Table of Contents

 

 

 

FORM 6-K

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Report of Foreign Issuer
August 30, 2016

 

Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934

 

Commission file number:  333-12032

 

Mobile TeleSystems PJSC

(Exact name of Registrant as specified in its charter)

Russian Federation

(Jurisdiction of incorporation or organization)

 

4, Marksistskaya Street
Moscow 109147
Russian Federation

(Address of principal executive offices)

 

Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F.

 

Form 20-F    x    Form 40-F    o

 

Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.

 

Yes    o    No    x

 

 

 


Table of Contents

 

PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES

 

Interim Condensed Consolidated Financial Statements

 

As of June 30, 2016 and December 31, 2015 and for the Six Months Ended June 30, 2016 and 2015 (unaudited)

 


Table of Contents

 

PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES

 

TABLE OF CONTENTS

 

 

 

Page

 

 

 

UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS OF JUNE 30, 2016 AND DECEMBER 31, 2015 AND FOR THE SIX MONTHS ENDED JUNE 30, 2016 AND 2015:

 

 

 

 

Unaudited interim condensed consolidated statement of financial position

1-2

 

Unaudited interim condensed consolidated statement of profit or loss

3

 

Unaudited interim condensed consolidated statement of comprehensive income

4

 

Unaudited interim condensed consolidated statement of changes in shareholders’ equity

5

 

Unaudited interim condensed consolidated statement of cash flows

6-7

 

 

 

Notes to the unaudited interim condensed consolidated financial statements:

8-25

 

 

 

1.

General information and description of business

8

 

2.

Summary of significant accounting policies and new accounting pronouncements

8

 

3.

Short-term investments

12

 

4.

Investments in associates

12

 

5.

Other investments

12

 

6.

Borrowings

13

 

7.

Fair value of financial instruments

15

 

8.

Income tax

17

 

9.

Related parties

17

 

10.

Segment information

20

 

11.

Commitments and contingencies

21

 

12.

Subsequent events

24

 


Table of Contents

 

PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES

 

UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION

(Amounts in millions of Russian Rubles)

 

 

 

Notes

 

June 30,
2016

 

December 31,
2015

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NON-CURRENT ASSETS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property, plant and equipment

 

 

 

288,402

 

302,662

 

Investment property

 

 

 

359

 

364

 

Goodwill

 

 

 

33,980

 

34,468

 

Other intangible assets

 

 

 

76,629

 

74,596

 

Investments in associates

 

4

 

8,545

 

9,299

 

Other investments

 

5

 

34,386

 

34,667

 

Deferred tax assets

 

 

 

8,816

 

9,287

 

Accounts receivable, related parties

 

9

 

3,513

 

3,335

 

Other financial assets

 

 

 

17,773

 

25,203

 

Other non-financial assets

 

 

 

682

 

480

 

 

 

 

 

 

 

 

 

Total non-current assets

 

 

 

473,085

 

494,361

 

 

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Inventories

 

 

 

12,813

 

14,510

 

Trade and other receivables

 

 

 

37,252

 

34,542

 

Accounts receivable, related parties

 

9

 

2,447

 

6,326

 

Short-term investments

 

3

 

27,978

 

49,840

 

Advances paid and prepaid expenses

 

 

 

5,665

 

4,781

 

VAT receivable

 

 

 

7,041

 

9,815

 

Income tax assets

 

 

 

3,655

 

5,190

 

Assets held for sale

 

 

 

461

 

549

 

Cash and cash equivalents

 

 

 

24,956

 

33,464

 

 

 

 

 

 

 

 

 

Total current assets

 

 

 

122,268

 

159,017

 

 

 

 

 

 

 

 

 

TOTAL ASSETS

 

 

 

595,353

 

653,378

 

 

1


Table of Contents

 

PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES

 

UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION

(CONTINUED)

(Amounts in millions of Russian Rubles)

 

 

 

Notes

 

June 30,
2016

 

December 31,
2015

 

 

 

 

 

 

 

 

 

EQUITY AND LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EQUITY:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

 

 

207

 

207

 

Treasury stock

 

 

 

(24,255

)

(24,468

)

Retained earnings

 

 

 

168,780

 

173,200

 

Accumulated other comprehensive income

 

 

 

484

 

11,176

 

 

 

 

 

 

 

 

 

Equity attributable to owners of the Company

 

 

 

145,216

 

160,115

 

Non-controlling interests

 

 

 

6,218

 

8,256

 

 

 

 

 

 

 

 

 

Total equity

 

 

 

151,434

 

168,371

 

 

 

 

 

 

 

 

 

NON-CURRENT LIABILITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Borrowings

 

6

 

234,634

 

292,168

 

Deferred tax liabilities

 

 

 

29,094

 

27,346

 

Provisions

 

 

 

2,221

 

2,565

 

Other non-financial liabilities

 

 

 

4,182

 

4,342

 

Other financial liabilities

 

 

 

554

 

676

 

 

 

 

 

 

 

 

 

Total non-current liabilities

 

 

 

270,685

 

327,097

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trade and other payables

 

 

 

82,981

 

57,756

 

Accounts payable, related parties

 

9

 

1,702

 

1,809

 

Subscriber prepayments

 

 

 

13,994

 

17,451

 

Borrowings

 

6

 

49,009

 

53,701

 

Income tax liabilities

 

 

 

1,045

 

831

 

Provisions

 

 

 

5,691

 

7,863

 

Other non-financial liabilities

 

 

 

10,821

 

8,721

 

Other financial liabilities

 

 

 

7,991

 

9,778

 

 

 

 

 

 

 

 

 

Total current liabilities

 

 

 

173,234

 

157,910

 

 

 

 

 

 

 

 

 

TOTAL EQUITY AND LIABILITIES

 

 

 

595,353

 

653,378

 

 

The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.

 

2


Table of Contents

 

PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES

 

UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENT OF PROFIT OR LOSS

(Amounts in millions of Russian Rubles, except per share amounts)

 

 

 

 

Notes

 

Six months
ended June 30,
2016

 

Six months
ended June 30,
2015

 

 

 

 

 

 

 

 

 

Service revenue

 

 

 

195,007

 

188,831

 

Sales of goods

 

 

 

21,219

 

14,042

 

 

 

10

 

216,226

 

202,873

 

 

 

 

 

 

 

 

 

Cost of services

 

 

 

68,374

 

63,400

 

Cost of goods

 

 

 

20,053

 

11,729

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

 

 

47,579

 

44,745

 

Depreciation and amortization

 

 

 

41,080

 

40,669

 

Operating share of the profit of associates

 

4

 

(1,462

)

(1,643

)

Other (income) / expenses

 

 

 

(482

)

2,309

 

 

 

 

 

 

 

 

 

Operating profit

 

 

 

41,084

 

41,664

 

 

 

 

 

 

 

 

 

Finance income

 

 

 

(3,005

)

(4,763

)

Finance costs

 

 

 

16,057

 

12,609

 

Currency exchange gains

 

 

 

(3,270

)

(107

)

Non-operating share of the loss of associates

 

4

 

1,020

 

804

 

Change in fair value of financial instruments

 

 

 

178

 

(91

)

Other expenses/(income)

 

 

 

96

 

(114

)

 

 

 

 

 

 

 

 

Profit before tax

 

 

 

30,008

 

33,326

 

 

 

 

 

 

 

 

 

Income tax expense

 

8

 

6,720

 

6,649

 

 

 

 

 

 

 

 

 

Profit for the period

 

 

 

23,288

 

26,677

 

 

 

 

 

 

 

 

 

Profit / (loss) for the period attributable to:

 

 

 

 

 

 

 

Owners of the Company

 

 

 

23,563

 

27,961

 

Non-controlling interests

 

 

 

(275

)

(1,284

)

 

 

 

 

 

 

 

 

Earnings per share (basic and diluted), Russian Rubles:

 

 

 

11.85 and 11.84

 

14.06 and 14.05

 

 

The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.

 

3


Table of Contents

 

PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES

 

UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(Amounts in millions of Russian Rubles)

 

 

 

Six months
ended June 30,
2016

 

Six months
ended June 30,
2015

 

 

 

 

 

 

 

Profit for the period

 

23,288

 

26,677

 

 

 

 

 

 

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

Items that may be reclassified subsequently to profit or loss:

 

 

 

 

 

Exchange differences on translating foreign operations

 

(8,412

)

(10,016

)

Net fair value loss on financial instruments

 

(1,736

)

(3,402

)

 

 

 

 

 

 

Share of other comprehensive income of associates and joint ventures

 

 

 

 

 

Items that may be reclassified subsequently to profit or loss:

 

 

 

 

 

Exchange differences on translating foreign operations in associates and joint ventures

 

(1,190

)

(2,026

)

 

 

 

 

 

 

Other comprehensive loss for the period, net of income tax

 

(11,338

)

(15,444

)

 

 

 

 

 

 

Total comprehensive income for the period

 

11,950

 

11,233

 

 

 

 

 

 

 

Total comprehensive income / (loss) for the period attributable to:

 

 

 

 

 

Owners of the Company

 

12,871

 

12,837

 

Non-controlling interests

 

(921

)

(1,604

)

 

The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.

 

4


Table of Contents

 

PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES

 

UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(Amounts in millions of Russian Rubles, except share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated other comprehensive income / (loss)

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

Treasury stock

 

Additional
paid-in

 

Investments
revaluation

 

Foreign
currency
translation

 

Remeasurements
of the net
defined

 

Retained

 

Equity
attributable to

 

Non-controlling

 

Total

 

 

 

Shares

 

Amount

 

Shares

 

Amount

 

capital

 

reserve

 

reserve

 

benefit liability

 

earnings

 

equity holders

 

interests

 

equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at January 1, 2015

 

2,066,413, 562

 

207

 

(77,501,432

)

(24,464

)

5,052

 

4,268

 

8,803

 

407

 

174,556

 

168,829

 

9,793

 

178,622

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Profit / (loss) for the period

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

27,961

 

27,961

 

(1,284

)

26,677

 

Other comprehensive loss for the period, net of income tax

 

—

 

—

 

—

 

—

 

—

 

(3,402

)

(11,722

)

—

 

—

 

(15,124

)

(320

)

(15,444

)

Total comprehensive (loss) / income for the period

 

—

 

—

 

—

 

—

 

—

 

(3,402

)

(11,722

)

—

 

27,961

 

12,837

 

(1,604

)

11,233

 

Issuance of stock options

 

—

 

—

 

—

 

—

 

79

 

—

 

—

 

—

 

—

 

79

 

—

 

79

 

Dividends declared by MTS

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

(38,903

)

(38,903

)

—

 

(38,903

)

Dividends to non-controlling interest

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

(82

)

(82

)

(257

)

(339

)

Disposal of Intellect Telecom

 

—

 

—

 

—

 

—

 

252

 

—

 

—

 

—

 

—

 

252

 

14

 

266

 

Disposal of Rent Nedvizhimost

 

—

 

—

 

—

 

—

 

6,003

 

—

 

—

 

—

 

—

 

6,003

 

342

 

6,345

 

Acquisition of NIS

 

—

 

—

 

—

 

—

 

(506

)

—

 

—

 

—

 

—

 

(506

)

(29)

 

(535

)

Changes in ownership interest with no gain/loss of control — MGTS and NIS

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

89

 

89

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at June 30, 2015

 

2,066,413,562

 

207

 

(77,501,432

)

(24,464

)

10,880

 

866

 

(2,919

)

407

 

163,532

 

148,509

 

8,348

 

156,857

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at January 1, 2016

 

2,066,413,562

 

207

 

(77,521,163

)

(24,468

)

—

 

1,045

 

9,638

 

493

 

173,200

 

160,115

 

8,256

 

168,371

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Profit / (loss) for the period

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

23,563

 

23,563

 

(275

)

23,288

 

Currency translation adjustment, net of income tax

 

—

 

—

 

—

 

—

 

—

 

—

 

(8,956

)

—

 

—

 

(8,956

)

(646

)

(9,602

)

Change in fair value of derivatives, net of income tax

 

—

 

—

 

—

 

—

 

—

 

(1,736

)

—

 

—

 

—

 

(1,736

)

—

 

(1,736

)

Total comprehensive (loss) / income for the period

 

—

 

—

 

—

 

—

 

—

 

(1,736

)

(8,956

)

—

 

23,563

 

12,871

 

(921

)

11,950

 

Issuance of stock options

 

—

 

—

 

—

 

—

 

(101

)

—

 

—

 

—

 

—

 

(101

)

3

 

(98

)

Dividends declared by MTS

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

(27,879

)

(27,879

)

—

 

(27,879

)

Dividends to non-controlling interest

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

(1,120

)

(1,120

)

Unclaimed dividends

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

2

 

2

 

—

 

2

 

Sale of own stock

 

—

 

—

 

1,024,587

 

214

 

—

 

—

 

—

 

—

 

—

 

214

 

—

 

214

 

Purchase of own stock

 

—

 

—

 

(6,986

)

(1

)

—

 

—

 

—

 

—

 

—

 

(1

)

—

 

(1

)

Changes in ownership interest with no gain/loss of control — MTS Bank additional share issuance

 

—

 

—

 

—

 

—

 

(5

)

—

 

—

 

—

 

—

 

(5

)

—

 

(5

)

Reclassification to retained earnings

 

—

 

—

 

—

 

—

 

106

 

—

 

—

 

—

 

(106

)

—

 

—

 

—

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at June 30, 2016

 

2,066,413,562

 

207

 

(76,503,562

)

(24,255

)

—

 

(691

)

682

 

493

 

168,780

 

145,216

 

6,218

 

151,434

 

 

The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.

 

5


Table of Contents

 

PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES

 

UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(Amounts in millions of Russian Rubles)

 

 

 

Six months
ended

 

Six months
ended

 

 

 

June 30, 2016

 

June 30, 2015

 

 

 

 

 

 

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

Profit for the period

 

23,288

 

26,677

 

 

 

 

 

 

 

Adjustments for:

 

 

 

 

 

Depreciation and amortization

 

41,080

 

40,669

 

Finance income

 

(3,005

)

(4,763

)

Finance costs

 

16,057

 

12,609

 

Income tax expense

 

6,720

 

6,649

 

Currency exchange gain

 

(3,270

)

(107

)

Amortization of deferred connection fees

 

(491

)

(569

)

Share of the profit of associates

 

(442

)

(839

)

Change in fair value of financial instruments

 

179

 

(91

)

Inventory obsolescence expense

 

621

 

86

 

Allowance for doubtful accounts

 

1,131

 

1,483

 

Change in provisions

 

6,317

 

4,752

 

Other non-cash items

 

(793

)

(294

)

 

 

 

 

 

 

Movements in operating assets and liabilities:

 

 

 

 

 

Increase in trade and other receivables

 

(7,458

)

(4,824

)

Decrease/(increase) in inventory

 

950

 

(2,516

)

Decrease in advances paid and prepaid expenses

 

843

 

3,113

 

Decrease/(increase) in VAT receivable

 

461

 

(1,599

)

(Decrease)/Increase in trade and other payables and other current liabilities

 

(3,337

)

2,103

 

 

 

 

 

 

 

Dividends received

 

1,181

 

1,471

 

Income tax paid

 

(2,960

)

(4,207

)

Interest received

 

2,081

 

2,062

 

Interest paid, net of interest capitalized

 

(15,479

)

(9,849

)

 

 

 

 

 

 

NET CASH PROVIDED BY OPERATING ACTIVITIES

 

63,674

 

72,016

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

(25,545

)

(40,921

)

Purchases of other intangible assets

 

(14,126

)

(12,720

)

Purchase of 4G and 3G licenses in Russia and Ukraine

 

(2,598

)

(7,044

)

Proceeds from sale of property, plant and equipment and assets held for sale

 

1,300

 

1,326

 

Purchases of short-term and other investments

 

(7,482

)

(68,657

)

Proceeds from sale of short-term and other investments

 

22,042

 

4,519

 

Investments in associates

 

(1,326

)

—

 

 

 

 

 

 

 

NET CASH USED IN INVESTING ACTIVITIES

 

(27,735

)

(123,497

)

 

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PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES

 

UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(CONTINUED)

(Amounts in millions of Russian Rubles)

 

 

 

Six months
ended

 

Six months
ended

 

 

 

June 30, 2016

 

June 30, 2015

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

Repayment of notes

 

(17,904

)

(479

)

Notes and debt issuance cost paid

 

—

 

(1,213

)

Finance lease obligation principal paid

 

(168

)

(224

)

Dividends paid

 

—

 

(82

)

Cash flows from transactions under common control

 

3,063

 

4,252

 

Proceeds from loans

 

1,036

 

43,818

 

Repayment of loans

 

(26,035

)

(9,009

)

Cash inflow under credit guarantee agreement related to foreign-currency hedge

 

(1,034

)

—

 

Other financial activities

 

—

 

5

 

 

 

 

 

 

 

NET CASH (USED IN)/PROVIDED BY FINANCING ACTIVITIES

 

(41,042

)

37,068

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

(3,405

)

(2,924

)

 

 

 

 

 

 

NET DECREASE IN CASH AND CASH EQUIVALENTS

 

(8,508

)

(17,337

)

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS, beginning of the period , including cash and cash equivalents within assets held for sale nill and 156, respectively

 

33,464

 

61,566

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS, end of the period

 

24,956

 

44,229

 

 

 

 

 

 

 

Less cash and cash equivalents within assets held for sale

 

—

 

(109

)

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS, end of the period

 

24,956

 

44,120

 

 

The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.

 

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PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES

 

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in millions of Russian Rubles unless otherwise stated)

 

1.                       GENERAL INFORMATION AND DESCRIPTION OF BUSINESS

 

Public Joint-Stock Company Mobile TeleSystems (“MTS PJSC”, or “the Company”) is a company incorporated under the laws of the Russian Federation and having its registered address at 4, Marksistskaya Street, 109147, Moscow, Russian Federation.

 

Business of the Group — MTS PJSC was incorporated on March 1, 2000, through the merger of MTS CJSC and Rosico TC CJSC, its wholly-owned subsidiary. MTS CJSC started its operations in the Moscow license area in 1994 and then began expanding through Russia and the CIS. MTS PJSC’s majority shareholder is Public Joint-Stock Financial Corporation Sistema or “Sistema”, whose controlling shareholder is Vladimir P. Yevtushenkov.

 

In these notes, “MTS” or “the Group” refers to the Company and its subsidiaries.

 

The Group provides a wide range of telecommunications services including voice and data transmission, internet access, pay TV, various value added services through wireless and fixed lines, as well as selling equipment and accessories. The Group’s principal operations are located in Russia, Ukraine, Turkmenistan, Uzbekistan and Armenia.

 

MTS completed its initial public offering in 2000 and listed its shares of common stock, represented by American Depositary Shares, or ADSs, on the New York Stock Exchange under the symbol “MBT”. Since 2003 common shares of MTS PJSC have been traded on the Public Joint-Stock Company “Moscow Exchange MICEX-RTS” (“Moscow Exchange”).

 

Since 2009, the Group has been developing its own retail network, operated by Russian Telephone Company JSC (“RTC”), a wholly owned subsidiary of MTS PJSC.

 

Seasonality — The Group’s financial results are impacted by seasonality through the calendar year. Higher consumption of roaming services in May-September and increased demand for handsets and accessories before winter holidays enhance revenue from services and sales of goods for the second half-year. However, the Group doesn’t view its business as highly seasonal as defined by IAS 34, Interim Financial Reporting.

 

2.                       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NEW ACCOUNTING PRONOUNCEMENTS

 

Basis of preparation — These interim condensed consolidated financial statements have been prepared in accordance with IAS 34, Interim Financial Reporting, and should be read in conjunction with the annual consolidated statements of the Group for the year ended December 31, 2015.

 

These interim condensed consolidated financial statements are unaudited and do not include all the information and disclosures required in the annual IFRS financial statements. The Group omitted disclosures which would substantially duplicate the information contained in its 2015 audited consolidated financial statements, such as accounting policies and details of accounts which have not changed significantly in amount or composition. Additionally, the Group has provided disclosures where significant events have occurred subsequently to the issuance of its annual consolidated statements of the Group for the year ended December 31, 2015.

 

Management believes that the disclosures in these interim condensed consolidated financial statements are adequate to make the presented information not misleading if these interim condensed consolidated financial statements are read in conjunction with the annual consolidated statements of the Group for the year ended December 31, 2015 and the notes related thereto. In the opinion of management, the financial statements reflect all adjustments necessary to present fairly the Group’s financial position, financial performance and cash flows for the interim reporting period in accordance with IAS 34, Interim Financial Reporting. Operating results for the six months ended June 30, 2016 are not necessarily indicative of the results that may be expected for the year ended December 31, 2016.

 

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PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES

 

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in millions of Russian Rubles unless otherwise stated)

 

These consolidated financial statements are prepared on a historical cost basis, unless disclosed otherwise. Historical cost is generally based on the fair value of the consideration given in exchange for goods and services.

 

Amounts in the consolidated financial statements are stated in millions of Russian Rubles, unless indicated otherwise.

 

The interim condensed consolidated financial statements of the Group as of June 30, 2016 and December 31, 2015 and for the six months ended June 30, 2016 and 2015 were authorized for issue by the Company’s Chief Executive Officer on August 29, 2016.

 

Basis of consolidation — The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company. Control is achieved only where the Company has the power over the entity, is exposed and has rights to variable returns, and is able to use its power over the entity to affect its amount of variable returns. The results of the controlled entities acquired or disposed of during the reporting period are included in the consolidated financial statements from the date, the Group achieves control over the entity, or until the date on which the Company ceases to control the entity. If necessary, the accounting policies of controlled entities’ are aligned with the accounting policy applied by the Group. All intra-group balances, income, expenses and cash flows are eliminated on consolidation.

 

Those entities where the Group exercises significant influence are recognized as associates and accounted for using the equity method. Significant influence is the power to participate in the financial and operating policies decisions of the investee but is not to control those policies. Investments in these entities are recognized at cost at the time of acquisition and adjusted thereafter to recognize the Group’s share of the profit or loss and other comprehensive income. The carrying amount of the investment in such entities may include goodwill as the positive difference between the cost of the investment and Group’s proportionate share in the fair values of the entity’s identifiable assets and liabilities. The carrying amount of the investment accounted for using the equity method is tested for impairment provided there are indications of impairment. If the carrying amount of the investment exceeds its recoverable amount, an impairment loss is recognized in the amount of the difference. The recoverable amount is measured at the higher of fair value less costs of disposal and value in use. The Group presents its share in profits or losses in associates within operating profit if those interests are viewed as part of Group’s core operations. As of June 30, 2016, only MTS Belarus was considered to be a part of Group’s core operating activity. Shares in profits and losses of other Group’s associates were presented as non-operating items.

 

The Group has joint operations with MTS Bank, a Group associate, relating to the development of the MTS Dengi project and with Vimpelcom, relating to construction of LTE base stations. Joint operations are characterized by the fact that the operators that have joint control over the arrangement have a right to the assets, and obligations for the liabilities, relating to the arrangement. Respectively, each operator accounts for its share of the joint assets and liabilities, and recognizes its share of the output, revenues and expenses incurred under the arrangement.

 

Investments in shares of the companies over which the Group does not have control or ability to exercise significant influence are accounted for using the cost method. The Group does not evaluate cost-method investments for impairment unless there is an indicator of impairment.

 

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PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES

 

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in millions of Russian Rubles unless otherwise stated)

 

As of June 30, 2016 and December 31, 2015, the Company had investments in the following significant entities:

 

 

 

Accounting
method

 

June 30,
2016

 

December 31,
2015

 

MTS Turkmenistan

 

Consolidated

 

100.0

%

100.0

%

MTS Bermuda (1)

 

Consolidated

 

100.0

%

100.0

%

MTS Ukraine

 

Consolidated

 

100.0

%

100.0

%

RTC

 

Consolidated

 

100.0

%

100.0

%

Sibintertelecom

 

Consolidated

 

100.0

%

100.0

%

Sputnikovoe TV

 

Consolidated

 

100.0

%

100.0

%

Dega

 

Consolidated

 

100.0

%

100.0

%

NVision Group

 

Consolidated

 

100.0

%

100.0

%

Stream

 

Consolidated

 

100.0

%

100.0

%

Metro-Telecom

 

Consolidated

 

95.0

%

95.0

%

MGTS Group

 

Consolidated

 

94.7

%

94.7

%

K-Telecom

 

Consolidated

 

80.0

%

80.0

%

Navigation Information Systems Group

 

Consolidated

 

77.7

%

77.7

%

UMS (2)

 

Consolidated

 

50.01

%

50.01

%

MTS International Funding Limited (3) (“MTS International”)

 

Consolidated

 

SE

 

SE

 

MTS Belarus

 

Equity

 

49.0

%

49.0

%

MTS Bank

 

Equity

 

26.8

%

27.0

%

Zifrovoe TV

 

Equity

 

20.0

%

20.0

%

OZON Holdings Limited

 

Equity

 

10.8

%

10.8

%

 

(1)                  A wholly-owned subsidiary established to repurchase the Group’s ADSs. Liquidated in May 2016.

(2)                  On August 5, 2016 the Group sold its stake in UMS (Note 12).

(3)                  A private company organized and existing as a private limited company under the laws of Ireland. The Group does not have any equity in MTS International. It was established for the purpose of raising capital through the issuance of debt securities on the Irish Stock Exchange followed by transferring the proceeds through a loan facility to the Group. In 2010 and 2013, MTS International issued $750 million 8.625% notes due in 2020 and $500 million 5.0% notes due in 2023, respectively (Note 6). The notes are guaranteed by MTS PJSC in the event of default. MTS International does not perform any other activities except those required for notes servicing. The Group bears all costs incurred by MTS International in connection with the notes’ maintenance activities. Accordingly, the Group concluded that it exercises control over the entity.

 

Functional currency translation methodology — As of June 30, 2016, the functional currencies of Group entities were as follows:

 

·                           For entities incorporated in the Russian Federation, MTS Finance, Dega and MTS International — the Russian Ruble (“RUB”);

·                           For MTS Ukraine — the Ukrainian Hryvna;

·                           For MTS Turkmenistan — the Turkmenian Manat;

·                           For K-Telecom — the Armenian Dram;

·                           For Universal Mobile Services (“UMS”) — the Uzbek Sum;

·                           For MTS Belarus — the Belorussian Ruble,

·                           For Nvision Czech Republic A.S. — the Czech Koruna.

 

Foreign-currency transactions are translated into the functional currency at the exchange rates prevailing at the dates of the transactions. At the reporting date, monetary items denominated in foreign currencies are translated at the closing rate, whereas non-monetary items are stated at the exchange rate at the date of their recognition. Exchange rate differences are recognized in profit or loss.

 

For entities whose records are maintained in their functional currency, which is other than the reporting currency, all year-end assets and liabilities have been translated into U.S. Dollars at the period-end exchange rate set by local central banks. Subsequently, U.S. Dollars balances have been translated into Russian Rubles at the period-end exchange rate set by the Central Bank of Russia. Revenues and expenses have been translated at the average exchange rate for the period using cross-currency exchange rate via U.S. Dollar as described above. Translation differences resulting from the use of these rates are reported as a component of other comprehensive income.

 

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PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES

 

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in millions of Russian Rubles unless otherwise stated)

 

Management estimates — The preparation of consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Significant estimates include allowance for doubtful accounts and inventory obsolescence, the valuation of assets acquired and liabilities assumed in business combinations, the recoverability of investments and the valuation of goodwill, property, plant and equipment and intangible assets, liability under put option agreement, certain provisions and financial instruments.

 

Significant accounting policies — The accounting policies and methods of computation applied in the preparation of these interim condensed consolidated financial statements are consistent with those disclosed in the annual consolidated financial statements of the Group for the year ended December 31, 2015.

 

Standards, interpretations and amendments in issue but not yet effective — The Group has not applied the following new and revised IFRSs that have been issued but not yet effective:

 

Amendments to IAS 12

 

Recognition of Deferred Tax Assets for Unrealized Losses (1)

IFRS 9

 

Financial Instruments (2)

Amendments to IFRS 2

 

Classification and measurement of Share-based Payment Transactions (2)

IFRS 15

 

Revenue from contracts with Customers (2)

IFRS 16

 

Leases (3)

Amendments to IFRS 10 and IAS 28

 

Sale or Contribution of Assets between an Investor and its Associate or Joint Venture (4)

 

(1)          Effective for annual periods beginning on or after January 1, 2017, with earlier application permitted

(2)          Effective for annual periods beginning on or after January 1, 2018, with earlier application permitted

(3)          Effective for annual periods beginning on or after January 1, 2019, with earlier application permitted

(4)          Effective date is not currently determined

 

IFRS 9, Financial Instruments . IFRS 9 governs the classification and measurement of financial assets and liabilities, derecognition, impairment and hedge accounting matters. The Group is currently evaluating the impact of these amendments on the Group’s consolidated financial statements.

 

IFRS 15, Revenue from Contracts with Customers . This standard provides a single, principles-based five-step model for the determination and recognition of revenue to be applied to all contracts with customers. It replaces the existing standards IAS 18, Revenue , and IAS 11, Construction Contracts . The core principle of IFRS 15 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Under the standard, an entity recognizes revenue when (or as) a performance obligation is satisfied, i. e. when “control” of the goods or services underlying the particular performance obligation is transferred to the customer. Far more prescriptive guidance has been added in IFRS 15 to deal with specific scenarios. Furthermore, extensive disclosures are required by IFRS 15. The Group is currently evaluating the impact of these amendments and the transition alternatives on the consolidated financial statements.

 

IFRS 16, Leases. This standard principally requires lessees to recognize assets and liabilities for all leases and to present the rights and obligations associated with these leases in the statement of financial position. Going forward, lessees will therefore no longer be required to make the distinction between finance and operating leases. For all leases, the lessee will recognize a lease liability in its statement of financial position for the obligation to make future lease payments. At the same time, the lessee will capitalize a right of use to the underlying asset which is generally equivalent to the present value of the future lease payment plus directly attributable expenditures. The standard also includes new provisions on the definition of a lease and its presentation, on disclosures in the notes, and on sale and leaseback transactions. The Group is currently evaluating the impact of these amendments on the consolidated financial statements.

 

Other mentioned IFRS pronouncements do not have a material impact on the Group’s consolidated financial statements.

 

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PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES

 

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in millions of Russian Rubles unless otherwise stated)

 

3.                       SHORT-TERM INVESTMENTS

 

The Group’s short-term investments comprised the following:

 

 

 

Category

 

June 30,
2016

 

December 31,
2015

 

 

 

 

 

 

 

 

 

Deposits

 

Loans and receivables

 

19,115

 

42,492

 

Assets in Sistema-Capital trust management (Notes 7, 9)

 

Financial asset at fair value through profit or loss

 

2,603

 

—

 

Loans

 

Loans and receivables

 

6,191

 

7,082

 

Notes

 

Available for sale

 

69

 

266

 

 

 

 

 

 

 

 

 

Total short-term investments

 

 

 

27,978

 

49,840

 

 

4.                       INVESTMENTS IN ASSOCIATES

 

The Group’s investments in associates (all accounted for using the equity method) comprised the following:

 

 

 

Country of
operations

 

Operating activity

 

June 30,
2016

 

December 31,
2015

 

 

 

 

 

 

 

 

 

 

 

MTS Belarus

 

Belarus

 

telecommunications

 

4,610

 

5,407

 

MTS Bank

 

Russia

 

banking

 

1,244

 

1,120

 

Equity investments in other unquoted companies

 

Russia

 

e-commerce, digital TV, etc.

 

2,691

 

2,772

 

 

 

 

 

 

 

 

 

 

 

Total investments in associates

 

 

 

 

 

8,545

 

9,299

 

 

On February 25, 2016 the Group acquired 946,347 ordinary shares of MTS Bank of 3,588,347 shares, placed as a part of an earlier approved additional share issuance, for a total consideration of RUB 1,325 million. As the result of the transaction, the Group’s share in the capital of MTS Bank decreased from 27.0% to 26.8%.

 

The Group’s share in the profit of MTS Belarus was included in operating share of the profit of associates in the accompanying consolidated statement of profit or loss in amount of RUB 1,462 million and RUB 1,643 million for the six months ended June 30, 2016 and 2015, respectively.

 

The Group’s share in the net losses of other associates was included in the line “non-operating share of the loss of the associates” in the accompanying consolidated statement of profit or loss in amount of RUB 1,020 million and RUB 804 million for the six months ended June 30, 2016 and 2015, respectively.

 

5.                       OTHER INVESTMENTS

 

The Group’s other investments comprised the following:

 

 

 

 

 

June 30,

 

December 31,

 

 

 

Category

 

2016

 

2015

 

 

 

 

 

 

 

 

 

Deposits

 

Loans and receivables

 

30,409

 

30,677

 

Loans/Unquoted Notes

 

Loans and receivables

 

2,802

 

2,787

 

Other

 

-

 

1,175

 

1,203

 

 

 

 

 

 

 

 

 

Total other investments

 

 

 

34,386

 

34,667

 

 

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PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES

 

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in millions of Russian Rubles unless otherwise stated)

 

6.                       BORROWINGS

 

The Group’s borrowings comprised the following:

 

 

 

June 30,
2016

 

December 31,
2015

 

 

 

 

 

 

 

Notes

 

73,416

 

100,034

 

Bank and other loans

 

199,244

 

234,040

 

Finance lease obligations

 

10,983

 

11,795

 

 

 

 

 

 

 

Total borrowings

 

283,643

 

345,869

 

 

 

 

 

 

 

Less: current portion

 

(49,009

)

(53,701

)

 

 

 

 

 

 

Total borrowings, non-current

 

234,634

 

292,168

 

 

Notes — The reconciliation between opening and closing balance of the Group’s Notes for the six months ended June 30, 2016 was the following:

 

 

 

Currency

 

Interest rate
(actual at
June 30,
2016)

 

Carrying amount

 

 

 

 

 

 

 

 

 

Balance at January 1, 2016

 

 

 

 

 

100,034

 

Repayments

 

 

 

 

 

 

 

MTS International Notes due 2020 (Note 2)

 

USD

 

8.625

%

(17,904

)

Currency exchange gain

 

 

 

 

 

(8,739

)

Other movement

 

 

 

 

 

25

 

 

 

 

 

 

 

 

 

Balance at June 30, 2016

 

 

 

 

 

73,416

 

 

 

 

 

 

 

 

 

Less: current portion

 

 

 

 

 

(3,854

)

 

 

 

 

 

 

 

 

Total notes, non-current

 

 

 

 

 

69,562

 

 

During the six months ended June 30, 2016 the Group repurchased 274 029 MTS International Notes due 2020 with nominal value of 1,000 USD. The Group has recognized an excess of notes purchase price over its principal amount of RUB 3,045 million as a finance expense within the consolidated statement of profit or loss.

 

The fair values of the Notes based on the market quotes as of June 30, 2016 at the stock exchanges where they are traded were as follows:

 

 

 

Stock exchange

 

% of par

 

Fair value

 

 

 

 

 

 

 

 

 

MTS International Notes due 2023

 

Frankfurt stock exchange

 

102.50

 

30,728

 

MTS International Notes due 2020

 

Frankfurt stock exchange

 

117.00

 

23,072

 

MTS PJSC Notes due 2017

 

Moscow Exchange

 

98.65

 

9,865

 

MTS PJSC Notes due 2023

 

Moscow Exchange

 

97.00

 

9,700

 

MTS PJSC Notes due 2020

 

Moscow Exchange

 

100.50

 

2,120

 

MTS PJSC Notes due 2016

 

Moscow Exchange

 

99.95

 

1,787

 

MTS PJSC Notes due 2018

 

Moscow Exchange

 

103.89

 

6

 

 

 

 

 

 

 

 

 

Total notes

 

 

 

 

 

77,278

 

 

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PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES

 

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in millions of Russian Rubles unless otherwise stated)

 

Bank and other loans — The reconciliation between opening and closing balance of the Group’s loans from banks and financial institutions for the six months ended June 30, 2016 was the following:

 

 

 

Currency

 

Interest rate
(actual at June 30,
2016)

 

Carrying
amount

 

 

 

 

 

 

 

 

 

Balance at January 1, 2016

 

 

 

 

 

234,040

 

New loans

 

 

 

 

 

 

 

Loans

 

various

 

various

 

1,036

 

 

 

 

 

 

 

 

 

Repayments

 

 

 

 

 

 

 

Notes in REPO

 

RUB

 

-

 

(10,005

)

Sberbank

 

RUB

 

8.45%

 

(10,000

)

Calyon, ING Bank N.V, Nordea Bank AB, Raiffeisen Zentralbank Osterreich AG

 

USD

 

LIBOR + 1.15% (2.07%)

 

(4,487

)

Other financial institutions

 

 

 

 

 

(3,858

)

Currency exchange gain

 

 

 

 

 

(6,984

)

Other movement

 

 

 

 

 

(498

)

 

 

 

 

 

 

 

 

Balance at June 30, 2016

 

 

 

 

 

199,244

 

 

 

 

 

 

 

 

 

Less: current portion

 

 

 

 

 

(44,469

)

 

 

 

 

 

 

 

 

Total bank and other loans, non-current

 

 

 

 

 

154,775

 

 

Compliance with covenants — Covenants related to Group notes and bank loans did not change during six months ended June 30, 2016. The Group was in compliance with all existing covenants as of June 30, 2016.

 

Pledges — The credit facility agreements of UMS are secured by telecommunication equipment and premises with carrying value of RUB 1,701 million and RUB 2,271 million as of June 30, 2016 and December 31, 2015 respectively.

 

Available credit facilities — As of June 30, 2016, the Group’s total available unused credit facilities amounted to RUB 27,475 million and related to the following credit lines:

 

 

 

Currency

 

Maturity

 

Interest rate

 

Available till

 

Available
amount

 

 

 

 

 

 

 

 

 

 

 

 

 

Aloqabank

 

UZS

 

2022

 

12%

 

September 2017

 

6,796

 

China Development Bank

 

USD

 

2022

 

6M Libor + 3.25%

 

May 2017

 

6,426

 

China Development Bank

 

CNY

 

2022

 

6M Shibor + 3.52%

 

May 2017

 

5,995

 

Sberbank

 

RUB

 

To be agreed

 

Central Bank key rate + max.5.00%

 

June 2019

 

5,000

 

Absolut Bank

 

RUB

 

2019

 

CBR(1) auction rate + 1.25%-1.8%

 

December 2019

 

3,000

 

Uzpromstroibank

 

UZS

 

2017

 

9%

 

December 2017

 

258

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

27,475

 

 

(1)  CBR — Central Bank rate

 

In addition, the Group has a credit facility made available by Citibank at MosPrime + 1.50% interest rate with the available amount set up on request and to be repaid within 182 days.

 

Scheduled maturities — Except for the non-scheduled reduction of Notes in respect of the purchase of MTS International Notes due 2020, there were no other changes in scheduled maturities of the Group’s borrowings (gross of debt issuance costs) outstanding.

 

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PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES

 

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in millions of Russian Rubles unless otherwise stated)

 

Finance lease obligations — The following table presents a summary of net book value of leased property, plant and equipment:

 

 

 

June 30,
2016

 

December 31,
2015

 

 

 

 

 

 

 

Network and base station equipment

 

6,354

 

6,352

 

Office equipment, vehicles and other

 

81

 

54

 

 

 

 

 

 

 

Leased assets, net

 

6,435

 

6,406

 

 

Depreciation of the assets under finance leases for the six months ended June 30, 2016 and 2015 amounted to RUB 301 million and RUB 285 million, respectively, and was included in depreciation and amortization expense in the accompanying consolidated statement of profit or loss.

 

Interest expense accrued on finance lease obligations for the six months ended June 30, 2016 and 2015 amounted to RUB 450 million and RUB 342 million, respectively, and was included in finance costs in the accompanying consolidated statement of profit or loss.

 

The following table presents future minimum lease payments under capital leases together with the present value of the net minimum lease payments as at June 30, 2016 and December 31, 2015:

 

 

 

June 30,
2016

 

December 31,
2015

 

 

 

 

 

 

 

Minimum lease payments, including:

 

 

 

 

 

Current portion (less than 1 year)

 

1,446

 

1,366

 

More than 1 to 5 years

 

5,854

 

6,243

 

Over 5 years

 

10,675

 

11,022

 

Total minimum lease payments

 

17,975

 

18,631

 

 

 

 

 

 

 

Less amount representing interest

 

(6,992

)

(6,836

)

 

 

 

 

 

 

Present value of net minimum lease payments, including:

 

 

 

 

 

Current portion (less than 1 year)

 

686

 

564

 

More than 1 to 5 years

 

3,037

 

3,334

 

Over 5 years

 

7,260

 

7,897

 

Total present value of net minimum lease payments

 

10,983

 

11,795

 

 

 

 

 

 

 

Less current portion of lease obligations

 

(686

)

(564

)

 

 

 

 

 

 

Non-current portion of lease obligations

 

10,297

 

11,231

 

 

No significant changes in the composition of assets in lease and average lease terms occurred during the six months ended June 30, 2016 and 2015.

 

7.                       FAIR VALUE OF FINANCIAL INSTRUMENTS

 

Group financial instruments are represented by various financial assets and liabilities, principal types of which are trade and other receivables and payables, cash and cash equivalents, investments, derivative instruments, notes and bank loans and put option over non-controlling interests.

 

The Group accounts for its financial assets and liabilities at amortized cost, except for derivative instruments, several marketable securities and liability under put option agreement, which are accounted for at fair value.

 

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NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in millions of Russian Rubles unless otherwise stated)

 

The table below presents the fair value of financial instruments:

 

 

 

Level of inputs

 

June 30,
2016

 

December 31,
2015

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

Sistema International Funding S.A. Bonds due 2019 (related party) (Note 3, 9)

 

Level 1

 

69

 

75

 

Sistema Notes due in 2016 (series 04) (related party) (Notes 3,9)

 

Level 1

 

—

 

191

 

Derivative instruments

 

Level 2

 

17,569

 

25,027

 

Cross-currency interest rate swap

 

 

 

17,427

 

25,027

 

Interest rate swap

 

 

 

142

 

—

 

Assets in Sistema-Capital trust management (related party) (Note 3, 9)

 

Level 2

 

2,603

 

—

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

Derivative instruments

 

Level 2

 

(554

)

(676

)

Interest rate swap

 

 

 

(554

)

(676

)

Liability under put option agreement

 

Level 3

 

(2,932

)

(2,925

)

Contingent consideration

 

Level 3

 

(128

)

(115

)

 

Changes in the Group’s net assets and earnings resulted from fair value measurements of Level 3 liabilities were not significant for the six months ended June 30, 2016 and 2015.

 

In May 2016, the Group entered into trust agreement with the asset management company Sistema-Capital. The trust agreement provided for short-term profit-taking on operations with securities. This contract was not designated for hedge accounting purposes.

 

The fair value measurement of the Group’s derivative instruments and assets in Sistema-Capital trust management is based on the observable yield curves for similar instruments and represents the estimated amount the Group would receive or pay to terminate these agreements at the reporting date, taking into account current interest rates, foreign exchange spot and forward rates.

 

The liability under put option agreement is measured at fair value using a discounted cash flow technique. The most significant quantitative inputs used to measure the fair value of the liability under put option agreement are presented in the table below:

 

Unobservable inputs

 

June 30,
2016

 

December 31,
2015

 

 

 

 

 

 

 

Discount rate

 

13%

 

15%

 

Revenue growth rate

 

(1.4) – (1.6)% (av. -1.5%)

 

(1.6) – (4.6)% (av. -2.2%)

 

OIBDA margin

 

42.9-43.8% (av. 43.4%)

 

44.7-46.1% (av. 45.4%)

 

 

Carrying value of the Group’s financial instruments accounted for at amortized cost approximates their fair value due to their short-term nature and market interest rates, except for issued loans and borrowings as disclosed in the table below:

 

 

 

June 30, 2016

 

December 31, 2015

 

 

 

Fair value

 

Carrying value

 

Fair value

 

Carrying value

 

 

 

 

 

 

 

 

 

 

 

Borrowings

 

(284,742

)

(285,452

)

(340,201

)

(348,012

)

 

While management has used available market information in estimating the fair value of its financial instruments, the market information may not be fully reflective of the value that could be realized in the current circumstances.

 

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NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in millions of Russian Rubles unless otherwise stated)

 

There were no transfers between levels of inputs within the hierarchy for the six months ended June 30, 2016 and 2015.

 

There were no transfers between the accounting categories of financial instruments during the six months ended June 30, 2016 and 2015.

 

8.                       INCOME TAX

 

Significant components of income tax expense for the six months ended June 30, 2016 and 2015 were as follows:

 

 

 

Six months ended June 30

 

 

 

2016

 

2015

 

 

 

 

 

 

 

Current income tax charge

 

4,895

 

6,808

 

Adjustments recognised for current tax of prior periods

 

(126

)

54

 

 

 

 

 

 

 

Total current income tax

 

4,769

 

6,862

 

 

 

 

 

 

 

Deferred tax

 

1,951

 

(213

)

 

 

 

 

 

 

Income tax expense

 

6,720

 

6,649

 

 

The statutory income tax rates in jurisdictions in which the Group operated during six months ended June 30, 2016 did not change significantly in comparison to the statutory income tax rates effective at December 31, 2015. The Russian statutory income tax rate of 20% reconciled to the Group’s effective income tax rate for the six months ended June 30, 2016 and 2015 was as follows:

 

 

 

Six months ended June 30

 

 

 

2016

 

2015

 

 

 

 

 

 

 

Statutory income tax rate for the period

 

20.0

%

20.0

%

Adjustments:

 

 

 

 

 

Expenses not deductible for tax purposes

 

2.1

 

3.0

 

Settlements with tax authorities

 

(0.4

)

0.2

 

Different tax rate of foreign subsidiaries

 

(0.4

)

(0.3

)

Earnings distribution from subsidiaries

 

0.6

 

(3.2

)

Change in fair value of derivative financial instruments

 

0.4

 

0.0

 

Other

 

0.1

 

0.3

 

 

 

 

 

 

 

Effective income tax rate

 

22.4

%

20.0

%

 

9.                       RELATED PARTIES

 

Related parties include entities under common ownership with the Group, affiliated companies and associated companies.

 

Terms and conditions of transactions with related parties — Outstanding balances as of June 30, 2016 were unsecured and settlements are made on a cash basis. There have been no guarantees provided or received for any related party receivables or payables. As of June 30, 2016 and December 31, 2015 the Group had no impairment of receivables relating to amounts owed by related parties as well as expenses recognized during the periods of six months ended June 30, 2016 and 2015 in respect to bad or doubtful debts from related parties.

 

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NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in millions of Russian Rubles unless otherwise stated)

 

Accounts receivable from and accounts payable to related parties were as follows:

 

 

 

June 30,
2016

 

December 31,
2015

 

 

 

 

 

 

 

Accounts receivable:

 

 

 

 

 

Business Nedvizhimost, a subsidiary of Sistema

 

3,515

 

7,511

 

MTS Belarus, the Group’s associate

 

1,505

 

1,226

 

MTS Bank, the Group’s associate

 

623

 

693

 

Other related parties

 

317

 

231

 

 

 

 

 

 

 

Total accounts receivable, related parties

 

5,960

 

9,661

 

 

 

 

 

 

 

Less non-current portion

 

(3,513

)

(3,335

)

 

 

 

 

 

 

Accounts receivable, related parties — current

 

2,447

 

6,326

 

 

 

 

 

 

 

Accounts payable:

 

 

 

 

 

MTS Belarus, the Group’s associate

 

510

 

380

 

MTS Bank, the Group’s associate

 

429

 

410

 

Business-Nedvizhimost, a subsidiary of Sistema

 

233

 

36

 

Maxima, a subsidiary of Sistema

 

185

 

212

 

Sitronics Smart Technology, subsidiary of Sistema

 

46

 

68

 

Sitronics KASU, a subsidiary of Sistema

 

37

 

407

 

Rent-Nedvizhimost, a subsidiary of Sistema

 

—

 

87

 

Other related parties

 

262

 

209

 

 

 

 

 

 

 

Total accounts payable, related parties

 

1,702

 

1,809

 

 

The Group has neither the intent nor the ability to offset the outstanding accounts payable and accounts receivable with related parties under the terms of existing agreements.

 

 

 

June 30,

 

December 31,

 

 

 

2016

 

2015

 

Advances for property, plant and equipment:

 

 

 

 

 

Intellect Telecom, a subsidiary of Sistema

 

497

 

421

 

Other related parties

 

—

 

15

 

 

 

 

 

 

 

Total advances for property, plant and equipment

 

497

 

436

 

 

Investing and financing transactions — The Group holds certain investments in related parties which are summarized as follows:

 

 

 

June 30,

 

December 31,

 

 

 

2016

 

2015

 

 

 

 

 

 

 

Short-term investments

 

 

 

 

 

Sistema-Capital, a subsidiary of Sistema (assets management)

 

2,603

 

—

 

Sistema International Funding S.A. Bonds due in 2019, a subsidiary of Sistema

 

69

 

75

 

Sistema Notes due in 2016 (series 04)

 

—

 

191

 

Deposits at MTS Bank, the Group’s assosiate

 

—

 

128

 

Other loans receivable

 

—

 

81

 

 

 

 

 

 

 

Total short-term investments in related parties

 

2,672

 

475

 

 

 

 

 

 

 

Other investments in loans

 

 

 

 

 

Loan receivable from MTS Bank, the Group associate

 

2,100

 

2,100

 

Promissory notes of Sistema

 

550

 

528

 

Loan receivable from Intellect Telecom, a subsidiary of Sistema

 

69

 

67

 

Other

 

57

 

26

 

 

 

 

 

 

 

Total other investments in loans to related parties

 

2,776

 

2,721

 

 

 

 

 

 

 

Other investments in shares

 

 

 

 

 

Sistema Venture Capital (former Sistema Mass Media), a subsidiary of Sistema

 

117

 

117

 

Other

 

32

 

40

 

 

 

 

 

 

 

Total investments in shares of related parties

 

149

 

157

 

 

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NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in millions of Russian Rubles unless otherwise stated)

 

Operating transactions — For the six months period ended June 30, 2016 and 2015, operating transactions with related parties were as follows:

 

 

 

Six months
ended June 30,
2016

 

Six months
ended June 30,
2015

 

Revenues from related parties:

 

 

 

 

 

MTS Bank, the Group associate (telecommunications and call center services, bank cards distribution commission)

 

316

 

301

 

MTS Belarus, the Group associate (roaming and interconnect services)

 

139

 

144

 

Medsi Group, subsidiaries of Sistema (telecommunications and call center services)

 

66

 

53

 

Detsky Mir, subsidiaries of Sistema (child goods retail)

 

47

 

27

 

Sistema, parent company (consulting services)

 

7

 

38

 

Stream, a former Group’s associate (SMS notifications)

 

—

 

119

 

NVision Group, a former subsidiaries of Sistema (fixed line services)

 

—

 

50

 

Other related parties

 

135

 

62

 

 

 

 

 

 

 

Total revenues from related parties

 

710

 

794

 

 

 

 

 

 

 

Operating expenses / (income) incurred on transactions with related parties:

 

 

 

 

 

Maxima, a subsidiary of Sistema (advertising)

 

516

 

585

 

Rent-Nedvizhimost, a subsidiary of Sistema (rent)

 

299

 

426

 

Business Nedvizhimost, a subsidiary of Sistema (rent)

 

238

 

140

 

Business Nedvizhimost, a subsidiary of Sistema (property sale)

 

(441

)

—

 

MTS Bank, the Group’s associate (commission related (income)/expenses)

 

170

 

(14

)

AB Safety, a subsidiary of Sistema (security services)

 

129

 

113

 

Jet Air Group, subsidiaries of Sistema (transportation services)

 

122

 

100

 

Stream TV, subsidiaries of Sistema (content services)

 

96

 

80

 

MTS Belarus, the Group associate (roaming and interconnect services)

 

91

 

197

 

Elavius, a subsidiary of Sistema (transportation services)

 

85

 

182

 

Stream, a former Group’s associate (content services)

 

—

 

742

 

NVision Group, a former subsidiary of Sistema (IT consulting)

 

—

 

435

 

Other related parties

 

131

 

240

 

 

 

 

 

 

 

Total operating expenses incurred on transactions with related parties

 

1,436

 

3,226

 

 

Public Joint-Stock Company “MTS Bank” (“MTS Bank”) — The Group has loan agreement and maintains certain bank accounts with MTS Bank, an associate of the Group. As of June 30, 2016 and December 31, 2015 the Group’s cash position at MTS Bank amounted to RUB 2,869 million and RUB 2,564 million, respectively, including short-term deposits in the amount of RUB 322 million and RUB 323 million, respectively. Interest accrued on loan receivable, the deposits and cash on current accounts for the six months period ended June 30, 2016 and 2015 amounted to RUB 135 million and RUB 459 million, respectively, and was included as a component of finance income in the accompanying interim condensed consolidated statements of profit and loss.

 

During the six months period ended June 30, 2016 and 2015 the Group provided telecommunication, call center services and bank cards distribution services to MTS Bank and recognized the related income in the amount of RUB 316 million and RUB 301 million, respectively. Besides during the six months ended June 30, 2015, the Group provided services related to granting of consumer credits to MTS Bank customers and recognized the related income in the amount of RUB 117 million the amount represents agency fees after the cross-fines deduction.

 

During the six months period ended June 30, 2016 and 2015, the Group incurred commission expenses and cash collection fees in the amount of RUB 170 million and RUB 103 million, respectively.

 

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NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in millions of Russian Rubles unless otherwise stated)

 

Sistema — In November 2009, the Group accepted a promissory note, issued by Sistema, as repayment of the loan principal and interest accrued to date under an agreement with Sistema-Hals. The note is interest free and repayable in 2017. As of June 30, 2016 and December 31, 2015 the amount receivable of RUB 550 million and RUB 528 million, respectively, was included in other investments in the accompanying interim condensed consolidated statements of financial position.

 

In October 2014 the Group acquired 2,501,350 Sistema Notes due 2016 (series 04) and 1,000 Sistema International Funding S.A. Bonds due in 2019 for RUB 519 million and RUB 32 million, respectively. The acquired bonds were classified as available for sale and accounted for at fair value with changes recognized in other comprehensive income. In March 2015 and May 2015 upon scheduled redemption, the Group received principal and coupon in the amount of RUB 409 million. In March 2016 the Group received principal and coupon of Sistema Notes due 2016 (series 04)
in the amount of RUB 201 million.

 

Business-Nedvizhimost — In 2015, the Group sold its 100% stake in Rent Nedvizhimost to Business Nedvizhimost for a consideration of RUB 8,500 million in total, of which accounts receivable as of June 30, 2016 and December 31, 2015 amounted to RUB 3,513 million and RUB 7,511 million respectively, including as of June 30, 2016 RUB 3,513 million is due before December 31, 2018 and bearing interest of 12% p.a. Interest income for the six months period ended June 30, 2016 and 2015 amounted to RUB 178 million and RUB 165 million respectively, and was included as a component of finance income in the accompanying interim condensed consolidated statements of profit or loss.

 

NVision Group — In December 2015 the Group completed acquisition of shares of NVision Group excluding several non-core subsidiaries (see Note 5 of Consolidated Financial statements for the year ended December 31, 2015).

 

Sistema-Capital — In April 2016 the Group entered into trust agreement with the asset management company Sistema-Capital. As at June 30, 2016 the balance of assets under trust management amounted to RUB 2,603 million.

 

Remuneration of key management personnel — Key management personnel of the Group are members of the Board of Directors and Management Board. During the six months period ended June 30, 2016 and 2015, their total remuneration amounted to RUB 547 million and RUB 561 million, respectively. These amounts comprised of RUB 240 million and RUB 232 million in base salaries and RUB 307 million and RUB 329 million in bonuses paid pursuant to a bonus plan, respectively.

 

Management and directors are also entitled to cash-settled and equity-settled share-based payments. Related compensation accrued during the six months period ended June 30, 2016 and 2015 amounted to RUB 187 million and RUB 164 million, respectively.

 

10.                SEGMENT INFORMATION

 

Management analyzes and reviews results of the Company’s operating segments separately based on the nature of products and services, regulatory environments and geographic areas. MTS Group’s management evaluates the segments’ performance based on revenue and operating profit. Management does not analyze assets or liabilities by reportable segments.

 

The Group identified the following reportable segments:

 

Russia convergent : represents the results of mobile and fixed line operations, which encompasses services rendered to customers across regions of Russia, including voice and data services, transmission, broadband, pay-TV and various value-added services.

 

Moscow fixed line : represents the results of fixed line operations carried out in Moscow by the Group’s subsidiary MGTS. MGTS is the only licensed PSTN operator in Moscow and considered
a natural monopoly under Russian antimonopoly regulations. Consequently, substantial part of services provided by MGTS are subject to governmental regulation.

 

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NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in millions of Russian Rubles unless otherwise stated)

 

Ukraine: represents the results of mobile and fixed line operations carried out across multiple regions of Ukraine.

 

The “Other” category does not constitute a reportable segment. It includes the results of a number of other operating segments that do not meet the quantitative thresholds for separate reporting, such as Armenia, Uzbekistan, Turkmenistan, Satellite TV, Billing, System Integrator and Belarus.

 

The intercompany eliminations presented below primarily consist of sales transactions between segments conducted under the normal course of operations.

 

Financial information by reportable segment is presented below:

 

Six months ended June 30 2016:

 

 

 

Russia 
convergent

 

Moscow 
fixed line

 

Ukraine

 

Total

 

Other

 

HQ and 
elimination

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

External customers

 

173,180

 

17,402

 

13,629

 

204,211

 

11,948

 

67

 

216,226

 

Intersegment

 

2,669

 

2,465

 

1,521

 

6,655

 

5,160

 

(11,815

)

—

 

Total revenue

 

175,849

 

19,867

 

15,150

 

210,866

 

17,108

 

(11,748

)

216,226

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating profit

 

40,426

 

4,793

 

1,422

 

46,641

 

(80

)

(5,477

)

41,084

 

Depreciation and amortization

 

28,878

 

5,499

 

3,086

 

37,463

 

3,618

 

(1

)

41,080

 

 

Six months ended June 30, 2015 :

 

 

 

Russia 
convergent

 

Moscow 
fixed line

 

Ukraine

 

Total

 

Other

 

HQ and 
elimination

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

External customers

 

166,249

 

17,298

 

12,216

 

195,763

 

7,024

 

86

 

202,873

 

Intersegment

 

1,969

 

2,418

 

1,592

 

5,979

 

932

 

(6,911

)

—

 

Total revenue

 

168,218

 

19,716

 

13,808

 

210,742

 

7,956

 

(6,825

)

202,873

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating profit

 

38,763

 

6,181

 

1,883

 

46,827

 

(637

)

(4,526

)

41,664

 

Depreciation and amortization

 

30,523

 

3,742

 

2,452

 

36,717

 

3,978

 

(26

)

40,669

 

 

The consolidated operating profit is reconciled to the consolidated profit before tax on the face of the consolidated statement of profit or loss.

 

11.                COMMITMENTS AND CONTINGENCIES

 

Capital commitments — As of June 30, 2016, the Group had executed purchase agreements of approximately RUB 38,527 million to acquire property, plant and equipment, intangible assets and costs related thereto.

 

Operating leases — The Group has entered into non-cancellable agreements to lease space for telecommunications equipment, offices and transmission channels, which expire in various years up to 2064. Rental expenses under the operating leases of RUB 3,665 million and RUB 3,017 million
for the year ended June 30, 2016 and 2015, respectively, are included in selling, general and administrative expenses in the accompanying consolidated statement of profit or loss. Rental expenses under the operating leases of RUB 10,091 million and RUB 9,696 million for the year ended June 30, 2016 and 2015, respectively, are included in cost of services in the accompanying consolidated statement of profit or loss. Future minimum lease payments due under these leases at June 30, 2016 are as follows:

 

Payments due in

 

 

 

2016

 

3,520

 

2017

 

2,232

 

2018

 

803

 

2019

 

450

 

2020

 

304

 

Thereafter

 

1,121

 

 

 

 

 

Total

 

8,430

 

 

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PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES

 

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in millions of Russian Rubles unless otherwise stated)

 

Taxation — In May 2016, the Russian tax authorities completed a tax audit of MTS PJSC for the years ended December 31, 2013 and 2012. Based on the results of this audit additional taxes, penalties and fines in the amount of RUB 575 million were accrued in the interim condensed consolidated financial statements for the six months ended June 30, 2016. The Group prepared and filed an appeal to the Federal Tax Service.

 

Pricing of revenue and expenses between each of the Group’s subsidiaries and various discounts and bonuses to the Group’s subscribers in the course of performing its marketing activities may be subject to transfer pricing rules.

 

The Group estimates the following contingent liabilities in respect of additional tax and customs settlements:

 

 

 

June 30,
2016

 

December 31,
2015

 

 

 

 

 

 

 

Contingent liabilities for additional taxes other than income tax and customs settlements

 

325

 

419

 

Contingent liabilities for additional income taxes

 

1,662

 

413

 

 

Management believes that it has adequately provided for tax and customs liabilities in the accompanying consolidated financial statements. However, the risk remains that the relevant tax and customs authorities could take differing positions with regard to interpretive issues and the effect could be significant.

 

Licenses — In July 2012, the Federal Service for Supervision in the Area of Communications, Information Technologies and Mass Media allocated MTS the necessary license and frequencies to provide LTE telecommunication services in Russia. Under the terms and conditions of the LTE license, the Group is obligated to fully deploy LTE networks within seven years, commencing from January 1, 2013, and deliver LTE services in each population center with over 50,000 inhabitants in Russia by 2019. Also, the Group is obligated to invest at least RUB 15 billion annually toward the LTE roll-out until the network is fully deployed.

 

In May 2007, the Federal Service for Supervision in the Area of Communications, Information Technologies and Mass Media awarded MTS a license to provide 3G services in Russia. The 3G license was granted subject to certain capital and other commitments.

 

In March 2015, upon winning a tender, MTS-Ukraine has acquired a nationwide license for the provision of UMTS (3G) telecommunications services. The license with the cost of UAH 2,715 million (RUB 6,015 million at the acquisition date) has been granted for 15 years. In accordance with the terms of the license MTS-Ukraine was required to launch 3G services in Ukraine by October, 2015, and provide coverage across Ukraine by April, 2020.

 

In accordance with the terms of the license, MTS-Ukraine also concluded agreements on conversion of provided frequencies with the Ministry of Defense of Ukraine, Ministry of Internal Affairs of Ukraine and State Service of Special Communications and Information Protection of Ukraine. As of December 31, 2015, MTS-Ukraine paid UAH 358 million (RUB 865 million as of the payment date) for conversion of frequencies and is liable to pay UAH 267 million (RUB 699 million as of June 30, 2016) adjusted for the rate of inflation in the years 2017-2018.

 

Management believes that as of June 30, 2016 the Group complied with conditions of aforementioned licenses.

 

Litigation — In the ordinary course of business, the Group is a party to various legal and customs proceedings, and subject to claims, certain of which relate to developing markets and evolving fiscal and regulatory environments in which MTS operates. Management believes that the Group’s liability, if any, in all such pending litigation, other legal proceeding or other matters will not have a material effect upon its financial condition, results of operations or liquidity of the Group.

 

Potential adverse effects of economic instability and sanctions in Russia — In 2014 political and economic sanctions were introduced by the EU, US and other countries targeting certain Russian economic sectors. There is significant uncertainty regarding the extent and timing of further

 

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PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES

 

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in millions of Russian Rubles unless otherwise stated)

 

sanctions. Also, Russian Ruble has materially depreciated against the U.S. Dollar and Euro and ruble interest rates have increased significantly after the Central Bank of Russia raised its key rate to 17% in December 2014. The decline of Russian Ruble continued in 2015 and partly reversed in the first half of 2016. The Central Bank of Russia has decreased its key rate to 11% as of December 31, 2015 and further to 10.5% in June 30, 2016. However, the key rate remains higher than in the beginning of the year 2014, when it was equal to 5.5%. Russia sovereign credit ratings also were decreased.

 

These factors resulted in a higher cost of capital, increased inflation and uncertainty regarding further economic growth, which could have a negative impact on the Group’s business including ability to obtain financing on commercially reasonable terms. Management believes it is taking the appropriate measures to support the sustainability of the Group’s business in the current circumstances. The Group has a hedging policy in place, which partly mitigated variability of cash outflows, denominated in foreign currencies.

 

Political and economic crisis in Ukraine — During the year ended December 31, 2014,
a deterioration in the political environment of Ukraine has led to general instability, economic deterioration and armed conflict in eastern Ukraine. The deterioration has further exacerbated the country’s already weak macroeconomic trends, which have led to reduced credit ratings, significant depreciation of its national currency and increased inflation. During 2014, the Ukrainian Parliament adopted a law allowing for the imposition of sanctions against countries, persons and companies deemed by the Ukrainian government to threaten Ukrainian national interests, national security, sovereignty or the territorial integrity of Ukraine. The National Bank of Ukraine (“NBU”) passed
a decree temporarily prohibiting Ukrainian companies to pay dividends to foreign investors. The decree was extended for a few times and its edition effective as of June 30, 2016 allows payment of dividends for the years 2014-2015, subject to certain restrictions. These circumstances, combined with continued political and economic instability in the country, could result in further negative impact on the Group’s business including our financial position and results of operations.

 

Such risks especially apply to funds deposited in Ukrainian banks, whose liquidity is affected by the economic downturn. As of December 31, 2014, the Group held RUB 21,203 million in current accounts and deposits in Ukrainian banks, including RUB 5,072 million in Delta Bank. In December 2014, Delta Bank delayed customer payments and put limits on cash withdrawals. On March 2, 2015, NBU adopted a resolution declaring Delta Bank to be insolvent. The Group reserved the full amount of deposited funds (RUB 5,072 million) and related interest (RUB 66 million) as of December 31, 2014. During the year ended December 31, 2015, the Group created an additional reserve of RUB 1,698 million for cash balances deposited in distressed Ukrainian banks (including RUB 185 million for cash balances deposited in Delta Bank, RUB 868 million for cash balances deposited in bank Kyivska Rus and RUB 645 million for cash balances deposited in Platinum Bank) that was included as a component of operating expenses in the accompanying consolidated statement of profit or loss.

 

Also, in 2015 the Group entered in a factoring agreement in respect to cash balances deposited in bank Kyivska Rus, under which the factor is obliged to reimburse the Group for 45% of cash balance. As of June 30, 2016, the Group held RUB 2,734 million in current accounts and deposits in Ukrainian banks.

 

Anti-terror law — On July 7, 2016 a packet of anti-terror laws (also known as “Yarovaya-Ozerov packet of laws”) was enacted. The packet provides for mandatory storage of recorded phone conversations, text messages of subscribers, images, sounds, video and other types of messages by telecommunications operators for certain periods of time. These requirements become effective starting July 1, 2018. Compliance with the packet may require construction of additional storage, processing and indexing centers and significant increase in the Group capital expenditures. This may adversely impact Group’s financial indicators, in particular free cash flow.

 

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NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in millions of Russian Rubles unless otherwise stated)

 

The requirements of the packet of anti-terror laws are in the process of clarification and in-depth development. The Group will estimate the possible impact of the law packet on the Group’s financial statements, including additional provisions, when the law packet requirements are sufficiently specified.

 

Investigations into former operations in Uzbekistan — In March 2014, the Group received requests for the provision of information from the United States Securities and Exchange Commission (“SEC”) and the United States Department of Justice (“DOJ”) relating to a currently conducted investigation of the Group’s former subsidiary in Uzbekistan.

 

In 2015, activities related to the Group’s former operations in Uzbekistan have been referenced in a civil forfeiture complaints (“The Complaints”), filed by DOJ in the U.S. District Court, Southern District of New York (Manhattan), directed at certain assets of an unnamed Uzbek government official. The Complaints allege among other things that MTS and certain other parties made corrupt payments to the unnamed Uzbek official to assist their entering and operating in the Uzbekistan telecommunications market. The Complaints are solely directed towards assets held by the unnamed Uzbek official, and none of MTS’s assets are affected by the Complaints.

 

The Company continues to cooperate with these investigations. The Company cannot predict the outcome of the investigations, including any fines or penalties that may be imposed, and such fines or penalties could be significant.

 

12.        SUBSEQUENT EVENTS

 

Dividends repayment — In June 2016 General Annual Shareholders meeting approved distribution of dividends based on results of 2015 financial year in amount RUB 14,01 per ordinary share or RUB 27,997 million . Dividends were paid in July 2016 in full amount.

 

Reduction of authorized capital — In August 2016 the Group announced a reduction of its authorized capital for 68,031,987 treasury shares previously held by MTS Bermuda  (from 2,066,413,562 to 1,998,381,575 ordinary registered shares). The Group incorporated and registered the respective changes in its Charter.

 

Disposal of investment in UMS — On August 5, 2016, the Group sold its 50.01% stake in the UMS (Universal Mobile Systems) to the State Unitary Enterprise Centre of Radio Communication, Radio Broadcasting and Television of The Ministry of Development of Information Technologies and Communications of the Republic of Uzbekistan.

 

The carrying amounts of assets and liabilities of the UMS as of June 30, 2016 were as follows:

 

Assets

 

 

 

Property, plant and equipment

 

6,573

 

Other intangible assets

 

3,025

 

Other non-current assets

 

2,475

 

Current assets

 

1,339

 

 

 

 

 

Liabilities

 

 

 

Non-current liabilities

 

4,746

 

Current liabilities

 

1,961

 

 

 

 

 

Total net assets

 

6,705

 

 

The results of UMS represent the entirety of the Group’s operating segment «Uzbekistan» and are included in the «Other» category in Note 10 “Segment information”. The «Other» category comprises from the results of a number operating segments that do not meet the quantitative thresholds for separate reporting as reportable segment.

 

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NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in millions of Russian Rubles unless otherwise stated)

 

The Group will recognize loss on disposal of UMS in amount of approximately RUB 2.7 billion, which will be recorded as part of loss for the period from discontinued operations in the consolidated statement of profit or loss.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

 

MOBILE TELESYSTEMS PJSC

 

 

 

 

 

 

 

By:

/s/ Andrei Dubovskov

 

 

Name:

Andrei Dubovskov

 

 

Title:

CEO

 

 

 

 

Date:    August 30, 2016

 

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