at Carlsberg between 2000 and 2015. Mr. Jensen has served as a memberMember of Golden Telecom,the Committee on Corporate Governance in Denmark since 2012, and has previously served on a number of corporate boards, including DONG Energy A/S (2010 to 2015), Brightpoint Inc.’s board, Lauritzen
Fonden/Vesterhavet A/S, and Royal Scandinavia A/S. Mr. Jensen received a Bachelor of Science in Economics from December 2003 to February 2008. Mr. Johnsen received an M.B.A.Copenhagen Business School in Strategic Management from the Norwegian School1986, and a Master of Science in Economics and Business Administration from Copenhagen Business School in 1999.1988.
Ole Bjørn SjulstadGuy Laurence has been a director of VimpelComVEON Ltd. since April 2010. He servesJuly 2017. Mr. Laurence is serving as a member of VimpelComVEON Ltd.’s finance and strategy committee, audit committee, nominating and corporate governance's compensation committee and business reviewof its finance committee. Mr. SjulstadLaurence brings more than 30 years of global experience in telecommunications, media and pay television. Mr. Laurence was previously CEO at Rogers, a memberCDN$14bn telecoms and media group in Canada, and prior to that he worked at Vodafone for thirteen years holding several senior positions including CEO of OJSC VimpelCom’s boardVodafone UK, operating in one of directors from June 2008 until April 2010. Mr. Sjulstad has been the Head of Telenor’s representative office in Russia since 2009. Mr. Sjulstad joined the Telenor Group in 2000most competitive and is currently a Senior Vice President. He served as Managing Director of Telenor Asia Pte Ltd. in Singapore from 2002 until 2004 when he relocated to Norway. He continued focusing on emergingmature communications markets in Asia as Senior Vice Presidentthe world, and DirectorCEO of Corporate Development, Asia region of Telenor ASA. In March 2007, he joined Telenor’s Central & Eastern European regional unit. In March 2009,Vodafone Netherlands. Mr. Sjulstad was appointed Head of Telenor, Russia. Mr. Sjulstad also served on the board of directors of Grameenphone Limited in Bangladesh from 2002 until 2008. Mr. Sjulstad has degrees in Mechanical Engineering and Business Administration from the Kongsberg International Institute (Ingeniørhøgskole), which he received in 1983. Mr. Sjulstad also completed the Program for Executive Development at IMD, Lausanne in October 2008.
Morten Karlsen Sørby has been an alternate director of VimpelCom Ltd. since February 2015. Mr. Sørby has served as Executive Vice President of the Telenor Group since 2003 when he was also appointed Head of the Norwegian Market of the Telenor Group. Mr. Sørby joined the Telenor Group in 1993 as a Vice President in Norsk Telekom, a subgroup of the Telenor Group. He then served as Senior Vice President, General Manager and Deputy CEO inLaurence holds a number of Telenor Group companies between 1995directorships, including of Vodafone UK Ltd., Maple Leaf Sports & Entertainment, Chelsea FC plc and 2002.Chelsea Football Club Ltd.
Alexey M. Reznikovich has been a director of VEON Ltd. since April 2010 and served as Chairman from December 2012 until July 2017. Mr. SørbyReznikovich was a member of the board of directors of OJSCPJSC VimpelCom from 2000 to 2003. He became Head of the Nordic Region of Telenor in 2005 and was appointed Head of Corporate Development in 2009 and Head of Strategy and Regulatory Affairs in 2011. In 2014, Mr. Sørby served as CEO of Uninor, an Indian Telenor Group Company. Mr. Sørby has also been chairman of several boards of directors of Telenor Group companies in Norway, Denmark and Sweden since 2005 andMay 2002 until April 2010. Mr Reznikovich has been a board member of Digi, a Telenor Group company in Malaysia since 2013. Prior to joining the Telenor Group, Mr. Sørby worked at Arthur Andersen & Co. in Oslo, Norway. Mr. Sørby received his Master of Science degree in business administration from the University of Karlstad, Sweden in 1983. He is a state licensed public accountant in Norway and completed the Program for Executive Development at IMD in Lausanne, Switzerland in 1997.
Trond Ø Westlie has been a director of VimpelCom Ltd. since July 2014. Mr. Westlie is serving as chairman of VimpelCom Ltd’s audit committee, and as a member of its special committee overseeing the internal investigation and the company’s response to the inquiries by various authorities. Mr. Westlie joined A.P. Moller - Maersk in January 2010 as Group CFO and member of the Executive Board. Mr. Westlie served as Executive Vice President and Chief Financial Officer of the Telenor Group from September 2005 to December 2009. Previously, he was Group Executive Vice President and Chief Financial Officer of Aker Kvaerner ASA from
2002 to 2004, and Executive Vice President and CFO of Aker Maritime ASA from 2000 to 2002. Mr. Westlie has served on numerous corporate boards and is currently a memberMember of the Board of Danske Bank, Danish Ship Finance, Shama AS and Tønsberg Delikatesse AS.Directors at Qvantel Oy from November 2017. Mr. Westlie qualified as a State Authorized Public Auditor from Norges Handelshøyskole in Norway in 1987.
Our supervisory board approved the appointments of Gennady Gazin in October 2014 and Morten Karlsen Sørby in February 2015 as alternate directors on our supervisory board in accordance with our bye-laws. Mr. Gazin and Mr. Sørby are presently serving in place of Leonid R. Novoselsky (age 45) and Jon Fredrik Baksaas (age 60), respectively.
Jon Fredrik Baksaas has been a director of VimpelCom Ltd. since November 2011, and before his current term, heReznikovich served as a directorManaging Partner of VimpelCom Ltd.LetterOne Technology from June 2014 to September 2017. Prior to joining LetterOne Technology, he was Chief Executive Officer of LLC Altimo from April 20102005 to June 2011. Mr. Baksaas has served as the PresidentMay 2014 and Chief Executive Officer of Telenor ASA since June 2002, chairman of the board of directors of Telenor MobileAltimo Holdings AS since 2002, chairman of the board of directors of Telenor Business Partner Invest AS since 2001, a member of the board of Svenska Handelsbanken AB since 2003, a member of the board of Doorstep AS since 2000, a member of the advisory council of Det Norske Veritas since 2004 and a member of the board of GSM Association since January 2009. Before joining Telenor in 1989, Mr. Baksaas served as the Chief Financial Officer of Aker AS, Chief Financial Officer of Stolt-Nielsen Seaway and held finance-related positions in Det Norske Veritas in Norway and Japan. Mr. Baksaas received a Master of Science degree from the Norwegian School of Economics and Business Administration in Bergen, Norway in 1979 and completed the program for Executive Development at the International Institute for Management Development in Lausanne, Switzerland in 1991.
Leonid Novoselsky has been a director of VimpelCom& Investments Ltd. since April 2010. Mr. Novoselsky was a member of OJSC VimpelCom’s board of directors from June 2006 until April 2010.to May 2014. He is a co-founder and the current President of the Gradient Group since September 2013. Since September 2008, Mr. Novoselsky has been a member of the supervisory board of directors of OJSC “Protek,” onethe Alfa Group Consortium since 2002, with overall responsibility for business development and management supervision of the largest pharmaceutical distributorsgroup's assets. Mr. Reznikovich was a director of Golden Telecom from May 2007 until February 2008. In 2001, Mr. Reznikovich founded EMAX, a new business venture to develop internet centers in Russia and has been a director of EMAX and of CAFEMAX, an internet café chain, since February 2001. From December 1998 to 2000, Mr. Reznikovich was a partner at McKinsey & Co. Prior to his time at McKinsey, Mr. Reznikovich worked at Procter & Gamble in Italy and Transworld in the United States. He graduated from the Economics Faculty of the Moscow State University and received an M.B.A. from Georgetown University in the United States and from INSEAD in France.
Alexander Pertsovsky has been an alternate director for Alexey Reznikovich of the VEON Ltd. supervisory board since January 2018. Mr. Pertsovsky is serving as a member of VEON Ltd.'s compensation committee. Mr. Pertsovsky joined LetterOne Technology in London on 1 January 2018 from Bank of America Merrill Lynch. At Bank of America Merrill Lynch, Mr. Pertsovsky served as the Country Executive for Russia & CIS since February 2013. Prior to that, Mr. Pertsovsky was at Renaissance Capital, which he joined in 2002 and oversaw the institutional securities business and our activities in Russia. He became Chief Executive Officer of Renaissance Capital in 2007. Mr. Novoselsky graduatedPertsovsky holds an MS degree in Applied Mathematics from the Moscow Institute of Steel and Alloys in 1993 with a degree inRadio, Engineering and in 1999,Automation. He also received an M.B.A. from the Wharton School of theColumbia University of Pennsylvania.in 2002.
Management Board
Jo LunderJean-Yves Charlier was appointed as Chief Executive Officer of VimpelComVEON Ltd. by the VimpelComVEON Ltd. supervisory board effective July 2011. Previously, Mr. Lunder served as the Chairman of the VimpelCom Ltd. supervisory board fromin April 2010 until June 2011. From May 2002 to October 2010 and from August 2011 to May 2013, Mr. Lunder served as a member of OJSC VimpelCom’s board of directors, and from May 2002 until July 2003 and from August 2011 to March 2012, Mr. Lunder served as the Chairman of the board of directors of OJSC VimpelCom. Since September 1999, Mr. Lunder has also held numerous other positions at OJSC VimpelCom, including Chief Executive Officer from April 2001 to October 2003, General Director from May 2001to October 2003, President and Chief Operating Officer from September 2000 to April 2001, First Deputy Chief Executive Officer and Chief Operating Officer from September 1999 to April 2000. Mr. Lunder has served as a member of the board of directors of Orkla ASA since 2012. From September 2007 until June 2011, Mr. Lunder served as the Executive Vice President of FERD, one of Norway’s largest privately owned financial and industrial groups. In addition, Mr. Lunder served as Executive Chairman of the board of directors of the Aibel Group Ltd., Chairman of the board of Elopak AS, Chairman of the board of Swix Sport AS, and a member of the board of directors of Pronova BioPharma ASA. From February 2005 to September 2007, Mr. Lunder served as Chief Executive Officer of Atea ASA, one of Europe’s largest IT infrastructure companies. From 1993 until August 1999, Mr. Lunder was employed in various capacities for Telenor and its affiliates, including Chief Operating Officer of Telenor Mobile. Mr. Lunder earned a Bachelor’s degree from the Oslo Business School in 1986 and an M.B.A. degree from Henley Management College in the United Kingdom in 1996 and completed a Management Training Program at IMD, Switzerland in 1998.
Jean-Yves Charlier was appointed as Chief Executive Officer of VimpelCom Ltd. by the VimpelCom Ltd. supervisory board effective April 13, 2015. Prior to his appointment as Chief Executive Officer of VimpelComVEON Ltd., he was the Chairman and Chief Executive Officer of SFR in France from 2012 until 2014. While at SFR he completed the demerger of SFR from Vivendi in a transaction with cable operator Numericable. From 2007 until 2012, Mr. Charlier was the Chief Executive Officer for Promethean, an interactive learning company, and, from 2004 until 2007, Mr. Charlier was the Chief Executive Officer of Colt, an alternative carrier. He started his career with Wang in France and also held senior executive positions with Equant and BT Global Services. Mr. Charlier has been on the board of several other listed companies including Activision Blizzard and Vivendi. He holds an M.B.A. from the Wharton Business
School and a bachelorBachelor of arts (internationalArts in international business administration)administration from the American College in Paris, France.
Andrew DaviesTrond Odegard Westlie joined VimpelCom Ltd. in November 2013VEON on October 2, 2017 and assumed his duties as Chief Financial Officer. FromOfficer following the release of quarterly results on November 2010 to October 2013,9, 2017. Mr. Davies was theWestlie is an experienced financial executive having been Chief Financial Officer at Verizon Wireless. Prior to his appointment at Verizon Wireless,of AP Moller-Maersk from 2010 through 2016 and Chief Financial Officer of Telenor from 2005 through 2009. Mr. Davies held a number of senior financial roles within Vodafone Group, latterly as CFO of Vodafone India and Vodafone Turkey and including positions in Vodafone UK and Vodafone Japan. Prior to joining Vodafone in 2003, Mr. Davies was CFO of Singlepoint (4U), which was acquired by Vodafone in 2003, and held positions with Honeywell Inc. and the General Electric Company after starting his career with KPMG in 1987. Mr. Davies servesWestlie previously served as a member of the VEON supervisory board and chairman of various subsidiaries of VimpelCom Ltd. Mr. Davies earned a Bachelor of Science degree in mathematics from Imperial College in London in 1987.our audit and risk committee between July 2014 and August 2016.
Mikhail SlobodinScott Dresserhas served was appointed as HeadGroup General Counsel, with effect from September 1, 2014. Mr. Dresser was most recently Vice President of RussiaGlobal Strategic Initiatives at BirdLife International, a global conservation organization. Between 2006 and 2012, Mr. Dresser was with Virgin Media in the UK, including service as General Counsel, where he led its legal department and acted as principal liaison with Virgin Media's Board of VimpelCom Ltd. and General Director of OJSC VimpelCom since September 2013. Mr. Slobodin has beenDirectors, as well as being a member of the Supervisory Board of Euroset Holding N.V. since November 2013. Before joining VimpelCom, Mr. Slobodin was anits Executive Vice President of Strategy and New Business Development in OJSC TNK-BP Management. From 2003 to 2011, he held key positions in several companies in the oil & gas sector including as President of OJSC Russian Utility Systems; General Director, President of CJSC Integrated Energy Systems; Vice President for Energy of OJSC TNK-BP Management; and Director of the Engineering Business Development Department of OJSC TNK Management. Mr. Slobodin started his business career in 1998, as Head of the Economics Division in OJSC SUAL. Mr. Slobodin graduated from the Ural State University in 1993, majoring in Economics, and has an academic degree as a Candidate of Science (Engineering).
Maximo Ibarra has served as Head of Italy and Chief Executive Officer and General Director of WIND Italy since May 2012. From May 2009 to May 2012, Mr. Ibarra served as the Consumer Director of WIND Italy, having served as Mobile Marketing and Customer Management Director from 2004 to April 2009. From June 2003 to February 2004, Mr. Ibarra served as Vice President Marketing & Strategies of the Benetton Group. From September 2001 to June 2003, he served as Vice President for Strategy and Business Development in Fiat Auto. From December 2000 to September 2001, Mr. Ibarra served as the Commercial Director of DHL International, and from January 1996 to December 2000, he held several positions in Omnitel (now Vodafone). Mr. Ibarra holds a degree in Political Sciences and Economics from the Sapienza University of Rome, which he received in 1991.
Vincenzo Nesciwas appointed Head of Africa and Asia effective July 1, 2014. Mr. Nesci has served as Chief Executive Officer of GTH since July 2014 and Executive Chairman of Optimum Telecom Algeria since July 2012. In 2010, Mr. Nesci joined GTH as the Chief Executive Officer of the Sub-Saharan Africa Cluster. Previously, Mr. Nesci joined Alcatel in 1980 and held positions in Egypt, Italy, Belgium, Ethiopia and East Africa. He was nominated Country Senior Officer of Alcatel in Egypt in 1993, appointed Vice-President for the Middle East in 1999, and became President of the Middle East and Africa Business Unit in 2008. Prior to joining Alcatel, Mr. Nesci worked for General Electric in Libya and Nigeria. He is a member of the board of various subsidiaries of VimpelCom Ltd. Mr. Nesci received a Master in Economics degree from L. Bocconi University in Italy in 1973. He was also a Lecturer and Assistant Professor in Banking and Finance, Conseiller du Commerce Extérieur de la France, a Board Member of the Chambre de Commerce Franco-Arabe and a member of the World Economic Forum.
Peter Chernyshov has been Head of Ukraine since June 2014. Mr. Chernyshov previously served as Vice President of Carlsberg Group, responsible for six countries in Eastern Europe, from September 2012 to February 2014 and as Chief Executive Officer of Carlsberg Ukraine from 2006 to September 2012. From 1999 to 2006, he worked for BBH (Baltic Beverage Holding), where he held various management positions, including General Director of OJSC “Vena” from 2003 to 2005 and Vice President of Finance at Baltika Breweries from 2005 to 2006. Mr. Chernyshov is currently a member of the board of the European Business Association (EBA) in Ukraine. Mr. Chernyshov received a Master’s degree in mathematics from Ural State University in 1990 and an MBA from Kingston University Business School (UK) in 2002.
Andrey Patokahas been Head of the CIS since January 2015. From February 2014 to January 2015, Mr. Patoka was Executive Vice President, Chief Infrastructure Officer of OJSC VimpelCom, and from 2008 to February 2014, Mr. Patoka was Vice-President, Head of B2B Business Unit of OJSC VimpelCom. Prior to that, Mr. Patoka worked for Golden Telecom from September 2003 to March 2004 as the Deputy General Director and Senior Vice President, International and Regional Business. Mr. Patoka also served as Head of the Regional Business Development Department of Sovintel from September 2003 to March 2004 and Head of the International and Regional Business Development Department of Sovintel from March 2004 to September 2008. Mr. Patoka held positions at Combellga starting in 1992, reaching the position of Commercial Director, heading the Sales Department, in 2002. Mr. Patoka is currently a member of the board of directors of CJSC Samara Telecom, CJSC Rascom, CJSC WestBalt Telecom, Sakhalin Telecom Limited, Golden Telecom Limited and CJSC Kubintersvyaz. Mr. Patoka graduated from the Military Krasnoznamenny Institute of the Russian Ministry of Defence with a degree in military translation in 1987.
Jeffrey Hedbergwas appointed Chief Executive Officer of Mobilink in Pakistan in July 2014. Prior to joining Mobilink, Mr. Hedberg worked at Boston Consulting Group from March 2013, where he was a Senior Advisor in the firm’s South Africa office and its Munich-based Technology, Media and Telecommunications Practice area. Mr. Hedberg served as Acting CEO of Telekom South Africa from July 2010 to June 2011 and as CEO of Telkom’s Nigerian subsidiary, Multi-Links Nigeria, from November 2009 to June 2010. From May 2006 to November 2009, Mr. Hedberg was CEO of Cell C in South Africa. Mr. Hedberg was Executive Vice President and Member of the Board of Management of Deutsche Telekom AG from 1999 to 2002 where he developed the strategy for the International Division, and in 2002 he was appointed CEO and Chairman of Deutsche Telekom USA. Prior to that, Mr. Hedberg served as Executive Vice President of Swisscom International from 1997 to 1999. Mr. Hedberg currently serves as a member of the board of directors of various subsidiaries of VimpelCom Ltd., including Business & Communication Systems (Pvt) Ltd., LinkDotNet Telecom Limited, LinkdotNET Pakistan (Pvt) Ltd. and Waseela Microfinance Bank Limited. Mr. Hedberg received a Master’s degree in International Management from the University of Denver in 1992 and a Bachelor of Business Administration Degree from Northeastern University in 1985.
Ziad Shatarajoined Banglalink in January 2013 as its Chief Executive Officer. Before joining Banglalink, he was with Wind Telecommunications as its Chief Technology Officer from 2010 to 2012, and its IT director from 2008 to 2009. Prior to joining WIND, Mr. Shatara had more than 17 years of proficiency in building, running and expanding operations in telecommunications, including cellular business, fixed lines and broadband networks integration.Team. He also has additional professional expertise in the fields of IT, Customer Service and Retail Operations. Mr. Shatara started his career in the IT industry in 1991. He then moved into telecommunications, starting with a role with the first GSM operator in Jordan, Fastlink, in 1994. From 1994 to 2007 he worked in many regional networks in the Middle and the Far East. Mr. Shatara holds a B.Sc. and a M.Sc. in Electrical and Computer Engineering, which he received in 1989 and 1991, respectively, at the Technical University of Budapest in Hungary.
Taras Parkhomenko has served as the Chief Executive Officer of our subsidiary in Kazakhstan since February 2013. In August 2006, Mr. Parkhomenko joined Kyivstar as Deputy Marketing Director for Strategic Affairs at Kyivstar, and in 2010 became Chief Marketing Officer and a member of the Management Board of Kyivstar. From 2003 to 2006, Mr. Parkhomenko served as Marketing Director at the pharmaceutical corporation
Arterium. From 2002 to 2003, Mr. Parkhomenko served as Manager for brands strategic management at BBH company (in the Carlsberg Group). From 1996 to 2001, Mr. Parkhomenkopreviously held positions in the marketingUnited States at White Mountains RE Group (which is the operating company of White Mountains Insurance Group Ltd), in the role of Senior Vice President and strategic planning functionAssociate General Counsel from 2005-2006; as Senior Advisor for Legal and Financial Affairs for the International Global Conservation Fund (an international environmental conservation organization) from 2002-2005; and positions at Golden Telecom.Morgan, Lewis & Bockius LLP and at Lord Day & Lord, Barrett Smith. Mr. Parkhomenko received a degree in economicsDresser studied at the Vanderbilt University School of Law and systems engineering from the Kyiv International University of Civil Aviation in 1997 and the certificate of the British Chartered Institute of Marketing (CIM) in 2002.
Anton Kudryashov has been Chief Group Business Development and Portfolio Officer since October 2013. Previously Mr. Kudryashov was Head of Russia of VimpelCom Ltd. and General Director of OJSC VimpelCom from January 2012 to September 2013. Mr. Kudryashov has been a member of the Supervisory Board of Euroset Holding N.V. from December 2012 until November 2013. Previously Mr. Kudryashov served as Chief Executive Officer of CTC Media from August 2008. Mr. Kudryashov started his professional career at CS First Boston, an international investment bank, where he served in various positions from 1991 to 1995, including as Vice President from 1993 to 1995. In 1995, he became one of the founding partners of Renaissance Capital investment bank. Mr. Kudryashov also held senior executive positions in insurance and private equity. In 1998, Mr. Kudryashov founded Afisha Publishing HouseNew Hampshire, and was admitted to the ChairmanBar, in New York and Connecticut, in 1993. Mr. Dresser is on the advisory board of the Board of Afisha Publishing House until 2005. From 2002 to 2003, he served as the restructuring Chief Executive Officer of NTV-Plus. Mr. Kudryashov graduated with a degree in Economics from the Finance Academy in Moscow (formerly Moscow Finance Institute) in 1989 and completed his post-graduate studies at the Institute of European Studies, Academy of Science in Moscow in 1990 and the London School of Economics in 1991. He is a member of the Russian Television Academy and also a member of the Board of the Russian Union of Industrialists and Entrepreneurs (RSPP).BirdLife International.
Yogesh Malikhas served as Group Chief Technology Officer of VimpelComVEON Ltd. since March 2014. Mr. Malik served as Chief Executive Officer of Uninor, an Indian mobile network operator majority owned by the Telenor Group, from May 2013 through November 2013 and prior to that, served in a variety of senior positions at Uninor from 2010, including COO covering the areas of Technology, Regulatory and Customer Care. Mr. Malik has also served as CTO of Grameenphone in Bangladesh, CTO of Kyivstar in Ukraine and Head of Technology & Sourcing at Telenor Group headquarters in Norway.Norway, CTO of "Kyivstar" JSC in Ukraine and CTO of Grameenphone in Bangladesh. Prior to joining the Telenor Group, Mr. Malik worked for TIW, Tata/AT&T and Ericsson in various senior positions in a variety of countries. Mr. Malik has acted as the official spokesperson for VEON and helped implement innovative technology to overhaul the group's IT systems. Mr. Malik received an Engineering Degree in Electronics from MSU University, Baroda, India in 1993, and an Executive M.B.A. from IMD, Lausanne, Switzerland in 2008.
Jeremy Roffe-VidalMark MacGann was appointed Group Chief Human ResourcesCorporate & Public Affairs Officer in February 2015. Before joining VimpelCom,November 2017. Mr. Roffe-VidalMacGann was basedmost recently Senior Board Advisor and Head of Public Policy EMEA at Uber, and led the company's public policy organization across Europe, the Middle East and Africa, making a major contribution to Uber's pioneering development in dozens of countries and hundreds of cities internationally. In prior roles, Mr. MacGann led government affairs and public policy for the New York Stock Exchange in the aftermath of the financial crisis. His leadership transformed DIGITALEUROPE, the technology industry's largest trade body into a highly effective lobbying organization in Europe. In addition, Mr. MacGann previously headed global and regional government affairs functions at Alcatel, the global telecom technology provider; and during his tenure as Associate Partner in New York, London and Paris offices of the leading strategic advisory firm, Brunswick Group, he advised global telecom, media and technology players on major cross-border transactions. Mr. MacGann holds degrees in politics and economics from the Institut d'Etudes Politiques, France and served as Group Human Resources and Corporate Vice-President at Cap Gemini S.A. Prior to this, from 2001 to 2004, he held the position of Vice President Human Resources in Invensys (now part of Schneider Electric) in London and France. From 2004 to 2008, Jeremy Roffe-Vidal served as Senior Vice President Human Resources of Alstom Power Systems based in Switzerland. Mr. Roffe-Vidal received a degree in Psychology from GoetheKingston University, in Germany in 1992.London.
Mikhail GerchukChristopher Schlaeffer has served as Group Chief Commercial and Digital Officer since January 2016, with responsibility for the development of new digital services and telecommunications propositions and for leading our global brand and commercial functions as well. Mr. Schlaeffer joined VEON from his role
as Founder and Chief Executive Officer of two tech startups in Berlin and London which he served from 2010 until today. Prior to that, Mr. Schlaeffer was with Deutsche Telekom for 12 years as the group's Chief Product and Innovation Officer, Corporate Development Officer (with responsibility for Technology, IT, Innovation, R&D, and Venture Capital), Chief Strategy Officer since July 2012. From October 2011 to July 2012 heand Chief Marketing Officer of the mobile division for T-Mobile International. He also served as a Member of the Executive Operating Board and played a key role in Deutsche Telekom's transformation. Mr. Schlaeffer holds a Master's degree from the Vienna University of Economics and is recognized as a "Young Global Leader" by the World Economic Forum.
Jacky Simmonds was appointed as VEON's Group Chief Commercial Officer. Mr. Gerchuk servedPeople Officer in October 2017. Ms. Simmonds has experience across a number of sectors including travel, tourism and aviation in over 25 years working as Acting Headan HR Executive, bringing particular expertise in leading significant transformations of organizations to become more digitally enabled businesses. Ms. Simmonds regularly features in the annual list of the CIS Business Unit from February 2014top ten Most Influential HR Practitioners in the United Kingdom. Ms. Simmonds will be responsible for managing and leveraging the talent and experience across VEON's operating markets as well as developing a strategy to January 2015. Previously, Mr. Gerchuk served as Vice President and Chief Commercial Officer of MTS from December 2008 until October 2011, having joined MTS in August 2007 asbuild a world-class HR function across the Group Marketing Director. At MTS, he also served on the boards of directors of Comstar, MGTS, MTS Ukraine and several other MTS subsidiaries.group. Prior to joining MTS, Mr. GerchukVEON, Ms. Simmonds was Chief Commercial OfficerGroup People Director at Vodafone Malta from 2006 to 2007. He held senior marketing positionseasyJet plc where she focused on organizational change, updating the ways of working, employee engagement and talent development. She played a crucial role in helping it shape itself for further growth and scale in Europe. Before joining easyJet plc, Ms. Simmonds was Group HR Director at VodafoneTUI Group UK between 2002for over five years. Ms. Simmonds is also a Non-Executive Director at Ferguson Plc, where she chairs the Remuneration Committee, and 2006, including Head of Voice Propositions between 2004 and 2006 and Senior Global Marketing Manager between 2002 and 2004. Mr. Gerchuk also worked as an Associate at Booz Allen Hamilton in London from 1999 to 2002 and, before that, as Category Marketing Manager at PepsiCo and Brand Manager at Mars, Inc. Mr. Gerchuk received an M.A. in Economic Geography and English from Moscow State University in 1994 and an M.B.A. from INSEAD in 1999.
Scott Dresser was appointed as Group General Counsel, with effect from September 1, 2014. From 2012 to 2014, Mr. Dresser served as Vice President of Global Strategic Initiatives at BirdLife International, a global conservation organization. Between 2006 and 2012, Mr. Dresser was with Virgin Media in the UK, including service as General Counsel, where he led its legal department and acted as principal liaison with the company’s Board of Directors, as well as beingis a member of its Executive Management Team. Hethe Nominations and Audit Committee.
Joshua Drew has been VEON's Group Chief Compliance Officer since October 2017. Mr. Drew joined VEON in July 2016 as Associate General Counsel and was appointed Acting Group Chief Compliance Officer in March 2017. In his role as VEON's Group Chief Compliance Officer, Mr. Drew is responsible for leading a team of compliance professionals across all of VEON's operating markets to establish and implement an effective compliance program, while also previously held positions inadvising senior management and the US at White Mountains RE Group (which is the operating company of White Mountains Insurance Group Ltd), in the role of SeniorSupervisory Board on core compliance, risk and governance issues. Prior to joining VEON, Mr. Drew was Vice President and Associate General Counsel for over five years at Hewlett-Packard Enterprise and Hewlett-Packard, with responsibility for investigations and anti-corruption compliance. Mr. Drew also previously served as a prosecutor with the U.S. Department of Justice for ten years. Mr. Drew has a B.A. from 2005-2006;Wesleyan University and a J.D. from Northwestern University School of Law.
Kjell Morten Johnsen has been VEON's Head of Major Markets, with responsibility for our business in Russia and the Italy Joint Venture since August 2016. Mr. Johnsen joined VEON from Telenor, where he was head of Telenor Europe with previous roles as CEO of Telenor Serbia, as well as Senior AdvisorVice President and Head of Telenor Russia, Telenor Central & Eastern Europe. He was also a member of VEON Ltd.'s supervisory board from 2010 until 2015 and PJSC's Board of Directors from 2007 to 2013. Prior to entering the telecommunications industry in 2000, Mr. Johnsen worked for LegalNorsk Hydro in France and Financial Affairs forUkraine, and Scandsea International in Norway and Russia. Mr. Johnsen, has an M.B.A. from the Global Conservation Fund (an international non-profit organization) from 2002-2005;Norwegian School of Economics and positions at Morgan, Lewis & Bockius LLP and at Lord Day & Lord, Barrett Smith. Mr. Dresser received a bachelor of science degree in Business Administration, and has attended the University of Oslo, Norwegian School of Management, and Nord University Business School.
Peter Chernyshov has been Chief Executive Officer of Ukraine since June 2014 and Head of Eurasia since February 2018. From 2006 to 2014, Mr. Chernyshov held various leadership roles in Carlsberg Ukraine and Slavutich Brewery (part of the Carlsberg Group). From 1999 to 2006, Mr. Chernyshov occupied several positions in the companies of BBH (Baltic Beverage Holding, now part of the Carlsberg Group), working at different times in three countries: from 1999 to 2000 as the Business controller for Russian operations in the BBH HQ Stockholm, Sweden; from 2001 to 2002, as the CFO of BBH in Kiev, Ukraine; from 2003 to April 2006, as the CEO of Vena Breweries, Saint Petersburg and Chelyabinsk, Russia; and from August 2005 to April 2006, as Vice President, Finance at
Baltika, Saint Petersburg, Russia. Mr. Chernyshov has served as member of the board of the American Chamber of Commerce (ACC) in Ukraine. Mr. Chernyshov received a Master's degree in mathematics from Ural State University in 1990 and an M.B.A. from Kingston University Business School in 2001.
Aamir Hafeez Ibrahim has been the Chief Executive Officer of our operations in Pakistan since July 2016 and Head of Emerging Markets since March 2018. Prior to his position as CEO, Mr. Ibrahim was Mobilink's Deputy CEO and Chief Commercial Officer. Mr. Ibrahim has over two decades of international experience as a senior executive across multiple industries and continents. Prior to joining Mobilink, he was the Senior Vice President for Telenor Group, where he led distribution initiatives across Asia. Mr. Ibrahim has also held senior leadership positions at Ford Motor Company, Jaguar & Land Rover. Mr. Ibrahim has extensive experience specifically in strategic marketing, sales and distribution, analytics, product development, government and regulatory management, business planning, M&A, public relations and crisis management. Mr. Ibrahim has an undergraduate degree in Accounting from the University of New HampshireTexas and an MBA from IMD in 1989Switzerland. In 2012, he received an Advanced Management Program diploma from Harvard Business School. Mr. Ibrahim has lived and a juris doctorate degree from Vanderbilt University Law School in 1992.worked across multiple cultures and countries including Thailand, Pakistan, the United Kingdom, the United Arab Emirates, Switzerland and the United States.
Romano RighettiVasyl Latsanych has served as Group Chief RegulatoryExecutive Officer of PJSC VimpelCom since January 2012. He has10, 2018. Mr. Latsanych came to VEON from the MTS Group, where he held a number of senior roles, the most recent being Group Vice President for Strategy and Marketing. Mr. Latsanych also served as Deputyon the board of directors of Sitronics Kasu, NVision Group, Medsi, SMM and several other MTS subsidiaries. Mr. Latsanych graduated from Lviv State Lysenko Institute in 1995, and received an Executive M.B.A. from the London Business School in 2001.
Matthieu Galvani has been Chief OperatingExecutive Officer of WINDVEON's operations in Algeria, under the Djezzy brand since October 2010January 2016. Mr. Galvani has a deep knowledge of Algeria and emerging markets, with significant experience in senior executive roles in the industry and in the Middle East and North Africa. Mr. Galvani was previously Chief Commercial Officer for VEON's emerging markets, which serves 95 million customers in Algeria, Bangladesh and Pakistan. His previous roles include Chief Marketing Officer of Vivendi KenCell in Kenya from 2000 to 2004; Chief Commercial Officer of OTA from 2005 to 2009; Chief Commercial Officer of Tunisie Telecom from 2009 to 2014, and Chief Commercial Officer of Zain in Saudi Arabia from 2014 to 2016. Mr. Galvani, a French national, holds a Master's degree in Econometrics, and a post graduate degree in Energy Economics from the University of Paris X and the French Atomic Energy Agency (CEA).
Erik Aas has been Head of Bangladesh since December 2015. Mr. Aas previously served as the Chief Executive Officer of Pt AXIS Telekom from 2007 until 2014. From 1997 to 2007, Mr. Aas served in various senior executive roles for the Telenor Group, including as the Chief Executive Officer and Director of Regulatory, Antitrust, Wholesalethe Board of Grameenphone. Mr. Aas is the Chairman and Privacy AffairsManaging Director of Lakeview Invest AS and Lakeview Trading AS since September 2014. Mr. Aas attended the International Directors Programme from INSEAD from 2012 to 2013. Mr. Aas received an Executive M.B.A. from IMD, Switzerland in 2001 and graduated with a Master of Science degree for Civil Engineering from the Norwegian University of Science and Technology in 1991.
Oleksandr Komarov has been Head of Kazakhstan since January 2006. In May 2011,2016. Mr. Righetti was appointed Head of the Regulatory Board and in January 2012, he was appointed Group Chief Regulatory Officer. From 1999 to 2005, he worked for Telecom Italia S.p.A., where he held the position of Regulatory Affairs and International Institutions Vice President. During 1999, Mr. RighettiKomarov served as Director of the Regulatory DepartmentChief Commercial Officer at AGCOM. From 1995 to 1999,Beeline Kazakhstan from July 2013 until 2016. Previously, Mr. RighettiKomarov served as General Director for the Italian MinistryChief Executive Officer of Communications. PriorGroupM from 2007 to that,2013, Acting Chief Executive Officer of MediaCom from 2009 to 2010, the Chief Executive Officer of Video International Advertising Group Kiev from 2006 to 2007 and the Chief Executive Officer of Adell Saatchi & Saatchi from 2004 to 2006. Mr. Righetti was a partnerKomarov received an Executive M.B.A. from the Stockholm School of Economics in an Italian consultancy firm, professor of business engineering at University of Rome, and2006 as well as a supervisorPostgraduate Diploma in an international audit company, Marketing from the Chartered Institute of Marketing in 2001.
Mr. RighettiKomarov received a degree in Economics from L.U.I.S.S.—Guido Carli University in 1984.
Enrique Aznar has been VimpelCom’s Group Chief Compliance Officer since August 2013 and was appointed to the Management Board in October 2014. Prior to VimpelCom, Enrique was Head of Corporate Governance & Compliance - Chief Integrity Officer at Millicom International Cellular S.A., based in Luxembourg (2011-2013); Chief Ethics & Compliance Officer at Nokia Siemens Networks, based in Helsinki (2009-2011); Deputy General Counsel & Chief Compliance Officer, Europe, Middle East, and Africa for Tyco International, based in Madrid (2005-2009) and held different legal roles with Dell, Inc (2000-2005), Freshfields (1997-2000), Price Waterhouse (1994-1997) and Arthur Andersen (1989-1992). Enrique is a qualified lawyer in Spain, England and Wales. He earned a Licenciatura en Derecho (Law Degree)electronic devices engineering from the National Technical University of BarcelonaUkraine 'Kyiv Polytechnic Institute' in 1988, a Master of Arts in International & Comparative Business Law in London in 1993 and a Business Management Program certificate (PDD) at IESE Business School in 2003. He also attended a Leadership Program at Stanford University in the United States in 2012.
Rozzyn Boyjoined the company in February 2015 as Chief Communications Officer. Ms. Boy was previously Global Head of Corporate Communications and Brand for Tata Communications Ltd, where she was responsible for all external and internal communications as well as its global Brand positioning. Prior to joining Tata, she held leadership roles in consultancy for PR firms, Hill & Knowlton (UK Technology Practice Head), Firefly Communications (Associate Director) and Text 100, in the UK and South Africa, and was also Head of Communications for Motorola Sub-Saharan Africa. Ms. Boy has a BA honors in Communications and Journalism from The Nelson Mandela Metropolitan University in South Africa.1995.
B. Compensation
We paid our directors and senior managers an aggregate amount of approximately US$28.745 million for services provided during 2014,2017, including approximately US$2.442 million for stock-based compensation awards. In addition, we accrued contingent compensation ofshort-term employee benefits and approximately US$20.6 million, including US$1.91 million for stock-based compensation awards.
long-term employee benefits. For more information regarding our director and senior management compensation, including a description of applicable stock based and cash based plans, see Note 2526 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 20-F.statements.
Pursuant to our bye-laws, we indemnify and hold harmless our directors and senior managers from and against all actions, costs, charges, liabilities, losses, damages and expenses in connection with any act done, concurred in or omitted in the execution of our business, or their duty, or supposed duty, or in their respective offices or trusts, to the extent authorized by law. We may also advance moneys to our directors and officers for costs, charges and expenses incurred by any of them in defending any civil or criminal proceedings. The foregoing indemnity will not apply (and any funds advanced will be required to be repaid) with respect to a director or officer if any allegation of fraud or dishonesty is proved against such director or officer. We have also entered into separate indemnification agreements with our directors and senior managers pursuant to which we have agreed to indemnify each of them within substantially the same scope as provided in the bye-laws.
We have obtained insurance on behalf of our senior managers and directors for liability arising out of their actions in their capacity as a senior manager or director.
We do not have any pension, retirement or similar benefit plans available to our directors or senior managers.
C. Board Practices
Our company VEON Ltd. is governed by our supervisory board, currently consisting of nineten directors. Our bye-laws provide that our supervisory board consists of at least seven and no more than thirteen directors, as determined by the supervisory board and subject to approval by a majority of the shareholders voting in person or by proxy at a general meeting. We have not entered into any service contracts with any of our current directors providing for benefits upon termination of service.
The supervisory board generally delegates management of our company to the management board which sub-delegates management to the CEO, subject to certain material business decisions that are reserved to the supervisory board. The management board consists of the CEO and other senior executives. The CEO has exclusive authority to identify and recommend our senior executives to the supervisory board for the supervisory board’sboard's approval.
In the composition of our management and supervisory boards, we are committed to diversity of nationality, age, education, gender and professional background.
Group Executive Committee
We have not entered into any service contracts with anya group executive committee, which is a management advisory committee currently comprised of our current directors providing for benefits upon terminationVEON Ltd.'s CEO, CFO, General Counsel, Chief Technology Officer, Group Chief Corporate & Public External Affairs Officer, Chief Digital Officer, Chief People Officer, Head of service.Major Markets, Head of Eurasia and Head of Emerging Markets. The group executive committee is focused on the management of the business affairs of VEON Ltd. and its subsidiaries as a whole, including execution of the group's competitive strategy, driving financial performance and overseeing and coordinating group-wide initiatives.
Committees of the Supervisory Board
The committees of our supervisory board consist of: an audit and risk committee, a compensation committee, a nominating and corporate governance committee and a finance and strategy committee, a business review committee and a special committee.
Audit and risk committee
Our bye-laws provide that each member of the audit and risk committee is required to satisfy the requirements of Rule 10A-3 under the Exchange Act and the rules and regulations thereunder as in effect from time to time. The audit and risk committee is primarily responsible for among other things, the appointment,following: the integrity of VEON Ltd.'s financial statements and its financial reporting to any governmental or regulatory body and the public; VEON Ltd.'s audit process; the qualifications, engagement, compensation, retentionindependence and oversightperformance of VEON Ltd.'s independent auditors, their conduct of the auditors, establishing proceduresannual audit of the VEON Ltd.'s financial statements and their engagement to provide any other services; VEON Ltd.'s process for addressing complaintsmonitoring compliance with legal and regulatory requirements as well as VEON Ltd.'s corporate compliance codes and related guidelines, including the Code of Conduct; VEON Ltd.'s systems of enterprise risk management and internal controls; and VEON Ltd.'s compliance program. The audit and risk committee also supervises activities related to accounting or audit mattersthe DPA, the SEC Judgment and engaging necessary advisors.the Dutch Settlement Agreement, including but not limited to investigations and other disclosures required by the DPA and the SEC Judgment and our response to inquiries by the SEC, DOJ and OM. The current members of our audit and risk committee, Trond Ø WestlieJørn Jensen (chairman), Ole-Bjørn SjulstadGennady Gazin and Gennady Gazin,Gunnar Holt, are expected to serve until our next annual general meeting. Gennady Gazin is presently serving on
For details related to the auditagreements related to the investigations by the SEC, the DOJ and the OM, see Note 22 to our audited consolidated financial statements.
Compensation committee as an alternate director for, and in place of, Mr. Novoselsky.
Our compensation committee is responsible for approving the compensation of the directors, officers and employees of VimpelComVEON Ltd. and its subsidiaries, our employee benefit plans, any equity compensation plans of VimpelComVEON Ltd. and its subsidiaries, and any contract relating to a director, officer or shareholder of our companyVEON Ltd. or any of our subsidiaries or their respective family members or affiliates. The current members of our compensation committee, Alexey ReznikovichUrsula Burns (chairman), Kjell-Morten Johnsen and Andrey Gusev, were appointed on July 28, 2014. Each member isAlexander Pertsovsky, Guy Laurence, are expected to serve until our next annual general meeting.
Nominating and corporate governance committee
Our nominating and corporate governance committee is responsible for coordinating the selection process for candidates to become directors and recommending such candidates to the supervisory board. The current members of our nominating and corporate governance committee, Gennady Gazin (chairman), Gunnar Holt and Andrei Gusev, and Ole-Bjørn Sjulstad, are expected to serve until our next annual general meeting. Gennady Gazin is presently serving on the nominating and corporate governance
Finance committee as an alternate director for, and in place of, Mr. Novoselsky.
Our finance and strategy committee is responsible for reviewing financial transactions, policies, strategies and the capital structure of VimpelComVEON Ltd. and its subsidiaries. The current members of our finance and strategy committee, Andrei Gusev (chairman), Gennady Gazin and Ole-Bjørn Sjulstad, are expected to serve until our next annual general meeting. Gennady Gazin is presently serving on the finance and strategy committee as an alternate director for, and in place of, Mr. Novoselsky.
Our business review committee is responsible for reviewing and discussing with senior management key operational performance related topics for all of VimpelCom’s business units. Our business review committee’s objective is to provide a forum outside of regular supervisory board meetings for directors to stay informed about key operational matters and to provide a platform for discussion and the expression of views by the committee members to senior management. The current members of our business review committee, Andrei Gusev (chairman), Ole-Bjørn Sjulstad and Sir Julian Horn-Smith, were appointed on July 28, 2014, andGuy Laurence, are expected to serve until our next annual general meeting.
Following noticeTable of Contents
D. Employees
The following chart sets forth the investigationsnumber of our employees as of December 31, 2017, 2016 and 2015, respectively:
| | As of December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2017 | 2016 | 2015 | |||||||
Russia(1) | 22,031 | 23,668 | 29,255 | |||||||
Pakistan | 4,175 | 4,603 | 6,361 | |||||||
Algeria | 3,193 | 2,819 | 3,669 | |||||||
Bangladesh | 1,178 | 1,326 | 2,194 | |||||||
Ukraine | 2,656 | 2,502 | 2,945 | |||||||
Uzbekistan | 1,333 | 1,240 | 1,241 | |||||||
HQ | 640 | 566 | 345 | |||||||
Others(2) | 4,732 | 5,270 | 6,311 | |||||||
| | | | | | | | | | | |
Total(3) | 39,938 | 41,994 | 52,321 | |||||||
| | | | | | | | | | | |
From time to time, we establishedalso employ external staff, who fulfill a special committee in March 2014position at the company for a temporary period of less than twelve months. We do not consider these employees to overseeconstitute a significant percentage of our employee totals and have not included them above.
The following chart sets forth the internal investigation being conducted by the company’s external counselnumber of our employees as of December 31, 2017, according to geographic location and our responseestimates of main categories of activities:
| | As of December 31, 2017 | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Category of activity(1) | Russia | Pakistan | Algeria | Bangladesh | Ukraine | Uzbekistan | |||||||||||||
Executive and senior management | 14 | 18 | 11 | 14 | 13 | 20 | |||||||||||||
Engineering, construction and information technology | 1,772 | 742 | 821 | 343 | 1,025 | 320 | |||||||||||||
Sales, marketing and other commercial operations | 11,698 | 1,588 | 1,302 | 522 | 802 | 338 | |||||||||||||
Finance, administration and legal | 1,719 | 512 | 423 | 136 | 474 | 109 | |||||||||||||
Customer service | 5,213 | 530 | 405 | 95 | 113 | 293 | |||||||||||||
Procurement and logistics | 534 | 82 | 108 | 26 | 124 | 22 | |||||||||||||
Other support functions | 1,082 | 703 | 123 | 42 | 105 | 231 | |||||||||||||
| | | | | | | | | | | | | | | | | | | | |
Total | 22,031 | 4,175 | 3,193 | 1,178 | 2,656 | 1,333 | |||||||||||||
| | | | | | | | | | | | | | | | | | | | |
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Our employees are represented by unions or operate collective bargaining arrangements in Armenia, Algeria, Kyrgyzstan, Ukraine, as are the Italy Joint Venture's employees. We consider relations with our employees to the inquiries by various authorities. Our special committee is responsible for overseeing the internal investigation and the company’s response to the inquiries by various authoritiesbe generally good. In February 2016, BDCL experienced labor disruptions in connection with the investigationsimplementation of our announced performance transformation program. Such disruptions have not had a significant impact on our operations. An application for the registration of a union within BDCL was rejected by the SEC, DOJgovernment authorities. A consequent notification has been made by UNI Global Union to the Dutch NCP and OM. The current members of our special committee, Gennady Gazin (chairman), Sir Julian Horn-Smith and Trond Ø Westlie, are expected to serve until our next annual general meeting. Gennady Gazina process is presently serving on the special committee as an alternate director for, and in place of, Mr. Novoselsky. For details of the investigations by the SEC, DOJ and OM, please also see “Itemongoing. See "Item 3—Key Information—D. Risk Factors—Risks Related to Our Business—We are subject to investigationsmay be adversely impacted by the SEC, DOJ and OM, and are conducting an internal investigation. We are unable to predict the duration, scope or results of these investigations or their impact on us.”
D. Employees
The following chart sets forth the number of our employees at December 31, 2014, 2013 and 2012:
| At December 31, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
Russia | 27,935 | 26,843 | 24,400 | |||||||||
Italy | 6,896 | 6,903 | 6,890 | |||||||||
Algeria | 3,732 | 4,040 | 4,016 | |||||||||
Africa & Asia | 5,742 | 7,585 | 9,802 | |||||||||
Ukraine | 4,116 | 4,510 | 5,001 | |||||||||
CIS | 7,437 | 7,729 | 8,075 | |||||||||
Other | 166 | 232 | — | |||||||||
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Total | 56,024 | 57,842 | 58,184 | |||||||||
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As of December 31, 2014, we had 27,935 employees in Russia. We estimate that 110 were in executive and senior managerial positions, 5,985 were in engineering, construction and information technology, 11,351 were in sales, marketing and other commercial operations, 1,437 were in finance, administration and legal, 6,374 were in customer service, 458 were in site acquisitions, regional projects and security, 884 were in procurement and logistics and 1,336 were in other support functions.
As of December 31, 2014, we had 6,896 employees in Italy. We estimate that 2,690 were in engineering, construction and information technology, 1,719 were in sales, marketing and other commercial operations, 334 were in finance, administration and legal, 1,611 were in customer service, 102 were in procurement and logistics and 440 were in other support functions and security. Of these 6,896 employees, about 123 were in executive and senior managerial positions.
As of December 31, 2014, we had 3,732 employees in Algeria and we estimate that 43 were in executive and senior managerial positions, 953 were in engineering, construction and information technology, 353 were in sales, marketing and other commercial operations, 773 were in finance, administration and legal (including procurement, logistic and other support services) and 1,610 were in customer service.
As of December 31, 2014, we had 5,742 employees in Africa & Asia and we estimate that 93 were in executive and senior managerial positions, 1,638 were in engineering, construction and information technology, 1,126 were in sales, marketing and other commercial operations, 942 were in finance, administration and legal (including procurement, logistic and other support services) and 1,943 were in customer service.
As of December 31, 2014, we had 4,116 employees in Ukraine and we estimate that 886 were in executive and senior managerial positions, 853 were in engineering, construction and information technology, 849 were in sales, marketing and other commercial operations, 631 were in finance, administration and legal, 736 were in customer service, 29 were in site acquisitions, regional projects and security, 77 were in procurement and logistics and 55 were in other support functions.
As of December 31, 2014, we had 7,437 employees in the CIS and we estimate that 21 were in executive and senior managerial positions, 3,156 were in engineering, construction and information technology, 2,019 were in sales, marketing and other commercial operations, 637 were in finance, administration and legal, 1,029 were in customer service, 105 were in site acquisitions, regional projects and security, 217 were in procurement and logistics and 253 were in other support functions.
We have not experienced any work stoppages and consider relations with our employees to be good.other labor matters."
E. Share Ownership
To our knowledge, as of March 17, 2015,1, 2018, other than Mikhail Fridman, none of our directors or senior managers beneficially owned more than 1.0% of any class of our capital stock. To our knowledge, Mr. Fridman has an indirect economic benefit in our shares held for the account of Altimo Coöperatief U.A.L1T VIP Holdings S.à r.l. ("L1T VIP Holdings") and, thus, may be considered under the definition of “beneficial owner”"beneficial owner" for purposes of SECthis Annual Report on Form 20-F only, as a beneficial owner of the shares held for the account of Altimo Coöperatief U.A. (“Altimo Coöperatief”).L1T VIP Holdings. See the section of this Annual Report on"Form 20-F entitled “ItemItem 7—Major Shareholders and Related Party Transactions—A. Major Shareholders.”Shareholders."
To our knowledge, as of March 1, 2018, Jean-Yves Charlier owned 497,756 of our ADSs, Ursula Burns owned 231,353 of our ADSs and Erik Aas owned 100,000 of our ADSs.
To our knowledge, as of March 1, 2018, none of the other supervisory or management board members held any Common Shares or ADSs. To our knowledge, as of March 1, 2018, none of our directors or senior managers held any options on the company's common shares.
For more information regarding share ownership, including a description of applicable stock based plans and options, see Note 25 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 20-F.
A. Major Shareholders
The following table sets forth information with respect to the beneficial ownership of VimpelComVEON Ltd. as of March 1, 20152018, by each person who is known by us to beneficially own 5.0% or more of our common or convertible preferredissued and outstanding shares. As of March 1, 2015,2018, we had 1,756,731,135 issued and outstanding common shares and 305,000,000 issuedzero convertible preferred shares.shares issued and outstanding. None of our shareholders has different voting rights.
Shareholder | Number of VimpelCom Ltd. Common Shares | Percent of VimpelCom Ltd. Common Shares | Number of VimpelCom Ltd. Preferred Shares | Percent of VimpelCom Ltd. Voting Shares | ||||||||||||
Altimo Coöperatief U.A.(1) | 986,572,563 | 56.2 | % | — | 47.9 | % | ||||||||||
Telenor East Holding II AS(2) | 580,578,840 | 33.0 | % | 305,000,000 | 43.0 | % | ||||||||||
Please For a discussion of certain risks associated with our major shareholders, see the sections of this Annual Report on Form 20-F entitled “Item"Item 3—Key Information—D. Risk Factors—Risks Related to Our Business—A disposition by one or bothour largest shareholder of our strategic shareholders of their respective stakesits stake in VimpelComVEON Ltd. or a change in control of VimpelComVEON Ltd. could harm our business” and “—Litigation and disputes among our two largest shareholders and us could materially affect our business.”business."
Name | Number of VEON Ltd. Common Shares | Percent of VEON Ltd. Issued and Outstanding Shares | |||||
|---|---|---|---|---|---|---|---|
L1T VIP Holdings S.à r.l.(1) | 840,625,001 | 47.85 | % | ||||
Telenor East Holding II AS(2) | 256,703,840 | 14.61 | % | ||||
Stichting Administratiekantoor Mobile Telecommunications Investor(3) | 145,947,562 | 8.31 | % | ||||
As reported on Schedule 13D, Amendment No. 22, filed on August 16, 2012, by Telenor East with the SEC, on August 16, 2012, Telenor East announced that on August 15, 2012, Weather II exercised its rights under the Weather Put Options to sell 71,000,000 VimpelCom Ltd. convertible preferred shares to Telenor East. As reported on Schedule 13D, Amendment No. 23, filed on October 1, 2012, by Telenor EastASA with the SEC, Telenor
East announced that it took delivery is the direct beneficial owner of, such shares on September 28, 2012. VimpelCom Ltd. registered the share transfer following the cancellation of FAS injunctions that prohibited such transfer. As a result, Telenor East’s interest in preferred shares increased from approximately 54.0% to approximately 70.4% of VimpelCom Ltd.’s outstanding convertible preferred shares, and Telenor East’s voting interest increased from approximately 39.5% to approximately 43.0% of VimpelCom Ltd.’s outstanding voting shares.
As reported on Schedule 13D, Amendment No. 6, filed on August 15, 2012, by Altimo Coöperatief with the SEC, on August 15, 2012, Altimo Coöperatief purchased (i) 305,000,000 VimpelCom Ltd. common shares from Weather II, (ii) 12,000,000 VimpelCom Ltd. common shares from NatixisMobile Holding AS and (iii) 3,265,652 VimpelCom Ltd. common shares from a number of other investors. As a result of these transactions, Altimo Coöperatief’s interest in common shares increased from approximately 31.4% to approximately 51.0% of VimpelCom Ltd.’s outstanding common shares, and Altimo Coöperatief’s voting interest increased from approximately 25.0% to approximately 40.5% of VimpelCom Ltd.’s outstanding voting shares. As reported on Schedule 13D, Amendment No. 7, filed on October 5, 2012, by Altimo Coöperatief with the SEC, between August 17, 2012 and October 4, 2012, Altimo Coöperatief purchased 27,213,111 VimpelCom Ltd. common shares of which (i) 23,449,768 were purchased on the open market, (ii) 1,614,474 were purchased on September 4, 2012, from Natixis, (iii) 288,042 were purchased on September 4, 2012, from Thursday Holding and (iv) 1,860,827 were purchased on October 2, 2012, from East Capital. As a result of these transactions, Altimo Coöperatief’s interest in common shares increased from approximately 51.0% to approximately 52.7% of VimpelCom Ltd.’s outstanding common shares, and Altimo Coöperatief’s voting interest increased from approximately 40.5% to approximately 41.9% of VimpelCom Ltd.’s outstanding voting shares. As reported on Schedule 13D, Amendment No. 8, filed on October 29, 2012, by Altimo Coöperatief with the SEC, on October 26, 2012, Altimo Coöperatief agreed to purchase 123,600,000 VimpelCom Ltd. convertible preferred shares from Bertofan Investments Limited within 60 days. As reported on Schedule 13D, Amendment No. 9, filed on December 20, 2012, by Altimo Coöperatief with the SEC, on December 20, 2012 Altimo Coöperatief acquired such shares from Bertofan pursuant to the agreement between the parties. As a result of this transaction, Altimo Coöperatief’s interest in convertible preferred shares increased from approximately 1.1% to approximately 29.7% of VimpelCom Ltd.’s outstanding convertible preferred shares, and Altimo Coöperatief’s voting interest increased from approximately 41.9% to approximately 47.9%.
As reported on Schedule 13D, Amendment No. 10, filed on December 26, 2012 by Altimo Coöperatief with the SEC, on December 21, 2012, Altimo Coöperatief issued notice to VimpelCom Ltd. pursuant to Section 4.3(d) of its bye-laws, stating its present intention to convert 128,532,000 convertible preferred shares to common shares at the ratio of one convertible preferred share to one common share and setting forth a conversion date of April 16, 2013. As reported on Schedule 13D, Amendment No. 12, filed on April 23, 2013 by Altimo Coöperatief with the SEC, on April 16, 2013, Altimo Coöperatief paid to VimpelCom Ltd. a conversion premium of $1,392,644,220 (or $10.835 per share), and Altimo Coöperatief’s 128,532,000 shares of convertible preferred shares automatically converted into 128,532,000 common shares.
As reported on Schedule 13D, Amendment No. 15, filed on February 19, 2014 by Altimo Coöperatief with the SEC, Roniju Holdings Limited (“Roniju”), as of February 18, 2014, directly owned a majority of the shares of Letterone Holdings S.A. and, in such capacity,Telenor ASA may have beenbe deemed to be the beneficial ownerowners of 986,572,563 VimpelCom256,703,840 of VEON Ltd.'s common shares. The common shares held by Telenor East represent approximately 14.61% of VEON Ltd.'s issued and outstanding shares.
Based on a review of our register of members maintained in Bermuda, as of March 1, 2015, 100%2018, a total of our1,228,276,403 common shares representing approximately 69.92% of VEON Ltd.'s issued commonand outstanding shares were held of record by BNY (Nominees) Limited in the United Kingdom as agentcustodian of The Bank of New York Mellon for the purposes of our ADRADS program and 100%a total of our510,912,045 common shares representing approximately 29.08% of VEON Ltd.'s issued preferredand outstanding shares were held of record by Telenor East in Norway. ItNederlands Centraal Instituut Voor Giraal Effectenverkeer B.V. and where ING Bank N.V. is likely that there areacting as custodian of The Bank of New York Mellon, for the purposes of our ADS program, and a numbertotal of 17,542,687 common shares representing approximately 1.00% of VEON Ltd.'s issued and outstanding shares were held of record by Nederlands Centraal Instituut Voor Giraal Effectenverkeer B.V., for the purposes of our common shares listed and tradable on Euronext Amsterdam. As of March 1, 2018, 22 record holders of ourVEON Ltd.'s ADRs, holding an aggregate of 498,849,387 common shares (representing approximately 28.40% of VEON Ltd.'s issued and outstanding shares), were listed as having addresses in the United States.
Changes in Percentage Ownership by Major Shareholders
As reported on Schedule 13D, Amendment No. 17, filed on November 6, 2015 by Letterone Investment Holdings S.à r.l. with the SEC, Letterone Holdings S.A. and its affiliates engaged in an internal reorganization, and as part of that reorganization, 986,572,563 VEON Ltd. common shares were transferred by Altimo Coöperatief U.A. to L1T VIP Holdings on October 30, 2015.
As reported on Schedule 13D, Amendment No. 18, filed on November 12, 2015 by L1T VIP Holdings with the SEC, Letterone Holdings S.A. and its affiliates engaged in an internal reorganization, and as part of that reorganization, on November 11, 2015, all of the shares in Letterone Investment Holdings S.A. owned by Letterone Holdings S.A. (which constituted a controlling interest in L1T VIP Holdings and the indirect ownership of the 986,572,563 VEON Ltd. common shares) were transferred to six separate entities.
As reported on Schedule 13D, Amendment No. 19, filed on April 1, 2016 by L1T VIP Holdings and Letterone Investment Holdings S.A. with the SEC, L1T VIP Holdings transferred 145,947,562 of ADSs, representing rights with respect to 145,947,562 of VEON Ltd.'s common stock, to Stichting.
As reported on Schedule 13D, Amendment 34, filed on September 21, 2016 by Telenor East Holding II AS, Telenor Mobile Holding AS and Telenor ASA with the SEC, Telenor East Holding II AS sold 142,500,000 of ADSs in VEON Ltd. pursuant to an underwritten offering.
As reported on Schedule 13D, Amendment 36, filed on September 27, 2016 by Telenor East Holding II AS, Telenor Mobile Holding AS and Telenor ASA with the SEC, Telenor East Holding II AS sold 21,375,000 of ADSs in VEON Ltd. pursuant to an underwritten offering.
As reported on Schedule 13D, Amendment 38, filed on April 12, 2017 by Telenor East Holding II AS, Telenor Mobile Holding AS and Telenor ASA with the SEC, Telenor East Holding II AS sold 70,000,000 of ADSs in VEON Ltd. pursuant to an underwritten offering.
As reported on Schedule 13D, Amendment 40, filed on September 25, 2017 by Telenor East Holding II AS, Telenor Mobile Holding AS and Telenor ASA with the SEC, Telenor East Holding II AS sold 90,000,000 ADSs in VEON Ltd. pursuant to an underwritten offering.
Telenor Divestment
Since September 2016, Telenor East Holding II AS has completed a series of offerings to divest its holdings of VEON's ADSs. Telenor has indicated that the September 2017 sale of VEON Ltd.'s ADSs was the final divestment by Telenor, as Telenor expects to use the balance of its remaining ADSs to exchange and redeem the outstanding exchangeable bond. For more information on Telenor's exchangeable bond, see "—B. Related Party Transactions—Major Shareholders and their Affiliates—Telenor."
B. Related Party Transactions
In addition to the transactions described below, VimpelComVEON Ltd. has also entered into transactions with related parties and VimpelCom affiliates as part of the ordinary course of business. These mainly relate to ordinary course telecommunications operations, such as interconnection, roaming, retail and roaming.management advisory services. Their terms vary according to the nature of the services provided thereunder. VimpelComVEON Ltd. and certain of its subsidiaries may, from time to time, also haveenter into general services agreements relating to the conduct of business and from time to time enter into financing transactions within the VimpelCom Group.VEON group.
For more information on our related party transactions, see Note 2526 to our audited consolidated financial statements included elsewherestatements.
Registration Rights Agreements
The Registration Rights Agreement, as amended, between VEON Ltd., Telenor East and certain of its affiliates, Altimo Holdings & Investments Ltd. and Altimo Coöperatief U.A. requires us to use our best efforts to effect a registration under the Securities Act, if requested by one of the shareholders party to the Registration Rights Agreement, of our securities held by such party in this Annual Reportorder to facilitate the sale and distribution of such securities. Pursuant to the Registration Rights Agreement, we have filed a registration statement on Form 20-F.F-3 with the SEC using a "shelf" registration process.
Separately, in connection with a private offering by the Telenor East of US$1,000,000,000 in aggregate principal amount of 0.25 per cent bonds due 2019 (the "Bonds") that are exchangeable under certain conditions for up to a total at issuance of 204,081,633 of VEON Ltd.'s ADSs (subject to adjustment) to non-US persons pursuant to Regulation S under the Securities Act, VEON Ltd. entered into a registration rights agreement, dated September 21, 2016 (the "New Registration Rights Agreement") for the benefit of holders of the Bonds. Pursuant to the New Registration Rights Agreement, we filed a registration statement on Form F-3 with the SEC on September 30, 2016 using a "shelf" registration process, which Form F-3 was declared effective on October 13, 2016. The New Registration Rights Agreement requires us to use our commercially reasonable efforts to keep the shelf registration statement continuously effective under the Securities Act in order to permit the prospectus forming a part thereof to be usable by holders (subject to permitted suspension periods) for a period until the earliest of such time as all of the ADSs issuable or issued in exchange for or upon redemption of the Bonds have (i) been registered under the New Shelf Registration Statement and disposed of in accordance therewith, (ii) become eligible to be transferred without condition as contemplated by Rule 144 under the Securities Act, or any successor rule or regulation thereto that may be adopted by
the SEC, or otherwise, no longer bear any restrictive legend and have become fungible with the VEON Ltd. ADSs issued under any VEON Ltd. ADS program or (iii) ceased to be outstanding.
Under these shelf registration processes, a selling shareholder may from time to time sell VEON Ltd. common shares, which may be represented by ADSs, in one or more offerings, upon the filing of one or more prospectus supplements or post effective amendments. As of the date of this report, we do not qualify as a well-known seasoned issuer (as such term is defined in Rule 405 under the Securities Act) and, as a result, we and any selling shareholders are currently unable to use automatic shelf registration for the resale of such securities.
Related Party Transactions with Major Shareholders and their Affiliates
Related Party Transactions with Telenor and its Affiliates
Service AgreementsTelenor East
VimpelCom In September 2016, Telenor East sold 163,875,000 of VEON Ltd.'s ADSs pursuant to an underwritten offering, in April 2017, Telenor East sold 70,000,000 of VEON Ltd.'s ADSs pursuant to an underwritten offering, and in September 2017, Telenor East sold 90,000,000 ADSs pursuant to an underwritten offering. In September 2016, in a transaction outside the United States to non-US persons pursuant to Regulation S under the Securities Act, Telenor East also issued a US$1,000,000,000 0.25% bond due 2019 that is exchangeable under certain conditions for up to a total at issuance of 204,081,633 of VEON Ltd.'s ADSs (subject to adjustment) at an exchange price representing a premium of 40% to the public offering price of the ADSs at the issue date.
From March 2011 until December 2017, VEON Ltd. was a party to a service agreement with Telenor. Pursuant to the agreement, Telenor dated as of March 8, 2011, under which Telenor rendersrendered to VimpelCom orVEON Ltd. and its affiliates services related to telecommunicationtelecommunications operations, including management advisory services, training, technical assistance and network maintenance, industry information research and consulting, implementation support for special projects and other services as mutually agreed by Telenor and VimpelCom. VimpelCom paysVEON Ltd. VEON Ltd. paid Telenor annually US$1.5 million annually for the services.
On June 19, 2009, Kyivstar entered into an agreement with LLC Miratech Corporation, a Telenor affiliate, regarding the outsourcing of IT professionals to Kyivstar. Payment provisions under this agreement provide for monthly payments in accordance with performed works. This agreement is valid until June 30, 2015.
On August 25, 2010, Kyivstar entered into an agreement with LLC Miratech Corporation for provision of various IT services to Kyivstar. The payment provisions under this agreement provide for monthly payments based on works performed. The agreement was valid until the end of 2014. Following a competitive tender procedure for the selection of a service provider in 2014, this agreement was extended untilterminated December 31, 2017.12, 2017 with effect from October 1, 2016.
A number of our operating companies have roaming agreements with the following mobile operators that are Telenor affiliates: Grameenphone Limited (Bangladesh),Telenor Sverige AB (Sweden); Telenor Norge AS (Norway); Telenor Denmark AS (Denmark),; Telenor Serbia Ltd. (Serbia); Telenor d.o.o Podgorica (Montenegro); Telenor Magyarorszag Zrt. (Hungary), DiGi Telecommunications Sdn. Bhd. (Malaysia),; Telenor (Montenegro), Telenor Pakistan (Pvt) Ltd. (Pakistan), Telekom d.o.o. (Serbia), Telenor Sverige AB (Sweden) andBulgaria EAD (Bulgaria); Total Access Communication Public Company Limited (dtac) (Thailand); DiGi Telecommunications Sdn. Bhd. (Malaysia); Telenor Pakistan (Pvt) Ltd. (Pakistan); Telenor Myanmar Limited (Myanmar); Grameenphone Limited (Bangladesh).
Related Party Transactions with LetterOne and its Affiliates
Service Agreements
VimpelCom is From December 2010 until March 2018, VEON Ltd. was a party to a General Services Agreement with LetterOneL1HS Corporate Advisor Limited, dated December 1, 2010,part of the LetterOne Group, under which LetterOneL1HS Corporate Advisor Limited rendersrendered to VimpelComVEON Ltd. and its affiliates services related to telecommunicationtelecommunications operations, including management advisory services, training, technical assistance and network maintenance, industry information research and consulting, implementation support for special projects and other services as mutually agreed by LetterOneL1HS Corporate Advisor Limited and VimpelCom. VimpelCom pays LetterOneVEON Ltd. VEON Ltd. paid L1HS Corporate Advisor Limited annually US$1.5 million for the services. VimpelCom isThe agreement was terminated on December 12, 2017 with effect from March 12, 2018.
From August 2013 until March 2018, VEON was also party to a Consultancy Deed with LetterOneL1HS Corporate Advisor Limited, dated August 21, 2013, under which LetterOneL1HS Corporate Advisor Limited providesprovided additional consultancy services to VimpelComVEON Ltd. for which VimpelCom pays annuallyVEON Ltd. paid US$3.5 million.million annually. The General Services Agreement and Consultancy Deed were originally entered into by VimpelCom and Altimo Management Services Ltd., but the latteragreement was replaced by LetterOne Corporate Advisor Limited pursuant to a Deedterminated on December 12, 2017 with effect from March 12, 2018.
Table of Assignment and Novation dated June 3, 2014.Contents
Related Party Transactions with Alfa GroupJoint Ventures and its AffiliatesAssociates
Agreement relating to VimpelCom Ltd. TransactionEuroset
CTF Holdings Limited, In July 2017, PJSC VimpelCom, a subsidiary of VEON Ltd., and MegaFon entered into an affiliateagreement ending their retail joint venture, Euroset. The transaction closed on February 22, 2018. Under the agreement, MegaFon acquired PJSC VimpelCom's 50% interest in Euroset and PJSC VimpelCom agreed to pay RUB 1.2 billion (US$21 million as of December 31, 2017), subject to certain adjustments, and has acquired rights to 50% of Euroset's approximately 4,000 retail stores in Russia. As a result of the Alfa Grouptransaction, PJSC VimpelCom has fully disposed of its interest in Euroset with all of its rights and obligations.
WIND
Following the classification of our operations in Italy as an asset held for sale and a former affiliatediscontinued operation from January 1, 2016 to November 5, 2016, the intercompany positions were disclosed as related party transactions and balances. Consequently, the outstanding balances and transactions occurred were treated as related party transactions during that period, mainly representing regular business activities, i.e., roaming and interconnect. For a discussion of Storm LLC (a former Kyivstar shareholder),the contribution and framework agreement entered into a guarantee dated October 4, 2009 in favor of VimpelCom Ltd., Kyivstar and Storm LLC, pursuant to which CTF Holdings Limited guaranteed Altimo Holdings’ performance of its indemnification obligations in respect of Storm underform the Share Exchange Agreement in relation to the VimpelCom Ltd. transaction between certain members of the Alfa Group and certain members of the Telenor Group, dated October 4, 2009 (the “VimpelCom Ltd. SEA”). CTF Holdings Limited’s maximum aggregate liability under the guarantee is limited to US$500.0 million. The guarantee terminated in 2014.
Credit Facilities
Please see the section of this Annual Report on Form 20-F entitled “Item 5—Operating and Financial Review and Prospects—Liquidity and Capital Resources—Financing Activities—VimpelCom Amsterdam B.V. financing” for a description of credit facilities with Alfa-Bank.
Other Transactions
In the ordinary course of business, we maintain some of our bank accounts, and place time deposits with, Alfa-Bank, which is part of the Alfa Group and also a corporate client of OJSC VimpelCom. We also have agreements in place with Alfa Strakhovaniye JSC, which is also part of the Alfa Group, for the provision of insurance coverage.
VimpelCom Ltd. Registration Rights Agreement
The Registration Rights Agreement between VimpelCom, the Telenor Group companies party theretoItaly Joint Venture and the Altimo Group companies party thereto requires us to use our best efforts to effect a registration underShareholders' Deed and FinCo Shareholders' Deed setting out the Securities Act, if requested by one ofterms through which the shareholders party to the VimpelCom Ltd. Registration Rights Agreement, of our securities held by such party in order to facilitate the saleItaly Joint Venture and distribution of such securities in an underwritten offering. Pursuant to the Registration Rights Agreement, on May 23, 2014 we filed a registration statement on Form F-3 with the SEC using a “shelf” registration process, as a “well-known seasoned issuer” as defined in Rule 405 under the Securities Act. Under this shelf registration process, a selling shareholder may from time to time sell VimpelCom common shares, which may be represented by ADSs, in one or more offerings, upon the filing of one or more prospectus supplements or post effective amendments.
Related Party Transactions with Joint Venturesits subsidiaries are owned, controlled, managed and Associatesfinanced, see "Item 10—Additional Information—C. Material Contracts."
Associates Firma KurierSupervisory Board and Management Board Members
OJSC VimpelCom has arrangements in place to receive bill delivery services from Firma Kurier. Firma Kurier was an affiliate of OJSC VimpelCom until August 18, 2014, when OJCS VimpelCom sold its interest in Firma Kurier.
Euroset
OJSC VimpelCom has commercial contracts with Euroset, which became an associate in October 2008. In 2014 OJSC VimpelCom recognized $11.3 million of revenue from Euroset primarily for mobile and fixed line services and from the sale of equipment and accessories. OJSC VimpelCom accrued to Euroset certain expenses totaling US$36.9 million in 2014, primarily dealer commissions and bonuses for services for acquisition of new customers, customer care and receipt of customers’ payments. In addition, OJSC VimpelCom purchased equipment and accessories from Euroset in 2014 for $4.1 million.
SPAL
WIND holds a 33% stake in SPAL TLC S.p.A. (“SPAL”). SPAL is WIND’s largest distributor in terms of points of sale, and SPAL has an exclusive distribution arrangement with WIND through December 31, 2016 which grants SPAL the right to be WIND’s exclusive distributor with respect to retail stores with certain exceptions (e.g., stores having a direct relationship with WIND). In 2014, WIND recognized US$26 million of revenue from SPAL and accrued to SPAL certain expenses totaling US$34 million.
WIND Canada
VimpelCom and GTH provided loans to Wind Canada in aggregate principal amount of US$2.24 billion to fund acquisition of licenses and ongoing operations. On September 16, 2014, VimpelCom and GTH agreed to sell all of their debt and equity interest in Wind Canada to Globalive Capital (formerly AAL Holdings), the controlling shareholder of Wind Canada, and certain investment funds for approximately CAD 135 million, with the proceeds going to VimpelCom in repayment of part of the debt owed to VimpelCom. At the same time, GTH was released from all of its obligations under the related Shareholders Agreement and certain debt obligations of Wind Canada.
Related Party Transactions with supervisory board and management board members
Compensation paid to the supervisory board and management board members is disclosed in “Item 6 —Directors,"Item 6—Directors, Senior Management and Employees—B. Compensation”Compensation. During 2014"
The company anticipates entering into an agreement with Guy Laurence under which he will provide certain consulting and advisory services relating to our digital offering. Under the agreement, Mr. Laurence would receive US$30,000 per year in compensation for his services. The initial term of the agreement is expected to be one year, while either party may terminate the agreement for any reason upon 30 days written notice.
Except as specified above, during 2017 and through the date of this Annual Report on Form 20-F, none of our supervisory board and management board members have been involved in any related party transactions with us.
C. Interests of Experts and Counsel
Not required.
Consolidated Statements and Other Financial Information
See “Item"Item 18—Financial Statements”Statements" and the financial statements referred to therein.
Legal Proceedings
For informationa discussion of legal or arbitration proceedings which may have, or have had in the recent past, significant effects on the legal proceedings our companies are involved in, pleasefinancial position or profitability, see NoteNotes 22 (Provisions) and 26 (Risks, commitments, contingencies and uncertainties) to our audited consolidated financial statements included elsewhere in this Annual Report on Form 20-F. For details
We cannot predict the outcome of the investigations byvarious claims and legal actions in which we are involved beyond the SEC, DOJinformation included in our financial statements, including any fines or penalties that may be imposed, and OM, pleasesuch fines or penalties could be significant. For information about certain risks related to current and potential legal proceedings, see “Item"Item 3—Key Information—D. Risk Factors" and, in particular, "Item 3—Key Information—D. Risk Factors—Risks Related to Our Business—We arecould be subject to criminal prosecution or civil sanction if we breach the DPA with the DOJ, the SEC Judgment or Dutch Settlement Agreement, and we may face other potentially negative consequences relating to the investigations by, and agreements with, the DOJ, SEC DOJ and OM, including additional investigations and are conducting an internal investigation. We are unable to predict the duration, scope or results of these investigations or their impact on us.”litigation."
Policy on Dividend Distributions
In January 2014,February 2018, our supervisory board approved a final dividend policy pursuant to which from 2014 we aim to pay annual dividends of USD 0.035US$17 cents per share, until we reachbringing total 2017 dividend to US$28 cents per share. The dividend, with a group Net Debtrecord date of March 5, 2018, was paid on March 13, 2018. The company will make appropriate tax withholdings of up to EBITDA ratio15% when the dividend is paid to the company's share depositary, The Bank of less than 2.0.New York Mellon. For ordinary shareholders at Euronext Amsterdam, the final dividend of US$17 cents will be paid in euro.
VEON is committed to paying a sustainable and progressive dividend based on the evolution of the company's equity free cash flow. The precise amount and timing of dividends for a particular year will be approved byis subject to the approval of our supervisory board subject to the following constraints and guidelines:
A. Our supervisory board may consider various factors in determining the amount of dividends such as investment opportunities, capital market expectations, debt repayments schedules, desired level of leverage, share repurchase programs and any other factors at the discretion of our supervisory board.
B. All dividend decisions shall be taken assuring that the covenants or other restrictions in agreements to which the company or any subsidiary is a party shall be satisfied and that the company’s operating subsidiaries shall be in compliance with any law restricting the distribution of dividends.
C. The exact amount and timing of any dividend declarations and payments will require, subject to the requirements of applicable law, the affirmative vote of at least five members of the supervisory board.
The financial terms referred to above are derived from and computed on the basis of measurements that appear in our audited annual consolidated IFRS financial statements. Unless otherwise specified, all financial measurements in these guidelines shall be calculated based on the financial statements for the year ended prior to the decision being taken. For interim dividends, these financial measurements shall be calculated based on the financial statements for the quarters in the year ended prior to the decision being taken (whether such financial statements are audited or unaudited).
Pursuant to Bermuda law, we are restrictedprohibited from declaring or paying a dividend if there are reasonable grounds for believing that (a) we are, or would after the payment be, unable to pay our liabilities as they become due, or (b) the realizable value of our assets would, as a result of the dividend, be less than our liabilities. The supervisory board may, subject to our bye-laws and in accordance with Bermuda law,the Companies Act, declare a dividend to be paid to the shareholders holding shares entitled to receive dividends, in proportion to the number of shares held by them, and such dividend may be paid in cash or wholly or partly in shares or other assets, including through the issuance of our shares or other securities, in which case the supervisory board may fix the value for distribution in specie of any assets, shares or securities. We are not required to pay interest on any unpaid dividend. In accordance with our bye-laws, dividends may be declared and paid in proportion to the amount paid up on each share. The holders of common shares are entitled to dividends if the payment of dividends is approved by the supervisory board. The holders of convertibleConvertible preferred shares, are not entitledwhen and if issued, have no entitlement to receive dividends.
In November 2014, we announced the payment of a dividend of US$0.035 per common share. The dividends were paid in December 2014.
We cannot assure you we will continue to pay dividends on our common shares and ADSs in the future and any decision by our companyVEON Ltd. not to pay dividends or to reduce dividend payments in the future could adversely affect the value of our common shares or ADSs. For more information regarding certain risks involved in connection with the recommendation and payment of dividends, please see “Item"Item 10—Additional Information—B. Memorandum and Articles of Association—Dividends and Dividend Rights” “Item," "Item 3—Key Information—D. Risk Factors—Risks Related to Our Business—As a holding company, VimpelComVEON Ltd. depends on the performance of its subsidiaries”subsidiaries and “—their ability to pay dividends, and may therefore be affected by changes in exchange controls and currency restrictions in the countries in which its subsidiaries operate" and "Item 3—Key Information—D. Risk Factors—Risks Related to the Ownership of Our ADSs—Various factors may hinder the declaration and payment of dividends.”"
Significant Changes
Other than as disclosed in this Annual Report on Form 20-F, there have not been any significant changes since the date of the audited consolidated financial statements included as part of this Annual Report onForm 20-F.
| ITEM 9. THE OFFER AND LISTING A. Offer and Listing Details |
Price historyHistory
The following table sets out, for the periods indicated, the reported high and low market quotations for our ADSs and for our common shares listed on the NYSE for periods prior to September 10, 2013, when we switched the listing of our ADSs to the NASDAQ Global Stock Market. Subsequent periods are based on NASDAQ market quotations.Euronext Amsterdam. Each of our ADSs represents one of our common shares. We listed our ADSs on the NASDAQ Global Select Market on September 10, 2013. The ADSs were previously listed on the New York Stock Exchange. We listed on Euronext Amsterdam on April 4, 2017.
| | NASDAQ | Euronext Amsterdam | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | High | Low | High | Low | |||||||||||||||||||
Monthly | |||||||||||||||||||||||
September 2017 | US$ | 4.40 | US$ | 4.10 | EUR | 3.78 | EUR | 3.46 | |||||||||||||||
October 2017 | US$ | 4.16 | US$ | 3.84 | EUR | 3.60 | EUR | 3.34 | |||||||||||||||
November 2017 | US$ | 4.13 | US$ | 3.72 | EUR | 3.49 | EUR | 3.19 | |||||||||||||||
December 2017 | US$ | 4.01 | US$ | 3.75 | EUR | 3.70 | EUR | 3.17 | |||||||||||||||
January 2018 | US$ | 4.01 | US$ | 3.80 | EUR | 3.48 | EUR | 3.08 | |||||||||||||||
February 2018 | US$ | 3.78 | US$ | 2.89 | EUR | 3.18 | EUR | 2.42 | |||||||||||||||
Quarterly |
|
| |||||||||||||||||||||
First Quarter 2016 | US$ | 4.26 | US$ | 2.90 | EUR | — | EUR | — | |||||||||||||||
Second Quarter 2016 | US$ | 4.22 | US$ | 3.35 | EUR | — | EUR | — | |||||||||||||||
Third Quarter 2016 | US$ | 4.48 | US$ | 3.33 | EUR | — | EUR | — | |||||||||||||||
Fourth Quarter 2016 | US$ | 3.98 | US$ | 3.14 | EUR | — | EUR | — | |||||||||||||||
First Quarter 2017 | US$ | 4.28 | US$ | 3.93 | EUR | — | EUR | — | |||||||||||||||
Second Quarter 2017 | US$ | 4.34 | US$ | 3.68 | EUR | 3.99 | EUR | 3.38 | |||||||||||||||
Third Quarter 2017 | US$ | 4.40 | US$ | 3.89 | EUR | 3.78 | EUR | 3.40 | |||||||||||||||
Fourth Quarter 2017 | US$ | 4.16 | US$ | 3.72 | EUR | 3.70 | EUR | 3.17 | |||||||||||||||
Annually |
|
| |||||||||||||||||||||
2013(1) | US$ | 14.55 | US$ | 7.23 | EUR | — | EUR | — | |||||||||||||||
2014 | US$ | 12.80 | US$ | 9.65 | EUR | — | EUR | — | |||||||||||||||
2015 | US$ | 6.37 | US$ | 3.29 | EUR | — | EUR | — | |||||||||||||||
2016 | US$ | 4.48 | US$ | 3.01 | EUR | — | EUR | — | |||||||||||||||
2017 | US$ | 4.40 | US$ | 3.68 | EUR | 3.99 | EUR | 3.17 | |||||||||||||||
B. Plan of Distribution
Year Ended December 31 | High | Low | ||||||
2010: | ||||||||
Annual | US$ | 17.56 | US$ | 13.96 | ||||
2011: | ||||||||
Annual | US$ | 15.69 | US$ | 9.16 | ||||
2012: | ||||||||
Annual | US$ | 12.50 | US$ | 7.23 | ||||
2013: | ||||||||
First Quarter | US$ | 12.55 | US$ | 10.57 | ||||
Second Quarter | US$ | 12.42 | US$ | 9.65 | ||||
Third Quarter | US$ | 11.75 | US$ | 9.79 | ||||
Fourth Quarter | US$ | 14.55 | US$ | 11.75 | ||||
2014: | ||||||||
First Quarter | US$ | 12.72 | US$ | 8.49 | ||||
Second Quarter | US$ | 9.19 | US$ | 7.54 | ||||
Third Quarter | US$ | 8.94 | US$ | 7.11 | ||||
Fourth Quarter | US$ | 6.86 | US$ | 3.29 | ||||
Months | ||||||||
September 2014 | US$ | 8.94 | US$ | 7.11 | ||||
October 2014 | US$ | 6.86 | US$ | 5.69 | ||||
November 2014 | US$ | 6.40 | US$ | 5.25 | ||||
December 2014 | US$ | 5.12 | US$ | 3.29 | ||||
January 2015 | US$ | 4.28 | US$ | 3.43 | ||||
February 2015 | US$ | 5.48 | US$ | 4.12 | ||||
Not required.
C. Markets
Our ADSs are listed and traded on NASDAQ Global Select Market under the symbol “VIP.”"VEON." NASDAQ Global Select Market is the principal trading market for the ADSs.
Our common shares are listed and traded on Euronext Amsterdam under the symbol "VEON."
Under certain circumstances, holders of common shares listed on Euronext Amsterdam may convert such shares to ADSs listed on NASDAQ.
D. Selling Shareholders
Not required.
| E. Dilution |
Not required.
Not required.
F. Expenses of the Issue
Not required.
ITEM 10. ADDITIONAL INFORMATION
A. Share Capital
Not required.
B. Memorandum and Articles of Association
We describe below the material provisions of our memorandum of association and bye-laws, certain provisions of Bermuda law relating to our organization and operation, and some of the terms of our share rights based on provisions of our memorandum of association, andour current bye-laws, and applicable Bermuda law and certain agreements relating to our shares. Although we believe that we have summarized the material terms of our memorandum of association and bye-laws, Bermuda legal requirements and our share capital, this summary is not complete and is qualified in its entirety by reference to our memorandum of association, andour bye-laws and applicable Bermuda law. All references to our bye-laws herein, unless otherwise noted, are to Section B of our bye-laws, which were originally approved on April 20, 2010 by our shareholders and which were amended and again approved by our shareholders on September 25, 2013.2013, and on March 30, 2017.
The affirmative vote of at least 75.0% of the voting shares presentvoted at a shareholders meeting is required to approve amendments to our bye-laws.
General
VimpelCom VEON Ltd. is an exempted company limited by shares registered under the Companies Act 1981 of Bermuda (“the Companies Act”) on June 5, 2009, and our registered office is located at Victoria Place, 31 Victoria Street, Hamilton HM 10, Bermuda. Our registration number with the Registrar of Companies in Bermuda is 43271. As set forth in paragraph 6 of our memorandum of association, our companyVEON Ltd. was formed with unrestricted business objects. We are registered with the Dutch Trade Register (registration number 34374835) as a company formally registered abroad (formeel(formeel buitenlandse kapitaalvennootschap)kapitaalvennootschap), as this term is referred to in the Dutch Companies Formally Registered Abroad Act (Wet(Wet op de formeel buitenlandse vennootschappen)vennootschappen), which means that we are deemed a Dutch resident company for tax purposes in accordance with applicable Dutch tax regulations.
Our bye-laws are split into two distinct sets of bye-laws:sub-sets: Section A and Section B. Section A of our bye-laws were in effect until the October 4, 2009 shareholders agreement among VEON Ltd., Altimo Coöperatief U.A. and Telenor and usEast Holding II AS in relation to our companyVEON Ltd. (the “VimpelCom"VEON Shareholders Agreement”Agreement") terminated on December 10, 2011. Termination of the VimpelComVEON Shareholders Agreement caused Section B of our bye-laws to automatically come into force to the exclusion of Section A of our bye-laws. References to our bye-laws in the following sections of this Item 10 are to Section B of our bye-laws.
Issued Share Capital
As of December 31, 2014, our2017, the authorized share capital iswas US$3,064,171.83, divided into 2,759,171,830 common shares, par value US$0.001, of which 2,759,171,827 are authorized and 1,756,731,135 are issued, and305,000,000 convertible preferred shares, par value US$0.001, of which 305,000,0001,756,731,135 common shares were issued and outstanding and zero convertible preferred shares were issued and outstanding. All issued and outstanding shares are authorized and issued.fully paid.
Subject to our bye-laws and to any shareholders’shareholders' resolution to the contrary, and without prejudice to any special rights previously conferred on the holders of any existing shares or class of shares, our supervisory board
has the power to issue any authorized but unissued shares on such terms and conditions as it may determine. Further, subject to the provisions of Bermuda law, any of our preferred shares may be issued or converted into shares that (at a determinable date or at our option or the holder’s option) are liable to be redeemed on such terms and in such manner as may be determined by the supervisory board before the issue or conversion.
The company We may increase, divide, consolidate, change the currency or denomination of or reduce itsour share capital with the approval of itsour shareholders. Subject to Bermuda law and our bye-laws, all or any of the special rights for the time being attached to any class of shares for the time being in issue may be altered or abrogated with the consent in writing of the holders of the issued shares of such class carrying 75.0% or more of all of the votes capable of being cast at the relevant time at a separate general meeting of the holders of the shares of that class, or with the sanction of a resolution passed at a separate general meeting of the holders of shares of that class by a majority of the votes cast. All provisions of our bye-laws relating to general shareholder meetings shall apply to any such separate general meeting, except that the necessary quorum shall be one or more holders present in person or by proxy holding or representing at least one-third of the shares of the relevant class.
We may purchase our own shares for cancellation or acquire them as treasury shares in accordance with Bermuda law on such terms as the supervisory board may determine. As our common shares and convertible preferred shares have equal voting rights, we sometimes refer to them collectively as voting shares.
Our company We may, under itsour bye-laws, at any time request any person it haswe have cause to believe is interested in theour shares of our company to confirm details of shares of our companyshares in which that person holds an interest.
Common Sharesshares
The holders of common shares are, subject to our bye-laws and Bermuda law, generally entitled to enjoy all the rights attaching to common shares.
Except for treasury shares, each fully paid common share entitles its holder to:
board (any dividend or other moneys payable in respect of a share which has remained unclaimed for seven years from the date when it became due for payment shall, if the supervisory board so resolves, be forfeited and cease to remain owing by VEON Ltd.);
Convertible Preferred Sharespreferred shares
Except for treasury shares, each fully paid convertible preferred share, when and if issued, entitles its holder to:
The holders As of the date of this Annual Report on Form 20-F, we have zero convertible preferred shares are not entitled to receive dividendsissued and are not entitled to any payment in respect of our surplus assets in the event of our liquidation. The holders of convertible preferred shares are, subject to our bye-laws and Bermuda law, entitled to convert their convertible preferred shares, at their option, at any time (a) after the date which is two years and six calendar months after the date of issue of the relevant convertible preferred shares but before the date which is five years after such date of issue and (b) during the period between the date on which a mandatory offer to acquire all common shares and all convertible preferred shares is announced and the final business day such offer is open for acceptance, in each case, in whole or in part, into common shares on the basis of one common share for one convertible preferred share. Upon conversion, the converting shareholder must pay to us a conversion premium per share equal to the greater of (1) the closing price of our common shares on the NASDAQ on the date of the conversion notice, and (2) the 30 day volume weighted average price on the NASDAQ of our common shares on the date of the conversion notice. The holders of convertible preferred shares have the same voting rights as the holders of common shares. Any convertible preferred shares not redeemed five years after their issue will be immediately redeemed by the company at a redemption price of US$0.001 per share.
outstanding. There are no sinking fund provisions attached to any of our shares. Holders of fully paid common shares or convertible preferred shares have no further liability to the companyVEON Ltd. for capital calls.
All rights of any share of any class held in treasury are suspended and may not be exercised while the share is held by the companyVEON Ltd. in treasury.
Shareholders’Shareholders' Meetings
Shareholders’ Shareholders' meetings are convened and held in accordance with our bye-laws and Bermuda law. Registered holders of voting shares as of the record date for the shareholder meeting may attend and vote.
Annual General Meetinggeneral meeting
Our bye-laws and Bermuda law provide that our annual general meeting must be held each year at such time and place as the CEO or the supervisory board may determine.
The Convening the annual general meeting requires that 30 clear days’days' prior notice be given to each shareholder entitled to attend and vote at such annual general meeting. The notice must state the date, place and time at which the meeting is to be held, that the election of directors will take place and, as far as practicable, any other business to be conducted at the meeting.
Under Bermuda law, shareholders may, at their own expense (unless the company otherwise resolves), require a company to: (a) give notice to all shareholders entitled to receive notice of the annual general meeting of any resolution that the shareholders may properly move at the next annual general meeting; and (b) circulate to all shareholders entitled to receive notice of any general meeting a statement in respect of any matter referred to in the proposed resolution or any business to be conducted at such general meeting. The number of shareholders necessary for such a requisition is either: (1) any number of shareholders representing not less than 5.0% of the total voting rights of all shareholders entitled to vote at the meeting to which the requisition relates; or (2) not less than 100 registered shareholders.
Special general meeting
The CEO or the supervisory board may convene a special general meeting whenever in their judgment such a meeting is necessary. The supervisory board must, on the requisition in writing of shareholders holding not less than 10.0% of our paid up voting share capital, convene a special general meeting. Each special general meeting may be held at such time and place as the CEO or the supervisory board may appoint.
Convening a special general meeting requires that 30 clear days' notice be given to each shareholder entitled to attend and vote at such meeting. The notice must state the date, place and time at which the meeting is to be held and as far as possible any other business to be conducted at the meeting.
Our bye-laws state that notice for all shareholders' meetings may be given by:
Shorter notice for general meetings
A shorter notice period will not invalidate a general meeting if it is approved by either: (a) in the case of an annual general meeting, all shareholders entitled to attend and vote at the meeting, or (b) in the case of a special general meeting, a majority of shareholders having the right to attend and vote at the meeting and together holding not less than 95.0% in nominal value of the shares giving a right to attend and vote at the meeting.
Special General Meeting
The CEOaccidental omission to give notice of a general meeting to, or the supervisory board may convenenon-receipt of notice of a special general meeting whenever in their judgment such a meeting is necessary. The supervisory board must, on the requisition in writing of shareholders holding not less than 10.0% of our paid up voting share capital, convene a special general meeting. Each special general meeting may be held at such time and place as the CEO or the supervisory board may appoint.
A special general meeting requires 30 clear days’ notice be given to eachby, any shareholder entitled to attend and votereceive notice shall not invalidate the proceedings at suchthat meeting. The notice must state the date, place and time at which the meeting is to be held and as far as possible any other business to be conducted at the meeting.
Our bye-laws state that notice for all shareholders’ meetings may be given by:
delivering such notice to the shareholder in person;
sending such notice by letter or courier to the shareholder’s address as stated in the register of shareholders;
transmitting such notice by electronic means in accordance with directions given by the shareholder; or
accessing such notice on our website.
Postponement or Cancellationcancellation of General Meetinggeneral meeting
The supervisory board may postpone or cancel any general meeting called in accordance with the bye-laws (other than a meeting requisitioned by shareholders) provided that notice of postponement or cancellation is given to each shareholder before the time for such meeting.
Quorum
Subject to the Companies Act and our bye-laws, at any general meeting, two or more persons present in person at the start of the meeting and having the right to attend and vote at the meeting and holding or representing in person or by proxy at least 50.0% plus one voting share of our total issued votingand outstanding shares at the relevant time will form a quorum for the transaction of business.
If within half an hour from the time appointed for the meeting a quorum is not present, then, in the case of a meeting convened on a requisition, the meeting shall be deemed canceledcancelled and, in any other case, the meeting shall stand adjourned to the same day one week later, at the same time and place, or to such other day, time or place as the CEO may determine.
Voting Rights
Under Bermuda law, the voting rights of our shareholders are regulated by our bye-laws and, in certain circumstances, the Companies Act.
Subject to Bermuda law and our bye-laws, a resolution may only be put to a vote at a general meeting of any class of shareholders if:
In addition to those matters required by Bermuda law or by the NASDAQ rules to be approved by a simple majority of shareholders at any general meeting, the following actions require the approval of a simple majority of the votes cast at any general meeting:
Any question proposed for the consideration of the shareholders at any general meeting may be decided by the affirmative votes of a simple majority of the votes cast, except for:
Our bye-laws require voting on any resolution at any meeting of the shareholders to be conducted by way of a poll vote. Except where cumulative voting is required, each person present and entitled to vote at a meeting of the shareholders shall have one vote for each share of which such person is the holder or for which such person holds a proxy and such vote shall be counted by ballot or, in the case of a general meeting at which one or more shareholders are present by electronic means, in such manner as the chairman of the meeting may direct. A person entitled to more than one vote need not use all his votes or cast all the votes he uses in the same way.
If no instruction is received from a holder of our ADSs, the Depositary shall give a proxy to an individual selected by the supervisory board to vote the number of shares represented by the uninstructed ADSs at any shareholders' meeting. The supervisory board's proxy designee will then vote the shares in accordance with the votes of all other shares represented and voting at the meeting, excluding any votes of any security holder of the company beneficially owning more than five percent of the securities entitled to vote at the meeting.
Voting Rightsrights of Common Sharescommon shares
The holders of common shares, subject to the provisions of our bye-laws, are entitled to one vote per common share, voting together with the convertible preferred shares as a single class, except where cumulative voting applies when electing directors.
Voting Rightsrights of Convertible Preferred Sharesconvertible preferred shares
The provisions of our bye-laws entitle the holders of convertible preferred shares subject to the provisions of our bye-laws, are entitled(if and when issued) to one vote per convertible preferred share, voting together with the common shares as a single class, except where cumulative voting applies when electing directors.
Transfer Restrictions
For such time as all of our common shares are fully paid and listed on NASDAQ, Euronext Amsterdam (or another appointed exchange, as determined from time to time by the Bermuda Monetary Authority), there are no Bermuda law transfer restrictions applicable to the shares. Were any of our shares to not be fully paid, our bye-laws permit the supervisory board to decline to register a transfer. At such time as our common shares cease to be listed on NASDAQ, Euronext Amsterdam (or another appointed exchange, as determined from time to time by the Bermuda Monetary Authority), the Bermuda Exchange Control Act 1972 and associated regulations require that the prior consent of the Bermuda Monetary Authority be obtained for any transfers of shares.
Foreign Shareholders
There are Our bye-laws have no requirements or restrictions with respect to foreign ownership of our shares.
Supervisory Board and Management Board
Our company VEON Ltd. is governed by our supervisory board, currently consisting of nineten directors.
The Subject to certain material business decisions that are reserved to the supervisory board, the supervisory board generally delegates day-to-day management of our company to the management board which sub-delegates management to the CEO, subject to certain material business decisions that are reservedother than the approval of financial statements of our subsidiary group companies and appointment of auditors of our subsidiary group companies where the authority matrix in our bye-laws delegates this authority from the management board to the supervisory board.CEO and the CFO, acting jointly. The management board consists of the CEO and other senior executives.executives, including the CFO. The CEO has exclusive authority to identify and recommend our senior executives to the supervisory board for the supervisory board’sboard's ratification.
All directors are elected by our shareholders to the supervisory board through cumulative voting. Each voting share confers on its holder a number of votes equal to the number of directors to be elected. The holder may cast those votes for candidates in any proportion, including casting all votes for one candidate.
Under our bye-laws, the amount of any fees or other remuneration payable to directors is determined by the supervisory board upon the recommendation of the compensation committee. We may repay to any director such reasonable costs and expenses as he may incur in the performance of his duties.
The supervisory board has the power to borrow on the company’sVEON Ltd.'s behalf and delegates that authority to the management board, subject to the restrictions set forth in our bye-laws.bye-laws, including that financing transactions, incurrence of indebtedness, guarantee or provision of security that (i) (x) exceed US$300 million (as determined by the CFO and VEON Ltd.'s General Counsel) or (y) are not solely among subsidiary group companies, and (2) involve pledging or otherwise encumbering the shares of any subsidiary group company (or affiliate thereof) in indebtedness in amount greater than US$50 million in each case, as determined by the CFO and VEON Ltd.'s General Counsel, still require the approval of the supervisory board.
There is no requirement for the members of our supervisory board to own shares. A director who is not a shareholder will nevertheless be entitled to attend and speak at general meetings and at any separate meeting of the holders of any class of shares.
Neither Bermuda law nor our bye-laws establish any mandatory retirement age for our directors or executive officers.
Dividends and Dividend Rights
Pursuant to Bermuda law, we are restrictedprohibited from declaring or paying a dividend if there are reasonable grounds for believing that (a) we are, or would after the payment be, unable to pay our liabilities as they become due, or (b) the realizable value of our assets would, as a result of the dividend, be less than the aggregate of our liabilities.
The supervisory board may, subject to our bye-laws and in accordance with Bermuda law,the Companies Act, declare a dividend to be paid to the shareholders holding shares entitled to receive dividends, in proportion to the number of shares held by them, and such dividend may be paid in cash or wholly or partly in shares or other assets, including through the issuance of our shares or other securities, in which case the supervisory board may fix the value for distribution in specie of any assets, shares or securities. We are not required to pay interest on any unpaid dividend.
In accordance with our bye-laws, dividends may be declared and paid in proportion to the amount paid up on each share. The holders of common shares are entitled to dividends if the payment of dividends is approved by the supervisory board. The holders of convertibleConvertible preferred shares are not entitled(if and when issued) have no entitlement to receive dividends.
Dividends unclaimed for a period of seven years from the date of payment may be forfeited.
Our bye-laws and Bermuda law do not provide for pre-emptive rights of shareholders in respect of new shares issued by us.
There is no statutory regulation of the conduct of takeover offers and transactions under Bermuda law. However, our bye-laws provide that any person who, individually or together with any of its affiliates or any other members of a group, acquires beneficial ownership of any common shares or convertible preferred shares which, taken together with common shares and/or convertible preferred shares already beneficially owned by it or any of its affiliates or its group, in any manner, carry 50.0% or more of the voting rights of our issued and outstanding voting shares, must, within 30 days of acquiring such shares, make a general offer to all holders of common shares (including any common shares issued on the conversion of convertible preferred shares during the offer period) and convertible preferred shares to purchase their shares.
Interested Party Transactions
The supervisory board and the management board have the right to approve transactions with interested parties, subject to compliance with Bermuda law. Prior to approval by the supervisory board or the management board, as the case may be, on such transaction, all interests must be fully disclosed. An interested director may participate in the discussion and vote on such a transaction, unless otherwise restricted by applicable law or in accordance with our bye-laws.
Liquidation Rights
If VimpelComVEON Ltd. is wound up, the liquidator may, with the sanction of a resolution of the shareholders, divide among the shareholders in specie or in kind the whole or any part of our assets (whether they shall consist of property of the same kind or not) and may, for such purpose, set such value as he deems fair upon any property to be divided as aforesaid and may determine how such division shall be carried out as between the shareholders or different classes of shareholders.
The liquidator may, with the same sanction, vest the whole or any part of such assets in trustees upon such trusts for the benefit of the shareholders as the liquidator thinks fit, but so that no shareholder may be compelled to accept any shares or other securities or assets on which there is any liability.
The holders of common shares, in the event of our winding-up or dissolution, are entitled to our surplus assets in respect of their holdings of common shares, pari passu and pro rata to the number of common shares held by each of them. TheConvertible preferred shares (if and when issued) do not entitle the holders thereof to any payment or distribution of convertible preferred shares,surplus assets in the event of our winding-up or dissolution, are not entitled to any payment or distribution in respectdissolution.
Table of our surplus assets.Contents
Share Registration, Transfers and Settlement
All of our issued shares are registered. The register of members of a company is generally open to inspection by shareholders and by members of the general public without charge. The register of members is required to be open for inspection for not less than two hours in any business day (subject to the ability of a company to close the register of members for not more than 30 days in a year). A company is required to maintain its share register in Bermuda but may, subject to the provisions of the Companies Act, establish a branch register outside of Bermuda. A company is required to keep at its registered office a register of directors and officers that is open for inspection for not less than two hours in any business day by members of the public without charge. Bermuda law does not, however, provide a general right for shareholders to inspect or obtain copies of any other corporate records.
| C. Material Contracts |
None.
The Contribution and Framework Agreement, dated as of August 6, 2015, as amended, by and among VEON Ltd., VimpelCom Amsterdam B.V., Hutchison, Hutchison Europe Telecommunications S.à r.l. and Hutchison 3G Italy Investments S.à r.l., sets out the terms on which the parties will form the equal joint venture holding company to own and operate their telecommunications businesses in Italy. A copy of this agreement is incorporated by reference as Exhibit 4.4 to this Annual Report on Form 20-F.
The Shareholders' Deed, dated as of August 6, 2015, as amended, by and among Hutchison 3G Italy Investments S.à r.l., VimpelCom Luxembourg Holdings S.à r.l., Hutchison Europe Telecommunications S.à r.l., VEON Ltd. and Hutchison, sets out the terms on which Hutchison 3G Italy Investments S.à r.l. and its subsidiaries are owned, controlled, managed and financed following the completion of the Italy Joint Venture. A copy of this agreement is incorporated by reference as Exhibit 4.5 to this Annual Report on Form 20-F.
The FinCo Shareholders' Deed, dated as of November 5, 2016, by and among VIP-CKH Ireland Limited, VimpelCom Luxembourg Holdings S.à r.l., Hutchison Europe Telecommunications S.à r.l., VEON Ltd. and Hutchison, sets out the terms on which VIP-CKH Ireland Limited is owned, controlled, managed and financed following the completion of the Italy Joint Venture. A copy of this agreement is incorporated by reference as Exhibit 4.6 to this Annual Report on Form 20-F.
For more information regarding the Italy Joint Venture, see "Explanatory Note—Presentation of Financial Information of the Italy Joint Venture."
D. Exchange Controls
We have been designated by the Bermuda Monetary Authority as non-resident of Bermuda for Bermuda exchange control purposes. This designation allows us to engage in transactions in currencies other than the Bermuda dollar, and there are no restrictions on our ability to transfer funds (other than funds denominated in Bermuda dollars) in and out of Bermuda or to pay dividends to United States or other non-Bermuda residents who are holders of our common shares or convertible preferred shares.
For the purposes of Bermuda exchange control regulations, for such time as our ADSs remain listed on an appointed stock exchange (which includes the NASDAQ Global Select Market) or our common shares remain listed on an appointed stock exchange (which includes Euronext Amsterdam), there are no limitations on the issue and free transferability of our common shares and convertible preferred shares or our ADSs representing common shares to and between non-residents of Bermuda for exchange control purposes, provided our ADSs remain listed on an appointed stock exchange (which includes NASDAQ).purposes. Certain issues and transfers of common shares and convertible preferred shares involving persons deemed resident in Bermuda for exchange control purposes may require the specific prior consent of the Bermuda Monetary Authority.
United States Federal Income Tax Considerations
The following discussion generally summarizessummary describes certain material United StatesU.S. federal and Dutch income and withholding tax consequences to a beneficial owner arising fromU.S. Holders (defined below) under present law of an investment in our ADSs or common shares. This summary applies only to U.S. Holders that hold the ownership and disposition of ourADSs or common shares or ADSs. The discussion which followsas capital assets within the meaning of Section 1221 of the Code (as defined below) and that have the U.S. dollar as their functional currency.
This summary is based on (a) the United States Internal Revenue Code of 1986, as amended (the "Code"), applicable U.S. Treasury regulations, as well as judicial and administrative interpretations thereof, all as of the date of this Annual Report on Form 20-F. All of the foregoing authorities are subject to change or differing interpretation, which we refer tochange or differing interpretation could apply retroactively and could affect the tax consequences described below. The statements in this Annual Report on Form 20-F asare not binding on the U.S. Internal Revenue Code,Service (the "IRS") or any court, and thus we can provide no assurance that the Treasury regulations promulgated thereunder, and judicial and administrative interpretations thereof, (b) Dutch law and (c)U.S. federal income tax consequences discussed below will not be challenged by the Convention (defined in “—Dutch Tax Considerations” below) as in effect on the date hereof, and is subject to any changes (possibly on a retroactive basis) in theseIRS or other laws occurring after such date. It is also based, in part, on representations of the depositary, and assumes that each obligation in the deposit agreement and any related agreements will be performed in accordance with its terms.sustained by a court if challenged by the IRS. Furthermore, this summary does not address any estate or gift tax consequences, any state, local or non-U.S. tax consequences or any other tax consequences other than U.S. federal income tax consequences.
The following discussion which follows is intended as a descriptive summary only and isdoes not intended asdescribe all the tax adviceconsequences that may be relevant to any particular investor. It is also notinvestor or to persons in special tax situations such as:
U.S. Holders of our ADSs or common shares are urged to consult their tax advisors about the application of the U.S. federal or Dutch incometax rules to their particular circumstances as well as the state, local and withholdingnon-U.S. tax consequences to a prospective holderthem of ADSs or common shares. Each investor is urged to consult its own tax advisor regarding the specific United States federal, state, and local and Dutch tax consequences of thepurchase, ownership and disposition of theour ADSs or common shares and regarding the effect and applicability of tax treaties.
United States Federal Income Tax Considerationsshares.
This summary of United States federal income and withholding tax consequences applies to a U.S. Holder of ADSs or common shares. As used herein, the term U.S. Holder"U.S. Holder" means a beneficial owner of our ADSs or common shares that, is: (i) for U.S. federal income tax purposes, is or is treated as:
Since the United States federal income and withholding The tax treatment of a U.S. Holder may vary depending upon particular situations, certain U.S. Holders (including, but not limited to, insurance companies, tax-exempt organizations, financial institutions, U.S. Holders subject to the alternative minimum tax, U.S. Holders who are broker-dealerspartner (or other owner) in securities,an entity treated as a partnership for U.S. Holders that have a “functional currency” other than the U.S. dollar, U.S. Holders that received common shares as compensation for services, and U.S. Holders that own, directly, indirectly or by attribution, 5.0% or more of the outstanding common shares) may be subject to special rules not discussed below. In addition, this summary is generally limited to U.S. Holders who will hold ADSs or common shares as “capital assets” within the meaning of Section 1221 of the Internal Revenue Code and not as part of a “hedging transaction,” “straddle” or “conversion transaction” within the meaning of Sections 1221, 1092 and 1258 of the Internal Revenue Code and the regulations thereunder. The discussion below also does not address the effect of any United States state or local tax law or foreign tax law on a U.S. Holder in the ADSs or common shares.
For purposes of applying United States federal income and withholding tax law, a U.S. Holder of ADSs will be treated as the owner of the underlying common shares represented thereby.
Taxation of dividends on ADSs or common shares
Subject to the discussion under the heading “—Passive foreign investment company,” the gross amount of any dividend received by a U.S. Holder (determined without deduction for any Dutch withholding taxes) with respect topurposes that holds our ADSs or common shares generally will depend on such partner's (or other owner's) status and the activities of the partnership. A partnership and a U.S. Holder that is a partner (or other owner) in such a partnership should consult its tax advisor.
The discussion below assumes that the representations contained in the deposit agreement are true and that the obligations in the deposit agreement and any related agreement will be subject to taxation as foreign source dividend income tocomplied with in accordance with their terms. The discussion below assumes that the
extent such distributions representations contained in the deposit agreement are made fromtrue and that the current or accumulated earningsobligations in the deposit agreement and profitsany related agreement will be complied with in accordance with their terms. Generally, a holder of our company, as determinedan ADS should be treated for U.S. federal income tax purposes. A dividend will be included in income when receivedpurposes as holding the common shares represented by the ADS. As a result, no gain or loss will generally be recognized upon an exchange of ADSs for common shares. The U.S. HolderTreasury has expressed concerns that intermediaries in the casechain of common shares orownership between the holder of an ADS and the issuer of the security underlying the ADS may be taking actions that are inconsistent with the claiming of foreign tax credits for U.S. Holders of ADSs. Accordingly, the creditability of foreign taxes, if any, as described below, could be affected by the depositaryactions taken by intermediaries in the casechain of ADSs. A U.S. corporateownership between the holder willof an ADS and us if as a result of such actions the holder of an ADS is not be allowed a deduction for dividends received in respectproperly treated as the beneficial owner of underlying common shares.
Dividends and other distributions
Subject to the passive foreign investment company rules discussed below, the gross amount of distributions on ADSs or common shares. A distribution, if any, in excess of such current and accumulated earnings and profits first will be treated as a non-taxable return of capital to the extent of the U.S. Holder’s basis in the ADSs or common shares, and thereafter as a capital gain. The portion of any distribution to a U.S. Holder treated as a non-taxable return of capital will reduce such holder’s tax basis in such ADSs or common shares.
Subject to certain exceptions for short-term and hedged positions, the U.S. dollar amount of dividends receivedmade by a U.S. Holder that is an individualus with respect to the ADSs or common shares (including the amount of non-U.S. taxes withheld therefrom, if any) generally will be subjectincludible as dividend income in a U.S. Holder's gross income in the year received (or deemed received), but only to the extent such distributions are paid out of our current or accumulated earnings and profits as determined under U.S. federal income tax principles. Because we do not maintain calculations of our earnings and profits under U.S. federal income tax principles, a U.S. Holder should expect all cash distributions will be reported as dividends for U.S. federal income tax purposes. Such dividends will not be eligible for the dividends-received deduction allowed to U.S. taxationcorporations with respect to dividends received from other U.S. corporations.
Dividends received by certain non-corporate U.S. Holders (including individuals) may be "qualified dividend income," which is taxed at a maximum currentthe lower applicable capital gains rate, of 15.0%, or 20% depending on the income level of the individual, if the dividends are “qualified dividends.” Dividends paid onprovided that (1) either (a) the ADSs or common shares, will beas applicable, are readily tradable on an established securities market
in the United States, or (b) we are eligible for the benefits of a qualifying income tax treaty with the United States that includes an exchange of information program, (2) we are neither a passive foreign investment company (as discussed below) nor treated as qualified dividends if our company was not, in the year priorsuch with respect to the year in which the dividend was paid, and is not, in theU.S. Holder for our taxable year in which the dividend is paid or the preceding taxable year, (3) the U.S. Holder satisfies certain holding period requirements and (4) the U.S. Holder is not under an obligation to make related payments with respect to positions in substantially similar or related property. Under IRS authority, common shares, or ADSs representing such shares, generally are considered for purposes of clause (1) above to be readily tradable on an established securities market in the United States if they are listed on the NASDAQ Global Select Market, as our ADSs are. However, based on existing guidance, it is not entirely clear whether any dividends you receive with respect to the common shares will be taxed as qualified dividend income, because the common shares are not themselves listed on a passive foreign investment company, or PFIC. Based on our audited financial statements and relevant market and shareholder data,U.S. exchange for trading purposes. If we believe that it was notare treated as a PFICresident of The Netherlands for U.S. federalpurposes of Dutch tax law, we may be eligible for the benefits of the income tax purposes with respect to our prior taxable years. In addition, based on our financial statementstreaty between the United States and our current expectations regarding the value and nature of our assets and the sources and nature of our income, we do not anticipate being treated as a PFIC for our current taxable year. Individuals, estates and trusts with gross income in excess of US$200,000 (US$250,000 for joint filers) will be subject to an additional Medicare tax of 3.8% of net investment income, which generally includes dividends, in excess of certain thresholds.
The Netherlands. U.S. Treasury has announced its intention to promulgate rules pursuant to which holders of ADSs or common shares and intermediaries through whom such securities are held will be permitted to rely on certifications from issuers to establish that dividends are treated as qualified dividends. Because such procedures have not yet been issued, it is not clear whether our company will be able to comply with them. Holders of our ADSs and common shares should consult their own tax advisors regarding the availability of the reduced dividend taxlower rate infor dividends paid with respect to the lightADSs or common shares.
The amount of their own particular circumstances.
If a dividend isany distribution paid in Euros, the amount included in gross income by a U.S. Holderforeign currency will be equal to the U.S. dollar value of such currency, translated at the spot rate of exchange on the date of receipt by the U.S. Holder (orsuch distribution is received by the depositary, in the case of ADSs),ADSs, or by the U.S. Holder, in the case of the Euro amount distributed,common shares, regardless of whether the payment is actually converted into U.S. dollars. Any gain or loss resulting from currency exchange rate fluctuations during the period from the date the dividend is included in the income of the U.S. Holder to the date the Euros arefact converted into U.S. dollars generallyat that time. Any further gain or loss on a subsequent conversion or other disposition of the currency for a different U.S. dollar amount will be treated asU.S. source ordinary income or loss from U.S. sources.loss.
To the extent described under “—Dutch Tax Considerations,” The dividends we pay with respect to the ADSs to U.S. Holderswill generally be foreign source and considered "passive category" income, and non-U.S. taxes withheld therefrom, if any, may be subject to withholding tax imposed bycreditable against the Netherlands at a rate of 15.0%. Subject to certain conditions and limitations, tax withheld by the Netherlands on dividends may be deducted from a U.S. Holder’s U.S. taxable income or credited against a U.S. Holder’sHolder's U.S. federal income tax liability. Dividends received by a U.S. Holder with respectliability, subject to applicable limitations. If the ADSs will be treateddividends constitute qualified dividend income as foreign source income, which may be relevant indiscussed above, the amount of the dividend taken into account for purposes of calculating such holder’sthe foreign tax credit limitation.limitation will generally be limited to the gross amount of the dividend, multiplied by the reduced rate applicable to the qualified dividend income, divided by the highest rate of tax normally applicable to dividends. The limitation on foreign taxes eligible for credit is calculated separately with respect to specific classes of income. For this purpose, dividends we distribute generally will constitute “passive income,” or, inThe rules relating to the casedetermination of certainthe U.S. foreign tax credit are complex, and U.S. Holders that are membersshould consult their tax advisors regarding the availability of a financial services groupforeign tax credit in their particular circumstances and the possibility of claiming an itemized deduction (in lieu of the foreign tax credit) for any foreign taxes paid or persons predominantly engaged in the active conduct of a banking, insurance, financing or similar business, “general category income.”withheld.
Taxation on saleSale or exchangeother taxable disposition of the ADSs or common shares
Subject to the discussion under the heading ��—Passivepassive foreign investment company” rules discussed below, upon a sale or other taxable disposition of the sale of ADSs or common shares, a U.S. Holder generally will result in the recognition of U.S.-sourcerecognize capital gain or loss for U.S. federal income tax purposes in an amount equal to the
difference between the amount realized on the sale and the U.S. Holder’sHolder's adjusted tax basis in such ADSs or common shares. If aAny such gain or loss generally will be treated as long-term capital gain or loss if the U.S. Holder disposes ofHolder's holding period in the ADSs or common shares exceeds one year. Non-corporate U.S. Holders (including individuals) generally will be subject to U.S. federal income tax on long-term capital gain at preferential rates. The deductibility of capital losses is subject to significant limitations. Gain or loss, if any, realized by a U.S. Holder on the sale or other disposition of the ADSs or common shares generally will be treated as U.S. source gain or loss for U.S. foreign tax credit limitation purposes.
If the consideration received upon the sale or other disposition of the ADSs or common shares is paid in foreign currency, the amount realized will generally be the U.S. dollar value of the payment received, determinedtranslated at the spot rate of exchange on the date of the sale or other disposition. A U.S. Holder may realize additional gain or loss upon the subsequent sale or disposition of such currency, which will generally be treated as U.S. source ordinary income or loss. If the ADSs or common shares, as
applicable, are treated as traded on an established securities market and the relevant U.S. Holder is either a cash basis taxpayer or an accrual basis taxpayer who has made a special election (which must be applied consistently from year to year and cannot be changed without the consent of the IRS), such holder will determine the U.S. dollar value of the amount realized in foreign currency by translating the amount received at the spot rate of exchange on the settlement date of the sale. If the ADSs or common shares, as applicable, are not treated as traded on an established securities market, or the relevant U.S. Holder is an accrual basis taxpayer that does not elect to determine the amount realized using the spot rate on the settlement date, for the sale. Gainsuch U.S. Holder will recognize foreign currency gain or loss uponto the extent of any difference between the U.S. dollar amount realized on the date of sale or disposition (as determined above) and the U.S. dollar value of the currency received translated at the spot rate on the settlement date.
A U.S. Holder's initial U.S. federal income tax basis in the ADSs or common shares generally will equal the cost of such ADSs or common shares, as applicable. If a U.S. Holder used foreign currency to purchase the ADSs or common shares, the cost of the ADSs or common shares will be capital gain or loss and will be long-term capital gain or loss ifthe U.S. dollar value of the foreign currency purchase price on the date of purchase, translated at the spot rate of exchange on that date. If the ADSs or common shares, have been held for more than one year. Long-term capital gain realized by aas applicable, are treated as traded on an established securities market and the relevant U.S. Holder with respect tois either a cash basis taxpayer or an accrual basis taxpayer who has made the special election described above, the U.S. Holder will determine the U.S. dollar value of the cost of such ADSs or common shares will be subject to taxby translating the amount paid at a maximum currentthe spot rate for individuals of 15%, or 20.0% dependingexchange on the individual’s income level, and generally 35.0% for corporations. However, special rules may apply to a redemption of common shares which may result in the proceedssettlement date of the redemption being treated as a dividend. Certain limitations exist on the deductibility of capital losses by both corporate and individual taxpayers. If a U.S. Holder receives a currency other than the U.S. dollar (e.g., Euros) upon a sale or exchange of ADSs or common shares, gain or loss, if any, recognized on the subsequent sale, conversion or disposition of such currency will be U.S. source ordinary income or loss. However, if such currency is converted into U.S. dollars on the date received by the U.S. Holder, the U.S. Holder generally should not be required to recognize any additional gain or loss on such conversion.
In addition, individuals, estates and trusts with an adjusted gross income in excess of US$200,000 (US$250,000 for joint filers) are subject to an additional Medicare tax of 3.8% of net investment income, which generally includes capital gains, in excess of certain thresholds.purchase.
Passive foreign investment companyForeign Investment Company rules
In general, the foregoing discussion assumes that we are not currently, and We will not be in the future, classified as a passive foreign investment company (a "PFIC") for any taxable year if either: (1) at least 75% of our gross income is "passive income" for purposes of the PFIC rules or (2) at least 50% of the value of our assets (determined on the basis of a quarterly average) is attributable to assets that produce or are held for the production of passive income. For this purpose, we will be treated as owning our proportionate share of the assets and earning our proportionate share of the income of any other corporation in which we referown, directly or indirectly, 25% or more (by value) of the stock. Under the PFIC rules, if we were considered a PFIC at any time that a U.S. Holder holds our ADSs or common shares, we would continue to in this discussionbe treated as a PFIC withinwith respect to such investment unless (1) we cease to be a PFIC and (2) the meaningU.S. Holder has made a "deemed sale" election under the PFIC rules.
Based on our financial statements and relevant market and shareholder data, we believe that we should not be treated as a PFIC with respect to our most recently closed taxable year. This is a factual determination, however, that must be made annually after the close of the Internal Revenue Code. Generally, if during anyeach taxable year of a non-U.S. corporation, 75.0% or more of such non-U.S. corporation’s gross income consists of certain kinds of “passive” income, or if 50.0% or more of the gross value of such non-U.S. corporation’s assets are “passive assets” (generally assetsand is subject to uncertainty in several respects. Therefore, there can be no assurance that generate passive income), such non-U.S. corporationwe will not be classified as a PFIC for suchthe current taxable year or for any future taxable year.
Based on our current and projected income, assets and activities, If we do not believe that we will be classified asare considered a PFIC for our current orat any succeeding taxable year. However, because PFIC status is a factual mattertime that must be determined annually, there can be no assurances in this regard.
Consequences of PFIC classification. If we were classified as a PFIC for any taxable year in which a U.S. Holder is a holder ofholds our ADSs or common shares, such holderany gain recognized by the U.S. Holder on a sale or other disposition of our ADSs or common shares, as well as the amount of any "excess distribution" (defined below) received by the U.S. Holder, would be subjectallocated ratably over the U.S. Holder's holding period for our ADSs or common shares. The amounts allocated to special rules, generally resulting in increased tax liability in respectthe taxable year of gain realized on the sale or other disposition (or the taxable year of ADSs or common shares or uponreceipt, in the receipt of certain distributions on ADSs or common shares. For example, gain recognized on disposition of PFIC stock or the receiptcase of an “excess distribution” fromexcess distribution) and to any year before we became a PFIC is: (1) treatedwould be taxed as if it were ordinary income earned ratably onincome. The amount allocated to each day in the taxpayer’s holding period for the stockother taxable year would be subject to tax at the highest marginal rate in effect during the period in which it was deemed earnedfor individuals or corporations, as appropriate, for that taxable year, and (2) subject to an interest charge as ifwould be imposed. For the resulting tax had actually been due in such earlier year or years. An “excess distribution”purposes of these rules, an excess distribution is the amount ofby which any distribution received by a U.S. Holder on its ADSs or common shares exceeds 125% of the average of the annual distributions on our ADSs or common shares received during the taxable yearpreceding three years or the U.S. Holder's holding period, whichever is shorter. Certain elections may be
available that exceeds 125.0%would result in alternative treatments (such as mark-to-market treatment) of our ADSs or common shares if VEON Ltd. is considered a PFIC. We do not intend to provide the immediately preceding three-year averageinformation necessary for U.S. Holders of distributions receivedour ADSs or common shares to make qualified electing fund elections, which, if available, would result in tax treatment different from the corporation, subject to certain adjustments.
A disposition is defined to include, subject to certain exceptions, any transaction or event that constitutesgeneral tax treatment for an actual or deemed transfer of property for any purpose under the Internal Revenue Code, includinginvestment in a sale, exchange, gift, transfer at death, and the pledging of PFIC stock to securedescribed above. If we are treated as a loan. The foregoing rules will continue to applyPFIC with respect to a U.S. Holder who heldfor any taxable year, the commonU.S. Holder will be deemed to own shares while we met the definitionin any of our subsidiaries that are also PFICs. However, an election for mark to market treatment would likely not be available with respect to any such subsidiaries.
If VEON Ltd. is considered a PFIC, even if we ceasea U.S. Holder will also be subject to meet the definition of a PFIC. You are urged toannual information reporting requirements. U.S. Holders should consult your owntheir tax advisors regardingabout the consequencespotential application of the PFIC rules to an investment in a PFIC.our ADSs or common shares.
QEF Election. A U.S. Holder of a PFIC who makes a Qualified Electing Fund election, or a QEF Election, will be taxable currently on its pro rata share of the PFIC’s ordinary earnings and net capital gain, unless it makes
a further election to defer payments of tax on amounts included in income for which no distribution has been received, subject to an interest charge. Special adjustments are provided to prevent inappropriate double taxation of amounts so included in a U.S. Holder’s income upon a subsequent distribution or disposition of the stock.
For a U.S. Holder to qualify for treatment under the QEF election, we would be required to provide certain information to the U.S. Holder. Although we have not definitively decided whether we would provide such information, we do not currently intend to do so.
Mark to market election. A U.S. Holder of “marketable stock” under the PFIC rules may be able to avoid the imposition of the special tax and interest charge by making a “mark-to-market election.” Generally, pursuant to this election, a U.S. Holder would include in ordinary income, for each taxable year during which such stock is held, an amount equal to the increase in value of the stock, which increase will be determined by reference to the value of such stock at the end of the current taxable year as compared with its value as of the end of the prior taxable year. A U.S. Holder desiring to make the mark-to-market election should consult its tax advisor with respect to the application and effect of making such election.
United States information reporting and backup withholding
Distributions made on Dividend payments with respect to our ADSs or common shares and proceeds from the sale, exchange or redemption of our ADSs or common shares or ADSs that are paid within the United States or through certain U.S.-related financial intermediaries to a U.S. Holder aremay be subject to information reporting to the IRS and possible U.S. backup withholding. A U.S. Holder may be subject to a “backup”eligible for an exemption from backup withholding tax unless, in general,if the U.S. Holder complies with certain proceduresfurnishes a correct U.S. federal taxpayer identification number and makes any other required certification or is a personotherwise exempt from suchbackup withholding. A holder that is not a U.S. person generally is not subjectHolders who are required to information reporting or backup withholding tax, butestablish their exempt status may be required to comply with applicableprovide such certification procedures to establish that he is not a U.S. person in order to avoid the application of such information reporting requirements or backup withholding tax to payments received within the United States or through certain U.S.-related financial intermediaries.
Individuals will be required to attach certain information regarding “specified foreign financial assets” to their U.S. federal income tax returns for any year in which the aggregate value of all such assets held by such individuals exceeds US$50,000 on the last day of the taxable year or US$75,000 at any time during the taxable year (higher thresholds apply for certain married individuals filing joint returns). A “specified foreign financial asset” includes any depository or custodial accounts at foreign financial institutions, and to the extent not held in an account at a financial institution, (1) stocks or securities issued by non-U.S. persons, and (2) any interest in a non-U.S. entity. Our company is a non-U.S. person and entity for this purpose. Penalties may be imposed for the failure to disclose such information regarding specified foreign financial assets.IRS Form W-9. U.S. Holders should consult their tax advisors regarding the potential application of the U.S. information reporting and backup withholding rules.
Backup withholding is not an additional tax. Amounts withheld as backup withholding may be credited against a U.S. Holder's U.S. federal income tax liability, and such U.S. Holder may obtain a refund of any excess amounts withheld under the backup withholding rules by timely filing an appropriate claim for refund with the IRS and furnishing any required information.
Additional information reporting requirements
Certain U.S. Holders who are individuals and certain entities may be required to file IRS Form 8938 (Statement of Specified Foreign Financial Assets) or otherwise report information relating to an interest in ADSs or common shares, subject to certain exceptions (including an exception for ADSs or common shares held in accounts maintained by certain financial institutions). Penalties can apply if U.S. Holders fail to satisfy such reporting requirements. U.S. Holders should consult their tax advisors regarding the applicability of these new rulesrequirements to their acquisition and ownership of our ADSs or common shares.
Foreign account tax compliance
Pursuant to Sections 1471 through 1474 of the Code and applicable Treasury Regulations (commonly referred to as "FATCA"), a "foreign financial institution" may be required to withhold a 30% U.S. tax on certain "passthru payments" (each as defined in the Code), unless certain information reporting requirements are met. Under current guidance, such withholding would only apply to passthru payments made after December 31, 2018. While the company does not expect that it should be treated as a foreign financial institution for purposes of FATCA, such withholding may apply to passthru payments made with respect to any ADSs or common shares held by or through such a foreign financial institution (such as an intermediary). U.S. Holders should consult their own tax advisors regarding the potential impact of FATCA on them.
THE DISCUSSION ABOVE IS A GENERAL SUMMARY. IT DOES NOT COVER ALL TAX MATTERS THAT MAY BE IMPORTANT TO YOU. EACH PROSPECTIVE PURCHASER SHOULD
CONSULT ITS OWN TAX ADVISOR ABOUT THE TAX CONSEQUENCES OF AN INVESTMENT IN OUR ADSS OR COMMON SHARES UNDER THE INVESTOR'S OWN CIRCUMSTANCES.
Material Bermuda Tax Considerations
Under current Bermuda law, we are not subject to tax in Bermuda on our income or capital gains.
Furthermore, we have obtained from the Minister of Finance of Bermuda, under the Exempted Undertakings Tax Protection Act 1966, an undertaking that, in the event that Bermuda enacts any legislation imposing tax computed on any income or gains, that tax will not be applicable to us until March 31, 2035. This undertaking does not, however, prevent the imposition of any tax or duty on persons ordinarily resident in Bermuda or any property tax on property interests we may have in Bermuda. We pay an annual government fee in Bermuda based on our authorized share capital and share premium. The annual government fee applicable to us is currently US$8,360.
Under current Bermuda law, no income, withholding or other taxes or stamp or other duties are imposed in Bermuda upon the issue, transfer or sale of our common shares or on any payments in respect of our common shares (except, in certain circumstances, to persons ordinarily resident in Bermuda).
Dutch Tax Considerations
The following This summary solely addresses the materialprincipal Dutch tax consequences for a Non-resident holder (as described below), including a U.S. Holder,of the acquisition, ownership and disposal of our ADSs in respect of their disposition or acquisition. This summaryour common shares and does not addresspurport to describe every aspect of Dutch taxation that may be relevant to you, as a Non-residentparticular holder. Tax matters are complex, and the tax consequences of the acquisition, ownership and disposal to a particular holder nor does it address special circumstancesof ADSs or treatment that may be available under applicable law. Ifcommon shares will depend in part on such holder's circumstances. Accordingly, you are a Non-resident holder, you shouldurged to consult your own tax advisor for more information abouta full understanding of the tax consequences of your owningthe acquisition, ownership and disposingdisposal to you, including the applicability and effect of our ADSs.Dutch tax laws.
Where in this summary English terms and expressions are used in this summary to refer to Dutch concepts, the intended meanings are those ofmeaning to be attributed to such terms and expressions shall be the meaning to be attributed to the equivalent Dutch concepts under Dutch tax law. Where in this taxation summary the terms “the Netherlands”"the Netherlands" and “Dutch”"Dutch" are used, these refer solely to the European part of the Kingdom of the Netherlands.
This summary is based on the tax law of the Netherlands excluding unpublished(unpublished case law in effectnot included) as ofit stands at the date of this Annual Report on Form 20-F. However, DutchThe tax law upon which this summary is based, is subject to changes, possibly with retroactive effect. Any such change sometimes on a retroactive basis. In addition, any changemay invalidate the contents of this summary, which will not be updated to our organizational structure or to the manner in which we conduct our business may affect the matters summarized below.reflect such change.
Where The summary in this summary reference is made to a “holder” of our ADSs, that concept includes, without limitation:
Income and capital gains taxes
For purposes of this section,Dutch tax considerations paragraph does not address your Dutch tax consequences if you are a “Non-resident holder”holder of ADSs or common shares who:
Taxes on income and capital gains
(a)Non-resident individuals
If you are an individual who is neither resident nor deemed to be resident in the Netherlands for purposes of Dutch income tax, or corporation tax, as the case may be;
(b) your ADSs and any benefits derived or deemed to be derived therefrom have no connection with your past, present or future employment, management activities and functions or membership of a management board (bestuurder) or a supervisory board (commissaris);
(c) your ADSs do not form part of a substantial interest or a deemed substantial interest in VimpelCom within the meaning of Chapter 4 of the Dutch Income Tax Act 2001 (Wet inkomstenbelasting 2001); and
(d) if you are not an individual, no part of the benefits derived from your ADSs is exempt from Dutch corporation tax under the participation exemption as laid down in the Dutch Corporation Tax Act 1969 (Wet op de vennootschapsbelasting 1969).
Generally, if you hold an interest in VimpelCom, such interest forms part of a substantial interest or a deemed substantial interest in VimpelCom if any one or more of the following circumstances is present:
(1) You alone or, if you are an individual, together with your partner, if any, own, or are deemed to own, directly or indirectly, either a number of shares in VimpelCom representing 5.0% or more of its total issued and outstanding capital (or the issued and outstanding capital of any class of its shares), or rights to acquire, directly or indirectly, shares, whether or not already issued, representing 5.0% or more of its total issued and outstanding capital (or the issued and outstanding capital of any class of its shares), or profit participating certificates (winstbewijzen) relating to 5.0% or more of its annual profit or to 5.0% or more of its liquidation proceeds.
(2) You have acquired or are deemed to have acquired your shares, profit participating certificates or rights to acquire shares in VimpelCom under a non-recognition provision.
(3) Your partner or any of your relatives by blood or by marriage in the direct line (including foster children) or of those of your partner has a substantial interest (as described under items (1) and (2) above) in VimpelCom.
A holder who is entitled to the benefits from shares or profit participating certificates (for instance a holder of a right of usufruct) is deemed to be a holder of shares or profit participating certificates, as the case may be, and his entitlement to benefits is considered a share or profit participating certificate, as the case may be.
If you are a holder of ADSs and you satisfy test (a) above but do not satisfy any one or more of tests (b), (c) and (d), this summary does not address your Dutch income tax position or corporation tax position, as the case may be.
If you are a Non-resident holder of ADSs, you will not be subject to any Dutch taxes on income or capital gains (other than the dividend withholding tax described below) in respect of any benefits derived or deemed to be derived by you from or in connection with your ADSs including any capital gain realized on the disposal thereof,or common shares, except in the following circumstances:if:
(1) if
(2) if you are an individual and permanent representative; or
If you are an individual and a Non-resident holder, you may derive, or be deemed to derive, benefits from your ADSs that are taxable as benefits from miscellaneous activities in the following circumstances, among others:
(a) if your investment activities go beyond the activities of an active portfolio investor, for instance in the case of use of insider knowledge (voorkennis) or comparable forms of special knowledge; or
(b) if you hold ADSs, whether directly or indirectly, and any benefits to be derived from such ADSs are intended, in whole or in part, as remuneration for activities performed by you or by a person who is a connected person to you, as meant by article 3.92b, paragraph 5, of the Dutch Income Tax Act 2001 (Wet inkomstenbelasting 2001).
Such benefits will be taxable in the Netherlands only if such activities are performed or deemed to be performed in the Netherlands.
Attribution ruleNon-resident corporate entities
Benefits If you are a corporate entity, or an entity including an association, a partnership and a mutual fund, taxable as a corporate entity, which is neither resident, nor deemed to be resident in the Netherlands for purposes of Dutch corporation tax, you will not be subject to Dutch corporation tax in respect of any benefits derived or deemed to be derived from certain miscellaneous activities byor in connection with ADSs or common shares, except if:
General
If you are neither resident nor deemed to be resident in the Netherlands, you will for Dutch tax purposes not carry on or be deemed to carry on an enterprise, in whole or in part, through a permanent establishment or a permanent representative in the Netherlands by reason only of the execution and/or enforcement of the documents relating to the issue of ADSs or common shares or the parents who exercise, authority overperformance by VEON Ltd. of its obligations under such documents or under the child, irrespective of the country of residence of the child.ADSs or common shares.
Dividend withholding tax
Dividends distributed by VimpelComGeneral
VEON Ltd. is generally required to a Non-resident holder of ADSs generally are subject to awithhold Dutch dividend withholding tax imposed by the Netherlands at a rate of 15.0%. from dividends distributed by VEON Ltd., subject to possible relief under Dutch domestic law, the Treaty on the Functioning of the European Union or an applicable Dutch income tax treaty depending on a particular holder of ADSs' or common shares individual circumstances.
The concept “dividends"dividends distributed by VimpelCom”VEON Ltd." as used in this sectionDutch tax considerations paragraph includes, but is not limited to, the following:
If a Non-resident holder of ADSs is resident in the non-European part of the Kingdom of the Netherlands or in a country that has concluded a double taxation treaty with the Netherlands, such holder may be eligible for a full or partial relief from the dividend withholding tax, provided such relief is timely and duly claimed. Pursuant to Dutch rules to avoid dividend stripping, dividend withholding tax relief will only be available to the beneficial owner of dividends distributed by VimpelCom.
In addition, a Non-resident holder of ADSs that is not an individual, is entitled to an exemption from dividend withholding tax, provided that the following tests are satisfied:
The exemption from dividend withholding tax is not available if pursuant to a provision for the prevention of fraud or abuse included in a double taxation treaty between the Netherlands and the country of residence of the Non-resident holder of ADSs, such holder would not be entitled to the reduction of tax on dividends provided for by such treaty. Furthermore, the exemption from dividend withholding tax will only be available to the beneficial owner of dividends distributed by VimpelCom if a Non-resident holder of ADSs is resident in a Member State of the European Union with which the Netherlands has concluded a double taxation treaty that provides for a reduction of tax on dividends based on the ownership of the number of voting rights, the test under 2.a. above is also satisfied if such holder owns 5.0% of the voting rights in VimpelCom.
If a Non-resident Holder of ADSs is subject to Dutch income tax or Dutch corporation tax in respect of any benefits derived or deemed to be derived from its ADSs, including any capital gain realized on the disposal thereof, it can generally credit Dutch dividend withholding tax against his Dutch income tax or its Dutch corporation tax liability, as applicable, and is generally entitled to a refund pursuant to a negative tax assessment if and to the extent that there are net profits, unless (a) VEON Ltd.'s shareholders have resolved in advance to make such repayment and (b) the dividend withholding tax, together with any other creditable domestic and/or foreign taxes, exceeds his aggregate Dutch income tax or its aggregate Dutch corporation tax liability, respectively.
Pursuant to Dutch rules to avoid dividend stripping, a holder of ADSs who receives proceeds from such ADSs will not be recognized as the beneficial owner of such proceeds if, in connection with the receiptpar value of the proceeds, it has given a consideration, in the framework of a composite transaction including, without limitation, the mere acquisition of one or more dividend coupons or the creation of short-term rights of enjoyment of shares (kortlopende genotsrechten op aandelen), whereas it may be presumed that (a) such proceeds in whole or in part, directly or indirectly, inure to a person who would not have been entitled to an exemption from, reduction or refund of, or credit for, dividend withholding tax, or who would have been entitled to a smaller reduction or refund of, or credit for, dividend withholding tax than the actual recipient of the proceeds; and (b) such person acquires or retains, directly or indirectly, an interest in VimpelCom shares, ADSs or similar instruments, comparablecommon shares concerned has been reduced by an equal amount by way of an amendment to its interest in ADSs prior to the time the composite transaction was first initiated.
Gift and inheritance taxes
If you are a holder of ADSs and dispose of ADSs by way of gift, in form or in substance, or if you are an individual and a holder of ADSs and you die, no No Dutch gift tax or Dutch inheritance tax aswill arise with respect to an acquisition or deemed acquisition of ADSs or common shares by way of gift by, or upon the case may be, will be due unless:
you are,death of, a holder of ADSs or at the time of your death you were,common shares who is neither resident ornor deemed to be resident in the Netherlands for purposes of Dutch gift tax or Dutch inheritance tax as applicable; or
you makeexcept if, in the event of a gift whilst not being a resident nor being a deemed resident in the Netherlands for purposes of Dutch gift tax or Dutch inheritance tax, the holder of ADSs then becomeor common shares becomes a resident or a deemed resident ofin the Netherlands and die as a resident or deemed resident of the Netherlandsdies within 180 days after the date of the gift.
For purposes of the above,Dutch gift tax and Dutch inheritance tax, a gift of ADSs or common shares made under a condition precedent (opschortende voorwaarde) is deemed to be made at the time the condition precedent is satisfied.
F. Dividends and Paying Agents
Not required.
G. Statement by Experts
Not required.
Not required.
We file and submit reports and other information with the SEC. Any documents that we file and submit with the SEC may be read and copied at the SEC’sSEC's public reference room at 450 Fifth100 F Street, N.W.,NE, Washington, D.C. 20549. We file our annual reports on Form 20-F and submit our quarterly results and other current reports on Form 6-K.
I. Subsidiary Information
Not required.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk from adverse movements in foreign currency exchange rates and changes in interest rates on our obligations.
As of December 31, 20142017 and 2013,2016, the largest currency exposure risks for the group as a whole were in relation to the Bangladeshi taka, the Russian ruble, the Euro, the Algerian dinar,Georgian lari, the Pakistani rupee, the Bangladeshi taka,Uzbek som, the Algerian dinar, the Ukrainian hryvnia, the Kazakh tenge and the Uzbek som,euro, because the majority of our cash flows from operating activities in Bangladesh, Russia, Italy,Georgia, Pakistan, Uzbekistan, Algeria, Pakistan, Bangladesh, Ukraine, Kazakhstan and Uzbekistanthe Italy Joint Venture's cash flows from operating activities are denominated in these functional currencies, respectively, while our debt, if not incurred in or hedged to the aforementioned currencies, is primarily denominated in U.S. dollars.
We hold partapproximately 60% of our readily available cash in subsidiariesand bank deposits in U.S. dollars (including the deposit of 987 million serving as collateral for the MTO which is classified as other financial assets in our financial statements) in order to hedge against the risk of functional currency devaluation. We also
To reduce balance sheet currency mismatches, we hold part of our debt in Russian rublesruble, Pakistani rupee and Euros to manage part of this risk.other currencies. Nonetheless, if the U.S. dollar value of the Bangladeshi taka, the Russian ruble, Euro,the Georgian lari, the Pakistani rupee, the Uzbek som, the Algerian dinar, Pakistani rupee, Bangladeshi taka,the Ukrainian hryvnia, the Kazakh tenge or Uzbek somthe euro were to dramatically decline, it could negatively impact our ability to repay or refinance our U.S. dollar denominated indebtedness. Fluctuations in the value of the Russian ruble, Euro, Algerian dinar, Pakistani rupee, Bangladeshi taka, Ukrainian hryvnia, Kazakh tenge or Uzbek som against the U.S. dollarindebtedness as well as could adversely affect VimpelCom’sour financial condition and results of operations dueoperations.
For more information regarding our translation of foreign currency-denominated amounts into U.S. dollars and our exposure to potential revaluationadverse movements in foreign currency exchange rates, see "Item 5—Operating and Financial Review and Prospects—Factors Affecting Comparability of U.S. dollar denominated indebtedness affecting net income through foreign exchange gain/loss.Financial Position and Results of Operations—Foreign Currency Translation," "Item 5—Operating and Financial Review and Prospects—Factors Affecting Comparability of Financial Position and Results of Operations—Inflation" and Notes 2 and 4 to our audited consolidated financial statements.
Our treasury function has developed risk management policies that establish guidelines for limiting foreign currency exchange rate risk. For more information on risks associated with currency exchange rates, see the section of this Annual Report on Form 20-F entitled “Item"Item 3—Key Information—D. Risk Factors—Risks Related to Our Business—We are exposed to foreign currency exchange loss and currency fluctuation and convertibility risks.”translation risks."
The following table summarizes information, as of December 31, 2014, about2017, regarding the maturity of the part of our financial instruments that are sensitive todebt for which the foreign currency exchange rates, primarily represented by foreign currency denominated debt obligations:revaluation directly affects our reported profit or loss:
| | Aggregate nominal amount of total debt denominated in foreign currency outstanding as of December 31, | | | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | More than 4 years | Fair Value as of December 31, 2017 | ||||||||||||||||||
| | 2017 | 2018 | 2019 | 2020 | 2021 | |||||||||||||||
Total debt: | ||||||||||||||||||||
Fixed Rate (US$) | 852 | 679 | 378 | 377 | — | — | 939 | |||||||||||||
Average interest rate | 8.3 | % | 8.2 | % | 7.8 | % | 7.7 | % | — | — | — | |||||||||
Fixed Rate (RUB) | 2,682 | 2,474 | 2,474 | 1,984 | 798 | — | 2,767 | |||||||||||||
Average interest rate | 9.5 | % | 9.6 | % | 9.6 | % | 9.6 | % | 9.5 | % | — | — | ||||||||
Fixed Rate (other currencies) | 65 | 65 | 46 | 28 | — | — | 73 | |||||||||||||
Average interest rate | 5.7 | % | 5.7 | % | 5.7 | % | 5.7 | % | — | — | — | |||||||||
Variable Rate (US$) | 212 | 137 | 75 | — | — | — | 218 | |||||||||||||
Average interest rate | 3.7 | % | 3.7 | % | 3.7 | % | — | — | — | — | ||||||||||
Variable Rate (EUR) | 752 | 752 | 752 | 481 | 60 | — | 781 | |||||||||||||
Average interest rate | 2.6 | % | 2.6 | % | 2.6 | % | 2.5 | % | 1.9 | % | — | — | ||||||||
TOTAL | 4,563 | 4,108 | 3,725 | 2,870 | 858 | — | 4,779 | |||||||||||||
| Aggregate nominal amount of total debt denominated in foreign currency outstanding as of December 31, | Fair Value as of December 31, 2014 | |||||||||||||||||||||||
| 2015 | 2016 | 2017 | 2018 | 2019 | ||||||||||||||||||||
Total debt: | ||||||||||||||||||||||||
Fixed Rate (US$) | 3,400.9 | 2,300.8 | 2,300.6 | 1,300.5 | 1,000.3 | 3,154.7 | ||||||||||||||||||
Average interest rate | 8.1 | % | 8.5 | % | 8.5 | % | 8.0 | % | 7.7 | % | ||||||||||||||
Fixed Rate (RUB) | 213.3 | 213.3 | 213.3 | — | — | 146.8 | ||||||||||||||||||
Average interest rate | 9.0 | % | 9.0 | % | 9.0 | % | — | — | ||||||||||||||||
Fixed Rate (other currencies) | 11.6 | 10.8 | — | — | — | 12.8 | ||||||||||||||||||
Average interest rate | 14.2 | % | 14.2 | % | — | — | — | |||||||||||||||||
Variable Rate (US$) | 14.5 | — | — | — | — | 95.1 | ||||||||||||||||||
Average interest rate | 2.3 | % | — | — | — | — | ||||||||||||||||||
Variable Rate (other currencies) | — | — | — | — | — | — | ||||||||||||||||||
Average interest rate | — | — | — | — | — | |||||||||||||||||||
| 3,640.3 | 2,524.8 | 2,513.9 | 1,300.5 | 1,000.3 | 3,409.5 | |||||||||||||||||||
In accordance with our policies, we do not enter into any treasury management transactions of a speculative nature.
As of December 31, 2014,2017, the variable interest rate risk on the financing of our group was limited as 76%80% of the group’sgroup's total debt was fixed rate debt.
For more information on our market risks and financial risk management for derivatives and other financial instruments, see Notes 54 and 17 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 20-F.statements.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
A. Debt Securities
Not required.
B. Warrants and Rights
Not required.
C. Other Securities
Not required.
D. American Depositary Shares
Fees paidPayable by our ADS holders
The Bank of New York Mellon is the depositary for our ADR program.ADSs. Our depositary collects its fees for delivery and surrender of ADRsADSs directly from investors (or their intermediaries) depositing shares or surrendering ADRsADSs for the purpose of withdrawal. The depositary collects fees for making distributions to investors by deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the fees. The depositary may collect its annual fee for depositary services by deductions from cash distributions or by billing investors or by charging the book-entry system accounts of participants acting for them. According to our amended and restated deposit agreement
with our depositary, dated March 26, 2010 (the “Deposit Agreement”),December 29, 2017, holders of our ADRsADSs may have to pay our depositary, either directly or indirectly, fees or charges up to the amounts set forth in the table below.
| For: | Persons depositing or withdrawing shares or must pay to the depositary: | ||||
|---|---|---|---|---|---|
Issuance of ADRs, including issuances resulting from a distribution of our shares or rights or other property | US$5.00 (or less) per 100 | ||||
Cancellation of | US$5.00 (or less) per 100 ADSs (or portion of 100 ADSs) | ||||
Any cash distribution to | US$ | ||||
Depositary service | US$ | ||||
Distribution of securities distributed to holders of deposited securities that are distributed to ADS holders | A fee equivalent to the fee that would be payable if securities distributed had been shares and the shares had been deposited for ADS issuance | ||||
Transfer and registration of shares on our share register to or from the name of the depositary or its agent when a shareholder deposits or withdraws shares | Registration or transfer fees | ||||
Cable, telex and facsimile transmissions (when expressly provided in the deposit agreement) | Expenses of the depositary | ||||
Converting foreign currency to U.S. dollars | Expenses of the depositary | ||||
Taxes and other governmental charges the depositary or the custodian have to pay on any | As necessary | ||||
Any charges incurred by the | As necessary | ||||
Fees Payable by the Depositary to Us
Our depositary has agreed to reimburse us or pay us for:
our continuing NASDAQ listing fees;
In certain instances, our depositary has agreed to provide additional payments to us based on changes in certain conditions relating to the ADR facility. AccordingADS facility and to our agreement with the depositary, there are limits on the amount of investor relations program or special relations promotional activities expenses for which our depositary will pay or reimburse us, but the amount of payment or reimbursement available to us is not tied to the amount ofwaive certain fees the depositary collects from investors.and expenses.
From January 1, 20142017 to December 31, 2014,2017, the depositary reimbursed expenses of approximately US$100,000 for maintenance costs for the ADRs, and reimbursed to us or paid on our behalf approximately US$900,0002.5 million for investor relationship programs or special investor relations promotional activities.
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
| ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS |
Not required.
None.
(a) ITEM 15. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
An evaluation was carried out under the supervision of and with the participation of our management, including our Chief Executive Officer or “CEO,”("CEO") and Chief Financial Officer or “CFO,”("CFO") of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 20-F. These disclosure controls and procedures include our Disclosure Review Committee’sCommittee's review of the preparation of our Exchange Act reports. The Disclosure Review Committee also provides an additional verification of our disclosure controls and procedures. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon the evaluation, our CEO and CFO have concluded that as of December 31, 2014,2017, our disclosure controls and procedures were effective in providing reasonable assurance that information required to be disclosed by us in our reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’sSEC's rules and forms, and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.
(b) Management’sManagement's Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation and fair presentation of our company’sVEON Ltd.'s published consolidated financial statements under generally accepted accounting principles.
There are inherent limitations to the effectiveness of any system of controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the company’scompany's policies and procedures may deteriorate.
Our management has assessed the effectiveness of our company’scompany's internal control over financial reporting as of December 31, 2014.2017. In making its assessment, our management has utilized the criteria set forth in the Internal Control – Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and the Securities and Exchange Commission’sCommission's Guidance Regarding Management’sManagement's Report on Internal Control Over Financial Reporting Under Section 13(a) or 15(d) of the Exchange Act.
As a result of management’smanagement's assessment of our internal control over financial reporting as of December 31, 2014,2017, management concluded that our internal control over financial reporting was effective.
Remediation of Material Weaknesses
We previously reported material weaknesses that were identified as of December 31, 2013 relating to the design and operating effectiveness of our internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The material weaknesses identified as of December 31, 2013 did not result in a material misstatement of our consolidated financial statements. The material weaknesses resulted from a lack of control in the CIS business unit regarding procurement processes, capitalization of fixed assets and review of results of operations by headquarters personnel to permit the timely detection of circumvention or overriding of internal control over financial reporting. During 2014, we took a number of remediation measures to address the previously identified material weaknesses.
We remediated our procedures related to contract verification and fixed asset controls within the CIS business unit and carried out additional procedures to compensate for the effect of such matters on our financial reporting.
We appointed a Group Director Financial Planning & Analysis who reports directly to our CFO to further improve the company’s analytical review controls and review the results from the CIS business unit on a disaggregated country level basis.
We engaged counsel to conduct an investigation of our operations in Uzbekistan and additional countries and a component of this investigation has focused on our internal control over financial reporting.
We retained external advisors to assist in the design and implementation of remediation activities, and have implemented recommendations made by them relating to our internal control over financial reporting.
We enhanced our compliance team at our headquarters in Amsterdam and throughout the group, with compliance officers and coordinators at all of our business units and covering all our operations.
We implemented our Group Governance Policy Manual which lays out the delegated authority levels for certain types of spend and circumstances. In addition we updated our Group Procurement Policy and updated tendering procedures.
We believe that these efforts have addressed the previously reported material weaknesses that could have affected our internal control over financial reporting during the year ended December 31, 2014.
(c) Report ofAttestation report Independent Registered Public Accounting Firm
PricewaterhouseCoopers Accountants N.V. (“PwC”("PwC"), our company’sVEON Ltd.'s independent registered public accounting firm, has audited and issued an attestation report on the effectiveness of the company’sVEON Ltd.'s internal controls over financial reporting as of December 31, 2014,2017, a copy of which appears in Item 18.
(d) Changes in Internal Control Over Financial Reporting
Except for the remediation efforts relating to the material weaknesses around the effectiveness of internal controls over financial reporting regarding procurement, accounting for fixed assets and in respect of the oversight of the CIS business unit and individual countries therein by headquarters personnel, as described above, there There have been no changes in our internal control over financial reporting identified in connection with an evaluation thereof that occurred during the period covered by this Annual Report on Form 20-F that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 15T. CONTROLS AND PROCEDURES
Not required.
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
The supervisory board has determined that Trond Ø Westlie,Jørn P. Jensen, a member of our audit and risk committee, is a “financial"financial expert,”" as defined in Item 16A of Form 20-F. Mr. WestlieJensen is “independent,”"independent," as defined in Rule 10A-3 under the Exchange Act. For a description of Mr. Westlie’sJensen's experience, please see “Item"Item 6—Directors, Senior Management and Employees—A. Directors and Senior Management—Supervisory Board—Trond Ø Westlie.”Jørn P. Jensen."
On December 1, 2012, we enacted a groupwideOur group-wide Code of Conduct ("Code") applies to all VEON employees, officers and directors, including its principal executive officer, principal financial officer, and principal accounting officer. The Code includes a code of ethics, as defined in Item 16B of Form 20-F under the Exchange Act, which applied to employees, officers and directors of VimpelCom. VimpelCom also expects compliance by its business partners with thethat establishes group-wide principles set forth in the Code of Conduct. The new Code of Conduct replaced our code of ethics which was in place prior to December 1, 2012. The Code of Conduct provides group-wide standards designed primarily to deter wrongdoing and promote truthful, honest and ethical conduct, compliance with applicable governmental laws, rules and regulations, prompt internal reporting of violations and accountability for adherence to the code. All employees, officers and directors of VimpelCom are required to acknowledge having read and understood the contents of the Code of Conduct.Code. Our Code of Conduct in force is available on our website at http://www.vimpelcom.com.www.veon.com (information appearing on the website is not incorporated by reference into this Annual Report on Form 20-F). In 2017, we amended our Code to: emphasize our anti-bribery and anti-corruption commitment; update our committee references; reflect the inclusion of our "SpeakUp" channels, including anonymous reporting options and our non-retaliation policy; enhance the applicability of the Code to third parties; and revise the anti-money laundering section. We will disclose any further amendment to the provisions of such code of ethicsthe Code or any waiver, including any implicit waiver, that our supervisory board may grant on our website at the same address.
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
PricewaterhouseCoopers Accountants N.V. have served as our independent public accountants for the fiscal yearyears ended December 31, 2014,2017 and Ernst & Young Accountants LLP have served as our independent public accountants for the fiscal year ended December 31, 2013, the years2016, for which audited financial statements appear in this Annual Report on Form 20-F. The following table presents the aggregate fees
for professional services and other services rendered by PricewaterhouseCoopers Accountants N.V. and their member firms in 20142017 and Ernst & Young Accountants LLP and their affiliates in 2013.2016.
| Year ended December 31, | ||||||||
| 2014 | 2013 | |||||||
| (In millions) | ||||||||
Audit Fees | US$ | 9.1 | US$ | 14.0 | ||||
Audit-Related Fees | US$ | 0.8 | US$ | 0.5 | ||||
Tax Fees | US$ | 1.6 | US$ | 0.0 | ||||
All Other Fees | US$ | 2.9 | US$ | 0.3 | ||||
|
|
|
| |||||
Total | US$ | 14.4 | US$ | 14.8 | ||||
|
|
|
| |||||
| | Year ended December 31, | ||||||
|---|---|---|---|---|---|---|---|
| | 2017 | 2016 | |||||
| | (in millions of U.S. dollars) | ||||||
Audit Fees | 11.2 | 10.3 | |||||
Audit-Related Fees | 1.1 | 0.7 | |||||
Tax Fees | — | 0.3 | |||||
All Other Fees | — | 0.2 | |||||
| | | | | | | | |
Total | 12.3 | 11.5 | |||||
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Audit ServicesFees
Audit servicesFees mainly consisted of fees for the audit of the consolidated financial statements as of and for the years ended December 31, 20142017 and 2013,2016, the review of quarterly consolidated financial statements and services provided in connection with regulatory and statutory filings, including comfort letters, consents and Sarbanes-Oxley Section 404 attestation services.
Audit-related ServicesAudit-Related Fees
Audit-related services Audit-Related Fees are fees for assurance and related services which are reasonably related to the performance of audit or review and generally include advisoryaudit and assurance services regarding specific regulatory filingsrelated to transactional offerings and reporting procedures and other agreed-upon services related to accounting and billing records.
Tax ServicesFees
Tax servicesFees consisted of fees for permissible review of tax compliance, services for preparation of corporate and personal income tax returns for statutory tax purposes and tax-related surveys.
Other Services
Other services include permissible strategy advisory, consultingsurvey services and survey servicesgeneric training, as well as agreed-upon procedures not related to accounting records and billing records.systems.
Audit Committee Pre-Approval Policies and Procedures
The Sarbanes-Oxley Act of 2002 required the companyVEON Ltd. to implement a pre-approval process for all engagements with its independent public accountants. In compliance with Sarbanes-Oxley requirements pertaining to auditor independence, the company’sVEON Ltd.'s audit and risk committee pre-approves the engagement terms and fees of VimpelCom’sVEON Ltd.'s independent public accountant for audit and non-audit services, including tax services. The company’sVEON Ltd.'s audit and risk committee pre-approved the engagement terms and fees of PricewaterhouseCoopers Accountants N.V. and its affiliates for all services performed for the fiscal year ended December 31, 2014.2017.
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
None.
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS |
Not applicable.
Not applicable.
None.
As disclosed in VimpelCom Ltd.’s Annual Report on Form 20-F for the year ended December 31, 2013, at a meeting held on December 17, 2013, the Audit Committee of the company’s Supervisory Board recommended to the Supervisory Board that the Supervisory Board propose to VimpelCom’s shareholders the engagement of PricewaterhouseCoopers Accountants N.V. (“PwC”) as its independent registered public accounting firm for the fiscal year ending December 31, 2014. At the same meeting, the company’s Supervisory Board decided to ask Ernst & Young Accountants LLP (“EY”) to resign as the company’s independent registered public accounting firm.
On June 12, 2014, EY provided VimpelCom Ltd. a resignation letter to resign as the company’s auditor with effect as of the same day.
On July 28, 2014, the company’s shareholders approved the appointment of PwC as the company’s auditor. The recommendation to appoint PwC was the result of a tender process performed by the company’s Supervisory Board as part of the company’s regular review of its external auditor.
The report of EY on the company’s financial statements for the year ended December 31, 2012 did not contain an adverse opinion or a disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope, or accounting principles. In connection with the audit of the company’s financial statements for the year ended December 31, 2013, material weaknesses were identified related to the company’s procurement process, capitalization of fixed assets and oversight of the CIS business unit and individual countries therein by headquarters personnel.
In connection with the audits of the company’s financial statements for each of the two fiscal years ended December 31, 2013 and December 31, 2012 and in the subsequent interim period through June 12, 2014, there were no disagreements with EY on any matters of accounting principles or practices, financial statement disclosure, or auditing scope and procedures which, if not resolved to the satisfaction of EY would have caused EY to make reference to the matter in their report.
The company has requested EY to furnish it a letter addressed to the Securities and Exchange Commission stating whether it agrees with the above statements. A copy of that letter, dated March 24, 2015 is filed as Exhibit 15.3 to this Form 20-F.
None.
ITEM 16G. CORPORATE GOVERNANCE
We comply with the corporate governance rules applicable to foreign private issuers listed on the NASDAQ StockGlobal Select Market.
We are permitted to follow “home"home country practice”practice" in Bermuda in lieu of the provisions of NASDAQ’sNASDAQ's corporate governance rules, except that we are required to: (1) have a qualifying audit committee under NASDAQ listing rule 5605(c)(3); (2) ensure that our audit committee’scommittee's members meet the independence requirement under NASDAQ listing rule 5605(c)(2)(A)(ii); and (3) comply with the voting rights requirements under NASDAQ listing rule 5640.
In accordance with NASDAQ listing rule 5615(a)(3)(B), the following is a summary of the “home"home country practices”practices" in Bermuda that we follow in lieu of the relevant NASDAQ listing rules.
Disclosure of Third Party Director and Nominee Compensation
NASDAQ listing rule 5250(b)(3) provides that each U.S. company listed on NASDAQ must disclose the material terms of all agreements and arrangements between any director or nominee for director, and any person or entity other than the company, relating to compensation or other payment in connection with such person's candidacy or service as a director of the company. As a foreign private issuer, we are exempt from complying with this NASDAQ requirement, and some of our directors have agreements with persons or entities other than the company.
Director Independence
NASDAQ listing rule 5605(b)(1) provides that each U.S. company listed on NASDAQ must have a majority of independent directors, as defined in the NASDAQ rules. Bermuda corporate law does not require that we have a majority of independent directors. As a foreign private issuer, we are exempt from complying with this NASDAQ requirement, and we do not currently have a majority of independent directors, as defined in the NASDAQ rules.requirement.
Executive Sessions
NASDAQ listing rule 5605(b)(2) requires that the independent directors, as defined in the NASDAQ rules, of a U.S. company listed on the NASDAQ Global Select Market meet at regularly scheduled executive sessions at which only such independent directors are present. Bermuda corporate law does not impose any such requirement on our company.VEON Ltd. As a foreign private issuer, we are exempt from complying with this NASDAQ requirement and our internal corporate governance rules and procedures do not currently require independent directors to meet at regularly scheduled executive sessions.
Our board does not, however, include any members of our management, and, from time to time, the board has requested that management not be present for portions of board meetings in order to allow the board to serve as a more effective check on management.
Independent Director Oversight of Director Nominations
NASDAQ rule 5605(e)(1) requires that director nominees of U.S. listed companies are selected, or recommended for the board’sboard's selection, either by (1) a majority of the board’sboard's independent directors,
as defined in the NASDAQ rules, in a vote in which only such independent directors participate or (2) a nominations committee composed solely of independent directors, as defined in the NASDAQ rules. Bermuda corporate law does not impose any such requirement on our company.VEON Ltd. As a foreign private issuer, we are exempt from complying with the NASDAQ requirement regarding independent director oversight of director nominations. Our nominating and corporate governance committee is responsible for identifying and selecting candidates to serve as directors, but it is not composed solely of independent directors, as defined in the NASDAQ rules.directors.
Compensation Committee
NASDAQ rule 5605(d)(2) requires that U.S. listed companies have a compensation committee with at least two members and composed entirely of independent directors, as defined in the NASDAQ rules. In addition, the NASDAQ rules require a U.S. listed company’scompany's compensation committee to have a charter that meets the requirements of rule 5605(d)(1) and the responsibilities and authorities listed in rule 5605(d)(3). Bermuda corporate law does not impose any such requirements on our company.VEON Ltd. As a foreign private issuer, we are exempt from complying with the NASDAQ requirements described in this paragraph. However, our supervisory board has established a compensation committee, which currently comprises three directors and acts in an advisory capacity to our supervisory board with respect to compensation issues. The compensation committee is responsible for approving the compensation of the directors, officers and employees of VimpelComVEON Ltd. and its subsidiaries, our employee benefit plans, any equity compensation plans of VimpelComVEON Ltd. and its subsidiaries, and any contract relating to a director, officer or shareholder of our companyVEON Ltd or any of our subsidiaries or their respective family members or affiliates.
We do not have a compensation committee composed solely of independent directors (as defined under the NASDAQ listing rules) because our Our internal corporate governance rules do not require us to have independent directors (as defined under NASDAQ rules). We believe the structure and responsibilities of our compensation committee are adequate to ensure that appropriate incentives are in place for our officers and employees, and the current members of our compensation committee are not officers or employees of our company.VEON Ltd.
Audit Committee
NASDAQ rule 5605(c)(2)(A) requires that U.S. listed companies have an audit committee composed of at least three members, each of whom is an independent director, as defined in the NASDAQ rules. Bermuda corporate law does not impose any such requirement on our company.VEON Ltd. As a foreign private issuer, we are exempt from complying with the NASDAQ requirement to have an audit committee with at least three members, each of whom is an independent director, as defined in the NASDAQ rules.members. However, our audit and risk committee currently comprises three directors, all of whom meet the criteria for independence set forth in Rule 10A-3 under the Exchange Act. The audit and risk committee is primarily responsible for among other things, the appointment, compensation, retention and oversight of the auditors, establishing procedures for addressing complaints related to accounting or audit matters and engaging necessary advisors.
Equity Compensation Plans
NASDAQ rule 5635(c) requires that U.S. listed companies give shareholders an opportunity to vote on all stock option or other equity compensation plans and material amendments thereto (with specific exceptions). Bermuda corporate law does not impose any such requirement on our company.VEON Ltd. As a foreign private issuer, we are exempt from complying with this NASDAQ requirement, and no equity compensation plans have been submitted for approval by our shareholders.
PART III ITEM 16H MINE SAFETY DISCLOSURE
Not required.
We have responded to Item 18 in lieu of this Item.
| ITEM 18. |
INDEX TO FINANCIAL STATEMENTS
The financial information required by this item, together with the report of PricewaterhouseCoopers Accountants N.V., is set forth on pages F-1 through F-110.
OF VIMPELCOM LTD.Table of Contents
ListTable of Exhibits.Contents
| | | Incorporated by Reference | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Number | Description of Exhibit | Form | File No. | Exhibit | Date | Filed Herewith | |||||||
| 2.5 | Registration Rights Agreement, dated as of September 21, 2016, by and among VimpelCom Ltd., Telenor East Holding and Morgan Stanley & Co. International plc, J.P. Morgan Securities plc, Citigroup Global Markets Limited and Credit Suisse Securities (Europe) Limited | 6-K | 001-34694 | 4.1 | 9/22/2016 | ||||||||
2.6 | Multicurrency Term and Revolving Facilities Agreement, dated as of February 16, 2017, by and among, inter alios, VimpelCom Holdings B.V. and Citibank Europe plc, UK Branch | 20-F | 001-34694 | 2.6 | 4/03/2017 | ||||||||
4.1 | Form of Indemnification Agreement | 20-F | 001-34694 | 4.3 | 6/30/2011 | ||||||||
4.2 | Executive Investment Plan | S-8 | 333-180368 | 4.3 | 3/27/2012 | ||||||||
4.3 | Director Investment Plan | S-8 | 333-183294 | 4.3 | 8/14/2012 | ||||||||
4.4 | Amendment and Restatement Deed relating to the Contribution and Framework Agreement, dated as of November 4, 2016, by and among VimpelCom Amsterdam B.V., VimpelCom Ltd., Hutchison Europe Telecommunications S.à r.l., CK Hutchison Holdings Limited and Hutchison 3G Italy Investments S.à r.l.(1) | 20-F | 001-34694 | 4.4 | 4/03/2017 | ||||||||
4.5 | Amendment and Restatement Deed relating to Shareholders' Deed, dated as of November 4, 2016, by and among Hutchison 3G Italy Investments S.à r.l., VimpelCom Luxembourg Holdings S.à r.l., Hutchison Europe Telecommunications S.à r.l., VimpelCom Ltd. and CK Hutchison Holdings Limited | 20-F | 001-34694 | 4.5 | 4/03/2017 | ||||||||
4.6 | FINCO Shareholders' Deed, dated as of November 5, 2016, by and among VIP-CKH Ireland Limited, VimpelCom Luxembourg Holdings S.à r.l, Hutchison Europe Telecommunications S.à r.l, VimpelCom Ltd and CK Hutchison Holdings Limited | 20-F | 001-34694 | 4.6 | 04/03/2017 | ||||||||
8 | List of Subsidiaries | * | |||||||||||
| Incorporated by Reference | ||||||||||||
Number | Description of Exhibit | Form | File No. | Exhibit | Date | Filed | ||||||
| 1.1 | Bye-laws of VimpelCom Ltd. adopted on April 20, 2010 and Amended and Restated on September 25, 2013 | 6-K | 001-34694 | 99.2 | 9/27/2013 | |||||||
| 2.1 | Form of Deposit Agreement (common shares) between VimpelCom Ltd. and The Bank of New York Mellon, as depositary | F-4 | 333-164770 | 4.1 | 2/8/2010 | |||||||
| 2.2 | Agreement to furnish instruments relating to long-term debt | * | ||||||||||
| 2.3 | Registration Rights Agreement, dated as October 4, 2009, between and among VimpelCom Ltd., Eco Telecom Limited, Altimo Holdings & Investments Ltd., Altimo Coöperatief U.A., Telenor Mobile Communications AS and Telenor East Invest AS | F-4 | 333-164770 | 2.3 | 2/8/2010 | |||||||
| 2.4 | Assignment, Assumption and Amendment Agreement to the Registration Rights Agreement, dated as of November 27, 2013, by and among VimpelCom Ltd., Altimo Holdings & Investments Ltd., Altimo Coöperatief U.A., Telenor Mobile Communications AS, Telenor East Invest AS and Telenor East Holding II AS | 13D | 005-85442 | 99.1 | 12/5/2013 | |||||||
| 2.5 | Indenture, dated as of April 23, 2014, by and among Wind Acquisition Finance S.A., WIND Telecomunicazioni S.p.A., BNY Mellon Corporate Trustee Services Limited, The Bank of New York Mellon, London Branch, The Bank of New York Mellon and The Bank of New York Mellon (Luxembourg) S.A. | 20-F | 001-34694 | 2.5 | 5/15/2014 | |||||||
| 2.6 | Indenture, dated as of July 10, 2014 by and among Wind Acquisition Finance S.A., WIND Telecomunicazioni S.p.A., Deutsche Bank Trust Company Americas, Deutsche Bank AG, London Branch and Deutsche Bank Luxembourg S.A. | * | ||||||||||
| 4.1 | Form of Indemnification Agreement | 20-F | 001-34694 | 4.5 | 6/30/2011 | |||||||
| 4.2 | Executive Investment Plan | S-8 | 333-180368 | 4.3 | 3/27/2012 | |||||||
| 4.3 | Director Investment Plan | S-8 | 333-183294 | 4.3 | 8/14/2012 | |||||||
| 8 | List of Subsidiaries | * | ||||||||||
| Incorporated by Reference | ||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Number | Description of Exhibit | Form | File No. | Exhibit | Date | Filed Herewith | ||||||||||||||||||||
| 12.1 | Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, 15 U.S.C. Section 7241 | * | ||||||||||||||||||||||||
12.2 | ||||||||||||||||||||||||||
Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, 15 U.S.C. Section 7241 | * | |||||||||||||||||||||||||
13.1 | ||||||||||||||||||||||||||
Certification of CEO and CFO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 | * | |||||||||||||||||||||||||
15.1 | ||||||||||||||||||||||||||
Consent of PricewaterhouseCoopers Accountants N.V. (VEON Ltd.) | * | |||||||||||||||||||||||||
15.2 | Consent of PricewaterhouseCoopers SpA (Italy Joint Venture) | * | ||||||||||||||||||||||||
99.1 | Glossary of | * | ||||||||||||||||||||||||
99.2 | ||||||||||||||||||||||||||
Regulation of Telecommunications | * | |||||||||||||||||||||||||
99.3 | Consolidated financial statements of VIP-CKH Luxembourg S.à.r.l for the years ended December 31, 2017 and 2016 | * | ||||||||||||||||||||||||
101.INS | XBRL Instance Document(2) | * | ||||||||||||||||||||||||
101.SCH | XBRL Taxonomy Extension Schema(2) | * | ||||||||||||||||||||||||
101.CAL | XBRL Taxonomy Extension Scheme Calculation Linkbase(2) | * | ||||||||||||||||||||||||
101.DEF | XBRL Taxonomy Extension Scheme Definition Linkbase(2) | * | ||||||||||||||||||||||||
101.LAB | XBRL Taxonomy Extension Scheme Label Linkbase(2) | * | ||||||||||||||||||||||||
101.PRE | XBRL Taxonomy Extension Scheme Presentation Linkbase(2) | * | ||||||||||||||||||||||||
VEON Ltd. has not filed as exhibits instruments relating to long-term debt, under which the total amount of securities authorized does not exceed 10% of the total assets of VEON Ltd. and its subsidiaries on a consolidated basis. VEON Ltd. agrees to furnish a copy of any such instrument to the Securities and Exchange Commission upon request.
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this Annual Report on Form 20-F on its behalf.
| VEON LTD. | ||||||
By: | /s/ | |||||
| Name: | ||||||
| Title: | Chief Executive Officer | |||||
| Date: | March | |||||
Consolidated financial statements
VimpelCom
VEON Ltd.
As of December 31, December 20142017 and 20132016 and
for
For the three years ended
December 31, December2017
2014, 2013 and 2012.Table of Contents
Report of Independent Registered Public Accounting FirmREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To: Thethe Supervisory Board and Shareholders of VimpelComVEON Ltd. (“("the Company”Company")
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated statements of financial position of VEON Ltd. and its subsidiaries as of December 31, 2017 and 2016, and the related consolidated income statement, statement of comprehensive income, of changes in equity and of cash flows for each of the three years in the period ended December 31, 2017, including the related notes (collectively referred to as the "consolidated financial statements"). We also have audited the Company's internal control over financial reporting as of December 31, 2017, based on criteria established inInternal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the accompanying consolidated statement of financial position and the related consolidated statements of income, comprehensive income, changes in equity and cash flows,referred to above present fairly, in all material respects, the financial position of VimpelCom Ltd. and its subsidiaries atthe Company as of December 31, 2014,2017 and 2016, and the results of its operationstheir operation and itstheir cash flows for each of the yearthree years in the period ended December 31, 2014,2017 in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014,2017, based on criteria established inInternal Control – Control—Integrated Framework(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).COSO.
Basis for Opinions
The Company’sCompany's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’sManagement's Annual Report on Internal Control Over Financial Reporting appearing under Item 15(b).15. Our responsibility is to express opinions on thesethe Company's consolidated financial statements and on the Company’sCompany's internal control over financial reporting based on our integrated audit.audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our auditaudits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the auditaudits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our auditaudits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the consolidated financial statements, assessingstatements. Our audits also included evaluating the accounting principles used and significant estimates made by management, andas well as evaluating the overall presentation of the consolidated financial statement presentation.statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our auditaudits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit providesaudits provide a reasonable basis for our opinions.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Definition and Limitations of Internal Control over Financial Reporting
A company’scompany's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board.generally accepted accounting principles. A company’scompany's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’scompany's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Amsterdam, 24 March 2015
15, 2018
PricewaterhouseCoopers Accountants N.V.
/s/ F.P. Izeboud RA, CPA
F.P. Izeboud RA CPAWe have served as the Company's auditor since 2014.
Report of Independent Registered Public Accounting Firm
TABLE OF CONTENTS
To the Supervisory Board and Shareholders of VimpelCom Ltd.
We have audited the accompanying consolidated statements of financial position of VimpelCom Ltd. as of December 31, 2013 and the related consolidated income statements and statements of comprehensive income, changes in equity, and cash flows for each of the two years in the period ended December 31, 2013. These financial statements are the responsibility of VimpelCom Ltd.’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of VimpelCom Ltd. at December 31, 2013 and the consolidated results of its operations and its cash flows for each of the two years in the period ended December 31, 2013, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board.
/s/ Ernst & Young Accountants LLP
Amsterdam, The Netherlands
May 15, 2014
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Consolidated income statementsTable of Contents
CONSOLIDATED INCOME STATEMENT
for the yearsyear ended 31 December 2014, 2013 and 201231
| (In millions of U.S. dollars, except per share amounts) | Note | 2017 | 2016 | 2015 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Service revenues* | 9,105 | 8,553 | 9,313 | ||||||||||
Sale of equipment and accessories | 244 | 184 | 190 | ||||||||||
Other revenues | 125 | 148 | 103 | ||||||||||
| | | | | | | | | | | | | | |
Total operating revenues | 8 | 9,474 | 8,885 | 9,606 | |||||||||
| | | | | | | | | | | | | | |
Service costs* | (1,879 | ) | (1,769 | ) | (1,937 | ) | |||||||
Cost of equipment and accessories | (260 | ) | (216 | ) | (231 | ) | |||||||
Selling, general and administrative expenses | 9 | (3,748 | ) | (3,668 | ) | (4,563 | ) | ||||||
Depreciation | 15 | (1,454 | ) | (1,439 | ) | (1,550 | ) | ||||||
Amortization | 16 | (537 | ) | (497 | ) | (517 | ) | ||||||
Impairment loss | 10 | (66 | ) | (192 | ) | (245 | ) | ||||||
Loss on disposals of non-current assets | (24 | ) | (20 | ) | (39 | ) | |||||||
| | | | | | | | | | | | | | |
Total operating expenses | (7,968 | ) | (7,801 | ) | (9,082 | ) | |||||||
| | | | | | | | | | | | | | |
Operating profit | 1,506 | 1,084 | 524 | ||||||||||
| | | | | | | | | | | | | | |
Finance costs | (935 | ) | (830 | ) | (829 | ) | |||||||
Finance income | 95 | 69 | 52 | ||||||||||
Other non-operating losses, net | 11 | (97 | ) | (82 | ) | (42 | ) | ||||||
Share of (loss) / profit of joint ventures and associates | 14 | (412 | ) | 48 | 14 | ||||||||
Impairment of joint ventures and associates | 14 | (110 | ) | (99 | ) | — | |||||||
Net foreign exchange (loss) / gain** | (71 | ) | 157 | (314 | ) | ||||||||
| | | | | | | | | | | | | | |
(Loss) / profit before tax | (24 | ) | 347 | (595 | ) | ||||||||
| | | | | | | | | | | | | | |
Income tax expense | 12 | (472 | ) | (635 | ) | (220 | ) | ||||||
| | | | | | | | | | | | | | |
Loss for the year from continuing operations | (496 | ) | (288 | ) | (815 | ) | |||||||
| | | | | | | | | | | | | | |
Profit after tax for the period from discontinued operations | 5 | — | 920 | 262 | |||||||||
Gain on disposal of discontinued operations, net of tax | 5 | — | 1,788 | — | |||||||||
| | | | | | | | | | | | | | |
Profit for the period from discontinued operations | — | 2,708 | 262 | ||||||||||
| | | | | | | | | | | | | | |
(Loss) / profit for the period | (496 | ) | 2,420 | (553 | ) | ||||||||
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Attributable to: |
| ||||||||||||
The owners of the parent (continuing operations) | (483 | ) | (380 | ) | (917 | ) | |||||||
The owners of the parent (discontinued operations) | — | 2,708 | 262 | ||||||||||
Non-controlling interest | (13 | ) | 92 | 102 | |||||||||
| | | | | | | | | | | | | | |
| (496 | ) | 2,420 | (553 | ) | |||||||||
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Earnings / (loss) per share |
| ||||||||||||
Basic and diluted from continuing operations | 6 | $ | (0.28 | ) | $ | (0.22 | ) | $ | (0.52 | ) | |||
Basic and diluted from discontinued operations | 6 | $ | 0.00 | $ | 1.55 | $ | 0.15 | ||||||
Basic and diluted for (loss) / profit attributable to ordinary equity holders of the parent | 6 | $ | (0.28 | ) | $ | 1.33 | $ | (0.37 | ) | ||||
| | | | | | | | | | | | | | |
| Years ended 31 December | ||||||||||||||||
| Note | 2014 | 2013 | 2012 | |||||||||||||
| (In millions of US dollars, except per share amounts) | ||||||||||||||||
Service revenue | 18,725 | 21,529 | 22,122 | |||||||||||||
Sale of equipment and accessories | 519 | 725 | 677 | |||||||||||||
Other revenue | 8 | 383 | 292 | 262 | ||||||||||||
|
|
|
|
|
| |||||||||||
Total operating revenue | 7 | 19,627 | 22,546 | 23,061 | ||||||||||||
|
|
|
|
|
| |||||||||||
Operating expenses | ||||||||||||||||
Service costs | 4,381 | 5,133 | 5,439 | |||||||||||||
Cost of equipment and accessories | 551 | 780 | 693 | |||||||||||||
Selling, general and administrative expenses | 9 | 6,725 | 8,373 | 7,161 | ||||||||||||
Depreciation | 15 | 2,839 | 3,050 | 2,926 | ||||||||||||
Amortization | 16 | 1,479 | 1,791 | 2,080 | ||||||||||||
Impairment losses | 10 | 992 | 2,973 | 386 | ||||||||||||
Loss on disposals of non-current assets | 15 | 74 | 100 | 205 | ||||||||||||
|
|
|
|
|
| |||||||||||
Total operating expenses | 17,041 | 22,200 | 18,890 | |||||||||||||
|
|
|
|
|
| |||||||||||
Operating profit | 2,586 | 346 | 4,171 | |||||||||||||
|
|
|
|
|
| |||||||||||
Finance costs | 2,026 | 2,150 | 2,029 | |||||||||||||
Finance income | (54 | ) | (91 | ) | (154 | ) | ||||||||||
Other non-operating losses | 11 | 152 | 172 | 75 | ||||||||||||
Shares of loss of associates and joint ventures accounted for using the equity method | 12 | 38 | 159 | 9 | ||||||||||||
Net foreign exchange loss/ (gain) | 605 | (20 | ) | (70 | ) | |||||||||||
|
|
|
|
|
| |||||||||||
(Loss)/profit before tax | (181 | ) | (2,024 | ) | 2,282 | |||||||||||
|
|
|
|
|
| |||||||||||
Income tax expense | 13 | 722 | 2,064 | 906 | ||||||||||||
|
|
|
|
|
| |||||||||||
(Loss)/ profit for the year | (903 | ) | (4,088 | ) | 1,376 | |||||||||||
|
|
|
|
|
| |||||||||||
Attributable to: | ||||||||||||||||
The owners of the parent | (647 | ) | (2,625 | ) | 1,539 | |||||||||||
Non-controlling interest | (256 | ) | (1,463 | ) | (163 | ) | ||||||||||
|
|
|
|
|
| |||||||||||
| (903 | ) | (4,088 | ) | 1,376 | ||||||||||||
|
|
|
|
|
| |||||||||||
Earnings per share | ||||||||||||||||
Basic, (loss)/earnings for the year attributable to ordinary equity holders of the parent | 14 | $ | (0.37 | ) | $ | (1.53 | ) | $ | 0.95 | |||||||
Diluted, (loss)/earnings for the year attributable to ordinary equity holders of the parent | 14 | $ | (0.37 | ) | $ | (1.53 | ) | $ | 0.95 | |||||||
The accompanying notes are an integral part of these consolidated financial statements.
Consolidated statementsTable of comprehensive incomeContents
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
for the yearsyear ended 31 December 2014, 2013 and 201231
| Year ended 31 December | ||||||||||||||||
| Note | 2014 | 2013 | 2012 | |||||||||||||
| (In millions of US dollars) | ||||||||||||||||
(Loss)/ profit for the year | (903 | ) | (4,088 | ) | 1,376 | |||||||||||
|
|
|
|
|
| |||||||||||
Other comprehensive income to be reclassified to profit or loss in subsequent periods | ||||||||||||||||
Share of foreign currency translation of associates and joint ventures accounted for using the equity method (net of tax in 2014 of USD nil, 2013 of USD nil and 2012 of USD nil) | (169 | ) | (15 | ) | 17 | |||||||||||
Net movement on cash flow hedges (net of tax in 2014 of USD 5, 2013 of USD 10 and 2012 of USD 15) | 17 | 145 | 100 | (76 | ) | |||||||||||
Foreign currency translation | (4,054 | ) | (550 | ) | (63 | ) | ||||||||||
|
|
|
|
|
| |||||||||||
Other comprehensive loss for the year, net of tax | (4,078 | ) | (465 | ) | (122 | ) | ||||||||||
|
|
|
|
|
| |||||||||||
Total comprehensive (loss)/income for the year, net of tax | (4,981 | ) | (4,553 | ) | 1,254 | |||||||||||
|
|
|
|
|
| |||||||||||
Attributable to: | ||||||||||||||||
The owners of the parent | (4,633 | ) | (3,156 | ) | 1,519 | |||||||||||
Non-controlling interests | (348 | ) | (1,397 | ) | (265 | ) | ||||||||||
|
|
|
|
|
| |||||||||||
| (4,981 | ) | (4,553 | ) | 1,254 | ||||||||||||
|
|
|
|
|
| |||||||||||
| (In millions of U.S. dollars) | Note | 2017 | 2016 | 2015 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
(Loss) / profit for the period | (496 | ) | 2,420 | (553 | ) | |||||||
Items that may be reclassified to profit or loss (net of tax, see Note 11) |
| |||||||||||
Net movement on cash flow hedges | 17 | 4 | 7 | 13 | ||||||||
Share of other comprehensive loss of joint ventures | 14 | (12 | ) | — | — | |||||||
Foreign currency translation* | 23 | (638 | ) | 85 | (1,836 | ) | ||||||
Other | (11 | ) | 6 | 31 | ||||||||
Items reclassified to profit or loss (net of tax) |
| |||||||||||
Reclassification of accumulated foreign currency translation reserve to profit or loss on disposal of discontinued operation (net of tax of US$ nil) | 5 | — | (259 | ) | — | |||||||
Reclassification of accumulated cash flow hedge reserve to profit or loss on disposal of discontinued operation (net of tax of US$7 for 2016) | 5 | — | 53 | — | ||||||||
| | | | | | | | | | | | | |
Other comprehensive loss for the period, net of tax | (657 | ) | (108 | ) | (1,792 | ) | ||||||
| | | | | | | | | | | | | |
Total comprehensive (loss) / income for the period, net of tax | (1,153 | ) | 2,312 | (2,345 | ) | |||||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Attributable to: | ||||||||||||
The owners of the parent | (1,060 | ) | 2,233 | (1,727 | ) | |||||||
Non-controlling interests | (93 | ) | 79 | (618 | ) | |||||||
| | | | | | | | | | | | | |
| (1,153 | ) | 2,312 | (2,345 | ) | ||||||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
Consolidated statementsTable of financial positionContents
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
as of 31 December 2014 and 201331
| (In millions of U.S. dollars) | Note | 2017 | 2016 | ||||||
|---|---|---|---|---|---|---|---|---|---|
Assets | |||||||||
Non-current assets | |||||||||
Property and equipment | 15 | 6,097 | 6,719 | ||||||
Intangible assets | 16 | 2,168 | 2,257 | ||||||
Goodwill | 10 | 4,394 | 4,696 | ||||||
Investments in joint ventures and associates | 14 | 1,921 | 2,179 | ||||||
Deferred tax assets | 12 | 272 | 343 | ||||||
Non-current income tax advance | 12 | 28 | 25 | ||||||
Other financial assets | 17 | 34 | 306 | ||||||
Other assets | 19 | 199 | 118 | ||||||
| | | | | | | | | | |
Total non-current assets | 15,113 | 16,643 | |||||||
| | | | | | | | | | |
Current assets | |||||||||
Inventories | 21 | 72 | 125 | ||||||
Trade and other receivables | 20 | 745 | 685 | ||||||
Other assets | 19 | 394 | 439 | ||||||
Current income tax assets | 12 | 230 | 169 | ||||||
Other financial assets | 17 | 1,130 | 190 | ||||||
Cash and cash equivalents | 18 | 1,304 | 2,942 | ||||||
| | | | | | | | | | |
Total current assets | 3,875 | 4,550 | |||||||
| | | | | | | | | | |
Assets classified as held for sale | 5 | 533 | — | ||||||
| | | | | | | | | | |
Total assets | 19,521 | 21,193 | |||||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Equity and liabilities | |||||||||
Equity | |||||||||
Equity attributable to equity owners of the parent | 23 | 4,352 | 5,960 | ||||||
Non-controlling interests | (425 | ) | 83 | ||||||
| | | | | | | | | | |
Total equity | 3,927 | 6,043 | |||||||
| | | | | | | | | | |
Non-current liabilities | |||||||||
Financial liabilities | 17 | 10,362 | 8,070 | ||||||
Provisions | 22 | 116 | 148 | ||||||
Other liabilities | 19 | 83 | 44 | ||||||
Deferred tax liabilities | 12 | 376 | 331 | ||||||
| | | | | | | | | | |
Total non-current liabilities | 10,937 | 8,593 | |||||||
| | | | | | | | | | |
Current liabilities | |||||||||
Trade and other payables | 1,523 | 1,744 | |||||||
Other liabilities | 19 | 1,346 | 1,236 | ||||||
Other financial liabilities | 17 | 1,268 | 3,046 | ||||||
Current income tax payables | 12 | 48 | 57 | ||||||
Provisions | 22 | 422 | 474 | ||||||
| | | | | | | | | | |
Total current liabilities | 4,607 | 6,557 | |||||||
| | | | | | | | | | |
Liabilities associated with assets held for sale | 5 | 50 | — | ||||||
| | | | | | | | | | |
Total equity and liabilities | 19,521 | 21,193 | |||||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Note | 2014 | 2013* | ||||||||||
| (In millions of US dollars) | ||||||||||||
Assets | ||||||||||||
Non-current assets | ||||||||||||
Property and equipment | 15 | 11,849 | 15,493 | |||||||||
Intangible assets | 16 | 7,717 | 9,837 | |||||||||
Goodwill | 10 | 10,285 | 14,709 | |||||||||
Investments in associates and joint ventures | 12 | 265 | 449 | |||||||||
Deferred tax assets | 13 | 575 | 294 | |||||||||
Other financial assets | 17 | 602 | 262 | |||||||||
Non-current income tax assets | 13 | 91 | 52 | |||||||||
Other non-financial assets | 18 | 26 | 18 | |||||||||
|
|
|
| |||||||||
Total non-current assets | 31,410 | 41,114 | ||||||||||
|
|
|
| |||||||||
Current assets | ||||||||||||
Inventories | 19 | 117 | 192 | |||||||||
Trade and other receivables | 17, 20 | 1,886 | 2,407 | |||||||||
Other non-financial assets | 18 | 797 | 790 | |||||||||
Current income tax asset | 13 | 219 | 335 | |||||||||
Other financial assets | 17 | 266 | 440 | |||||||||
Cash and cash equivalents | 21 | 6,342 | 4,454 | |||||||||
|
|
|
| |||||||||
Total current assets | 9,627 | 8,618 | ||||||||||
|
|
|
| |||||||||
Assets classified as held for sale | 6 | 5 | 142 | |||||||||
|
|
|
| |||||||||
Total assets | 41,042 | 49,874 | ||||||||||
|
|
|
| |||||||||
Equity and liabilities | ||||||||||||
Equity | ||||||||||||
Equity attributable to equity owners of the parent | 22,23 | 5,006 | 9,733 | |||||||||
Non-controlling interests | (1,030 | ) | (655 | ) | ||||||||
|
|
|
| |||||||||
Total equity | 3,976 | 9,078 | ||||||||||
|
|
|
| |||||||||
Non-current liabilities | ||||||||||||
Financial liabilities | 17 | 23,936 | 26,802 | |||||||||
Provisions | 24 | 527 | 417 | |||||||||
Other non-financial liabilities | 18 | 401 | 433 | |||||||||
Deferred tax liability | 13 | 1,637 | 1,641 | |||||||||
|
|
|
| |||||||||
Total non-current liabilities | 26,501 | 29,293 | ||||||||||
|
|
|
| |||||||||
Current liabilities | ||||||||||||
Trade and other payables | 17 | 4,007 | 4,860 | |||||||||
Other non-financial liabilities | 18 | 1,930 | 2,101 | |||||||||
Other financial liabilities | 17 | 3,188 | 2,426 | |||||||||
Current income tax payable | 13 | 72 | 166 | |||||||||
Provisions | 24 | 1,368 | 1,880 | |||||||||
|
|
|
| |||||||||
Total current liabilities | 10,565 | 11,433 | ||||||||||
|
|
|
| |||||||||
Liabilities associated with assets held for sale | 6 | — | 70 | |||||||||
|
|
|
| |||||||||
Total equity and liabilities | 41,042 | 49,874 | ||||||||||
|
|
|
| |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
Consolidated statementsTable of changes in equityContents
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
for the yearsyear ended December 31, 2017
| | | | Attributable to equity owners of the parent | | | |||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (In millions of U.S. dollars) | Note | Number of shares outstanding | Issued capital | Capital Surplus | Other capital reserves | Accumulated deficit | Foreign currency translation | Total | Non- controlling interests | Total equity | ||||||||||||||||||||
As of January 1, 2017 | 1,749,004,648 | 2 | 12,753 | 753 | (439 | ) | (7,109 | ) | 5,960 | 83 | 6,043 | |||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loss for the period | — | — | — | (483 | ) | — | (483 | ) | (13 | ) | (496 | ) | ||||||||||||||||||
Other comprehensive loss | — | — | (18 | ) | — | (559 | ) | (577 | ) | (80 | ) | (657 | ) | |||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total comprehensive loss | — | — | (18 | ) | (483 | ) | (559 | ) | (1,060 | ) | (93 | ) | (1,153 | ) | ||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Dividends declared | 24 | — | — | — | (536 | ) | — | (536 | ) | (168 | ) | (704 | ) | |||||||||||||||||
Share-based payment transactions | 122,756 | — | — | — | — | — | — | — | — | |||||||||||||||||||||
Changes in ownership interest in a subsidiary that do not result in a loss of control | 5 | — | — | (12 | ) | — | — | (12 | ) | (247 | ) | (259 | ) | |||||||||||||||||
Reallocation to legal reserve in Algeria | — | — | 6 | (6 | ) | — | — | — | — | |||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
As of December 31, 2017 | 1,749,127,404 | 2 | 12,753 | 729 | (1,464 | ) | (7,668 | ) | 4,352 | (425 | ) | 3,927 | ||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
for the year ended December 2014, 2013 and 201231, 2016
| | | | Attributable to equity owners of the parent | | | |||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (In millions of U.S. dollars) | Note | Number of shares outstanding | Issued capital | Capital Surplus | Other capital reserves | Accumulated deficit | Foreign currency translation | Total | Non- controlling interests | Total equity | ||||||||||||||||||||
As of January 1, 2016 | 1,749,004,648 | 2 | 12,753 | 667 | (2,706 | ) | (6,951 | ) | 3,765 | 129 | 3,894 | |||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Profit for the period | — | — | — | 2,328 | — | 2,328 | 92 | 2,420 | ||||||||||||||||||||||
Other comprehensive income / (loss) | — | — | 63 | — | (158 | ) | (95 | ) | (13 | ) | (108 | ) | ||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total comprehensive income / (loss) | — | — | 63 | 2,328 | (158 | ) | 2,233 | 79 | 2,312 | |||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Dividends declared | 24 | — | — | — | (61 | ) | — | (61 | ) | (106 | ) | (167 | ) | |||||||||||||||||
Changes in ownership interest in a subsidiary that do not result in a loss of control | — | — | 23 | — | — | 23 | (19 | ) | 4 | |||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
As of December 31, 2016 | 1,749,004,648 | 2 | 12,753 | 753 | (439 | ) | (7,109 | ) | 5,960 | 83 | 6,043 | |||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
for the year ended December 31, 2015
| | | | Attributable to equity owners of the parent | | | |||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (In millions of U.S. dollars) | Note | Number of shares outstanding | Issued capital | Capital Surplus | Other capital reserves | Accumulated deficit | Foreign currency translation | Total | Non- controlling interests | Total equity | ||||||||||||||||||||
As of January 1, 2015 | 1,748,598,146 | 2 | 12,746 | 84 | (1,990 | ) | (5,836 | ) | 5,006 | (1,030 | ) | 3,976 | ||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Loss) / profit for the period | — | — | — | (655 | ) | — | (655 | ) | 102 | (553 | ) | |||||||||||||||||||
Other comprehensive income / (loss) | — | — | 43 | — | (1,115 | ) | (1,072 | ) | (720 | ) | (1,792 | ) | ||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total comprehensive income / (loss) | — | — | 43 | (655 | ) | (1,115 | ) | (1,727 | ) | (618 | ) | (2,345 | ) | |||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Dividends declared | — | — | — | (61 | ) | — | (61 | ) | (188 | ) | (249 | ) | ||||||||||||||||||
Sale of 51% shareholding in Omnium Telecom Algerie, net of tax of US$350 | 5 | — | — | 644 | — | — | 644 | 1,607 | 2,251 | |||||||||||||||||||||
Share-based payment transactions and exercise of options | 406,502 | — | 7 | (6 | ) | — | — | 1 | — | 1 | ||||||||||||||||||||
Restructuring of the Company's ownership in LLC "Sky Mobile" and LLP "KaR-Tel" | 5 | — | — | (98 | ) | — | — | (98 | ) | 358 | 260 | |||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
As of December 31, 2015 | 1,749,004,648 | 2 | 12,753 | 667 | (2,706 | ) | (6,951 | ) | 3,765 | 129 | 3,894 | |||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In millions of US dollars) | Note | Number of shares | Issued capital | Capital Surplus | Treasury shares | Other capital reserves | Retained earnings | Foreign currency translation | Total | Non- controlling interest | Total equity | |||||||||||||||||||||||||||||||
As of 1 January 2012 | 1,618,120,527 | 2 | 11,545 | (213 | ) | (133 | ) | 3,909 | (1,073 | ) | 14,037 | 865 | 14,902 | |||||||||||||||||||||||||||||
Profit for the period | — | — | — | — | 1,539 | — | 1,539 | (163 | ) | 1,376 | ||||||||||||||||||||||||||||||||
Total other comprehensive income /(loss) | — | — | — | (76 | ) | — | 56 | (20 | ) | (102 | ) | (122 | ) | |||||||||||||||||||||||||||||
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||
Total comprehensive income | — | — | — | (76 | ) | 1,539 | 56 | 1,519 | (265 | ) | 1,254 | |||||||||||||||||||||||||||||||
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||
Dividends | — | — | — | — | (1,295 | ) | — | (1,295 | ) | (26 | ) | (1,321 | ) | |||||||||||||||||||||||||||||
Acquisitions | — | (10 | ) | — | — | — | — | (10 | ) | 1 | (9 | ) | ||||||||||||||||||||||||||||||
Divestments | — | — | — | — | — | — | — | (42 | ) | (42 | ) | |||||||||||||||||||||||||||||||
Changes in a parent’s ownership interest in a subsidiary that do not result in a loss of control | — | — | — | (12 | ) | — | (5 | ) | (17 | ) | (34 | ) | (51 | ) | ||||||||||||||||||||||||||||
Other changes | 1,082,151 | — | 1 | 9 | — | — | 2 | 12 | 4 | 16 | ||||||||||||||||||||||||||||||||
As of 31 December 2012 | 1,619,202,678 | 2 | 11,536 | (204 | ) | (221 | ) | 4,153 | (1,020 | ) | 14,246 | 503 | 14,749 | |||||||||||||||||||||||||||||
|
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|
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|
|
| |||||||||||||||||||||||
| (In millions of US dollars) | Note | Number of shares | Issued capital | Capital Surplus | Treasury shares | Other capital reserves | Retained earnings | Foreign currency translation | Total | Non- controlling interest | Total equity | |||||||||||||||||||||||||||||||||
As of 1 January 2013 | 1,619,202,678 | 2 | 11,536 | (204 | ) | (221 | ) | 4,153 | (1,020 | ) | 14,246 | 503 | 14,749 | |||||||||||||||||||||||||||||||
Profit/(loss) for the period | — | — | — | — | (2,625 | ) | — | (2,625 | ) | (1,463 | ) | (4,088 | ) | |||||||||||||||||||||||||||||||
Total other comprehensive income /(loss) | — | — | — | 100 | 12 | (643 | ) | (531 | ) | 66 | (465 | ) | ||||||||||||||||||||||||||||||||
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|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Total comprehensive income /(loss) | — | — | — | 100 | (2,613 | ) | (643 | ) | (3,156 | ) | (1,397 | ) | (4,553 | ) | ||||||||||||||||||||||||||||||
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Preferred shares conversion | 128,532,000 | — | 1,392 | — | — | — | — | 1,392 | — | 1,392 | ||||||||||||||||||||||||||||||||||
Dividends | — | — | — | — | (2,780 | ) | — | (2,780 | ) | — | (2,780 | ) | ||||||||||||||||||||||||||||||||
Acquisitions | 6 | — | (7 | ) | — | (12 | ) | (21 | ) | — | (40 | ) | 53 | 13 | ||||||||||||||||||||||||||||||
Divestments | 6 | — | — | — | — | (25 | ) | — | (25 | ) | 25 | — | ||||||||||||||||||||||||||||||||
Changes in a parent’s ownership interest in a subsidiary that do not result in a loss of control | 17 | — | — | — | 91 | — | (10 | ) | 81 | 161 | 242 | |||||||||||||||||||||||||||||||||
Other changes | 509,061 | — | 9 | 6 | — | — | — | 15 | — | 15 | ||||||||||||||||||||||||||||||||||
As of 31 December 2013 | 1,748,243,739 | 2 | 12,930 | (198 | ) | (42 | ) | (1,286 | ) | (1,673 | ) | 9,733 | (655 | ) | 9,078 | |||||||||||||||||||||||||||||
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The accompanying notes are an integral part of these consolidated financial statements.
Consolidated statementsTable of changes in equity (continued)Contents
| (In millions of US dollars) | Note | Number of shares | Issued capital | Capital Surplus | Treasury shares | Other capital reserves | Retained earnings | Foreign currency translation | Total | Non- controlling interest | Total equity | |||||||||||||||||||||||||||||||||
As of 1 January 2014 | 1,748,243,739 | 2 | 12,930 | (198 | ) | (42 | ) | (1,286 | ) | (1,673 | ) | 9,733 | (655 | ) | 9,078 | |||||||||||||||||||||||||||||
Loss for the period | — | — | — | — | (647 | ) | — | (647 | ) | (256 | ) | (903 | ) | |||||||||||||||||||||||||||||||
Total other comprehensive income/(loss) | — | — | — | 138 | — | (4,124 | ) | (3,986 | ) | (92 | ) | (4,078 | ) | |||||||||||||||||||||||||||||||
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Total comprehensive income/(loss) | — | — | — | 138 | (647 | ) | (4,124 | ) | (4,633 | ) | (348 | ) | (4,981 | ) | ||||||||||||||||||||||||||||||
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Dividends | — | — | — | — | (58 | ) | — | (58 | ) | (21 | ) | (79 | ) | |||||||||||||||||||||||||||||||
Acquisition of non-controlling interest | — | — | — | — | — | — | — | 4 | 4 | |||||||||||||||||||||||||||||||||||
Changes in a parent’s ownership interest in a subsidiary that do not result in a loss of control | 17 | — | — | — | (7 | ) | — | (39 | ) | (46 | ) | (10 | ) | (56 | ) | |||||||||||||||||||||||||||||
Exercise of stock options | 354,407 | — | — | 7 | (4 | ) | — | — | 3 | — | 3 | |||||||||||||||||||||||||||||||||
Share-based payment transactions | — | 7 | — | (1 | ) | 1 | — | 7 | — | 7 | ||||||||||||||||||||||||||||||||||
As of 31 December 2014 | 1,748,598,146 | 2 | 12,937 | (191 | ) | 84 | (1,990 | ) | (5,836 | ) | 5,006 | (1,030 | ) | 3,976 | ||||||||||||||||||||||||||||||
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CONSOLIDATED STATEMENT OF CASH FLOWS
for the year ended December 31
| (In millions of U.S. dollars) | Note | 2017 | 2016 | 2015 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
Operating activities | ||||||||||||
(Loss) / profit before tax | (24 | ) | 347 | (595 | ) | |||||||
Non-cash adjustments to reconcile profit before tax to net cash flows: | ||||||||||||
Depreciation | 16 | 1,454 | 1,439 | 1,550 | ||||||||
Amortization | 17 | 537 | 497 | 517 | ||||||||
Impairment losses | 10 | 66 | 192 | 245 | ||||||||
Loss on disposals of non-current assets | 24 | 20 | 39 | |||||||||
Finance costs | 935 | 830 | 829 | |||||||||
Finance income | (95 | ) | (69 | ) | (52 | ) | ||||||
Other non-operating losses, net | 11 | 97 | 82 | 42 | ||||||||
Share of loss / (profit) of joint ventures and associates | 14 | 412 | (48 | ) | (14 | ) | ||||||
Impairment of joint ventures and associates | 14 | 110 | 99 | — | ||||||||
Net foreign exchange loss / (gain) | 71 | (157 | ) | 314 | ||||||||
Changes in trade and other receivables and prepayments | (168 | ) | (129 | ) | (287 | ) | ||||||
Changes in inventories | 54 | (13 | ) | (43 | ) | |||||||
Changes in trade and other payables | 311 | (107 | ) | 173 | ||||||||
Changes in provisions and pensions | (119 | ) | (645 | ) | (185 | ) | ||||||
Interest paid | 17 | (834 | ) | (789 | ) | (807 | ) | |||||
Interest received | 89 | 63 | 49 | |||||||||
Income tax paid | 12 | (445 | ) | (420 | ) | (671 | ) | |||||
Net cash flow from operating activities of discontinued operations | — | 683 | 929 | |||||||||
| | | | | | | | | | | | | |
Net cash flow from operating activities | 2,475 | 1,875 | 2,033 | |||||||||
| | | | | | | | | | | | | |
Investing activities |
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Proceeds from sale of property and equipment and intangible assets | 8 | 15 | 18 | |||||||||
Purchase of property and equipment and intangible assets | (2,037 | ) | (1,651 | ) | (2,207 | ) | ||||||
Loans granted | (2 | ) | — | (102 | ) | |||||||
Repayment of loans granted | — | — | 101 | |||||||||
(Payment on) / receipts from deposits | 17 | (898 | ) | 19 | (361 | ) | ||||||
(Investment in) / redemption of financial assets | (99 | ) | (87 | ) | 74 | |||||||
Acquisition of subsidiaries, net of cash acquired | — | 7 | (17 | ) | ||||||||
Proceeds from sale of subsidiaries, net of cash disposed | 12 | (325 | ) | — | ||||||||
Net cash flow used in investing activities of discontinued operations | — | (649 | ) | (140 | ) | |||||||
| | | | | | | | | | | | | |
Net cash flow used in investing activities | (3,016 | ) | (2,671 | ) | (2,634 | ) | ||||||
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Net cash flow from operating activities | 2,475 | 1,875 | 2,033 | |||||||||
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Net cash flow used in investing activities | (3,016 | ) | (2,671 | ) | (2,634 | ) | ||||||
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Financing activities |
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Net proceeds from exercise of share options and purchase of treasury shares | — | — | 2 | |||||||||
Acquisition of non-controlling interests | 5 | (259 | ) | (5 | ) | (4 | ) | |||||
Proceeds from borrowings, net of fees paid* | 17 | 6,193 | 1,882 | 2,052 | ||||||||
Repayment of borrowings | 17 | (5,948 | ) | (1,816 | ) | (4,840 | ) | |||||
Dividends paid to owners of the parent | 24 | (518 | ) | (61 | ) | (61 | ) | |||||
Dividends paid to non-controlling interests | 24 | (201 | ) | (106 | ) | (188 | ) | |||||
Proceeds from sale of non-controlling interests, net of fees paid | — | — | 2,307 | |||||||||
Net cash flow used in financing activities of discontinued operations | — | (20 | ) | (707 | ) | |||||||
| | | | | | | | | | | | | |
Net cash flow used in financing activities | (733 | ) | (126 | ) | (1,439 | ) | ||||||
| | | | | | | | | | | | | |
Net change in cash and cash equivalents | (1,274 | ) | (922 | ) | (2,040 | ) | ||||||
Net foreign exchange difference | (353 | ) | (64 | ) | (374 | ) | ||||||
Cash and cash equivalents classified as held for sale | ||||||||||||
at the beginning of period | — | 314 | — | |||||||||
at the end of the period | (11 | ) | — | (314 | ) | |||||||
Cash and cash equivalents at beginning of period | 2,942 | 3,614 | 6,342 | |||||||||
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Cash and cash equivalents at end of period** | 18 | 1,304 | 2,942 | 3,614 | ||||||||
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The accompanying notes are an integral part of these consolidated financial statements.
VimpelCom Ltd.
Notes to the consolidated financial statements
(in millions of U.S. dollars unless otherwise stated)
Consolidated statements of cash flows
For the years ended 31 December 2014, 2013 and 2012
| Year ended 31 December | ||||||||||||||||
| (In millions of US dollars) | Note | 2014 | 2013 | 2012 | ||||||||||||
Operating activities | ||||||||||||||||
(Loss)/ profit for the year | (903 | ) | (4,088 | ) | 1,376 | |||||||||||
Income tax expense | 13 | 722 | 2,064 | 906 | ||||||||||||
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Profit/(loss) before tax | (181 | ) | (2,024 | ) | 2,282 | |||||||||||
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Non-cash adjustment to reconcile profit/(loss) before tax to net cash flows from operating activities: | ||||||||||||||||
Depreciation | 15 | 2,839 | 3,050 | 2,926 | ||||||||||||
Amortization | 16 | 1,479 | 1,791 | 2,080 | ||||||||||||
Impairment losses | 10 | 992 | 2,973 | 386 | ||||||||||||
Loss on disposals of non-current assets | 18 | 74 | 100 | 205 | ||||||||||||
Finance costs | 2,026 | 2,150 | 2,029 | |||||||||||||
Finance income | (54 | ) | (91 | ) | (154 | ) | ||||||||||
Other non-operating (gains)/ losses | 11 | 152 | 172 | 75 | ||||||||||||
Shares of loss of associates and joint ventures accounted for using the equity method | 12 | 38 | 159 | 9 | ||||||||||||
Net foreign exchange loss/ (gain) | 605 | (20 | ) | (70 | ) | |||||||||||
Movements in provisions and pensions | 169 | 1,463 | 36 | |||||||||||||
Operating profit before working capital adjustments | 8,139 | 9,723 | 9,804 | |||||||||||||
Working capital adjustments: | ||||||||||||||||
Change in trade and other receivables and prepayments | (174 | ) | 270 | 10 | ||||||||||||
Change in inventories | 19 | (44 | ) | 14 | ||||||||||||
Change in trade and other payables | 135 | (286 | ) | 421 | ||||||||||||
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| (20 | ) | (60 | ) | 445 | ||||||||||||
Interest paid | (2,157 | ) | (2,084 | ) | (2,144 | ) | ||||||||||
Interest received | 47 | 37 | 383 | |||||||||||||
Income tax paid | (730 | ) | (1,265 | ) | (1,231 | ) | ||||||||||
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Net cash flows from operating activities | 5,279 | 6,351 | 7,257 | |||||||||||||
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Investing activities | ||||||||||||||||
Proceeds from sale of property, plant and equipment and intangible assets | 22 | 40 | 42 | |||||||||||||
Purchase of property, plant and equipment and intangible assets | (4,489 | ) | (3,955 | ) | (3,886 | ) | ||||||||||
Proceeds from sale of investment in and loan to associate | 110 | — | — | |||||||||||||
Loans granted to associates | (23 | ) | (118 | ) | (189 | ) | ||||||||||
Change in short-term deposits and other financial assets | 17 | 332 | (316 | ) | 107 | |||||||||||
Disposal of subsidiaries, net of cash disposed | 6 | 69 | 83 | (75 | ) | |||||||||||
Acquisition of subsidiaries, net of cash acquired | — | 2 | — | |||||||||||||
Other | 2 | 51 | (7 | ) | ||||||||||||
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Net cash flows used in investing activities | (3,977 | ) | (4,213 | ) | (4,008 | ) | ||||||||||
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Financing activities | ||||||||||||||||
Proceeds from borrowings, net of fees paid(1) | 16,738 | 5,587 | 3,094 | |||||||||||||
Repayment of borrowings | (15,322 | ) | (5,487 | ) | (3,650 | ) | ||||||||||
Dividends paid to equity holders of the parent | (71 | ) | (4,055 | ) | — | |||||||||||
Dividends paid to non-controlling interests | (19 | ) | — | (26 | ) | |||||||||||
Proceeds from issuance of share capital | — | 1,392 | — | |||||||||||||
Other | 3 | (12 | ) | (5 | ) | |||||||||||
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Net cash flows used in/ from financing activities | 1,329 | (2,575 | ) | (587 | ) | |||||||||||
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Net increase/(decrease) in cash and cash equivalents | 2,631 | (437 | ) | 2,662 | ||||||||||||
Net foreign exchange difference | (743 | ) | (58 | ) | (38 | ) | ||||||||||
Cash and cash equivalents at beginning of period | 21 | 4,454 | 4,949 | 2,325 | ||||||||||||
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Cash and cash equivalents at end of period(2) | 21 | 6,342 | 4,454 | 4,949 | ||||||||||||
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The accompanying notes are an integral part of these consolidated financial statements.
Notes to consolidated financial statements
1 General informationGENERAL INFORMATION
VimpelCom VEON Ltd. (“VimpelCom”("VEON", the “Company”"Company", and together with its consolidated subsidiaries, the “Group” or “we”"Group") was incorporated in Bermuda on June 5, June 2009. The registered office of VimpelComVEON is Victoria Place, 31 Victoria Street, Hamilton HM 10, Bermuda. VimpelCom’sVEON's headquarters and the principal place of business isare located at Claude Debussylaan 88, 1082 MD Amsterdam, the Netherlands.
The Company changed its name from VimpelCom Ltd. to VEON Ltd., effective as of March 30, 2017.
The consolidated financial statements were authorized by the Supervisory Board for issuance on March 15, 2018. The Company has the ability to amend and reissue the consolidated financial statements.
The consolidated financial statements are presented in United States dollars (“("U.S. dollar”dollar" or “USD”"US$"). In these notes, U.S. dollar amounts are presented in millions, except for share and per share (or American Depository Shares (“ADS”("ADS")) amounts and as otherwise indicated.
VimpelCom’s VEON's ADSs are listed on the NASDAQ Stock Market.Global Select Market ("NASDAQ"). From April 4, 2017, VEON's common shares are listed on Euronext Amsterdam, the regulated market of Euronext Amsterdam N.V. ("Euronext Amsterdam").
The Company’sShare information
As of December 31, 2017, the Company's largest shareholders and remaining free float are as follows:
Shareholder | Common shares | % of common and voting shares | |||||
|---|---|---|---|---|---|---|---|
L1T VIP Holdings S.à r.l. ("LetterOne") | 840,625,001 | 47.9 | % | ||||
Telenor East Holding II AS ("Telenor") | 256,703,840 | 14.6 | % | ||||
Stichting Administratiekantoor Mobile Telecommunications Investor * | 145,947,562 | 8.3 | % | ||||
Free Float | 513,454,732 | 29.2 | % | ||||
| | | | | | | | |
Total outstanding common shares | 1,756,731,135 | 100 | % | ||||
| | | | | | | | |
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Shares held by the Company or its subsidiaries ("Treasury shares") | 7,603,731 | 0.4 | % | ||||
Notes to the consolidated financial statements (Continued)
(in millions of U.S. dollars unless otherwise stated)
1GENERAL INFORMATION (Continued)
In April and September 2017, Telenor ASA (“Telenor”),sold, respectively, 70,000,000 and their respective affiliates, beneficially own,90,000,000 common shares of VEON Ltd. in the aggregate, approximately 90.9%form of ourADSs listed on NASDAQ and common shares listed on Euronext Amsterdam pursuant to an underwritten offering. The Company did not receive any proceeds from the offering, and Telenor's sale of the ADSs and common shares did not result in dilution of the Company's issued and outstanding voting shares. The offering was made pursuant to the Company's shelf registration statement on Form F-3 initially filed with the U.S. Securities and Exchange Commission (the"SEC") on May 23, 2014, as amended and most recently declared effective on April 20, 2016 (the"Registration Statement"). The ADSs and common shares were offered by means of a prospectus and accompanying prospectus supplement forming a part of the effective Registration Statement. Telenor has indicated that these transactions will be the final divestment of Telenor's VEON ADSs, as Telenor expects to use the balance of its remaining ADSs to exchange and/or redeem Telenor's exchangeable bond.
VimpelComNature of operations and principal activities
VEON earns revenuerevenues by providing voice data and otherdata telecommunication services through a range of wireless, fixedtraditional and broadband internet services, as well as selling equipmentmobile and accessories.fixed-line technologies. As of December 31, December 2014,2017, the Company operated telecommunications services in Russia, Italy,Pakistan, Algeria, Kazakhstan,Bangladesh, Ukraine, Pakistan, Bangladesh,Uzbekistan, Kazakhstan, Armenia, Tajikistan, Uzbekistan, Georgia, Kyrgyzstan and Laos.Laos, and in Italy via a 50/50 joint venture.
During the year 2017, several local currencies demonstrated significant volatility against the U.S. dollar, which impacted the Company's financial position and results of operations following the translation of non-U.S. currency amounts into U.S. dollars for consolidation purposes. In particular, in U.S. dollar terms, the fluctuations of local currencies caused a 3% increase in total revenue for the Group during 2017, as compared to 2016.
In addition, on September 2, 2017, the Government of Uzbekistan announced the liberalization of currency exchange rules, effective from September 5, 2017. The Company also holds equity shareholdingsCentral Bank of Uzbekistan set the official exchange rate at 8,100 Uzbek som ("UZS") per U.S dollar, a depreciation of 92%, resulting in a company operatingdecrease in Zimbabwe.the value of net assets of the Uzbekistan operations in U.S. dollar terms. The effect of the foreign currency liberalization in Uzbekistan resulted in a loss of US$16 recognized in the Income statement (within 'Net foreign exchange gain / (loss)'), and a negative movement in foreign currency translation reserve of US$420, recognized in Other comprehensive income.
In December 2017, the Company repatriated a net amount of approximately US$200 from Unitel LLC ("Unitel"), its wholly-owned subsidiary in Uzbekistan. The repatriation resulted in a foreign exchange loss of US$49.
Notes to the consolidated financial statements of the Company for the year ended 31 December 2014 were authorized for issue in accordance with a resolution of the Audit Committee of the Supervisory Board on 17 March 2015, acting under authority delegated to the Audit Committee from the Supervisory Board.
In April 2014, the Group signed a Share Purchase Agreement (“SPA”) under which it agreed to sell a non-controlling 51% stake in Omnium Telecom Algeria S.p.A. (“OTA”). The transaction closed on 30 January 2015. See Notes 6 and 26 for further information about this transaction.
During 2014, the Company also successfully completed the disposals of its equity shareholding in the Globalive group of companies in Canada, and Telecel Globe which included operations in Central African Republic and Burundi. See Note 6 for further details about these transactions.
In July 2014, VimpelCom completed a refinancing of WIND Group which improved the capital structure of its indirectly owned subsidiaries WIND Telecomunicazioni S.p.A. (“WIND”) and Wind Acquisition Finance S.A. (“WAF”). See Note 17 for more details.
2 Basis of preparation of the consolidated financial statements(Continued)
Basis(in millions of preparationU.S. dollars unless otherwise stated)
2BASIS OF PREPARATION OF THE CONSOLIDATED FINANCIAL STATEMENTS
BASIS OF PREPARATION
These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”("IFRS") as issued by the International Accounting Standards Board, (“IASB”), effective at the time of preparing the consolidated financial statements and applied by VimpelCom.VEON.
The consolidated income statement has been presented based on the nature of the expense, other than 'Selling, general and administrative expenses', which has been presented based on the function of the expense.
The consolidated financial statements have been prepared on a historical cost basis, unless disclosed otherwise. Certain comparative amounts have been reclassified to conform to the current period presentation.
BASIS OF CONSOLIDATION
The consolidated financial statements comprise the financial statements of the Company and its subsidiaries. Subsidiaries are all entities (including structured entities) over which the Company has control. Please refer to Note 13 for a list of significant subsidiaries.
Intercompany transactions, balances and unrealized gains or losses on transactions between Group companies are eliminated. When necessary, amounts reported by subsidiaries have been adjusted to conform with the Group's accounting policies.
When the Group ceases to consolidate a subsidiary due to loss of control, the related subsidiary's assets (including goodwill), liabilities, non-controlling interest and other components of equity are de-recognized. This may mean that amounts previously recognized in other comprehensive income are reclassified to profit or loss. Any consideration received is recognized at fair value, and any investment retained is re-measured to its fair value, and this fair value becomes the initial carrying amount for the purposes of subsequently accounting for the retained interest. Any resultant gain or loss is recognized in the income statement.
FOREIGN CURRENCY TRANSLATION
The consolidated financial statements of the Group are presented in U.S. dollars. Each entity in the Group determines its own functional currency and amounts included in the financial statements of each entity are measured using that functional currency.
Upon consolidation, the assets and liabilities measured in the functional currency are translated into U.S. dollars at exchange rates prevailing on the balance sheet date; whereas revenue, expenses, gains and losses are translated into U.S. dollars at historical exchange rates prevailing on the transaction dates. Translation adjustments resulting from the process of translating financial statements into U.S. dollars are reported in other comprehensive income, a separate component of equity (i.e. cumulative translation adjustment).
Notes to the consolidated financial statements (Continued)
(in millions of U.S. dollars unless otherwise stated)
3SIGNIFICANT ACCOUNTING POLICIES THAT RELATE TO THE CONSOLIDATED FINANCIAL STATEMENTS AS A WHOLE
Accounting policies are included in the relevant notes to these consolidated financial statements.
A number of new or amended standards became effective as of January 1, 2017. However, the Company did not have to change its accounting policies or make retrospective adjustments as a result of adopting these standards.
As a result of amendments to IAS 7 'Statement of Cash Flows: Disclosure Initiative', the Group has provided disclosure regarding changes in liabilities arising from financing activities for the current period in Note 17.
NEW STANDARDS, INTERPRETATIONS AND AMENDMENTS NOT YET ADOPTED BY THE GROUP
The following section outlines significant and relevant new standards that are issued, but not yet effective, up to the date of the issuance of the Group's financial statements, and which have not been early adopted by the Company.
New accounting standards in 2018
The following table presents the transitional impact that adoption of IFRS 9, 'Financial Instruments' ("IFRS 9") and IFRS 15,'Revenue from contracts with customers' ("IFRS 15") is expected to have on the opening balance sheet of the Group, as of January 1, 2018. Further details regarding the impact of IFRS 9 and IFRS 15 can be found below.
Notes to the consolidated financial statements (Continued)
(in millions of U.S. dollars unless otherwise stated)
3SIGNIFICANT ACCOUNTING POLICIES THAT RELATE TO THE CONSOLIDATED FINANCIAL STATEMENTS AS A WHOLE (Continued)
| | | Impact of IFRS 9 | Impact of IFRS 15 | | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Opening balance sheet | Classification and measurement | Impairment | Revenue and contract costs | Adjusted opening balance sheet | |||||||||||
Assets | ||||||||||||||||
Non-current assets | ||||||||||||||||
Investments in joint ventures and associates | 1,921 | (25 | ) | (10 | ) | 40 | 1,926 | |||||||||
Deferred tax assets | 272 | — | 4 | (12 | ) | 264 | ||||||||||
Other financial assets | ||||||||||||||||
Available for sale | 18 | (18 | ) | — | — | — | ||||||||||
Fair value through other comprehensive income | — | 18 | — | — | 18 | |||||||||||
Other assets | 199 | — | — | 93 | 292 | |||||||||||
Current assets | ||||||||||||||||
Trade and other receivables | 745 | — | (18 | ) | — | 727 | ||||||||||
Other financial assets | ||||||||||||||||
Available for sale | 53 | (53 | ) | — | — | — | ||||||||||
Fair value through other comprehensive income | — | 53 | — | — | 53 | |||||||||||
Other assets | 394 | — | — | (8 | ) | 386 | ||||||||||
Equity | ||||||||||||||||
Equity attributable to equity owners of the parent | 4,352 | (25 | ) | (18 | ) | 85 | 4,394 | |||||||||
Non-controlling interests | (425 | ) | — | (5 | ) | 14 | (416 | ) | ||||||||
Liabilities | ||||||||||||||||
Other liabilities (current) | 1,346 | — | — | (1 | ) | 1,345 | ||||||||||
Deferred tax liabilities | 376 | — | (1 | ) | 15 | 390 | ||||||||||
IFRS 15 'Revenue from contracts with customers'
IFRS 15 replaces IAS 18'Revenue' and IAS 11'Construction contracts' and related interpretations. IFRS 15 addresses revenue recognition for contracts with customers as well as treatment of incremental costs incurred to obtain a contract with a customer, described in more detail below.
Revenue recognition
Due to the nature of the Group's existing product offerings (i.e. prevailing pre-paid service offerings), as well as the Group's existing accounting policies (described in Note 8), the impact of IFRS 15 on revenue recognition by the Group will be immaterial, as shown in the table presented earlier in this Note.
Notes to the consolidated financial statements (Continued)
(in millions of U.S. dollars unless otherwise stated)
3SIGNIFICANT ACCOUNTING POLICIES THAT RELATE TO THE CONSOLIDATED FINANCIAL STATEMENTS AS A WHOLE (Continued)
Costs of obtaining a contract with customer
Under IFRS 15, certain incremental costs incurred in acquiring a contract with a customer ("contract costs"), which previously did not qualify for recognition as an asset under any of the other accounting standards, will be deferred in the consolidated statement of financial position. Such costs relate primarily to commissions paid to third-party dealers and will be amortized as revenue is recognized under the related contract, within the 'Selling, general and administrative expenses' line item within the income statement.
The Group will apply the practical expedient available in IFRS 15 for contract costs for which the amortization would have been shorter than 12 months. Such costs relate primarily to commissions paid to third-party dealers upon top-up of prepaid credit by customers and sale of top-up cards.
The expected impact of capitalizing contract costs upon implementation of IFRS 15 is shown in the table presented earlier in this Note.
Transition
The standard is effective for annual periods beginning on or after January 1, 2018. The Group will adopt the standard using the modified retrospective approach, which means that the cumulative impact of the adoption will be recognized in retained earnings as of January 1, 2018 and that comparatives will not be restated.
The impact that adoption of IFRS 15 is expected to have on the opening balance sheet of the Group, as of January 1, 2018, is shown in the table presented earlier in this Note.
IFRS 9 'Financial instruments'
IFRS 9 replaces IAS 39 'Financial instruments: Recognition and Measurement' ("IAS 39"). IFRS 9 impacts the Group's classification and measurement of financial instruments, impairment of financial assets and hedge accounting, described in more detail below.
Classification and measurement
The new standard requires the Company to assess the classification of financial assets on its balance sheets in accordance with the cash flow characteristics of the financial assets and the relevant business model that the Company has for a specific class of financial assets.
IFRS 9 no longer has an "Available-for-sale" classification for financial assets. The new standard has different requirements for debt or equity financial assets.
Debt instruments should be classified and measured either at:
Notes to the consolidated financial statements (Continued)
(in millions of U.S. dollars unless otherwise stated)
3SIGNIFICANT ACCOUNTING POLICIES THAT RELATE TO THE CONSOLIDATED FINANCIAL STATEMENTS AS A WHOLE (Continued)
Investments in equity instruments, other than those to which consolidation or equity accounting apply, should be classified and measured either at:
The company will continue to initially measure financial assets at its fair value plus transaction cost upon initial recognition, except for financial assets measured at fair value through profit and loss, consistent with current practices. The majority of the financial assets classification will not be impacted by the transition to IFRS 9 on January 1, 2018. The reclassifications upon transition to IFRS 9 are shown in the table presented earlier in this Note.
Impairment (allowance for doubtful debt)
IFRS 9 introduces the Expected Credit Loss model, which replaces the incurred loss model of IAS 39 whereby an allowance for doubtful debt was required only in circumstances where a loss event has occurred. By contrast, the Expected Credit Loss model requires the Company to recognize an allowance for doubtful debt on all financial assets carried at amortized cost (including, for example, 'Trade receivables'), as well as debt instruments classified as financial assets carried at fair value through other comprehensive income (for example, government bonds held for liquidity purposes), since initial recognition, irrespective whether a loss event has occurred.
As a result, the allowance for doubtful debt of the Company will increase upon implementation of IFRS 9 on January 1, 2018. The expected impact of applying the Expected Credit Loss model is shown in the table presented earlier in this Note.
Hedge Accounting
IFRS 9 allows for more possibilities for the Company to apply hedge accounting (for example, risk components of non-financial assets or liabilities may be designated as part of a hedging relationship). In addition, the requirements of the standard have been more closely aligned with the Company's risk management policies and hedge effectiveness will be measured prospectively.
Transition
The Group will adopt the standard using the modified retrospective approach for classification and measurement and impairment. This means that the cumulative impact of the adoption will be recognized in retained earnings as of January 1, 2018 and that comparatives will not be restated.
All hedge accounting relationships existing as of January 1, 2018 will be continued under IFRS 9.
The Company will retrospectively adopt the cost of hedging approach for foreign currency basis spreads existing in cross-currency interest rate swaps used in a hedging relationship, the impact of which is immaterial to the consolidated financial results and position of the Group.
Notes to the consolidated financial statements (Continued)
(in millions of U.S. dollars unless otherwise stated)
3SIGNIFICANT ACCOUNTING POLICIES THAT RELATE TO THE CONSOLIDATED FINANCIAL STATEMENTS AS A WHOLE (Continued)
IFRS 16,'Leases'
IFRS 16 replaces the IAS 17 Leases, the current lease accounting standard and will become effective on January 1, 2019. The new lease standard will require assets leased by the Company to be recognized on the statement of financial position of the Company with a corresponding liability. The Company is in the process of assessing the impact of IFRS 16 which is expected to have a material impact on the consolidated income statement and consolidated financial position upon adoption in 2019.
IFRIC 23 'Uncertainty over income tax treatments'
The Interpretation clarifies the application of recognition and measurement requirements in IAS 12 'Income Taxes' when there is uncertainty over income tax treatments. The Group has yet to assess the impact of IFRIC 23, which may be material to the consolidated income statement and consolidated financial position upon adoption in 2019.
SIGNIFICANT ACCOUNTING JUDGMENTS, ESTIMATES AND ASSUMPTIONS
The preparation of these consolidated financial statements has required management to apply accounting policies and methodologies based on complex and subjective judgments, estimates based on past experience and assumptions determined to be reasonable and realistic based on the related circumstances. The use of these
judgements, estimates and assumptions affects the amounts reported in the statement of financial position, the income statement, statement of cash flows, statement of changes in equity, as well as the notes. The final amounts for items for which estimates and assumptions were made in the consolidated financial statements may differ from those reported in these statements due to the uncertainties that characterize the assumptions and conditions on which the estimates are based.
Application The sources of certain accounting principles requiresuncertainty identified by the Group are described together with the applicable note, as follows:
Significant accounting judgement / source of estimation uncertainty | Described in | |
|---|---|---|
| Revenue recognition | Note 8 | |
| Impairment of non-current assets | Note 10 | |
| Investment in Italy Joint Venture | Note 14 | |
| Control over subsidiaries | Note 13 | |
| Depreciation and amortization of non-current assets | Note 15 and Note 16 | |
| Deferred tax assets and uncertain tax positions | Note 12 and Note 22 | |
| Fair value of financial instruments | Note 17 | |
| Provisions | Note 22 and Note 26 |
Notes to the consolidated financial statements (Continued)
(in millions of U.S. dollars unless otherwise stated)
4FINANCIAL RISK MANAGEMENT
The Group's principal financial liabilities, other than derivatives, consist of loans and borrowings and trade and other payables. The main purpose of these financial liabilities is to finance the Group's operations. The Group has trade and other receivables, and cash and short-term deposits that are derived directly from its operations. The Company views derivative instruments as risk management tools and does not use them for trading or speculative purposes.
The Group is exposed to market risk, credit risk and liquidity risk.
The Company's Management Board oversees the management of these risks. The Company's Management Board is supported by the treasury department who advises on financial risks and the appropriate financial risk governance framework for the Company. The Finance and Strategy Committee provides assurance to the Company's Management Board that the Group's financial risk management activities are governed by appropriate policies and procedures, and that financial risks are identified, measured and managed in accordance with Group policies and the Group's risk appetite. All derivative activities for risk management purposes are carried out by specialist teams with appropriate skills, experience and supervision.
The Group Chief Executive Officer ("CEO"), Group Chief Financial Officer ("CFO") and other senior management of the Company review and agree on policies for managing each of these risks, which are summarized below.
MARKET RISK
Market risk is the risk that the fair value or future cash flows of a higher degreefinancial instrument will fluctuate because of subjectivity when making judgmentschanges in market prices. Market risk comprises interest rate risk and foreign currency risk.
INTEREST RATE RISK
Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Company's exposure to the risk of changes in market interest rates relates primarily to the Company's long-term debt obligations with floating interest rates. The Company manages its interest rate risk exposure through a portfolio of fixed and variable rate borrowings and hedging activities.
At December 31, 2017, after taking into account the effect of interest rate swaps, approximately 80% of the Company's borrowings are at a fixed rate of interest (2016: 81%).
Interest rate sensitivity
The following table demonstrates the sensitivity to possible changes in interest rates on variable interest loans and borrowings, taking into account the related derivative financial instruments, cash and cash equivalents and current deposits. With all other variables held constant, the Company's profit before tax is affected through the impact on floating rate borrowings while the Company's equity is affected through the impact of a parallel shift of the yield curve to the fair value of derivatives as follows:
Notes to the consolidated financial statements (Continued)
(in millions of U.S. dollars unless otherwise stated)
4FINANCIAL RISK MANAGEMENT (Continued)
| | Effect on profit / (loss) before tax | Effect on other comprehensive income | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Increase / decrease in basis points | +100 | –100 | +100 | –100 | |||||||||
2017 | |||||||||||||
Euro | (7 | ) | 7 | 23 | (24 | ) | |||||||
U.S. Dollar | 3 | (3 | ) | (20 | ) | 21 | |||||||
Pakistani Rupee | (3 | ) | 3 | 1 | (1 | ) | |||||||
Ukrainian Hryvnia | 2 | (2 | ) | — | — | ||||||||
Other currencies | 4 | (4 | ) | — | — | ||||||||
2016 | |||||||||||||
Algerian Dinar | (1 | ) | 1 | — | — | ||||||||
Uzbek Som | 7 | (7 | ) | — | — | ||||||||
Pakistani Rupee | — | — | 2 | (2 | ) | ||||||||
Ukrainian Hryvnia | 1 | (1 | ) | — | — | ||||||||
Other currencies | 2 | (2 | ) | — | — | ||||||||
FOREIGN CURRENCY RISK
Foreign currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. The Company's exposure to the risk of changes in foreign exchange rates relates primarily to the debt denominated in currencies other than the functional currency of the relevant entity, the Company's operating activities (predominantly capital expenditures at subsidiary level denominated in a different currency from the subsidiary's functional currency) and the Company's net investments in foreign subsidiaries.
The Company manages its foreign currency risk by selectively hedging committed exposures.
The Company hedges part of its exposure to fluctuations on the translation into U.S. dollars of its foreign operations by holding net borrowings in foreign currencies and can use foreign currency swaps and forwards for this purpose as well.
Foreign currency sensitivity
The following table demonstrates the sensitivity to a possible change in exchange rates against the US dollar with all other variables held constant. Additional sensitivity changes to the indicated currencies are expected to be approximately proportionate. The table shows the effect on the Company's profit before tax (due to changes in the underlyingvalue of monetary assets and liabilities, including non-designated foreign currency derivatives) and equity (due to the effect on the cash flow hedge reserve and/or effect on currency translation reserve for quasi equity loans). The Company's exposure to foreign currency changes for all other currencies is not material.
Notes to the consolidated financial statements (Continued)
(in millions of U.S. dollars unless otherwise stated)
4FINANCIAL RISK MANAGEMENT (Continued)
| | Effect on profit / (loss) before tax | Effect on other comprehensive income | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Change in foreign exchange rate against US$ | 10% depreciation | 10% appreciation | 10% depreciation | 10% appreciation | |||||||||
2017 | |||||||||||||
Russian Ruble | 44 | (48 | ) | — | — | ||||||||
Bangladeshi Taka | (69 | ) | 76 | — | — | ||||||||
Pakistani Rupee | (27 | ) | 30 | — | — | ||||||||
Kazakh Tenge | 4 | (5 | ) | — | — | ||||||||
Uzbek Som | (12 | ) | 13 | — | — | ||||||||
Georgian Lari | (32 | ) | 35 | — | — | ||||||||
Armenian dram | (0 | ) | 1 | — | — | ||||||||
Euro | (18 | ) | 20 | 132 | (145 | ) | |||||||
Algerian Dinar | (3 | ) | 3 | — | — | ||||||||
Other currencies | 0 | (0 | ) | — | — | ||||||||
2016 | |||||||||||||
Russian Ruble | (80 | ) | 84 | 30 | (33 | ) | |||||||
Bangladeshi Taka | (68 | ) | 75 | — | — | ||||||||
Pakistani Rupee | (30 | ) | 33 | — | — | ||||||||
Kazakh Tenge | 5 | (5 | ) | — | — | ||||||||
Uzbek Som | (4 | ) | 4 | (27 | ) | 30 | |||||||
Georgian Lari | (30 | ) | 33 | — | — | ||||||||
Armenian dram | 18 | (20 | ) | — | — | ||||||||
Euro | (9 | ) | 10 | — | — | ||||||||
Algerian Dinar | (3 | ) | 4 | — | — | ||||||||
Other currencies | (5 | ) | 5 | — | — | ||||||||
CREDIT RISK
Credit risk is the risk that a counterparty will not meet its obligations under a financial instrument or customer contract, leading to a financial loss. The Company is exposed to credit risk from its operating activities (primarily from trade receivables), and from its treasury activities, including deposits with banks and financial institutions, derivative financial instruments and other financial instruments. See Note 18 for further information on restrictions on cash balances.
Trade receivables consist of amounts due from customers for airtime usage and amounts due from dealers and customers for equipment sales. In certain circumstances, VEON requires deposits as collateral for airtime usage. In addition, VEON has introduced a prepaid service and equipment sales are typically paid in advance of delivery, except for equipment sold to dealers on credit terms. VEON's credit risk arising from the services the Company provides to customers is mitigated to a large extent due to the majority of its active customers being subscribed to a prepaid service as of December 31, 2017 and 2016, and accordingly not giving rise to credit risk.
Notes to the consolidated financial statements (Continued)
(in millions of U.S. dollars unless otherwise stated)
4FINANCIAL RISK MANAGEMENT (Continued)
VEON's credit risk arising from its trade receivables from dealers is mitigated due to the risk being spread across a large number of dealers. Management periodically reviews the history of payments and credit worthiness of the dealers. The Company also has receivables from other local and international operators from interconnect and roaming services provided to their customers, as well as receivables from customers using fixed-line services, such as business services, wholesale services and services to residents. Receivables from other operators for roaming services are settled through clearing houses, which helps to mitigate credit risk in this regard.
VEON holds available cash in bank accounts, as well as other financial assets with financial institutions in countries where it operates. To manage credit risk associated with such asset holdings, VEON allocates its available cash to a variety of local banks and local affiliates of international banks within the limits set forth by its treasury policy. Management periodically reviews the creditworthiness of the banks with which it holds assets. In respect of financial instruments used by the Company's treasury function, the aggregate credit risk the Group may have with one counterparty is limited by reference to, amongst others, the long-term credit ratings assigned for that counterparty by Moody's, Fitch Ratings and Standard & Poor's and CDS spreads of that counterparty. Counterparty credit limits are reviewed and approved by the Company's CFO. The limits are set to minimize the concentration of risks and therefore mitigate financial loss through potential counterparty's failure.
Value Added Tax ("VAT") is recoverable from tax authorities by offsetting it against VAT payable to the tax authorities on VEON's revenue or direct cash receipts from the tax authorities. Management periodically reviews the recoverability of the balance of input value added tax and believes it is fully recoverable.
VEON issues advances to a variety of its vendors of property and equipment for its network development. The contractual arrangements with the most significant vendors provide for equipment financing in respect of certain deliveries of equipment. VEON periodically reviews the financial position of vendors and their compliance with the contract terms.
The Company's maximum exposure to credit risk for the components of the statement of financial position at December 31, 2017 and 2016 is the carrying amount as illustrated in Note 17, Note 18 and Note 20.
LIQUIDITY RISK
The Company monitors its risk to a shortage of funds using a recurring liquidity planning tool. The Company's objective is to maintain a balance between continuity of funding and flexibility through the use of bank overdrafts, bank loans, debentures, preference shares, financial and operating leases. The Company's policy is to create a balanced debt maturity profile. As of December 31, 2017, 10% of the Company's debt (2016: 27%) will mature in less than one year based on the carrying value of bank loans, equipment financing and loans from others reflected in the financial statements. The Company assessed the concentration of risk with respect to refinancing its debt and concluded it to be low based on liquidity in the markets the Company has access to, and recent history of refinancing. The Company believes that access to sources of funding is sufficiently available and the Company's policy is to diversify the funding sources where possible.
Notes to the consolidated financial statements (Continued)
(in millions of U.S. dollars unless otherwise stated)
4FINANCIAL RISK MANAGEMENT (Continued)
Available facilities
The Company had the following available facilities as of balance sheet date for the years indicated below:
| | Amounts in millions of transactional currency | US$ equivalent amounts | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Final availability period | Facility amount | Utilized | Available | Facility amount | Utilized | Available | ||||||||||||
2017 | |||||||||||||||||||
VEON Holdings B.V.—Revolving Credit Facility* | Feb 2020 | US$1,688 | US$250 | US$1,438 | 1,688 | 250 | 1,438 | ||||||||||||
VEON Holdings B.V.—Term Loan Facility | May 2018 | RUB 45,000 million | RUB 30,000 million | RUB 15,000 million | 781 | 520 | 261 | ||||||||||||
Banglalink Digital Communications Ltd.—Syndicated Term Loan Facility | Sep 2018 | BDT 29,300 million | — | BDT 29,300 million | 353 | — | 353 | ||||||||||||
Pakistan Mobile Communications Limited—Syndicated Term Loan Facility | Jun 2018 | PKR 26,750 million | PKR 17,000 million | PKR 9,750 million | 242 | 154 | 88 | ||||||||||||
Pakistan Mobile Communications Limited—Term Loan Facility | Jun 2018 | PKR 10,000 million | PKR 5,000 million | PKR 5,000 million | 90 | 45 | 45 | ||||||||||||
2016 |
|
|
|
| |||||||||||||||
VEON Amsterdam B.V.—Revolving Credit Facility | March 2017 | US$1,800 | — | US$1,800 | 1,800 | — | 1,800 | ||||||||||||
VEON Holdings B.V.—Vendor Financing Facility China Development Bank | September 2018 | RMB 700 million | RMB 149 million | RMB 551 million | 101 | 21 | 80 | ||||||||||||
PJSC VimpelCom—Revolving Credit Facility Sberbank | May 2017 | RUB 15,000 million | — | RUB 15,000 million | 247 | — | 247 | ||||||||||||
Optimum Telecom Algérie SpA—Term Loan Facility | December 2017 | DZD 32,000 million | — | DZD 32,000 million | 290 | — | 290 | ||||||||||||
Multi-currency term and revolving facilities of up to US$2,250
VEON Holdings entered into a new multi-currency term and revolving facilities agreement (the"TL/RCF") of up to US$2,250 on February 16, 2017. The TL/RCF replaced the US$1,800 revolving credit facility signed in 2014. The term facility of US$562.5 has a five-year tenor and the revolving credit facility of US$1,585.5 had an initial tenor of three years, with VEON Holdings having the right to request two one-year extensions to the tenor of the revolving credit facility, subject to lender consent. On January 25, 2018 lenders for an aggregate commitment of US$1,586 confirmed one-year extension to February 2021.
Under the TL/RCF, the Net Debt to Adjusted EBITDA covenant ratio will be calculated on the basis of the consolidated financial statements of VEON Ltd. and "pro-forma" adjusted for acquisitions and divestments of any business bought or sold during the relevant period.
Notes to the consolidated financial statements (Continued)
(in millions of U.S. dollars unless otherwise stated)
4FINANCIAL RISK MANAGEMENT (Continued)
During Q2 2017, VEON Holdings drew down EUR 527 million under the Term loan.
Banglalink BDT 29.3 billion facilities agreement
On December 26, 2017 Banglalink has entered into a new floating rate term facilities agreement of BDT 29.3 billion (US$353), divided in two tranches. The first tranche of BDT 10.7 billion (US$129) has a three-year tenor and the second tranche BDT 18.6 billion (US$224) has a five-year tenor. The term facilities agreement includes an option to increase the amount of the facilities up to a total amount of BDT 40 billion.
Maturity profile
The table below summarizes the maturity profile of the Group's financial liabilities based on contractual undiscounted payments. Payments related to variable interest rate financial liabilities and derivatives are included based on the interest rates and foreign currency exchange rates applicable as of December 31, 2017 and December 31, 2016, respectively. The total amounts in the table differ from the carrying amounts as stated in Note 17 as the below table includes both undiscounted notional amounts and interest while the carrying amounts are measured using the effective interest method.
| | Less than 1 year | 1 - 3 years | 3 - 5 years | More than 5 years | Total | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
At December 31, 2017 | ||||||||||||||||
Bank loans and bonds | 1,862 | 4,141 | 4,958 | 2,774 | 13,735 | |||||||||||
Derivative financial liabilities | ||||||||||||||||
Gross cash inflows | (37 | ) | (49 | ) | (12 | ) | — | (98 | ) | |||||||
Gross cash outflows | 29 | 27 | 51 | — | 107 | |||||||||||
Trade and other payables | 1,523 | — | — | — | 1,523 | |||||||||||
Other financial liabilities | — | 62 | — | — | 62 | |||||||||||
Warid non-controlling interest put option liability | — | 310 | — | — | 310 | |||||||||||
| | | | | | | | | | | | | | | | | |
Total financial liabilities | 3,377 | 4,491 | 4,997 | 2,774 | 15,639 | |||||||||||
Related derivatives financial assets | ||||||||||||||||
Gross cash inflows | (275 | ) | — | — | — | (275 | ) | |||||||||
Gross cash outflows | 270 | — | — | — | 270 | |||||||||||
| | | | | | | | | | | | | | | | | |
Related derivative financial assets | (5 | ) | — | — | — | (5 | ) | |||||||||
| | | | | | | | | | | | | | | | | |
Total financial liabilities, net of derivative assets | 3,372 | 4,491 | 4,997 | 2,774 | 15,634 | |||||||||||
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Notes to the consolidated financial statements (Continued)
(in millions of U.S. dollars unless otherwise stated)
4FINANCIAL RISK MANAGEMENT (Continued)
| | Less than 1 year | 1 - 3 years | 3 - 5 years | More than 5 years | Total | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
At December 31, 2016 | ||||||||||||||||
Bank loans and bonds | 3,529 | 3,897 | 2,018 | 3,310 | 12,754 | |||||||||||
Derivative financial liabilities | ||||||||||||||||
Gross cash inflows | (451 | ) | — | — | — | (451 | ) | |||||||||
Gross cash outflows | 495 | 2 | — | — | 497 | |||||||||||
Trade and other payables and dividend payables | 1,744 | — | — | — | 1,744 | |||||||||||
Other financial liabilities | 29 | 44 | — | — | 73 | |||||||||||
Warid non-controlling interest put option liability | — | — | 290 | — | 290 | |||||||||||
| | | | | | | | | | | | | | | | | |
Total financial liabilities | 5,346 | 3,943 | 2,308 | 3,310 | 14,907 | |||||||||||
Related derivatives financial assets | ||||||||||||||||
Gross cash inflows | (29 | ) | — | — | — | (29 | ) | |||||||||
Gross cash outflows | 27 | — | — | — | 27 | |||||||||||
| | | | | | | | | | | | | | | | | |
Related derivative financial assets | (2 | ) | — | — | — | (2 | ) | |||||||||
| | | | | | | | | | | | | | | | | |
Total financial liabilities, net of derivative assets | 5,344 | 3,943 | 2,308 | 3,310 | 14,905 | |||||||||||
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
CAPITAL MANAGEMENT
The primary objective of the Company's capital management is to ensure that it maintains healthy capital ratios in order to secure access to debt and capital markets at all times and maximize shareholder value. The Company manages its capital structure and makes adjustments to it in light of changes in economic conditions could significantly affectand significant changes were introduced in 2017 in order to move towards a holding company funding structure. To maintain or adjust the capital structure, the Company may adjust the dividend payment to shareholders, return capital to shareholders or issue new shares. Current credit ratings of the Company support its capital structure objectives.
In February 2017, our Supervisory Board approved a dividend policy pursuant to which from 2017 the Company aims to pay a sustainable and progressive dividend based on the evolution of the Company's equity free cash flow, which is defined as net cash flow from operating activities less net cash used in investing activities, as reported in the consolidated financial statements. No other changes were made in the objectives, policies or processes for managing capital during the year ended on December 31, 2017.
The Net Debt to Adjusted EBITDA ratio is an important measure used by the Company to assess its capital structure. Net Debt represents the amount of interest-bearing debt measured at amortized cost adjusted for derivatives designated in hedging relationship less cash and cash equivalents and bank deposits. Adjusted EBITDA is defined as last twelve months earnings before interest, tax, depreciation, amortization and impairment, loss on disposals of non-current assets, other non-operating losses and share of profit / (loss) of joint ventures. For reconciliation of Adjusted EBITDA to Profit / (loss) before tax, refer to Note 4 below includes further discussion7.
Table of certain critical accounting estimates.Contents
Basis of consolidation
The
Notes to the consolidated financial statements comprise(Continued)
(in millions of U.S. dollars unless otherwise stated)
4FINANCIAL RISK MANAGEMENT (Continued)
Further, this ratio is included as a financial covenant in the credit facilities of the Company. For most of our credit facilities the Net Debt to Adjusted EBITDA ratio is calculated at consolidated level of either VEON Ltd. or VEON Holdings B.V. and is "pro-forma" adjusted for acquisitions and divestments of any business bought or sold during the relevant period. Under these credit facilities, the Company is required to maintain the Net Debt to Adjusted EBITDA ratio below 3.5x. As of December 31, 2017, the Company did not breach any covenants.
Notes to the consolidated financial statements (Continued)
(in millions of U.S. dollars unless otherwise stated)
5 SIGNIFICANT TRANSACTIONS
TRANSACTIONS IN 2017
Towers in Pakistan classified as held-for-sale
On August 30, 2017, Pakistan Mobile Communications Limited ("PMCL"), a subsidiary of the Company, signed an agreement for the sale of its subsidiary, Deodar (Private) Limited ("Deodar") for approximately US$940, subject to customary closing adjustments, to Tanzanite Tower (Private) Limited ("Tanzanite"), a tower operating company owned by edotco Group Sdn. Bhd. ("edotco"), and Dawood Hercules Corporation ("Dawood").
Deodar holds the tower business of PMCL, a portfolio of approximately 13,000 towers, and provides network tower services in Pakistan. As a result of this anticipated transaction, on June 30, 2017, the Company classified Deodar as a disposal group held-for-sale. The completion of the transaction is subject to the satisfaction or waiver of certain conditions including receipt of customary regulatory approvals.
Following the classification as a disposal group held-for sale, the Company no longer accounts for depreciation and amortization expenses of Deodar assets.
The assets and liabilities of Deodar classified as held for sale as of balance sheet date are presented below:
| 2017 | ||||
|---|---|---|---|---|
Property and equipment | 177 | |||
Goodwill | 224 | |||
Deferred tax assets | 64 | |||
Other non-current assets | 2 | |||
Other current assets | 44 | |||
| | | | | |
Total assets held for sale | 511 | |||
| | | | | |
| | | | | |
| | | | | |
Non-current liabilities | (7 | ) | ||
Current liabilities | (28 | ) | ||
| | | | | |
Total liabilities held for sale | (35 | ) | ||
| | | | | |
| | | | | |
| | | | | |
Included in the equity of the Group is cumulative other comprehensive income of US$(28) related to Deodar, which is classified as held for sale.
Global Telecom Holding S.A.E share buyback
Global Telecom Holdings S.A.E ("GTH"), a subsidiary of the Company, bought back 524,569,062 ordinary shares from its shareholders for EGP 4.1 billion (US$259), which transaction settled on February 21, 2017. The Company did not take part in the share buyback. As a result of the share buyback, the Company's interest in GTH increased by 5.77% from 51.92% to 57.69%, resulting in a US$12 loss recognized directly in equity. The cancellation of the 524,569,062 ordinary shares was approved at an extraordinary general meeting of GTH's shareholders on March 19, 2017 and took effect on April 16, 2017 after ratification by the Egyptian Financial Supervisory Authority of the minutes of the March 19, 2017 extraordinary general meeting.
Notes to the consolidated financial statements (Continued)
(in millions of U.S. dollars unless otherwise stated)
5 SIGNIFICANT TRANSACTIONS (Continued)
Global Telecom Holding S.A.E mandatory tender offer
On November 8, 2017, VEON submitted an application to the Egyptian Financial Supervisory Authority ("EFSA") to approve a mandatory tender offer ("MTO") by VEON Holdings B.V. for any and all of the outstanding shares of GTH which are not owned by VEON (up to 1,997,639,608 shares, representing 42.31% of GTH's total shares). The MTO will be funded by cash on hand and/or the utilization of undrawn credit facilities. The proposed offer price under the MTO is EGP 7.90 per share. Any increase of the Company's interest in GTH will be accounted for directly in equity upon closing of the transaction. The MTO is subject to EFSA approval.
As of December 31, 2017, cash balances of US$987 are pledged as collateral for the Mandatory Tender Offer for the purchase of shares of GTH, refer to Note 17.
Exit from Euroset Holding N.V. Joint Venture
On July 7, 2017, PJSC VimpelCom, a subsidiary of the Company, entered into a Framework Agreement with PJSC MegaFon ("MegaFon") to unwind their retail joint venture, Euroset Holding N.V. ("Euroset"). Under the agreement, MegaFon acquired PJSC VimpelCom's 50% interest in Euroset and PJSC VimpelCom paid RUB 1.25 billion (approximately US$20 and subject to possible completion adjustments) and acquired rights to 50% of Euroset's approximately 4,000 retail stores in Russia. The transaction was successfully completed subsequent to year end, on February 22, 2018.
As a result of this anticipated transaction, the investment in the Euroset joint venture was classified as an asset held-for-sale on June 30, 2017. However, as a result of the impairment described in Note 14, the investment in Euroset had a carrying value of nil prior to reclassification as an asset held-for-sale.
Laos operations classified as held for sale
On October 27, 2017, VimpelCom Holding Laos B.V. ("VimpelCom Laos"), a subsidiary of the Company, entered into a Sale and Purchase Agreement for the sale of its operations in Laos to the Lao People's Democratic Republic ("Government of Laos"). Under the agreement, VimpelCom Laos will transfer its 78% interest in VimpelCom Lao Co. Limited ("VIP Lao") to the Government of Laos, the minority shareholder, in exchange for purchase consideration of US$22. Although purchase consideration has been received (in two separate payments, on December 8, 2017 and February 22, 2018), the transaction remains subject to satisfaction of other closing conditions.
As a result of this anticipated transaction, we classified our Laos business as an asset held for sale on June 30, 2017. In connection with this classification, the Company no longer accounts for depreciation and amortization expenses of VIP Lao assets.
Notes to the consolidated financial statements (Continued)
(in millions of U.S. dollars unless otherwise stated)
5 SIGNIFICANT TRANSACTIONS (Continued)
The assets and liabilities of VIP Lao classified as held for sale as of balance sheet date are presented below:
| 2017 | ||||
|---|---|---|---|---|
Property and equipment | 15 | |||
Intangible assets | 2 | |||
Current assets | 5 | |||
| | | | | |
Total assets held for sale | 22 | |||
| | | | | |
| | | | | |
| | | | | |
Non-current liabilities | (5 | ) | ||
Current liabilities | (10 | ) | ||
| | | | | |
Total liabilities held for sale | (15 | ) | ||
| | | | | |
| | | | | |
| | | | | |
Included in the equity of the Group is cumulative other comprehensive income of nil and non-controlling interests of US$(5) related to Laos, which is classified as held for sale.
TRANSACTIONS IN 2016
Joint venture in Italy
The Company signed an agreement with Hutchison Europe Telecommunications S.à r.l., a wholly-owned subsidiary of CK Hutchison Holdings Ltd ("HET"), which indirectly owns 100% of Italian mobile operator 3 Italia, on August 6, 2015 to combine its operations in Italy with 3 Italia in a 50/50 joint venture. As a result of the expected loss of control from the agreement, the Company classified its operations in Italy as an asset held for sale and discontinued operation in the consolidated financial statements.
The transaction was successfully completed on November 5, 2016 following satisfaction of the necessary conditions precedent, which included receipt of approvals from the European Commission and the Italian Ministry of Economic Development. In connection with these approvals, the Italy Joint Venture and its subsidiaries. Subsidiaries are all entities (including structured entities) overshareholders signed agreements with Iliad SA ("Iliad") for the sale of spectrum and sites and an undertaking to provide other services including national roaming, to enable the French telecommunication operator to enter the Italian market.
Under the transaction, the Company contributed its entire shareholding in the operations in Italy, in exchange for a 50% interest in the newly-formed Italy Joint Venture and subject to customary working capital and net cash adjustments. As a result, the Company has lost control of its operation in Italy.
Notes to the consolidated financial statements (Continued)
(in millions of U.S. dollars unless otherwise stated)
5 SIGNIFICANT TRANSACTIONS (Continued)
On completion of the transaction, the assets and liabilities of Italy were deconsolidated and an investment in joint venture, in which the Company has control.joint control, was recorded at fair value of EUR 1,897 million (US$2,113). The initial investment in the joint venture is based on a Level 3 fair value derived from a discounted cash flow model, incorporating the expected realization of synergies adjusted for market expectations and the impact of agreements entered into with Iliad, as described above. The key assumption used in the discounted cash flow model are as follows:
Key assumptions | November 5, 2016 | |||
|---|---|---|---|---|
Discount rate (functional currency) | 6.9 | % | ||
Average annual revenue growth rate during forecast period (functional currency) | (2.3 | )% | ||
Terminal growth rate | 0.5 | % | ||
Average operating (EBITDA) margin during forecast period | 35.7 | % | ||
Average capital expenditure as a percentage of revenue | 21.0 | % | ||
The investment in the Italy Joint Venture is equity accounted from November 5, 2016, refer to Note 14 for further details regarding investments in joint ventures and associates.
The effect of the disposal of Italy for the current year is detailed below:
| | Note | 2016 | ||||
|---|---|---|---|---|---|---|
Fair value of investment in joint venture | 14 | 2,113 | ||||
Cash consideration receivable* | 28 | |||||
| | | | | | | |
Total consideration on disposal | 2,141 | |||||
De-recognition of assets classified as held for sale | (15,974 | ) | ||||
De-recognition of liabilities classified as held for sale | 15,414 | |||||
Release of cumulative other comprehensive income related to Italy | 207 | |||||
| | | | | | | |
Gain on disposal of discontinued operations, net of tax | 1,788 | |||||
| | | | | | | |
| | | | | | | |
| | | | | | | |
From August 2015, Italy is no longer a reportable segment subsequent to its classification as a discontinued operation. The comparative information has been adjusted accordingly (Note 7). Transactions between the Group and its operation in Italy are disclosed as Related Party transactions and balances (Note 25).
Notes to the consolidated financial statements (Continued)
(in millions of U.S. dollars unless otherwise stated)
5 SIGNIFICANT TRANSACTIONS (Continued)
Financial information related to the discontinued operation is set out below. Financial year 2016 includes 10 months of results for the Italy operations, compared with 12 months for financial year 2015.
| | 2016 | 2015 | |||||
|---|---|---|---|---|---|---|---|
Total operating revenues | 4,135 | 4,913 | |||||
Total operating expenses | (2,556 | ) | (3,765 | ) | |||
| | | | | | | | |
Operating profit | 1,579 | 1,148 | |||||
| | | | | | | | |
Other (expenses) / income | (217 | ) | (722 | ) | |||
| | | | | | | | |
Profit / (loss) before tax | 1,362 | 426 | |||||
| | | | | | | | |
Income tax (expense) / benefit | (442 | ) | (164 | ) | |||
| | | | | | | | |
Profit / (loss) after tax for the period from discontinued operations | 920 | 262 | |||||
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Acquisition in Pakistan
On November 26, 2015, International Wireless Communications Pakistan Limited and Pakistan Mobile Communications Ltd ("PMCL"), each indirect subsidiaries of the Company, signed an entity when itagreement with Warid Telecom Pakistan LLC and Bank Alfalah Limited, to combine their operations in Pakistan. On July 1, 2016, the transaction was closed and PMCL acquired 100% of the voting shares in Warid Telecom (Pvt) Limited ("Warid") for a consideration of 15% of the shares in PMCL. As a result, the Company gained control over Warid.
Notes to the consolidated financial statements (Continued)
(in millions of U.S. dollars unless otherwise stated)
5 SIGNIFICANT TRANSACTIONS (Continued)
VEON elected to measure the non-controlling interest in the acquiree at fair value. The fair values of the identifiable assets and liabilities of Warid at the date of acquisition were:
| 2016 | ||||
|---|---|---|---|---|
Non-current assets | ||||
Property and equipment | 199 | |||
Intangible assets | 201 | |||
Deferred tax assets | 308 | |||
Other financial assets | 2 | |||
Current assets | ||||
Inventories | 1 | |||
Trade and other receivables | 26 | |||
Other non-financial assets | 23 | |||
Current income tax assets | 17 | |||
Cash and cash equivalents | 7 | |||
Non-current liabilities | ||||
Financial liabilities | (402 | ) | ||
Provisions | (6 | ) | ||
Other non-financial liabilities | (15 | ) | ||
Current liabilities | ||||
Trade and other payables | (113 | ) | ||
Other non-financial liabilities | (83 | ) | ||
Other financial liabilities | (45 | ) | ||
| | | | | |
Total identifiable net assets at fair value | 120 | |||
Purchase consideration | 321 | |||
| | | | | |
Goodwill resulting from the acquisition | 201 | |||
| | | | | |
Purchase consideration | ||||
Share issued by PMCL | 274 | |||
Contingent consideration liability | 47 | |||
| | | | | |
Total purchase consideration | 321 | |||
| | | | | |
Analysis of cash flows on acquisition | ||||
Net cash acquired with the subsidiary (included in cash flows from investing activities) | 7 | |||
| | | | | |
Net cash flow on acquisition | 7 | |||
| | | | | |
There have been no period adjustments to the provisional fair values of the assets acquired, liabilities assumed and consideration to date.
The goodwill of US$201 comprises the value of expected synergies arising from the acquisition. The goodwill recognized is exposeddeductible for income tax purposes.
Notes to orthe consolidated financial statements (Continued)
(in millions of U.S. dollars unless otherwise stated)
5 SIGNIFICANT TRANSACTIONS (Continued)
The fair value of the trade receivables amounts to US$26. The gross amount of trade receivables is US$33, of which US$7 is expected not to be collected.
From the date of acquisition, Warid contributed US$161 of revenue and a loss of US$6 to Loss before tax from continuing operations of the Group. If the combination had taken place at the beginning of the year, the contribution to revenue from continuing operations would have been US$313, and the contribution to the results before tax from continuing operations for the Group would have been a loss of US$37.
PMCL issued 679,604,049 ordinary shares as consideration for the 100% interest in Warid. The fair value of the shares is based on a Level 3 fair value derived from a discounted cash flow model, incorporating the expected realization of synergies adjusted for market expectations. The discount rate applied was 14.1% with a 4% terminal growth rate.
As part of the share purchase agreement, an earn-out payment has rightsbeen agreed in the event that a tower transaction is affected by PMCL within four years from the acquisition date. The earn-out also applies if another telecommunications operator in Pakistan effects a tower transaction, provided the transaction meets certain parameters, in the same timeframe. The contingent consideration will be settled with a share transfer of PMCL shares. At the acquisition date, the fair value of the contingent consideration was estimated to variable returns from its involvement withbe US$47 using a discounted cash flow technique. There were no changes to the entity andfair value of the contingent consideration since the acquisition date, other than the unwinding of discount.
The fair value of the non-controlling interest in PMCL related to the Warid acquisition has been estimated by applying a discounted cash flow technique.
As part of the acquisition agreement, the Company also agreed put-call options over the entire non-controlling interest, whereby the Company has the ability to affect those returns through its powercall, and the non-controlling interest has the ability to put the entire non-controlling interest of PMCL. The options are exercisable four years from the acquisition date at the fair market value of the PMCL shares.
The put-call options over the entity. Subsidiariesnon-controlling interest of PMCL are fullyaccounted for as a put-option redemption liability which is classified as a financial liability in the Company's consolidated fromfinancial statements (Note 17). The put-option redemption liability is measured at the date on which control is transferreddiscounted redemption amount with a value of US$274 at the acquisition date. Interest over the put-option redemption liability will accrue until the options have been exercised or are expired. As a result, no non-controlling interest will be recognized over the non-controlling interest in PMCL in the Company's consolidated financial statements.
Interest expense and foreign exchange loss over the option's redemption liability amounted to US$21 and US$1, respectively, for the period ended December 31, 2016. In addition, PMCL declared dividends of US$7 attributable to the Company. They are deconsolidated fromnon-controlling interest of PMCL (Note 24), which has reduced the put-option redemption liability. As of December 31, 2016, the resulting carrying value of put-option redemption liability was US$290 (Note 17).
Following the acquisition of Warid, the legal merger of Mobilink and Warid occurred by way of a scheme of arrangement under Pakistani law as approved by a merger order of the Islamabad High Court dated December 15, 2016, whereby Warid merged into PMCL and (the former) ceased to exist. The court order provides for a merger effective date of July 1, 2016.
Notes to the consolidated financial statements (Continued)
(in millions of U.S. dollars unless otherwise stated)
5 SIGNIFICANT TRANSACTIONS (Continued)
Acquisition of additional interest in 2Day Telecom LLP and KazEuroMobile LLP
On September 30, 2016 the Company acquired an additional interest of 16% in 2Day Telecom LLP, increasing its interest to 75%, for cash consideration of US$7. On the same date, the Company acquired an additional 24% interest in KazEuroMobile LLP for KZT 1, increasing its interest to 75%. The purpose of these transactions is to streamline the ownership structure of the Group. The transactions were accounted for through equity by increasing other capital reserves.
The transactions resulted in a decrease in equity attributable to the shareholders of the parent of US$9 and US$1 respectively.
Sale of operations in Zimbabwe
On November 18, 2015, the Company, together with its subsidiary GTH, entered into an agreement with ZARNet (Private) Limited to sell its stake in Telecel International Limited for US$40. Telecel International Limited owns 60% of Telecel Zimbabwe (Pvt) Ltd. ZARNet is wholly owned by the Government of the Republic of Zimbabwe through the Ministry of Information & Communication Technology, Postal and Courier Services.
Due to constraints in ZARNet's ability to pay the full US$40 outside of Zimbabwe, it was agreed that control ceases.ZARNet will satisfy the purchase price consideration with US$21 cash (of which US$10 was received in 2015 and US$11 was received in 2016), and a US$19 Vendor Note payable in three years to Global Telecom Netherlands B.V., a subsidiary of GTH. Due to the currency restrictions in Zimbabwe, management have not included the Vendor Note in determining the result of the sale, as it is currently uncertain whether it will be recoverable.
Inter-company transactions, balances and unrealised gains The transaction closed on transactions between Group companies are eliminated. Unrealised losses are also eliminated. When necessary, amounts reported by subsidiaries have been adjusted to conformNovember 30, 2016, resulting in a gain of US$21.
ACCOUNTING POLICIES
Transactions with the group’s accounting policies.non-controlling interests that do not result in loss of control
Transactions with non-controlling interests that do not result in loss of control are accounted for as equity transactions—that is, as transactions with the owners in their capacity as owners. The difference between fair value of any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary is recorded in equity. Gains or losses on disposals to non-controlling interests are also recorded in equity.
3.Significant accounting policiesNon-current assets (or disposal groups) held for sale and discontinued operations
New accounting pronouncements adopted by Non-current assets (or disposal groups) are classified as held for sale if their carrying amount will be recovered principally through a sale transaction or loss of control rather than through continuing use, and a sale is considered highly probable. They are measured at the Company in 2014
VimpelCom adopts new IFRSs by following the transitional requirementslower of each new standard.
The following new IFRS has been adopted by VimpelCom as of 1 January 2014 but had no material impact on the Group’s financial position or financial performance :their carrying amount and fair value less costs to sell.
|
VimpelCom enters into interconnect contracts with various counterpartiesNon-current assets (including those that are settled on a net basis in the normal course of business. However, following Russian legislation net settlement is not possible in the event of bankruptcypart of a counterparty. Consequently,disposal group) are not depreciated or amortized while they are classified as held for sale. Assets and liabilities of a disposal group classified as held for sale are presented separately from the offsetting of the respective financialother assets and liabilities relevant for the Russian jurisdiction is not allowed in the light of the amendments to IAS 32. As a result of the retrospective application of the amendments to IAS 32, the outstanding receivables and payables balances under the interconnect contracts included in the 31 December 2013 statement of financial position presented as comparative information in these consolidated financialposition.
statements have been presented on a gross basis leading to the increaseTable of the trade and other receivables and trade and other payables by USD 127. No additional statement of financial position as of 1 January 2013 is presented because the application of the amendments to IAS 32 did not result in a change of equity in any of the prior periods.
Annual Improvements to IFRSs 2012-2014 Cycle (early adoption). Annual improvements set out amendments to IFRS and the related Bases for Conclusions and guidance made during the IASB’s Annual Improvements process. The amendments are mandatory for annual periods beginning on or after 1 January 2016. Earlier application is permitted. The main change stemming from this Improvements Cycle early adopted by the Group pertains to disclosures with respect to Offsetting Arrangements as defined in IFRS 7 that are no longer required for the interim periods. There is no impact on the financial position or performance of the Group. Also, no disclosures in the annual IFRS consolidated financial statements are affected by this early adoption.
|
|
Other standards, amendments and interpretations that are effective for the financial year beginning on 1 January 2014 are not relevant to the Group.
New accounting pronouncements not yet adopted by the Company
The following are standards that are issued, but not yet effective, up
Notes to the date of the issuance of the Group’s financial statements, and which have not been early adopted by the Company:
|
|
Future changes in IFRS
IFRSs are undergoing a process of revision, with a view to increasing harmonization of accounting rules internationally. Proposals to issue new or revised IFRSs, as yet unpublished, on financial instruments, revenue recognition, leases and other topics may change standards and may therefore affect the accounting policies applied by VimpelCom in future periods.
Business combinations
Business combinations are accounted using the acquisition method of accounting. Accordingly, the cost of the acquisition, or the total consideration transferred, is measured at the aggregate of the fair values at the date of exchange of assets given, liabilities incurred or assumed, contingent consideration given and equity instruments issued by the Group in exchange for control of the acquiree and the amount of any non-controlling interest in the acquiree. The aggregate consideration transferred is allocated to the underlying assets acquired, including any intangible assets identified, and liabilities assumed based on their respective estimated fair values. Determining the fair value of assets acquired and liabilities assumed requires the use of significant estimates and assumptions, including assumptions with respect to future cash inflows and outflows, discount rates, licenses and other assets’ lives and market multiples, among other items. The results of operations of acquired businesses are included in the consolidated financial statements (Continued)
(in millions of U.S. dollars unless otherwise stated)
5 SIGNIFICANT TRANSACTIONS (Continued)
A discontinued operation is a component that is classified as held for sale and that represents a separate major line of business or geographical area of operations. Discontinued operations are excluded from the results of continuing operations and are presented as a single amount in the income statement. All other notes to the financial statements include amounts for continuing operations, unless otherwise mentioned.
Notes to the consolidated financial statements (Continued)
(in millions of U.S. dollars unless otherwise stated)
6 EARNINGS PER SHARE
Earnings per common share for all periods presented has been determined by dividing profit available to common shareholders by the weighted average number of common shares outstanding during the period.
The following table sets forth the computation of basic and diluted earnings per share ("EPS") for continuing operations, for the years ended December 31:
Continuing operations (In millions of U.S. dollars, except share and per share amounts) | 2017 | 2016 | 2015 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
Numerator: | ||||||||||
(Loss) / profit for the period attributable to the owners of the parent | (483 | ) | (380 | ) | (917 | ) | ||||
Denominator: | ||||||||||
Weighted average common shares outstanding for basic earnings per share (in millions) | 1,749 | 1,749 | 1,748 | |||||||
Effect of dilutive securities: Employee stock options (in millions) | — | — | 1 | |||||||
| | | | | | | | | | | |
Denominator for diluted earnings per share (in millions) | 1,749 | 1,749 | 1,749 | |||||||
| | | | | | | | | | | |
Basic (loss) / earnings per share | $ | (0.28 | ) | $ | (0.22 | ) | $ | (0.52 | ) | |
Diluted (loss) / earnings per share | $ | (0.28 | ) | $ | (0.22 | ) | $ | (0.52 | ) | |
| | | | | | | | | | | |
The following table sets forth the computation of basic and diluted earnings per share ("EPS") for discontinued operations, for the years ended December 31:
Discontinued operations (In millions of U.S. dollars, except share and per share amounts) | 2017 | 2016 | 2015 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
Numerator: | ||||||||||
(Loss) / profit for the period attributable to the owners of the parent | — | 2,708 | 262 | |||||||
Denominator: | ||||||||||
Weighted average common shares outstanding for basic earnings per share (in millions) | 1,749 | 1,749 | 1,748 | |||||||
Effect of dilutive securities: Employee stock options (in millions) | — | — | 1 | |||||||
| | | | | | | | | | | |
Denominator for diluted earnings per share (in millions) | 1,749 | 1,749 | 1,749 | |||||||
| | | | | | | | | | | |
Basic (loss) / earnings per share | $ | 0.00 | $ | 1.55 | $ | 0.15 | ||||
Diluted (loss) / earnings per share | $ | 0.00 | $ | 1.55 | $ | 0.15 | ||||
| | | | | | | | | | | |
Notes to the consolidated financial statements (Continued)
(in millions of U.S. dollars unless otherwise stated)
7SEGMENT INFORMATION
Management analyzes the Company's operating segments separately because of different economic environments and stages of development in different geographical areas, requiring different investment and marketing strategies. Management does not analyze assets or liabilities by reportable segments.
Management evaluates the performance of the Company's segments on a regular basis, primarily based on earnings before interest, tax, depreciation, amortization, impairment, gain / loss on disposals of non-current assets, other non-operating gains / losses and share of profit / loss of joint ventures and associates ("Adjusted EBITDA").
From the first quarter of 2017, management has included the Italy Joint Venture (see Note 14) as a separate reportable segment, due to its increased contribution to the Company's overall financial result and position.
Financial information by reportable segment for the years ended December 31, 2017, 2016 and 2015, is presented in the following tables, with the exception of the Italy Joint Venture, for which financial information is presented in Note 7. Inter-segment transactions between operating segments are on an arm's length basis in a manner similar to transactions with third parties. The segment data for acquired operations are reflected herein from the date of their respective acquisition.
For each business combination, VimpelCom elects whether
| | External customers | Inter-segment | Total revenue | |||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Revenue | 2017 | 2016 | 2015* | 2017 | 2016 | 2015 | 2017 | 2016 | 2015* | |||||||||||||||||||
Russia | 4,698 | 4,059 | 4,528 | 31 | 38 | 55 | 4,729 | 4,097 | 4,583 | |||||||||||||||||||
Pakistan | 1,525 | 1,293 | 1,014 | — | 2 | — | 1,525 | 1,295 | 1,014 | |||||||||||||||||||
Algeria | 914 | 1,040 | 1,273 | 1 | — | — | 915 | 1,040 | 1,273 | |||||||||||||||||||
Bangladesh | 574 | 621 | 604 | — | — | — | 574 | 621 | 604 | |||||||||||||||||||
Ukraine | 600 | 566 | 592 | 22 | 20 | 30 | 622 | 586 | 622 | |||||||||||||||||||
Uzbekistan | 513 | 662 | 710 | — | 1 | 1 | 513 | 663 | 711 | |||||||||||||||||||
HQ | — | 10 | — | — | — | — | — | 10 | — | |||||||||||||||||||
Other | 650 | 634 | 885 | (54 | ) | (61 | ) | (86 | ) | 596 | 573 | 799 | ||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total segments | 9,474 | 8,885 | 9,606 | — | — | — | 9,474 | 8,885 | 9,606 | |||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Adjusted EBITDA | Capital expenditures | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Other disclosures | 2017 | 2016 | 2015 | 2017 | 2016 | 2015 | |||||||||||||
Russia | 1,788 | 1,574 | 1,825 | 686 | 663 | 910 | |||||||||||||
Pakistan | 703 | 507 | 409 | 535 | 215 | 238 | |||||||||||||
Algeria | 426 | 547 | 684 | 129 | 201 | 189 | |||||||||||||
Bangladesh | 233 | 267 | 242 | 101 | 137 | 134 | |||||||||||||
Ukraine | 347 | 306 | 292 | 114 | 106 | 299 | |||||||||||||
Uzbekistan | 261 | 395 | 437 | 63 | 174 | 55 | |||||||||||||
HQ | (325 | ) | (421 | ) | (1,291 | ) | 28 | 27 | 16 | ||||||||||
Other | 154 | 57 | 277 | 135 | 218 | 193 | |||||||||||||
| | | | | | | | | | | | | | | | | | | | |
Total segments | 3,587 | 3,232 | 2,875 | 1,791 | 1,741 | 2,034 | |||||||||||||
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
If the business combination is achieved in stages, the value of the Group’s previously held equity interest in the acquiree is remeasured to fair value at the acquisition date and the difference is recognized through profit or loss. Furthermore, goodwill is only recognized at the time when the Group obtains control over the entity. Goodwill is initially measured at cost, being the excess of the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree and the fair value of the Group’s previously held equity interest in the acquiree, if any, over the fair value of the net amounts of identifiable assets acquired and liabilities assumed at the acquisition date. After initial recognition, goodwill is carried at cost less any accumulated impairment losses.
If the consideration is lower than the fair value of the net assets of the subsidiary acquired, the difference is recognized in profit or loss.
Goodwill is not amortized, but is tested for impairment on at least an annual basis or when impairment indicators are observed.
The Group may enter into business combinations which include options (call, put, or a combination of both) over the shares of the non-controlling interest. The Group considers such options to assess possible implications, if any, on control.
Once the Group has acquired control of a business, any further transaction that changes the Group’s ownership interest, but does not result in the Group losing control, is accounted for as a transaction between shareholders. Any difference between the amount received for the change in ownership interest and the corresponding share of the carrying amount of the net assets is charged or credited to shareholders’ equity.Contents
Investment in associates and joint ventures
An associate is an entity over which the Group has significant influence and that is neither a subsidiary nor an interest in a joint venture. Significant influence is the power to participate in the financial and operating policy decisions of the investee without control or joint control over those policies, and significant influence is assumed if the Group holds, directly or indirectly, 20% or more but less than 50% of the voting power of the investee, unless it can be clearly demonstrated that it does not have significant influence. The Group has interests in joint ventures as a type of joint arrangement whereby the parties that have joint control of the arrangement have rights
Notes to the net assets of the joint venture. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require unanimous consent of the parties sharing control.
Investments in associates and joint ventures are incorporated in the financial statements of the Group using the equity method of accounting. Under the equity method, the investment in associate or joint venture is initially recognized at cost and is adjusted in subsequent periods for the post acquisition changes in the Group’s share of the net assets of the associate or joint venture less any impairment in the value of the investment. Losses of an associate or joint venture in excess of the Groups’ interest in that associate are recognized only to the extent that the Group has incurred a legal or constructive obligation or made payments on behalf of the associate or joint venture.
Goodwill upon acquisition is recorded as part of the investment value.
Financial statements of associates or joint ventures are prepared for the same reporting period as the Group. Where necessary, adjustments are made to bring the accounting policies in line with those of the Group.
Upon loss of significant influence, the Group measures and recognises its remaining investment in an associate at its fair value unless the investment should be accounted for as a joint venture, i.e. equity method of accounting. Any difference between the carrying amount of the retained interest and the fair value thereof and any proceeds from a disposal is recognized in profit or loss.
Foreign currency translation
The consolidated financial statements (Continued)
(in millions of U.S. dollars unless otherwise stated)
7SEGMENT INFORMATION (Continued)
The following table provides the reconciliation of consolidated Adjusted EBITDA to consolidated income statement before tax for the years ended December 31:
| | 2017 | 2016 | 2015 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
Total Segments Adjusted EBITDA | 3,587 | 3,232 | 2,875 | |||||||
Depreciation | (1,454 | ) | (1,439 | ) | (1,550 | ) | ||||
Amortization | (537 | ) | (497 | ) | (517 | ) | ||||
Impairment losses | (66 | ) | (192 | ) | (245 | ) | ||||
Loss on disposals of non-current assets | (24 | ) | (20 | ) | (39 | ) | ||||
Finance costs | (935 | ) | (830 | ) | (829 | ) | ||||
Finance income | 95 | 69 | 52 | |||||||
Other non-operating losses, net | (97 | ) | (82 | ) | (42 | ) | ||||
Share of (loss) / profit of joint ventures and associates | (412 | ) | 48 | 14 | ||||||
Impairment of joint ventures and associates | (110 | ) | (99 | ) | — | |||||
Net foreign exchange (loss) / (gain) | (71 | ) | 157 | (314 | ) | |||||
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(Loss) / profit before tax | (24 | ) | 347 | (595 | ) | |||||
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Geographical information of non-current assets
The total of non-current assets (other than financial instruments, investments in subsidiaries and deferred tax assets, which are included in Other, along with consolidation eliminations), broken down by location of the Group are presented in US dollars. Each entityassets, is shown in the Group determines its own functional currency and amounts included infollowing tables:
| | 2017 | 2016* | |||||
|---|---|---|---|---|---|---|---|
Russia | 5,969 | 6,116 | |||||
Pakistan | 1,840 | 2,169 | |||||
Algeria | 2,151 | 2,324 | |||||
Bangladesh | 988 | 1,104 | |||||
Ukraine | 552 | 556 | |||||
Uzbekistan | 213 | 509 | |||||
HQ | 55 | 38 | |||||
Other | 3,345 | 3,827 | |||||
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Total segments | 15,113 | 16,643 | |||||
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Notes to the consolidated financial statements of each entity are measured using that functional currency.
In 2014 the functional currency of the Company’s operations in Uzbekistan was changed from the US dollar to the Uzbek som. The impact of change in functional currency was not material and accounted for in the Company’s 2014 financial statements.
Transactions denominated in foreign currencies are initially recognized at the functional currency rate prevailing on the date of the transaction. At period end, monetary assets and liabilities are translated to the functional currency using the closing rate with differences taken to profit and loss. Non-monetary items carried at historical cost that are denominated in foreign currencies are translated to the functional currency at the rate prevailing on the initial transaction dates. Non-monetary items carried at fair value are translated to the functional currency at the date when the fair value was determined.
Upon consolidation, the assets and liabilities of foreign operations are translated into US dollars at the rate of exchange prevailing at the reporting date and their income statements are translated at the weighted average exchange rate for the period. The exchange rate differences arising on consolidation translation are recognized in other comprehensive income. On disposal or loss of control of a foreign operation, the component of other comprehensive income relating to that particular foreign operation is recognized in profit and loss as part of the gain or loss on disposal.
Revenue recognition(Continued)
VimpelCom(in millions of U.S. dollars unless otherwise stated)
8REVENUE
VEON generates revenue from providing voice, data and other telecommunication services through a range of wireless, fixed and broadband Internet services, as well as selling equipment and accessories. Products and services may be sold separately or in bundled packages.
Revenue is recognized to The following table provides a breakdown of total operating revenue from external customers by mobile and fixed line for the extentyears ended December 31:
| | 2017 | 2016 | 2015 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
Mobile services | 8,688 | 8,089 | 8,797 | |||||||
Fixed line services | 786 | 796 | 809 | |||||||
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Total revenue | 9,474 | 8,885 | 9,606 | |||||||
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ACCOUNTING POLICIES
The following accounting policies have been applied for the Group has delivered goodsfor the current and comparative years. Refer to Note 3 for details regarding upcoming changes to revenue recognition and impact for the Group in future years.
Generally, revenue for products is recorded when the equipment is sold or rendered services under an agreement, the amountupon transfer of the associated risks and rewards, and revenue can be measured reliably and itfor services is probable thatrecorded when the economic benefits associated withservices are rendered. Revenue for bundled packages is recorded based on the transaction will flow to the Group. Revenue is measured at therelative fair value allocation of each component in the consideration received, subject to the considerations described below, and is stated net of value-added-tax and sales tax charged to customers.
WirelessMobile services
Service revenue includes revenue from airtime charges from contract and prepaid customers, monthly contract fees, interconnect revenue, roaming charges and charges for value added services (“VAS”("VAS"). VAS includes short messages, (“SMS”), multimedia messages, (“MMS”), caller number identification, call waiting, data transmission, mobile internet, downloadable content, mobile finance services, machine-to-machine and other services. The content revenue relating to VAS is presented net of related costs when the Company acts as an agent of the content providers and gross when the Company acts as the primary obligor of the transaction.
In 2016, the Group aligned its practices for content revenue across the group and re-presented the comparative period of 2015. The impact of this refinement in policy was not material for any periods presented, reducing service revenue and service costs by US$19. The net results, financial position and operating cash flows for these periods remained unaffected. The Company concluded that net presentation of the content revenue better reflected the actual nature and substance of the arrangements with content providers.
More specifically, the accounting for revenue sharing agreements and delivery of content depends on the analysis of the facts and circumstances surrounding these transactions, which will determine if the revenue is recognized gross or net.
VimpelCom charges customers a fixed monthly fee for
Notes to the useconsolidated financial statements (Continued)
(in millions of certain services. Such fees are recognized as revenue in the respective month when earned.U.S. dollars unless otherwise stated)
8REVENUE (Continued)
Service revenue is generally recognized when the services (including VAS and roaming revenue) are rendered. Sales of prepaid cards, used as a method of cash collection, is accounted for as customer advances for future services and the respective revenue is deferred until the customer uses the airtime. Prepaid cards might not have expiration dates but are subject to statutory expiration periods, and unused prepaid balances are added to service revenue based on an estimate of the expected balance that will expire unused. VEON charges customers a fixed monthly fee for the use of certain services. Such fees are recognized as revenue in the respective month when earned.
Some tariffs include bundle rollovers which effectively allow customers to rollover unused minutes from one month to the following month. For these tariffs, the portion of the access fee representing the fair value of the rolled over minutes is deferred until the service is delivered.
Sales of equipmentFixed-line services
Revenue from mobile equipment sales, such as handsets, are recognized in the period in which the equipment is sold to either a network customer or, if sold via an intermediary, when the significant risks and rewards associated with the device have passed to the intermediary and the intermediary has no general right of return or if a right of return exists, when such right has expired.
Interconnect and roaming revenue
Interconnect revenue (transit traffic) is generated when the Group receives traffic from mobile or fixed customers of other operators and that traffic terminates on VimpelCom’s network. Revenue is recognized on a gross or net basis depending on the amount of control over the traffic routing and hence exposure to risks and rewards.
The Group recognizes mobile usage and roaming service revenue based on minutes of traffic processed or contracted fee schedules when the services are rendered. Roaming revenue include both revenue from VimpelCom customers who roam outside of their home country network and revenue from other wireless carriers for roaming by their customers on VimpelCom’s network. Revenue due from foreign carriers for international roaming calls are recognized in the period in which the call occurs.
Fixed-line services
Revenue from traditional voice services and other service contracts is accounted for when the services are provided. Revenue from Internet services is measured primarily by monthly fees and internet-traffic volume which has not been included in monthly fees. Payments from customers for fixed-line equipment are not recognized as revenue until installation and testing of such equipment are completed and the equipment is accepted by the customer. Domestic Long Distance/International Long Distance (“DLD/ILD”) and zonal revenue are recorded gross or net depending on the contractual arrangements with the end-users.
Connection fees
VimpelCom VEON defers upfront telecommunications connection fees. The deferral of revenue is recognized over the estimated average customer life or the minimum contractual term, whichever is shorter. The Company also defers direct incremental costs related to connection fees for fixed line customers, in an amount not exceeding the revenue deferred.
Sales of equipment
Revenue from mobile equipment sales, such as handsets, are recognized in the period in which the equipment is sold to either a network customer or, if sold via an intermediary, when the significant risks and rewards associated with the device have passed to the intermediary and the intermediary has no general right of return or if a right of return exists, when such right has expired.
Multiple elements agreements (“MEA”("MEA")
MEA are agreements under which VimpelComVEON provides more than one service. Services/Services / products may be provided or ‘bundled’'bundled' under different agreements or in groups of agreements which are interrelated to such an extent that, in substance, they are elements of one agreement. In the event of an MEA, each element is accounted for separately if it can be distinguished from the other elements and has a fair value on a standalone basis. The customer’scustomer's perspective is important in determining whether the transaction contains multiple elements or is just a single element arrangement. The relative fair value method is applied in determining the value to be allocated to each element of an MEA. Fair value is determined as the selling price of the individual item. If an item has not been sold separately by the Group yet, but is sold by other suppliers, the fair value is the price at which the items are sold by the other suppliers.
Dealer commissions
Dealer commissions are expensed as customer acquisition costs (“service costs” in
Notes to the consolidated income statements) when the services are provided.
If dealer commissions meet the definition of an asset, they are capitalized as part of intangible assets, and are amortized over the expected customer life.
Classification of non-operating items
The Company distinguishes results of operations between operating and non-operating depending on the nature of the transaction. Results that directly relate to operations are classified as operating items regardless of whether they involve cash, occur irregularly, infrequently, or are unusual in amount. Results that do not directly relate to operations such as sale of investments, changes in fair value of investments and other financial instruments are classified as non-operating.
Interest income/expense
For financial instruments measured at amortized cost, interest income or expense is recorded using the effective interest rate, which is the rate that discounts the estimated future cash payments or receipts based on the expected life of the financial instrument or a shorter period, where appropriate, to the net carrying amount of the financial asset or liability. Interest income or expense is included in finance income/costs in the consolidated income statement.
Taxation
Income tax expense represents the aggregate amount determined on the profit for the period based on current tax and deferred tax.
In cases when the tax relates to items that are charged to other comprehensive income or directly to equity, the tax is also charged respectively to other comprehensive income or directly to equity.
Current income tax
Current tax is the expected tax payable on the taxable income for the year and any adjustments to tax payable in respect of previous years. Current tax, for the current and prior periods, to the extent unpaid, is recognized as a liability. If the amount already paid in respect of current and prior period exceeds the amount due for those periods, the excess is recognized as an asset.
Current tax liabilities (assets) for the current and prior periods are measured at the amount expected to be paid to (recovered from) the taxation authorities, using the tax rates (and tax laws) that have been enacted or substantially enacted by the end of the reporting period.
Uncertain tax positionsstatements (Continued)
VimpelCom’s policy is to comply fully with the applicable tax regulations (in the jurisdictions in which its operations are subject to income taxes. VimpelCom’s estimatesmillions of current income tax expense and liabilities are calculated assuming that all tax computations filed by VimpelCom’s subsidiaries will be subject to a review or audit by the relevant tax authorities. VimpelCom and the relevant tax authorities may have different interpretations of how regulations should be applied to actual transactions. Such uncertain tax positions are accounted for in accordance with IAS 12 ‘Income Taxes’or IAS 37 ‘Provisions, Contingent Liabilities and Contingent Assets’ depending on the type of tax in question.
VimpelCom records provisions for income taxes it estimates will ultimately be payable when the review or audits have been completed, including allowances for any interest and penalties which may become payable.
For provisions for taxes other than income tax, the Company follows the general policy on provisions.
Deferred taxation
Deferred taxes are recognized using the liability method and thus are computed as the taxes recoverable or payable in future periods in respect of deductible or taxable temporary differences. A temporary difference arises where the carrying amount of an asset or liability is different from its corresponding tax base.
Deferred tax assets and liabilities are generally recognized for all taxable temporary differences, except to the extent that they arise from:
is not a business combination; and
at the time of the transaction, affects neither accounting profit nor taxable profit (tax loss).
Deferred tax assets are recognized for all deductible temporary differences to the extent that it is probable that future taxable profit will be available against which the deductible temporary differences can be utilized. Deferred tax assets are also recognized for the carry-forward of unused tax losses and unused tax credits to the extent that it is probable that future taxable profits will be available to offset unused tax losses and unused tax credits. The carrying amount of deferred tax assets is reviewed at each reporting period date and adjusted to reflect changes in probability that sufficient taxable profits will be available to allow all or part of the assets to be recovered.
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantially enacted by the end of the reporting period.
Deferred tax is recognized for all taxable temporary differences associated with investments in subsidiaries, branches and associates, and interests in joint ventures except where the timing of the reversal of the temporary difference can be controlled, and it is probable that the temporary difference will not reverse in the foreseeable future.
Deferred tax assets and liabilities are offset when the entity has a legally enforceable right to offset current tax assets against current tax liabilities, and when they relate to income taxes levied by the same taxation authority on either the same taxable entity, or different taxable entities which intend either to settle current tax liabilities and assets on a net basis.
Property and equipmentU.S. dollars unless otherwise stated)
Property and equipment (“P&E”) are stated at cost, net of accumulated depreciation and accumulated impairment losses, if any.8
The costs of an item of P&E include:
its purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates;
any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management;
initial cost estimations of dismantling and removing the item and restoring the site to which it is located, with an equal obligation recognized;
costs of installation and assembly of a connection line between the client and the Company’s network;
costs of site preparation, e.g. creating a foundation for the installation of connections; and
professional fees, e.g. for engineers.
Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets as follows:
Telecommunication equipment 3—20 years
Buildings and constructions 10—50 years
Office and measuring equipment 3—10 years
Other equipment 3—10 years
Equipment acquired under a finance lease arrangement is depreciated on a straight-line basis over its estimated useful life or the lease term, whichever is shorter.
Assets in the course of construction are carried out at cost, less any recognized impairment losses. Depreciation of these assets commences when the assets are ready for their intended use.
Repair and maintenance costs which do not meet capitalization requirements are expensed as incurred.
The carrying amount of an item in P&E is derecognized on disposal or when no future economic benefits are expected from its use or disposal. The gain or loss from derecognition of an item in P&E is calculated as the difference between the net proceeds from disposal, if any, and the carrying amount of the item, and is included in the income statement when derecognized.
Each asset’s residual value, useful life and method of depreciation is reviewed at the end of each financial year, and adjusted prospectively if necessary.
Borrowing costsREVENUE
Borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset, that necessarily takes a substantial period of time (longer than six months) to get ready for its intended use, are capitalized as part of the cost of the respective assets. All other borrowing costs are expensed in the period incurred. Borrowing costs consist of interest and other costs that VimpelCom incurs in connection with the borrowing of funds in order to produce qualifying assets.
Rental expenses
Rental expenses related to the land where network equipment is located are expensed, unless amounts charged under operating leases during the construction period of the network are directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management.
Leases
Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards associated with ownership of the leased asset to VimpelCom. All other leases are classified as operating leases. The determination of whether an arrangement is, or contains, a lease is based on the substance of the arrangement at the inception date, or when the terms of the agreement are modified.
Finance leases
At the commencement of a finance lease term, VimpelCom recognizes the assets and liabilities in its statement of financial position at amounts equal to the fair value of the leased property or, if lower, the present value of the minimum lease payments as determined at the inception of the lease. The corresponding liability to the lessor is included in the statement of financial position as a finance lease obligation.
The discount rate used in calculating the present value of the minimum lease payments is the interest rate implicit in the lease. If there is no interest rate in the lease, the Company’s incremental borrowing rate is used. Any initial direct costs of VimpelCom related to the lease are added to the amount recognized as an asset.
Operating leases
The rental payable under operating leases is recognized as operating lease expenses in the income statement on a straight-line basis over the lease term unless another systematic basis is more representative of the time pattern of VimpelCom’s benefit. No asset is capitalized. If the periodic payments or part of the periodic payments has been prepaid, the Company recognizes these prepayments in the statement of financial position as other non-financial assets.
Intangible assets (excluding Goodwill)
Intangible assets acquired separately are measured initially at cost. Following initial recognition, intangible assets are carried at cost less accumulated amortization and accumulated impairment losses, if any. Internally generated intangible assets (excluding eligible development costs) are expensed in the income statement as incurred. The cost basis of intangible assets acquired as part of a business combination is the fair value of the assets at acquisition date.
Intangible assets with a finite useful life are amortized over the estimated life on a systematic basis starting from the date the asset is ready for use. The amortization method reflects the pattern in which the asset’s future economic benefits are expected to be consumed by the Group. The useful lives for licenses and other significant intangibles depend on the terms of the license or other agreements. If that pattern cannot be determined reliably, the straight-line method is used. For intangible assets associated with customer relationships, the Company uses a declining balance amortization pattern based on the value contribution brought by customers. For other intangible assets, the straight-line method is used. The amortization charge for each period is recognized in profit or loss. The amortization period and the amortization method for an intangible asset with a finite useful life are reviewed at least annually.
Gains or losses arising from derecognition of an intangible asset are measured as the difference between the net disposal proceeds and the carrying amount of the asset and are recognized in the income statement (‘Loss on disposals of non-current asset’) when the asset is derecognized.
Goodwill
Goodwill is recognized for the future economic benefits arising from net assets acquired that are not individually identified and separately recognized. Goodwill is the difference between the consideration transferred, the amount of any non-controlling interest in the acquiree and the acquisition date fair value of any previous equity interest in the acquiree over the fair value of the identifiable net assets acquired. If the non-controlling interest is measured at its fair value, goodwill includes amounts attributable to the non-controlling interest. If the non-controlling interest is measured at its proportionate share of identifiable net assets, goodwill includes only amounts attributable to VimpelCom.
Goodwill is initially recognized as an asset at cost and is subsequently measured at cost less any accumulated impairment losses.
Impairment of assets
Property and equipment, intangible assets and investments in associates and joint ventures are tested for impairment. The Company assesses, at the end of each reporting period, whether there are any indicators that an asset may be impaired. If there are such indicators (i.e. asset becoming idle, damaged or no longer in use), the Company estimates the recoverable amount of the asset. An asset’s recoverable amount is the higher of an asset’s or CGU’s fair value less costs of disposal and its value in use. Where the carrying amount of an asset or CGU exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. In determining fair value less costs of disposal, recent market transactions are taken into account, if available. If no such transactions can be identified, an appropriate valuation model is used. These calculations are corroborated by valuation multiples, quoted share prices for publicly traded subsidiaries or other available fair value indicators.
Goodwill is tested for impairment annually as of 1 October and as necessary when circumstances indicate that the carrying value may be impaired. Goodwill impairment is identified by assessing the recoverable amount, being the higher of Value in Use and Fair Value less Cost of Disposal, of each CGU (or group of CGUs). Where the recoverable amount of the cash-generating unit is less than the carrying amount, an impairment loss is recognized for the difference. Impairment losses relating to goodwill cannot be reversed in future periods.
For assets other than goodwill, an assessment is made at each reporting date whether there is any indication that previously recognized impairment losses may no longer exist or may have decreased. If such indication exists, the Company estimates the asset’s or CGU’s recoverable amount. A previously recognized impairment loss is reversed only if there has been a change in the assumptions used to determine the asset’s recoverable amount since the last impairment loss was recognized. The reversal is limited so that the carrying amount of the asset does not exceed its recoverable amount, nor exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognized for the asset in prior years. Such reversal is recognized in the income statement in the same line item where impairment was originally recorded unless the asset is carried at a revalued amount, in which case the reversal is treated as a revaluation increase.
The Company bases its impairment calculation on detailed budgets and forecast calculations which are prepared separately for each of the Company’s CGUs. These budgets and forecast calculations are available for a period of three years. For the periods between third and fifth years extrapolation is applied for revenue growth to arrive at a long term inflation rate. For longer periods, a long term growth rate is applied in order to project future cash flows after the fifth year.
Impairment losses of continuing operations are recognized in the income statement in a separate line item.
Financial instruments (Continued)
Derivative financial instruments and hedge accountingSOURCE OF ESTIMATION UNCERTAINTY
The Company uses derivative instruments such as forwards, interest rate swaps and forward rate agreements, futures, options and others in line with its Risk Management guidelines. The Company does not enter into any derivative instruments for trading or speculative purposes. Such derivative instruments are initially recognized at fair value on the date on which a derivative contract is entered into and are subsequently re-measured at fair value. Derivatives are carried as financial assets when the fair value is positive and as financial liabilities when the fair value is negative.
When a contract is entered into, the instrument is initially recognized at fair value, with subsequent changes in fair value being recognized as a financial component of income. Where a hedge relationship is identified and the derivative financial instrument is designated as a hedge, subsequent changes in fair value are accounted for in accordance with the specific criteria discussed below. The relationship between each derivative qualifying as a hedging instrument and the hedged item is documented to include the risk management objective, the strategy for covering the hedge and the means by which the hedging instrument’s effectiveness will be assessed. An assessment of the effectiveness of each hedge is made when each derivative financial instrument becomes active and throughout the hedge term.
When the hedge refers to changes in the fair value of a recognized asset or liability (a fair value hedge), the changes in the fair value of the hedging instrument and those of the hedged item are both recognized in profit or loss. If the hedge is not fully effective, the non-effective portion is treated as finance income or expense for the year in the income statement.
For a cash flow hedge, the fair value changes of the derivative are subsequently recognized, limited to the effective portion, in other comprehensive income (cash flow hedge reserve). A hedge is normally considered highly effective if from the beginning and throughout its life the changes in the expected cash flows for the hedged item are substantially offset by the changes in the fair value of the hedging instrument. When the economic effects deriving from the hedged item are realized, the reserve is reclassified to the income statement together with the economic effects of the hedged item. Whenever the hedge is not highly effective, the non-effective portion of the change in fair value of the hedging instrument is immediately recognized as a financial component of the profit or loss for the year. The Company designated cash flow hedges with respect to certain obligations denominated in USD for the entities which functional currency is EUR or RUB and with respect to floating rate debt which was swapped to fixed rate. These obligations are translated at the year-end exchange rate and any resulting exchange gains and losses are offset in the income statement against the change in the fair value of the hedging instrument.
When hedged forecasted cash flows are no longer considered highly probable during the term of a derivative, the portion of the cash flow hedge reserve relating to that instrument is reclassified as a financial component of the profit or loss for the year. If instead the derivative is sold or no longer qualifies as an effective hedging instrument, the cash flow hedge reserve recognized to date remains as a component of equity and is reclassified to profit or loss for the year in accordance with the criteria of classification described above when the originally hedged transaction affects profit or loss.
Fair values
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Management determines fair value based on a hypothetical transaction that would take place in the principal market or, in its absence, the most advantageous market. The principal market is the market with the greatest volume and level of activity for the asset or liability. The most advantageous market is the market that maximises the amount that would be received to sell the asset or minimises the amount that would be paid to transfer the liability, after taking into account transaction costs and transport costs.
Fair value measurement is based on the assumptions of market participants (that is, it is not a Group-specific measurement). Market participants are buyers and sellers in the principal (or most advantageous) market for the asset or liability that are independent, knowledgeable, able and willing to transact in the asset or liability.
The fair value hierarchy ranks fair value measurements based on the type of inputs; it does not depend on the type of valuation techniques used:
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Any put options granted to non-controlling interests give rise to a financial liability, which are measured at the present value of the redemption amount. Subsequently, the put option is accounted for with an effective interest method of accounting.
Inventories
Inventories are valued at the lower of cost and net realizable value. The cost of inventories is comprised of all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. Inventories are measured by applying the weighted-average cost method.
Net realizable value is the estimated selling price in the ordinary course of business less the estimated selling expenses. The amount of any reversal of any write-down of inventories is recognized in the Income Statement in the period in which the reversal occurs.
Phone sets are often sold for less than cost in connection with promotions to obtain new subscribers with minimum commitment periods. Such loss on the sale of equipment is only recorded when the sale occurs if the normal resale value is higher than the cost of the phone set. If the normal resale value is lower than cost, the difference is recognized as impairment immediately.
Trade and other receivables
Trade and other receivables include invoiced amounts less appropriate allowances for estimated uncollectible amounts. Estimated uncollectible amounts are based on the ageing of the receivable balances, payment history and other evidence of collectability. Receivable balances are written off when management deems them not to be collectible.
Cash and cash equivalents
Cash and cash equivalents in the statement of financial position are comprised of cash at banks and on hand and highly liquid investments that are readily convertible to known amounts of cash, are subject to only an insignificant risk of changes in value and have an original maturity of less than 92 days.
Convertible preference shares (“CPS”)
Both a liability and an equity component are recorded for CPS. The value of the liability is equal to the present value of the redemption amount, which represents the value of USD 0.001 per share. The equity value is the residual amount after deducting the debt value from the fair value of the entire instrument.
Provisions
Provisions are recognized when the Company has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. In the case of litigation against VimpelCom, no provision is made when the legal procedures are at too early stage to estimate the outcome with any reliability.
The amount recognized as a provision is the best estimate of the expenditure required to settle the obligation at the balance sheet date. Provisions are discounted to their present value if the effect of the time value of money is material. In order to calculate the present value, a pre-tax risk free rate that reflects current market assessments of the time value of money and the risks specific to the liability is used. In some cases, a part or all of the expenditure required to settle a provision is expected to be reimbursed by another party. The reimbursement is recognized only if it is virtually certain that the reimbursement will be received when the obligation is settled. The reimbursement is treated as a separate asset.
The Company discloses for each class of provision, carrying amounts at the beginning and end of the period, additions, amounts used, unused amounts reversed and adjustments due to discount reversal or changes in the discount rate as well as translation adjustments.
Contingent liabilities and assets are not recognized on the statement of financial position.
4.Significant accounting judgments, estimates and assumptions
Accounting judgments
Debt refinancing
The Company occasionally negotiates with lenders to restructure its existing debt obligations. Such restructuring may result in a modification or an exchange of debt instruments with the lender that may be carried out in a number of ways. Whether a modification or exchange of debt instruments represents a settlement of the original debt or merely a renegotiation of that debt determines the accounting treatment that should be applied by the Company. An exchange between the Company and the existing lender of debt instruments with substantially different terms should be accounted for as an extinguishment of the original financial liability and the recognition of a new financial liability with a resulting profit or loss recorded in the income statement. If the terms are not substantially different, modification accounting is applied, whereby no profit or loss is recorded in the income statement. The terms are substantially different if the discounted present value of the cash flows under the new terms, including any fees paid net of any fees received and discounted using the original effective interest rate, is at least 10% different from the discounted present value of the remaining cash flows of the original financial liability. In addition to this test, the Company needs to apply judgment if there are other qualitative factors that would indicate the terms to be substantially different. See Note 17 for details of the debt refinancing completed by the Company, and the corresponding accounting concluded.
Events after the reporting period
The financial statements present, among other things, the Company’s financial position at the end of the reporting period. In certain circumstances, it is appropriate to adjust the financial statements for events that occurred subsequent to the end of the reporting period but prior to the date the financial statements are authorized for issue, where the events offer greater clarity concerning the conditions that existed at the end of the reporting period. Reported amounts in certain cases should be adjusted for ‘adjusting events’ that provide evidence of conditions that existed at the end of the reporting period, whereas in other cases (‘non-adjusting events’), the Company is not required to change reported amounts, but is required to disclose the nature of the non-adjusting events in the financial statements. Judgment is needed to distinguish between adjusting and non-adjusting events. See Note 27 for details of the subsequent events identified by the Company as requiring adjustment or disclosure by the Company.
Critical accounting estimates
A critical accounting estimate is an estimate that is both important to the presentation of the Group’s financial position and requires management’s most difficult, subjective or complex judgments, often as a result of the need to determine estimates and develop assumptions about the outcome of matters that are inherently uncertain. Management evaluates such estimates on an on-going basis, based upon historical results, historical
experience, trends, consultations with experts, forecasts of the future, and other methods which management considers reasonable under the circumstances. Management considers the accounting estimates discussed below to be its critical accounting estimates, and, accordingly, provides an explanation of each.
Revenue Recognition
The Group’sGroup's revenue consists primarily consists of revenue from sale of telecommunications services and periodic subscriptions. The Group offers customers, via MEAs (‘bundles’multiple element agreements ('bundles') or otherwise, a number of different services with different price plans, and provides discounts in various types and forms, often in connection with different campaigns, over the contractual or average customer relationship period. Determining the fair value of each deliverable can require complex estimates due to the nature of the goods and services provided. The Group also sells wholesale products to other operators and vendors in different countries and across borders. Management has to make estimates related to revenue recognition, relying to some extent on information from other third-party operators regarding values of services delivered. Management also makes estimates for the final outcome in instances where the other parties dispute the amounts charged. Furthermore, management has to estimate the average customer relationship for revenue that is initially recognized as deferred revenue in the statement of financial position and is thereafter recognized in the income statement over a future period, e.g.for example, revenue from connection fees. Management also applies judgment in evaluating gross or net presentation of revenue and associated fees. In this case, among others, the main factor is whether the Company is considered as the primary obligor in the transactions, and the extent of latitude in establishing prices.
Business combinations
Notes to the consolidated financial statements (Continued)
We have entered into(in millions of U.S. dollars unless otherwise stated)
9SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses consisted of the following items for the years ended December 31:
| | 2017 | 2016 | 2015 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
Network and IT costs | 1,185 | 1,043 | 1,017 | |||||||
Personnel costs | 927 | 775 | 848 | |||||||
Customer associated costs | 893 | 822 | 860 | |||||||
Losses on receivables | 59 | 58 | 51 | |||||||
Taxes, other than income taxes | 219 | 244 | 227 | |||||||
Other | 465 | 726 | 1,560 | |||||||
| | | | | | | | | | | |
Total selling, general and administrative expenses | 3,748 | 3,668 | 4,563 | |||||||
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Included within "Other" for the year ended December 31, 2015, is the provision expense related to the Uzbekistan investigation (see Note 22 for further details).
Included within "Other" for the year ended December 31, 2017, is a reduction of US$106 following the amendment of an agreement with a vendor, which resulted in certain acquisitionspayments to the Company.
Total operating lease expense recognized in the past and may make additional acquisitionsconsolidated income statement amounted to US$444 (2016: US$408, 2015: US$385). Please refer to Note 26 for details regarding operating lease commitments.
ACCOUNTING POLICIES
Dealer commissions
Dealer commissions are expensed in the future. Forconsolidated income statement when the larger acquisitions, third-party valuation expertsservices are engagedprovided unless they meet the definition of an asset. Dealer commissions are part of customer associated costs.
The accounting treatment of certain dealer commissions by the Group will change upon adoption of IFRS 15 on January 1, 2018, refer to assist in determining and allocatingNote 3 for further details.
Leases
Leases are classified as finance leases whenever the fair valuesterms of the lease transfer substantially all the risks and rewards associated with ownership of the leased asset to VEON. All other leases are classified as operating leases. The determination of whether an arrangement is, or contains, a lease is based on the substance of the arrangement at the inception date, or when the terms of the agreement are modified.
Notes to the consolidated financial statements (Continued)
(in millions of U.S. dollars unless otherwise stated)
9SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (Continued)
Operating lease expenses
The rental payable under operating leases is recognized as an operating lease expenses in the income statement on a straight-line basis over the lease term unless another systematic basis is more representative of the time pattern of VEON's benefit. No asset is capitalized. If the periodic payments or part of the periodic payments has been prepaid, the Company recognizes these prepayments in the statement of financial position as other non-financial assets.
Finance leases
At the commencement of a finance lease term, VEON recognizes the assets acquired and liabilities assumed. Ourin its statement of financial statements are impacted by the manner in which we allocate the purchase price in a business combination, as assets that are consideredposition at amounts equal to be subject to depreciation will reduce future operating results, whereas goodwill and certain other intangible assets are of a non- amortizing nature, therefore there is no income statement impact. As part of our purchase price allocation, it is necessary to determine the purchase price paid, which includes the fair value of securities issuedthe leased property or, if lower, the present value of the minimum lease payments as determined at the inception of the lease. The corresponding liability to the lessor is included in the statement of financial position as a finance lease obligation.
The discount rate used in calculating the present value of the minimum lease payments is the interest rate implicit in the lease. If there is no interest rate in the lease, the Company's incremental borrowing rate is used. Any initial direct costs of VEON related to the lease are added to the amount recognized as an asset.
Notes to the consolidated financial statements (Continued)
(in millions of U.S. dollars unless otherwise stated)
10IMPAIRMENT
Property and equipment and intangible assets are tested regularly for impairment. The Company assesses, at the end of each reporting period, whether there exist any indicators that an estimateasset may be impaired (i.e. asset becoming idle, damaged or no longer in use). If there are such indicators, the Company estimates the recoverable amount of the asset. Impairment losses of continuing operations are recognized in the income statement in a separate line item.
Impairment losses relate to the following for the years ended 31 December:
| | Note | 2017 | 2016 | 2015 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
Property and equipment | 15 | 15 | 100 | 150 | ||||||||
Intangible assets | 16 | — | 14 | — | ||||||||
Goodwill | 51 | 78 | 95 | |||||||||
| | | | | | | | | | | | | |
Total impairment loss | 66 | 192 | 245 | |||||||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
CASH-GENERATING UNITS
Goodwill has been allocated to cash-generating units ("CGUs") as disclosed in the table below, for the years ended December 31. There were no changes to the methodology of goodwill allocation to CGUs.
Year ended December 31, 2017 | 2017 | Impairment | Reclassification* | Translation adjustment | 2016 | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Russia | 2,434 | — | — | 122 | 2,312 | |||||||||||
Algeria | 1,340 | — | — | (53 | ) | 1,393 | ||||||||||
Pakistan | 244 | — | (237 | ) | (16 | ) | 497 | |||||||||
Kazakhstan | 177 | — | — | 1 | 176 | |||||||||||
Kyrgyzstan | 128 | (17 | ) | — | — | 145 | ||||||||||
Uzbekistan | 46 | — | — | (68 | ) | 114 | ||||||||||
Armenia | 25 | (34 | ) | — | — | 59 | ||||||||||
Tajikistan | — | — | — | — | — | |||||||||||
Others | — | — | — | — | — | |||||||||||
| | | | | | | | | | | | | | | | | |
Total | 4,394 | (51 | ) | (237 | ) | (14 | ) | 4,696 | ||||||||
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Year ended December 31, 2016 | 2016 | Impairment | Acquisition | Translation adjustment | 2015 | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Russia | 2,312 | — | — | 388 | 1,924 | |||||||||||
Algeria | 1,393 | — | — | (42 | ) | 1,435 | ||||||||||
Pakistan | 497 | — | 201 | 1 | 295 | |||||||||||
Kazakhstan | 176 | — | — | 3 | 173 | |||||||||||
Kyrgyzstan | 145 | (49 | ) | — | 17 | 177 | ||||||||||
Uzbekistan | 114 | — | — | (17 | ) | 131 | ||||||||||
Armenia | 59 | — | — | — | 59 | |||||||||||
Tajikistan | — | (21 | ) | — | — | 21 | ||||||||||
Others | — | (8 | ) | — | — | 8 | ||||||||||
| | | | | | | | | | | | | | | | | |
Total | 4,696 | (78 | ) | 201 | 350 | 4,223 | ||||||||||
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Notes to the consolidated financial statements (Continued)
(in millions of U.S. dollars unless otherwise stated)
10IMPAIRMENT (Continued)
The Company performed its annual goodwill impairment test as of October 1, 2017. The Company considers the relationship between market capitalization and its book value, changes in country risk premiums and significant decreases in the operating results of its CGUs versus budgeted amounts, among other factors, when reviewing for indicators of impairment on a quarterly basis. As of the impairment test date, the market capitalization of the Group was not below the book value of its equity. The Company further performed an assessment for the period between October 1, and December 31, 2017 for any contingent consideration.adverse developments that could have negatively impacted the valuations.
After The recoverable amounts of CGUs have been determined based on fair value less costs of disposal calculations, using cash flow projections from business plans prepared by management in the purchase price is established, we allocate itfourth final quarter of 2017. To the extent the business initiatives would not be valued by the market due to their early stages, they were not included in the cash flow projections. The business plans cover a period of five years. The key assumptions and outcomes of the impairment test are discussed separately below.
Impairment losses in 2017
| | Armenia | Kyrgyzstan | Other | Total | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Property and equipment | — | — | 15 | 15 | |||||||||
Goodwill | 34 | 17 | — | 51 | |||||||||
| | | | | | | | | | | | | | |
Total impairment loss | 34 | 17 | 15 | 66 | |||||||||
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
During the 2017 annual impairment test, the Company recognized impairment losses in respect of the Armenia and Kyrgyzstan CGUs in amounts of US$34 and US$17, respectively, allocated to the underlyingexisting carrying value of goodwill. The impairments were concluded largely due to lower cash flow outlook in those countries. The recoverable amounts of the Armenia and Kyrgyzstan CGUs of US$105 and US$209, respectively, were determined based on a fair value less costs of disposal calculation using the latest cash flow projections (Level 3 fair value). Details regarding key assumptions and inputs used by the Company are included later in this Note.
Several countries exhibited limited headroom, and these are described later in this Note.
Additionally, in connection with the rollout of the Company's transformation strategy and commitment to network modernization, the Company continuously re-evaluates the plans for its existing network, including equipment purchased but not installed, and consequently recorded an impairment loss of US$15.
Notes to the consolidated financial statements (Continued)
(in millions of U.S. dollars unless otherwise stated)
10IMPAIRMENT (Continued)
Impairment losses in 2016
Impairment losses in 2016 were allocated to current and non-current assets acquiredas follows:
| | Georgia | Kyrgyzstan | Tajikistan | Other | Total | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Property and equipment | 16 | — | 54 | 30 | 100 | |||||||||||
Intangibles | 13 | — | 1 | — | 14 | |||||||||||
Goodwill | — | 49 | 21 | 8 | 78 | |||||||||||
Other assets* | — | — | 12 | — | 12 | |||||||||||
| | | | | | | | | | | | | | | | | |
Total impairment loss | 29 | 49 | 88 | 38 | 204 | |||||||||||
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
During the 2016 annual impairment test, the Company concluded impairments for the CGUs Georgia and Kyrgyzstan in amounts of US$29 and US$49, respectively. The impairments were concluded largely due to lower operating performances in those countries. The recoverable amounts of US$53 and US$219, respectively, were determined based on a fair value less costs of disposal calculation using the latest cash flow projections (Level 3 fair value). The Company applied a post-tax discount of 10.3% and 14.5%, respectively.
For the Georgia CGU, the carrying amount of goodwill was already nil prior to the impairment test. As such, the total amount of the impairment loss was allocated to the carrying amounts of property and equipment and intangible assets based on relative carrying value before the impairment.
In Q4 2016, the Company also concluded an impairment for CGU Tajikistan in an amount of US$88 due to negative cash flow outlook primarily driven by excessive tax levies. The impairment was allocated to all non-current and current assets, including goodwill.
Additionally, in connection with the rollout of the Company's transformation strategy and commitment to network modernization, the Company has re-evaluated the plans for its existing network, including equipment purchased but not installed, and consequently recorded an impairment loss of US$30.
Impairment losses in 2015
In Q1 2015, due to higher weighted average cost of capital for Ukraine by 1.0% as compared to October 1, 2014, the Group recorded an impairment loss of US$51 in the Ukraine CGU. The recoverable amount was determined based on a fair value less costs of disposal calculation using the latest cash flow projections (Level 3 fair value). Due to the macroeconomic and geopolitical situation in the country, the Company applied higher post-tax discount factors for the first two years in the explicit period of 27.1% in 2015 and 20.4% in 2016, followed by normalized post-tax discount rate of 17.8% as of March 31, 2015.
Notes to the consolidated financial statements (Continued)
(in millions of U.S. dollars unless otherwise stated)
10IMPAIRMENT (Continued)
Also, due to higher weighted average costs of capital for the CGU Armenia, an impairment was reported in Q1 2015 for the amount of US$44. The recoverable amount was determined based on a fair value less costs of disposal calculation using the latest cash flow projections (Level 3 fair value). The Company applied post-tax discount rate of 12.1% as of March 31, 2015.
Based on the annual goodwill impairment test as of October 1, 2015, there were no other impairment losses identified for these and other CGUs.
Additionally, in connection with the rollout of the Company's transformation strategy and commitment to network modernization, the Company has re-evaluated the plans for its existing network, including equipment purchased but not installed, and consequently recorded an impairment loss of US$150.
KEY ASSUMPTIONS
The key assumptions and inputs used by the Company in determining the recoverable amount are as follows:
Assumption | Description | |
|---|---|---|
Discount rate | Discount rates are initially determined in US$ based on the risk-free rate for 20-year maturity bonds of the United States Treasury, adjusted for a risk premium to reflect both the increased risk of investing in equities and the systematic risk of the specific CGU relative to the market as a whole. | |
The equity market risk premium used was 6.0% (2016: 5.5%, 2015: 5.5%). The systematic risk, beta, represents the median of the raw betas of the entities comparable in size and geographic footprint with the ones of the Company ("Peer Group"). | ||
The debt risk premium is based on the median of Standard & Poor's long-term credit rating of the Peer Group. | ||
The weighted average cost of capital is determined based on target debt-to-equity ratios representing the median historical five-year capital structure for each entity from the Peer Group. | ||
The discount rate in functional currency of a CGU is adjusted for the long-term inflation forecast of the respective country in which the business operates, as well as the applicable country risk premium. | ||
Projected revenue growth rates | The revenue growth rates vary based on numerous factors, including size of market, GDP (Gross Domestic Product), foreign currency projections, traffic growth, market share and others. |
Notes to the consolidated financial statements (Continued)
(in millions of U.S. dollars unless otherwise stated)
10IMPAIRMENT (Continued)
Assumption | Description | |
|---|---|---|
Projected average operating margin | The Company estimates operating margin based on Adjusted EBITDA divided by Total Operating Revenue for each CGU and each future year. The forecasted operating margin is based on the budget of the following year and assumes cost optimization initiatives which are part of on-going operations, as well as regulatory and technological changes known to date, such as telecommunication license issues and price regulation among others. | |
Average capital expenditure as a percentage of revenue | Capital expenditure ("CAPEX") is defined as purchases of property and equipment and intangible assets other than goodwill. The cash flow forecasts for capital expenditure are based on past experience and amounts budgeted for the following year(s) and include the network roll-outs plans and license requirements. | |
Projected license and spectrum payments | The cash flow forecasts for license and spectrum payments for each operating company for the initial five years include amounts for expected renewals and newly available spectrum. Beyond that period, a long-run cost of spectrum is assumed. | |
Long-term growth rate | A long-term growth rate into perpetuity is estimated based on a percentage that is lower than or equal to the country long-term inflation forecast, depending on the CGU. |
The table below shows key assumptions used in fair value less costs of disposal calculations.
| | Discount rate (functional currency) | Average annual revenue growth rate during forecast period | Terminal growth rate | |||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2017 | 2016 | 2015 | 2017 | 2016 | 2015 | 2017 | 2016 | 2015 | |||||||||||||||||||
Russia | 10.6 | % | 9.7 | % | 11.2 | % | 1.9 | % | 2.4 | % | 2.4 | % | 1.0 | % | 1.0 | % | 1.0 | % | ||||||||||
Ukraine | 17.1 | % | 17.2 | % | 18.2 | % | 3.9 | % | 3.6 | % | 3.9 | % | 2.0 | % | 1.0 | % | 3.0 | % | ||||||||||
Algeria | 10.7 | % | 9.8 | % | 11.4 | % | 1.0 | % | (0.8 | )% | (0.9 | )% | 3.0 | % | 3.0 | % | 4.0 | % | ||||||||||
Pakistan | 15.0 | % | 14.3 | % | 15.7 | % | 5.0 | % | 7.6 | % | 4.8 | % | 4.0 | % | 4.0 | % | 5.0 | % | ||||||||||
Bangladesh | 12.7 | % | 11.9 | % | 13.4 | % | 5.0 | % | 6.4 | % | 6.5 | % | 4.6 | % | 4.7 | % | 5.9 | % | ||||||||||
Kazakhstan | 10.8 | % | 12.4 | % | 12.3 | % | 3.2 | % | 4.4 | % | 3.5 | % | 2.4 | % | 2.0 | % | 3.0 | % | ||||||||||
Kyrgyzstan | 15.5 | % | 14.5 | % | 14.2 | % | (1.5 | )% | (1.8 | )% | 2.4 | % | 3.5 | % | 2.5 | % | 2.5 | % | ||||||||||
Uzbekistan | 15.3 | % | 15.4 | % | 18.4 | % | 6.9 | % | 1.7 | % | 1.7 | % | 6.5 | % | 1.0 | % | 2.0 | % | ||||||||||
Armenia | 13.0 | % | 12.0 | % | 12.9 | % | (1.0 | )% | (2.8 | )% | (0.7 | )% | 3.0 | % | 1.0 | % | 2.0 | % | ||||||||||
Georgia | 11.0 | % | 10.3 | % | 12.6 | % | 5.6 | % | 6.4 | % | 6.5 | % | 1.0 | % | 1.0 | % | 3.0 | % | ||||||||||
Tajikistan | n.a. | n.a. | 13.5 | % | n.a. | n.a. | (4.2 | )% | n.a. | n.a. | 2.0 | % | ||||||||||||||||
Notes to the consolidated financial statements (Continued)
(in millions of U.S. dollars unless otherwise stated)
10IMPAIRMENT (Continued)
| | Average operating margin | Average CAPEX as a percentage of revenue | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2017 | 2016 | 2015 | 2017 | 2016 | 2015 | |||||||||||||
Russia | 36.4 | % | 38.6 | % | 44.1 | % | 15.7 | % | 15.9 | % | 16.5 | % | |||||||
Ukraine | 49.9 | % | 44.9 | % | 44.9 | % | 15.6 | % | 17.0 | % | 19.1 | % | |||||||
Algeria | 46.2 | % | 50.8 | % | 48.7 | % | 14.8 | % | 15.8 | % | 16.3 | % | |||||||
Pakistan | 43.6 | % | 33.3 | % | 39.2 | % | 15.3 | % | 14.3 | % | 14.1 | % | |||||||
Bangladesh | 38.7 | % | 44.9 | % | 41.2 | % | 14.3 | % | 14.6 | % | 15.8 | % | |||||||
Kazakhstan | 44.5 | % | 43.6 | % | 52.3 | % | 17.9 | % | 18.8 | % | 20.3 | % | |||||||
Kyrgyzstan | 42.0 | % | 43.9 | % | 54.1 | % | 16.4 | % | 17.0 | % | 12.3 | % | |||||||
Uzbekistan | 42.9 | % | 58.2 | % | 61.2 | % | 14.1 | % | 18.2 | % | 16.3 | % | |||||||
Armenia | 29.7 | % | 37.8 | % | 35.5 | % | 19.6 | % | 14.1 | % | 11.8 | % | |||||||
Georgia | 25.2 | % | 25.7 | % | 32.2 | % | 23.3 | % | 17.3 | % | 16.4 | % | |||||||
Tajikistan | n.a. | n.a. | 42.4 | % | n.a. | n.a. | 13.6 | % | |||||||||||
Sensitivity to changes in assumptions
The following table illustrates the CGUs with limited headroom and potential impairments that would need to be recorded if certain key parameters would adversely change by one percentage point. Any additional adverse changes in the key parameters by more than one percentage point would increase the amount of impairment exposure approximately proportionally.
| | | Potential impairment if an assumption changes by 1.0pp | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
CGU | Headroom | Discount rate | Average growth rate | Average operating margin | Average CAPEX / revenue | Terminal growth rate | |||||||||||||
Bangladesh | 82 | (33 | ) | — | — | — | (17 | ) | |||||||||||
Uzbekistan | 15 | (9 | ) | (3 | ) | — | (1 | ) | (7 | ) | |||||||||
Georgia | 9 | — | — | — | — | — | |||||||||||||
ACCOUNTING POLICIES
Goodwill
Goodwill is recognized for the future economic benefits arising from net assets acquired that are not originally reflected inindividually identified and separately recognized.
Goodwill is not amortized but is tested for impairment annually and as necessary when circumstances indicate that the acquired entity need tocarrying value may be assessedimpaired.
The Company bases its impairment calculation on detailed budgets and valued. This process requires significant judgment on our part as to what those assets and liabilitiesforecast calculations which are and how they should be valued. Significant acquired intangible assets that have been recognized by the Group in connection with business combinations include customer bases, customer contracts, brands, licenses, service concession rights, roaming agreements and software. The significant tangible assets primarily include networks. The valuationprepared separately for each of the individual assets, in particular intangible assets, such as customer intangibles, brands,Company's CGUs. These budgets and so forth requires usforecast calculations are prepared for a period of five years. For longer periods, a long-term growth rate is applied to make significant assumptions, including, among others, the expectedproject future cash flows after the appropriate interest rate to value those cash flows and expected future customer churn rates. All of these factors, which are generally developed in conjunction with the guidance and input of professional valuation specialists, require judgment and estimates. A change in any of these estimates or judgments could change the amount of the purchase price to be allocated to the particular asset or liability. The resulting change in the purchase price allocation to a non-goodwill asset or liability has a direct impact on the residual amount of the purchase price that cannot be allocated, referred to as “goodwill.” See Note 6 for further information about significant business combinations.fifth year.
Impairment of non-current assetsSOURCE OF ESTIMATION UNCERTAINTY
The Group has made significant investments in property and equipment, intangible assets, goodwill and other investments.
Pursuant
Notes to IAS 36, goodwill and other intangible assets with indefinite useful lives and intangible assets not yet brought into use must be tested for impairment annually or more often if indicatorsthe consolidated financial statements (Continued)
(in millions of impairment exist. Other assets are tested for impairment when circumstances indicate there may be a potential impairment.U.S. dollars unless otherwise stated)
10IMPAIRMENT (Continued)
Estimating recoverable amounts of assets and CGUs must, in part, be based on management’smanagement's evaluations, including the determination of the appropriate CGUs, the relevant discount rate, estimatesestimation of future performance, the revenue generatingrevenue-generating capacity of the assets, timing and amount of future purchases of property and equipment, assumptions of the future market conditions and the long-term growth rate into perpetuity (terminal value). In doing this, management needs to assume a market participant perspective. Changing the assumptions selected by management, in particular, the discount rate and growth rate assumptions used to estimate the recoverable amounts of assets, could significantly impact the Group’sGroup's impairment evaluation and hence results.
A significant part of the Group’sGroup's operations is in countries with emerging markets. The political and economic situation in these countries may change rapidly and recession may potentially have a significant impact on these countries. On-going recessionary effects in the world economy and increased macroeconomic risks impact our assessment of cash flow forecasts and the discount rates applied.
There are significant variations between different markets with respect to growth, mobile penetration, ARPU,average revenue per user ("ARPU"), market share and similar parameters, resulting in differences in operating margins. The future developmentsdevelopment of operating margins areis important in the Group’sGroup's impairment assessments, and the long-term estimates of these margins are highly uncertain. In particular thisThis is particularly the case for emerging markets that are still not yet in a mature phase.
Notes to the consolidated financial statements (Continued)
(in millions of U.S. dollars unless otherwise stated)
11OTHER NON-OPERATING LOSSES, NET
Other non-operating (losses) / gains consisted of the following for the years ended December 31:
| | 2017 | 2016 | 2015 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
Loss from early debt redemption | (124 | ) | — | 4 | ||||||
Change of fair value of embedded derivative | (6 | ) | 12 | — | ||||||
Change of fair value of other derivatives | (13 | ) | (120 | ) | (15 | ) | ||||
Impairment loss of other financial assets | (20 | ) | — | (1 | ) | |||||
Gains relating to past acquisitions and divestments | 70 | — | — | |||||||
Other (losses) / gains | (4 | ) | 26 | (30 | ) | |||||
| | | | | | | | | | | |
Other non-operating losses, net | (97 | ) | (82 | ) | (42 | ) | ||||
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Loss from early debt redemption relates to the settlement of the cash tender offer for certain outstanding debt securities, see Note 17 for further details.
The change in fair value of other derivatives mainly relates to derivatives in Russia (refer to Note 17).
Included in 'Gains relating to past acquisitions and divestments' is a net gain of US$45 pertaining to indemnification from a past business acquisition, and a gain of US$25 as a result of an increase in cash consideration receivable pertaining to the disposal of Italy operations in 2016.
Notes to the consolidated financial statements (Continued)
(in millions of U.S. dollars unless otherwise stated)
12 INCOME TAXES
Current income tax is the expected tax expense, payable or receivable on taxable income or loss for the period, using tax rates enacted or substantively enacted at reporting date, and any adjustment to tax payable in respect of previous years. Any penalties or interests relating to income tax claims or litigations are included within income tax expense.
Income tax expense consisted of the following for the years ended December 31:
| | 2017 | 2016 | 2015 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
Current income taxes | ||||||||||
Current year | 397 | 615 | 712 | |||||||
Adjustments in respect of previous years | (28 | ) | (3 | ) | 38 | |||||
| | | | | | | | | | | |
Total current income taxes | 369 | 612 | 750 | |||||||
Deferred income taxes | ||||||||||
Origination / reversal of temporary differences | (166 | ) | (217 | ) | (782 | ) | ||||
Changes in tax rates | 10 | (7 | ) | 24 | ||||||
Current year tax losses unrecognized | 153 | 172 | 207 | |||||||
Recognition / utilization of previously unrecognized tax losses or tax credits | — | (15 | ) | (23 | ) | |||||
Derecognition of previously recognized tax losses | — | 95 | 32 | |||||||
Expiration of tax losses | — | 2 | — | |||||||
Write off deferred tax assets | 20 | — | 7 | |||||||
Adjustments in respect of previous years | 86 | — | 6 | |||||||
Other | — | (7 | ) | (1 | ) | |||||
| | | | | | | | | | | |
Total deferred tax expense | 103 | 23 | (530 | ) | ||||||
| | | | | | | | | | | |
Income tax expense | 472 | 635 | 220 | |||||||
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Notes to the consolidated financial statements (Continued)
(in millions of U.S. dollars unless otherwise stated)
12 INCOME TAXES (Continued)
EFFECTIVE TAX RATE
The table below outlines the reconciliation between the statutory tax rate in the Netherlands (25%) and the effective income tax rates for the Group, together with the corresponding amounts, for the years ended December 31:
| | 2017 | 2016 | 2015 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
(Loss) / profit before tax from continued operations | (24 | ) | 347 | (595 | ) | |||||
Income tax benefit at statutory tax rate (25.0%) | (6 | ) | 87 | (148 | ) | |||||
Difference due to the effects of: | ||||||||||
Different tax rates in different jurisdictions | (90 | ) | 152 | (76 | ) | |||||
Non-deductible expenses | 216 | 89 | 320 | |||||||
Non-taxable income | (35 | ) | (81 | ) | (11 | ) | ||||
Adjustments in respect of previous years | 52 | (3 | ) | 44 | ||||||
Movement in (un)recognized deferred tax assets | 173 | 247 | 230 | |||||||
Withholding taxes | 123 | 62 | (179 | ) | ||||||
Tax claims | 25 | 59 | 5 | |||||||
Change in income tax rate | 10 | (7 | ) | 28 | ||||||
Minimum taxes and other | 4 | 30 | 7 | |||||||
| | | | | | | | | | | |
Income tax expense | 472 | 635 | 220 | |||||||
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Effective tax rate | –1,966.7 | % | 183.0 | % | –37.0 | % | ||||
EXPLANATORY NOTES TO THE EFFECTIVE TAX RATE
Different tax rates in different jurisdictions
Certain jurisdictions in which VEON operates have income tax rates which are different to the Dutch statutory tax rate of 25%. In 2017 and 2015, the effective tax rate was positively impacted by taxable income recognized in jurisdictions in which income tax rates are lower than 25%. In 2016, the effective tax rate was negatively impacted by higher taxable income recognized in jurisdictions with higher income tax rates.
Non-deductible expenses
In 2017, the Group incurred non-deductible expenses primarily in Luxembourg (US$96) and Russia (US$91), in respect of share of loss of joint ventures and associates and impairment of joint ventures and associates. In addition, GTH incurred non-deductible financial and business expenses (US$20).
Notes to the consolidated financial statements (Continued)
(in millions of U.S. dollars unless otherwise stated)
12 INCOME TAXES (Continued)
The 2016 non-deductible expenses mainly relate to GTH (US$24), and our operations in Pakistan (US$20) and Tajikistan (US$18). The main item of GTH non-deductible expenses in the amount of US$24 represents a legal provision due to the Iraqna case (refer to Note 22). The non-deductible expenses of US$20 within Pakistan mainly relate to permanent differences due to Final Tax Regime ("FTR") on mobile financial services and site sharing expenses. The FTR is a final tax liability on source income arising from sales, contracts and import of goods and services. Therefore, expenses incurred in deriving such income are treated as non-deductible. For Tajikistan, the non-deductible expenses mainly relate to on-charged intercompany expenses.
The 2015 non-deductible expenses mainly relate to the provision recognized regarding the Uzbekistan investigations (Note 22) being non-tax deductible (US$199 tax impact), non-deductible interest expenses recorded in Egypt and non-deductible impairment losses.
Non-taxable income
In 2017, the Group recognized a non-taxable gain pertaining to indemnification from a past business acquisition (see Note 11), which had a positive impact on the effective tax by US$17.
In addition, the Group recognizes permanent differences for non-taxable income in Pakistan under the FTR.
Movement in (un)recognized deferred tax assets
In 2017, the effective tax rate was impacted by tax losses for which no deferred tax asset was recognized, primary within holding entities in the Netherlands (US$109) and in GTH (US$35), as well as other subsidiaries across the Group (US$10).
In addition, deferred tax assets of US$20 previously recognized within holding entities in Luxembourg were written off during the year.
In 2016, the effective tax rate was impacted by a US$247 change in recognition of deferred tax assets resulting mainly from tax losses for which no deferred tax asset was recognized in the Netherlands. Furthermore, WIND Telecom SpA had tax losses for which a deferred tax asset had been recognized of US$95. As a result of the Italy Joint Venture we will no longer be able to offset these losses against future profits of our Italian operating company, as a consequence the deferred tax asset of US$95 was written down. At the same time, Bangladesh starts to be profit making and utilizing its tax losses. During 2016, the (positive) results of Bangladesh have been monitored closely. As there were sufficient arguments to start recognizing some of the deferred tax assets on losses, an amount of US$21 was recognized as of December 31, 2016.
In 2015, the effective tax rate was impacted by a US$220 change in recognition of deferred tax assets resulting mainly from tax losses for which no deferred tax asset was recognized in Georgia, Egypt and the Netherlands and a re-measurement of deferred tax asset on previous year tax losses in Luxembourg.
Adjustments in respect of previous years
In 2017, updated tax positions in respect of prior years for Bangladesh and Russia had the effect of increasing tax expense by a net amount of US$58.
Notes to the consolidated financial statements (Continued)
(in millions of U.S. dollars unless otherwise stated)
12 INCOME TAXES (Continued)
In 2016, the effect of prior year adjustments of US$3 decreased the effective tax rate and mainly relate to Luxembourg for an amount of US$3 due to adjustment in carry forward losses arising due to filing to annual tax return.
In 2015, the effect of prior year adjustments of US$44 increased the effective tax rate and mainly relate to the settlement with the Algerian government, resulting in a tax charge of US$24.
Withholding taxes
In 2017, the expense related to withholding taxes amounted to US$123, of which US$53 relate to a dividend from the Company's wholly-owned subsidiary in Russia of US$1,060, which is expected to be paid in 2018. Furthermore, it is expected that Algeria and Pakistan will distribute dividends subject to withholding tax in the foreseeable future, resulting in an increase in accruals in 2017 by US$59, whilst the remaining amount relates primarily to withholding taxes in respect of subsidiaries within the Eurasia region.
In 2016, the expense related to withholding taxes amounted to US$62. US$25 of such withholding taxes relate to amounts due as a result of a dividend from Russia of US$500 to be paid in 2017. The withholding tax on dividends at CIS level mainly relates to withholding taxes on a dividend from Kyrgyzstan that increased due to expected future dividend distributions during 2017. Furthermore, it is expected that Algeria and Pakistan will distribute dividends being subject to withholding tax in the foreseeable future resulting in an increase in accruals in 2016.
In 2015, the effect of withholding taxes on undistributed earnings resulted in a tax benefit of US$179. The amount includes a tax benefit of US$61 relating to a release of accrued Russian withholding taxes on dividends that will be distributed and a release of accrued withholding taxes for the Algerian capital gain taxes and distributed dividends (US$59).
Tax claims
In 2017, tax claims relate primarily to increases in uncertain income tax positions in Russia and GTH, offset by a reversal in Tajikistan, resulting in a net impact on income tax expense of US$24 (see also Note 22).
Change in income tax rate
In 2017, the effective tax rate of the Group was impacted by changes in tax rates, primarily a decrease in the nominal tax rate in Pakistan (from 31% to 30% in 2017), resulting in a total tax benefit of US$9.
In 2016, changes in income tax rates of US$7 decreased the effective tax rate. The nominal tax rate decreased in Pakistan (from 32% to 31% in 2016).
In 2015, the increase of the effective tax rate was mainly caused by the nominal tax rate increase in Uzbekistan (from 7.5% to 53% as from 2016).
Notes to the consolidated financial statements (Continued)
(in millions of U.S. dollars unless otherwise stated)
12 INCOME TAXES (Continued)
DEFERRED TAXES
The Group reported the following deferred tax assets and liabilities in the statement of financial position as of December 31:
| | 2017 | 2016 | |||||
|---|---|---|---|---|---|---|---|
Deferred tax assets | 272 | 343 | |||||
Deferred tax liabilities | (376 | ) | (331 | ) | |||
| | | | | | | | |
Net deferred tax position | (104 | ) | 12 | ||||
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
The following table shows the movements of the deferred tax assets and liabilities in 2017:
| | | Movement in deferred taxes | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Opening balance | Net income statement movement | Changes in composition of the group | Other comprehensive & other | Currency translation | Tax rate changes | Closing balance | |||||||||||||||
Property and equipment, net | (420 | ) | (6 | ) | — | (13 | ) | (4 | ) | — | (443 | ) | ||||||||||
Intangible assets, net | (166 | ) | — | — | (4 | ) | 5 | — | (165 | ) | ||||||||||||
Trade receivables | 30 | 19 | — | (4 | ) | (9 | ) | — | 36 | |||||||||||||
Other assets | (3 | ) | (12 | ) | — | 1 | 6 | — | (8 | ) | ||||||||||||
Provisions | 29 | 3 | — | (3 | ) | 4 | — | 33 | ||||||||||||||
Long-term debt | 25 | (6 | ) | — | (7 | ) | 1 | — | 13 | |||||||||||||
Accounts payable | 94 | 38 | — | 28 | (27 | ) | — | 133 | ||||||||||||||
Other liabilities | 53 | (27 | ) | — | (33 | ) | 30 | — | 23 | |||||||||||||
Other movements and temporary differences | 23 | (24 | ) | — | — | — | — | (1 | ) | |||||||||||||
Deferred subnational income taxes and other | (1 | ) | 2 | — | 4 | (4 | ) | — | 1 | |||||||||||||
Withholding tax on distributed earnings | (73 | ) | (43 | ) | — | 1 | (1 | ) | — | (116 | ) | |||||||||||
| | | | | | | | | | | | | | | | | | | | | | | |
| (409 | ) | (56 | ) | — | (30 | ) | 1 | — | (494 | ) | ||||||||||||
Tax losses and other balances carried forwards | 2,270 | (47 | ) | — | 197 | (50 | ) | — | 2,370 | |||||||||||||
Non-recognized deferred tax assets on losses and credits | (1,822 | ) | — | — | (158 | ) | — | — | (1,980 | ) | ||||||||||||
Non-recognized deferred tax assets on temporary differences | (27 | ) | — | — | 27 | — | — | — | ||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | |
Net deferred tax positions | 12 | (103 | ) | — | 36 | (49 | ) | — | (104 | ) | ||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
The movement in the net deferred tax position in 2017 primarily relates to WHT deferred liability on increased dividends from Pakistan and Russia.
Notes to the consolidated financial statements (Continued)
(in millions of U.S. dollars unless otherwise stated)
12 INCOME TAXES (Continued)
The following table shows the movements of the deferred tax assets and liabilities in 2016:
| | | Movement in deferred taxes | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Opening balance | Net income statement movement | Changes in composition of the group | Other comprehensive & other | Currency translation | Tax rate changes | Closing balance | |||||||||||||||
Property and equipment, net | (499 | ) | 32 | 74 | 26 | (54 | ) | 1 | (420 | ) | ||||||||||||
Intangible assets, net | (228 | ) | 32 | (3 | ) | 37 | (3 | ) | (1 | ) | (166 | ) | ||||||||||
Trade receivables | 21 | 13 | — | (1 | ) | (3 | ) | — | 30 | |||||||||||||
Other assets | (5 | ) | 3 | — | — | (1 | ) | — | (3 | ) | ||||||||||||
Provisions | 23 | 3 | 3 | (1 | ) | 1 | — | 29 | ||||||||||||||
Long-term debt | 9 | 9 | — | (1 | ) | 8 | — | 25 | ||||||||||||||
Accounts payable | 71 | 8 | — | 1 | 14 | — | 94 | |||||||||||||||
Other liabilities | 45 | 7 | 1 | (2 | ) | 2 | — | 53 | ||||||||||||||
Other movements and temporary differences | 20 | — | — | 1 | 1 | — | 23 | |||||||||||||||
Deferred subnational income taxes and other | (2 | ) | 1 | (2 | ) | 2 | — | — | (1 | ) | ||||||||||||
Withholding tax on distributed earnings | (45 | ) | (26 | ) | — | — | (2 | ) | — | (73 | ) | |||||||||||
| | | | | | | | | | | | | | | | | | | | | | | |
| (590 | ) | 82 | 73 | 62 | (37 | ) | — | (409 | ) | |||||||||||||
Tax losses and other balances carried forwards* | 2,613 | (89 | ) | 233 | (14 | ) | (298 | ) | (174 | ) | 2,270 | |||||||||||
Non-recognized deferred tax assets on losses and credits * | (2,263 | ) | — | — | (44 | ) | 311 | 174 | (1,822 | ) | ||||||||||||
Non-recognized deferred tax assets on temporary differences | (14 | ) | (16 | ) | — | — | 3 | — | (27 | ) | ||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | |
Net deferred tax positions | (254 | ) | (23 | ) | 306 | 4 | (21 | ) | — | 12 | ||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
The movement in net deferred tax position mainly relates to recognition of losses for Pakistan due to the acquisition of Warid. As of December 31, 2016, the amount of deductible temporary differences for which no deferred tax asset was recognized amounted to US$27 for Georgia.
Notes to the consolidated financial statements (Continued)
(in millions of U.S. dollars unless otherwise stated)
12 INCOME TAXES (Continued)
VEON recognizes a deferred tax asset for the carry forward of unused tax losses and other carry forwards to the extent that it is probable that the deferred tax asset will be utilized. The amount and expiry date of unused tax losses and other carry forwards for which no deferred tax asset is recognized are as follows:
As of December 31, 2017 | 0 - 5 years | 6 - 10 years | More than 10 years | Indefinite | Total | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Tax losses expiry | ||||||||||||||||
Recognized losses | (347 | ) | (12 | ) | — | (833 | ) | (1,192 | ) | |||||||
Recognized DTA | 85 | 3 | — | 234 | 322 | |||||||||||
Non-recognized losses | (420 | ) | (2,639 | ) | — | (6,396 | ) | (9,455 | ) | |||||||
Non-recognized DTA | 95 | 660 | — | 1,232 | 1,987 | |||||||||||
As of December 31, 2017 | 0 - 5 years | 6 - 10 years | More than 10 years | Indefinite | Total | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Other credits carried forwards expiry | ||||||||||||||||
Recognized credits | (68 | ) | — | — | — | (68 | ) | |||||||||
Recognized DTA | 68 | — | — | — | 68 | |||||||||||
Non-recognized credits | — | — | — | — | — | |||||||||||
Non-recognized DTA | — | — | — | — | — | |||||||||||
As of December 31, 2016 | 0 - 5 years | 6 - 10 years | More than 10 years | Indefinite | Total | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Tax losses expiry | ||||||||||||||||
Recognized losses | (47 | ) | — | — | (1,223 | ) | (1,270 | ) | ||||||||
Recognized DTA | — | 9 | — | 402 | 411 | |||||||||||
Non-recognized losses | (1,016 | ) | (2,148 | ) | — | (5,137 | ) | (8,301 | ) | |||||||
Non-recognized DTA | 237 | 537 | — | 1,003 | 1,777 | |||||||||||
Other credits carried forwards expiry | ||||||||||||||||
Recognized credits | (37 | ) | — | — | — | (37 | ) | |||||||||
Recognized DTA | 37 | — | — | — | 37 | |||||||||||
Non-recognized credits | — | — | — | (187 | ) | (187 | ) | |||||||||
Non-recognized DTA | — | — | — | 45 | 45 | |||||||||||
Losses mainly relate to our holding entities in Luxembourg (2017: US$6,532, 2016: US$5,126) and the Netherlands (2017: US$2,474, 2016: US$2,148), of which US$28 (2016: US$80) is recognized in the consolidated statement of financial position.
VEON reports the tax effect of the existence of undistributed profits that will be distributed in the foreseeable future. The Company has a deferred tax liability of US$116 (2016: US$73) relating to the tax effect of the undistributed profits that will be distributed in the foreseeable future, primarily in relation to its Russian, Algerian and Pakistan operations.
Notes to the consolidated financial statements (Continued)
(in millions of U.S. dollars unless otherwise stated)
12 INCOME TAXES (Continued)
At December 31, 2017, undistributed earnings of VEON's foreign subsidiaries (outside the Netherlands) which are indefinitely invested and will not be distributed in the foreseeable future, amounted to US$6,833 (2016: US$8,495). Accordingly, no deferred tax liability is recognized for this amount of undistributed profits.
TAXES RECORDED OUTSIDE THE INCOME STATEMENT
In 2017, a current tax charge and a deferred tax benefit of US$6 and US$102, respectively, was reported outside of the income statement in respect of foreign exchange losses for intercompany loans between our subsidiaries in Uzbekistan and Russia, denominated in U.S. dollars, recognized directly in equity.
In addition, the Company recorded a net deferred tax charge of nil in respect of cash flow hedge movements recognized directly in equity in 2017 (2016: US$5, 2015: US$5).
In 2015, the amount of current and deferred taxes recorded outside of the income statement amounts to US$348 comprising of US$345 current tax charge and US$(3) deferred tax charge. The current tax charge mainly relates to the Algerian capital gain tax of US$428, of which US$350 was recognized directly in equity.
INCOME TAX ASSETS
The Company reported both current and non-current income tax assets, totaling US$258 (2016: US$194). These tax assets mainly relate to advance tax payments in Pakistan, Bangladesh and Ukraine which can only be offset against income tax liabilities in fiscal periods subsequent to balance sheet date.
ACCOUNTING POLICIES
Income taxes
Income tax expense represents the aggregate amount determined on the profit for the period based on current tax and deferred tax.
In cases where the tax relates to items that are charged to other comprehensive income or directly to equity, the tax is also charged respectively to other comprehensive income or directly to equity.
Uncertain tax positions
The Group's policy is to comply with the applicable tax regulations in the jurisdictions in which its operations are subject to income taxes. The Group's estimates of current income tax expense and liabilities are calculated assuming that all tax computations filed by the Company's subsidiaries will be subject to a review or audit by the relevant tax authorities. The Company and the relevant tax authorities may have different interpretations of how regulations should be applied to actual transactions (refer Note 22 and Note 26, respectively, for further details regarding provisions recognized and risks and uncertainties). Such uncertain tax positions are accounted for in accordance with IAS 12 'Income Taxes' or IAS 37 'Provisions, Contingent Liabilities and Contingent Assets' depending on the type of tax in question.
Notes to the consolidated financial statements (Continued)
(in millions of U.S. dollars unless otherwise stated)
12 INCOME TAXES (Continued)
Deferred taxation
Deferred taxes are recognized using the liability method and thus are computed as the taxes recoverable or payable in future periods in respect of deductible or taxable temporary differences between the tax bases of assets and liabilities and their carrying amounts in the Company's financial statements.
SOURCE OF ESTIMATION UNCERTAINTY
Deferred tax assets and uncertain tax positions
Deferred tax assets are recognized to the extent that it is probable that the assets will be realized. Significant judgment is required to determine the amount that can be recognized and depends foremost on the expected timing, level of taxable profits, tax planning strategies and the existence of taxable temporary differences. Estimates made relate primarily to losses carried forward in some of the Group's foreign operations. When an entity has a history of recent losses, the deferred tax asset arising from unused tax losses is recognized only to the extent that there is convincing evidence that sufficient future taxable profit will be generated. Estimated future taxable profit is not considered such evidence unless that entity has demonstrated the ability by generating significant taxable profit for the current year or there are certain other events providing sufficient evidence of future taxable profit. New transactions and the introduction of new tax rules may also affect judgments due to uncertainty concerning the interpretation of the rules and any transitional rules.
Uncertain tax positions are recognized when it is probable that a tax position will not be sustained, and the amount can be reliably measured. The expected resolution of uncertain tax positions is based upon management's judgment of the likelihood of sustaining a position taken through tax audits, tax courts and/or arbitration, if necessary. Circumstances and interpretations of the amount or likelihood of sustaining a position may change through the settlement process. Furthermore, the resolution of uncertain tax positions is not always within the control of the Group and it is often dependent on the efficiency of the legal processes in the relevant taxing jurisdictions in which the Group operates. Issues can, and often do, take many years to resolve.
See also Note 26 for further information.
Notes to the consolidated financial statements (Continued)
(in millions of U.S. dollars unless otherwise stated)
13INVESTMENTS IN SUBSIDIARIES
The Company held investments in the significant subsidiaries for the years ended December 31 as detailed in the table below. The equity interest presented represents the economic rights available to the Company.
| | | | Equity interest held by the Group | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| | Country of incorporation | Nature of subsidiary | |||||||||
Name of significant subsidiary | 2017 | 2016 | |||||||||
VEON Amsterdam B.V. | Netherlands | Holding | 100 | % | 100 | % | |||||
VEON Holdings B.V. | Netherlands | Holding | 100 | % | 100 | % | |||||
PJSC VimpelCom | Russia | Operating | 100 | % | 100 | % | |||||
JSC "Kyivstar" | Ukraine | Operating | 100 | % | 100 | % | |||||
LLP "KaR-Tel" | Kazakhstan | Operating | 75.0 | % | 75.0 | % | |||||
LLC "Tacom" | Tajikistan | Operating | 98.0 | % | 98.0 | % | |||||
LLC "Unitel" | Uzbekistan | Operating | 100 | % | 100 | % | |||||
LLC "VEON Georgia" | Georgia | Operating | 80.0 | % | 80.0 | % | |||||
CJSC "VEON Armenia" | Armenia | Operating | 100 | % | 100 | % | |||||
LLC "Sky Mobile" | Kyrgyzstan | Operating | 50.1 | % | 50.1 | % | |||||
VimpelCom Lao Co. Ltd. | Lao PDR | Operating | 78.0 | % | 78.0 | % | |||||
VEON Luxembourg Holdings S.à r.l. | Luxembourg | Holding | 100 | % | 100 | % | |||||
VEON Luxembourg Finance Holdings S.à r.l. | Luxembourg | Holding | 100 | % | 100 | % | |||||
VEON Luxembourg Finance S.A. | Luxembourg | Holding | 100 | % | 100 | % | |||||
Global Telecom Holding S.A.E | Egypt | Holding | 57.7 | % | 51.9 | % | |||||
Omnium Telecom Algérie S.p.A.* | Algeria | Holding | 26.3 | % | 23.7 | % | |||||
Optimum Telecom Algeria S.p.A.* | Algeria | Operating | 26.3 | % | 23.7 | % | |||||
Pakistan Mobile Communications Limited | Pakistan | Operating | 49.0 | % | 44.0 | % | |||||
Banglalink Digital Communications Limited | Bangladesh | Operating | 57.7 | % | 51.9 | % | |||||
Wind Telecom S.p.A.** | Italy | Holding | — | 100 | % | ||||||
Pursuant to local laws and regulations and covenants in agreements relating to indebtedness, subsidiaries may be restricted from declaring or paying dividends to VEON.
The company holds and controls its investments in Omnium Telecom Algérie S.p.A., Optimum Telecom Algeria S.p.A, Pakistan Mobile Communications Limited, Warid Telecom Limited and Banglalink Digital Communications Limited ("Banglalink") through its subsidiary GTH, in which it holds a 57.7% interest as of balance sheet date.
Notes to the consolidated financial statements (Continued)
(in millions of U.S. dollars unless otherwise stated)
13INVESTMENTS IN SUBSIDIARIES (Continued)
MATERIAL PARTLY-OWNED SUBSIDIARIES
Financial information of subsidiaries that have material non-controlling interests ("NCIs") is provided below:
| | Equity interest held by NCIs | Book values of material NCIs | Profit / (loss) attributable to material NCIs | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Name of significant subsidiary | 2017 | 2016 | 2017 | 2016 | 2017 | 2016 | |||||||||||||
LLP "KaR-Tel" ("Kar-Tel") | 25.0 | % | 25.0 | % | 252 | 253 | 8 | 10 | |||||||||||
LLC "Sky Mobile" ("Sky Mobile") | 49.8 | % | 49.8 | % | 167 | 164 | 3 | (21 | ) | ||||||||||
Global Telecom Holding S.A.E ("GTH") | 42.3 | % | 48.1 | % | (778 | ) | (219 | ) | (40 | ) | 116 | ||||||||
Omnium Telecom Algérie S.p.A. ("OTA") | 73.7 | % | 76.3 | % | 1,235 | 1,332 | 100 | 141 | |||||||||||
The summarized financial information of these subsidiaries before intercompany eliminations for the years ended December 31 are detailed below. Note that the amount of non-controlling interests presented for OTA of 73.7% represents the non-controlling interests in Algeria of 54.4% and the non-controlling interests in GTH, the intermediate parent company in Egypt, of 42.3%.
Summarized income statement
| | Kar-Tel | Sky Mobile | GTH | OTA | |||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2017 | 2016 | 2015 | 2017 | 2016 | 2015 | 2017 | 2016 | 2015 | 2017 | 2016 | 2015 | |||||||||||||||||||||||||
Operating revenue | 348 | 308 | 534 | 108 | 136 | 164 | 3,015 | 2,955 | 2,894 | 915 | 1,040 | 1,273 | |||||||||||||||||||||||||
Operating expenses | (296 | ) | (255 | ) | (410 | ) | (97 | ) | (162 | ) | (93 | ) | (2,384 | ) | (2,463 | ) | (2,462 | ) | (703 | ) | (753 | ) | (922 | ) | |||||||||||||
Other (expenses) / income | (7 | ) | 2 | 97 | (2 | ) | (12 | ) | 29 | (450 | ) | (213 | ) | (364 | ) | (27 | ) | (33 | ) | (72 | ) | ||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Profit / (loss) before tax | 45 | 55 | 221 | 9 | (38 | ) | 100 | 181 | 279 | 68 | 185 | 254 | 279 | ||||||||||||||||||||||||
Income tax expense | (13 | ) | (14 | ) | (51 | ) | (4 | ) | (5 | ) | (10 | ) | (375 | ) | (144 | ) | (115 | ) | (49 | ) | (69 | ) | (106 | ) | |||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Profit / (loss) for the year | 32 | 41 | 170 | 5 | (43 | ) | 90 | (194 | ) | 135 | (47 | ) | 136 | 185 | 173 | ||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total comprehensive income / (loss) | 32 | 41 | 170 | 5 | (43 | ) | 90 | (194 | ) | 135 | (47 | ) | 136 | 185 | 173 | ||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Attributed to NCIs | 8 | 10 | 44 | 3 | (21 | ) | 40 | (40 | ) | 116 | 26 | 100 | 141 | 132 | |||||||||||||||||||||||
Dividends paid to NCIs | — | — | — | — | — | — | 116 | — | — | 82 | — | (57 | ) | ||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Notes to the consolidated financial statements (Continued)
(in millions of U.S. dollars unless otherwise stated)
13INVESTMENTS IN SUBSIDIARIES (Continued)
Summarized statement of financial position
| | Kar-Tel | Sky Mobile | GTH | OTA | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2017 | 2016 | 2017 | 2016 | 2017 | 2016 | 2017 | 2016 | |||||||||||||||||
Property and equipment | 184 | 203 | 79 | 80 | 2,028 | 2,314 | 517 | 531 | |||||||||||||||||
Intangible assets | 92 | 91 | 12 | 14 | 1,324 | 1,356 | 291 | 394 | |||||||||||||||||
Other non-current assets | 204 | 205 | 131 | 147 | 1,806 | 2,268 | 1,361 | 1,417 | |||||||||||||||||
Trade and other receivables | 22 | 16 | 6 | 6 | 250 | 222 | 31 | 44 | |||||||||||||||||
Cash and cash equivalents | 14 | 29 | 32 | 33 | 375 | 606 | 125 | 309 | |||||||||||||||||
Other current assets | 74 | 64 | 12 | 3 | 850 | 337 | 66 | 84 | |||||||||||||||||
Financial liabilities | — | — | — | — | (3,072 | ) | (2,903 | ) | (128 | ) | (343 | ) | |||||||||||||
Provisions | (5 | ) | (7 | ) | (4 | ) | (15 | ) | (341 | ) | (396 | ) | (31 | ) | (28 | ) | |||||||||
Other liabilities | (84 | ) | (94 | ) | (22 | ) | (29 | ) | (1,876 | ) | (1,787 | ) | (400 | ) | (492 | ) | |||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Total equity | 501 | 507 | 246 | 239 | 1,344 | 2,017 | 1,832 | 1,916 | |||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Attributed to: | |||||||||||||||||||||||||
Equity holders of the parent | 249 | 254 | 79 | 75 | 2,157 | 2,236 | 597 | 584 | |||||||||||||||||
Non-controlling interests | 252 | 253 | 167 | 164 | (778 | ) | (219 | ) | 1,235 | 1,332 | |||||||||||||||
Summarized statement of cash flows
| | Kar-Tel | Sky Mobile | GTH | OTA | |||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2017 | 2016 | 2015 | 2017 | 2016 | 2015 | 2017 | 2016 | 2015 | 2017 | 2016 | 2015 | |||||||||||||||||||||||||
Net operating cash flows | 105 | 99 | 137 | 23 | 58 | 81 | 877 | 1,077 | (339 | ) | 345 | 446 | (706 | ) | |||||||||||||||||||||||
Net investing cash flows | (73 | ) | (124 | ) | (363 | ) | (24 | ) | 45 | (65 | ) | (924 | ) | (473 | ) | (823 | ) | (172 | ) | (238 | ) | (201 | ) | ||||||||||||||
Net financing cash flows | (48 | ) | (83 | ) | (110 | ) | — | (115 | ) | (88 | ) | (157 | ) | (492 | ) | (1,032 | ) | (350 | ) | (288 | ) | (1,270 | ) | ||||||||||||||
Effect of exchange rate changes on cash and cash equivalents | — | 1 | (5 | ) | — | (1 | ) | (3 | ) | (18 | ) | (14 | ) | (151 | ) | (7 | ) | (14 | ) | (153 | ) | ||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net increase / (decrease) in cash equivalents | (16 | ) | (107 | ) | (341 | ) | (1 | ) | (13 | ) | (75 | ) | (222 | ) | 98 | (2,345 | ) | (184 | ) | (94 | ) | (2,330 | ) | ||||||||||||||
SIGNIFICANT ACCOUNTING JUDGEMENT
Control over subsidiaries
Subsidiaries, which are those entities over which the Company is deemed to have control, are consolidated. The Company controls an entity when the Company is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. In certain circumstances, significant judgment is required to assess if the Company is deemed to have control over entities where the Company's ownership interest does not exceed 50%.
Notes to the consolidated financial statements (Continued)
(in millions of U.S. dollars unless otherwise stated)
14 INVESTMENTS IN JOINT VENTURES AND ASSOCIATES
The Company held investments in the following joint ventures and associates for the years ended December 31:
| | | | Equity interest held by the Group | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| | Country of incorporation | Nature of subsidiary | |||||||||
Name of significant joint venture | 2017 | 2016 | |||||||||
VIP-CKH Luxembourg S.à.r.l.* | Luxembourg | Holding | 50 | % | 50 | % | |||||
VIP-CKH Ireland Limited* | Ireland | Financing | 50 | % | 50 | % | |||||
Euroset Holding N.V. ("Euroset") | Russia | Operating | 50 | % | 50 | % | |||||
The following table provides aggregated financial information for the Group's joint ventures and associates:
| | Italy Joint Venture | Euroset | Other | Total | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
As of January 1, 2015 | — | 237 | 28 | 265 | |||||||||
Share of profit / (loss) | — | 18 | (4 | ) | 14 | ||||||||
Reclassified to assets held for sale | — | — | (19 | ) | (19 | ) | |||||||
Foreign currency translation | — | (56 | ) | (3 | ) | (59 | ) | ||||||
| | | | | | | | | | | | | | |
As of December 31, 2015 | — | 199 | 2 | 201 | |||||||||
| | | | | | | | | | | | | | |
Acquisitions | 2,113 | — | — | 2,113 | |||||||||
Share of profit / (loss) | 59 | (10 | ) | (1 | ) | 48 | |||||||
Impairment of Euroset | — | (99 | ) | — | (99 | ) | |||||||
Foreign currency translation | (119 | ) | 36 | (1 | ) | (84 | ) | ||||||
| | | | | | | | | | | | | | |
As of December 31, 2016 | 2,053 | 126 | — | 2,179 | |||||||||
| | | | | | | | | | | | | | |
Share of loss of joint ventures | (390 | ) | (22 | ) | — | (412 | ) | ||||||
Share of other comprehensive loss | (12 | ) | — | — | (12 | ) | |||||||
Impairment of Euroset | — | (110 | ) | — | (110 | ) | |||||||
Foreign currency translation | 270 | 6 | — | 276 | |||||||||
| | | | | | | | | | | | | | |
As of December 31, 2017 | 1,921 | — | — | 1,921 | |||||||||
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
ITALY JOINT VENTURE
The Italy Joint Venture includes VIP-CKH Luxembourg S.à r.l and its subsidiaries, which hold the combined businesses of Wind and 3 Italia, and the financing company VIP-CKH Ireland Limited. On November 5, 2016, the Company completed the transaction with CK Hutchison Holdings Ltd to form a joint venture in Italy, combining their respective businesses. Refer to Note 5 for further details.
Notes to the consolidated financial statements (Continued)
(in millions of U.S. dollars unless otherwise stated)
14 INVESTMENTS IN JOINT VENTURES AND ASSOCIATES (Continued)
Summarized financial information
The information of the Italy Joint Venture disclosed below reflects the amounts presented in the financial statements of the relevant joint venture and not the Group's share of those amounts, unless otherwise stated. The information presented below has been amended to reflect adjustments made by the Company when using the equity method, including fair value adjustments and modifications for differences in accounting policy.
Income statement and statement of comprehensive income | 2017 | 2016* | |||||
|---|---|---|---|---|---|---|---|
Operating revenue | 6,913 | 1,250 | |||||
Operating expenses | (6,877 | ) | (1,058 | ) | |||
Other expenses | (755 | ) | (20 | ) | |||
Income tax expenses | (61 | ) | (54 | ) | |||
| | | | | | | | |
Loss for the period | (780 | ) | 118 | ||||
Other comprehensive loss | (24 | ) | — | ||||
| | | | | | | | |
Total comprehensive loss | (804 | ) | 118 | ||||
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Included within 'Operating expenses' is depreciation and amortization expense of US$2,063 in 2017 (2016: US$290). Included within 'Other expenses' is interest expense of US$484 of interest expense (2016: US$68).
Statement of financial position | 2017 | 2016* | |||||
|---|---|---|---|---|---|---|---|
Non-current assets | 17,672 | 17,469 | |||||
Current assets | 2,782 | 2,579 | |||||
Assets held for sale | 289 | 53 | |||||
| | | | | | | | |
Total assets | 20,743 | 20,101 | |||||
Non-current liabilities | (13,166 | ) | (12,673 | ) | |||
Current liabilities | (3,729 | ) | (3,322 | ) | |||
Liabilities relating to assets held for sale | (7 | ) | — | ||||
| | | | | | | | |
Total liabilities | (16,902 | ) | (15,995 | ) | |||
| | | | | | | | |
Net assets | 3,841 | 4,106 | |||||
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Reconciliation to carrying amounts | |||||||
Company's equity interest | 50 | % | 50 | % | |||
Company's share of Italy Joint Venture net assets | 1,921 | 2,053 | |||||
| | | | | | | | |
Carrying amount | 1,921 | 2,053 | |||||
Included in the balances disclosed above are the following: | |||||||
Cash and cash equivalents | 743 | 666 | |||||
Current financial liabilities* | (59 | ) | (186 | ) | |||
Non-current financial liabilities* | (12,406 | ) | (12,409 | ) | |||
Notes to the consolidated financial statements (Continued)
(in millions of U.S. dollars unless otherwise stated)
14 INVESTMENTS IN JOINT VENTURES AND ASSOCIATES (Continued)
There were no dividends received from the Italy Joint Venture in 2017 or 2016. The Italy Joint Venture is restricted from making dividend distributions and certain other payments to VEON as a result of existing covenants in the financing documents, which govern the secured debt of the Italy Joint Venture.
Segment information
As disclosed in Note 7, the Italy Joint Venture is a separate reportable segment. Financial information for the years ended December 31 is presented below.
| | 2017 | 2016* | |||||
|---|---|---|---|---|---|---|---|
Revenue | |||||||
External customers | 6,912 | 1,250 | |||||
Inter-segment | 1 | — | |||||
| | | | | | | | |
Total revenue | 6,913 | 1,250 | |||||
| | | | | | | | |
Adjusted EBITDA | 2,131 | 482 | |||||
Other disclosures | |||||||
Capital expenditure | 1,434 | 584 | |||||
The following table provides a reconciliation of Adjusted EBITDA to (loss) / profit for the period for the Italy Joint Venture, for the years ended December 31.
| | 2017 | 2016* | |||||
|---|---|---|---|---|---|---|---|
Adjusted EBITDA | 2,131 | 482 | |||||
Depreciation and amortization | (2,063 | ) | (290 | ) | |||
Impairment of non-current assets | (27 | ) | — | ||||
Gain / (loss) on disposals of non-current assets | (4 | ) | — | ||||
Net finance costs | (468 | ) | (68 | ) | |||
Other non-operating (losses) / gains | (288 | ) | 48 | ||||
Income tax expenses | (61 | ) | (54 | ) | |||
| | | | | | | | |
(Loss) / profit for the period | (780 | ) | 118 | ||||
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Refinancing of Wind Tre S.p.A.
On October 24, 2017, the Italy Joint Venture, through its wholly-owned subsidiary, Wind Tre S.p.A ("Wind Tre"), entered into a senior facilities agreement with a group of 21 international banks consisting of a EUR 3.0 billion (approximately US$3.5 billion) five year term loan with interest based on a leverage grid (beginning at 2.0%) (the"Wind Tre Facility A"), and a EUR 400 million (approximately US$470) five year revolving credit facility with interest based on a leverage grid (beginning at 1.75%).
Notes to the consolidated financial statements (Continued)
(in millions of U.S. dollars unless otherwise stated)
14 INVESTMENTS IN JOINT VENTURES AND ASSOCIATES (Continued)
On November 3, 2017, Wind Tre drew down the Wind Tre Facility A and issued EUR 5.6 billion (approximately US$6,516) and US$2.0 billion of senior secured notes, consisting of EUR 2.250 billion Senior Secured Floating Rate Notes due 2024, EUR 1.625 billion 2.625% Senior Secured Notes due 2023, EUR 1.750 billion 3.125% Senior Secured Notes due 2025 and US$2.0 billion 5.0% Senior Secured Notes due 2026 (collectively, the"Wind Tre Notes").
Proceeds from the Wind Tre Facility A and Wind Tre Notes were used to repay outstanding amounts under Wind Tre then-existing senior term loan facility and repaid loans with Wind Tre's subsidiary, Wind Acquisition Finance S.A. ("WAF"), who then used the funds to repay all of WAF's senior secured and senior notes.
EUROSET
In Q4 2016, due to operational underperformance of Euroset, the Company recorded an impairment of US$99. During Q2 2017, due to the continued operational underperformance of Euroset, the Company has revised its previous estimates and assumptions regarding Euroset's future cash flows. As a result, the Company impaired the remaining carrying value of the investment in Euroset.
The recoverable amount of Euroset was determined using fair value less costs of disposal, based on a Level 3 fair value derived from a discounted cash flow model.
Key assumptions | Q2 2017 | Q4 2016 | |||||
|---|---|---|---|---|---|---|---|
Discount rate (functional currency) | 13.4 | % | 16.0 | % | |||
Average annual revenue growth rate during forecast period (functional currency) | 1.7 | % | 4.5 | % | |||
Terminal growth rate | 0.0 | % | 1.0 | % | |||
Average operating (EBITDA) margin during forecast period | 0.0 | % | 3.7 | % | |||
Average capital expenditure as a percentage of revenue | 0.9 | % | 0.4 | % | |||
ACCOUNTING POLICIES
The Company's investments in its associates and joint ventures are accounted for using the equity method. Under the equity method, the investment in an associate or a joint venture is initially recognized at cost. The carrying amount of the investment is adjusted to recognize changes in the Company's share of net profit after tax, other comprehensive income and equity of the associate or joint venture since the acquisition date.
The Company assesses, at the end of each reporting period, whether there are any indicators that an investment in a Joint Venture may be impaired. If there are such indicators, the Company estimates the recoverable amount of the joint venture after applying the equity method.
Notes to the consolidated financial statements (Continued)
(in millions of U.S. dollars unless otherwise stated)
14 INVESTMENTS IN JOINT VENTURES AND ASSOCIATES (Continued)
SIGNIFICANT ACCOUNTING JUDGEMENT
Investment in Italy Joint Venture
VEON holds an interest in:
(together, the"Italy Joint Venture").
Both joint arrangements are classified as joint ventures in accordance with IFRS 11'Joint Arrangements', based on the following:
In this context, it was also concluded that the investment in the two joint ventures shall be considered to be accounted for in the aggregate, rather than as two separate joint ventures. A key consideration in this determination was the shareholder agreement which stipulates that decisions about the activities of the joint ventures (including dividend distributions and shareholder loan repayments) require unanimous consent from both shareholders. This conclusion required substantial judgment as to the application of accounting guidance. Refer Note 5 for more details regarding the Company's acquisition of its interest in the Italy Joint Venture.
Notes to the consolidated financial statements (Continued)
(in millions of U.S. dollars unless otherwise stated)
15 PROPERTY AND EQUIPMENT
The following table summarizes the movement in property and equipment for the years ended December 31:
| | Telecommunications equipment | Land, buildings and constructions | Office and other equipment | Equipment not installed and assets under construction | Total | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Cost | ||||||||||||||||
As of January 1, 2016 | 10,068 | 423 | 1,113 | 919 | 12,523 | |||||||||||
Acquisition (Note 5) | 116 | 10 | 39 | 34 | 199 | |||||||||||
Additions | 62 | 7 | 21 | 1,322 | 1,412 | |||||||||||
Disposals | (444 | ) | (9 | ) | (33 | ) | (22 | ) | (508 | ) | ||||||
Transfer | 1,153 | 9 | 52 | (1,214 | ) | — | ||||||||||
Translation adjustment | 1,137 | 21 | 127 | (53 | ) | 1,232 | ||||||||||
| | | | | | | | | | | | | | | | | |
As of December 31, 2016 | 12,092 | 461 | 1,319 | 986 | 14,858 | |||||||||||
Reclassified to assets held for sale (Note 5) | (662 | ) | (1 | ) | (5 | ) | (7 | ) | (675 | ) | ||||||
Additions | 39 | 14 | 26 | 1,194 | 1,273 | |||||||||||
Disposals | (671 | ) | (5 | ) | (49 | ) | (19 | ) | (744 | ) | ||||||
Transfer | 1,426 | 15 | 164 | (1,605 | ) | — | ||||||||||
Translation adjustment | (284 | ) | (2 | ) | 24 | (37 | ) | (299 | ) | |||||||
| | | | | | | | | | | | | | | | | |
As of December 31, 2017 | 11,940 | 482 | 1,479 | 512 | 14,413 | |||||||||||
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Accumulated depreciation and impairment | ||||||||||||||||
As of January 1, 2016 | (5,221 | ) | (179 | ) | (688 | ) | (196 | ) | (6,284 | ) | ||||||
Transfer | (17 | ) | (1 | ) | 21 | (3 | ) | — | ||||||||
Depreciation charge for the year | (1,266 | ) | (33 | ) | (140 | ) | — | (1,439 | ) | |||||||
Disposals | 415 | 6 | 29 | 14 | 464 | |||||||||||
Impairment | (65 | ) | (2 | ) | (6 | ) | (27 | ) | (100 | ) | ||||||
Translation adjustment | (772 | ) | (9 | ) | (79 | ) | 80 | (780 | ) | |||||||
| | | | | | | | | | | | | | | | | |
As of December 31, 2016 | (6,926 | ) | (218 | ) | (863 | )) | (132 | ) | (8,139 | ) | ||||||
Reclassified to assets held for sale (Note 5) | 478 | — | 3 | 1 | 482 | |||||||||||
Transfer | 14 | 1 | (17 | ) | 2 | — | ||||||||||
Depreciation charge for the year | (1,270 | ) | (32 | ) | (152 | ) | — | (1,454 | ) | |||||||
Disposals | 635 | 5 | 42 | 13 | 695 | |||||||||||
Impairment | (5 | ) | — | — | (10 | ) | (15 | ) | ||||||||
Translation adjustment | 131 | 2 | (22 | ) | 4 | 115 | ||||||||||
| | | | | | | | | | | | | | | | | |
As of December 31, 2017 | (6,943 | ) | (242 | ) | (1,009 | ) | (122 | ) | (8,316 | ) | ||||||
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Net book value | ||||||||||||||||
As of January 1, 2016 | 4,847 | 244 | 425 | 723 | 6,239 | |||||||||||
As of December 31, 2016 | 5,166 | 243 | 456 | 854 | 6,719 | |||||||||||
As of December 31, 2017 | 4,997 | 240 | 470 | 390 | 6,097 | |||||||||||
Non-cash investing activities
In 2017, VEON acquired property and equipment in the amount of US$441 (2016: US$699), which was not paid for as of respective year end.
Notes to the consolidated financial statements (Continued)
(in millions of U.S. dollars unless otherwise stated)
15 PROPERTY AND EQUIPMENT (Continued)
Changes in estimates
�� During 2017, there were no other material change in estimates related to property and equipment other than the impairment described in Note 10 of US$15 (2016: US$100), and accelerated depreciation in Pakistan, Ukraine and Bangladesh pertaining to network modernization activities US$74 (2016: US$153).
Additional information
Property and equipment pledged as security for further information aboutbank borrowings amounts to US$875 as of December 31, 2017 (2016: US$1,029), and primarily relate to securities for borrowings of PMCL (refer to Note 17 for details regarding amounts borrowed).
During 2017, VEON capitalized interest in the goodwillcost of property and equipment in the amount of US$3 (2016: US$5). In 2017, the capitalization rate was 8.3% (2016: 10.3%).
ACCOUNTING POLICIES
Property and equipment is stated at cost, net of any accumulated depreciation and accumulated impairment losses.
Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets as follows:
Class of property and equipment | Useful life | |
|---|---|---|
| Telecommunication equipment | 3 - 20 years | |
| Buildings and constructions | 10 - 50 years | |
| Office and other equipment | 3 - 10 years |
Each asset's residual value, useful life and method of depreciation is reviewed at the end of each financial year and adjusted prospectively, if necessary.
Borrowing costs
Borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset that necessarily takes a substantial period of time (longer than six months) to get ready for its intended use are capitalized as part of the cost of the respective qualifying assets. All other non-current assets impairment test.borrowing costs are expensed in the period incurred.
Notes to the consolidated financial statements (Continued)
(in millions of U.S. dollars unless otherwise stated)
15 PROPERTY AND EQUIPMENT (Continued)
SOURCE OF ESTIMATION UNCERTAINTY
Depreciation and amortization of non-current assets
Depreciation and amortization expenses are based on management estimates of useful life, residual value and amortization method of property and equipment and intangible assets. Estimates may change due to technological developments, competition, changes in market conditions and other factors and may result in changes in the estimated useful life and in the amortization or depreciation charges. Technological developments are difficult to predict and our views on the trends and pace of development may change over time. Some of the assets and technologies, in which the Group invested several years ago, are still in use and provide the basis for the new technologies. Critical
The useful lives of property and equipment and intangible assets are reviewed at least annually, taking into consideration the factors mentioned above and all other relevant factors. Estimated useful lives for similar types of assets may vary between different entities in the Group due to local factors such as growth rate, maturity of the market, historical and expected replacements or transfer of assets and quality of components used.
Notes to the consolidated financial statements (Continued)
(in millions of U.S. dollars unless otherwise stated)
16 INTANGIBLE ASSETS
The following table summarizes the movement in intangible assets for the years ended December 31:
| | Telecommunications licenses, frequencies & permissions | Software | Brands and trademarks | Customer relationships | Other intangible assets | Total | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Cost | |||||||||||||||||||
As of January 1, 2016 | 1,761 | 827 | 564 | 1,738 | 313 | 5,203 | |||||||||||||
Acquisition in Pakistan (Note 5) | 70 | 1 | 30 | 100 | — | 201 | |||||||||||||
Additions | 164 | 176 | — | — | (11 | ) | 329 | ||||||||||||
Disposals | (16 | ) | (63 | ) | — | (6 | ) | (15 | ) | (100 | ) | ||||||||
Transfer | — | 11 | — | — | (11 | ) | — | ||||||||||||
Translation adjustment | 38 | 86 | (17 | ) | 21 | (13 | ) | 115 | |||||||||||
| | | | | | | | | | | | | | | | | | | | |
As of December 31, 2016 | 2,017 | 1,038 | 577 | 1,853 | 263 | 5,748 | |||||||||||||
Reclassified to assets held for sale (Note 5) | (8 | ) | — | — | — | — | (8 | ) | |||||||||||
Additions | 332 | 178 | — | — | 8 | 518 | |||||||||||||
Disposals | (38 | ) | (93 | ) | — | — | (9 | ) | (140 | ) | |||||||||
Transfer | — | 4 | — | — | (4 | ) | — | ||||||||||||
Translation adjustment | (110 | ) | (25 | ) | (25 | ) | (44 | ) | (21 | ) | �� | (225 | ) | ||||||
| | | | | | | | | | | | | | | | | | | | |
As of December 31, 2017 | 2,193 | 1,102 | 552 | 1,809 | 237 | 5,893 | |||||||||||||
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Accumulated amortization and impairment | |||||||||||||||||||
As of January 1, 2016 | (705 | ) | (458 | ) | (189 | ) | (1,401 | ) | (226 | ) | (2,979 | ) | |||||||
Amortization charge for the year | (161 | ) | (187 | ) | (37 | ) | (97 | ) | (15 | ) | (497 | ) | |||||||
Disposals | 16 | 60 | — | 6 | 13 | 95 | |||||||||||||
Impairment | (12 | ) | (2 | ) | — | — | — | (14 | ) | ||||||||||
Translation adjustment | (27 | ) | (71 | ) | 7 | (24 | ) | 19 | (96 | ) | |||||||||
| | | | | | | | | | | | | | | | | | | | |
As of December 31, 2016 | (889 | ) | (658 | ) | (219 | ) | (1,516 | ) | (209 | ) | (3,491 | ) | |||||||
Reclassified to assets held for sale | 6 | — | — | — | — | 6 | |||||||||||||
Amortization charge for the year | (160 | ) | (206 | ) | (83 | ) | (75 | ) | (13 | ) | (537 | ) | |||||||
Disposals | 37 | 91 | — | — | 8 | 136 | |||||||||||||
Translation adjustment | 69 | 22 | 12 | 37 | 21 | 161 | |||||||||||||
| | | | | | | | | | | | | | | | | | | | |
As of December 31, 2017 | (937 | ) | (751 | ) | (290 | ) | (1,554 | ) | (193 | ) | (3,725 | ) | |||||||
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Net book value | |||||||||||||||||||
As of January 1, 2016 | 1,056 | 369 | 375 | 337 | 87 | 2,224 | |||||||||||||
As of December 31, 2016 | 1,128 | 380 | 358 | 337 | 54 | 2,257 | |||||||||||||
As of December 31, 2017 | 1,256 | 351 | 262 | 255 | 44 | 2,168 | |||||||||||||
On May 16, 2017, PMCL participated in an auction for the acquisition of additional 4G/LTE spectrum in Pakistan. PMCL was awarded 10 MHz paired spectrum in the 1800 MHz band for a total consideration of US$295 million, plus withholding tax of 10% representing payment of income tax in advance.
Notes to the consolidated financial statements (Continued)
(in millions of U.S. dollars unless otherwise stated)
16 INTANGIBLE ASSETS (Continued)
Non-cash investing activities
During 2017, VEON acquired intangible assets in the amount of US$92 (2016: US$194), which was not paid for as of respective year end.
Changes in estimates
During 2017, there were no other material change in estimates related to intangible assets other than accelerated amortization of US$45 pertaining to brands and trademarks in Pakistan.
Additional information
As of December 31, 2017, no intangible assets were pledged as collateral and no assets have restrictions on title.
During 2017 and 2016, VEON did not capitalize any interest within the cost of intangible assets.
ACCOUNTING POLICIES
Intangible assets acquired separately are measured initially at cost and are subsequently measured at cost less accumulated amortization and impairment losses.
Intangible assets with a finite useful life are generally amortized with the straight-line method over the estimated useful life of the intangible asset.
The amortization period and the amortization method for intangible assets with finite useful lives are reviewed at least annually.
SOURCE OF ESTIMATION UNCERTAINTY
Depreciation and amortization of non-current assets
Refer also to Note 15 for further details regarding source of estimation uncertainty.
Significant estimates in the evaluationsevaluation of useful lives for intangible assets include, but are not limited to, the estimated average customer relationship based on churn, the remaining license or concession period and the expected developments in technology and markets. The useful lives of property and equipment and intangible assets are reviewed at least annually, taking into consideration the factors mentioned above and all other important relevant factors. Estimated useful lives for similar types of assets may vary between different entities in the Group due to local factors such as growth rate, maturity of the market, history and expectations for replacements or transfer of assets, climate and quality of components used.
The actual economic lives of intangible assets may be different than our estimated useful lives, thereby resulting in a different carrying value of our intangible assets with finite lives. We continue to evaluate the amortization period for intangible assets with finite lives to determine whether events or circumstances warrant revised amortization periods. A change in estimated useful lives is a change in accounting estimate, and depreciation and amortization charges are adjusted prospectively. See
Notes to the consolidated financial statements (Continued)
(in millions of U.S. dollars unless otherwise stated)
17 FINANCIAL ASSETS AND LIABILITIES
Set out below is the carrying value of the Company's financial instruments, together with a comparison, by class, of the carrying amounts and fair value of the Company's financial instruments that are recognized in the consolidated financial statements as of December 31, other than those with carrying amounts that are reasonable approximations of fair values. Details regarding how fair value is determined for each class of financial instruments is disclosed later in this Note.
FINANCIAL ASSETS
The Company holds the following financial assets as of December 31:
| | Carrying value | Fair value | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Financial assets | 2017 | 2016 | 2017 | 2016 | |||||||||
Financial assets at fair value through profit or loss | |||||||||||||
Derivatives not designated as hedges | |||||||||||||
Foreign exchange contracts | 5 | 2 | 5 | 2 | |||||||||
Embedded derivatives in notes | 5 | 12 | 5 | 12 | |||||||||
Financial assets at fair value | |||||||||||||
Available for sale financial assets | 71 | 71 | 71 | 71 | |||||||||
| | | | | | | | | | | | | | |
Total financial assets at fair value | 81 | 85 | 81 | 85 | |||||||||
| | | | | | | | | | | | | | |
Loans granted, deposits and other financial assets | |||||||||||||
Bank deposits and interest accrued | 70 | 385 | 70 | 385 | |||||||||
Cash pledged as collateral* | 998 | — | 998 | — | |||||||||
Other investments | 12 | 24 | 12 | 24 | |||||||||
Other loans granted | 3 | 2 | 3 | 2 | |||||||||
| | | | | | | | | | | | | | |
Total loans granted, deposits and other financial assets | 1,083 | 411 | 1,083 | 411 | |||||||||
| | | | | | | | | | | | | | |
Total financial assets | 1,164 | 496 | 1,164 | 496 | |||||||||
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Non-current | 34 | 306 | |||||||||||
Current | 1,130 | 190 | |||||||||||
Deferred tax assets and uncertain tax positions
Notes to the consolidated financial statements (Continued)
Deferred tax assets are recognized(in millions of U.S. dollars unless otherwise stated)
17 FINANCIAL ASSETS AND LIABILITIES (Continued)
FINANCIAL LIABILITIES
The Company holds the following financial liabilities as of December 31:
| | Carrying value | Fair value | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Financial Liabilities | 2017 | 2016 | 2017 | 2016 | |||||||||
Financial liabilities at fair value through profit or loss | |||||||||||||
Derivatives not designated as hedges | |||||||||||||
Foreign exchange contracts | — | 29 | — | 29 | |||||||||
Contingent consideration | 49 | 47 | 49 | 47 | |||||||||
Financial liabilities at fair value | |||||||||||||
Derivatives designated as net investment hedges | |||||||||||||
Cross currency interest rate exchange contracts | 59 | — | 59 | — | |||||||||
Derivatives designated as cash flow hedges | |||||||||||||
Foreign exchange contracts | — | 4 | — | 4 | |||||||||
Interest rate exchange contracts | 1 | 3 | 1 | 3 | |||||||||
| | | | | | | | | | | | | | |
Total financial liabilities at fair value | 109 | 83 | 109 | 83 | |||||||||
| | | | | | | | | | | | | | |
Financial liabilities at amortized cost | |||||||||||||
Bank loans and bonds, principal | 11,103 | 10,489 | 11,548 | 10,983 | |||||||||
Interest accrued | 129 | 173 | 130 | 173 | |||||||||
Discounts, unamortized fees, hedge basis adjustment | (34 | ) | 40 | — | — | ||||||||
| | | | | | | | | | | | | | |
Bank loans and bonds at amortized cost | 11,198 | 10,702 | 11,678 | 11,156 | |||||||||
Put-option liability over non-controlling interest | 310 | 290 | 310 | 290 | |||||||||
Other financial liabilities | 13 | 41 | 13 | 41 | |||||||||
| | | | | | | | | | | | | | |
Total financial liabilities at amortized cost | 11,521 | 11,033 | 12,001 | 11,487 | |||||||||
| | | | | | | | | | | | | | |
Total financial liabilities | 11,630 | 11,116 | 12,110 | 11,570 | |||||||||
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Non-current | 10,362 | 8,070 | |||||||||||
Current | 1,268 | 3,046 | |||||||||||
Notes to the extentconsolidated financial statements (Continued)
(in millions of U.S. dollars unless otherwise stated)
17FINANCIAL ASSETS AND LIABILITIES (Continued)
Bank loans and bonds
The Company had the following principal amounts outstanding for interest-bearing loans and bonds at December 31:
| | | | | | | Principal amount outstanding | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Borrower | Type of debt | Guarantor | Currency | Interest rate | Maturity | 2017 | 2016 | ||||||||||
VEON Holdings | Loans | None | RUB | 8.75% - 10.0% | 2022 | 2,474 | — | ||||||||||
VEON Holdings | Notes | None (2016: PJSC VimpelCom) | US$ | 5.2% - 5.95% | 2019 - 2023 | 1,554 | 1,554 | ||||||||||
VEON Holdings | Notes | None | US$ | 3.95% - 4.95% | 2021 - 2024 | 1,500 | — | ||||||||||
VEON Holdings | Loans | None | EUR | 3mEURIBOR + 1.9% - 2.75% | 2022 | 752 | — | ||||||||||
VEON Holdings | Notes | PJSC VimpelCom | US$ | 7.5% | 2022 | 628 | 1,280 | ||||||||||
VEON Holdings | Syndicated loan (RCF) | None | US$ | 1mLIBOR + 2.25% | 2018 | 250 | — | ||||||||||
VEON Holdings | Notes | None | RUB | 9.0% | 2018 | 208 | 198 | ||||||||||
VEON Holdings | Notes | PJSC VimpelCom | US$ | 6.25% | 2017 | — | 349 | ||||||||||
GTH Finance B.V. | Notes | VEON Holdings B.V. | US$ | 6.25% - 7.25% | 2020 - 2023 | 1,200 | 1,200 | ||||||||||
VIP Finance Ireland | Eurobonds | None | US$ | 7.748% - 9.1% | 2018 - 2021 | 543 | 1,150 | ||||||||||
PMCL | Loans | None | PKR | 6mKIBOR + 0.35% - 0.8% | 2020 - 2022 | 379 | 166 | ||||||||||
PMCL | Loans | EKN* | US$ | 6mLIBOR + 1.9% | 2020 | 212 | 231 | ||||||||||
Banglalink | Senior Notes | None | US$ | 8.6% | 2019 | 300 | 300 | ||||||||||
PJSC VimpelCom | Ruble Bonds | None | RUB | 10.0% - 11.9% | 2017 | 19 | 660 | ||||||||||
PJSC VimpelCom | Loans | None | RUB | 12.75% | 2017 - 2018 | — | 1,021 | ||||||||||
VEON Amsterdam | Loans | None | US$ | 1mLibor + 3.3% | 2017 | — | 1,000 | ||||||||||
Omnium Telecom Algeria SpA | Syndicated loan | None | DZD | Bank of Algeria re-discount rate + 2.0% | 2019 | — | 340 | ||||||||||
Other loans | 1,084 | 1,040 | |||||||||||||||
| | | | | | | | | | | | | | | | | | |
Total bank loans and bonds | 11,103 | 10,489 | |||||||||||||||
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Termination of Guarantees
On June 30, 2017, the guarantees issued by VEON Holdings under each of the RUB 12,000 million 9.00% notes due 2018 (the"RUB Notes"), the US$600 5.20% notes due 2019 (the"2019 Notes") and the US$1,000 5.95% notes due 2023 (the"2023 Notes", and together with the RUB Notes and the 2019 Notes, the"Notes"), issued by PJSC VimpelCom, were terminated. VEON Holdings exercised its option to terminate the guarantees pursuant to the terms of the trust deeds entered into in respect of the Notes, between VEON Holdings, PJSC VimpelCom and BNY Mellon Corporate Trustee Services Limited, each dated February 13, 2013 (together the"Trust Deeds"). The guarantees in respect of each of the Notes will continue to apply to VEON Holdings' obligation to redeem the Notes on exercise of the put option under each of the Trust Deeds until that it is probable thatput option has expired or been satisfied.
Notes to the assets will be realized. Significant judgment is requiredconsolidated financial statements (Continued)
(in millions of U.S. dollars unless otherwise stated)
17FINANCIAL ASSETS AND LIABILITIES (Continued)
Reconciliation of cash flows from financing activities
| Bank loans and bonds at amortized cost | ||||
|---|---|---|---|---|
Balance as of January 1, 2017 | 10,702 | |||
Cash flows | ||||
Proceeds from borrowings, net of fees paid | 6,193 | |||
Repayment of borrowings | (5,948 | ) | ||
Interest paid | (834 | ) | ||
Non-cash movements | ||||
Interest accrued | 774 | |||
Early redemption premium accrued* | 168 | |||
Foreign currency translation | 138 | |||
Other non-cash movements | 5 | |||
| | | | | |
Balance as of December 31, 2017 | 11,198 | |||
| | | | | |
| | | | | |
| | | | | |
Issuance of New Notes and Cash Tender Offer for Certain Outstanding Debt Securities
On May 30, 2017, VEON Holdings announced a cash tender offer (the"Offer") in respect of the outstanding (i) U.S.$1,000 9.125% Loan Participation Notes due 2018 issued by, but with limited recourse to, VIP Finance Ireland Limited (the"2018 Notes"), (ii) U.S.$1,000 7.748% Loan Participation Notes due 2021 issued by, but with limited recourse to, VIP Finance Ireland Limited (the"2021 Notes") and (iii) U.S.$1,500 7.5043% Guaranteed Notes due 2022 issued by VEON Holdings (the"2022 Notes" and together with the 2018 Notes and the 2021 Notes, the"Existing Notes").
The aggregate principal amount accepted for repurchase was US$1,259, which was settled on or before June 29, 2017. The unamortized debt issuance costs and unamortized fair value hedge basis adjustment were released to the income statement at the date of the closing, which, together with the early redemption premium, resulted in a loss from early debt redemption of US$124, recorded within "Other non-operating gains/losses" (refer to Note 11).
On June 16, 2017, VEON Holdings issued US$600 3.95% Senior Notes due 2021 and US$900 4.95% Senior Notes due 2024 (together, the"New Notes"). The net proceeds of the New Notes were used to finance the purchase of the Existing Notes and for general corporate purposes.
Notes to the consolidated financial statements (Continued)
(in millions of U.S. dollars unless otherwise stated)
17FINANCIAL ASSETS AND LIABILITIES (Continued)
DERIVATIVES AND HEDGING ACTIVITIES
Financial instruments and hedging policy
The Company applies cash flow hedge accounting using financial instruments (usually derivatives) to mitigate some or all of the risk of a hedged item. Any gains or losses on the expected timing, levelhedging instrument (generally a derivative) are initially recorded in other comprehensive income. The amount included in other comprehensive income is the lesser of taxable profits, tax planning strategiesthe fair value of the hedging instrument and the existence of taxable temporary differences. The estimates relate primarily to losses carried forwardhedged item. Where the hedging instrument's change in somefair value is greater than that of the Group’shedged item, the excess is recorded in profit or loss as ineffectiveness. Gains or losses deferred in other comprehensive income are reclassified to the income statement when the hedged item affects the income statement.
The Company also applies net investment hedge accounting to mitigate foreign currency risk related to the Company's foreign operations. WhenThe portion of the gain or loss on the hedging instrument that is determined to be an entityeffective hedge is recognized in other comprehensive income. The gain or loss on the hedging instrument relating to the effective portion of the hedge that has
Any derivative instruments for which no hedge accounting is applied are recorded at fair value with any fair value changes recognized directly in profit or loss.
Derivative financial instruments
VEON uses derivative instruments, including swaps, forward contracts and options to manage certain foreign currency and interest rate exposures. The Company has designated a historyportion of recent lossesits derivative contracts, which mainly relate to hedging the deferred tax assetinterest and foreign exchange risk of external debt and net investments in foreign operations, as formal hedges and applies hedge accounting on these derivative contracts.
Cash flows arising from unused tax lossesderivative instruments for which hedge accounting is recognized onlyapplied are reported in the statement of cash flows in the same line where the underlying cash flows of the hedged item are recorded.
Put options over non-controlling interest of a subsidiary are accounted for as financial liabilities in the Company's consolidated financial statements. The put-option redemption liability is measured at the discounted redemption amount. Interest over the put-option redemption liability will accrue in line with the effective interest rate method, until the options have been exercised or are expired.
Embedded derivatives in Notes
The Notes issued by the Company's Bangladesh subsidiary, Banglalink Digital Communications Ltd. ("Banglalink"), include early repayment options. Accordingly, Banglalink can repay the debt at certain dates prior to the extent that there is convincing evidence that sufficient future taxablematurity date at agreed redemption prices. These embedded derivatives are accounted for as financial assets at fair value through profit will be generated. Estimated future taxable profit is not considered such evidenceor loss.
Notes to the consolidated financial statements (Continued)
(in millions of U.S. dollars unless that entity has demonstratedotherwise stated)
17FINANCIAL ASSETS AND LIABILITIES (Continued)
Net investment hedge in foreign operations
During the ability by generating significant taxable profit for the current year or there are certain other events providing sufficient evidencemonth of future taxable profit. New transactions and the introduction of new tax rules may also affect the judgments due to uncertainty concerning the interpretation of the rules and any transitional rules.
Provisions for uncertain tax positions are recognized when it is probable that a tax position will not be sustained and the amount can be reliably measured. The expected resolution of uncertain tax positions is based upon managements’ judgment of the likelihood of sustaining a position taken through tax audits, tax courts and/or arbitration, if necessary. Circumstances and interpretations of the amount or likelihood of sustaining a position may change through the settlement process. Furthermore, the resolution of uncertain tax positions is not always within the control ofJune 2017, the Group and it is often dependent on the efficiencyentered into several cross-currency swaps with several different banks, by exchanging a notional amount of the legal processesUS$600 for EUR 537 million for 4 years. The swaps mature June 16, 2021. These derivatives were subsequently designated as hedging instruments in the relevant taxing jurisdictionsa hedge of net investment in foreign operations in which the Group operates. Issues can,Italy joint-venture is the hedged item.
Additionally, the Company designated term loans drawn during 2017, maturing in 2022, and often do, take many yearswith an aggregate, EUR-denominated principal amount of EUR 627 million as hedging instruments in a hedge of net investment in foreign operations in which the Italy joint-venture is the hedged item.
Losses of US$125 recognized in 2017, relating to resolve. See Note 13the net investment hedge are recognized in the "Foreign currency translation" line item within the consolidated statement of comprehensive income.
Interest rate swap contracts
The Company's Pakistan subsidiary, PMCL, entered into several Interest Rate Swap Agreements to reduce the cash flow volatility due to variable debt interest payments. Pursuant to these agreements, Pakistan Mobile Communications Limited pays a fixed rate of 8.15% - 8.72% and Note 26receives KIBOR three- or six-month floating rate on an outstanding notional amount of PKR 10,350 million as of December 31, 2017 (2016: PKR 16,483 million), which will amortize until maturity along with the principal of the underlying debt. The swaps expire between May 16, 2019 and December 23, 2019.
Derivatives not designated as hedging instruments
The Company uses foreign currency denominated borrowings, foreign exchange swaps, options and forward currency contracts to manage its transaction exposures. These currency forward contracts are not designated as cash flow, fair value or net investment hedges and are entered into for further information.periods consistent with currency transaction exposures, generally from one to six months. Although the instruments have not been designated in a hedge relationship, they act as an economic hedge and offset the underlying transaction when they occur.
Derivatives under hedge accounting
The Company uses cross currency interest rate swaps, interest rate swaps, foreign exchange forwards / swaps, options and zero cost collars to manage its exposure to variability in cash flows that is attributable to foreign exchange and interest rate risk to loans and borrowings. Most of these derivative contracts are either designated as cash flow, fair value or net investment hedges and are entered into for periods up to the maturity date of the hedged loans and borrowings.
Notes to the consolidated financial statements (Continued)
(in millions of U.S. dollars unless otherwise stated)
17FINANCIAL ASSETS AND LIABILITIES (Continued)
The following table sets out the Company's hedge accounting with derivatives as hedging items as of December 31:
| | | Nominal value | Fair value of assets | Fair value of liabilities | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Risk being hedged | ||||||||||||||||||||
| | 2017 | 2016 | 2017 | 2016 | 2017 | 2016 | |||||||||||||||
Cash flow hedge accounting | |||||||||||||||||||||
Interest rate exchange contracts | Interest | 93 | 158 | — | — | 1 | 3 | ||||||||||||||
Foreign exchange contracts | Currency | — | 73 | — | — | — | 4 | ||||||||||||||
Net investment hedge accounting |
| ||||||||||||||||||||
Cross currency interest rate exchange contracts | Currency | 600 | — | — | — | 59 | — | ||||||||||||||
No hedge accounting applied |
| ||||||||||||||||||||
Cross currency interest rate exchange contracts | Currency | — | 7 | — | — | — | — | ||||||||||||||
Foreign exchange contracts | Currency | 283 | 407 | 5 | 2 | — | 29 | ||||||||||||||
The following table shows the periods in which the cash flows of the derivatives, to which cash flow hedge accounting applies, are expected to occur:
| | Less than 1 year | 1 - 3 years | 3 - 5 years | More than 5 years | Total | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
As of December 31, 2017 | ||||||||||||||||
Cash flows | (2 | ) | (0 | ) | — | — | (2 | ) | ||||||||
Cash flow hedge reserve | 2 | |||||||||||||||
As of December 31, 2016 | ||||||||||||||||
Cash flows | (9 | ) | (2 | ) | — | — | (11 | ) | ||||||||
Cash flow hedge reserve* | (0 | ) | ||||||||||||||
FAIR VALUES
The fair value of financial assets and liabilities is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the balance sheet date. The fair values were estimated based on quoted market prices for our bonds, derived from market prices or by using discounted cash flows under the agreement at the rate applicable for the instruments with similar maturity and risk profile.
The carrying amount of cash and cash equivalents, trade and other receivables, and trade and other payables approximate their respective fair value.
The fair value of derivative financial instruments is determined using present value techniques such as discounted cash flow techniques, Monte Carlo simulation and/or the Black-Scholes model. These valuation techniques are commonly used for valuations of derivatives. Observable inputs (Level 2) used in the valuation techniques include LIBOR, EURIBOR, swap curves, basis swap spreads, foreign exchange rates and credit default spreads of both counterparties and our own entities.
Notes to the consolidated financial statements (Continued)
(in millions of U.S. dollars unless otherwise stated)
17FINANCIAL ASSETS AND LIABILITIES (Continued)
The fair value of Available for sale financial assets are determined through comparison of various multiples and reference to market valuation of similar entities quoted in an active market. If information is not available, a discounted cash flow method is used.
Fair value measurements for financial liabilities at amortized cost are based on quoted market prices, where available. If the quoted market price is not available, the fair value measurement is based on discounted expected future cash flows using a market interest rate curve, credit spreads and maturities.
SOURCE OF ESTIMATION UNCERTAINTY
Fair value of financial instruments
Where the fair value of financial assets and financial liabilities recorded in the statement of financial position cannot be derived from active markets, their fair value is determined using valuation techniques, including discounted cash flow models. The inputs to these models are taken from observable markets where possible, but when this is not feasible, a degree of judgment is required in establishing fair values. The judgments include considerations of inputs such as liquidity risk, credit risk and volatility. Changes in assumptions about these factors could affect the reported fair value of financial instruments. See Note 17 for further information.
ProvisionsFAIR VALUE HIERARCHY
The Group is subject to various legal proceedings, disputes As of December 31, 2017 and claims, including regulatory discussions related to the Group’s business, licenses, tax positions and investments and the outcomes are subject to significant uncertainty. Management evaluates, among other factors, the degree of probability of an unfavourable outcome and the ability to make a reasonable estimate of the amount of loss. Unanticipated events or changes in these factors may require2016, the Group to increase or decrease the amount recorded or to be recorded for a matter that has not been previously recorded because it was not considered probable.
For certain operations in emerging markets, the Group is involved in legal proceedings and regulatory discussions. Management’s estimates relating to legal proceedings and regulatory discussions in these countries involve a high level of uncertainty. See Note 24 and 26 for further information.
The Group’s principalrecognized financial liabilities, other than derivatives, comprise of loans and borrowings and trade and other payables. The main purpose of these financial liabilities is to finance the Group’s operations. The Group has loans given and other receivables, trade and other receivables, and cash and short-term deposits that derive directly from its operations. The Company views derivative instruments as risk management tools and does not use them for trading or speculative purposes.
The Group is exposed to market risk, credit risk and liquidity risk.
The Company’s Management Board oversees the management of these risks. The Company’s Management Board is supported by the treasury department that advises on financial risks and the appropriate financial risk governance framework for the Company. The Finance and Strategy Committee provides assurance to the
Company’s Management Board that the Group’s financial risk management activities are governed by appropriate policies and procedures and that financial risks are identified, measured and managed in accordance with Group policies and Group risk appetite. All derivative activities for risk management purposes are carried out by specialist teams that have the appropriate skills, experience and supervision.
The Group Chief Executive Officer, the Group Chief Financial Officer and other senior management of the Company review and agree policies for managing each of these risks which are summarized below.
Market risk
Market risk is the risk that theat fair value of future cash flows of a financial instrument will fluctuate because of changes in market prices. Market prices comprise three types of risk: interest rate risk, currency risk, and credit risk. Financial instruments affected by market risk include loans and borrowings, deposits, and derivative financial instruments. The sensitivity analyses in the following sections relate to the position as of 31 December in 2014 and 2013. The sensitivity analyses have been prepared on the basis that the amount of net debt, the ratio of fixed to floating interest rates of the debt and derivatives and the proportion of financial instruments in foreign currencies are all constant and on the basis of the hedge designations in place at 31 December 2014 and 2013 respectively. The analyses exclude the impact of movements in market variables on the carrying value of pension and other post-retirement obligations (insignificant for the Group), provisions and the non-financial assets (as disclosure focuses on financial instruments) and the translation risk of liabilities of foreign operations (not intended to be covered in this note based on IFRS rules).
Interest rate risk
Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Company’s exposure to the risk of changes in market interest rates relates primarily to the Company’s long-term debt obligations with floating interest rates. The Company manages its interest rate risk by having a balanced portfolio of fixed and variable rate loans and borrowings. To further manage this, the Company enters into interest rate swaps, in which the Company agrees to exchange, at specified intervals, the difference between fixed and variable rate interest amounts calculated by reference to an agreed-upon notional principal amount. These swaps are designated to hedge underlying debt obligations.
At 31 December 2014, after taking into account the effect of interest rate swaps, approximately 76% of the Company’s borrowings are at a fixed rate of interest (2013: 93%).
Interest rate sensitivity
The following table demonstrates the sensitivity to a reasonably possible change in interest rates on loans and borrowings, taking into account the related derivative financial instruments, cash and cash equivalents and current deposits. With all other variables held constant, the Company’s profit before tax is affected through the impact on floating rate borrowings and cash and the Company’s equity is affected through the impact of a parallel shift of the yield curve on the fair value of derivatives to which cash flow hedge accounting is applied as follows:
| Increase/decrease in basis points | Effect on profit before tax | Effect on other components of equity | ||||||||||
2014 | ||||||||||||
Euro | +100 | (18 | ) | 253 | ||||||||
US Dollar | +100 | 3 | (242 | ) | ||||||||
Algerian Dinar | +100 | 27 | — | |||||||||
Bangladeshi Taka | +100 | (1 | ) | — | ||||||||
Uzbek Sum | +100 | 6 | — | |||||||||
Pakistani Rupee | +100 | (3 | ) | — | ||||||||
Other currencies | +100 | (11 | ) | — | ||||||||
Euro | -100 | 37 | (72 | ) | ||||||||
US Dollar | -100 | (3 | ) | 252 | ||||||||
Algerian Dinar | -100 | (27 | ) | — | ||||||||
Bangladeshi Taka | -100 | 1 | — | |||||||||
Uzbek Sum | -100 | (6 | ) | — | ||||||||
Pakistani Rupee | -100 | 3 | — | |||||||||
Other currencies | -100 | (8 | ) | — | ||||||||
2013 | ||||||||||||
Euro | +100 | (4 | ) | 234 | ||||||||
US Dollar | +100 | 6 | (205 | ) | ||||||||
Algerian Dinar | +100 | 26 | — | |||||||||
Bangladeshi Taka | +100 | (3 | ) | — | ||||||||
Uzbek Sum | +100 | 3 | — | |||||||||
Other currencies | +100 | 1 | — | |||||||||
Euro | -100 | 4 | (235 | ) | ||||||||
US Dollar | -100 | (6 | ) | 214 | ||||||||
Algerian Dinar | -100 | (26 | ) | — | ||||||||
Bangladeshi Taka | -100 | 3 | — | |||||||||
Uzbek Sum | -100 | (3 | ) | — | ||||||||
Other currencies | -100 | (1 | ) | — | ||||||||
Foreign currency risk
Foreign currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. The Company’s exposure to the risk of changes in foreign exchange rates relates primarily to the debt at subsidiary level denominated in currencies other than their functional currency, the Company’s operating activities (predominantly capital expenditures at subsidiary level denominated in a different currency from the subsidiary’s functional currency) and the Company’s net investments in foreign subsidiaries.
The Company manages its foreign currency risk by selectively hedging cash flow exposures that are expected to occur within a maximum 18-month period.
The Company hedges part of its exposure to fluctuations on the translation into US dollar of its foreign operations by holding net borrowings in foreign currencies and can use foreign currency swaps and forwards for this purpose as well.
Foreign currency sensitivity
The following table demonstrates the sensitivity to a reasonably possible change in exchange rates against the USD with all other variables held constant. The table shows the effect on the Company’s profit before tax (due to changes in the value of monetary assets and liabilities, including non-designated foreign currency derivatives) and equity (due to the effect on the cash flow hedge reserve). The Company’s exposure to foreign currency changes for all other currencies is not material.
| Change in foreign exchange rate against USD | Effect on profit before tax | Effect on other components of equity | ||||||||
2014 | ||||||||||
Euro | 10% depreciation | 31 | 95 | |||||||
Russian Ruble | 10% depreciation | (34 | ) | 7 | ||||||
Bangladeshi Taka | 10% depreciation | (67 | ) | — | ||||||
Kazakh Tenge | 10% depreciation | 44 | — | |||||||
Uzbek Sum | 10% depreciation | (26 | ) | — | ||||||
Georgian Lari | 10% depreciation | (22 | ) | — | ||||||
Algerian Dinar | 10% depreciation | (41 | ) | — | ||||||
Other currencies | 10% depreciation | (7 | ) | — | ||||||
Euro | 10% appreciation | (34 | ) | (105 | ) | |||||
Russian Ruble | 10% appreciation | 40 | (7 | ) | ||||||
Bangladeshi Taka | 10% appreciation | 73 | — | |||||||
Kazakh Tenge | 10% appreciation | (48 | ) | — | ||||||
Uzbek Sum | 10% appreciation | 29 | — | |||||||
Georgian Lari | 10% appreciation | 24 | — | |||||||
Algerian Dinar | 10% appreciation | 45 | — | |||||||
Other currencies | 10% appreciation | 7 | — | |||||||
2013 | ||||||||||
Euro | 10% depreciation | (103 | ) | 137 | ||||||
Russian Ruble | 10% depreciation | (89 | ) | 3 | ||||||
Bangladeshi Taka | 10% depreciation | (48 | ) | — | ||||||
Kazakh Tenge | 10% depreciation | 25 | — | |||||||
Uzbek Sum | 10% depreciation | (23 | ) | — | ||||||
Algerian Dinar | 10% depreciation | (43 | ) | — | ||||||
Other currencies | 10% depreciation | (3 | ) | — | ||||||
Euro | 10% appreciation | 113 | (151 | ) | ||||||
Russian Ruble | 10% appreciation | 98 | (4 | ) | ||||||
Bangladeshi Taka | 10% appreciation | 53 | — | |||||||
Kazakh Tenge | 10% appreciation | (28 | ) | — | ||||||
Uzbek Sum | 10% appreciation | 26 | — | |||||||
Algerian Dinar | 10% appreciation | 48 | — | |||||||
Other currencies | 10% appreciation | 4 | — | |||||||
The movement on the profit/(loss) before tax is a result of a change in the fair value of foreign currency derivative financial instruments not designated in a hedging relationship and monetary assets and liabilities denominated in currencies other than the functional currency of the entity. Although the derivatives have not been designated in a hedge relationship, they act as a commercial hedge and will partly offset the underlying transactions when they occur.
Credit risk
Credit risk is the risk that a counterparty will not meet its obligations under a financial instrument or customer contract, leading to a financial loss. The Company is exposed to credit risk from its operating activities (primarily for trade receivables) and from its financing activities, including deposits with banks and financial institutions, foreign exchange transactions and other financial instruments. See Note 21 for further information on restrictions on cash balances.
Trade accounts receivable consist of amounts due from customers for airtime usage and amounts due from dealers and customers for equipment sales. In certain circumstances, VimpelCom requires deposits as collateral for airtime usage. In addition, VimpelCom has introduced a prepaid service GSM network. Equipment sales are typically paid in advance of delivery, except for equipment sold to dealers on credit terms. VimpelCom’s credit risk arising from its trade accounts receivable from customers is mitigated as a result of 94% of its active customers being subscribed to a prepaid service as of 31 December 2014 (2013: 92%) and, accordingly, not giving rise to credit risk.
VimpelCom’s credit risk arising from its trade accounts receivable from dealers is mitigated due to the large number of dealers. Management periodically reviews the history of payments and credit worthiness of the dealers. The Company also has receivables from other local and international operators from interconnect and roaming services provided to their customers, as well as receivables from customers using fixed-line services, such as business services, wholesale services and services to residents. Receivables from other operators for roaming services are settled through clearing houses which mitigates credit risk in this regard.
VimpelCom holds available cash in bank accounts, as well as other financial assets with financial institutions in countries where it operates. To manage credit risk associated with such asset holdings, VimpelCom allocates its available cash to a variety of local banks and local affiliates of international banks within the limits set forth by its treasury policy. Management periodically reviews the credit worthiness of the banks with which it holds assets. In respect of financial instruments used by the Company’s treasury function, the aggregate credit risk the Group may have with one counterparty is limited by reference to, amongst others, the long-term credit ratings assigned for that counterparty by Moody’s, Fitch Ratings and Standard & Poor’s and CDS spreads of that counterparty.
VAT is recoverable from tax authorities by offsetting it against VAT payable to the tax authorities on VimpelCom’s revenue or direct cash receipts from the tax authorities. Management periodically reviews the recoverability of the balance of input value added tax and believes it is fully recoverable.
VimpelCom issues advances to a variety of its vendors of property and equipment for its network development. The contractual arrangements with the most significant vendors provide for equipment financing in respect of certain deliveries of equipment. VimpelCom periodically reviews the financial position of vendors and their compliance with the contract terms.
Trade receivables
Concentrations of credit risk with respect to trade receivables are limited given that the Group’s customer base is large and unrelated. Due to this management believes there is no further credit risk provision required in excess of the provision for bad and doubtful receivables.
Financial instruments and cash deposits
Credit risk from financial assets held with banks and financial institutions is managed by the Company’s treasury department in accordance with the Company’s policy. Investments of surplus funds are made only with approved counterparties and within credit limits assigned to each counterparty, which have been set as a function
of the current banking relationship, the credit rating of the counterparty and the legal group it belongs to and the balance sheet total of the counterparty. Counterparty credit limits are reviewed and approved by the Company’s CFO. The limits are set to minimise the concentration of risks and therefore mitigate financial loss through potential counterparty’s failure.
The Company’s maximum exposure to credit risk for the components of the statement of financial position at 31 December 2014 and 2013 is the carrying amount as illustrated in Note 17.position.
Liquidity risk
The Company monitors its risk to a shortage of funds using a recurring liquidity planning tool. The Company’s objective is to maintain a balance between continuity of funding and flexibility through the use of bank overdrafts, bank loans, debentures, preference shares, financial and operating leases. The Company’s policy is that not more than 35% of borrowings should mature in a single year. 11% of the Company’s debt will mature in less than one year at 31 December 2014 (2013: 6%)fair value hierarchy ranks fair value measurements based on the carrying valuetype of bank loans, equipment financing and loans from others reflectedinputs used in the financial statements. The Company assessed the concentration of risk with respect to refinancing its debt and concludedvaluation; it to be low based on liquidity in the markets the Company has access to, and recent history of refinancings. The Company believes that access to sources of funding is sufficiently available and the Company’s policy is to diversify the funding sources where possible. See Note 27 for subsequent changes to the maturity schedule following the refinancing in Italy and other financing transactions.
The Company has the following Facilities:
At 31 December 2014 | Amounts in millions of transaction currency | USD equivalent amounts | ||||||||||||||||||||||||||
Facility | Maturity | Facility amount | Utilized | Available | Facility amount | Utilized | Available | |||||||||||||||||||||
VimpelCom Amsterdam B.V.—Revolving Credit Facility | April 2017 | USD 1,800 | USD 500 | USD 1,300 | 1,800 | 500 | 1,300 | |||||||||||||||||||||
VimpelCom Holdings B.V.—Vendor Financing Facility China Development Bank / Bank of China | November 2017 | USD 1,000 | — | USD 1,000 | 1,000 | — | 1,000 | |||||||||||||||||||||
OJSC VimpelCom—Revolving Credit Facility Sberbank | May 2017 | RUB 15,000 | — | RUB 15,000 | 267 | — | 267 | |||||||||||||||||||||
WIND Telecomunicazioni S.p.A.—Revolving Credit Facility | November 2018 | EUR 600 | EUR 100 | EUR 500 | 726 | 121 | 605 | |||||||||||||||||||||
Omnium Telecom Algeria SpA—Term Loan Facility | September 2019 | DZD 50,000 | — | DZD 50,000 | 569 | — | 569 | |||||||||||||||||||||
Optimum Telecom Algérie SpA—Term Loan Facility | September 2019 | DZD 32,000 | — | DZD 32,000 | 364 | — | 364 | |||||||||||||||||||||
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Total | 4,726 | 621 | 4,105 | |||||||||||||||||||||||||
At 31 December 2013 Facility VimpelCom Amsterdam B.V.—Revolving Credit Facility VimpelCom Amsterdam B.V.—Revolving Credit Facility VimpelCom Amsterdam B.V.—Vendor Financing Facility China Development Bank VimpelCom Amsterdam B.V.—Vendor Financing Facility HSBC Bank OJSC VimpelCom—Revolving Credit Facility Sberbank WIND Telecomunicazioni S.p.A.—Revolving Credit Facility Total Amounts in millions of transaction
currency USD equivalent amounts Maturity Facility
amount Utilized Available Facility
amount Utilized Available December 2014 USD 225 — USD 225 225 — 225 December 2014 EUR 205 — EUR 205 281 — 281 December 2014 USD 500 USD 103 USD 397 500 103 397 March 2015 USD 270 USD 87 USD 183 270 87 183 May 2017 RUB 15,000 — RUB 15,000 458 — 458 November 2016 EUR 400 EUR 100 EUR 300 550 138 412 2,284 328 1,956
All facilities at 31 December 2014 are new and/or extended and have replaced facilities existing at 31 December 2013, which have been either terminated or fully utilized.
The table below summarises the maturity profile of the Company’s financial liabilities based on contractual undiscounted payments. Payments related to variable interest rate financial liabilities and derivatives are included baseddoes not depend on the interest rates applicable as per 31 December 2014 and 31 December 2013 respectively. The total amountstype of valuation techniques used:
| Less than 1 year | 1-3 years | 3-5 years | More than 5 years | Total | ||||||||||||||||
At 31 December 2014 | ||||||||||||||||||||
Bank loans and bonds | 3,948 | 6,355 | 6,835 | 15,513 | 32,651 | |||||||||||||||
Equipment financing | 290 | 386 | 275 | 184 | 1,135 | |||||||||||||||
Loans from others | 149 | 156 | 34 | 313 | 652 | |||||||||||||||
Derivatives over non-controlling interest | — | 330 | — | — | 330 | |||||||||||||||
Derivative financial instruments—liabilities | ||||||||||||||||||||
—Gross cash inflows | (8 | ) | (15 | ) | — | — | (23 | ) | ||||||||||||
—Gross cash outflows | 43 | 65 | 13 | 3 | 124 | |||||||||||||||
Trade and other payables and dividend payables | 4,007 | — | — | — | 4,007 | |||||||||||||||
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Total financial liabilities | 8,429 | 7,277 | 7,157 | 16,013 | 38,876 | |||||||||||||||
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Related derivative financial instruments—assets | ||||||||||||||||||||
—Gross cash inflows | (969 | ) | (665 | ) | (665 | ) | (5,668 | ) | (7,967 | ) | ||||||||||
—Gross cash outflows | 708 | 505 | 503 | 4,988 | 6,704 | |||||||||||||||
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Related financial instruments—assets | (261 | ) | (160 | ) | (162 | ) | (680 | ) | (1,263 | ) | ||||||||||
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Net | 8,168 | 7,117 | 6,995 | 15,333 | 37,613 | |||||||||||||||
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At 31 December 2013 Bank loans and bonds Equipment financing Loans from others Derivatives over non-controlling interest Derivative financial instruments—liabilities —Gross cash inflows —Gross cash outflows Trade and other payables Total financial liabilities Related derivative financial instruments—assets —Gross cash inflows —Gross cash outflows Related derivative financial instruments—assets Net Less than
1 year 1-3
years 3-5 years More than
5 years Total 3,637 8,493 17,459 6,163 35,752 216 279 150 93 738 108 98 42 53 301 — — 330 — 330 (421 ) (485 ) (2,710 ) (604 ) (4,220 ) 482 566 2,761 636 4,445 4,860 — — — 4,860 8,882 8,951 18,032 6,341 42,206 (154 ) (306 ) (1,453 ) — (1,913 ) 151 302 1,426 — 1,879 (3 ) (4 ) (27 ) — (34 ) 8,879 8,947 18,005 6,341 42,172
Capital management
The primary objective of the Company’s capital management is
Notes to ensure that it maintains at least a BB/Ba3 credit rating, with an aim to improve this, and healthy capital ratios in order to secure access to debt and capital markets at all times and maximise shareholder value. The Company manages its capital structure and makes adjustments to it in light of changes in economic conditions. To maintain or adjust the capital structure, the Company may adjust the dividend payment to shareholders, return capital to shareholders or issue new shares.
No changes were made in the objectives, policies or processes for managing capital during the years ended 31 December 2013. In January 2014, our Supervisory Board approved a dividend policy pursuant to which from 2014 the Company aims to pay annual dividends of USD 0.035 per share until the Company reaches a group Net Debt to EBITDA ratio of less than 2 times.
The Net Debt to Adjusted EBITDA ratio is an important measure to assess the capital structure in light of maintaining a strong credit rating. Net Debt represents the amount of interest-bearing debt at amortized costs and guarantees given less cash and cash equivalents and current and non-current bank deposits adjusted for derivatives designated as hedges. Adjusted EBITDA is defined as earnings before interest, tax, depreciation, amortization and impairment, loss on disposals of non-current assets, other non-operating losses and shares of profit/ (loss) of associates and joint ventures).
The Net Debt to Adjusted EBITDA ratio relevant to the Company’s Russian subsidiary OJSC VimpelCom, which holds and/or guarantees a major part of the debt of the Company, at 31 December 2014 and 2013 was 2.4 and 2.8x respectively. The required ratio is <3.5x (2013: <3.5x) for a portion of the debt. The ratio is calculated based on the consolidated financial statements of OJSC VimpelCom prepared under IFRS.
Another major part of the debt of the Company is held and/or guaranteed by Wind Italy, to which the Net Debt to Adjusted EBITDA ratio of 5.87x (2013: 4.67x) is relevant. The required ratio is <5.95x (2013:< 4.95x). The ratio is calculated based on consolidated financial statements of Wind Italy prepared under IFRS. The required ratio was increased as part of the consent of the WIND Senior Facility Agreement, as mentioned in Note 17.
Furthermore, debt issued in 2014 by VimpelCom Amsterdam B.V. and VimpelCom Holdings B.V. that is not guaranteed by OJSC VimpelCom (refer to Note 17) includes a Net Debt to Adjusted EBITDA covenant ratio on the basis of the consolidated financial statements of VimpelCom Ltd. At 31 December 2014, the Net Debt to Adjusted EBITDA ratio was 2.5x. The required ratio is <3.5x.
Collateral
The Company provides collateral for some lenders which is described for individual loans in Note 26.
6. Business combinations and other significant transactions
There were no significant business combinations during 2014 and 2013. Other significant transactions in 2014 and 2013 are discussed below.
Other transactions in 2014(Continued)
Sale(in millions of 51% shareholding in Omnium Telecom Algerie (OTA) and settlement of disputes with the Algerian State
In April 2014, the Company, together with its subsidiary Global Telecom Holding S.A.E (“GTH”), entered into a share purchase agreement (“SPA”) to sell a non-controlling 51% interest in OTA to the Fonds National d’Investissement (the “Algerian National Investment Fund” or “FNI”) for a cash consideration of USD 2,643 and to settle its disputes with the Algerian Government.
Upon signing of the SPA in April 2014, GTH suspended its current international arbitration against the Algerian State.
On 30 January 2015, the Company completed the sale by GTH of a non-controlling 51% interest in OTA to FNI, and ultimately terminated the international arbitration and all claims relating thereto.
The Company, GTH and the FNI entered into a shareholders agreement (“SHA”), effective as of the closing of the transaction (the “Closing”), which governs the relationship of GTH and the FNI as shareholders in OTA going forward. GTH will continue to exercise operational control over OTA and, as a result, both GTH and VimpelCom will continue to consolidate OTA. Accordingly, the gain upon sale will be recorded directly in equity as a transaction between the owners acting in their capacity as shareholders upon Closing of the SPA in January 2015.
Prior to the completion of the sale in January 2015, OTA paid a dividend to its shareholders in the amount of USD 1,862 equivalent.
Prior to Closing and in order to facilitate the Closing, OTA contributed its operations to Optimum Telecom Algérie S.p.A. (“Optimum”), a wholly-owned subsidiary of OTA. In addition, prior to Closing, OTA and Optimum established credit facilities with a syndicate of Algerian and international banks in an aggregate amount of DZD 82,000 (USD 932 equivalent) to finance part of the payments to be made by OTA at Closing and Optimum’s future operations.
As part of the transaction, the Company agreed, effective at Closing, that OTA will waive its tax receivable from the Algeria tax authorities in an amount of DZD 39,717 million (USD 451 equivalent), and pay with no admission of liability or wrongdoing, the fines from the Bank of Algeria of DZD 99,000 million (USD 1,125 equivalent) for alleged breaches of foreign exchange regulations in Algeria. As a condition precedent to Closing, the Bank of Algeria lifted the injunction that restricts all Algerian banks from engaging in foreign banking transactions on behalf of OTA, which will allow OTA to import the necessary equipment to improve the quality of the existing network, and pay dividends.
The waiver of the tax receivable and the payment of the claim from the Bank of Algeria are an integral part of the SPA.
Settling both disputes as part of entering into the SPA in April 2014 was considered an adjusting subsequent event under IAS 10 “Events after the Reporting Period” for the year ended 31 December 2013. Consequently, the waiver of the tax receivable of DZD 39,717 million (USD 451 equivalent) and the BofA payment of DZD 99,000 million (USD 1,125 equivalent) were already recorded in the consolidated income statement for the year ended 31 December 2013 as Income tax expense and Selling, general and administrative expenses, respectively. Also, deferred tax liabilities and related income tax expense were recorded for temporary difference on undistributed reserves in OTA of USD 246, representing the future withholding tax on the dividend to be paid prior to Closing and relating to the future capital gain tax. Additional tax charges of USD 88 were accounted for in 2013, due to the adverse tax impact of recording a provision for above mentioned claim from Bank of Algeria. As a result, the Group took a one-off cumulative charge of USD 2,151 in its 2013 consolidated income statement. In 2014, the Company had to record additional tax charges of USD 96 on increased undistributed profits in OTA.
As part of the transaction, GTH received an option to sell (a “Put Option”) all (and not less than all) of the OTA shares it holds to the FNI at the then fair market value. The Put Option is exercisable solely at the discretion of GTH during the three month period between 1 July 2021 and 30 September 2021 as well as at any time upon occurrence of certain events. Concurrently, the FNI received an option to buy (a “Call Option”) from GTH all (and not less than all) of the OTA shares GTH owns at the then fair market value. The Call Option is exercisable solely at the discretion of the FNI during the three month period between 1 October 2021 and 31 December 2021 as well as at any time upon the occurrence of certain events.
The minority shareholder in OTA, Cevital S.p.A. (“Cevital”) remained a shareholder at 3.43%, and agreed to terminate its existing OTA shareholding arrangements and dismiss all pending litigation against OTA in settlement for a dinar payment by OTA equating to approximately USD 50 (Note 26) plus Cevital’s entitled share of the approximately USD 1,862 pre-Closing dividend paid by OTA to its shareholders.
Disposal of interest in Wind Canada
The Company had an equity investment in and long term loans provided to the Globalive group of companies in Canada, including Globalive Wireless Management Corp., the operator of Wind Mobile cellular telephony service in Canada (“Wind Canada”). As of 31 December 2013, due to the recurring losses of Wind Canada and remote prospective of a possible disposal at the time, the equity investment and the long term loans had been impaired to zero.
On 16 September 2014, VimpelCom and GTH entered into and closed a sale and purchase agreement to sell all of their debt and equity interest in Wind Canada to a consortium of investors for CAD 135 million with the proceeds going to VimpelCom in repayment of part of the debt owed to VimpelCom. The successful sale transaction triggered a reversal of the impairment on the loans booked in 2013 in an amount of USD 110 million, and it was recorded in the line item “Impairment (gain)/loss” in the accompanied consolidated income statement.
Telecel GlobeU.S. dollars unless otherwise stated)
On 17 October 2014 VimpelCom signed and closed a Sale and Purchase Agreement to dispose of its entire indirect 100.0% stake in Telecel Globe (“Telecel”). Telecel included operations in Central African Republic and Burundi. Both operations are part of the segment Africa & Asia. The sale transaction in October 2014 triggered an impairment loss of USD 25 recorded in the line item “Impairment (gain)/loss” of the accompanied consolidated income statement. The related CTA expense of USD 7 was recycled from the OCI and also recorded on the line item Impairment (gain)/loss.
Telecel’s (100%) consolidated carrying values held for sale as of 31 December 2013 were as follows:FINANCIAL ASSETS AND LIABILITIES (Continued)
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Network Sharing Agreement with MTS
In late 2014 OJSC VimpelCom, a wholly owned indirect subsidiary of the Company, entered into an agreement with MTS for joint planning, development and operation of 4G/LTE networks in 36 regions of Russia. Under the terms of the agreement, between 2014 and 2016 MTS will build and operate 4G/LTE base stations in 19 regions and OJSC VimpelCom will build and operate 4G/LTE base stations in 17 regions of Russia. Within the first seven years of the project, OJSC VimpelCom and MTS plan to share base stations, platforms, infrastructure and resources of the transportation network, with each operator maintaining its own core network.
Other transactions in 2013
Rascom
On 15 July 2013, OJSC VimpelCom, the Russian subsidiary of VimpelCom Ltd., obtained control over CJSC Rascom, an entity which had until then been a joint venture accounted for using the equity method of accounting. The investment and its consolidation is not material for the Group and accounts for 0.1% of the Group revenue.
ION transaction
On 5 December 2013, VimpelCom Holdings B.V. has entered into a legally binding share purchase agreement to acquire 100% of the retail business of ION Group in Russia in the year 2017. The acquisition would be executed in the price range of USD 80—140 based on the financial results of ION Group for the year ended 31 December 2016 and is subject to an extensive list of conditions precedent to be satisfied.
Management analyses the Company’s operating segments separately because of different economic environments and stages of development in different geographical areas, requiring different investment and marketing strategies. Management does not analyse assets or liabilities by reportable segments. The segment data for acquired operations are reflected herein from the date of their respective acquisition.
Management evaluates the performance of the Company’s segments on a regular basis, primarily based on earnings before interest, tax, depreciation, amortization, impairment loss, loss on disposals of non-current assets, other non-operating losses and shares of profit/(loss) of associates and joint ventures (“adjusted EBITDA”).
During the year ended 31 December 2014, the profit measure (Adjusted EBITDA) of operating segment Algeria exceeded 10% of the total Adjusted EBITDA of the Group, which required separate presentation of Algeria outside of Africa and Asia reporting segment. As a result, comparative information for the years ended 31 December 2013 and 2012 were adjusted accordingly. No other segment information was changed as a result of this determination.
Financial information by reportable segment for 2014, 2013 and 2012 is presented in the following tables.
| Year ended 31 December 2014 | ||||||||||||||||||||||||||||||||||||
| Russia | Italy | Algeria | Africa and Asia | Ukraine | CIS | Total | HQ, adjustments and other eliminations | Total Segments | ||||||||||||||||||||||||||||
Revenue | ||||||||||||||||||||||||||||||||||||
External customers | 7,361 | 6,150 | 1,692 | 1,665 | 977 | 1,777 | 19,622 | 5 | 19,627 | |||||||||||||||||||||||||||
Inter-segment | 98 | 5 | — | 3 | 85 | 96 | 287 | (287 | ) | — | ||||||||||||||||||||||||||
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Total revenue | 7,459 | 6,155 | 1,692 | 1,668 | 1,062 | 1,873 | 19,909 | (282 | ) | 19,627 | ||||||||||||||||||||||||||
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Adjusted EBITDA | 2,980 | 2,416 | 857 | 579 | 484 | 912 | 8,228 | (258 | ) | 7,970 | ||||||||||||||||||||||||||
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Other disclosures | ||||||||||||||||||||||||||||||||||||
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Capital expenditures | 1,559 | 1,025 | 415 | 837 | 138 | 268 | 4,242 | 12 | 4,254 | |||||||||||||||||||||||||||
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| Year ended 31 December 2013 | ||||||||||||||||||||||||||||||||||||
| Russia | Italy | Algeria | Africa and Asia | Ukraine | CIS | Total | HQ, adjustments and other eliminations | Total Segments | ||||||||||||||||||||||||||||
Revenue | ||||||||||||||||||||||||||||||||||||
External customers | 9,007 | 6,614 | 1,796 | 1,710 | 1,546 | 1,863 | 22,536 | 10 | 22,546 | |||||||||||||||||||||||||||
Inter-segment | 102 | 4 | — | — | 64 | 83 | 253 | (253 | ) | — | ||||||||||||||||||||||||||
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Total revenue | 9,109 | 6,618 | 1,796 | 1,710 | 1,610 | 1,946 | 22,789 | (243 | ) | 22,546 | ||||||||||||||||||||||||||
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Adjusted EBITDA | 3,815 | 2,598 | (212 | ) | 617 | 781 | 856 | 8,455 | (195 | ) | 8,260 | |||||||||||||||||||||||||
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Capital expenditures | 1,822 | 1,287 | 122 | 488 | 211 | 369 | 4,299 | 7 | 4,306 | |||||||||||||||||||||||||||
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| Year ended 31 December 2012 | ||||||||||||||||||||||||||||||||||||
| Russia | Italy | Algeria | Africa and Asia | Ukraine | CIS | Total | HQ, adjustments and other eliminations | Total Segments | ||||||||||||||||||||||||||||
Revenue | ||||||||||||||||||||||||||||||||||||
External customers | 9,102 | 6,977 | 1,842 | 1,881 | 1,595 | 1,664 | 23,061 | — | 23,061 | |||||||||||||||||||||||||||
Inter-segment | 88 | 5 | — | — | 81 | 91 | 265 | (265 | ) | — | ||||||||||||||||||||||||||
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Total revenue | 9,190 | 6,982 | 1,842 | 1,881 | 1,676 | 1,755 | 23,326 | (265 | ) | 23,061 | ||||||||||||||||||||||||||
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Adjusted EBITDA | 3,878 | 2,658 | 1,047 | 691 | 859 | 813 | 9,946 | (178 | ) | 9,768 | ||||||||||||||||||||||||||
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Capital expenditures | 1,853 | 1,415 | 47 | 353 | 232 | 384 | 4,284 | — | 4,284 | |||||||||||||||||||||||||||
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The following table provides the reconciliation of consolidated Adjusted EBITDA to consolidated profit/(loss) for the years ended 31 December:
| 2014 | 2013 | 2012 | ||||||||||
Adjusted EBITDA | 7,970 | 8,260 | 9,768 | |||||||||
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Depreciation | (2,839 | ) | (3,050 | ) | (2,926 | ) | ||||||
Amortization | (1,479 | ) | (1,791 | ) | (2,080 | ) | ||||||
Impairment loss | (992 | ) | (2,973 | ) | (386 | ) | ||||||
Loss on disposals of non-current assets | (74 | ) | (100 | ) | (205 | ) | ||||||
Finance costs | (2,026 | ) | (2,150 | ) | (2,029 | ) | ||||||
Finance income | 54 | 91 | 154 | |||||||||
Other non-operating losses | (152 | ) | (172 | ) | (75 | ) | ||||||
Shares of loss/(profit) of associates and joint ventures accounted for using the equity method | (38 | ) | (159 | ) | (9 | ) | ||||||
Net foreign exchange (gain)/ loss | (605 | ) | 20 | 70 | ||||||||
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Profit/(loss) before tax | (181 | ) | (2,024 | ) | 2,282 | |||||||
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The following table provides the breakdown of total operating revenue from external customers by mobile and fixed line for the years ended 31 December:
| 2014 | 2013 | 2012 | ||||||||||
Mobile | 16,552 | 19,094 | 19,442 | |||||||||
Fixed line | 3,075 | 3,452 | 3,619 | |||||||||
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Total | 19,627 | 22,546 | 23,061 | |||||||||
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These business activities include the following operations:
mobile primarily includes providing wireless telecommunication services to the Company’s customers and other operators,
fixed line primarily includes all activities for providing wireline telecommunication services, broadband and consumer internet.
VimpelCom provides both mobile and fixed line services in Russia, Italy, Ukraine, CIS, Pakistan, and until September 2014 in Burundi and the Central African Republic. The operations in Burundi and the Central African Republic were disposed of in September 2014 (see Note 6).
Other revenue of USD 383 for the year ended 31 December 2014 (2013: USD 292, 2012: USD 262) includes the amounts received for the settlement of agreements reached between Wind Italy and certain vendors. In connection with these agreements, the Company accepted an exposure to possible obligation. In case the Company fails to meet the obligation, it can be subject to cash penalties at the amount of up to USD 38. No provisions have been recognized with this respect because the risk of the penalty materializing was estimated not probable.
9. Selling, general and administrative expenses
Selling, general and administrative expenses consist of the following:
| 2014 | 2013 | 2012 | ||||||||||
Network and IT costs | 2,116 | 2,042 | 1,944 | |||||||||
Personnel cost | 1,539 | 1,806 | 1,769 | |||||||||
Customer associated costs | 1,612 | 1,783 | 1,866 | |||||||||
Losses on receivables (Note 20) | 201 | 207 | 232 | |||||||||
Taxes | 301 | 330 | 359 | |||||||||
Provisions related to the Algeria transaction (Note 6) | 50 | 1,266 | — | |||||||||
Other G&A | 906 | 939 | 992 | |||||||||
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Total | 6,725 | 8,373 | 7,161 | |||||||||
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The following table sets forth the number of our employees at 31 December:
| 2014 | 2013 | 2012 | ||||||||||
Russia | 27,935 | 26,843 | 24,400 | |||||||||
Italy | 6,896 | 6,903 | 6,707 | |||||||||
Algeria | 3,732 | 4,040 | 4,016 | |||||||||
Africa and Asia | 5,742 | 7,585 | 9,802 | |||||||||
Ukraine | 4,116 | 4,510 | 5,001 | |||||||||
CIS | 7,437 | 7,729 | 8,075 | |||||||||
Other | 166 | 232 | 183 | |||||||||
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Total | 56,024 | 57,842 | 58,184 | |||||||||
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The number of employees represents people employed by VimpelCom on a full-time or part-time basis excluding people working under contract agreements with external service providers.
Carrying amount of goodwill and cash-generating units
Goodwill acquired through business combinations has been allocated to CGUs for impairment testing as follows:
CGU | 2014 | Impairment | Translation adjustment | 2013 | ||||||||||||
Italy | 4,887 | — | (667 | ) | 5,554 | |||||||||||
Russia | 2,490 | — | (1,789 | ) | 4,279 | |||||||||||
Ukraine | 75 | (767 | ) | (535 | ) | 1,377 | ||||||||||
Algeria | 1,702 | — | (231 | ) | 1,933 | |||||||||||
Pakistan | 307 | (163 | ) | 21 | 449 | |||||||||||
Kazakhstan | 322 | — | (61 | ) | 383 | |||||||||||
Kyrgyzstan | 228 | — | (44 | ) | 272 | |||||||||||
Uzbekistan | 143 | — | (105 | ) | 248 | |||||||||||
Armenia | 104 | — | (17 | ) | 121 | |||||||||||
Laos | — | (34 | ) | — | 34 | |||||||||||
Others | 27 | (28 | ) | (4 | ) | 59 | ||||||||||
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Total | 10,285 | (992 | ) | (3,432 | ) | 14,709 | ||||||||||
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There were no changes to the methodology of goodwill allocation to CGUs in 2014.
The Company performed its annual goodwill impairment test as of 1 October. The Company considers the relationship between market capitalization and its book value, changes in country risk premiums and significant decreases in the operating results of its CGUs versus budgeted amounts among other factors, when reviewing for indicators of impairment. As of the impairment test date the market capitalization of the Group was not below the book value of its equity. The Company further performed an assessment for the period between 1 October and 31 December for any adverse developments that could have negatively impacted the valuations, and none were identified.
The recoverable amounts of the CGUs have been determined based on fair value less costs of disposal calculation using cash flow projections from business plans including subsequent changes in the existing networks, renewal of the telecom licenses as well as any intended restructurings. The business plans as approved by the Group’s senior management cover the period of three years and are extrapolated for another two years. The key assumptions and outcome of the impairment test is discussed separately below.
Impairment losses
2014
Driven by continued volatile economic and political environment in Ukraine as well as deteriorated operating performance in the country, the Company concluded an impairment of USD 767. The recoverable amount was determined based on a fair value less costs of disposal calculation using the latest cash flow projections including the newly awarded 3G license as well as cost optimization restructurings and necessity to renew 2G licences in the future (Level 3 fair value). Due to current macroeconomic and geopolitical situation in the country, the Company applied higher post-tax discount factors for the first two years in the explicit period of 26.1% in 2015 and 19.4% 2016 followed by normalized post-tax discount rate of 16.8%. The political and economic environment in Ukraine remains very volatile and unpredictable, as indicated by the events that have occurred in the Ukraine in 2014 and continued in 2015. Depending on the developments in the Ukraine that may occur in the near future, additional impairments may need to be recognized.
The Company also concluded an impairment pertaining to its operations in Pakistan in an amount of USD 163. The impairment was mainly driven by significantly higher capital expenditures to expand the 3G telecommunication network planned for 2015 in order to regain the market share in the country following its contraction in 2014. The recoverable amount was determined based on a fair value less costs of disposal calculation using the latest cash flow projections including the expected capital expenditures to expand the network as well as necessity to renew 2G and 3G licenses in the future (Level 3 fair value). The post-tax discount rate applied was 16.6%.
Other impairment concluded related to goodwill in Laos of USD 34 and other smaller cash generating units of USD 28. The recoverable amounts were determined based on the fair value less costs of disposal using the latest cash flow projections and a post-tax discount rate of 16.2% for Laos and 13.1% for other cash generating units (Level 3 fair value).
In addition the Company recorded an impairment for other long-term assets for the total amount of USD 110, which was offset by an impairment reversal pertaining to the sale of the investment in Canada (Note 6).
2013
In its assessment of possible impairment triggering events in the fourth quarter, the Company determined that fourth quarter increases in the country risk premium and the increasingly volatile economic and political landscape in Ukraine required an impairment assessment to be made at 31 December 2013 for the Ukraine CGU. As a result of this 31 December 2013 impairment assessment, the Company recorded an impairment of goodwill in the Ukraine CGU in an amount of USD 2,085. The impairment was driven by macro-economic developments and the increases in the country risk premium, as well as weakening operational performance that resulted in the
reassessment of the Ukraine CGU’s long-term forecast. The recoverable amount was determined based on a value in use calculation using the latest cash flow projections and a pre-tax discount rate of 23.1%. These assumptions reflect the increase in the risks inherent in the estimated future cash flows attributable to the current economic and political volatility in the country, which became more pronounced during the fourth quarter of 2013. Given the volatility in Ukraine, particularly approaching 31 December 2013, the Company in determining the appropriate discount rate, considered that the rating downgrades suffered by Ukraine in November, contained negative outlooks and were already likely superseded by then current events. Additionally the Company referred to credit default swap spreads during the fourth quarter. Based on all of the available information the Company concluded that the discount rate of 23.1% appropriately reflects the return an investor would seek from the Ukraine CGU.
Other impairments recorded in 2013 related to the CGUs Armenia and Laos in an amount of USD 20 and USD 25 respectively, due to weakening operational performance. The Armenia CGU is part of the “CIS” reportable segment while the Laos CGU is part of the “Africa and Asia” reportable segment. The recoverable amounts were calculated as value in use using the latest available cash flow projections, and a after-tax discount rate of 12.1% and 15.3% respectively. Changes in the critical estimates such as WACC, operating margin or revenue growth rate by one p.p. for these CGUs would not result in any additional material impairment.
There were no other goodwill impairments recorded during 2013.
In addition, during 2013, the Company fully impaired its investment in Wind Canada in an amount of USD 764, mainly related to the reassessment of the future prospects of Wind Canada’s continuing operations in the country, which resulted from the strategic decision to withdraw from the January 2014 4G/LTE spectrum auction in the fourth quarter of 2013. In withdrawing from the spectrum auction, Wind Canada effectively curtailed its ability to execute its business plan and generate the cash flows necessary to repay the amounts owed by Wind Canada to the Company.
In addition the Company recorded an impairment for other long-term assets for the total amount of USD 79.
Key assumptions
The key assumptions and inputs used by the Company in undertaking the impairment test are the discount rate, average revenue growth rate (excluding perpetuity period), terminal growth rate, average operating margin and average capital expenditure as a percentage of revenue. Operating margin is defined as the ratio of operating income to revenue. Capital expenditure is defined as additions to property and equipment and intangible assets other than goodwill.
The discount rates used in the impairment test were initially determined in USD based on the risk free rate for 20-year maturity bonds of the United States Treasury adjusted for a risk premium to reflect both the increased risk of investing in equities and the systematic risk of the specific CGU relative to the market as a whole. The equity market risk premium used was 5.5% (2013: 6.00%) and the systematic risk, beta, represents the median of the raw betas of the entities comparable in size and geographic footprint with the ones of the Company (“Peer Group”). The debt risk premium is based on the median of Standard&Poors long term credit rating of the Peer Group. The weighted average cost of capital is determined based on target debt-to-equity ratios representing the median historical five-year capital structure for each entity from the Peer Group. The discount rate in functional currency is adjusted for the long-term inflation forecast of the respective country in which the business operates, as well as the applicable country risk premium.
The Company estimates revenue growth rates and operating margin calculated based on Adjusted EBITDA divided by Total Operating Revenue for each CGU and each future year.
The revenue growth rates vary based on numerous factors, including size of market, GDP (Gross Domestic Product), foreign currency projections, traffic growth, market share and others.
Terminal growth rate is estimated based on a percentage that is lower than or equal to the country long-term inflation forecast, depending on the CGU.
The forecast of operating income margin is based on the budget of the following year and assumes cost optimization initiatives which are part of on-going operations, as well as, regulatory and technological changes known to date, such as telecommunication license issues and price regulation among others. Similarly, the capital expenditures are based on the budget of the following year and network roll-out plans.
Discount rate (functional currency) | 2014 | 2013 | ||||||
Italy | 7.9 | % | 8.4 | % | ||||
Russia* | 11.2 | % | 12.5 | % | ||||
Ukraine* | 16.8 | % | 19.0 | % | ||||
Algeria** | 10.8 | % | n.a. | |||||
Pakistan | 16.6 | % | 22.5 | % | ||||
Kazakhstan | 11.4 | % | 12.4 | % | ||||
Kyrgyzstan | 16.5 | % | 17.0 | % | ||||
Uzbekistan | 10.2 | % | 10.7 | % | ||||
Armenia | 11.7 | % | 12.1 | % | ||||
Laos | 16.2 | % | 15.3 | % | ||||
Average annual revenue growth rate during forecast period (functional currency) | 2014 | 2013 | ||||||
Italy | 2.1 | % | 1.5 | % | ||||
Russia | 1.2 | % | 4.4 | % | ||||
Ukraine | 4.6 | % | 0.1 | % | ||||
Algeria | 6.0 | % | n.a. | |||||
Pakistan | 6.1 | % | 11.8 | % | ||||
Kazakhstan | 2.9 | % | 3.7 | % | ||||
Kyrgyzstan | 2.7 | % | 8.6 | % | ||||
Uzbekistan | (3.6 | %) | 3.1 | % | ||||
Armenia | 2.1 | % | (1.3 | %) | ||||
Laos | 5.6 | % | 9.9 | % | ||||
Terminal growth rate | 2014 | 2013 | ||||||
Italy | 1.0 | % | 1.0 | % | ||||
Russia | 1.0 | % | 3.0 | % | ||||
Ukraine | 2.0 | % | 3.0 | % | ||||
Algeria | 4.0 | % | n.a. | |||||
Pakistan | 6.0 | % | 11.8 | % | ||||
Kazakhstan | 3.0 | % | 3.0 | % | ||||
Kyrgyzstan | 3.0 | % | 3.0 | % | ||||
Uzbekistan | 2.0 | % | 2.3 | % | ||||
Armenia | 4.0 | % | 4.0 | % | ||||
Laos | 3.0 | % | 4.0 | % | ||||
Average operating margin Italy Russia Ukraine Algeria Pakistan Kazakhstan Kyrgyzstan Uzbekistan Armenia Laos 2014 2013 18.3 % 17.6 % 21.1 % 28.5 % 25.8 % 32.0 % 40.9 % n.a. 20.5 % 27.6 % 34.8 % 36.0 % 36.9 % 38.9 % 22.0 % 25.8 % 13.7 % 15.7 % 5.1 % 10.1 %
Average capital expenditure as a percentage of revenue | 2014 | 2013 | ||||||
Italy | 16.4 | % | 15.8 | % | ||||
Russia | 17.5 | % | 18.2 | % | ||||
Ukraine | 22.6 | % | 12.8 | % | ||||
Algeria | 13.6 | % | n.a. | |||||
Pakistan | 20.9 | % | 15.8 | % | ||||
Kazakhstan | 13.0 | % | 12.9 | % | ||||
Kyrgyzstan | 14.1 | % | 12.7 | % | ||||
Uzbekistan | 20.0 | % | 20.1 | % | ||||
Armenia | 15.7 | % | 13.6 | % | ||||
Laos | 18.3 | % | 14.4 | % | ||||
Sensitivity to changes in assumptions
Other than as disclosed below, there is no reasonably possible change in any of the above key assumptions which would cause the carrying value of any CGU to exceed its recoverable amount.
The carrying value of the Italy CGU is equal to its estimated recoverable amount; consequently, any adverse change in key assumptions would, in isolation, cause an impairment loss to be recognized. An increase of WACC by one p.p. or deterioration of operating margin by one p.p. or decrease in revenue growth by one p.p. or decrease in terminal growth rate by one p.p. would result in additional impairments of: USD 1,778, USD 619, USD 642 or USD 1,482, respectively. The recoverable amount of Italy included the proceeds from the sale of the towers (see Note 27 for more details of the sale).
Similarly, the carrying value of the Armenia CGU is equal to its estimated recoverable amount. Any adverse change in key assumptions would, in isolation, cause an impairment loss to be recognized. An increase of WACC by one p.p. or deterioration of operating margin by one p.p. or decrease in revenue growth by one p.p. or decrease in terminal growth rate by two p.p. would result in additional impairments of: USD 32, USD 15, USD 14 or USD 48, respectively.
The following tables illustrate the headroom derived from the impairment test using the assumptions disclosed above, and, for reasonably possible changes, the amount by which each key assumption must change in isolation in order for the estimated recoverable amount to equal its carrying value.
CGU | Period | Headroom | Increase of discount rate by | Decrease in Average Revenue Growth by | Decrease in Average Operating margin | Increase in Average Capital Expenditure | ||||||||
Italy | 2014 | nil | any | any | any | any | ||||||||
| 2013 | 646 | 0.4 p.p. | 1.0 p.p. | 1.0 p.p. | 1.0 p.p. | |||||||||
Armenia | 2014 | nil | any | any | any | any | ||||||||
The impairment amount for the CGU Ukraine of USD 767 would increase following an increase of WACC by one p.p., or decrease in operating margin by one p.p. or decrease in revenue growth by one p.p. or decrease in terminal growth rate by one p.p. by USD 66, USD 56, USD 50 or USD 58, respectively.
The impairment amount for the CGU Pakistan of USD 163 would increase following an increase of WACC by one p.p., or decrease in operating margin by one p.p. or decrease in revenue growth by one p.p. or decrease in terminal growth rate by one p.p. by USD 130, USD 67, USD 62 or USD 102, respectively.
11. Other non-operating losses
Other non-operating losses/(gains) consisted of the following for the years ended 31 December:
| 2014 | 2013 | 2012 | ||||||||||
Change in fair value of derivatives over non-controlling interests (Note 17) | 35 | 46 | 9 | |||||||||
Change in fair value of embedded derivatives (Note 17) | 149 | (71 | ) | (31 | ) | |||||||
Change of fair value of other derivatives (Note 17) | (149 | ) | — | — | ||||||||
Ineffective portion of hedges | 7 | 119 | — | |||||||||
Re-measurement of previously held investment in Rascom | — | (18 | ) | — | ||||||||
Non-operating provisions, net of indemnity claims (Note 24) | — | 100 | 70 | |||||||||
Loss from early debt redemption (Note 17) | 148 | — | — | |||||||||
Other (gains)/ losses | (38 | ) | (4 | ) | 27 | |||||||
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Results from early debt redemption and change in fair value of embedded derivatives mainly relate to the refinancing in Italy (Note 17).
12.1 Information about subsidiaries
The consolidated financial statements of the Group include the following subsidiaries for the years ended 31 December:
Name of significant subsidiaries | Country of incorporation | Nature of the subsidiary |
Equity interest in % | |||||||||
| 2014 | 2013 | |||||||||||
VimpelCom Amsterdam B.V. | Netherlands | Holding | 100 | % | 100 | % | ||||||
Wind Telecom S.p.A. | Italy | Holding | 100 | % | 100 | % | ||||||
WIND Acquisition Holdings Finance S.p.A | Italy | Holding | 100 | % | 100 | % | ||||||
WIND Retail S.r.l. | Italy | Operating | 100 | % | 100 | % | ||||||
WIND Telecomunicazioni S.p.A. | Italy | Operating | 100 | % | 100 | % | ||||||
VimpelCom Holdings B.V. | Netherlands | Holding | 100 | % | 100 | % | ||||||
OJSC VimpelCom | Russia | Operating | 100 | % | 100 | % | ||||||
“Kyivstar” PJSC | Ukraine | Operating | 100 | % | 100 | % | ||||||
Limnotex Developments Limited | Cyprus | Holding | 71.5 | % | 71.5 | % | ||||||
LLP “KaR-Tel” | Kazakhstan | Operating | 71.5 | % | 71.5 | % | ||||||
LLP “TNS-Plus” | Kazakhstan | Operating | 49.0 | % | 49.0 | % | ||||||
LLC “Tacom” | Tajikistan | Operating | 98.0 | % | 98.0 | % | ||||||
LLC “Golden Telecom” | Ukraine | Operating | 100 | % | 100 | % | ||||||
LLC “Unitel” | Uzbekistan | Operating | 100 | % | 100 | % | ||||||
LLC “Mobitel” | Georgia | Operating | 80.0 | % | 80.0 | % | ||||||
CJSC “ArmenTel” | Armenia | Operating | 100 | % | 100 | % | ||||||
LLC “Sky Mobile” | Kyrgyzstan | Operating | 71.5 | % | 71.5 | % | ||||||
VimpelCom Lao Co. Ltd. | Lao PDR | Operating | 78.0 | % | 78.0 | % | ||||||
Weather Capital S.à r.l. | Luxembourg | Holding | 100 | % | 100 | % | ||||||
Weather Capital Special Purpose 1 S.A. | Luxembourg | Holding | 100 | % | 100 | % | ||||||
Global Telecom Holding S.A.E. (former name Orascom Telecom Holding S.A..E.) | Egypt | Holding | 51.9 | % | 51.9 | % | ||||||
Omnium Telecom Algérie S.p.A. (former name Orascom Telecom Algérie S.p.A.) | Algeria | Operating | 50.3 | % | 50.3 | % | ||||||
Optimum Telecom Algérie S.p.A. | Algeria | Operating | 50.3 | % | 50.3 | % | ||||||
Pakistan Mobile Communications Limited | Pakistan | Operating | 51.9 | % | 51.9 | % | ||||||
Banglalink Digital Telecommunications Limited | Bangladesh | Operating | 51.9 | % | 51.9 | % | ||||||
U-com Burundi S.A. | Burundi | Operating | 0 | % | 51.9 | % | ||||||
Telecel Centrafrique S.A. | C.A.R. | Operating | 0 | % | 51.9 | % | ||||||
In October 2014 the Company sold its operations in Central African Republic and Burundi (Note 6).
In January 2015 the Company sold 51% shareholding in OTA decreasing the effective shareholding from 50.1% to 23.7% (Note 6).
12.2 Material partly-owned subsidiaries
Financial information of subsidiaries that have material non-controlling interests are provided below:
Name of significant subsidiaries | Country of operation | Equity interest held by non-controlling interest in % | ||||||||
| 2014 | 2013 | |||||||||
LLP “KaR-Tel” | Kazakhstan | 28.5 | % | 28.5 | % | |||||
LLC “Sky Mobile” | Kyrgyzstan | 28.5 | % | 28.5 | % | |||||
Global Telecom Holding S.A.E. (comprising Pakistan, | Egypt | 48.1 | % | 48.1 | % | |||||
Book values of material non-controlling interests | ||||||||||
LLP “KaR-Tel” | 164 | 141 | ||||||||
LLC “Sky Mobile” | 62 | 57 | ||||||||
Global Telecom Holding S.A.E. | (1,248 | ) | (881 | ) | ||||||
Profit/(loss) allocated to material non-controlling interests | ||||||||||
LLP “KaR-Tel” | 49 | 39 | ||||||||
LLC “Sky Mobile” | 23 | 19 | ||||||||
Global Telecom Holding S.A.E. | (324 | ) | (1,476 | ) | ||||||
LLP “KaR-tel” and LLC “Sky Mobile” are 100% owned by Limnotex Development Limited (“Limnotex”). The Company indirectly owns 71.5% of Limnotex. The non-controlling shareholder of Limnotex holds one put option for 15% of Limnotex shares which is accounted for as a financial liability (Note 17). During 2014 Limnotex paid approximately USD 19 of dividends to the non-controlling shareholder as its portion of dividends paid.
The summarised financial information of these subsidiaries before inter-company eliminations is as follows:
Summarised income statement for 2014:
| LLP “KaR-Tel” | LLC “Sky Mobile” | Global Telecom Holding S.A.E. | ||||||||||
Operating revenue | 690 | 178 | 3,331 | |||||||||
Operating expenses | (513 | ) | (109 | ) | (2,972 | ) | ||||||
Other costs/income | 25 | 22 | (758 | ) | ||||||||
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Profit/(loss) before tax | 202 | 91 | (399 | ) | ||||||||
Income tax expense | (49 | ) | (10 | ) | (286 | ) | ||||||
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Profit/(loss) for the year | 153 | 81 | (685 | ) | ||||||||
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Attributed to non-controlling interest | 49 | 23 | (324 | ) | ||||||||
Dividends paid to non-controlling interest | — | — | — | |||||||||
Summarised income statement for 2013:
| LLP “KaR-Tel” | LLC “Sky Mobile” | Global Telecom Holding S.A.E. | ||||||||||
Operating revenue | 776 | 192 | 3,470 | |||||||||
Operating expenses | (586 | ) | (120 | ) | (4,131 | ) | ||||||
Other costs/income | 21 | 2 | (1,434 | ) | ||||||||
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Profit/(loss) before tax | 211 | 74 | (2,095 | ) | ||||||||
Income tax expense | (58 | ) | (8 | ) | (988 | ) | ||||||
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Profit/(loss) for the year | 153 | 66 | (3,083 | ) | ||||||||
Attributed to non-controlling interest | 39 | 19 | (1,476 | ) | ||||||||
Dividends paid to non-controlling interest | — | — | — | |||||||||
Summarised income statement for 2012:
| LLP “KaR-Tel” | LLC “Sky Mobile” | Global Telecom Holding S.A.E. | ||||||||||
Operating revenue | 790 | 161 | 3,659 | |||||||||
Operating expenses | (601 | ) | (95 | ) | (3,026 | ) | ||||||
Other costs/income | 17 | (1 | ) | (948 | ) | |||||||
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Profit/(loss) before tax | 206 | 65 | (315 | ) | ||||||||
Income tax expense | (40 | ) | (7 | ) | (154 | ) | ||||||
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Profit/(loss) for the year | 166 | 58 | (469 | ) | ||||||||
Attributed to non-controlling interest | 47 | 16 | (216 | ) | ||||||||
Dividends paid to non-controlling interest | — | — | — | |||||||||
Summarised statement of financial position 2014:
| LLP “KaR-Tel” | LLC “Sky Mobile” | Global Telecom Holding S.A.E. | ||||||||||
Property and equipment | 414 | 86 | 2,391 | |||||||||
Intangible assets | 21 | 8 | 1,737 | |||||||||
Other non-current assets | 421 | 228 | 2,335 | |||||||||
Trade and other receivables | 24 | 14 | 233 | |||||||||
Cash and cash equivalents | 477 | 120 | 2,853 | |||||||||
Other current assets | 33 | 32 | 471 | |||||||||
Financial liabilities | — | — | 5,734 | |||||||||
Provisions | 9 | — | 1,486 | |||||||||
Other liabilities | 167 | 28 | 2,137 | |||||||||
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| |||||||
Total equity | 1,214 | 460 | 662 | |||||||||
Attributed to equity holders of parent | 1,050 | 398 | 1,910 | |||||||||
Non-controlling interest | 164 | 62 | (1,248 | ) | ||||||||
Summarised statement of financial position 2013:
| LLP “KaR-Tel” | LLC “Sky Mobile” | Global Telecom Holding S.A.E. | ||||||||||
Property and equipment | 515 | 94 | 2,093 | |||||||||
Intangible assets | 161 | 12 | 4,696 | |||||||||
Other non-current assets | 123 | 273 | 88 | |||||||||
Trade and other receivables | 27 | 5 | 226 | |||||||||
Cash and cash equivalents | 263 | 18 | 2,839 | |||||||||
Other current assets | 200 | 79 | 1,236 | |||||||||
Financial liabilities | 59 | — | 5,184 | |||||||||
Provisions | 9 | — | 201 | |||||||||
Other liabilities | 177 | 20 | 1,982 | |||||||||
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Total equity | 1,044 | 461 | 3,811 | |||||||||
Attributed to equity holders of parent | 903 | 330 | 3,913 | |||||||||
Non-controlling interest | 141 | 131 | (102 | ) | ||||||||
Summarised cash flow statement 2014:
| LLP “KaR-Tel” | LLC “Sky Mobile” | Global Telecom Holding S.A.E. | ||||||||||
Operating | 255 | 82 | (362 | ) | ||||||||
Investing | 45 | 21 | 252 | |||||||||
Financing | (72 | ) | — | 102 | ||||||||
Effect of exchange rate changes on cash and cash equivalents | (14 | ) | (2 | ) | 1 | |||||||
Net increase/(decrease) in cash equivalents | 214 | 101 | (7 | ) | ||||||||
Summarised cash flow statement 2013:
| LLP “KaR-Tel” | LLC “Sky Mobile” | Global Telecom Holding S.A.E. | ||||||||||
Operating | 270 | 92 | 1,166 | |||||||||
Investing | (221 | ) | (103 | ) | (508 | ) | ||||||
Financing | — | — | 159 | |||||||||
Effect of exchange rate changes on cash and cash equivalents | (4 | ) | — | 22 | ||||||||
Cash included as held for sale | — | — | (26 | ) | ||||||||
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Net increase/(decrease) in cash equivalents | 45 | (11 | ) | 813 | ||||||||
Summarised cash flow statement 2012:
| LLP “KaR-Tel” | LLC “Sky Mobile” | Global Telecom Holding S.A.E. | ||||||||||
Operating | 314 | 82 | 1,190 | |||||||||
Investing | (124 | ) | (41 | ) | (580 | ) | ||||||
Financing | (9 | ) | (64 | ) | 461 | |||||||
Effect of exchange rate changes on cash and cash equivalents | 1 | — | (59 | ) | ||||||||
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Net increase/(decrease) in cash equivalents | 182 | (23 | ) | 1,012 | ||||||||
12.3 Investments in Associaties
The Company does not have any material investments in Associates. The only material investment in Associate was disposed in September 2014 (Note 6). Group’s share of profit for the year ended 31 December 2014 amounted to USD 21 (2013: USD (139), 2012 (100)).
12.4 Investments in Joint Ventures
The Company has no significant operations in joint ventures. The aggregate carrying value of the investments is as follows:
Joint ventures | 2014 | 2013 | ||||||
Joint ventures | 237 | 414 | ||||||
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The following is the aggregate financial information of the investment:
| 2014 | 2013 | 2012 | ||||||||||
(Loss)/ profit before tax | (15 | ) | (18 | ) | 236 | |||||||
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Income tax expense | (1 | ) | (42 | ) | (47 | ) | ||||||
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(Loss)/ profit for the year | (16 | ) | (60 | ) | 189 | |||||||
Other comprehensive income | — | — | — | |||||||||
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Total comprehensive (loss)/ profit | (16 | ) | (60 | ) | 189 | |||||||
Elimination of intercompany transactions | — | (24 | ) | (14 | ) | |||||||
Group’s share of (loss)/ profit for the year | (8 | ) | (42 | ) | 88 | |||||||
Less Group’s share of profit for the year | — | — | (67 | ) | ||||||||
Group’s share of (loss)/ profit for the year from investment in Joint Ventures | (8 | ) | (42 | ) | 21 | |||||||
Income tax expense consisted of the following for the years ended 31 December:
Current tax | 2014 | 2013 | 2012 | |||||||||
Current year | 759 | 1,228 | 1,099 | |||||||||
Adjustments of previous years | (54 | ) | 562 | (67 | ) | |||||||
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| 705 | 1,790 | 1,032 | ||||||||||
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Deferred tax | ||||||||||||
Origination / (reversal) of temporary difference | (250 | ) | (100 | ) | (346 | ) | ||||||
Changes in tax rates | (4 | ) | 9 | (8 | ) | |||||||
Current year tax losses unrecognized | 167 | 142 | 319 | |||||||||
Recognition and utilization of previously unrecognized tax loss/ tax credit | (12 | ) | (94 | ) | (21 | ) | ||||||
Expiration of tax losses | 5 | 21 | 11 | |||||||||
Derecognition of previously recognized tax losses | 20 | 7 | 12 | |||||||||
Write off / (reversal of write off) of deferred tax asset temporary differences | 14 | 159 | (155 | ) | ||||||||
Adjustments of previous years | (12 | ) | 37 | 5 | ||||||||
Unrecognized other carry forwards | 89 | 93 | 57 | |||||||||
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| 17 | 274 | (126 | ) | |||||||||
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Income tax expense | 722 | 2,064 | 906 | |||||||||
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Any penalties or interests relating to income tax claims or litigations are included in the tax line item.
The table below outlines the reconciliation between the statutory tax rate in the Netherlands (25%) and effective corporate income tax rates for the Group, together with the corresponding amounts:
Reconciliation between statutory and effective income tax: | Year ended 31 December 2014 | Year ended 31 December 2013 | Year ended 31 December 2012 | |||||||||
Profit/(loss) before taxes | (181 | ) | (2,024 | ) | 2,282 | |||||||
Income tax expense (benefit) computed on profit before taxes at statutory tax rate | (45 | ) | (506 | ) | 571 | |||||||
Difference due to the effects of: | ||||||||||||
Different tax rates in different jurisdictions | (171 | ) | (42 | ) | (168 | ) | ||||||
Non-deductible expenses | 561 | 1,072 | 242 | |||||||||
Non-taxable income | (114 | ) | (45 | ) | (76 | ) | ||||||
Prior year adjustments | (64 | ) | 599 | (62 | ) | |||||||
Change in recognition of deferred tax assets | 184 | 404 | 224 | |||||||||
Withholding taxes | 262 | 473 | 97 | |||||||||
Tax claims | 138 | 112 | 85 | |||||||||
Change in Income tax rate | (4 | ) | 9 | (8 | ) | |||||||
Other | (25 | ) | (12 | ) | 1 | |||||||
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Income tax charge for the period | 722 | 2,064 | 906 | |||||||||
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The effective tax rate amounts to (398.8)% in 2014 (2013: (101.9)% and 2012: 39.7%).
Explanatory notes to the effective tax rate
Permanent differences
The non-deductible expenses have an increasing effect on the effective tax rate (USD 561). These mainly relate to the impairment of intangible assets in the Ukraine, Pakistan, Georgia and Laos being non-deductible for tax purposes. The effective tax rate increased due to this non deductibility by USD 245. The non-deductible interest increased the effective tax rate by USD 125.
Subnational income taxes in Italy that use a different taxation basis have an increasing impact on the effective tax rate of USD 33. Furthermore other non-deductible expenses have an increasing impact on effective tax rate of USD 135 (e.g.bad debt losses, application of CFC legislation and other non deductible business and financial expenses).
The non-taxable income reduced the effective tax rate by USD 114. The amount increased in 2014 compared to previous year due to non-taxable functional currency translation result, non taxable interest and dividend income.
Change in recognition of deferred tax assets
The effective tax rate increased by USD 184 due to the change of recognition of deferred tax assets.
The effective tax rate increased as a result of tax losses in Egypt, the Netherlands and Bangladesh for which no deferred tax asset is recognized. Furthermore, Italy is not able to recognize a deferred tax asset on future deductible interest expense increasing the effective tax rate.
The tax rate decreased as a result of recognized deferred tax asset on previous year tax losses (Luxembourg) and change of estimation of deferred tax assets on temporary non-deductible interest and other carry forwards having a positive impact on the ETR.
Withholding taxes
The effect of withholding taxes on undistributed earnings resulted in a tax charge of USD 262. The amount of USD 262 includes a one off tax charge of USD 87 relating to Algerian withholding taxes on dividends that will be distributed upon closing of the ‘Algerian deal’. The amount also includes withholding taxes accrued for future capital gain taxes (USD 45) and interest (USD 36) withholding taxes that will be due upon closing of the Algerian deal.
Finally, the company accrued for the withholding taxes on distribution of dividends from Russia and the CIS (USD 68) and withholding taxes on accrued management fees being capitalized (USD 26).
Prior year adjustments
The effect of prior year adjustments of USD 64 decreased the effective tax rate and mainly relate to the settlement with the Algerian government, resulting in a reversal of a write off of a tax receivable by USD 43.
Tax claims
The tax claims are reserves for uncertain income tax positions. See Note 4 ‘Significant accounting judgments, estimates and assumptions – Deferred tax assets and uncertain tax positions’ for further discussion.
Other
Other includes foreign currency translation result being non taxable. The amount increased in 2014 compared to 2013 due to the change of functional currency of Unitel (Uzbekistan) resulting in a non taxable translation result.
Deferred taxes
As per 31 December 2014 and 31 December 2013, the Group reported the following deferred tax assets and liabilities on the balance sheet:
| 31 December 2014 | 31 December 2013 | |||||||
Deferred tax assets as of 31 December | 575 | 294 | ||||||
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Deferred tax liabilities as of 31 December | (1,637 | ) | (1,641 | ) | ||||
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The following table shows the movements of the deferred tax assets and liabilities in 2014:
| Movements in Deferred taxes | ||||||||||||||||||||||||||||||||
| Opening balance | P/L movement | OCI movement | Acquisition/ Divestment | Other comprehensive income & Other | Currency translation | Tax rate changes | Ending balance | |||||||||||||||||||||||||
Property, plant and equipment, net | (739 | ) | (31 | ) | — | — | — | 220 | 3 | (547 | ) | |||||||||||||||||||||
Other intangible assets, net | (1,158 | ) | 215 | 1 | — | — | 151 | 16 | (774 | ) | ||||||||||||||||||||||
Trade accounts receivable | 121 | (26 | ) | — | — | — | (20 | ) | — | 74 | ||||||||||||||||||||||
Other assets | 703 | (72 | ) | — | — | — | (328 | ) | — | 303 | ||||||||||||||||||||||
Provisions | 62 | (2 | ) | — | — | — | (18 | ) | — | 42 | ||||||||||||||||||||||
Long-term liabilities | (136 | ) | (41 | ) | (13 | ) | — | — | 172 | (1 | ) | (19 | ) | |||||||||||||||||||
Short-term payables | (56 | ) | 45 | — | — | — | 83 | (3 | ) | 69 | ||||||||||||||||||||||
Other short-term liabilities | 75 | 34 | — | — | — | (23 | ) | (2 | ) | 84 | ||||||||||||||||||||||
Other movements and temporary differences | 35 | (16 | ) | (1 | ) | — | — | (3 | ) | (8 | ) | 7 | ||||||||||||||||||||
Deferred subnational income taxes and other | (79 | ) | 76 | (5 | ) | — | — | 2 | — | (6 | ) | |||||||||||||||||||||
Withholding tax on undistributed earnings | (439 | ) | (236 | ) | — | — | — | 76 | — | (599 | ) | |||||||||||||||||||||
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| (1,611 | ) | (54 | ) | (18 | ) | — | — | 312 | 5 | (1,366 | ) | |||||||||||||||||||||
Tax losses and other carry forwards | 2,821 | 302 | 2 | — | — | (8 | ) | (1 | ) | 3,116 | ||||||||||||||||||||||
Non recognized deferred tax assets on losses and credits | (2,391 | ) | (255 | ) | (1 | ) | — | — | 1 | — | (2,646 | ) | ||||||||||||||||||||
Non recognized deferred tax assets on temporary differences | (166 | ) | (14 | ) | — | — | — | 14 | — | (166 | ) | |||||||||||||||||||||
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Net deferred tax position | (1,347 | ) | (21 | ) | (17 | ) | — | — | 319 | 4 | (1,062 | ) | ||||||||||||||||||||
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The following table shows the movements of the deferred tax assets and liabilities in 2013:
| Movements in Deferred taxes | ||||||||||||||||||||||||||||||||
| Opening balance | P/L movement | OCI movement | Acquisition/ Divestment | Other comprehensive income & Other | Currency translation | Tax rate changes | Ending balance | |||||||||||||||||||||||||
Property, plant and equipment, net | (683 | ) | (94 | ) | — | (8 | ) | — | 44 | 3 | (739 | ) | ||||||||||||||||||||
Other intangible assets, net | (1,255 | ) | 117 | — | — | — | (23 | ) | 4 | (1,158 | ) | |||||||||||||||||||||
Trade accounts receivable | 187 | (69 | ) | — | — | — | 4 | (1 | ) | 121 | ||||||||||||||||||||||
Other assets | 59 | 622 | — | — | 8 | 15 | (1 | ) | 703 | |||||||||||||||||||||||
Provisions | 67 | (5 | ) | — | — | — | — | — | 62 | |||||||||||||||||||||||
Long-term liabilities | 175 | (306 | ) | — | — | — | (2 | ) | (1 | ) | (136 | ) | ||||||||||||||||||||
Short-term payables | 154 | (207 | ) | — | — | (2 | ) | (2 | ) | (1 | ) | (56 | ) | |||||||||||||||||||
Other short-term liabilities | 79 | — | — | — | — | (3 | ) | (2 | ) | 75 | ||||||||||||||||||||||
Other movements and temporary differences | 26 | 10 | — | — | — | — | (2 | ) | 35 | |||||||||||||||||||||||
Deferred subnational income taxes and other | (124 | ) | 46 | — | — | 3 | (4 | ) | — | (79 | ) | |||||||||||||||||||||
Withholding tax on undistributed earnings | (120 | ) | (319 | ) | — | — | — | — | — | (439 | ) | |||||||||||||||||||||
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| (1,435 | ) | (206 | ) | — | (8 | ) | 9 | 31 | (1 | ) | (1,611 | ) | ||||||||||||||||||||
Tax losses and other carry forwards | 1,675 | 1,153 | — | — | — | — | (7 | ) | 2,821 | |||||||||||||||||||||||
Non recognized deferred tax assets on losses and credits | (1,332 | ) | (1,059 | ) | — | — | — | — | (2,391 | ) | ||||||||||||||||||||||
Non recognized deferred tax assets on temporary differences | (12 | ) | (153 | ) | — | — | — | — | (166 | ) | ||||||||||||||||||||||
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Net deferred tax position | (1,104 | ) | (266 | ) | — | (8 | ) | 9 | 31 | (8 | ) | (1,347 | ) | |||||||||||||||||||
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VimpelCom recognizes a deferred tax asset for the carry forward of unused tax losses and other carry forwards to the extent that it is probable that the deferred tax asset will be utilized. The company recorded USD 64 deferred tax asset on losses in Luxembourg which utilization is dependent on future taxable profits in excess of the profits arising from the reversal of existing taxable temporary differences. Based on the current financing activities resulting in a taxable income each year and projections for future taxable income over the periods in which the deferred tax asset on losses will be utilized, management believes it is probable that the company will realize the benefit of these tax losses. The amount and expiry date of deductible temporary differences, unused tax losses and other carry forwards for which no deferred tax asset is recognized are as follows as per December 2014:
Tax losses year of expiration | Recognized losses | Recognized DTA | Non-recognized losses | Non-recognized DTA | ||||||||||||
0 - 5 years | — | — | (1,614 | ) | 481 | |||||||||||
6 - 10 years | (34 | ) | 7 | (1,408 | ) | 340 | ||||||||||
> 10 years | — | — | — | — | ||||||||||||
Indefinitely | (933 | ) | 316 | (5,857 | ) | 1,393 | ||||||||||
Total | (967 | ) | 323 | (8,879 | ) | 2,214 | ||||||||||
Other carry forwards year of expiration 0 - 5 years 6 - 10 years > 10 years Indefinitely Total Recognized credits Recognized DTA Non-recognized credits Non-recognized DTA (15 ) 15 (5 ) 1 (13 ) 13 — — — — — — (331 ) 91 (1,569 ) 431 (359 ) 119 (1,574 ) 432
These other carry forwards mainly relate to non-deductible interest in Italy that may be carried forward indefinitely to future years.
As of 31 December 2014, the amount of deductible temporary differences for which no deferred tax asset is recognized amounts to USD 697 (with a resulting non-recognized deferred tax asset of USD 166).
The following tables show the recognized and not recognized deferred income tax assets as per December 2013 for comparison purposes:
Tax losses year of expiration | recognized losses | recognized DTA | non recognized losses | non recognized DTA | ||||||||||||
0 - 5 years | (339 | ) | 97 | (1,047 | ) | 268 | ||||||||||
6 - 10 years | — | — | (1,175 | ) | 273 | |||||||||||
> 10 years | — | — | — | — | ||||||||||||
Indefinitely | (930 | ) | 346 | (6,228 | ) | 1,836 | ||||||||||
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total | (1,269 | ) | 443 | (8,450 | ) | 2,377 | ||||||||||
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Other carry forwards year of expiration | recognized credits | recognized DTA | non recognized credits | non recognized DTA | ||||||||||||
0 - 5 years | — | — | — | — | ||||||||||||
6 - 10 years | — | — | — | — | ||||||||||||
> 10 years | — | — | — | — | ||||||||||||
Indefinitely | — | — | (1,777 | ) | 489 | |||||||||||
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Total | — | — | (1,777 | ) | 489 | |||||||||||
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VimpelCom reports the tax effect of the existence of undistributed profits that will be distributed in the foreseeable future. During 2014, the Company has recorded a deferred tax liability of USD 598 relating to the tax effect of the undistributed profits that will be distributed in the foreseeable future, primarily in relation to its Russian and Algerian operations. At 31 December 2014, undistributed earnings of VimpelCom’s foreign subsidiaries (outside the Netherlands) which are indefinitely invested and that will not be distributed in the foreseeable future, amounted to approximately USD 6,563 (2013: USD 2,515; 2012: USD 7,693). Accordingly, no deferred tax liability is recognized for this amount of undistributed profits.
Taxes recorded outside profit and loss account
The amount of current and deferred taxes reported outside the profit and loss account amounts to USD 60 (USD 75 current tax; USD (15) deferred tax).
Non-current income tax assets
The company reported both current and non-current income tax assets. The non-current income tax asset (USD 91) mainly relates to advanced tax payments in the Ukraine that can be offset (or realized) against future tax liabilities. The advanced tax payments that will be offset in 2015 are considered current income tax assets; the amount that will not be offset in 2015, but in onward years are considered non-current income tax asset.
Earnings per common share for all periods presented has been determined by dividing profit available to common shareholders by the weighted average number of common shares outstanding during the period.
The following table sets forth the computation of basic and diluted earnings per share:
| Year ended 31 December | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
| (In millions of US dollars, except share amounts) | ||||||||||||
Numerator: | ||||||||||||
(Loss)/profit for the period attributable to the owners of the parent | (647 | ) | (2,625 | ) | 1,539 | |||||||
Denominator: | ||||||||||||
Denominator for basic earnings per share – weighted average common shares outstanding (millions) | 1,748 | 1,711 | 1,618 | |||||||||
Effect of dilutive securities: Employee stock options (millions) | 1 | 1 | 1 | |||||||||
Denominator for diluted earnings per share – assumed conversions (millions) | 1,749 | 1,712 | 1,619 | |||||||||
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Basic (loss)/earnings per share | $ | (0.37 | ) | $ | (1.53 | ) | $ | 0.95 | ||||
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Diluted (loss)/earnings per share | $ | (0.37 | ) | $ | (1.53 | ) | $ | 0.95 | ||||
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Employee stock options (representing 8,132,989 shares) that are out of the money as of 31 December 2014 were excluded in the computation of diluted EPS because inclusion of the options would have been antidilutive for the periods presented.
Property and equipment consisted of the following:
| Telecommunications equipment | Land, buildings and constructions | Office and measuring equipment | Other Equipment | Equipment not installed and assets under construction | Total | |||||||||||||||||||
Cost | ||||||||||||||||||||||||
At 1 January 2013 | 20,236 | 771 | 1,376 | 573 | 2,610 | 25,566 | ||||||||||||||||||
Acquisition of a subsidiary | 35 | 3 | — | 1 | — | 39 | ||||||||||||||||||
Reclassification to AHFS* | (156 | ) | (6 | ) | (5 | ) | (6 | ) | (6 | ) | (179 | ) | ||||||||||||
Additions | 829 | 17 | 41 | 24 | 2,479 | 3,390 | ||||||||||||||||||
Disposals | (1,130 | ) | (11 | ) | (57 | ) | (27 | ) | (43 | ) | (1,268 | ) | ||||||||||||
Transfer | 2,521 | 62 | 207 | 142 | (2,932 | ) | — | |||||||||||||||||
Translation adjustment | (206 | ) | (30 | ) | (44 | ) | (19 | ) | (47 | ) | (346 | ) | ||||||||||||
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At 31 December 2013 | 22,129 | 806 | 1,518 | 688 | 2,061 | 27,202 | ||||||||||||||||||
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Reclassification to AHFS* | (10 | ) | — | (1 | ) | — | (25 | ) | (36 | ) | ||||||||||||||
Additions | 900 | 16 | 44 | 16 | 2,394 | 3,370 | ||||||||||||||||||
Disposals | (1,248 | ) | (20 | ) | (74 | ) | (11 | ) | (13 | ) | (1,366 | ) | ||||||||||||
Transfer | 1,959 | 49 | 217 | (2 | ) | (2,223 | ) | — | ||||||||||||||||
Translation adjustment | (6,376 | ) | (290 | ) | (477 | ) | (274 | ) | (692 | ) | (8,109 | ) | ||||||||||||
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At 31 December 2014 | 17,354 | 561 | 1,227 | 417 | 1,502 | 21,061 | ||||||||||||||||||
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Depreciation and impairment | ||||||||||||||||||||||||
At 1 January 2013 | (8,488 | ) | (202 | ) | (831 | ) | (357 | ) | (22 | ) | (9,900 | ) | ||||||||||||
Reclassification to AHFS* | 82 | 3 | 4 | 4 | — | 93 | ||||||||||||||||||
Transfer | 7 | — | 1 | — | (8 | ) | — | |||||||||||||||||
Depreciation charge for the year | (2,714 | ) | (51 | ) | (210 | ) | (75 | ) | — | (3,050 | ) | |||||||||||||
Disposals | 1,056 | 7 | 54 | 16 | — | 1,133 | ||||||||||||||||||
Impairment (Note 10) | (45 | ) | — | — | — | (2 | ) | (47 | ) | |||||||||||||||
Translation adjustment | 14 | 10 | 23 | 12 | 3 | 62 | ||||||||||||||||||
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At 31 December 2013 | (10,088 | ) | (233 | ) | (959 | ) | (400 | ) | (29 | ) | (11,709 | ) | ||||||||||||
Reclassification to AHFS* | 10 | — | 1 | — | 25 | 36 | ||||||||||||||||||
Transfer | (2 | ) | — | 12 | (10 | ) | — | — | ||||||||||||||||
Depreciation charge for the year | (2,534 | ) | (46 | ) | (198 | ) | (61 | ) | — | (2,839 | ) | |||||||||||||
Disposals | 1,158 | 13 | 69 | 7 | — | 1,247 | ||||||||||||||||||
Impairment (Note 10) | (68 | ) | — | — | (4 | ) | (2 | ) | (74 | ) | ||||||||||||||
Translation adjustment | 3,548 | 79 | 314 | 189 | (3 | ) | 4,127 | |||||||||||||||||
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At 31 December 2014 | (7,976 | ) | (187 | ) | (761 | ) | (279 | ) | (9 | ) | (9,212 | ) | ||||||||||||
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Net book value | ||||||||||||||||||||||||
At 1 January 2013 | 11,748 | 569 | 545 | 216 | 2,588 | 15,666 | ||||||||||||||||||
At 31 December 2013 | 12,041 | 573 | 559 | 288 | 2,032 | 15,493 | ||||||||||||||||||
At 31 December 2014 | 9,378 | 374 | 466 | 138 | 1,493 | 11,849 | ||||||||||||||||||
None of the assets were pledged as collateral and no assets have restrictions on title. The Company is not party to significant finance leases.
Change in estimate
During 2014 there were no material change in estimates related to property and equipment.
Capitalized borrowing costs
During 2014 VimpelCom capitalized interest in the cost of property and equipment in the amount of USD 24 (2013: USD 48). During 2014 the capitalisation rate was 1.1% (2013: 2.2%).
The total gross carrying value and accumulated amortization of VimpelCom’s intangible assets consisted of the following:
| Telecommunications licenses, frequencies and permissions | Goodwill | Software | Brands and trademarks | Customer relation- ships | Telephone line capacity | Other intangible assets | Total | |||||||||||||||||||||||||
Cost | ||||||||||||||||||||||||||||||||
At 1 January 2013 | 4,854 | 16,973 | 1,473 | 2,377 | 4,256 | 178 | 3,827 | 33,938 | ||||||||||||||||||||||||
Acquisition of a subsidiary | — | 18 | — | — | 23 | — | — | 41 | ||||||||||||||||||||||||
Reclassification to AHFS | (27 | ) | — | (3 | ) | (6 | ) | (23 | ) | — | — | (59 | ) | |||||||||||||||||||
Additions | 135 | — | 284 | — | — | 6 | 491 | 916 | ||||||||||||||||||||||||
Disposals | (30 | ) | — | (26 | ) | — | (5 | ) | — | (6 | ) | (67 | ) | |||||||||||||||||||
Transfer | 1,807 | — | 432 | (252 | ) | 637 | — | (2,624 | ) | — | ||||||||||||||||||||||
Translation adjustment | 58 | (147 | ) | (72 | ) | 44 | 13 | (7 | ) | 29 | (82 | ) | ||||||||||||||||||||
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At 31 December 2013 | 6,797 | 16,844 | 2,088 | 2,163 | 4,901 | 177 | 1,717 | 34,687 | ||||||||||||||||||||||||
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Additions | 358 | — | 341 | — | 111 | 1 | 71 | 882 | ||||||||||||||||||||||||
Disposals | (302 | ) | — | (68 | ) | (2 | ) | (2 | ) | — | (3 | ) | (377 | ) | ||||||||||||||||||
Transfer | 12 | — | 26 | (1 | ) | 899 | — | (936 | ) | — | ||||||||||||||||||||||
Translation adjustment | (1,204 | ) | (4,192 | ) | (505 | ) | (329 | ) | (1,147 | ) | (74 | ) | (326 | ) | (7,777 | ) | ||||||||||||||||
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At 31 December 2014 | 5,661 | 12,652 | 1,882 | 1,831 | 4,762 | 104 | 523 | 27,415 | ||||||||||||||||||||||||
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Amortization and impairment | ||||||||||||||||||||||||||||||||
At 1 January 2013 | (1,622 | ) | (9 | ) | (1,021 | ) | (275 | ) | (2,483 | ) | (130 | ) | (833 | ) | (6,373 | ) | ||||||||||||||||
Reclassification to AHFS | 14 | — | 1 | 6 | 6 | — | — | 27 | ||||||||||||||||||||||||
Amortization charge for the year | (418 | ) | — | (318 | ) | (116 | ) | (669 | ) | (16 | ) | (254 | ) | (1,791 | ) | |||||||||||||||||
Disposals | 27 | — | 22 | — | 5 | — | — | 54 | ||||||||||||||||||||||||
Impairment (Note 10) | (31 | ) | (2,130 | ) | — | — | — | — | — | (2,161 | ) | |||||||||||||||||||||
Transfer | (1 | ) | — | 1 | — | (22 | ) | — | 22 | — | ||||||||||||||||||||||
Translation adjustment | (20 | ) | 4 | 45 | (12 | ) | (21 | ) | 5 | 102 | 103 | |||||||||||||||||||||
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At 31 December, 2013 | (2,051 | ) | (2,135 | ) | (1,270 | ) | (397 | ) | (3,184 | ) | (141 | ) | (963 | ) | (10,141 | ) | ||||||||||||||||
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Amortization charge for the year | (392 | ) | — | (306 | ) | (113 | ) | (602 | ) | (1 | ) | (65 | ) | (1,479 | ) | |||||||||||||||||
Disposals | 301 | — | 61 | 2 | 2 | — | 1 | 367 | ||||||||||||||||||||||||
Impairment (Note 10) | (1 | ) | (992 | ) | (2 | ) | — | — | — | — | (995 | ) | ||||||||||||||||||||
Transfer | 3 | — | (2 | ) | — | (707 | ) | — | 706 | — | ||||||||||||||||||||||
Translation adjustment | 569 | 760 | 298 | 111 | 735 | 54 | 308 | 2,835 | ||||||||||||||||||||||||
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At 31 December, 2014 | (1,571 | ) | (2,367 | ) | (1,221 | ) | (397 | ) | (3,756 | ) | (88 | ) | (13 | ) | 9,413 | |||||||||||||||||
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Net book value | ||||||||||||||||||||||||||||||||
At 1 January 2013 | 3,232 | 16,964 | 452 | 2,102 | 1,773 | 48 | 2,994 | 27,565 | ||||||||||||||||||||||||
At 31 December 2013 | 4,746 | 14,709 | 818 | 1,766 | 1,717 | 36 | 754 | 24,546 | ||||||||||||||||||||||||
At 31 December 2014 | 4,090 | 10,285 | 661 | 1,434 | 1,006 | 16 | 510 | 18,002 | ||||||||||||||||||||||||
As of 31 December 2014, other intangible assets primarily include the right of way for using the infrastructure of third parties with the book value of USD 354, respectively (2013: USD 569). None of the assets were pledged as collateral and no assets have restrictions on title.
During 2013, the 4G/LTE license was put into operations in Italy that was recorded as transfer between intangible assets groups.
During 2014 and 2013, VimpelCom did not capitalize any interest in the cost of intangible assets.
17. Financial assets and liabilities
Financial assets
The Company has the following financial assets as of 31 December:
| 2014 | 2013 | |||||||
Financial instruments at fair value through profit or loss | ||||||||
Derivatives not designated as hedges | ||||||||
Cross-currency interest rate exchange contracts | — | 2 | ||||||
Foreign exchange contracts | 94 | 1 | ||||||
Embedded derivatives in notes | 8 | 154 | ||||||
Derivatives over non-controlling interest | — | 35 | ||||||
Financial instruments at fair value | ||||||||
Derivatives designated as fair value hedges | ||||||||
Cross-currency interest rate exchange contracts | 170 | — | ||||||
Derivatives designated as cash flow hedges | ||||||||
Cross-currency interest rate exchange contracts | 320 | 9 | ||||||
Interest rate exchange contracts | — | 1 | ||||||
Foreign exchange contracts | 37 | — | ||||||
Available for sale financial instruments | 49 | 20 | ||||||
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Total financial Instruments at fair value | 678 | 222 | ||||||
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Loans granted, deposits and other financial assets at amortized cost | ||||||||
Bank deposits | 110 | 396 | ||||||
Interest receivable | 3 | 6 | ||||||
Other investment | 26 | 36 | ||||||
Other loans granted | 51 | 42 | ||||||
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Total loans granted, deposits and other financial assets | 190 | 480 | ||||||
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Total other financial assets | 868 | 702 | ||||||
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Total current | 266 | 440 | ||||||
Total non-current | 602 | 262 | ||||||
Financial liabilities
The Company has the following financial liabilities as of 31 December:
| 2014 | 2013 | |||||||
Financial instruments at fair value | ||||||||
Derivatives designated as cash flow hedges | ||||||||
Cross-currency interest rate exchange contracts | — | 171 | ||||||
Interest rate exchange contracts | 90 | 100 | ||||||
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Total financial Instruments at fair value | 90 | 271 | ||||||
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Other financial liabilities at amortised cost | ||||||||
Bank loans and bonds | ||||||||
Bank loans and bonds, principle | 25,024 | 26,507 | ||||||
Unamortized fair value adjustment under acquisition method of accounting | — | 665 | ||||||
Interest accrued | 394 | 594 | ||||||
Fair value adjustment | 29 | — | ||||||
Discounts, unamortized fees | (73 | ) | 50 | |||||
Equipment financing | ||||||||
Equipment financing principle | 1,019 | 272 | ||||||
Discounts, unamortized fees on equipment financing | (33 | ) | — | |||||
Interest accrued on equipment financing | 2 | — | ||||||
Loans from others | ||||||||
Loans from others, principal | 400 | 654 | ||||||
Interest accrued | 13 | 11 | ||||||
Derivative over non-controlling interest via equity | 259 | 204 | ||||||
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Total other financial liabilities at amortised cost | 27,034 | 28,957 | ||||||
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Total other financial liabilities | 27,124 | 29,228 | ||||||
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Total current | 3,188 | 2,426 | ||||||
Total non-current | 23,936 | 26,802 | ||||||
The unamortized fair value adjustment under the acquisition method of accounting relates to the fair value re-measurement of listed debt acquired in the business combination with Wind Telecom. This adjustment was written off due to the refinancing of associated debt.
Description of derivative financial instruments
VimpelCom uses derivative instruments, including swaps, forward contracts and options to manage certain foreign currency and interest rate exposures. The Company views derivative instruments as risk management tools and does not use them for trading or speculative purposes. The Company has designated the majority of its derivative contracts, which mainly relate to hedging the interest and foreign exchange risk of external debt, as formal hedges and applies hedge accounting on these derivative contracts.
All derivatives are accounted for on a fair value basis and the changes in fair value are recorded in profit or loss, except for put options over non-controlling interests not providing a present ownership interest in the outstanding shares, and derivative instruments which are accounted for using cash flow hedge accounting. Cash flows from derivative instruments are reported in the statement of cash flows in the same line where the underlying cash flows of the hedged item are recorded.
Foreign exchange contracts
OJSC VimpelCom enters into short-term forward and zero-cost collar agreements with several banks in order to protect cash flows of its short-term financial and non-financial obligations denominated in USD from
adverse USD-RUB movements. As of 31 December 2014, the notional amount outstanding of these derivative contracts (only zero-cost collars) was USD 603 (2013: USD 130) with an average cap rate of 48.72 (2013: 33.79) and an average floor rate of 39.95 (2013: 31.74).
Embedded derivatives in notes
The Notes issued by the Company’s Italian subsidiary, Wind Acquisition Finance S.A. and Banglalink Digital Communications Ltd. include early repayment options. Accordingly, these companies can repay the debt at certain dates prior to the maturity date at agreed redemption prices. These embedded derivatives are accounted for as a financial asset at fair value through profit or loss.
Derivatives over non-controlling interest – Put and call options
Limnotex
On 24 August 2011, the Company entered into put and call agreements representing up to 28.5% of the shares in its indirect subsidiary Limnotex, which owns 100% of LLP “KaR-Tel”, the Company’s Kazakhstan operator and 100% of LLC “Sky Mobile”, the Company’s Kyrgyzstan operator. As of 31 December 2014, the non-controlling shareholder of Limnotex, holds one put option for 15% of Limnotex shares exercisable during 2017 at a fixed price of USD 330. The call options allow the Company to acquire the total of 28.5% of Limnotex shares held by non-controlling shareholder at a multiple of Adjusted EBITDA. The call option is exercisable until May 2018.
The put option gives rise to a financial liability at the present value of the redemption amount with the value accretion recorded in the non-controlling interest. The value accretion is based on an annual effective interest of 7.41%. The financial liability as of 31 December 2014 amounted to USD 259.
During 2014, the Company wrote off the call option due to a change in the expected exercise date, and recorded a charge of USD 35 in “Other non-operating losses”.
Cross currency and interest rate exchange contracts
On April 23, 2014, the Company’s Italian subsidiary, Wind Acquisition Finance S.A. (“WAF”) entered into several cross-currency interest rate swap agreements with several banks to reduce the volatility of cash flows of USD denominated debt in the amount of USD 2,800 to EUR 2,030 and related interest from April 23, 2014 to April 23, 2021. Pursuant to these agreements, WAF receives a fixed USD rate of 7.375% and pays a fixed EUR rate equal to an average 6.4364% on €1,450 million principal amount and a floating EUR rate equal to 6 months EURIBOR plus on average 5.0688% on €580 million principal amount.
On 10 July 2014 WAF entered into several cross-currency interest rate swap agreements with several banks to reduce the volatility of cash flows of USD denominated debt in the amount of USD 1,900 to EUR 1,413 and related interest from 10 July 2014 to 15 July 2020. Pursuant to these cross-currency interest rate swap, WAF receives a fixed USD rate of 4.75% and pays a fixed EUR rate equal to on average 4.3474% on €984 million principal amount and a floating EUR rate equal to 6 months EURIBOR plus 4.00% on €429 million principal amount.
The Company’s Pakistan subsidiary, Pakistan Mobile Communications Limited, entered into several Cross-Currency Interest Rate Swap Agreements to reduce the volatility of cash flows on USD denominated debt with current outstanding balances of USD 23 (2013 USD 11) to PKR 2,274 (2013 PKR 878), and related interest with maturities until December 15, 2017. Pursuant to these agreements, the Company’s Pakistan subsidiary pays floating interest rate of 6 month KIBOR minus 0.32%-2.60%.
Interest rate exchange contracts
In December 2010, the Company’s Italian subsidiary WIND Telecommunicazioni S.p.A. entered into Interest Rate Swap agreements to reduce the volatility of cash flows on interest payments for variable-rate debt. In September 2012, the majority of these Interest Rate Swaps were restructured for the upcoming 12-18 months and additionally two basis swaps have been added to the portfolio. This restructuring was done to benefit from
the basis swap spread between EURIBOR 1 month and EURIBOR 6 month floating rates. In April and September 2013, the swaps have been restructured to align them with the underlying floating rate debt portfolio. Pursuant to these agreements, WIND Telecomunicazioni S.p.A. pays a fixed rate equal to on average 2.21% and receives EURIBOR 3/6 month floating rate on a notional amount of EUR 1,370 until maturity (between 26 September 2016 and 30 April 2020).
Interest-bearing bank loans and bonds
The Company has the following principal amounts outstanding for interest-bearing loans and bonds as of 31 December:
Lender | Interest rate | Maturity | Currency | 2014 | 2013 | |||||||||
Senior Secured Notes | 3m Euribor + 4.0-5.3% ;4.0-6.5% | 2019-2021 | EUR/USD | 5,868 | 5,136 | |||||||||
Eurobonds | 6.5-9.1% | 2016-2021 | USD | 3,100 | 3,100 | |||||||||
Senior Facility Agreement | 6m Euribor + 4.3- 4.8% | 2018-2019 | EUR | 2,156 | 3,236 | |||||||||
Senior Notes | 7.0-7.4% | 2021 | EUR/USD | 4,917 | 3,718 | |||||||||
Sberbank | 8.8-10.8% | 2015-2018 | RUB | 1,583 | 2,304 | |||||||||
Ruble Bonds | 8.3-8.9% | 2015 | RUB | 978 | 1,986 | |||||||||
Notes | 5.2-9.0% | 2017-2023 | USD/RUB | 3,813 | 4,167 | |||||||||
PIK Notes | 12.3% | 2017 | EUR/USD | — | 1,640 | |||||||||
Alfa Bank | 1mLibor + 3.3% | 2017 | USD | 1,000 | — | |||||||||
Revolving Credit Facilities | 6mLibor+3.0% Euribor+4.3% | 2017-2018 | EUR/USD | 621 | 137 | |||||||||
Senior Notes | 8.6% | 2019 | USD | 300 | — | |||||||||
Other loans | 688 | 1,083 | ||||||||||||
Total bank loans and bonds | 25,024 | 26,507 | ||||||||||||
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Less current portion | (2,407 | ) | (1,668 | ) | ||||||||||
Long-term portion of bank loans and bonds | 22,617 | 24,839 | ||||||||||||
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Loans from others
The Company has the following principal amounts outstanding for loans from other parties as of 31 December:
| Interest rate | Maturity | Currency | 2014 | 2013 | ||||||||||||||||
Debt to Italian Government (LTE license) | Rendistato+1 | % | 2016 | EUR | 196 | 334 | ||||||||||||||
Annuity loans | 3.4-5.5 | % | 2016 | EUR | 45 | 122 | ||||||||||||||
Terna Debt | 10.1 | % | 2035 | EUR | 159 | 184 | ||||||||||||||
Other loans | — | 14 | ||||||||||||||||||
Total loans from others | 400 | 654 | ||||||||||||||||||
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Less current portion | (125 | ) | (197 | ) | ||||||||||||||||
Long-term loans from others | 275 | 457 | ||||||||||||||||||
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Hedging activities and derivatives
Derivatives under hedge accounting
The Company uses cross currency interest rate swaps, interest rate swaps, foreign exchange forwards/swaps and zero cost collars to manage its transaction exposures and/or interest exposure related to loans and borrowings. Most of these derivative contracts are either designated as cash flow or fair value hedges and are entered into for periods up to the maturity date of the hedged loans and borrowings.
The company uses the following types of hedge accounting:
cash flow hedge accounting used to hedge the risk on future foreign currency cash flows and floating interest rate cash flows;
fair value hedge accounting used to convert the USD fixed interest rate on financial liabilities into USD floating interest rate.
The Company’s hedge accounting is summarized below:
| Risk being hedged | Nominal value | Fair value assets | Fair value liabilities | |||||||||||||
At 31 December 2014 | ||||||||||||||||
Cash flow hedge accounting | ||||||||||||||||
Cross currency and interest rate exchange contracts | Currency | 3,875 | 320 | — | ||||||||||||
Interest rate exchange contracts | Interest | 1,657 | — | 90 | ||||||||||||
Foreign exchange contracts | Currency | 191 | 37 | — | ||||||||||||
Fair value hedge accounting | ||||||||||||||||
Cross currency and interest rate exchange contracts | Currency | 1,375 | 170 | — | ||||||||||||
No hedge accounting | ||||||||||||||||
Cross currency and interest rate exchange contracts | Currency | 22 | — | — | ||||||||||||
Foreign exchange contracts | Currency | 468 | 94 | — | ||||||||||||
| Risk being hedged | Nominal value | Fair value assets | Fair value liabilities | |||||||||||||
At 31 December 2013 | ||||||||||||||||
Cash flow hedge accounting | ||||||||||||||||
Cross currency and interest rate exchange contracts | Currency | 4,250 | 9 | 171 | ||||||||||||
Interest rate exchange contracts | Interest | 3,807 | 1 | 100 | ||||||||||||
Foreign exchange contracts | Currency | 55 | — | — | ||||||||||||
No hedge accounting | ||||||||||||||||
Cross currency and interest rate exchange contracts | Currency | 11 | 2 | — | ||||||||||||
Foreign exchange contracts | Currency | 248 | 1 | — | ||||||||||||
The following table shows the periods in which the cash flows of the derivatives, to which cash flow hedge accounting applies, are expected to occur:
| Less than 1 year | 1-3 years | 3-5 years | More than 5 years | Total | ||||||||||||||||
At 31 December 2014 | ||||||||||||||||||||
Cash flows | 70 | 55 | 91 | 60 | 276 | |||||||||||||||
Cash flow hedge reserve | — | — | — | — | (71 | ) | ||||||||||||||
| Less than 1 year | 1-3 years | 3-5 years | More than 5 years | Total | ||||||||||||||||
At 31 December 2013 | ||||||||||||||||||||
Cash flows | (61 | ) | (77 | ) | (22 | ) | (5 | ) | (165 | ) | ||||||||||
Cash flow hedge reserve | — | — | — | — | (212 | ) | ||||||||||||||
Derivatives not designated as hedging instruments
The Company uses foreign currency denominated borrowings and forward currency contracts to manage its transaction exposures. These currency forward contracts are not designated as cash flow, fair value or net investment hedges and are entered into for periods consistent with currency transaction exposures, generally from one to six months. Although the derivatives have not been designated in a hedge relationship, they act as a commercial hedge and offset the underlying transaction when they occur.
Fair values
Set out below is a comparison by class of the carrying amounts and fair value of the Company’s financial instruments that are carried in the consolidated financial statements as of 31 December (based on future cash flows discounted at current market rates):
| Carrying value | Fair value | |||||||||||||||
| 2014 | 2013 | 2014 | 2013 | |||||||||||||
Financial assets | ||||||||||||||||
Financial instruments at fair value through profit or loss | ||||||||||||||||
Derivatives not designated as hedges | ||||||||||||||||
Cross-currency interest rate exchange contracts | — | 2 | — | 2 | ||||||||||||
Foreign exchange contracts | 94 | 1 | 94 | 1 | ||||||||||||
Embedded derivatives in notes | 8 | 154 | 8 | 154 | ||||||||||||
Derivatives over non-controlling interest | — | 35 | — | 35 | ||||||||||||
Financial instruments at fair value | ||||||||||||||||
Derivatives designated as fair value hedges | ||||||||||||||||
Cross-currency interest rate exchange contracts | 170 | — | 170 | — | ||||||||||||
Derivatives designated as cash-flow hedges | ||||||||||||||||
Cross-currency interest rate exchange contracts | 320 | 9 | 320 | 9 | ||||||||||||
Interest rate exchange contracts | — | 1 | — | 1 | ||||||||||||
Foreign exchange contracts | 37 | — | 37 | — | ||||||||||||
Available for sale financial instruments | 49 | 20 | 49 | 20 | ||||||||||||
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Total financial Instruments at fair value, assets | 678 | 222 | 678 | 222 | ||||||||||||
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Loans granted, deposits and other financial assets | ||||||||||||||||
Bank deposits | 110 | 396 | 110 | 396 | ||||||||||||
Interest receivable | 3 | 6 | 3 | 6 | ||||||||||||
Other investment | 26 | 36 | 26 | 36 | ||||||||||||
Other loans granted | 51 | 42 | 51 | 42 | ||||||||||||
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Total loans granted, deposits and other financial assets | 190 | 480 | 190 | 480 | ||||||||||||
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Total financial assets | 868 | 702 | 868 | 702 | ||||||||||||
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Financial instruments at fair value | ||||||||||||||||
Derivatives designated as cash flow hedges | ||||||||||||||||
Cross-currency interest rate exchange contracts | — | 171 | — | 171 | ||||||||||||
Interest rate exchange contracts | 90 | 100 | 90 | 100 | ||||||||||||
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Total financial Instruments at fair value, liabilities | 90 | 271 | 90 | 271 | ||||||||||||
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Total other financial liabilities at amortised cost | 27,034 | 28,957 | 25,410 | 29,792 | ||||||||||||
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Total financial liabilities | 27,124 | 29,228 | 25,500 | 30,063 | ||||||||||||
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The fair value of the financial assets and liabilities are included at the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. The fair values were estimated based on quoted market prices of our bonds, derived from market prices or by using discounted cash flows under the agreement at the rate applicable for the instruments with similar maturity and risk profile.
Total financial assets as of 31 December 2014 consist of non-current and current other financial assets of USD 602 and USD 266, respectively (31 December 2013: USD 262 and USD 440, respectively).
Total financial liabilities as of 31 December 2014 consist of non-current financial liabilities and current other financial liabilities of USD 23,936 and USD 3,188, respectively (31 December 2013: USD 26,802 and USD 2,426, respectively).
Fair value hierarchy
As of 31 December 2014 and 2013 the Company held financial instruments carried at fair value on the statement of financial position in accordance with IAS 39.
The Company measures the fair value of derivatives except for options over non-controlling interests and embedded derivatives in notes on a recurring basis, using observable inputs (Level 2), such as LIBOR, EURIBOR, swap curves, basis swap spreads, foreign exchange rates and credit default spreads of both counterparties and our own entities, using present value techniques, Monte Carlo simulation and/or Black-Scholes model.
The Company measures the fair value of options over non-controlling interests and embedded derivatives in notes on a recurring basis, using unobservable inputs (Level 3), such as projected redemption amounts, volatility, the fair value of underlying shares using an income valuation approach with present value techniques and Black-Scholes valuation model.
The following table provides the disclosure of fair value measurements separately for each major class of assets and liabilities measuredliabilities.
As of December 31, 2017 | Level 1 | Level 2 | Level 3 | Total | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Financial assets at fair value through profit or loss | |||||||||||||
Derivatives not designated as hedges | |||||||||||||
Foreign exchange contracts | — | 5 | — | 5 | |||||||||
Embedded derivatives in notes | — | 5 | — | 5 | |||||||||
Financial assets at fair value | |||||||||||||
Available for sale financial assets | — | 71 | — | 71 | |||||||||
| | | | | | | | | | | | | | |
Total financial assets at fair value | — | 81 | — | 81 | |||||||||
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Financial liabilities at fair value through profit or loss | |||||||||||||
Derivatives not designated as hedges | |||||||||||||
Foreign exchange contracts | — | — | — | — | |||||||||
Contingent consideration | — | — | 49 | 49 | |||||||||
Financial liabilities at fair value | |||||||||||||
Derivatives designated as net investment hedges | |||||||||||||
Cross currency interest rate exchange contracts | — | 59 | — | 59 | |||||||||
Derivatives designated as cash flow hedges | |||||||||||||
Interest rate exchange contracts | — | 1 | — | 1 | |||||||||
| | | | | | | | | | | | | | |
Total financial liabilities at fair value | — | 60 | 49 | 109 | |||||||||
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Notes to the consolidated financial statements (Continued)
(in millions of U.S. dollars unless otherwise stated)
17FINANCIAL ASSETS AND LIABILITIES (Continued)
As of December 31, 2016 | Level 1 | Level 2 | Level 3 | Total | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Financial assets at fair value through profit or loss | |||||||||||||
Derivatives not designated as hedges | |||||||||||||
Foreign exchange contracts | — | 2 | — | 2 | |||||||||
Embedded derivatives in notes | — | 12 | — | 12 | |||||||||
Financial assets at fair value | |||||||||||||
Derivatives designated as cash flow hedges | |||||||||||||
Foreign exchange contracts | — | — | — | — | |||||||||
Available for sale financial assets | — | 42 | 29 | 71 | |||||||||
| | | | | | | | | | | | | | |
Total financial assets at fair value | — | 56 | 29 | 85 | |||||||||
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Financial liabilities at fair value through profit or loss | |||||||||||||
Derivatives not designated as hedges | |||||||||||||
Foreign exchange contracts | — | 29 | — | 29 | |||||||||
Financial liabilities at fair value | |||||||||||||
Derivatives designated as cash flow hedges | |||||||||||||
Foreign exchange contracts | — | 4 | — | 4 | |||||||||
Interest rate exchange contracts | — | 3 | — | 3 | |||||||||
Contingent consideration | — | — | 47 | 47 | |||||||||
| | | | | | | | | | | | | | |
Total financial liabilities at fair value | — | 36 | 47 | 83 | |||||||||
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
The reconciliation of movements relating to financial instruments classified in Level 3 of the fair value hierarchy:
| | Financial assets at fair value | Financial liabilities at fair value | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Available for sale | Total | Contingent consideration | Total | |||||||||
As of January 1, 2016 | 27 | 27 | — | — | |||||||||
Change in fair value recognized in other comprehensive income | 5 | 5 | — | — | |||||||||
Purchased / incurred | — | — | 47 | 47 | |||||||||
Currency translation adjustments | (3 | ) | (3 | ) | — | — | |||||||
| | | | | | | | | | | | | | |
As of December 31, 2016 | 29 | 29 | 47 | 47 | |||||||||
| | | | | | | | | | | | | | |
Change in fair value recognized in the income statement | — | — | 2 | 2 | |||||||||
Change in fair value recognized in other comprehensive income | (9 | ) | (9 | ) | — | — | |||||||
Impairment loss | (20 | ) | (20 | ) | — | — | |||||||
| | | | | | | | | | | | | | |
As of December 31, 2017 | — | — | 49 | 49 | |||||||||
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Transfers into and out of fair value hierarchy levels are recognized at the end of the reporting period (or the date of the event or change in circumstances that caused the transfer). On a quarterly basis, the Company reviews if there are any indicators for a possible transfer between Level 2 and Level 3. This depends on how the Company is able to obtain the underlying input parameters when assessing the fair value.valuations.
Notes to the consolidated financial statements (Continued)
(in millions of U.S. dollars unless otherwise stated)
17FINANCIAL ASSETS AND LIABILITIES (Continued)
As of 31 December 2014 Description | (Level 1) | (Level 2) | (Level 3) | |||||||||
Financial instruments at fair value through profit or loss | ||||||||||||
Derivatives not designated as hedges | ||||||||||||
Cross-currency interest rate exchange contracts | — | — | — | |||||||||
Foreign exchange contracts | — | 94 | — | |||||||||
Embedded derivatives in notes | 8 | |||||||||||
Derivatives over non-controlling interest | — | — | — | |||||||||
Financial instruments at fair value | ||||||||||||
Derivatives designated as fair value hedges | ||||||||||||
Cross-currency interest rate exchange contracts | — | 170 | — | |||||||||
Derivatives designated as cash-flow hedges | ||||||||||||
Cross-currency interest rate exchange contracts | — | 320 | — | |||||||||
Interest rate exchange contracts | — | — | — | |||||||||
Foreign exchange contracts | — | 37 | — | |||||||||
Available for sale financial instruments | — | 27 | 22 | |||||||||
|
|
|
|
|
| |||||||
Total financial Instruments at fair value, assets | — | 648 | 30 | |||||||||
|
|
|
|
|
| |||||||
Assets for which fair values are disclosed | ||||||||||||
Loans granted, deposits and other financial assets | ||||||||||||
Bank deposits | — | 110 | — | |||||||||
Interest receivable | — | 3 | — | |||||||||
Other investment | — | 26 | — | |||||||||
Other loans granted | — | 51 | — | |||||||||
Trade and other receivables | — | 1,886 | — | |||||||||
Cash and cash equivalents | — | 6,342 | — | |||||||||
|
|
|
|
|
| |||||||
Total assets for which fair values are disclosed | — | 8,418 | — | |||||||||
|
|
|
|
|
| |||||||
Financial instruments at fair value | ||||||||||||
Derivatives designated as cash flow hedges | ||||||||||||
Cross-currency interest rate exchange contracts | — | — | — | |||||||||
Interest rate exchange contracts | — | 90 | — | |||||||||
|
|
|
|
|
| |||||||
Total financial Instruments at fair value, liabilities | — | 90 | — | |||||||||
|
|
|
|
|
| |||||||
Liabilities for which fair values are disclosed | ||||||||||||
Financial liabilities at amortized cost | 11,177 | 14,233 | — | |||||||||
Trade and other payables | — | 4,007 | — | |||||||||
|
|
|
|
|
| |||||||
Total liabilities for which fair values are disclosed | 11,177 | 18,240 | — | |||||||||
|
|
|
|
|
| |||||||
As of 31 December 2013 Description Financial instruments at fair value through profit or loss Derivatives not designated as hedges Cross-currency interest rate exchange contracts Foreign exchange contracts Embedded derivatives in notes Derivatives over non-controlling interest Financial instruments at fair value Derivatives designated as cash-flow hedges Cross-currency interest rate exchange contracts Interest rate exchange contracts Available for sale financial instruments Total financial Instruments at fair value, assets Assets for which fair values are disclosed Loans granted, deposits and other financial assets Bank deposits Interest receivable Other investment Other loans granted Trade and other receivables Cash and cash equivalents Total assets for which fair values are disclosed Financial instruments at fair value Derivatives designated as cash flow hedges Cross-currency interest rate exchange contracts Interest rate exchange contracts Total financial Instruments at fair value, liabilities Liabilities for which fair values are disclosed Financial liabilities at amortized cost Trade and other payables Total liabilities for which fair values are disclosed (Level 1) (Level 2) (Level 3) — 2 — — 1 — — — 154 — — 35 — 9 — — 1 — — — 20 — 13 209 — 396 — — 6 — — 36 — — 42 — — 2,407 — — 4,454 — 7,341 — — 171 — — 100 — — 271 — 20,327 9,465 — — 4,860 — 20,327 14,325 —
The movement All impairment losses and changes in fair values of financial instruments measured at the fair value using unobservable inputs (Level 3) is presented below:
| As of 31 Dec. 2013 | Currency translation adjustment | Change in fair value reported in earnings | Change in fair value reported in equity | Purchased | Sold/ Settled/ Expired | As of 31 Dec., 2014 | ||||||||||||||||||||||
Financial instruments at fair value through profit or loss | ||||||||||||||||||||||||||||
Derivatives not designated as hedges | ||||||||||||||||||||||||||||
Embedded derivatives in notes | 154 | — | (149 | ) | — | 3 | — | 8 | ||||||||||||||||||||
Financial instruments at fair value | ||||||||||||||||||||||||||||
Available for sale financial instruments | 20 | (2 | ) | — | 4 | — | — | 22 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total financial Instruments at fair value, assets | 174 | (2 | ) | (149 | ) | 4 | 3 | — | 30 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Financial instruments at fair value through profit or loss Derivatives not designated as hedges Embedded derivatives in notes Financial instruments at fair value Available for sale financial instruments Total financial Instruments at fair value, assets Loans granted, deposits and other financial assets for which fair values are disclosed As of 31
Dec.
2012 Currency
translation
adjustment Change in
fair value
reported in
earnings Change in
fair value
reported in
equity Purchased Sold/
Settled/
Expired As of 31
Dec.
2013 77 — 77 — — — 154 — — — — 20 — 20 77 — 77 — 20 — 174 796 (51 ) (862 ) 117 —
The changes in fair value are unrealisedunrealized and are recorded in “Other"Other non-operating losses”losses" in the consolidated income statement.statement or "Other" in the consolidated statement of comprehensive income.
Offsetting arrangementsOFFSETTING FINANCIAL ASSETS AND LIABILITIES
For the financial assets and liabilities subject to netting arrangements, each agreement between the Group and the counterparty allows for net settlement of the relevant financial assets and liabilities when both elect to settle on a net basis. In the absence of such an election, financial assets and liabilities are settled on a gross basis.
The major arrangements applicable for the Group are agreements with national and international interconnect operators and agreements with roaming partners.
Several entities of the Group have entered into International Swaps and Derivatives Association, Inc. (ISDA)("ISDA") Master Agreements or equivalent documents with their counterparties, governing the derivative transactions entered into between these entities and their counterparties. Based on theseThese documents onlyprovide for set-off of outstanding derivative positions in casethe event of termination if an Event of Default of either the entity or the counterparty it is allowedoccurs.
| | | | | Related amounts not set off in the statement of financial position | | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | Gross amounts set off in the statement of financial position | Net amounts presented in the statement of financial position | | |||||||||||||||
| | Gross amounts recognized | Financial instruments | Cash collateral received | Net amount | |||||||||||||||
As of December 31, 2017 | |||||||||||||||||||
Other financial assets (non-current) | 34 | — | 34 | — | — | 34 | |||||||||||||
Other financial liabilities (non-current) | 10,362 | — | 10,362 | — | — | 10,362 | |||||||||||||
Other financial assets (current) | 1,130 | — | 1,130 | — | — | 1,130 | |||||||||||||
Other financial liabilities (current) | 1,268 | — | 1,268 | — | — | 1,268 | |||||||||||||
Trade and other receivables | 817 | 72 | 745 | — | — | 745 | |||||||||||||
Trade and other payables | 1,595 | 72 | 1,523 | — | — | 1,523 | |||||||||||||
As of December 31, 2016 | |||||||||||||||||||
Other financial assets (non-current) | 306 | — | 306 | — | — | 306 | |||||||||||||
Other financial liabilities (non-current) | 8,070 | — | 8,070 | — | — | 8,070 | |||||||||||||
Other financial assets (current) | 190 | — | 190 | — | — | 190 | |||||||||||||
Other financial liabilities (current) | 3,047 | (1 | ) | 3,046 | — | — | 3,046 | ||||||||||||
Trade and other receivables | 783 | (98 | ) | 685 | — | — | 685 | ||||||||||||
Trade and other payables | 1,843 | (99 | ) | 1,744 | — | — | 1,744 | ||||||||||||
Notes to offset any derivative positions outstanding.
| Related amounts not set off in the consolidated statement of financial position | ||||||||||||||||||||||||
As at 31 December 2014 | Gross amounts recognized | Gross amounts set off in the consolidated statement of financial position | Net amounts presented in the consolidated statement of financial position | Financial instruments | Cash collateral received | Net amount | ||||||||||||||||||
Other financial assets (non-current) | 602 | — | 602 | — | — | 602 | ||||||||||||||||||
Other financial liabilities (non-current) | 23,936 | — | 23,936 | — | — | 23,936 | ||||||||||||||||||
Other financial assets (current) | 266 | — | 266 | — | — | 266 | ||||||||||||||||||
Other financial liabilities (current) | 3,188 | — | 3,188 | — | — | 3,188 | ||||||||||||||||||
Trade and other receivables | 1,983 | (97 | ) | 1,886 | — | — | 1,886 | |||||||||||||||||
Trade and other payables | 4,104 | (97 | ) | 4,007 | — | — | 4,007 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
As at 31 December 2013 Other financial assets (non-current) Other financial liabilities (non-current) Other financial assets (current) Other financial liabilities (current) Trade and other receivables Trade and other payables Related amounts not set
off in the consolidated
statement of financial
position Gross
amounts
recognized Gross
amounts set
off in the
consolidated
statement of
financial
position Net amounts
presented in
the consolidated
statement of
financial
position Financial
instruments Cash
collateral
received Net
amount 262 — 262 — — 262 26,802 — 26,802 — — 26,802 440 — 440 — — 440 2,426 — 2,426 — — 2,426 2,518 (111 ) 2,407 — — 2,407 4,971 (111 ) 4,860 — — 4,860
Major treasury events during 2014the consolidated financial statements (Continued)
VimpelCom Amsterdam B.V. financing(in millions of U.S. dollars unless otherwise stated)
In 2014, VimpelCom Amsterdam B.V. has further drawn under the term loan facility entered into on 20 December 2012 in an amount up to USD 500 with China Development Bank Corporation as lender, bearing interest at a rate of LIBOR plus a margin of 3.30%, to finance equipment purchases by subsidiaries of VimpelCom Amsterdam B.V. from Huawei Technologies Company Limited and its affiliates. On 28 January 2014, 26 March 2014, 20 June 2014, 22 September 2014 and 18 December 2014, VimpelCom Amsterdam B.V. drew down USD 104, USD 71, USD 65, USD 57 and USD 99 respectively under this facility, after which the facility was fully utilized. OJSC VimpelCom has guaranteed VimpelCom Amsterdam B.V.’s payment obligations under this facility.
In 2014, VimpelCom Amsterdam B.V. has further drawn under the facility agreement entered into on 28 March 2013 with HSBC Bank plc for an U.S. dollar denominated Swedish export credit facility supported by EKN, for a total principal amount of USD 500, of which USD 270 was committed. The purpose of the facility is to finance equipment and services provided to the subsidiaries of VimpelCom Amsterdam B.V. by Ericsson on a reimbursement basis. The committed facility bears interest at a rate of 1.72%. On 26 February 2014 and 9 October 2014, VimpelCom Amsterdam B.V. drew down USD 105 and USD 78 respectively under this facility, after which the committed part of the facility was fully utilized. OJSC VimpelCom has guaranteed VimpelCom Amsterdam B.V.’s payment obligations under this facility.
On each of 2 April 2014 and 18 April 2014, VimpelCom Amsterdam B.V. signed a credit facility agreement with OAO “Alfa-Bank”, each for a total principal amount of USD 500 (each an “Alfa-Bank Credit Facility”). Each Alfa-Bank Credit Facility has a three-year term, bears interest at a rate of LIBOR plus 3.25% per annum (subject to adjustments in accordance with the terms of the agreement) and is guaranteed by VimpelCom Holdings B.V. On 3 April 2014 and 23 April 2014, VimpelCom Amsterdam B.V. drew down USD 500 and USD 500 under the respective Alfa-Bank Credit Facilities.
On 7 April 2014, VimpelCom Amsterdam B.V. signed a revolving credit facility agreement with several international banks for a total principal amount of USD 1,650, with an option to increase the principal amount of the facility by up to USD 150 within 6 months after the date of signing (the “2014 RCF”), which increase was executed on 3 October 2014. The 2014 RCF has a three year tenor, bears interest at a rate of LIBOR plus 2.95% per annum (subject to adjustments in accordance with the terms of the agreement) and is guaranteed by VimpelCom Holdings B.V. On 23 April 2014, VimpelCom Amsterdam B.V. drew down USD 1,000 under the 2014 RCF which was repaid on 30 June 2014, and on 8 September 2014, VimpelCom Amsterdam B.V. drew down USD 500 under this facility which was repaid on 5 February 2015.
On 16 April 2014 and with effect as from 25 April 2014, VimpelCom cancelled the existing US$225 million and EUR 205 million (approximately USD 283 as of 25 April 2014) revolving credit facility that VimpelCom Amsterdam B.V., as borrower, had entered into with a syndicate of lenders in 2011.
OJSC VimpelCom financing18 CASH AND CASH EQUIVALENTS
On 30 April 2014, OJSC VimpelCom signed a loan facility agreement with CISCO Systems Finance International. The loan is a Russian ruble-denominated equipment financing facility for a total amount of RUB 1,500 million (approximately USD 42 as of 30 April 2014). The purpose of the facility is to finance equipment purchased by OJSC VimpelCom from CISCO on a reimbursement basis. The facility bears interest at a rate of 8.85%. The facility was drawn on 7 May 2014 and 9 July 2014 in an amount of RUB 1,312 million (approximately USD 37 as of 7 May 2014) and RUB 188 million (approximately USD 5 as of 9 July 2014) respectively.
On 30 May 2014, OJSC VimpelCom entered into a credit facility agreement with OJSC Sberbank for the amount of RUB 25,000 million (approximately USD 722 as of 30 May 2014). The facility bears interest at a rate of 10.75% (subject to adjustments in accordance with the terms of the agreement). On 29 September 2014, 13 October 2014 and 10 November 2014, OJSC VimpelCom drew down RUB 2,500 million (approximately USD 65 as of 29 September 2014), RUB 10,000 million (approximately USD 249 as of 13 October 2014) and RUB 12,500 million (approximately USD 261 as of 10 November 2014), respectively.
On 30 May 2014, OJSC VimpelCom entered into a revolving credit facility with OJSC Sberbank for the amount of RUB 15,000 million (approximately USD 433 as of 30 May 2014). The facility bears interest at a rate of MosPrime plus 2.1% (subject to adjustments in accordance with the terms of the agreement). On 2 July 2014, OJSC VimpelCom drew down an amount of RUB 8,000 million (approximately USD 234 as of 2 July 2014) under this facility, which was repaid on 29 September 2014. The revolving credit facility with OJSC Sberbank that OJSC VimpelCom had previously entered into on 1 December 2011 was terminated on 23 June 2014.
WAF Bonds
On 23 April 2014, Wind Acquisition Finance S.A., or “WAF,” issued EUR 1,750 million (approximately USD 2,418 as of 23 April 2014) 7.00% Euro denominated Senior Notes due 2021 and USD 2,800 7.375% U.S. dollar denominated Senior Notes due 2021 (together, the “2021 Notes”). The 2021 Notes are guaranteed by its parent Wind Telecomunicazioni S.p.A. The USD 2,800 U.S. dollar denominated tranche of the Senior Notes are hedged with cross currency interest rate swaps to EUR for an amount of EUR 2,030 million (approximately USD 2,805 as of 23 April 2014). The maturity date of the 2021 Notes and the related cross currency interest rate swaps is 23 April 2021. Pursuant to the cross currency interest rate swaps, WAF receives a fixed USD rate of 7.375% and pays a fixed EUR rate equal to an average 6.4364% on EUR 1,450 million (approximately USD 2,004 as of 23 April 2014) principal amount and a floating EUR rate equal to 6 months Euribor plus on average 5.0688% on EUR 580 million (approximately USD 801 as of 23 April 2014) principal amount.
Pursuant to an Offer to Purchase by WAF of all amounts outstanding under its 11.75% Senior Notes due 2017 using a portion of the proceeds of its offering of 2021 Notes, of the EUR 1,250 million (approximately USD 1,727 as of 23 April 2014) and USD 2,000 outstanding, notes for amounts of EUR 1,084 million (approximately USD 1,498 as of 23 April 2014) and USD 1,890 were tendered and settled on 23 April 2014 and notes for amounts of EUR 1 million (approximately USD 1 as of 9 May 2014) and USD 3 were tendered and settled on 9 May 2014. The remaining outstanding notes were called as per 15 July 2014. On 23 April 2014, funds have been placed in escrow accounts to fulfil those payments. The cross currency interest rate swaps related to the USD 2,000 11.75% Senior Notes due 2017 have been restructured to become part of the aforementioned cross currency interest rate swaps related to the 2021 Notes.
Pursuant to an Offer to Purchase by Wind Acquisition Holdings Finance S.A. of all amounts outstanding under its 12.25% Senior Notes due 2017 using (indirectly) a portion of the proceeds of the offering of 2021 Notes
by WAF, as well as a EUR 500 million (approximately USD 691 as of 17 April 2014) indirect cash injection from VimpelCom, which was settled on 17 April 2014, of the EUR 528 million (approximately USD 730 as of 23 April 2014) and USD 1,015 outstanding, notes for amounts of EUR 468 million (approximately USD 647 as of 23 April 2014) and USD 976 were tendered and settled on 23 April 2014 and notes for amounts of EUR 1 million (approximately USD 1 as of 9 May 2014) were tendered and settled on 9 May 2014. The remaining outstanding notes were called as per 15 July 2014. On 23 April 2014, funds have been placed in escrow accounts to fulfil those payments.
The net gain of USD 106 was recorded in “Other non-operating losses” in the consolidated income statement.
On 10 July 2014, WAF issued EUR 2,100 million (approximately USD 2,858 as of 10 July 2014) 4.00% Euro denominated Senior Secured Notes due 2020, EUR 575 million (approximately USD 783 as of 10 July 2014) 6 month Euribor + 4.00% Euro denominated Senior Secured Notes due 2020 and USD 1,900 4.75% U.S. dollar denominated Senior Notes due 2020 (together, the “2020 Notes”). The 2020 Notes are guaranteed by Wind Telecomunicazioni S.p.A. The USD 1,900 U.S. dollar denominated Senior Notes are hedged with cross currency interest rate swaps to EUR for an amount of EUR 1,413 million (approximately USD 1,923 as of 10 July 2014). The maturity date of the 2020 Notes and the related cross currency interest rate swaps is 15 July 2020. Pursuant to these cross currency interest rate swaps, WAF receives a fixed USD rate of 4.75% and pays a fixed EUR rate equal to on average 4.3474% on EUR 984 million (approximately USD 1,339 as of 10 July 2014) principal amount and a floating EUR rate equal to 6 months Euribor plus 4.00% on EUR 429 million (approximately USD 584 as of 10 July 2014) principal amount.
WAF issued an Offer to Purchase all amounts outstanding under its EUR 1,950 million (approximately USD 2,654 as of 10 July 2014) 7.375% Euro Senior Secured Notes due 2018 and under its USD 1,700 7.25% U.S. dollar Senior Secured Notes due 2018 using a portion of the proceeds of its offering of 2020 Notes. Of the outstanding amounts of EUR 1,950 million (approximately USD 2,654 as of 10 July 2014) and USD 1,700, notes for amounts of EUR 1,645 million (approximately USD 2,238 as of 10 July 2014) and USD 1,449 were tendered and settled on 10 July 2014. The remaining outstanding notes were called and settled on 25 July 2014. On 10 July 2014, funds have been placed in escrow accounts to fulfil those payments. Further proceeds have been used to repay portions of the Senior Facility Agreement on 10 July 2014 for EUR 573 million (approximately USD 780 as of 10 July 2014). The cross currency interest rate swaps related to the USD 1,700 million 7.25% Senior Notes due 2018 have been restructured to become part of the aforementioned cross currency interest rate swaps related to the 2020 Notes.
The refinancing transaction on 10 July 2014 was accounted for as an extinguishment resulting in a net pre-tax loss of USD 184 recorded in “Other non-operating losses” in the consolidated income statement.
WIND Senior Facility Agreement consent
Related to the aforementioned refinancing transaction, Wind Telecomunicazioni S.p.A. on 19 March 2014 requested, and on 3 April 2014 was granted, consent from the lenders in the Senior Facility Agreement (“SFA”) to enable, among other matters, a re-leveraging of Wind Telecomunicazioni S.p.A. and upstream loan to its parent Wind Acquisition Holdings Finance S.p.A., the adjustment of financial covenant ratios, an extension of the tenors of the term loan and revolving credit facilities, settlement of an outstanding intercompany loan with Wind Telecom S.p.A., and modification of the change of control definition, in exchange for a consent fee and an increase of the interest margin by 0.25%.
Banglalink Notes
On 6 May 2014, our Bangladesh subsidiary Banglalink issued USD 300 8.625% senior notes due 2019 (the “BDC Notes”). The BDC Notes were issued at a re-offer price of 99.008%, with a re-offer yield to maturity of 8.875% and a term of five years. Interest is payable semi-annually.
In May 2014, Banglalink repaid all amounts outstanding under its 17 December 2013 bridge facility from Standard Chartered Bank.
Also, in May and June 2014, Banglalink repaid 13.5% senior BDT notes and three other smaller facilities in an aggregate principal amount of USD 43, each of which had been subject to a common terms agreement dated 13 June 2007, as amended, and related intercreditor and security agreements.
PMCL Facilities
On 16 May 2014, Pakistan Mobile Communications Ltd. (“PMCL”) drew under several facilities for an amount of PKR 22,000 million (approximately USD 223 as of 16 May 2014). The interest rate varies from 3 month or 6 month KIBOR plus 1.00%-1.25% and the loans will mature in May 2021.
VimpelCom Holdings B.V. Facility
On 19 November 2014, VimpelCom Holdings B.V. entered into an USD 1,000 term loan facility agreement with China Development Bank Corporation and Bank of China Limited as lenders, bearing interest at a rate of LIBOR plus a margin of 3.06%, to finance equipment purchases by subsidiaries of VimpelCom Ltd. from Huawei Technologies Co. Ltd, its subsidiaries and its affiliates. VimpelCom Amsterdam B.V. has guaranteed the payment obligations under this facility. The facility is available for a period of three years and has a total tenor of eight years.
Omnium Telecom Algeria SpA Facility
On 16 December 2014, OTA signed a term loan facility agreement with several Algerian and international banks for a total principal amount of DZD 50,000 million (approximately USD 583 as of December 16, 2014). The maturity date of the facility is 30 September 2019. It bears interest at the of Bank of Algeria Re-Discount Rate plus 2.0% per annum (subject to adjustments in accordance with the terms of the agreement) and is unguaranteed. On 28 January 2015, the facility was fully drawn.
Optimum Telecom Algérie SpA Facility
On 16 December 2014, Optimum Telecom Algérie SpA signed a term loan facility agreement with several Algerian and international banks for a total principal amount of DZD 32,000 million (approximately USD 373 as of 16 December 2014). The maturity date of the facility is 30 September 2019 and bears interest at a rate of Bank of Algeria Re-Discount Rate plus 1.5% per annum (subject to adjustments in accordance with the terms of the agreement) and is unguaranteed. The facility is not yet drawn.
18. Current and non-current other financial assets and liabilities
Other non-current non-financial assets consisted of the following as of:
| 31 December 2014 | 31 December 2013 | |||||||
Deferred costs related to connection fees | 13 | 9 | ||||||
Other long-term assets | 13 | 9 | ||||||
|
|
|
| |||||
| 26 | 18 | |||||||
|
|
|
| |||||
Other current non-financial assets consisted of the following as of:
| 31 December 2014 | 31 December 2013 | |||||||
Advances to suppliers | 371 | 348 | ||||||
Input VAT | 161 | 91 | ||||||
Prepaid taxes | 141 | 196 | ||||||
Deferred costs related to connection fees | 16 | 20 | ||||||
Indemnification assets | 99 | 125 | ||||||
Others | 9 | 10 | ||||||
|
|
|
| |||||
| 797 | 790 | |||||||
|
|
|
| |||||
Other non-current non-financial liabilities consisted of the following as of:
| 31 December 2014 | 31 December 2013 | |||||||
Long-term deferred revenue | 76 | 110 | ||||||
Provision for pensions and other post-employment benefits | 126 | 110 | ||||||
Governmental grants | 41 | 46 | ||||||
Payables for intangibles | 43 | 52 | ||||||
Other non-current liabilities | 115 | 115 | ||||||
|
|
|
| |||||
| 401 | 433 | |||||||
|
|
|
| |||||
Other current non-financial liabilities consisted of the following as of:
| 31 December 2014 | 31 December 2013 | |||||||
Customer advances | 496 | 874 | ||||||
Short-term deferred revenue | 203 | 89 | ||||||
Customer deposits | 85 | 79 | ||||||
Other taxes payable | 580 | 554 | ||||||
Other payments to authorities | 124 | 104 | ||||||
Due to employees | 224 | 223 | ||||||
Other liabilities | 218 | 178 | ||||||
|
|
|
| |||||
| 1,930 | 2,101 | |||||||
|
|
| �� | |||||
Inventory consisted of the following as of:
| 31 December 2014 | 31 December 2013 | |||||||
Telephone handsets and accessories for sale | 99 | 170 | ||||||
SIM-Cards | 14 | 18 | ||||||
Other inventory | 26 | 29 | ||||||
Inventory write-offs | (22 | ) | (25 | ) | ||||
|
|
|
| |||||
| 117 | 192 | |||||||
|
|
|
| |||||
20. Trade and other receivables
Trade and other receivables consisted of the following as of 31 December:
| 2014 | 2013 | |||||||
Trade accounts receivable, gross | 2,429 | 3,144 | ||||||
Allowance for doubtful accounts | (582 | ) | (795 | ) | ||||
|
|
|
| |||||
Trade accounts receivable, net | 1,847 | 2,346 | ||||||
Other receivables | 39 | 61 | ||||||
|
|
|
| |||||
| 1,886 | 2,407 | |||||||
|
|
|
| |||||
As of 31 December 2014, trade receivables with an initial value of USD 582 (2013: USD 795) were impaired and, thus, fully provided for. See below the movements in the provision for the impairment of receivables:
| 2014 | 2013 | |||||||
Balance as of 1 January | 795 | 717 | ||||||
Classified as held for sale | (4 | ) | — | |||||
Provision for bad debts | 208 | 207 | ||||||
Provision released | (7 | ) | — | |||||
Accounts receivable written off | (292 | ) | (135 | ) | ||||
Foreign currency translation adjustment | (118 | ) | 6 | |||||
|
|
|
| |||||
Balance as of 31 December | 582 | 795 | ||||||
|
|
|
| |||||
As of 31 December, the aging analysis of trade receivables is as follows:
| Total | Neither past due nor impaired | Past due but not impaired | ||||||||||||||||||
| < 30 days | 30–120 days | > 120 days | ||||||||||||||||||
2014 | 1,847 | 1,187 | 181 | 137 | 342 | |||||||||||||||
2013 | 2,346 | 1,499 | 217 | 151 | 479 | |||||||||||||||
21. Cash and cash equivalents are held for the purpose of meeting short-term cash commitments rather than for investment or other purposes. Cash and cash equivalents are comprised of cash at bank and on hand and highly liquid investments that are readily convertible to known amounts of cash, are subject to only an insignificant risk of changes in value and have an original maturity of less than three months.
Cash and cash equivalents consisted of the following items as of 31 December:December 31:
| | 2017 | 2016 | |||||
|---|---|---|---|---|---|---|---|
Cash at banks and on hand | 840 | 1,707 | |||||
Short-term deposits with original maturity of less than three months | 464 | 1,235 | |||||
| | | | | | | | |
Total cash and cash equivalents | 1,304 | 2,942 | |||||
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| 2014 | 2013 | |||||||
Cash and cash equivalents at banks and on hand | 4,586 | 3,929 | ||||||
Short-term deposits with an original maturity of less than 90 days | 1,756 | 525 | ||||||
|
|
|
| |||||
Total cash and cash equivalents | 6,342 | 4,454 | ||||||
|
|
|
| |||||
Cash at banksbank earns interest at floating rates based on bank deposit rates,rates. Short-term deposits are made for varying periods of between one day and three months, depending on the immediate cash requirements of the Company, and earn interest at the respective short-term deposit rates.
The As of December 31, 2017, there were no restricted cash and cash equivalent balances.
As of December 31, 2016, cash balances as of 31 December 2014 in Algeria of USD 2,732 (2013: 2,651), Uzbekistan of USD 532 (2013: USD 256) and Ukraine USD 116 (31 December 2013: USD nil) areof US$347 and US$3, respectively, were restricted from repatriation due to local government or central bank regulations. Referregulations and were therefore unable to Note 6 for a discussionbe repatriated. In addition, short-term and long-term deposits at financial institutions in Uzbekistan of the settlement of our disputes with the Algerian Government, including around currency controls. There are no other foreign subsidiaries with significant cash balances for which the repatriation of surplus cash would result in a material tax liability.
The Company is not able to repatriate the cash balance of certain entities in Luxembourg and ItalyUS$372 as of December 31, December 2014 of USD 255 (2013: USD 197) due2016 were also subject to existing covenants under borrowing facilities.
Cash balances as of December 31, December 20142017 include investments in Money Market Fundsmoney market funds of USD 1,207 (2013: USD 223)US$91 (2016: US$578).
Notes to the consolidated financial statements (Continued)
(in millions of U.S. dollars unless otherwise stated)
19 OTHER ASSETS AND LIABILITIES
Other assets consisted of the following items as of December 31:
| | 2017 | 2016 | |||||
|---|---|---|---|---|---|---|---|
Other non-current assets | |||||||
Advances to suppliers | 15 | 21 | |||||
Deferred costs related to connection fees | 7 | 11 | |||||
Indemnification assets | 177 | 86 | |||||
| | | | | | | | |
Total other non-current assets | 199 | 118 | |||||
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Other current assets | |||||||
Advances to suppliers | 162 | 203 | |||||
Input value added tax | 181 | 179 | |||||
Prepaid taxes | 31 | 26 | |||||
Deferred costs related to connection fees | 12 | 12 | |||||
Other assets | 8 | 19 | |||||
| | | | | | | | |
Total other current assets | 394 | 439 | |||||
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Other liabilities consisted of the following items as of December 31:
| | 2017 | 2016 | |||||
|---|---|---|---|---|---|---|---|
Other non-current liabilities | |||||||
Long-term deferred revenue | 12 | 14 | |||||
Provision for pensions and other post-employment benefits | 54 | 17 | |||||
Other liabilities | 17 | 13 | |||||
| | | | | | | | |
Total other non-current liabilities | 83 | 44 | |||||
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Other current liabilities | |||||||
Customer advances | 228 | 234 | |||||
Short-term deferred revenue | 146 | 163 | |||||
Customer deposits | 189 | 156 | |||||
Other taxes payable | 427 | 365 | |||||
Other payments to authorities | 91 | 84 | |||||
Due to employees | 173 | 136 | |||||
Other liabilities | 92 | 98 | |||||
| | | | | | | | |
Total other current liabilities | 1,346 | 1,236 | |||||
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Notes to the consolidated financial statements (Continued)
(in millions of U.S. dollars unless otherwise stated)
20 TRADE AND OTHER RECEIVABLES
Trade and other receivables consisted of the following items as of December 31:
| | 2017 | 2016 | |||||
|---|---|---|---|---|---|---|---|
Trade receivables, gross | 788 | 769 | |||||
Allowance for doubtful debt | (169 | ) | (160 | ) | |||
| | | | | | | | |
Trade receivables, net | 619 | 609 | |||||
Other receivables | 126 | 76 | |||||
| | | | | | | | |
Total trade and other receivables | 745 | 685 | |||||
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
As of December 31, 2017, trade receivables with a value of US$169 (2016: US$160) were impaired. See below the movements in the allowance for doubtful debt:
| | 2017 | 2016 | |||||
|---|---|---|---|---|---|---|---|
Balance as of January 1 | 160 | 182 | |||||
Acquisition of a subsidiary | — | 9 | |||||
Divestment of a subsidiary | — | (57 | ) | ||||
Classified as held for sale | (1 | ) | — | ||||
Allowance for doubtful debts | 36 | 73 | |||||
Recoveries | (9 | ) | (5 | ) | |||
Accounts receivable written off | (13 | ) | (44 | ) | |||
Foreign currency translation adjustment | (4 | ) | 2 | ||||
| | | | | | | | |
Balance as of December 31 | 169 | 160 | |||||
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
The aging of trade receivables as of December 31 is shown below:
| | 2017 | 2016 | |||||
|---|---|---|---|---|---|---|---|
Neither past due nor impaired | 427 | 371 | |||||
Past due but not impaired | |||||||
Past due and impaired | |||||||
Less than 30 days past due | 101 | 86 | |||||
Between 30 and 120 days past due | 53 | 81 | |||||
Greater than 120 days past due | 38 | 71 | |||||
| | | | | | | | |
Total trade receivables | 619 | 609 | |||||
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
ACCOUNTING POLICIES
Trade and other receivables are measured at amortized cost and include invoiced amounts less appropriate allowances for estimated uncollectible amounts.
Estimated uncollectible amounts are calculated based on the ageing of the receivable balances, payment history and other evidence of collectability. Receivable balances are written off when management deems them not to be collectible.
Notes to the consolidated financial statements (Continued)
(in millions of U.S. dollars unless otherwise stated)
21 INVENTORIES
Inventories consisted of the following items as of December 31:
| | 2017 | 2016 | |||||
|---|---|---|---|---|---|---|---|
Telephone handsets and accessories for sale | 65 | 117 | |||||
SIM-Cards | 16 | 16 | |||||
Other inventory | 16 | 18 | |||||
Inventory write-downs | (25 | ) | (26 | ) | |||
| | | | | | | | |
Total inventories | 72 | 125 | |||||
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
ACCOUNTING POLICIES
Inventory is measured at the lower of cost and net-realizable value and carried at the weighted average cost basis.
Notes to the consolidated financial statements (Continued)
(in millions of U.S. dollars unless otherwise stated)
22 PROVISIONS
The following table summarizes the movement in provisions for the years ended December 31:
| | Income tax provisions | Indirect tax provisions | Decommissioning provision | Legal provision | Other provisions | Total | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Cost | |||||||||||||||||||
As of January 1, 2016 | 282 | 65 | 87 | 919 | 17 | 1,370 | |||||||||||||
Acquisitions | — | — | 5 | 1 | — | 6 | |||||||||||||
Divestments | — | (3 | ) | — | — | (1 | ) | (4 | ) | ||||||||||
Arising during the year | 67 | 63 | 1 | 75 | 45 | 251 | |||||||||||||
Utilized | (21 | ) | (24 | ) | — | (821 | ) | (30 | ) | (896 | ) | ||||||||
Unused amounts reversed | (13 | ) | (5 | ) | (1 | ) | (16 | ) | 1 | (34 | ) | ||||||||
Discount rate adjustment and imputed interest (change in estimate) | — | — | 1 | — | — | 1 | |||||||||||||
Translation adjustments and other | (71 | ) | — | 5 | (1 | ) | (5 | ) | (72 | ) | |||||||||
| | | | | | | | | | | | | | | | | | | | |
As of December 31, 2016 | 244 | 96 | 98 | 157 | 27 | 622 | |||||||||||||
| | | | | | | | | | | | | | | | | | | | |
Current | 3 | — | 98 | 45 | 2 | 148 | |||||||||||||
Non-current | 241 | 96 | — | 112 | 25 | 474 | |||||||||||||
As of January 1, 2017 | 244 | 96 | 98 | 157 | 27 | 622 | |||||||||||||
Arising during the year | 57 | 28 | 5 | 28 | 26 | 144 | |||||||||||||
Reclassified to assets held for sale | (1 | ) | — | (11 | ) | — | — | (12 | ) | ||||||||||
Utilized | (4 | ) | (16 | ) | (1 | ) | (66 | ) | (13 | ) | (100 | ) | |||||||
Unused amounts reversed | (32 | ) | (4 | ) | (2 | ) | (68 | ) | (9 | ) | (115 | ) | |||||||
Discount rate adjustment and imputed interest (change in estimate) | — | — | 10 | — | — | 10 | |||||||||||||
Translation adjustments and other | (6 | ) | (6 | ) | — | (2 | ) | 3 | (11 | ) | |||||||||
| | | | | | | | | | | | | | | | | | | | |
As of December 31, 2017 | 258 | 98 | 99 | 49 | 34 | 538 | |||||||||||||
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Non-current | — | — | 99 | 16 | 1 | 116 | |||||||||||||
Current | 258 | 98 | — | 33 | 33 | 422 | |||||||||||||
At December 31, 2017, legal provisions include the provision of US$33 in connection with the investigations relating to our business in Uzbekistan (2016: US$66). This matter is further discussed below.
During 2016, the Company also recorded provisions for a number of tax disputes in Pakistan and Bangladesh, including disputes relating to the supply of SIM cards, for which provisions remain at December 31, 2017.
The timing of payments in respect of non-current provisions is, with few exceptions, not contractually fixed and cannot be estimated with certainty. See "Sources of estimation uncertainty" below, in this Note 22, for assumptions and sources of uncertainty.
Significant tax and legal proceedings are discussed in Note 26. Given the uncertainties inherent in such proceedings, there can be no guarantee that the ultimate outcome will be in line with VEON's current view.
The Group has recognized a provision for decommissioning obligations associated with future dismantling of its towers in various jurisdictions.
Notes to the consolidated financial statements (Continued)
(in millions of U.S. dollars unless otherwise stated)
22 PROVISIONS (Continued)
Investigations by SEC / DOJ / OM
During the first quarter of 2016, the Company reached resolutions through agreements with the U.S. Securities and Exchange Commission ("SEC"), the U.S. Department of Justice ("DOJ"), and the Dutch Public Prosecution Service (Openbaar Ministerie) ("OM") relating to the previously disclosed investigations under the U.S. Foreign Corrupt Practices Act (the "FCPA") and relevant Dutch laws, pertaining to the Company's business in Uzbekistan and prior dealings with Takilant Ltd. Pursuant to these agreements, the Company paid an aggregate amount of US$795 in fines and disgorgements to the SEC, the DOJ and the OM in the first quarter of 2016.
On February 18, 2016, the United States District Court for the Southern District of New York (the"District Court") approved the agreements with the DOJ relating to charges that the Company and its subsidiary violated the anti-bribery, books-and-records and internal controls provisions of the FCPA. These agreements consisted of the deferred prosecution agreement (the"DPA"), entered into by VEON and the DOJ and a guilty plea by Unitel, a subsidiary of VEON operating in Uzbekistan. Under the agreements with the DOJ, VEON agreed to pay a total criminal penalty of US$230 to the United States, including US$40 in forfeiture.
In connection with the investigation by the OM, VEON and Silkway Holding BV, a wholly owned subsidiary of VEON, entered into a settlement agreement (the"Dutch Settlement Agreement") related to anti-bribery and false books-and-records provisions of Dutch law. Pursuant to the Dutch Settlement Agreement, VEON agreed to pay criminal fines of US$230 and to disgorge a total of US$375, which was satisfied by the forfeiture to the DOJ of US$40, a disgorgement to the SEC of US$167.5 and a further payment to the OM of US$167.5 beyond the criminal fines.
VEON also consented to the entry of a judgment and incorporated consent (the"SEC Judgment"), which was approved by the District Court on February 22, 2016, relating to the SEC's complaint against VEON, which charged violations of the anti-bribery, books-and-records and internal controls provisions of the FCPA. Pursuant to the SEC Judgment, VEON agreed to a judgment ordering disgorgement of US$375, to be satisfied by the forfeiture to the DOJ of US$40, the disgorgement to the OM of US$167.5, and a payment to the SEC of US$167.5, and imposing a permanent injunction against future violations of the U.S. federal securities laws.
The DPA, the guilty plea, the Dutch Settlement Agreement and the SEC Judgment comprise the terms of the resolution of the Company's potential liabilities in the previously disclosed DOJ, SEC and OM investigations regarding VEON and Unitel.
All amounts to be paid under the DPA, the guilty plea, the Dutch Settlement Agreement and the SEC Judgment were paid in the first quarter of 2016 and were deducted from the already existing provision of US$900 recorded in the third quarter of 2015 and disclosed in the 2015 annual consolidated financial statements. The remaining provision of US$105 related to future direct and incremental expected legal fees associated with the resolutions. In 2016, the Company paid US$24 in legal fees utilizing this provision and changed its estimate by reducing the provision to a balance of US$66 at the end of 2016.
In 2017, the Company paid US$14 in legal fees utilizing this provision and changed its estimate by reducing the provision by US$19, resulting in a remaining provision of US$33 as of December 31, 2017. The Company cannot currently estimate the magnitude of future costs to be incurred to comply with the DPA, the SEC Judgment and the Dutch Settlement Agreement, but these costs could be significant.
Notes to the consolidated financial statements (Continued)
(in millions of U.S. dollars unless otherwise stated)
22 PROVISIONS (Continued)
GTH—IRAQNA Litigation
On November 19, 2012, Atheer Telecom Iraq Limited ("Atheer"), an affiliate of the Zain Group, initiated English High Court proceedings in London against Orascom Telecom Iraq Ltd. ("OTIL") (a Maltese subsidiary of GTH) and GTH in relation to a dispute arising out of the sale by OTIL of its Iraqi mobile subsidiary, Iraqna, in 2007 to Atheer. Atheer's claim is founded on the tax covenants in the underlying share purchase agreement ("Iraqna SPA") between the parties. In particular, Atheer is seeking declarations from the Court that OTIL and GTH are liable to indemnify it in respect of three alleged tax liabilities: (i) a capital gains tax liability in the sum of Iraqi dinar ("IQD") 219 billion (US$183), which Atheer claims is in respect of the transaction that formed the subject-matter of the Iraqna SPA; (ii) an income tax liability in the sum of IQD 96 billion (US$80) in respect of the years 2004-2007; and (iii) a withholding tax liability in the sum of IQD 7 billion (US$6). OTIL and GTH dispute these claims and are vigorously defending them.
The dispute was listed for trial on July 20, 2015. As a result of delays by Atheer in providing disclosure, occasioning the parties to amend their respective statements of case, the trial was adjourned to the week commencing November 14, 2016. Atheer's amendments included withdrawing its claim for unjust enrichment in the amount of IQD 219 billion (US$183) and conceding that its contractual claims are capped at a total possible recovery of US$60.
The trial was heard November 14-18, 2016. On February 17, 2017, the court found GTH liable. Following a hearing on March 1, 2017, GTH and OTIL were ordered to pay Atheer the amounts of US$60, plus approximately US$8 in accrued interest, and an interim payment of GBP 1.25 million (US$2) for legal costs pending submission of a detailed schedule of costs by Atheer. The trial court judge denied GTH's and OTIL's request for leave to appeal and did not stay enforcement pending appeal. An application for Leave to Appeal the trial decision at the Court of Appeal was filed on March 22, 2017 and remains pending. The Company provided for the Court's judgment including the related legal fees.
On June 6, 2017, the English Court of Appeal denied GTH's application for leave to appeal. With no further venue for appeal, the matter is now concluded and final, with no remaining provision recorded.
VAT on Replacement SIMs
June 2009 to December 2011
On April 1, 2012, the National Board of Revenue ("NBR") issued a demand to Banglalink for BDT 7.74 billion (US$94) for unpaid SIM tax (VAT and supplementary duty). The NBR alleged that Banglalink evaded SIM tax on new SIM cards by issuing them as replacements. On the basis of 5 random SIM card purchases made by the NBR, the NBR concluded that all SIM card replacements issued by Banglalink between June 2009 and December 2011 (7,021,834 in total) were new SIM connections and subject to tax. Similar notices were sent to three other operators in Bangladesh. Banglalink and the other operators filed separate petitions in the High Court, which stayed enforcement of the demands.
Notes to the consolidated financial statements (Continued)
(in millions of U.S. dollars unless otherwise stated)
22 PROVISIONS (Continued)
In an attempt to assist the NBR in resolving the dispute, the Government ordered the NBR to form a Review Committee comprised of the NBR, the Commissioner of Taxes ("LTU"), Bangladesh Telecommunication Regulatory Commission ("BTRC"), AMTOB and the operators (including Banglalink). The Review Committee identified a methodology to determine the amount of unpaid SIM tax and, after analyzing 1,200 randomly selected SIM cards issued Banglalink, determined that only 4.83% were incorrectly registered as replacements. The Review Committee's interim report was signed off by all the parties, however, the Convenor of the Review Committee reneged on the interim report and unilaterally published a final report that was not based on the interim report or the findings of the Review Committee. The operators objected to the final report.
The NBR Chairman and operators' representative agreed that the BTRC would prepare further guidelines for verification of SIM users. Although the BTRC submitted its guidelines (under which Bangalink's exposure was determined to be 8.5% of the original demand), the Convenor of the Review Committee submitted a supplementary report which disregarded the BTRC's guidelines and assessed Banglalink's liability for SIM tax to be BDT 7.62 billion (US$92). The operators refused to sign the supplementary report.
On May 18, 2015, Banglalink received an updated demand from the LTU claiming Banglalink had incorrectly issued 6,887,633 SIM cards as replacement SIM cards between June 2009 and December 2011 and required Banglalink to pay BDT 5.32 billion (US$64) in SIM tax. The demand also stated that interest may be payable. Similar demands were sent to the other operators.
On June 25, 2015, Banglalink filed an application to the High Court to stay the updated demand, and a stay was granted. On August 13, 2015, Banglalink filed its appeal against the demand before the Appellate Tribunal and deposited 10% of the amount demanded in order to proceed. The other operators also appealed their demands. On April 26, 2016, Banglalink presented its legal arguments and on September 28, 2016, the appeals of all the operators were heard together
The Bangladesh Appellate Tribunal rejected the appeal of Banglalink and all other operators on June 22, 2017. On July 11, 2017, Banglalink filed an appeal of the Appellate Tribunal's judgment with the High Court Division of the Supreme Court of Bangladesh.
July 2012 to June 2015
On November 20, 2017 the LTU issued a final demand to Banglalink for BDT 1.69 billion (US$20) for unpaid tax on SIM card replacements issued by Banglalink between July 2012 and June 2015. On February 20, 2018, Banglalink filed its appeal against this demand before the Appellate Tribunal and deposited 10% of the amount demanded in order to proceed.
The operators continue to engage in discussions with the government in an attempt to resolve the dispute. As of December 31, 2017, the Company has recorded a provision of US$11 (2016: US$11).
ACCOUNTING POLICIES
Provisions are recognized when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Provisions are discounted using a current pre-tax rate if the time value of money is significant.
22. Issued capital and reservesTable of Contents
Notes to the consolidated financial statements (Continued)
As(in millions of 31 December 2014,U.S. dollars unless otherwise stated)
22 PROVISIONS (Continued)
SOURCE OF ESTIMATION UNCERTAINTY
Provisions
The Group is involved in various legal proceedings, disputes and claims, including regulatory discussions related to the Group's business, licenses, tax positions and investments, and the outcomes of these are subject to significant uncertainty. Management evaluates, among other factors, the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. Unanticipated events or changes in these factors may require the Group to increase or decrease the amount recorded for a matter that has not been previously recorded because it was not considered probable.
For certain operations in emerging markets, the Group is involved in various regulatory discussions. Management's estimates relating to regulatory discussions in these countries involve a high level of uncertainty. See also Note 26 for further information.
Notes to the consolidated financial statements (Continued)
(in millions of U.S. dollars unless otherwise stated)
23ISSUED CAPITAL AND RESERVES
The following table details the common shares of the Company had 2,759,171,827 authorized common shares (2013: 2,759,171,827) with a nominal valueas of USD 0.001 per share, of which 1,756,731,135 shares were issued and outstanding (2013: 1,756,731,135).December 31:
| | 2017 | 2016 | |||||
|---|---|---|---|---|---|---|---|
Authorized common shares (nominal value of US$0.001 per share) | 2,759,171,830 | 2,759,171,830 | |||||
Issued shares (see Note 1) | 1,756,731,135 | 1,756,731,135 | |||||
Treasury shares | (7,603,731 | ) | (7,726,487 | ) | |||
| | | | | | | | |
Outstanding shares | 1,749,127,404 | 1,749,004,648 | |||||
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
The holders of common shares are, subject to our bye-lawsby-laws and Bermuda law, generally entitled to enjoy all the rights attaching to common shares.
Each fully paid common share entitles its holder to (a) to:
As of 31 December 2014, the Company also had 305,000,000 authorized convertible voting preferred shares with a nominal value of USD 0.001 per share, of which 305,000,000 shares were issued and outstanding at 31 December 2014 (2013: 305,000,000). The redemption value of convertible preference shares are reflected in other financial liabilities. Each convertible preference share entitles its holder to one vote per convertible preferred share, voting together with the common shares as a single class, except where cumulative voting applies when electing directors. Convertible preferred shares do not have dividend rights. The holders of convertible preferred shares, in the event of our winding-up or dissolution, are not entitled to any payment or distribution in respect of our surplus assets. The holders of convertible preferred shares are, subject to our bye-laws and Bermuda law, entitled to convert their convertible preferred shares, at their option, at any time (a) after the date which is two years and six calendar months after the date of issue of the relevant convertible preferred shares but before the date which is five years after such date of issue and (b) during the period between the date on which a mandatory offer for all common and preferred shares is announced and the final business day such offer is open for acceptance, in each case, in whole or in part, into common shares on the basis of one common share for one convertible preferred share. Upon conversion, the converting shareholder must pay to VimpelCom a conversion premium per share equal to the greater of (a) the closing mid market price of VimpelCom common ADSs on the NASDAQ on the date of the conversion notice, and (b) the 30 day volume weighted average price on the NASDAQ of VimpelCom common ADSs on the date of the conversion notice. Any convertible preferred shares not redeemed five years after their issue will be immediately redeemed by the company at a redemption price of USD 0.001 per share.
In the accompanying financials and in these notes, shares held by the Company or its subsidiaries are treated as “treasury shares”. Treasury shares amount to 8,132,989 shares of common stock as of 31 December 2014 (2013: 8,487,396).
Share options exercised in each respective year have been settled using the treasuryTreasury shares of the Company. The reduction in the treasuryTreasury shares equity component is equal to the cost incurred to acquire the shares, on a weighted average basis. Any excess between the cash received from employees and reduction in treasuryTreasury shares is recorded in capital surplus.
Nature As of December 31, 2017 and purpose2016, there were no remaining VEON convertible preferred shares authorized and outstanding. The preferred shares, with a nominal value of reservesUS$0.001 per share, were convertible into VEON common shares at the option of the shareholder (Telenor) any time between October 15, 2013 and April 15, 2016 at a price based on the NASDAQ price of VEON ADSs. As of April 15, 2016, pursuant to the terms of the Company's bye-laws, the 305,000,000 preferred shares held by Telenor had been redeemed by the Company at a redemption price of US$0.001 per share and are no longer outstanding.
NATURE AND PURPOSE OF RESERVES
Other capital reserves
The other Other capital reserve isreserves are mainly used to recognise the value of equity-settled share-based payment transactions provided to employees, including key management personnel, as part of their remuneration (see Note 25) and to record the accumulated impact of derivatives designated as cash flow hedges (see Note(Note 17) and recognize the results of transactions that do not result in a change of control with non-controlling interest (Note 5).
Notes to the consolidated financial statements (Continued)
(in millions of U.S. dollars unless otherwise stated)
23ISSUED CAPITAL AND RESERVES (Continued)
Foreign currency translation reserve
The foreign currency translation reserve is used to record exchange differences arising from the translation of the financial statements of foreign subsidiaries. The other comprehensive loss recognized within the foreign currency reserve was driven primarily by the strengthening of the US Dollar and the depreciation of emerging markets currencies in which VEON operates, particularly the depreciation of the Uzbek som (see Note 1). In addition, a loss of US$125 was recognized within the foreign currency reserve pertaining to the hedge of net investment in foreign operations (see Note 17).
23. Dividends paid and proposed
Notes to the consolidated financial statements (Continued)
(in millions of U.S. dollars unless otherwise stated)
24DIVIDENDS PAID AND PROPOSED
Pursuant to Bermuda law, VimpelComVEON is restricted from declaring or paying a dividend if there are reasonable grounds for believing that (a) VimpelComVEON is, or would after the payment be, unable to pay its liabilities as they become due, or (b) the realizable value of VimpelComVEON assets would, as a result of the dividend, be less than the aggregate of VimpelComVEON liabilities.
In August 2017, the Supervisory Board approved the distribution of an interim gross dividend of US 11 cents per share for 2017, from the Company's freely distributable reserves, representing a total dividend payment of US$193. The dividend was paid on September 6, 2017.
Subsequent to year end, the Company announced that the VEON Supervisory Board approved a final dividend for 2017, refer to Note 27 for further details.
On 11 November 2014,2, 2016, the Supervisory Board approved and authorized the payment of an interim cash dividend relating to its 2016 results from its freely distributable reserves in the amount of US 3.5 cents per common share, representing a total dividend payment of US$61. The dividend was paid on December 7, 2016.
In addition to the dividend paid on December 7, 2016 the Supervisory Board, on February 27, 2017, authorized a proposed cash dividend relating to its 2016 results from its freely distributable reserves in the amount of US 19.5 cents per common share, representing a total dividend payment of US$343. The dividend was paid on April 12, 2017.
On November 6, 2015 the Company announced that the Supervisory Board authorized the payment of a dividend of USDUS 3.5 cents per ADS. The record date for the Company’s shareholders entitled to receive the dividend payment has been set for 24 November 2014. The ex-dividend date has been set for 20 November 2014. The dividend has beenwas paid inon December 2014.7, 2015.
The Company made appropriate tax withholdings of up to 15% when the dividend isdividends are paid to the Company’sCompany's ADS depositary, The Bank of New York Mellon.
24. ProvisionsDIVIDENDS DECLARED TO NON-CONTROLLING INTERESTS
The following table summarizes During the movement in provisions for2017 and 2016 years, certain subsidiaries of the years ended 31 December 2013 and 2014:Company declared dividends, of which a portion was paid or payable to non-controlling interests.
Name of subsidiary | Dividend declared | Dividend paid | Paid or payable to non- controlling interests | |||||
|---|---|---|---|---|---|---|---|---|
VIP Kazakhstan Holding AG | October 6, 2017 | October 10, 2017 | 11 | |||||
Omnium Telecom Algeria S.p.A | June 21, 2017 | August 18, 2017 | 82 | |||||
TNS Plus LLP | May 12, 2017 | May 15, 2017 | 12 | |||||
VIP Kyrgyzstan Holding AG | February 13, 2017 | February 16, 2017 | 55 | |||||
TNS Plus LLP | January 24, 2017 | January 25, 2017 | 7 | |||||
TNS Plus LLP | September 1, 2016 | September 2, 2016 | 18 | |||||
VIP Kazakhstan Holding AG | July 28, 2016 | August 2, 2016 | 18 | |||||
Omnium Telecom Algeria S.p.A | June 22, 2016 | September 1, 2 and 6, 2016 | 69 | |||||
| Income taxes provisions | Tax provisions other than for income tax | Provision for decommissioning | Legal provisions | Other provisions | Total provisions | |||||||||||||||||||
At 1 January 2013 | 222 | 178 | 210 | 50 | 80 | 740 | ||||||||||||||||||
Arising during the year | 228 | 224 | 17 | 25 | 1,311 | 1,805 | ||||||||||||||||||
Utilized | (3 | ) | (40 | ) | (2 | ) | (23 | ) | (34 | ) | (102 | ) | ||||||||||||
Reclassification | (106 | ) | 45 | 1 | 25 | 35 | — | |||||||||||||||||
Unused amounts reversed | (58 | ) | (36 | ) | (1 | ) | (7 | ) | (10 | ) | (112 | ) | ||||||||||||
Discount rate adjustment and imputed interest (change in estimates) | — | — | (15 | ) | — | — | (15 | ) | ||||||||||||||||
Translation adjustments and other | (8 | ) | (3 | ) | (8 | ) | (1 | ) | 1 | (19 | ) | |||||||||||||
At 31 December 2013 | 275 | 368 | 202 | 69 | 1,383 | 2,297 | ||||||||||||||||||
Current 2013 | 218 | 368 | — | 12 | 1,282 | 1,880 | ||||||||||||||||||
Non-current 2013 | 57 | — | 202 | 57 | 101 | 417 | ||||||||||||||||||
At 1 January 2014 | 275 | 368 | 202 | 69 | 1,383 | 2,297 | ||||||||||||||||||
Arising during the year | 108 | 12 | 45 | 12 | 162 | 339 | ||||||||||||||||||
Utilized | (8 | ) | (54 | ) | (2 | ) | (6 | ) | (231 | ) | (301 | ) | ||||||||||||
Reclassification | 44 | (247 | ) | — | (25 | ) | 228 | — | ||||||||||||||||
Unused amounts reversed | (16 | ) | (9 | ) | (1 | ) | (4 | ) | (41 | ) | (71 | ) | ||||||||||||
Discount rate adjustment and imputed interest (change in estimates) | — | — | 9 | — | 3 | 12 | ||||||||||||||||||
Translation adjustments and other | (50 | ) | (10 | ) | (63 | ) | (2 | ) | (256 | ) | (381 | ) | ||||||||||||
At 31 December 2014 | 353 | 60 | 190 | 44 | 1,248 | 1,895 | ||||||||||||||||||
Total current | 131 | 31 | — | 14 | 1,192 | 1,368 | ||||||||||||||||||
Total non-current | 222 | 29 | 190 | 30 | 56 | 527 | ||||||||||||||||||
At 31 December 2014, other provisions includeIn 2017, PMCL, a subsidiary of the claim from BankCompany, declared dividends to its shareholders, of Algeriawhich US$54 (2016: US$7) was declared to the non-controlling interest holders of USD 1,125 as further discussed in Note 6.
The timingPMCL. Dividends declared to non-controlling interests reduces the principal amount of payments in respectthe put-option liability over non-controlling interest on the date of non-current provisions is, with few exceptions, not contractually fixed and cannot be estimated with certainty. Key assumptions and sourcesdeclaration. As of uncertainty are discussed in Note 4.
Significant tax and legal proceedings are discussed in Note balance sheet date, an amount of US$26 below. Given the uncertainties inherent in such proceedings, there can be no guarantee that the ultimate outcome will be in line with VimpelCom’s current view.(2016: US$7) remained payable to non-controlling interests.
25. Related parties
Notes to the consolidated financial statements (Continued)
Shareholders and other related parties(in millions of U.S. dollars unless otherwise stated)
As of 31 December 2014, the Company is primarily owned by two major shareholders: LetterOne Holding S.A. (“LetterOne”) and Telenor East Holding II AS (“Telenor”). The Company has no ultimate controlling shareholder.
Alfa group is no longer a related party to the Company as defined inIAS 24 Related Party Disclosures following its internal restructuring and contributing its shares to LetterOne, whereby LetterOne is not part of the Alfa Group.25RELATED PARTIES
The following table provides the total amount of transactions that have been entered into with related parties and balancestheir affiliates for the years ended December 31:
| | 2017 | 2016 | 2015 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
Revenue from related parties | ||||||||||
LetterOne | — | — | 2 | |||||||
Telenor | 68 | 60 | 51 | |||||||
Discontinued operations | — | 68 | 60 | |||||||
Joint ventures and associates | 29 | 19 | 6 | |||||||
Other related parties | — | — | 6 | |||||||
Finance income from related parties | — | — | 1 | |||||||
| | | | | | | | | | | |
| 97 | 147 | 126 | ||||||||
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Services from related parties | ||||||||||
LetterOne | 6 | 8 | 8 | |||||||
Telenor | 67 | 64 | 44 | |||||||
Discontinued operations | — | 6 | 5 | |||||||
Joint ventures and associates | 29 | 19 | 20 | |||||||
Other related parties | — | — | 5 | |||||||
Finance costs to related parties | — | — | 1 | |||||||
| | | | | | | | | | | |
| 102 | 97 | 83 | ||||||||
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
The following table provides the total balance of accounts with them forrelated parties and their affiliates at the end of the relevant financial years:period:
| | 2017 | 2016 | |||||
|---|---|---|---|---|---|---|---|
Accounts receivable from related parties | |||||||
Telenor | — | 13 | |||||
Joint ventures and associates | 23 | 24 | |||||
Other assets due from related parties | 3 | 3 | |||||
| | | | | | | | |
| 26 | 40 | ||||||
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Accounts payable to related parties | |||||||
LetterOne | — | 1 | |||||
Telenor | — | 9 | |||||
Joint ventures and associates | 5 | 5 | |||||
| | | | | | | | |
| 5 | 15 | ||||||
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
As of December 31, 2017, the Company has no ultimate controlling shareholder. See also Note 1 for details regarding ownership structure.
RELATED PARTY TRANSACTIONS WITH TELENOR AND ITS AFFILIATES
| For the year ended and as of 31 December 2014 | For the year ended and as of 31 December 2013 | For the year ended and as of 31 December 2012 | ||||||||||
Revenue from LetterOne | — | 11 | 11 | |||||||||
Revenue from Telenor | 50 | 4 | 50 | |||||||||
Revenue from associates | 11 | 43 | 89 | |||||||||
Revenue from Weather | — | 1 | — | |||||||||
Finance income from associates | 2 | 39 | 681 | |||||||||
Wind International Services Spa | — | — | 27 | |||||||||
SPAL TLC SpA | 26 | 38 | 18 | |||||||||
Revenue from other related parties | 10 | — | 4 | |||||||||
|
|
|
|
|
| |||||||
| 99 | 136 | 880 | ||||||||||
|
|
|
|
|
| |||||||
Services from LetterOne | 3 | 11 | 12 | |||||||||
Services from Telenor | 57 | 6 | 44 | |||||||||
Services from associates | 37 | 72 | 202 | |||||||||
SPAL TLC SpA | 34 | 49 | — | |||||||||
Services from other related parties | 11 | — | 30 | |||||||||
|
|
|
|
|
| |||||||
| 142 | 138 | 288 | ||||||||||
|
|
|
|
|
| |||||||
Cash and cash equivalent | — | 52 | 112 | |||||||||
Accounts receivable from LetterOne | — | 1 | 1 | |||||||||
Accounts receivable from Telenor | 11 | 7 | 7 | |||||||||
Accounts receivable from Weather | — | 5 | — | |||||||||
Wind International Services Spa | — | — | 26 | |||||||||
SPAL TLC SpA | 3 | 11 | 46 | |||||||||
Accounts receivable from associates | 9 | 13 | 61 | |||||||||
Advances to associates and JV | 17 | — | — | |||||||||
Financial asset receivable from associates | 31 | — | 781 | |||||||||
Accounts receivable from other related parties | 1 | — | 3 | |||||||||
|
|
|
|
|
| |||||||
| 73 | 89 | 1,037 | ||||||||||
|
|
|
|
|
| |||||||
Accounts payable to Telenor | 13 | 3 | 3 | |||||||||
SPAL TLC SpA | 8 | 9 | 10 | |||||||||
Accounts payable to associates | 20 | 11 | 40 | |||||||||
Accounts payable to other related parties | 1 | — | 9 | |||||||||
|
|
|
|
|
| |||||||
| 42 | 23 | 62 | ||||||||||
|
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|
|
|
| |||||||
Outstanding balances and transactionsA number of our operating companies have roaming agreements with Telenor relateand its affiliates.
Notes to operations with VimpelCom’s shareholderthe consolidated financial statements (Continued)
(in millions of U.S. dollars unless otherwise stated)
25RELATED PARTIES (Continued)
As a result of changes to the composition of the Supervisory Board, announced on December 8, 2017, Telenor East Holding II AS, its consolidated subsidiaries, its direct ownersis no longer represented on VEON's Supervisory Board, and their consolidated subsidiaries mainly represented by roaming agreements. On 8 March 2011, VimpelCom also entered into a services agreement withas such, Telenor under which Telenor renders to VimpelCom orand its affiliates servicesare no longer considered to be a related to telecommunication operations, including management advisory services, training, technical assistance and network maintenance, industry information research and consulting, implementation support for special projects and other services as mutually agreed by Telenor and VimpelCom. VimpelCom pays Telenor annually USD 1.5 for the services.
RELATED PARTY TRANSACTIONS WITH LETTERONE AND ITS AFFILIATES
Outstanding balances and transactions with LetterOne relate VEON was a party to a General Services Agreement with LetterOne Corporate Advisor Limited, dated December 1, December 2010, under which LetterOne Corporate Advisor Limited renders to VimpelComVEON and its affiliates services related to telecommunication operations, including management advisory services, training, technical assistance and network maintenance, industry information research and consulting, implementation support for special projects and other services as mutually agreed by LetterOne Corporate Advisor Limited and VimpelCom. VimpelCom pays LetterOne Corporate Advisor Limited annually USD 1.5 for the services. VimpelCom is also party to a Consultancy Deed with LetterOne Corporate Advisor Limited, dated 21 August2013, under which LetterOne Corporate Advisor Limited provides additional consultancy services to VimpelCom for which VimpelCom pays annually USD 3.5.operations. The General Services Agreement and Consultancy Deed were originally entered into by VimpelComVEON and Altimo Management Services Ltd., but the latter was replaced first by LetterOneLIHS Corporate Advisor Limited pursuant to a Deed of AssignmentNovation and NovationAmendment dated 3 June 2014.January 14, 2016.
Outstanding balances and transactions with Weather II relate to operations with VimpelCom’s shareholder Weather II, its consolidated subsidiaries, its direct owners and their consolidated subsidiaries. In particular, Wind International Services (subsidiary On December 12, 2017 VEON received a notice confirming termination of Weather II) provides call termination and related services to VimpelCom subsidiaries pursuant to a frameworkthe agreement.
EffectiveRELATED PARTY TRANSACTIONS WITH JOINT VENTURES AND ASSOCIATES
Italy Joint Venture
VEON has commercial contracts with its joint venture in Italy, largely relating to roaming and interconnect which are transacted at arm's length and presented in the table above. In 2017, the Group recognized US$26 (2016: nil) of service revenue and US$1 (2016: nil) of service costs relating to these commercial contracts.
Euroset
PJSC VimpelCom has commercial contracts with Euroset. In 2017, PJSC VimpelCom recognized US$3 (2016: US$4, 2015: US$5) of revenue from 15 August 2012, all entities affiliated with Weather Investments II S.à r.l.Euroset primarily for mobile and fixed line services and from the sale of equipment and accessories. PJSC VimpelCom accrued to Euroset certain expenses totaling US$28 in 2017 (2016: US$19, 2015: US$20), primarily dealer commissions and bonuses for services for acquisition of new customers, customer care and receipt of customers' payments.
RELATED PARTY BALANCES AND TRANSACTIONS WITH DISCONTINUED OPERATIONS
Following the reclassification of the operations in Italy as an asset held for sale and discontinued operation, the intercompany positions between the continued and discontinued portions of the Group were treated as Related Party mainly representing regular business activities, i.e. roaming and interconnect.
COMPENSATION OF KEY MANAGEMENT PERSONNEL OF THE COMPANY
Under the Company's bye-laws, the Supervisory Board of the Company established a Compensation Committee, which has the overall responsibility for approving and evaluating the compensation and benefit plans, policies and programs of the Company's directors, officers and employees and for supervising the administration of the Company's equity incentive plans and other compensation and incentive programs.
Notes to the consolidated financial statements (Continued)
(in millions of U.S. dollars unless otherwise stated)
25RELATED PARTIES (Continued)
The Compensation Committee's rules and competences are no longer consideredset forth in the Company's Compensation Committee Charter, which forms part of the Company's bye-laws adopted on April 20, 2010, as amended and restated on September 2, 2013.
The Compensation Committee adheres to the following objectives in setting out compensation policies for the group:
The aim of the group's compensation and benefit policies and incentive plans is to stimulate and reward leadership efforts that result in sustainable success, improve our local and global performance, build increased trust and sponsorship and support long-term value creation. The group's compensation includes base salary, as well as short and long-term incentive schemes.
To ensure the overall competitiveness of the Company's and the group's pay levels, these levels are benchmarked against a peer group which consists of companies that are comparable in terms of size and scope, as listed on the NASDAQ stock exchange. The Compensation Committee regularly reviews the peer group to ensure that its composition is still appropriate. The composition of the peer group might be related to VimpelComadjusted as a result of a change in VimpelCom’s shareholder structure on that date.
Outstanding balances and transactions with associates relate to operations with VimpelCom’s equity investees (see Note 12). Loans receivable mainly represent outstanding balances from GWMC before the disposal in September 2014 (see Notes 6 and 17). Euroset transactions mainly represent sales of telephones and accessories, dealer commission payments for the acquisition of new customers and commission for payments receipts.
Terms and conditions of transactions with related parties
Outstanding balances at the year-end are unsecured, interest free and settlement occurs in cash. There have been no guarantees providedmergers or received for any related party receivables or payables. For the years ended 31 December 2014, 2013 and 2012, VimpelCom has not recorded any impairment of receivables relating to amounts owed by related parties, other than the loans from GWMC (Notes 6 and 17). This assessment is undertaken each financial year through examining the financial positioncorporate activities. The relative size of the related partyCompany and the marketgroup it belongs to is taken into account when determining whether the pay levels within the group are in line with the market-median levels.
Each year, the Compensation Committee conducts a scenario analysis, which includes the related party operates.
Compensation of key management personnelcalculation and composition of the Companyremuneration under different scenarios. The Compensation Committee concluded that the current policy has proven to function well in terms of a relationship between the strategic objectives and the chosen performance criteria and believes that the short and long-term incentive plans support this relationship.
Members Key Management Personnel ("KMPs") include members of the Supervisory Board and the Management Board of the Company areCompany. The following table sets forth the key management personnel. Thetotal compensation paid to KMPs:
| | 2017 | 2016* | 2015* | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
Short-term employee benefits | 42 | 37 | 36 | |||||||
Long-term employee benefits | 1 | — | — | |||||||
Share-based payments | 1 | — | 3 | |||||||
Termination benefits | 1 | 4 | 2 | |||||||
| | | | | | | | | | | |
Total compensation paid to key management personnel | 45 | 41 | 41 | |||||||
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| 2014 | 2013 | 2012 | ||||||||||
Short-term employee benefits | 26 | 27 | 31 | |||||||||
Long-term employee benefits | 19 | 12 | — | |||||||||
Share-based payment transactions | 2 | 11 | 1 | |||||||||
Termination benefits | 1 | 1 | — | |||||||||
|
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|
|
|
| |||||||
Total compensation to key management personnel | 48 | 51 | 32 | |||||||||
|
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| |||||||
Each of our unaffiliated directors currently receives an annual retainer of EUR 150,000. Each affiliated director receives an annual retainer of EUR 40,000, and our current chairmanprevious years for 'Long-term employee benefits' represented total nominal values of the Supervisory Board receives
Notes to the consolidated financial statements (Continued)
an additional annual retainer(in millions of EUR 4,000. In addition, each unaffiliated director who serves on any official committeeU.S. dollars unless otherwise stated)
25RELATED PARTIES (Continued)
Members of our Supervisory Board receives additional annual compensation of EUR 30,000 per committee (for serving as head of any such committee) or EUR 25,000 per committee (for serving as member of any such committee). All of our directors are reimbursed for expenses incurred in connection with service as a member of our Supervisory Board. For this purpose, the term “unaffiliated director” means a director that is not an “Affiliate” (as defined in the Company’s bye-laws) nor employed by an Affiliate of the Company and “affiliated director” means a director who is not an “unaffiliated director”.
In addition, until 2012 our directors who were not employees were able to participate in a phantom stock plan, pursuant to which they each receive up to a maximum of 20,000 phantom ADSs per year, with an additional 10,000 phantom ADSs granted to the chairman of the supervisory board and an additional 10,000 phantom ADSs granted to each director for serving as head of any official committee of the supervisory board. This plan was terminated as of 2012 and replaced by the Director Investment Plan discussed below. In 2014, an aggregate of 1,090,000 phantom ADSs were outstanding, all of which were exercisable as of 31 December 2014. No phantom ADSs were granted or exercised in 2014.
In addition, members of our senior management and supervisory boardManagement Board are eligible to participate in cash based long termcash-based long-term incentive plans discussed below.
ToCompensation of Key Management Board Members
The following table sets forth the extent thattotal compensation paid to the exercisekey management board members in 2017 and 2016 (gross amounts in whole euros and whole US$ equivalents):
| | Jean-Yves Charlier Group CEO | Andrew Davies Group CFO(iii) | Trond Westlie Group CFO(iii) | Scott Dresser Group General Counsel | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | EUR | US$ | EUR | US$ | EUR | US$ | EUR | US$ | |||||||||||||||||
2017 | |||||||||||||||||||||||||
Short-term employee benefits | |||||||||||||||||||||||||
Base salary(i) | 2,500,000 | 2,819,125 | 1,125,000 | 1,268,606 | 375,000 | 422,869 | 925,000 | 1,043,076 | |||||||||||||||||
Annual incentive(ii) | 4,125,000 | 4,651,556 | 3,518,295 | 3,967,405 | — | — | 977,272 | 1,102,021 | |||||||||||||||||
Other | 91,916 | 103,649 | 1,284,248 | 1,448,182 | 5,400 | 6,089 | 31,186 | 35,166 | |||||||||||||||||
Long-term employee benefits | — | — | — | — | — | — | — | — | |||||||||||||||||
Share-based payments | 709,661 | 800,249 | — | — | — | — | — | — | |||||||||||||||||
Termination benefits | — | — | 250,000 | 281,912 | — | — | — | — | |||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Total gross remuneration | 7,426,577 | 8,374,579 | 6,177,543 | 6,966,105 | 380,400 | 428,958 | 1,933,458 | 2,180,263 | |||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | |
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| | | | | | | | | | | | | | | | | | | | | | | | | | |
2016 | |||||||||||||||||||||||||
Short-term employee benefits | |||||||||||||||||||||||||
Base salary(i) | 2,500,000 | 2,750,000 | 1,100,000 | 1,210,000 | — | — | 750,000 | 825,000 | |||||||||||||||||
Annual incentive(ii) | 2,130,000 | 2,343,000 | 850,000 | 935,000 | — | — | 460,000 | 506,000 | |||||||||||||||||
Other | 26,000 | 28,600 | — | — | — | — | 20,000 | 22,000 | |||||||||||||||||
Long-term employee benefits | — | — | — | — | — | — | — | — | |||||||||||||||||
Share-based payments | — | — | — | — | — | — | — | — | |||||||||||||||||
Termination benefits | — | — | — | — | — | — | — | — | |||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Total gross remuneration | 4,656,000 | 5,121,600 | 1,950,000 | 2,145,000 | — | — | 1,230,000 | 1,353,000 | |||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | |
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Executive Investment
Notes to the consolidated financial statements (Continued)
(in millions of U.S. dollars unless otherwise stated)
25 RELATED PARTIES (Continued)
Compensation of Supervisory Board Members
The following table sets forth the total compensation paid to the key management board members in 2017 and 2016 (gross amounts in whole euros and whole US$ equivalents):
| | Retainer | Committees | Other compensation | Total | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2017 | 2016 | 2017 | 2016 | 2017 | 2016 | 2017 | 2016 | |||||||||||||||||
Alexey M. Reznikovich | |||||||||||||||||||||||||
In whole euros | 40,000 | 40,000 | — | — | — | — | 40,000 | 40,000 | |||||||||||||||||
US$ equivalent | 45,106 | 44,253 | — | — | — | — | 45,106 | 44,253 | |||||||||||||||||
Stan Chudnovsky | |||||||||||||||||||||||||
In whole euros | 193,918 | 60,870 | — | — | — | — | 193,918 | 60,870 | |||||||||||||||||
US$ equivalent | 218,672 | 67,342 | — | — | — | — | 218,672 | 67,342 | |||||||||||||||||
Mikhail Fridman | |||||||||||||||||||||||||
In whole euros | 40,000 | 40,000 | — | — | — | — | 40,000 | 40,000 | |||||||||||||||||
US$ equivalent | 45,106 | 44,253 | — | — | — | — | 45,106 | 44,253 | |||||||||||||||||
Gennady Gazin | |||||||||||||||||||||||||
In whole euros | 194,048 | 150,000 | 55,000 | 110,000 | 4,757 | 343,189 | 253,805 | 603,189 | |||||||||||||||||
US$ equivalent | 218,818 | 165,948 | 62,021 | 121,695 | 5,364 | 379,676 | 286,203 | 667,319 | |||||||||||||||||
Andrei Gusev | |||||||||||||||||||||||||
In whole euros | 40,000 | 40,000 | — | — | — | — | 40,000 | 40,000 | |||||||||||||||||
US$ equivalent | 45,106 | 44,253 | — | — | — | — | 45,106 | 44,253 | |||||||||||||||||
Gunnar Holt | |||||||||||||||||||||||||
In whole euros | 133,950 | 40,000 | 20,833 | — | — | — | 154,783 | 40,000 | |||||||||||||||||
US$ equivalent | 151,049 | 44,253 | 23,492 | — | — | — | 174,541 | 44,253 | |||||||||||||||||
Sir Julian Horn-Smith | |||||||||||||||||||||||||
In whole euros | 194,048 | 150,000 | — | 50,000 | 5,145 | — | 199,193 | 200,000 | |||||||||||||||||
US$ equivalent | 218,818 | 165,948 | — | 55,316 | 5,802 | — | 224,620 | 221,264 | |||||||||||||||||
Jørn P. Jensen | |||||||||||||||||||||||||
In whole euros | 195,538 | 60,870 | 30,000 | — | — | 937 | 225,538 | 61,807 | |||||||||||||||||
US$ equivalent | 220,498 | 67,342 | 33,829 | — | — | 1,037 | 254,327 | 68,379 | |||||||||||||||||
Ursula Burns | |||||||||||||||||||||||||
In whole euros | 436,213 | — | 12,500 | — | 1,517,500 | — | 1,966,213 | — | |||||||||||||||||
US$ equivalent | 491,896 | — | 14,096 | — | 1,711,209 | — | 2,217,201 | — | |||||||||||||||||
Guy Laurence | |||||||||||||||||||||||||
In whole euros | 110,619 | — | 20,833 | — | 1,250 | — | 132,702 | — | |||||||||||||||||
US$ equivalent | 124,740 | — | 23,492 | — | 1,410 | — | 149,642 | — | |||||||||||||||||
Nils Katla | |||||||||||||||||||||||||
In whole euros | 36,666 | 40,000 | — | — | — | — | 36,666 | 40,000 | |||||||||||||||||
US$ equivalent | 41,346 | 44,253 | — | — | — | — | 41,346 | 44,253 | |||||||||||||||||
Morten Karlsen Sørby | |||||||||||||||||||||||||
In whole euros | — | 23,913 | — | — | — | 665 | — | 24,578 | |||||||||||||||||
US$ equivalent | — | 26,455 | — | — | — | 736 | — | 27,191 | |||||||||||||||||
Trond Ø Westlie | |||||||||||||||||||||||||
In whole euros | — | 102,000 | — | 20,554 | — | — | — | 122,554 | |||||||||||||||||
US$ equivalent | — | 112,844 | — | 22,739 | — | — | — | 135,583 | |||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Total (in whole euros) | 1,615,000 | 747,653 | 139,166 | 180,554 | 1,528,652 | 344,791 | 3,282,818 | 1,272,998 | |||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Total (US$ equivalent) | 1,821,155 | 827,144 | 156,930 | 199,750 | 1,723,785 | 381,449 | 3,701,870 | 1,408,343 | |||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Notes to the consolidated financial statements (Continued)
(in millions of U.S. dollars unless otherwise stated)
25 RELATED PARTIES (Continued)
Value growth cash-based long-term incentive plans
To stimulate and reward leadership efforts that result in sustainable success, the Value-Growth Cash Based Long-Term Incentive Plan and Director Investment Plan(the
In March 2012, we adopted the VimpelCom Ltd. Executive Investment Plan, or “EIP,” in which certain"LTI Plan") has been designed for members of our senior managementrecognized leadership community. The participants in the LTI Plan may participate, andreceive cash payouts after the end of each relevant award performance period. The vesting of each award is subject to continued employment (except in August 2012, we adoptedlimited "good leaver" circumstances) of a specific Qualifying Period). For participants joining after the VimpelCom Ltd. Director Investment Plan,start, or “DIP,” in which members of our supervisory board may participate. Under the EIP and DIP, participants are invited to personally invest in our common shares. At the same time as their investment, participants will be awarded matching options to acquire a number of matching shares atleaving before the end of a specified performance period if, at the end of that performance period, certain performance conditions and other conditions set out in the plan documents have been met. If all conditions to vesting have been met, the number of matching shares that participants will receive when they exercise their optionsQualifying Period, vested awards will be based on a multiple of their initial investment.
The EIP and DIP are administered by the compensation committee of our supervisory board. The compensation committee determines the timing of awards, the performance conditions and performance period for the vesting of the matching options. In the case of the EIP, the compensation committee also determines which members of our senior management will receive invitations.
In June 2012, the compensation committee made an offer to certain members of senior management to participate in the EIP, and in August 2012, the compensation committee made an offer to members of our supervisory board to participate in the DIP. The matching options awarded in connection with these offers were subject to a two-year performancepro-rata reduction in accordance with the actual period and performance conditions set out inof employment during this Qualifying Period. Awards may vest early upon the plan’s documents, as well as the termsoccurrence of the plan. The relevant performance conditions were not met at the vesting date at the end of the performance period (or, for certain members of senior management whose employment terminated in 2014 before the end of the two-year period, at the last date of employment). Accordingly, the matching options awarded in 2012 did not vest and were not exercised in 2014. In March 2013 and June 2014, the compensation committee again made offerscorporate events relating to certain members of senior management to participate in the EIP and to members of our supervisory board to participate in the DIP, both under substantially the same terms and conditions as applicableVEON Ltd., subject to the 2012 offers. With respect to the 2014 offers, a numberCommittee's determination of participants in the 2013 EIP and 2013 DIP offers elected to exchange their 2013 participations for 2014 participations, and the applicable 2013 participations were forfeited upon this exchange.
Stock Option Plans
Historically, OJSC VimpelCom maintained a stock option plan, the 2000 Stock Option Plan, under which it granted options to certain of its, and its subsidiaries’, affiliates, officers, employees, directors and consultants to acquire shares of common stock of OJSC VimpelCom. In connection with the completion of the VimpelCom Ltd. Transaction, as of 21 April 2010, the 2000 Stock Option Plan was transferred to VimpelCom Ltd. and options granted under the 2000 Stock Option Plan, as amended, allow grantees to acquire VimpelCom Ltd. common shares upon exercise of the options. Options are granted by VC ESOP N.V., our indirect wholly owned subsidiary. The 2000 Stock Option Plan is administered by a committee appointed by the board of directors of VC ESOP N.V., which committee determines to whom options are granted under the plan, the number of options that are granted and the terms and conditions of option grants, including the exercise price per share. The committee appointed to administer the 2000 Stock Option Plan is currently composed of the three directors who currently sit on the compensation committee of our supervisory board.
On 21 April 2010, we adopted the VimpelCom 2010 Stock Option Plan, under which certain of our, and our subsidiaries’, affiliates, officers, employees, directors and consultants are eligible for grants of options to acquire our common shares. Options under the 2010 Stock Option Plan may be granted by VimpelCom Ltd. or our affiliates. The 2010 Stock Option Plan is administered by the compensation committee of our supervisory board, which committee determines to whom options are granted under the plan, the number of options that are granted and the terms and conditions of option grants, including the exercise price per share.
The Company has granted options to a selected number of senior management members based on similar terms and conditions as applicable to the 2010 Stock Option Plan. As of December 31, 2014, options to acquire approximately 1,712,177 of our common shares were outstanding based on our 2000 Stock Option Plan and 2010 Stock Option Plan, of which options in respect of approximately 1,245,177 of our common shares were exercisable as of such date. In addition, 175,200 options were exercised and 579,354 options lapsed or were cancelled in 2014, for example in connection with the termination of employment. The exercise prices of the options outstanding as of 31 December 2014, ranged from USD 10.42 per share to USD 16.74 per share. The options granted generally vest at varying rates over a two- or three-year period, subject in some instances to the attainment of performance targets, and vesting periods for certain employees will be accelerated if certain events specified in the stock option plans occur. The options outstanding as of 31 December 2014 are exercisable from dates ranging from the present date to 31 December 2020. If a plan participant ceases to be an employee of the Company or any of our affiliates (other than due to death or disability or for cause) or ceases to otherwise be eligible to participate in the plan, the individual will generally have the right to exercise vested options upon the earlier to occur of (a) the date of expiration of his option agreement and (b) the end of the first open trading window period following the effective date of termination of employment. In case of death or permanent disability of a plan participant, his or her beneficiaries generally will automatically acquire the right to exercise those options that have vested prior to the plan participant’s death or permanent disability for the earlier of (i) 190 days and 90 days in the event of death and permanent disability, respectively, and (ii) 31 December 2015, in the case of options granted under the 2000 Stock Option Plan, and 31 December 2020, in the case of options granted under the 2010 Stock Option Plan. If a plan participant ceases to be an employee for cause, then generally the right to exercise options will terminate immediately unless waived by the stock option committee discussed above.
Key Performance Indicators (SARs Plan"KPIs"
The Company has granted appreciation rights (“SAR”) to a selected number of senior management members based on similar terms and conditions as applicable to the 2010 Stock Option Plan. In 2013 most of these SARs granted were surrendered due to the introduction of the 2013-2015 Cash Based Long Term Incentive Plan discussed below. Participants of the 2013-2015 Cash Based Long Term Incentive Plan surrendered all unvested SAR tranches to become eligible for the 2013-2015 Cash Based Long Term Incentive Plan; only vested tranches (as of 31 December 2012) could be retained. As of 31 December 2014, 522,375 SARs remained outstanding, all of which are exercisable.
2013-2015 Cash Based Long Term Incentive Plan
In 2013, a cash based Long Term Incentive Plan was adopted for senior management. Under the 2013-2015 Cash Based Long Term Incentive Plan, the target amount that can be earned during the three year performance period is determined at the time of the grant.relevant event and a potential pro-rata reduction to reflect the early vesting.
The actual amount that can be earned is subjectCompany furthermore considers from time to the attainment of key performance indicators (“KPIs”),time new long-term incentive plans, which KPIs are set at the grant date for the duration of the three year performance period.may result in additional payouts not described above. The bonus vests in three annual tranches, assuming a full time participation in the plan as of 1 January 2013 up to and including 2015.
All unvested tranches lapse if the employment is terminated before the end of the performance period. In 2014, approximately USD 8.0 million was paid or banked in relation to amounts vestedawards launched under the 2013 tranche.LTI Plan are detailed below.
As of December 31, 20142017, the total target amount (all unvested) of target bonus amountsgranted for the 2014 and 2015 tranches was approximately USD 28.8 million.
The 2013-2015 Cash Based Long Term Incentive Plan has been discontinued and replaced by the VimpelCom Ltd, Value Growth Cash Based Long Term Incentive Plan discussed below. Consequently, the total unvested amountawards launched under the 2015 trancheLTI Plan was equal to US$127 (2016: US$22). The carrying value of obligations under the 2013-2015 Cash Based Long Term IncentiveLTI Plan (approximately USD 18.2 million)as of December 31, 2017, was equal to US$58 (2016: US$3). Included within 'Selling, general and administrative expenses' for 2017 is not expectedan amount of US$55 (2016: US$3) relating to vest.share-based payment expense under the LTI Plan.
VimpelCom Ltd. Value Growth Cash Based Long Term Incentive Plan2014 tranche
In January 2015, a new cash based Long Term Incentive Planaward was adoptedlaunched for senior management replacingunder the 2013-2015 Cash Based Long Term IncentiveLTI Plan discussed above. Under the VimpelCom Ltd. Value Growth Cash Based Long Term Incentive Plan, awards are granted annually,("2014 tranche"), the vesting of which is subject to the attainment of KPIs over a three and a half year (42 months) performance period (1 January(January 1, 2014 to June 30, 2017). The maximum target amount that may be earned under the 2014 tranche is determined at the time of the grant, and the vesting of the award was subject to the Committee's determination of the attainment of set KPIs after the relevant performance period (in the third quarter of 2017). For our OpCo's, the award was initially subject to the attainment of KPIs, generally with an equal or comparable weight, subject to individual discrepancies, that were business and strategy related, such as EBITDA market share and revenue market share and the Total Shareholder Return ("TSR") evolution of the Company compared to peer companies in the markets in which we operate. For HQ employees, the amount of the award was based solely on TSR evolution compared to selected peer companies. In the course of 2016, the plan was modified in such way that for our OpCo's, the amount of the award also entirely depended on TSR.
2015 tranche
In March 2016, the 2015 tranche was granted to senior management, the vesting of which is subject to the attainment of KPIs over a three and a half year (42 months) performance period (January 1, 2015 to June 30, 2018). The KPIs are principally based on the TSR evolution compared to peer companies in the markets in which we operate. The Committee regularly reviews the peer group to ensure that its composition is still appropriate.
Notes to the consolidated financial statements (Continued)
(in millions of U.S. dollars unless otherwise stated)
25 RELATED PARTIES (Continued)
2016 tranche
In October 2017, the 2016 tranche was granted to senior management, the vesting of which is subject to the attainment of KPIs over a three and a half year (42 months) performance period (January 1, 2016 to June 30, 2019). The KPIs are principally based on the TSR evolution compared to peer companies in the markets in which we operate. The Committee regularly reviews the peer group to ensure that its composition is still appropriate.
2017 tranche
In October 2017, the 2017 tranche was granted to senior management, the vesting of which is subject to the attainment of KPIs over a three and a half year (42 months) performance period (January 1, 2016 to June 30, 2020). The KPIs for the 2017 tranche are based on an absolute share price performance target, in order to create a direct link between management focus and real return to shareholders.
Transformation Bonus Plan
In August 2017, the Company introduced a Transformation Bonus Plan, which is designed to incentivize sustainable transformation and absolute shareholder value creation. The Transformation Bonus Plan is a one-time award, offered to senior management that are key to driving VEON's performance transformation program, with a performance period running from January 1, 2016 to December 31, 2018. The target payment aims at 400% of a participant's annual gross base salary, partially in cash and partially in shares of VEON, based on the achievement of established KPIs, vesting on December 31, 2018. The KPIs are based on the performance of VEON, comprising a Free Cash Flow target and a target volume-weighted average share price of VEON. The KPIs and payout structure will aid the VEON Group to fundamentally transform its business and evolve into a technology company.
Director cash-based long-term incentive plan
In December 2014, our Supervisory Board approved a cash based Long Term Incentive Plan for our unaffiliated directors (the"Director LTI Plan"). Under the Director LTI Plan, awards are granted annually, covering a three-year performance period (January 1, 2014 to December 31, 2016 for the first awards, with an additional performance measurement over the first six months of 2017). The maximum target amount that may be earned under an award is determined at the time of the grant. The vesting of an award is subject2017 and, January 1, 2015 to continued employment (except in limited “good leaver” circumstances) and to the compensation committee’s determination of the attainment of KPIs after the relevant performance period (in the third quarter of 2017June 30, 2018 for the firstsecond awards). For participants joining after the start of a performance period, vested awards will be subject to pro-rata reduction. Awards may vest early upon the occurrence of certain corporate events relating to VimpelCom Ltd., subject to the compensation committee’s determination of the attainment of KPIs at the time of the relevant event and a potential pro-rata reduction to reflect the early vesting.
As of 31 December 2014, the total amount (all unvested) of target awards granted under the 2014 award of the VimpelCom Ltd. Value Growth Cash Based Long Term Incentive Plan was approximately USD18.7 million.
Director Cash Based Long Term Incentive Plan
In December 2014, our supervisory board approved a cash based Long Term Incentive Plan for our unaffiliated directors (“Director LTI Plan”). Under the Director LTI Plan, awards are granted annually, covering a three year performance period (1 January 2014 to 31 December 2016 for the first awards, with an additional performance measurement over the first six months of 2017). The actual amount that may be earned under an award is determined on the basis of the annual retainer of the unaffiliated director and the actual payout to headquarters participants in the corresponding tranchetranches of the VimpelCom Ltd. Value Growth Cash Based Long Term Incentive Plan.Plan (discussed above). For participants leaving before the end, or joining after the start, of a performance period, vested awards will be subject to pro-rata reduction, provided that the participant has served as an unaffiliated director for at least 12 months during the performance period. Awards may vest early upon the occurrence of certain corporate events relating to VimpelComVEON Ltd., subject to the compensation committee’scommittee's determination of the attainment of KPIs at the time of the relevant event and a potential pro-rata reduction to reflect the early vesting.
26. Commitments, contingencies and uncertainties
Notes to the consolidated financial statements (Continued)
Risks(in millions of U.S. dollars unless otherwise stated)
Currency control25 RELATED PARTIES (Continued)
Short Term Incentive Plan
The Company's Short Term Incentive Scheme (the"STI Scheme") provides cash pay-outs to participating employees based on the achievement of established KPIs over the period of one calendar year. KPIs are set every year at the beginning of the year and evaluated in the first quarter of the next year. The KPIs are partially based on the financial and operational results (such as EBITDA and total operating revenue) of the Company, or the affiliated entity employing the employee, and partially based on individual targets that are agreed upon with the participant at the start of the performance period based on his or her specific role and activities. The weight of each KPI is decided on an individual basis.
Pay-out of the STI award is scheduled in March of the year following the assessment year and is subject to continued active employment during the year of assessment (except in limited "good leaver" circumstances in which case there is a pro-rata reduction) and is also subject to a pro-rata reduction if the participant commenced employment after the start of the year of assessment.
Executive Investment Plan
Executives of the Company may also be invited to participate in the Company's Executive Investment Plan (the"Executive Investment Plan"), which provides for payment of a matching investment subject to satisfaction of KPIs determined by the Committee. Currently, there are no such plans active and the last plan expired in 2016 without matching investments being due.
Notes to the consolidated financial statements (Continued)
(in millions of U.S. dollars unless otherwise stated)
26 RISKS, COMMITMENTS, CONTINGENCIES AND UNCERTAINTIES
KEY RISKS
Change in law and compliance risks
The imposition of currency exchange controls or other similar restrictions on currency convertibility in Algeria, Ukraine and CIS countries (particularly in Uzbekistan) could limit VimpelCom’s ability to convert local currencies or repatriate local cash in a timely manner or at all, as well as remit dividends from the respective countries. Any such restrictions could have a material adverse effect on VimpelCom’s business, financial condition and results of operations. The continued success and stability of the economies of these countries will be significantly impacted by their respective governments’ continued actions with regard to supervisory, legal and economic reforms. Refer to Note 6 for further information regarding the Company’s agreement to resolve its disputes, including as it relates to currency restrictions, with the Algerian Government.
Domestic and global economy risks
The economies of countries where VimpelCom operates are vulnerable to market downturns and economic slowdowns elsewhere in the world. The respective governments of these countries continue to take measures to support the economies in order to overcome the consequences of the global financial crisis. Despite some indications of recovery, there continues to be uncertainty regarding further economic growth, access to capital and cost of capital, which could negatively affect the Company’s future financial position, results of operations and business prospects.
In addition, the Company has significant operations in Russia and Ukraine, which represents 42% and 23% of the Company’s revenues and assets excluding intercompany transactions and balances, respectively. Both countries are currently experiencing a period of significant political and macroeconomic volatility, the outcome of which cannot be predicted and could negatively affect the Company’s financial position, results of operations and business prospects.
While management believes it is taking the appropriate measures to support the sustainability of VimpelCom’s business in the current circumstances, unexpected further deterioration in the areas could negatively affect the Company’s results and financial position in a manner not currently determinable.
Legislation risks
In the ordinary course of business, VimpelComVEON may be party to various legal and tax proceedings, including as it relates to compliance with the rules of the telecom regulators in the countries in which VimpelComVEON operates, competition law and anti-bribery and corruption laws, including the U.S. Foreign Corrupt Practices Act (“FCPA”("FCPA"). Non-compliance with such rules and laws may cause VimpelComVEON to be subject to claims, certainsome of which may relate to the developing markets and evolving fiscal and regulatory environments in which VimpelComVEON operates. In the opinion of management, VimpelCom’sVEON's liability, if any, in all pending litigation, other legal proceeding or other matters, other than what is discussed in this Note, will not have a material effect upon the financial condition, results of operations or liquidity of VimpelCom.
VimpelCom’s operations and financial position will continue to be affected by political developments in the countries in which VimpelCom operates including the application of existing and future legislation, and telecom and tax regulations. These developments could have a significant impact on VimpelCom’s ability to continue operations. VimpelCom does not believe that these contingencies, as related to its operations, are any more significant than those of similar enterprises in such countries.VEON.
Tax risks
The tax legislation in the markets VimpelComin which VEON operates in areis unpredictable and givegives rise to significant uncertainties, which could complicate the Company’sour tax planning and business decisions. Tax laws in many of
the emerging markets in which the Company operateswe operate have been in force for a relatively short period of time as compared to tax laws in more developed market economies. Tax authorities in the Company’sour markets are often somewhat less advanced in their interpretation of tax laws, as well as in their enforcement and tax collection methods.
Any sudden and unforeseen amendments of tax laws or changes in the tax authorities’authorities' interpretations of the respective tax laws and/or double tax treaties, could have a material adverse effect on our future results of operations, cash flows or the amounts of dividends available for distribution to shareholders in a particular period (e.g. introduction of transfer pricing rules, and Controlled Foreign Operation (“CFC”("CFC") legislation)legislation and more strict tax residency rules).
Management believes that itVEON has paid or accrued all taxes that are applicable. Where uncertainty exists, VimpelComVEON has accrued tax liabilities based on management’smanagement's best estimate. From time to time, we may also identify tax contingencies for which we have not recorded an accrual. Such unaccrued tax contingencies could materialize and require us to pay additional amounts of tax.
Currency control risks
The imposition of currency exchange controls or other similar restrictions on currency convertibility in the countries in which VEON operates could limit VEON's ability to convert local currencies or repatriate local cash in a timely manner or at all, as well as remit dividends from the respective countries. Any such restrictions could have a material adverse effect on VEON's business, financial condition and results of operations. The continued success and stability of the economies of these countries will be significantly impacted by their respective governments' continued actions with regard to supervisory, legal and economic reforms.
Refer to Note 18 for further information regarding restricted cash.
Commitments
Notes to the consolidated financial statements (Continued)
Telecom Licenses Capital Commitments(in millions of U.S. dollars unless otherwise stated)
VimpelCom’s26 RISKS, COMMITMENTS, CONTINGENCIES AND UNCERTAINTIES (Continued)
COMMITMENTS
Capital commitments
Capital commitments for the future purchase of equipment and intangible assets are as follows as of December 31:
| | 2017 | 2016 | |||||
|---|---|---|---|---|---|---|---|
Property and equipment | |||||||
Less than 1 year | 555 | 689 | |||||
Between 1 and 5 years | 262 | 448 | |||||
Intangible assets | |||||||
Less than 1 year | 40 | 32 | |||||
Between 1 and 5 years | 4 | 18 | |||||
| | | | | | | | |
Total commitments | 861 | 1,187 | |||||
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Telecom license capital commitments
VEON's ability to generate revenue in the countries it operates is dependent upon the operation of the wireless telecommunications networks authorized under its various licenses under GSM-900/1800 and “3G”"3G" (UMTS / WCDMA) mobile radiotelephony communications services and “4G”"4G" (LTE).
Under the license agreements, operating companies are subject to certain commitments, such as territory or population coverage, level of capital expenditures, and number of base stations to be fulfilled within a certain timeframe. If we are found to be involved in practices that do not comply with applicable laws or regulations, we may be exposed to significant fines, the risk of prosecution or the suspension or loss of our licenses, frequency allocations, authorizations or various permissions, any of which could harm our business, financial condition, results of operations, or cash flows.
After expiration of the license, our operating companies might be subject to additional payments for renewals, as well as new license capital and other commitments.
In July 2012, OJSCPJSC VimpelCom was awarded a mobile license, a data transmission license, a voice transmission license and a telematic license for the provision of LTE services in Russia. The roll-out of the LTE network will occur through a phased approach based on a pre-defined schedule pursuant to the requirements of the license. The LTE services were launched in the middle of 2013 and offered in six regions in Russia by the end of the year. The services willmust be extended to a specific number of additional regions each year through to December 1, December 2019 by when services must cover all of Russia. OJSCPJSC VimpelCom is required to comply with the following conditions among others under the terms of the license: (i) invest at least RUB 15 billion (USD 264)(US$260) in each calendar year, for which the Company compliedcontinues to comply with to date in the construction of its federal LTE network until the network is completed, which must occur before December 1, December 2019; (ii) provide certain data transmission services in all secondary and higher educational institutions in specified areas;areas with population over 50 thousand; and (iii) provide interconnection capability to telecommunications operators that provide mobile services using virtual networks in any five regions in Russia not later than July 25, July 2016. The latter requirement was fulfilled by PJSC VimpelCom within the required time.
Apple
On 4 October 2013, OJSC VimpelCom and Apple RUS (“Apple”) signed an agreement regarding VimpelCom’s purchase of iPhones from Apple (the “Agreement”). Under the Agreement, a specified number of iPhones handsets are to be ordered by OJSC VimpelCom each quarter between 4 October 2013 and 30 June 2016 according to a schedule (the “Schedule”). Pursuant
Notes to the Agreement, OJSC VimpelCom must acquire a minimumconsolidated financial statements (Continued)
(in millions of 600,000 iPhone handsets during the period of the Agreement. If OJSC VimpelCom does not comply with the Schedule and certain other terms of the Agreement, then according to the Agreement, OJSC VimpelCom could become liable for the shortfall in orders of iPhone handsets. The Company plans to fulfill its purchase obligations of the total number of equipment by the date mentioned in the agreement.
26 RISKS, COMMITMENTS, CONTINGENCIES AND UNCERTAINTIES (Continued)
Operating lease commitments
Operating lease commitments are as follows:follows as of December 31:
| | 2017 | 2016 | |||||
|---|---|---|---|---|---|---|---|
Less than 1 year | 70 | 121 | |||||
Between 1 and 5 years | 229 | 368 | |||||
More than 5 years | 167 | 148 | |||||
| | | | | | | | |
Total commitments | 466 | 637 | |||||
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| 2014 | 2013 | 2012 | ||||||||||
Less than 1 year | 209 | 297 | 244 | |||||||||
Between 1 and 5 years | 365 | 478 | 303 | |||||||||
More than 5 years | 200 | 315 | 275 | |||||||||
|
|
|
|
|
| |||||||
Total | 774 | 1,090 | 822 | |||||||||
|
|
|
|
|
| |||||||
Operating lease commitments mainly relate to the lease of base station sites and office spaces. Operating leases can be renewed but may be subject to renegotiations with lessors.
Contingencies and uncertaintiesCONTINGENT LIABILITIES
VimpelCom Ltd.VEON—Securities Class Action
Investigation of the operations On November 4, 2015, a class action lawsuit was filed in Uzbekistan
The United States Securities and Exchange Commission (“SEC”), the United States Departmentagainst VEON and certain of Justice (“DOJ”)its current and the Dutch Public Prosecution Service (“OM”) are conducting investigations related toformer officers by Charles Kux-Kardos, on behalf of himself and other investors in the Company which have been focused primarily onalleging certain violations of the Company’s prior dealings with Takilant Ltd. (“Takilant”).
In June 2007, Takilant purchased from the Company a 7% interestUnited States federal securities laws in the Company’s business in Uzbekistan for USD 20 and entered into a shareholders agreementconnection with the Company. In September 2009, Takilant exercised its option to put its 7% interest to the Company for USD 57.5, an amount specified in the shareholders agreement. In addition, the Company had agreements with TakilantCompany's public disclosures relating to the acquisition of frequency spectrum (including with respect to 3G and LTE) and channels in Uzbekistan pursuant to which the Company paid Takilant an aggregate of USD 57.
It has also been reported in the press that Takilant is currently being investigated in Sweden and Switzerland on allegations that it and certain persons associated with it have committed acts of bribery and money-laundering connected with their activities in Uzbekistan, and also that Takilant is being investigated in The Netherlands and perhaps other jurisdictions. These investigations may, in part, involve the Company.
As a result of concerns arising from press reports regarding Takilant, the Company commenced a review with respect to its operations in Uzbekistan, including its relations with Takilant, and in 2013Uzbekistan. On December 4, 2015, a second complaint was filed by Westway Alliance Corp. that asserts essentially the Company retained external counsel with expertise relating to the U.S. Foreign Corrupt Practices Act (“FCPA”) and other anti-corruption laws and regulations to conduct such investigation.
Following notice of the investigations by the SEC, DOJ and OM, the Company established a Special Committee of the Supervisory Board in March 2014 to oversee the internal investigation being conducted by the Company’s external counsel and the Company’s response to the inquiries by various authorities. The Special Committee consists of directors who qualify as independent for purposes of Rule 10A-3 under the Exchange Act. The investigation being conducted by the Company’s external counsel has been focused primarily on the Company’s Uzbekistan operations, including relations with Takilant, and whether there was any conduct in the Company’s operations in Uzbekistan that may have violated the anti-bribery provisions of the FCPA, the FCPA’s books and records and internal controls provisions, applicable local laws and/or the Company���s own internal policies, the investigation is also reviewing the Company’s operations in additional countries.
In 2014, the Company reported revenues and total assets from its Uzbekistan operations of USD 718 and USD 1,116, respectively, which equals 4% and 3% of the Company’s revenues and total assets, respectively.
The Company expects to continue incurring costs related to the investigations, primarily professional fees and expenses, which may be significant. These costs relate to responding to requests for information and testimonysame claims in connection with essentially the investigationssame disclosures.
On April 27, 2016, the court consolidated the two actions and appointed Westway as lead plaintiff. On May 6, 2016, a motion for reconsideration was filed on the appointment of Westway as lead plaintiff and on September 26, 2016, the court affirmed the selection of Westway as the lead plaintiff. An amended complaint was filed on December 9, 2016. Briefing on VEON's motion to dismiss the amended complaint was completed by May 2017.
On September 19, 2017, the Court in conducting the Company’s internal investigation,Southern District of New York rendered a decision granting in part VEON's motion to dismiss the Amended Complaint.
On February 9, 2018, VEON filed its Answer and Affirmative Defenses to the allegations that remain in the Amended Complaint after the Court's September 19, 2017 Order. Motions to dismiss have been or will be filed by all the Individual Defendants by March 12, 2018. Plaintiff Westway has until April 13, 2018 to file any response(s) to the motions to dismiss. Reply briefing by the Individual Defendants are due to be filed by May 14, 2018. No date has been set for any hearing on the pending motions. The Company and the Company cannot predictIndividual Defendants intend to vigorously defend the action at this time the ultimate amountall phases moving forward.
Table of all such costs, which costs will be expensed as incurred.
The SEC, DOJ and Dutch investigations, as well as the Company’s own investigations, are continuing, and the Company has cooperated, and continues to cooperate, with the authorities in these investigations. The Company is also exploring the prospect of resolving the Company’s potential liabilities arising from the facts established in the investigations. The Company is unable to predict the duration, scope or results of the ongoing investigations or how the results of these investigations or any resolutions may impact the Company’s business, results of operations, financial condition or the assessment of the Company’s internal controls. Further, there can be no assurance that such investigations will not be broader in scope than they currently appear, or that new investigations will not be commenced in these or other jurisdictions, or that there will not be litigation commenced against the Company.
One or more enforcement actions could be instituted in respect of the matters that are the subject of some or all of the investigations. The DOJ and SEC have a broad range of civil and criminal sanctions under the FCPA and other laws and regulations, including, but not limited to, fines, penalties, and disgorgement of profits. The OM and enforcement authorities in other jurisdictions also have a range of sanctions under the relevant laws and regulations. The imposition of any of these sanctions or remedial measures could have a material adverse effect on the Company’s results of operations or financial condition. At this time, no provision for any such fines, penalties, or disgorgements has been recorded, as there is no legal or constructive present obligation. Additionally, management cannot make a reliable estimate of any future potential losses arising from this matter.Contents
Global Telecom Holding
Notes to the consolidated financial statements (Continued)
Iraqna(in millions of U.S. dollars unless otherwise stated)
26 RISKS, COMMITMENTS, CONTINGENCIES AND UNCERTAINTIES (Continued)
GTH—License Fees Tax Litigation
On 19 November 2012, Atheer Telecom Iraq Limited (“Atheer”, an affiliate of the Zain Group) initiated English High Court proceedings against Orascom Telecom Iraq Ltd. (“OTIL”) and Global Telecom Holding S.A.E. (“GTH”) in relation to a dispute arising out of the sale by OTIL of its Iraqi mobile subsidiary, Iraqna, in 2007 to Atheer. Atheer’s claim is founded on the tax covenants in the underlying share purchase agreement (“SPA”) between the parties. In particular, Atheer is seeking declarations from the Court that OTIL and GTH are liable to indemnify it in respect of three alleged tax liabilities: (i) a capital gains tax liability in the sum of IQD 219 billion (approximately USD 192 as of 31 December 2014) in respect of the transaction that formed the subject-matter of the 2007 SPA; (ii) an income tax liability in the sum of approximately IQD 96 billion (approximately USD 84 as of 31 December 2014) in respect of the years 2004-2007; and (iii) a withholding tax liability in the sum of approximately IQD 7 billion (approximately USD 6 as of 31 December 2014).
The dispute is currently pending before the English High Court in London and is listed for hearing in July 2015. OTIL and GTH are vigorously defending the claims.
Egyptian Tax Litigation—Licence Fees DisputeAuthority (
In March 2010, the Egyptian Large Taxpayer Office (“LTO”"ETA") conducted a review of GTH’sGTH's tax filings for the tax years 2000-2004. Following itsthe review, in May 2010, the LTOInternal Committee of the ETA assessed additional tax liabilities in the amount of approximately EGPEgyptian pound ("EGP") 2 billion (approximately USD 280 as of 31 December 2014)(US$113) against GTH for these tax years. The basis for the assessment was that, according to the LTO, GTH’sETA, GTH's investments in Algeria, Syria, Iraq, Tunisia and Sub-Saharan Africa during these tax years were actually license fees paid to foreign governments for which Egyptian withholding tax was due according to Egyptian tax laws.
GTH challenged the LTO’sInternal Committee's ETA's assessment for lack of legal basis in a proceeding before an appellate committeethe Appellate Committee of the Egyptian Ministry of Finance.ETA. On 15 May 14, 2012, the appellate committeeAppellate Committee cancelled the LTO’sInternal Committee's assessment of EGP 2 billion (US$113) in part and reduced the assessed amount to EGP 397323 million (approximately USD 57 as at 31 December 2014) excluding late payment interest of EGP 429 million (approximately USD 60 as of 31 December 2014)(US$18).
GTH appealed the appellate committee’s decision before the North Cairo Primary Court. Under Egyptian tax law, full payment of the amount assessed by the appellate committee is required before the appellate committee’s decision can be appealed. Accordingly, GTH paidagreed to pay the assessed amount of EGP 397323 million (US$18) in installments whilst continuinginstalments on a without prejudice basis, which it has satisfied, and also appealed the Appellate Committee's decision to challenge the appellate committee’s assessment.North Cairo Court of First Instance. The LTOETA also challenged the appellate committee’sAppellate Committee's decision and is seeking to reinstitute its original assessment of EGP 2 billion. Proceedingsbillion (US$113) plus late payment interest. The proceedings remain ongoing before the Court.court.
Separately, on January 18, 2016, GTH, through its tax advisors, received a demand from the ETA claiming an amount of EGP 429 million (US$24) in late payment interest on the Appellate Committee's assessment of EGP 323 million (US$18). The demand threatened administrative seizure of GTH's assets in the event of non-payment. On February 17, 2016, GTH filed an appeal in the Administrative Court to challenge the demand and intends to vigorously defend itself. On February 24, 2016, GTH received an updated demand from the ETA, which GTH objected to on March 24, 2016. On May 3, 2016, the ETA resent the same demand, which GTH again objected to on May 7, 2016.
On December 28, 2017, GTH was notified that administrative seizure orders had been issued against various banks used by GTH in Egypt. On January 14, 2018, GTH registered a contestation of the enforcement which suspended the operability of the seizure orders until the matter can be heard by the court.
GTH—Iraqi Profits and Dividends Tax Assessment—2008 and 2009 Tax ReturnsLitigation
2005 Tax Year
In 2013,March 2011, the LTOETA conducted a reviewan audit of GTH’sGTH's tax filings for the years 2008 and 2009.year 2005. Following its review, on 24 February 2014, the LTO assessedETA concluded that income derived by OTIL from Iraqna("OTIL-Iraqna Income") for that year should be included in GTH's tax return and taxed at 20%, and accordingly claimed additional corporate income tax and withholding tax liabilities in the amount of EGP 1,470235 million (approximately USD 206 as of 31 December 2014) against(US$13). GTH for these tax years.
The assessment is based onchallenged the LTO’s calculation of GTH’s taxable income for the period in question, which the LTO increased by a total of EGP 3,699 million (approximately USD 517 as of 31 December 2014) subject to 20% tax of EGP 740 million (approximately USD 103 as of 31 December 2014) in addition to withholding tax on license and consultancy fees in the amount of EGP3,660 million (approximately USD 512 as at 31 December 2014) subject to approximately 20% tax of EGP 729 million (approximately USD 102 as of 31 December 2014).
The LTO has alleged that GTH wrongfully claimed tax deductions and tax exemptions in connection with corporate income taxes and withholding taxes.
GTH filed an objection to the assessment on 24 February 2014, the same day it was received. The dispute is currentlyETA's claim before the Internal Committee of the ETA arguing that the OTIL-Iraqna Income should be fully exempt from Egyptian corporate income tax authorities.
Omnium Telecom Algeria
Settlement of Disputes with Algerian Government
On 30 January 2015, the Company together with its subsidiary, GTH, completed the sale by GTH of a non-controlling 51% interest in Omnium Telecom Algeria S.p.A. (formerly known as Orascom Telecom Algérie) (“OTA”)pursuant to the Fonds National d’Investissement,Iraq-Egypt double taxation treaty.
On October 2, 2011, the Algerian National Investment Fund, for a purchase consideration of USD 2,643 (the “Transaction”). As part of the Transaction, the Company and GTH settled the disputes described below with the Algerian Government, and received a pre-closing dividend of USD 1,803 paid by OTA.
The foreign exchange and import restrictions put in place by the Bank of Algeria against OTA on 15 April 2010 were lifted on the closing of the Transaction, following the payment (with no admission of wrongdoing or liability) by OTA to the Algerian Treasury of the fine of DZD 99 billion (approximately USD 1,125). At closing of the Transaction, OTA definitively discontinued (with no admission of wrongdoing or liability) all pending related proceedings.
At closing of the Transaction, OTA also definitively discontinued (with no admission of wrongdoing or liability) all pending proceedings relating to the disputes with the Algerian tax administration relating to tax reassessments for the years 2004 to 2009. OTA has written off the related tax receivable on its balance sheet.
At closing of the Transaction, GTH terminated its international arbitration against the Algerian State initiated on 12 April 2012 and the parties to the arbitration settled the arbitration and all claims relating thereto.
Settlement of Dispute with Cevital
Pursuant to an amended Framework Agreement between GTH and Cevital S.p.A. (“Cevital”), a minority shareholder in OTA, at closing of the Transaction, Cevital dismissed all pending litigation against OTA in settlement for a dinar payment by OTA equal to approximately USD 50 plus Cevital’s entitled share of the approximately USD 1,862 pre-closing dividend paid by OTA to its shareholders.
SIM Card Users
In 2010, the Algerian Government issued a new finance law where in case of failure to identify a SIM card user, a penalty amounting to DZD 100,000 (approximately USD 0.0011 as of 31 December 2014) for each unidentified SIM is paid for the first year and increased to DZD 150,000 (approximately USD 0.0017 as of 31 December 2014) for the second year. Although the exposure cannot currently be estimated, it is not expected to have a material impact on the financial statements.
KaR—Tel
Turkish Litigation—Former Shareholders
In 2005, the Savings Deposit Insurance Fund (the “Fund”), a Turkish state agency responsible for collecting state claims arising from bank insolvencies, issued a Payment Order against KaR-Tel for TRY 7.55 billion (approximately USD 3,230 as of 31 December 2014). The Payment Order was based on the Fund’s claim against the Turkish Uzan Group, which the Fund alleged was a debtor of T. Imar Bankasi, an insolvent Turkish bank. Two entities in the Uzan Group (the “Former Shareholders”) held a 60% equity interest in KaR-Tel until November 2003 when KaR-Tel redeemed the Former Shareholders’ equity interest pursuant to a decision of the Almaty City Court of 6 June 2003, which was confirmed by the Kazakhstan Supreme Court on 23 July 2003 (the “Kazakh Judgment”).
On 20 October 2009, KaR-Tel filed with the Sisli 3d Court of the First Instance in Istanbul an application for the recognition of the Kazakh Judgment in Turkey. Following a number of hearings and appeals, on 30 January 2013, the Supreme Court upheld earlier court decisions and confirmed the recognition of the Kazakh Judgment in Turkey.
On 20 October 2009, KaR-Tel also filed with the 4th Administrative Court of Istanbul a petition asking the court to treat the recognition of the Kazakh Judgment as a court precedent and to suspend the enforcement proceedings in relation to the Order to Pay. On 25 October 2010, the 4th Administrative CourtInternal Committee ruled that the OrderOTIL-Iraqna Income should be taxed at 20% in the amount of EGP 235 million (US$13) but that credit should be given for taxes paid by OTIL in Iraq. GTH's appeal to Paythe Appellate Committee of the ETA was illegal and annulled it. The Court’sdismissed on August 1, 2015.
On November 11, 2015, GTH appealed the Appellate Committee's decision was appealedto the Administrative Court where proceedings are ongoing.
Notes to the consolidated financial statements (Continued)
(in millions of U.S. dollars unless otherwise stated)
26 RISKS, COMMITMENTS, CONTINGENCIES AND UNCERTAINTIES (Continued)
Separately, on January 18, 2016, GTH, through its tax advisors, received a demand from the ETA claiming an amount of EGP 235 million (US$13) assessed by the Fund.Appellate Committee together with late payment interest of EGP 258 million (US$15). The demand threatened administrative seizure of GTH's assets in the event of non-payment. On February 17, 2016, GTH filed an appeal in the Administrative Court to challenge the demand and intends to vigorously defend itself. On February 24, 2016, GTH received an updated demand from the ETA claiming EGP 505 million (EGP 235 million principal plus EGP 270 million interest), which GTH objected to on March 24, 2016. On May 3, 2016, the ETA sent a new demand, which GTH objected to on May 7, 2016.
On 22 March 2012, the Fund’s appealDecember 28, 2017, GTH was notified that administrative seizure orders had been issued against various banks used by GTH in Egypt. On January 14, 2018, GTH registered a contestation of the decisionenforcement which suspended the operability of the 4th Administrative Court was reviewedseizure orders until the matter can be heard by the Prosecution Officecourt.
2007 Tax Year
In addition, during the audit conducted by the ETA in 2011 in respect GTH's tax filings for the year 2007, the ETA concluded that GTH owed additional corporate income tax of the Council of State and sent to the 13th Chamber of the Council of State for review on the merits. The Council State Chamber’s decision remains pending.
KaR-Tel maintains that the Fund’s claim is without merit.
Competition Investigation—International Incoming Traffic
On 4 September 2014, Kazakhtelecom filed a complaint with the Kazakhstan Competition Authority (“KCA”) against KaR-Tel and Kcell JSC for allegedly unauthorised restricting international incoming traffic from Kazakhtelecom. The KCA requested information from KaR-Tel which KaR-Tel duly provided. The KCA
subsequently initiated a full investigation against KaR-Tel by Order N 92-OD dated 24 November 2014 and is collecting various data. KaR-Tel has filed formal objections against the Order in court. The company is also in the process of collecting internal data to help defend its position.
Wind Telecomunicazioni
Fastweb Litigation
On 2 January 2014, Fastweb served a claim on Wind based on competition proceedings no. A/357 which in August 2007 condemned Wind and Telecom Italia for abuse of their dominant positions in the wholesale termination market in favour of their respective internal commercial divisions and to the detriment of the competitors in the fixed market. Fastweb has claimed damages of approximately €138EGP 282 million (approximately USD 167 as of 31 December 2014) from Wind for losses suffered as a result of Wind’s breach of competition law.
Wind is challenging the claim on substantive and procedural grounds. The first hearing before the court of first instance was scheduled for March 2015 but has been postponed to an as yet unknown date.
Conclusion of Italian Competition Authority Investigation
In September 2012, the Italian Competition Authority (the “ICA”) commenced an investigation(US$16) in respect of Telecom Italia, Vodafone and Wind and carried out dawn raids on their premises. The investigation was pursuantdividends distributed by Iraqna to aOTIL in 2007. After GTH disputed the claim by Italian mobile operator, Bip Mobile. Bip Mobile alleged that Telecom Italia, Vodafone and Wind had entered into a horizontal agreement which was aimed at preventing the entry of Bip Mobile into the Italian mobile market through collusive pressure on the multi-brand point of sales since June 2012. In December 2013, the ICA extended its investigation to possible vertical agreements between Telecom Italia and Wind and their respective multi-brand dealers aimed at excluding competitors, in response to which Telecom Italia and Wind proposed certain undertakings.
On 29 December 2014, the ICA closed the investigation making mandatory the undertakings proposed by Wind and Telecom Italia in respect of the alleged vertical agreements, and without ascertaining any infringement by, or imposing any sanction on, Wind.
Conclusion of Withholding Tax Audits
In December 2013, the Agenzia delle Entrate (“ADE”) (the Italian tax authority) issued a tax assessment against Wind relating to non-application of withholding taxes in connection with its 2005 senior credit facilities (the “SCF Audit”). In the same month, the Guardia di Finanza (the Italian tax police), issued a report challenging the non-application of withholding taxes in connection with a 2006 PIK loan (the “PIK Audit”).
On 19 May 2014, WAHF settled the PIK Audit by agreeing to pay the sum of €84 million (approximately USD 115) to the ADE (€7 million to be paid on 20 May 2014 and the balance payable in quarterly instalments over three years).
On 22 May 2014, Wind settled the SCF Audit by agreeing to pay the sum of €62 million (approximately USD 85) to the AdE (€5 million to be paid on 22 May 2014 and the balance payable in quarterly instalments over three years).
Pursuant to the indemnities contained in the share sale and exchange agreement between the Company and Orascom TMT Investments S.a.r.l. (formerly, Weather Investments II S.a.r.l) (“OTMTI”) dated 15 April 2011, the Company will be pursuing reimbursement of a significant portion of both settlements from OTMTI.
General
Contingent tax liabilities
Multinational groups of the size of VimpelCom are exposed to varying degrees of uncertainty related to tax planning changes in tax law and periodic tax audits. VimpelCom accounts for its income taxes on the basis of its own internal analyses, supportedthe Iraq-Egypt double taxation treaty, the ETA referred the dispute to the Internal Committee, who upheld the ETA's position. GTH appealed the Internal Committee's decision to the Appeal Committee, where proceedings are ongoing.
GTH—tax assessments on a deemed basis
The Company has received assessments on deemed basis in respect of tax years 2012/2013 and 2014/2015. The Company has objected to these assessments, however the actual tax inspection for tax years 2012/2013 is ongoing and has not yet been concluded. An actual tax inspection for 2014/2015 is expected to start after the inspection for 2012/2013 is finalized.
Canadian action brought by external advice. VimpelCom continually monitors its global tax position,the Catalyst Capital group Inc.
VEON is a defendant in an action brought in 2016 by The Catalyst Capital Group Inc. ("Catalyst") for CAD 1.3 billion (US$1,034) alleging breach of contract in the Superior Court of Justice in Ontario, Canada. In 2014, Catalyst and whenever uncertainties arise, VimpelCom assesses the potential consequencescompany entered into an exclusivity agreement in connection with negotiations for the sale of the company's WIND Mobile business. Catalyst alleges that the company and either accrues the liability or discloses a contingent liability in its financial statements, dependingadvisor, UBS Securities Canada Inc., breached their exclusivity agreement obligations, which in turn enabled the sale of WIND Mobile to a consortium of other investors, who are also named co-defendants. The company filed a Statement of Defense denying all allegations and intends to vigorously contest the matter. VEON's motion to dismiss the claim (as well as motions of all other defendants) was heard August 16-18, 2017.
A decision from the Court on the strengthmotion to dismiss is not expected before Q2 2018.
Notes to the Company’s position and the resulting riskconsolidated financial statements (Continued)
(in millions of loss.U.S. dollars unless otherwise stated)
26 RISKS, COMMITMENTS, CONTINGENCIES AND UNCERTAINTIES (Continued)
Other contingencies and uncertainties
In addition to the individual matters discussedmentioned above, the Company is also involved in legal proceedings relating toother disputes, litigation and regulatory inquiries and investigations, both pending and threatened, in the normal conductordinary course of its business, such as claims for regulatory and employment issues as well as general liability.business. The Company believes it has provided fortotal value of all probable liabilities deriving from the normal course of business.other individual contingencies above US$5 other than disclosed above amounts to US$107 (2016: US$29). The Company does not expect any liability arising from any other of these legal proceedingscontingencies to have a material effect on the results of operations, liquidity, capital resources or financial position of the Company. Furthermore, the Company believes it has provided for all probable liabilities arising in the ordinary course of its business.
For the ongoing matters described above, where the Company has concluded that the potential loss arising from a negative outcome in the matter cannot be estimated, the Company has not recorded an accrual for the potential loss. However, in the event a loss is incurred, it may have an adverse effect on the results of operations, liquidity, capital resources, or financial position of the Company.
CollateralTable of Contents
Telecom Ventures, a Subsidiary
Notes to the consolidated financial statements (Continued)
(in millions of U.S. dollars unless otherwise stated)
27 EVENTS AFTER THE REPORTING PERIOD
Acquisition of spectrum in Ukraine
On January 31, 2018, the Company has short term deposits as per 31 December 2014 for USD nil (2013: 186) with Standard Chartered Bank as security for the bridge facility provided by the same bank to Bangladesh Digital Communications Ltd. VimpelCom Amsterdam B.V. has pledged cash and cash equivalents as per 31 December 2014 for USD 47 (2013: 47) with Citibank and Crédit Agricole as security for the Hermes loans of OTA. B.V. VimpelCom Finance S. à r.l. has a pledged short term deposits as per 31 December 2014 for USD 20 (2013: 20) with ANZ Bank as security for the loan provided by the same bank to VimpelCom Lao Ltd.
27. Events after the reporting period
Sale of 51% shareholding in Orascom Telecom Algerie (OTA) and settlement of disputes with the Algerian State
On 30 January 2015, the Company together with its subsidiary, GTH, completed the sale by GTH of a non-controlling 51% interest in OTA to the Fonds National d’Investissement, the Algerian National Investment Fund, for a purchase consideration of USD 2,643 (the “Transaction”). As part of the Transaction, the Company and GTH settled the disputes with the Algerian Government, and received a pre-closing dividend of USD 1,803 paid by OTA. See Notes 6 and 26 for details of the transaction.
Sale of majority stake in Wind tower subsidiary to Abertis Telecom
On 27 February 2015, the Company’s fully owned subsidiary WIND Telecomunicazioni S.p.A. (“WIND”) entered into a definitive agreement for the sale of 90% of the shares of WIND’s fully owned subsidiary Galata S.p.A. (“Galata”) to Abertis Telecom Terrestre SAU (“Abertis Telecom”) for a total cash consideration of EUR 693 million (approximately USD 737 as of 12 March 2015). Galata is a tower business consisting of 7,377 towers together with the relevant functions, employees and related contracts.
Upon the transaction closing, which is expected to occur in the near future, Abertis Telecom will own 90% of the share capital of Galata while WIND will retain a 10% stake. WIND has a Tower Services Agreement for an initial term of 15 years with Galata for the provision of a broad range of services on the contributed sites and sites subsequently built by Galata hosting WIND equipment.
VimpelCom Amsterdam B.V. cash tender offer for OJSC VimpelCom and VimpelCom Holdings B.V. U.S. dollar notes
On 2 March 2015, VimpelCom Amsterdam B.V. announced that it commenced a cash tender offer for up to USD 2,100 aggregate principal amount of the outstanding U.S. dollar notes issued by VimpelCom Holdings B.V. and loan participation notes issued by VIP Finance Ireland and UBS (Luxembourg) S.A. for the sole purpose of funding loans to OJSC Vimpelcom. The total outstanding amount of these bonds is USD 6,700. The tender offer expires on March 30, 2015 and settlement is expected to take place on April 2, 2015.
The Early Tender period expired on 13 March 2015, and at that date, bonds were validly tendered and will be accepted for the following amounts:
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OJSC VimpelCom
On 2 March 2015, Sberbank informed OJSC VimpelCom of an increase in fixed interest rates (from between 9.00% and 10.75% to between 14.50% and 16.25% with effect from 1 June 2015) in accordance with the terms of the credit facility agreements between OJSC VimpelCom and Sberbank. The increase in interest rates would apply to three loans from Sberbank with a total principal amount outstanding of RUB 89,060 million (approximately USD 1,454 million as of 2 March 2015). The actual amount of any increase in interest rates is subject to discussion between the parties.
On 5 March 2015, OJSC VimpelCom announced a new coupon rate (annual interest of 10.00%) on its RUB bonds for RUB 25,000 million (approximately USD 404 as of 5 March 2015) maturing on 8 March 2022 (subject to an investor put option at 17 March 2015, which option was exercised for 99% of the outstanding principal amount) and for RUB 10,000 million (approximately USD 162 as of 5 March 2015) maturing on 14 March 2022 (subject to an investor put option at 23 March 2015, of which the preliminary results are that all investors have exercised this option, subject to final confirmation on 26 March 2015). The new coupon rate of 10.00% is applicable to next four coupon periods (next two years).
WIND refinancing
On 12 March 2015, WIND Telecomunicazioni S.p.A. and Wind Acquisition Finance S.A. announced the refinancing transaction of the existing Senior Facility Agreement (“SFA”) with an outstanding principal amount of EUR 1,782 million (approximately USD 1,895 as of 12 March 2015) and the existing Revolving Credit Facility of EUR 600 million (approximately USD 638 as of 12 March 2015), under which EUR 200 million (approximately USD 213 million as of 12 March 2015) was drawn as of that date. The settlement will take place on 30 March 2015. The existing SFA will be partially prepaid by applying EUR 500 million (approximately USD 532 million as of 12 March 2015) of the proceeds from the sale of a 90% stake in its tower subsidiary Galata to Abertis Telecom for EUR 693 million (approximately USD 737 as of 12 March 2015). Furthermore, EUR 775 million (approximately USD 824 as of 12 March 2015) Senior Secured Notes will be issued by Wind Acquisition Finance S.A. and EUR 700 million (approximately USD 744 as of 12 March 2015) will be borrowed under a term loan as part of the new amended and restated SFA.
The new Senior Secured Notes to be issued by Wind Acquisition Finance S.A. are EUR 375 million (approximately USD 399 as of 12 March 2015) 4.00% Euro denominated Senior Secured Notes due 2020, issued at a price of 101.25% and EUR 400 million (approximately USD 425 as of 12 March 2015) 3 month Euribor + 4.125% Euro denominated Senior Secured Notes due 2020 (together, the “2020 Notes”). The 2020 Notes are guaranteed by Wind Telecomunicazioni S.p.A. The maturity date of the 2020 Notes is July 15, 2020.
The term loan under the amended and restated SFA bears interest at a rate of EURIBOR + 4.25% and the maturity date is November 26, 2019. In addition, a new Revolving Credit Facility (“RCF”) is agreed with a group of banks under the amended and restated SFA for a total amount of €400 million (approximately US$425 million as of March 12, 2015). Any future drawdowns under this RCF will bear interest at a rate of EURIBOR + 4.25% and the maturity date is November 26, 2019. The amended and restated SFA will no longer have maintenance-based financial covenants. In the event that more than 35% of the RCF commitments are drawn, the Total Net Debt/EBITDA ratio at the quarterly testing period must be below 7.25x based on the consolidated numbers for WIND Telecomunicazioni S.p.A.
Kyivstar awarded Ukraine 3G license
On 25 February 2015, Kyivstar, an indirect subsidiary of the Company, its wholly owned and market leadingwholly-owned subsidiary in Ukraine, has been awardedKyivstar, secured one of three licenses to provide nationwide 3G4G/LTE services, subject to final regulatory approvals. Kyivstar will pay UAH 0.9 billion (US$32) for 2x15 MHz of contiguous frequency in the 2600 MHz band.
In addition, on March 6, 2018, the Company announced that Kyivstar acquired the following spectrum in the 1800MHz band suitable for 4G/LTE:
Acquisition of additional spectrum and 4G/LTE License in Bangladesh
On February 13, 2018, the Company announced that its wholly-owned subsidiary in Bangladesh, Banglalink, has been awarded technology neutral spectrum in the 1800 and 2100 Mhz bandMHz bands.
Banglalink will pay a total of US$308.6 for a pricethe spectrum excluding VAT. An upfront payment of UAH 2.7 billion (approximately USD 96 as of 25 February 2015).60% for the spectrum will be payable in approximately 30 days with the remaining 40% payable over four years. In addition, Banglalink will pay US$35 to convert its existing spectrum holding in 900MHz and 1800MHz into technology neutral spectrum and US$1.2 to acquire the 4G/LTE license. The investment will be funded through locally available cash and by the BDT-denominated facility signed by Banglalink in December 2017, refer to Note 4 for further details.
DevaluationFinal 2017 Dividend of local currenciesUS 17 cents per share approved by Supervisory Board
Since 1 January 2015, several currencies exhibited abnormal devaluation against On February 22, 2018, the U.S. dollar. In particular, between 1 January 2015 and 20Company announced that the VEON Supervisory Board approved a final dividend of US 17 cents per share, bringing total 2017 dividend to US 28 cents per share. The record date for the Company's shareholders entitled to receive the final dividend payment was set for March 2015, the Russian ruble, the Euro, the Ukrainian hryvnia5, 2018 and the Algerian dinar depreciated againstfinal dividend was paid on March 13, 2018. The Company made appropriate tax withholdings of up to 15% when the U.S. dollardividend was paid to the Company's share depositary, The Bank of New York Mellon. For ordinary shareholders at Euronext Amsterdam, the final dividend of US 17 cents was paid in euro.
Federal Antimonopoly Service in Russia
All commercial policies, including roaming prices, are subject to antitrust monitoring and control on an ongoing basis. On July 14, 2017, the Federal Antimonopoly Service in Russia ("FAS") issued an injunction requiring all telecom operators to abolish "intra-network roaming" surcharges. The surcharges are applied by 6%, 11%, 32%operators to subscribers making and 9%, respectively. See Note 5 for more details on foreign currency sensitivities.receiving calls when travelling outside of their home regions. On March 12, 2018, the FAS opened an investigation into the intra-network roaming tariffs applied by PJSC VimpelCom. PJSC VimpelCom is currently engaged in discussions with the FAS regarding compliance with its injunction.
Amsterdam, 24 March 2015
VimpelCom15, 2018
VEON Ltd.
F-90