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TABLE OF CONTENTS
TABLE OF CONTENTS
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM20-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
VEON LTD.
(Exact name of registrantRegistrant as specified in its charter)
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
Fax: +31 20 797 7201
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 Select Market | ||||||
| Common shares, US$0.001 nominal value | NASDAQ Global Select Market* | ||||||
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 ☐o 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 ☒ý
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 ☒ No ☐
Yes ý 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 RegulationS-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, a non-accelerated filer or anon-accelerated filer.an emerging growth company. See definition of “accelerated"large accelerated filer," "accelerated filer," and large accelerated filer”"emerging growth company" in Rule12b-2 of the Exchange Act. (Check one):Act:
| Large accelerated filer | Accelerated filer o | 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 |
If “Other”"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 ☐o
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).
Yes ☐o No ☒ý
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS | ||||||
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE | 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 15T. CONTROLS AND PROCEDURES | 166 | |||||
ITEM 16. [RESERVED] | 166 | |||||
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT | 166 | |||||
ITEM 16B. CODE OF ETHICS | 166 | |||||
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES | 166 | |||||
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES | 167 | |||||
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS | 168 | |||||
ITEM 16F. CHANGE IN REGISTRANT'S CERTIFYING ACCOUNTANT | 168 | |||||
ITEM 16G. CORPORATE GOVERNANCE | 168 | |||||
ITEM 16H MINE SAFETY DISCLOSURE | 169 | |||||
ITEM 17. FINANCIAL STATEMENTS | 170 | |||||
ITEM 18. FINANCIAL STATEMENTS | 170 | |||||
ITEM 19. EXHIBITS | 171 |
On 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. changed its name to VEON Ltd. Please see Exhibit 1.2 to this Annual Report an Form 20-F.
References in this Annual Report on Form20-F to “VEON” and the “VEON Group,”"VEON" as well as references to “our"our company,” “the" "the company,” “our" "our group,” “the" "the group,” “we,” “us,” “our”" "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 Form20-F are to sections of this Annual Report on Form20-F, unless otherwise indicated. This Annual Report on Form
20-F includes audited consolidated financial statements asPresentation of and for the years ended December 31, 2016, 2015 and 2014 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.
In this Annual Report on Form20-F, references to (i) “U.S. dollars” and “US$” are to the lawful currencyInformation of the United States of America, (ii) “Russian rubles,” “rubles” or “RUB” are to 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,” “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” or “KZT” are to the lawful currency of the Republic of Kazakhstan, (ix) “Kyrgyz som” are to the lawful currency of Kyrgyzstan, (x) “Armenian dram” are to the lawful currency of the Republic of Armenia, (xi) “Tajik somoni” are to the lawful currency of Tajikistan, (xii) “Georgian lari” are to the lawful currency of Georgia, (xiii) “Lao kip” are to the lawful currency of Laos and (xiv) “€,” “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” are to the Euro Interbank Offered Rate, references to “MosPRIME” are to the Moscow Prime Offered Rate, references to “KIBOR” are to the Karachi Interbank Offered Rate and references to “BangladeshiT-Bill” are to Bangladeshi Treasury Bills.Italy Joint Venture
This Annual Report on Form20-F contains translations of certainnon-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 relevantnon-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, Pakistani rupee, Algerian dinar, Lao Kip We and Bangladeshi taka amounts at the exchange rates provided by Bloomberg Finance L.P.CK Hutchison Holdings Limited ("Hutchison") jointly own and from Russian ruble, Ukrainian hryvnia, Kazakh tenge, Uzbek som, Armenian dram, Georgian lari and Kyrgyz som amounts at official exchange rates, as described in more detail under “Item 5—Operating and Financial Review and Prospects—Certain Ongoing Factors Affecting Our Financial Position and Results of Operations—Foreign Currency Translation” below.
The discussionoperate 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 telecommunications industry"3," "Wind," "Wind Tre Business" and "Infostrada" brands, as the "Italy Joint Venture" in this Annual Report on Form20-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.” 20-F.
Certain amounts and percentages that appear in this Annual Report on Form20-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.
As of November 5, 2016, VEON Ltd. owns a 50.0% share of the Italy Joint Venture (as defined herein). We account for the Italy Joint Venture using the equity method. Wemethod 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. AllVenture's operations. However, we include operational and certain limited financial information related tofor the Italy Joint Venture is the sole responsibility of the Italy Joint Venture’s management, and no information contained herein, including, but not limited to, the Italy Joint Venture’s financial and industry data, market projections and strategy, has been prepared by or on behalf of, or approved by, our management. VEON Ltd. is not making, and has not made, any written or oral representation or warranty, express or implied, of any nature whatsoever, with respect to any Italy Joint Venture information included in this Annual Report on Form20-F, other than the financial information that is derived directly from our financial statements.
Accounting Treatment of our Historical WIND Business and the new Italy Joint Venture.
On November 5, 2016, we completed a transaction to form a joint venture holding company with CK Hutchison Holdings Limited (“Hutchison”), through which we jointly own and operate our historical WIND and Hutchison’s historical 3 Italia telecommunications businesses in Italy. Italy is no longer a reportable segment. We account for the Italy Joint Venture using the equity method. However, financial and operational information for Italy is included in this Annual Report on Form20-F because completion of the Italy Joint Venture occurred ten months into the 2016 financial year, and because the Italy Joint Venture is a significant part of our business.
From January 1, 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 our Italian business unit as an asset held for sale and discontinued operation in our financial statements. In connection with this classification, VEON Ltd. no longer accounted for depreciation and amortization expenses of the Italian assets. The financial data for 2015, 2014, 2013 and 2012 reflects the classification of ItalyHistorical WIND Business as an asset held for sale and a discontinued operation.
The data for 2012 is unaudited. The intercompany positions were disclosed as related party transactions and balances. The transaction was successfully completed on November 5, 2016. Under the transaction, VEON Ltd. contributed its entire shareholding in the operations in Italy, in exchange for a 50% interest in the newly formed Italy Joint Venture. As a result, the company does not control Since January 1, 2017, management has included the Italy Joint Venture’s operations in Italy. Please referVenture as a reportable segment due to Notes 6, 13 and 26its increased contribution to our audited consolidatedoverall 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 elsewhere in this Annual Report on Form20-F the required financial statements for further information.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 and
Adjusted EBITDA Margin.is a non-IFRS financial measure. Adjusted EBITDA and Adjusted EBITDA Margin arenon-IFRS financial measures. VEON calculatesshould not be considered in isolation or as a substitute for analyses of the results as reported under IFRS. We calculate Adjusted EBITDA as profit/(loss) for the year/profit before tax before depreciation, amortization, loss from disposal of non-current assets and impairment loss, financefinancial expenses and costs, income tax expensenet foreign exchange gain/(loss) and the other line items reflected in the reconciliation table in “Item 5—Certain Performance Indicators—Adjusted EBITDA.”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 consolidatedtotal Adjusted EBITDA includes certain reconciliation adjustments necessary because our Russia segment excludes certain expenses from its Adjusted EBITDA. As a result of the reconciliations, our consolidatedthe 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 each of oursuch reportable segments.
For a reconciliation of Adjusted EBITDA Margin is calculated as 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 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.Note 7 to our audited consolidated financial statements.
Our management uses Adjusted EBITDA and Adjusted EBITDA margin as a supplemental performance measuresmeasure and believes that Adjusted EBITDA and Adjusted EBITDA Margin provideprovides useful information to investors because they are indicatorsit is an indicator of the strength and performance of the company’sour business operations, including itsour ability to fund discretionary spending such as capital expenditures, acquisitions and other investments, as well as indicate itsour 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’sour 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 and Adjusted EBITDA Margin also assistassists management and investors by increasing the comparability of the company’sour 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’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,
Adjusted EBITDA Margin
Adjusted EBITDA Margin is a limitation of EBITDA’s ornon-IFRS financial measure. Adjusted EBITDA’s useEBITDA Margin is calculated as Adjusted EBITDA divided by total operating revenue, expressed as a performance measure is that it does not reflect the periodic costspercentage. For a description of certain capitalized tangible and intangible assets used in generating revenue or the need to replace capital equipment over time. Reconciliation ofhow we calculate Adjusted EBITDA to profit for the year, the most directly comparable IFRS financial measure, is presentedand a discussion of its limitations in “Item 5—Certain Performance Indicators—evaluating our performance, see "—Adjusted EBITDA” below.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 Form20-F, we present capital expenditures, which areinclude purchases of new licenses, equipment, new construction, upgrades, software, other long-lived assets and related reasonable costs incurred prior to intended use of thenon-current asset, 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. In this Annual ReportFor more information on Form20-F, we presentour capital expenditures, for all periods excluding our historical Italian operations (WIND) following its classification as asset held for salesee "Item 5—Operating and a discontinued operationFinancial Review and excluding the Italy Joint Venture. We also present capital expenditures without licenses. Reconciliation of capital expenditures to cash paid for purchase of property, plant and equipment and intangible assets, the most directly comparable IFRS financial measure, is presented in “Item 5—Key Information—Prospects—Liquidity and Capital Resources—Future Liquidity and Capital Requirements” below. For more information, please see “—Accounting Treatment of our Historical WIND Business and the new Italy Joint Venture”Requirements" and Note 67 to our audited consolidated financial statements included elsewhere instatements.
Certain Performance Indicators
In this Annual Report on Form20-F.
Functional currency financial measures. In the discussion and analysis of our results of operations, 20-F, we present certain financial measures in functional currency terms. Thesenon-IFRS financial measures include the resultsoperating data, including number of operationsmobile customers, mobile ARPU, number of our reportable segments in jurisdictions with local functional currencies,mobile data customers and exclude the impactnumber of translating the functional currency amounts to U.S. dollars. We analyze the performance of our reportable segments on a functional currency basis to increase the comparability of results between periods. Because changes in foreign exchange rates have anon-operating impact on the results of operations (as a result of translation to US$, our reporting currency),fixed-line broadband customers, which our management believes thatis useful in evaluating theirour 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 a functional currency basis provides an additional and meaningful assessmenteach of performance to our management and to investors. For information regarding our translation of foreign currency-denominated amounts into U.S. dollars,these metrics, see “Item"Item 5—Operating and Financial Review and Prospects—Certain Ongoing Factors Affecting Our Financial Position and Results of Operations—Foreign Currency Translation” and Notes 2 and 5 to our audited consolidated financial statements included elsewhere in their Annual Report on FormPerformance Indicators20-F.."
Market and Industry Data
This Annual Report on Form20-F contains 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. While weWe 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 Form20-F is sourced from the report of Analysys Mason, dated March 16, 2017.14, 2018. Mobile penetration rate is defined as mobile connections divided by population. Population figures for the mobile 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, 2016 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 have therefore been restated in this 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 Form20-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 Form20-F may appear without the “®”"®" or “TM”"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’companies' trade names, trademarks or service marks to imply a relationship with, or endorsement 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 Form20-F is the property of its respective holder.
Other Information
In this Annual Report on Form 20-F, references to (i) "U.S. dollars" and "US$" are to the lawful currency of the United States of America, (ii) "Russian rubles" or "RUB" are to 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" are to the Euro Interbank Offered Rate and references to "KIBOR" are to the Karachi Interbank Offered Rate.
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, Pakistani rupee, Algerian dinar and Bangladeshi taka amounts at the exchange rates provided by Bloomberg Finance L.P. and from Russian ruble, Ukrainian hryvnia, Kazakh tenge and Uzbek som amounts at official exchange rates, as described in more detail in "Item 5—Operating and Financial Review and Prospects—Factors Affecting Comparability of Financial Position and Results of Operations—Foreign Currency Translation."
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.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form20-F contains estimates and forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”"Securities Act") and Section 21E of the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”"Exchange Act"). Our estimates and forward-looking statements are mainly based on our current expectations and estimates of future events and trends, which affect or may affect our businesses and operations. Although we believe that these estimates and forward-looking statements are based upon reasonable assumptions, they are subject to numerous risks and uncertainties 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 Form20-F, may adversely affect our results as indicated in forward-looking statements. You should read this Annual Report on Form20-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”"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 may be influenced by various factors, including without limitation:
our anticipated performance and guidance for 2017 and 2018;
our expectations regarding our capital expendituresdebt and operational expenditures in and after 2016 and our ability to meet our projected capital requirements;
our plans to upgrade and build out our networks and to optimize our network operations;
our ability to integrate acquired companies, joint ventures or other forms of strategic partnerships into our existing businesses in a timely and cost-effective manner and to realize anticipated synergies therefrom;
our ability to meet license requirements and to obtain, maintain, renew or extend licenses, frequency allocations and frequency channels and obtain related regulatory approvals;
our plans regarding the marketing and distributionTable of our products and services, as well as our customer loyalty programs;Contents
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These statements are management’smanagement's best assessment of the company’sour strategic and financial position and of future market conditions, trends and other potential developments. While they 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:
risks relating to changes in political, economic and social conditions in each of the countries in which we operate (including as a result of armed conflict) such as any harm, reputational or 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;
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 Form20-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 Form20-F are made only as of the date of this Annual Report on Form20-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, 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, 20162017, 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 yearsyear ended December 31, 2013, and 2012,
have been audited by Ernst & Young Accountants LLP, an independent registered public accounting firm, 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 Form20-Fand the financial information in “Item"Item 5—Operating and Financial Review and Prospects.”Prospects."
The data for 2015, 2014 2013 and 20122013 reflects the classification of our Historical WIND Business as a discontinued operation, and the data for 2012 is unaudited.operation. The data for 2016 reflects 10 months of our Historical WIND Business classified as a discontinued operation and two months of WINDthe Italy Joint Venture classified as an equity investment. For more information, please see “Explanatory"Explanatory Note—Accounting TreatmentPresentation of our Historical WIND Business andFinancial Information of the new Italy Joint Venture”Venture" and Note 6 to our audited consolidated financial statements included elsewhere in this Annual Report on Formstatements. For a discussion of certain factors affecting comparability of our financial position and results of operations across periods, see "20-F.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 | |||||||||||
| | | | | | | | | | | | | | | | | |
Total operating revenue | 9,474 | 8,885 | 9,606 | 13,486 | 15,966 | |||||||||||
| | | | | | | | | | | | | | | | | |
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 | ) | ||||||
| | | | | | | | | | | | | | | | | |
| | Year ended December 31, | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 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 | ) | ||||||||
| | | | | | | | | | | | | | | | | |
Income tax expense | (472 | ) | (635 | ) | (220 | ) | (598 | ) | (1,813 | ) | ||||||
| | | | | | | | | | | | | | | | | |
(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 | ) | ||||||||
| | | | | | | | | | | | | | | | | |
| (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, | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 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 | |||||||||||
| | | | | | | | | | | | | | | | | |
Total liabilities | 15,594 | 15,150 | 29,960 | 37,066 | 40,796 | |||||||||||
| | | | | | | | | | | | | | | | | |
Total equity | 3,927 | 6,043 | 3,894 | 3,976 | 9,078 | |||||||||||
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Year ended December 31, | ||||||||||||||||||||
| 2016 | 2015(1) | 2014(1) | 2013 | 2012 Unaudited | ||||||||||||||||
| (in millions of U.S. dollars, except per share amounts and as indicated) | ||||||||||||||||||||
Consolidated income statements data: | ||||||||||||||||||||
Service revenue | 8,553 | 9,313 | 13,200 | 15,472 | 15,607 | |||||||||||||||
Sale of equipment and accessories | 184 | 190 | 218 | 391 | 422 | |||||||||||||||
Other revenue | 148 | 103 | 68 | 103 | 49 | |||||||||||||||
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Total operating revenue | 8,885 | 9,606 | 13,486 | 15,966 | 16,078 | |||||||||||||||
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Operating expenses | ||||||||||||||||||||
Service costs | 1,769 | 1,937 | 2,931 | 3,595 | 3,626 | |||||||||||||||
Cost of equipment and accessories | 216 | 231 | 252 | 438 | 400 | |||||||||||||||
Selling, general and administrative expenses | 3,668 | 4,563 | 4,743 | 6,256 | 4,962 | |||||||||||||||
Depreciation | 1,439 | 1,550 | 1,996 | 2,245 | 2,188 | |||||||||||||||
Amortization | 497 | 517 | 647 | 808 | 1,062 | |||||||||||||||
Impairment loss | 192 | 245 | 976 | 2,963 | 391 | |||||||||||||||
Loss on disposals ofnon-current assets | 20 | 39 | 68 | 93 | 199 | |||||||||||||||
Total operating expenses | 7,801 | 9,082 | 11,613 | 16,398 | 12,828 | |||||||||||||||
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Operating profit | 1,084 | 524 | 1,873 | (432 | ) | 3,250 | ||||||||||||||
Finance costs | 830 | 829 | 1,077 | 1,213 | 1,058 | |||||||||||||||
Finance income | (69 | ) | (52 | ) | (52 | ) | (90 | ) | (151 | ) | ||||||||||
Othernon-operating losses/(gains) | 82 | 42 | (121 | ) | (84 | ) | (34 | ) | ||||||||||||
Share of (profit) / loss of associates and joint ventures accounted for using the equity method | (48 | ) | (14 | ) | 38 | 159 | 9 | |||||||||||||
Impairment of associates and joint ventures accounted for using the equity method | 99 | — | — | — | — | |||||||||||||||
Net foreign exchange (gain)/ loss | (157 | ) | 314 | 556 | 12 | (52 | ) | |||||||||||||
Profit/(loss) before tax | 347 | (595 | ) | 375 | (1,642 | ) | 2,420 | |||||||||||||
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Income tax expense | 635 | 220 | 598 | 1,813 | 730 | |||||||||||||||
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(Loss)/profit for the year from continuing operations | (288 | ) | (815 | ) | (223 | ) | (3,455 | ) | 1,690 | |||||||||||
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Profit/(loss) after tax for the period from discontinued operations | 920 | 262 | (680 | ) | (633 | ) | (314 | ) | ||||||||||||
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 | ) | (314 | ) | ||||||||||||
Profit/(loss) for the year | 2,420 | (553 | ) | (903 | ) | (4,088 | ) | 1,376 | ||||||||||||
Attributable to: | ||||||||||||||||||||
The owners of the parent (continuing operations) | (380 | ) | (917 | ) | 33 | (1,992 | 1,853 | |||||||||||||
The owners of the parent (discontinued operations) | 2,708 | 262 | (680 | ) | (633 | ) | (314 | ) | ||||||||||||
Non-controlling interest | 92 | 102 | (256 | ) | (1,463 | ) | (163 | ) | ||||||||||||
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| 2,420 | (553 | ) | (903 | ) | (4,088 | ) | 1,376 | |||||||||||||
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Earnings/(loss) per share from continuing operations | ||||||||||||||||||||
Basic, (loss)/profit for the year attributable to ordinary equity holders of the parent | (0.22 | ) | (0.52 | ) | 0.02 | (1.16 | ) | 1.14 | ||||||||||||
Diluted, (loss)/profit for the year attributable to ordinary equity holders of the parent | (0.22 | ) | (0.52 | ) | 0.02 | (1.16 | ) | 1.14 | ||||||||||||
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 | ) | (0.19 | ) | ||||||||||||
Diluted, (loss)/profit for the year attributable to ordinary equity holders of the parent | 1.55 | 0.15 | (0.39 | ) | (0.37 | ) | (0.19 | ) | ||||||||||||
Weighted average number of common shares (millions) | 1,749 | 1,748 | 1,748 | 1,711 | 1,618 | |||||||||||||||
Dividends declared per share | 0.23 | 0.035 | 0.035 | 1.24 | 0.80 | |||||||||||||||
Consolidated balance sheet data: Cash and cash equivalents Working capital (deficit)(1) Property and equipment, net Intangible assets and goodwill Total assets Total liabilities Total equity As of December 31, 2016 2015 2014 2013(2) 2012
Unaudited(2) (in millions of U.S. dollars) 2,942 3,614 6,342 4,454 4,949 (2,007 ) (156 ) (938 ) (2,815 ) (2,421 ) 6,719 6,239 11,849 15,493 15,666 6,953 6,447 18,002 24,546 27,565 21,193 33,854 41,042 49,747 54,737 15,150 29,960 37,066 40,796 39,988 6,043 3,894 3,976 9,078 14,749
SELECTED OPERATING DATA
The following selected operating data as of and for the years ended December 31, 2017, 2016, 2015, 2014 2013 and 20122013 has been derived from internal company sources. The number of mobile data customers and fixed-line broadband customers have not been included as of December 31, 2012 because we did not have an operational protocol to collect that data in 2012. 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, | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 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 and for December 31, | ||||||||||||||||||||
| 2016 | 2015 | 2014 | 2013 | 2012 | ||||||||||||||||
Selected company operating data(1): | ||||||||||||||||||||
Mobile customers in millions | ||||||||||||||||||||
Russia | 58.3 | 59.8 | 57.2 | 56.5 | 56.1 | |||||||||||||||
Pakistan | 51.6 | 36.2 | 38.5 | 37.6 | 36.1 | |||||||||||||||
Algeria(2) | 16.3 | 17.0 | 17.7 | 17.6 | 16.7 | |||||||||||||||
Bangladesh | 30.4 | 32.3 | 30.8 | 28.8 | 25.9 | |||||||||||||||
Ukraine(2) | 26.1 | 25.4 | 26.2 | 25.8 | 25.1 | |||||||||||||||
Uzbekistan | 9.5 | 9.9 | 10.6 | 10.5 | 10.2 | |||||||||||||||
Others(3) | 15.3 | 15.7 | 16.1 | 15.3 | 14.3 | |||||||||||||||
Total mobile customers(4) | 207.5 | 196.3 | 197.1 | 192.1 | 184.4 | |||||||||||||||
Mobile MOU in minutes(2)(5) | ||||||||||||||||||||
Russia | 326 | 310 | 304 | 291 | 276 | |||||||||||||||
Pakistan(6) | 628 | 623 | 433 | 226 | 214 | |||||||||||||||
Algeria(2)(6) | 332 | 369 | 371 | 216 | 274 | |||||||||||||||
Bangladesh(6) | 312 | 306 | 197 | 184 | 216 | |||||||||||||||
Ukraine(2) | 559 | 543 | 508 | 501 | 513 | |||||||||||||||
Uzbekistan | 615 | 528 | 522 | 471 | 474 | |||||||||||||||
Mobile ARPU(2)(5) | ||||||||||||||||||||
Russia | US$ | 4.6 | US$ | 5.1 | US$ | 8.6 | US$ | 10.6 | US$ | 10.8 | ||||||||||
Pakistan | US$ | 2.3 | US$ | 2.1 | US$ | 2.1 | US$ | 2.3 | US$ | 2.6 | ||||||||||
Algeria(2) | US$ | 5.1 | US$ | 6.0 | US$ | 7.9 | US$ | 8.4 | US$ | 9.0 | ||||||||||
Bangladesh | US$ | 1.6 | US$ | 1.6 | US$ | 1.6 | US$ | 1.5 | US$ | 1.8 | ||||||||||
Ukraine(2) Uzbekistan Mobile data customers in millions Russia Pakistan Algeria(2) Bangladesh Ukraine(2) Uzbekistan(7) Others(3) Total mobile data customers(4) Fixed-line broadband customers in millions Russia Ukraine Others(3) Total broadband customers(4) As of and for December 31, 2016 2015 2014 2013 2012 US$ 1.7 US$ 1.8 US$ 3.1 US$ 4.7 US$ 5.2 US$ 5.6 US$ 5.7 US$ 5.6 US$ 5.3 US$ 4.6 36.6 34.3 31.9 29.4 — 25.1 16.8 14.4 10.9 — 7.0 4.1 1.3 0.5 — 14.9 14.0 12.2 9.8 — 11.2 12.0 11.1 11.3 — 4.6 4.7 5.4 5.4 — 7.9 7.8 8.4 8.1 — 107.3 93.7 84.7 75.4 — 2.2 2.2 2.3 2.3 — 0.8 0.8 0.8 — — 0.3 0.4 0.2 0.3 — 3.3 3.4 3.3 2.6 —
Not required.
Not required.
The risks below relate to our company and our American Depositary Shares (“ADSs”("ADSs"). Before purchasing our ADSs, you should carefully consider all of the information set forth in this Annual Report on Form20-F including, but not limited to, these risks.
In addition to those risk factors, there may be additional risks and uncertainties of which management is not aware or focused on or that management deems immaterial. Our business, financial condition or results of operations or prospects could be materially adversely affected by any of these risks. The trading price of our securities could decline due to any of these risks, and you may lose all or part of your investment.
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.
We have substantial amounts of indebtedness and debt service obligations. As of December 31, 2016,2017, the outstanding principal amount of our external debt for bonds, bank loans, equipment financing, and other loans from others amounted to approximately US$10.511.1 billion. For more information regarding our outstanding indebtedness and 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, which 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 levels 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 a 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 where they are secured, 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 or cross-acceleration) could have a material adverse effect on our business, financial condition, results of operations or 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” and Note 1817 to our audited consolidated financial statements included elsewhere in this Annual Report on Form20-F. Please also see “—A disposition by one or both of our largest shareholders of their respective stakes in VEON Ltd. or a change in control of VEON Ltd. could harm our business” for information regarding change of control provisions in some of our debt agreements.statements.
Aside from the risk of default, given our substantial amounts 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.
Our strategic initiatives, including with respect to our digital agenda, may not be ablesuccessfully implemented and the benefits we expect to successfully implementachieve may not be realized.
We continue to transform our strategic priorities.
We are rapidly transformingbusiness with the aim to reinvent the businessof reinventing our operations across all geographies and operations.markets in which we operate. This transformation involvesre-engineering fundamentals, working to revitalize the business and implementing a new digital model. However, thereThere can be no assurance that our strategy will be successfully implemented in every respect and will not cause changes in our operational efficiencies or structure. In addition, although we are working to improve revenue trendsthe implementation of our strategic priorities could result in our Algeria segment, there can be no assurance that the current trend of decreasing revenueincreased costs, conflicts with significant stakeholders, business interruptions and difficulty in Algeria will be reversed.
recruiting and retaining key personnel. A failure to obtain the anticipated benefits of our performance transformation program, including revenue targets;targets, cost optimization or a delay in the implementation of our transformation programs, could significantly affect our business, financial condition, results of operations, cash flows or prospects.
In addition, the implementation As part of our strategic prioritiesinitiative 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 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, in increased costs, conflicts with stakeholders,our strategy to modernize our technological and digital business interruptionsmodels may not be successful and difficulty in recruiting and retaining key personnel,our ambition to become an innovative telecommunications operator may not be achieved, which could harmadversely affect our 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 risks 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 Russia and 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. For a discussion ofmore information on the sanctions imposed against Russia and Ukraine, and Russia, see “Exhibit"Exhibit 99.2—Regulation of Telecommunications.” Our ability to raise additional capital may also be restricted by covenants in our financing agreements or 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.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 or prospects.
We are exposed to foreign currency exchange loss and currency fluctuation and translation 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 the euro. Thus, declining values of local currencies against the U.S. dollar, the Russian ruble or the euro could make it more difficult for us to repay or refinance our debt, purchase equipment or services denominated in U.S. dollar, denominated debt and/Russian ruble or euro denominated purchase equipment and services. Theeuro. For example, the values of the Russian, Algerian, Ukrainian, Uzbekistani, Pakistani and Kazakh 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. CurrencyWhile our total operating revenue in U.S. dollar terms was favorably impacted in 2017 from foreign currency transactions and translations, future currency fluctuations and volatility may result in losses or otherwise negatively impact our results of operations and resultoperations. In addition, changes in foreign currency transaction and translation losses in the future. For example, in 2016, total operating revenues in functional currency terms were relatively stable comparedexchange rates could also impact our ability to 2015, but in U.S. dollar terms, total operating revenues decreased by 8%.comply with covenants under our debt agreements. For more information about foreign currency translation, and our results of operations, see the sections entitled “Item"Item 5—Operating and Financial Review and Prospects—Results of Operations,” “Item 5—Operating and Financial Review and Prospects—Certain Ongoing Factors Affecting OurComparability of Financial Position and Results of Operations—Foreign Currency Translation” “Item," "Item 11—Quantitative and Qualitative Disclosures About Market Risk”Risk" and Notes 54 and 1817 to our audited consolidated financial statements included elsewherestatements.
Exchange rates may fluctuate if a government takes legislative or regulatory action with respect to its currency. For example, in this Annual Report on Form20-F.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 or prospects. We cannot ensure that our existing or future hedging strategies will sufficiently hedge against these risks.
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, cash flows or prospects. “Item"Item 5—Operating and Financial Review and Prospects—Certain Ongoing Factors Affecting OurComparability of Financial Position and Results of Operations—Inflation.”Inflation."
Changes in exchange rates could also impact our ability to comply with covenants under our debt agreements. Exchange rate risks could harm our business, financial condition, resultsTable of operations or prospects. We cannot ensure that our existing or future hedging strategies will sufficiently hedge against these risks.Contents
As a holding company, VEON Ltd. depends on the ability of its subsidiaries to pay dividends and therefore on the performance of its subsidiaries and istheir 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.
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 VEON Ltd.’sits subsidiaries to pay dividends and make payments or loansother transfers to VEON Ltd. depends on the success of their businesses and is not guaranteed. Although
VEON Ltd. 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.
VEON Ltd.’s's subsidiaries are separate and distinct legal entities. Any right that VEON Ltd.it 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. 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.
The ability of VEON Ltd.’s's subsidiaries to pay dividends and make payments or loans to VEON Ltd., and to guarantee VEON Ltd.’s'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. These covenants, laws and regulations, includeincluding restrictions on dividends, limitations on repatriation of cash and earnings limitationsand on the making of loans and repayment of debts, monetary transfer restrictions, and foreign currency exchange and related restrictions in certain agreements and/or certain jurisdictions in which VEON Ltd.’s's subsidiaries operate.operate or both. For further detailsmore 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"Item 5—Operating and Financial Review and Prospects—Certain Ongoing Factors Affecting OurComparability of Financial Position and Results of Operations—Foreign Currency Controls and Currency Restrictions”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.” 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 and relationships carry inherent business risks.”operations."
We have incurred and are continuing to incur costs and related management oversight obligations in connection with our obligations under the DPA, the SEC Judgment and the Dutch Settlement Agreement, which may be significant.
VEON Ltd. is subject to a DPAdeferred prosecution agreement ("DPA") with the DOJ, a judgment entered by the United States District Court for the Southern District of New York related to an agreement with the SEC Judgment(the "SEC Judgment") and the Dutch Settlement Agreementa settlement agreement with the OM. See “Item 8—Financial Information—A. Consolidated Statements and Other Financial Information—A.7. Legal Proceedings” and Notes25 and 27OM (the "Dutch Settlement Agreement"). For more information, see Note 22 to our audited consolidated financial statements included elsewhere in this Annual Report on Form20-F.statements. In conjunction with the DPA and pursuant to the SEC Judgment, VEON Ltd. is required to retain, at ourits own expense, an independent compliance monitor. The independent compliance monitor has been appointed.was appointed in 2016. Pursuant to the DPA and the SEC Judgment, the monitorship will continue for a period of three years from 2016, and 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. In addition,
VEON Ltd. incurred fines and disgorgement payablecontinues to the U.S. and Dutch authorities in connection with the entry into the DPA, the SEC Judgment and the Dutch Settlement Agreement. VEON Ltd. has incurred significantincur costs in
connection with the disposition of these investigations and agreements, including retention of legal counsel and other vendors/advisors and other costs related to the investigations undertaken in connection with these matters. VEON Ltd. currently cannot estimate the additional costs that it is likely to incur in connection with compliance with the DPA, the SEC Judgment and the Dutch Settlement Agreement, including the ongoing obligations relating to the monitorship, itscosts of legal representation, our obligations to cooperate with the agencies regarding their investigations of other parties the monitorship, and the costsimplementation of implementing the changes, if any, to its compliance program, internal controls, policies and procedures required by the monitor. However, suchWe 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 continue to implement,maintain, a compliance and ethics program designed to prevent and detect violations of the U.S. Foreign Corrupt Practices Act (the “FCPA”"FCPA") and other applicable anti-corruption laws throughout its operations. Further, VEON Ltd. must continue to undertake a review of its existing internal accounting controls, policies, and procedures regarding compliance with the FCPA and other applicable anti-corruption laws. The implementation of these programs and theIn connection with this review, of ourwe have adopted new or modified existing internal accounting controls, policies, and procedures regarding compliance with the FCPA and other applicable anti-corruption lawslaws. However, the implementation of such measures is ongoing, and may continue to take significant management time and resources.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, (butbut not limited to)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 in the information that was filed in connection with the DPA. Under such circumstance,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 injunction 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 our business, financial condition, results of operations, cash flows or prospects.
We may also face other potentially negative consequences relating to the investigations by and agreements with the DOJ, SEC and OM. None of theThe DPA, the SEC Judgment or the Dutch Settlement Agreement preventsdo 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 preventsdo 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, and may schedulebut further hearings.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 impactaffect the perception of us and result in reputational harm to our company.
Efforts to merge with or acquire other companies or product lines,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 if we complete a merger, an acquisition or other strategic partnership, wesuccess with such efforts may incur or assumesubject us to additional liabilities or experience integration problems.
We seek from time to time to merge with or acquire other companies or product lines,businesses, divest our companies or businesses or to form strategic partnerships through the formation of joint ventures or otherwise, for various strategic reasons, including toto: outsource the management of our telecommunications tower sites; acquire more frequency spectrum, new technologies and service capabilities; network share; add new customers; increase market penetrationpenetration; or expand into new markets. In particular, on November 5, 2016, we completed a transaction to form a joint venture holding company with Hutchison, through which we jointly own and operate our historical WIND and Hutchison’s historical 3 Italia telecommunications businesses in Italy (see “Item 5—Operating and Financial Review and Prospects—Key Developments and Trends—Italy Joint Venture”); and on July 1, 2016 we completed a transaction with WTPL and Bank Alfalah, which resulted in the merger of our telecommunications businesses in Pakistan (see “Item 5—Operating and Financial Review and Prospects—Key Developments and Trends—Pakistan Merger”). 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:
increased
expenditure;
delays, or failure, in realizing the synergy benefits or costs of a merged or acquired or formed company or products;
higher costs of integration than we anticipated;
developments, which may, among other things, restrict our ability to maintain such strategic partnerships;
In addition, ana 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 acquire, merge with, acquire or form strategic partnerships with businesses or assets, which result in assuming unforeseen liabilities in respect ofor which we have not obtained contractual protections or for which protection is not available, this could harm our business, financial condition, results of operations, cash flows or prospects.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, please see Note 65 to our audited consolidated financial statements included elsewhere in this Annual Report on Form20-F.statements.
Further, we may not be ableseek to divest some of our activities as planned,businesses, including further divestitures of our tower businesses, but such as any potential towersdivestitures may take longer than anticipated or may not happen at all. For example, we have agreed in principle to the sales (which could cause costsof our Pakistan tower business and our Laos operations, but the closing of each of these transactions is subject to be materially highercertain conditions. If these or other divestitures do not occur or closing takes longer than anticipated),expected, this may result in less cash proceeds to the group and continued operations of non-core businesses that divert the divestitures we carry out could negatively impactattention of our business.management.
Integration of the Warid and Mobilink (now Jazz) brands is subject to significant uncertainties and risks.
Although the Pakistan Merger is now complete,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 expectedfurther 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 willcontinues 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 may beis 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.
On March 22, 2017, For example, as one of the Italian telecommunications regulator AGCOM issued a notice tostructural remedies for the regulatory approval of 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 inEuropean Commission required the EU, including Italy.entrance of a new competitor, Iliad, into the Italian market. The business plans and results of operations of the Italy Joint Venture has until April 15, 2017could be adversely affected by the entrance of Iliad in the market, which is expected to inform AGCOMoccur within the first half of the measures it has taken, if any, to ensure compliance. The Italy Joint Venture believes that this notice will not have a material impact on its digital offering.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 andTNS-Plus LLP), Algeria (OTA), Uzbekistan (Buzton JV)(Buzton), Kyrgyzstan (Sky Mobile LLC, Terra LLC), Georgia (Mobitel LLC), Tajikistan (Tacom LLC) and Laos (VimpelCom Lao Co., Ltd). We also own 50% of the Italy Joint Venture. In addition, in Algeria and
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.”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 shareholders’shareholders' agreements entered into with our strategic partners. If disagreements develop with our partners, or any existing disagreements are exacerbated, our business, financial condition, results of operations, cash flows or prospects may be 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, VEONwe 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.
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 significant 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 PJSC 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 agreement, 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 one or both of our largest shareholdersshareholder of their respective stakesits 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”) and Telenor East Holding II AS (“Telenor East”("LetterOne"), in our company such as industry expertise, management oversight and business acumen. In Historically, we derived the same benefits from Telenor ASA ("Telenor"), which, in
September 2016, Telenor East partially divested2017, following completion of its stake inshare sale offering, indicated that the transaction would be the final divestment of Telenor's VEON Ltd. pursuantADSs, as Telenor expects to an underwritten offeringuse the balance of its remaining ADSs to exchange and/or redeem its exchangeable bond. See "Item 7—Major Shareholders and simultaneously issuedRelated Party Transactions—A. Major Shareholders—Telenor Divestment." Should LetterOne undertake a bond, which is exchangeable under certain conditions for VEON Ltd.’s ADSs. Further, it announced its intention to divest the remainderdivestment of its stake, in VEON Ltd. The completion of the divestiture of Telenor East’s remaining stake is subject to uncertainties with respect to timing and demand for an offering. If LetterOne or Telenor East were to dispose of their stake in VEON Ltd., we would be deprived of those benefits, which could harm our business, financial condition, results of operations, cash flows or prospects. See “Item 5—Operating and Financial Review and Prospects—Key Developments and Trends—Telenor Share Sale and Exchangeable Bond Issuance.”
Some of In addition, our financing agreements (representing approximately US$1.4 billion in outstanding indebtedness asgenerally have "change of December 31, 2016) have “change of control”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 prospects.
Our strategic shareholdersshareholder may pursue diverse development strategies, and thiswhich may hinder our ability to expand and/or compete in suchcertain regions.
As of March 15, 2017, LetterOne is VEON Ltd.’s's largest shareholders, LetterOne and Telenor East, and their respective affiliates, beneficially owned, in the aggregate, approximately 71.6% of our issued and outstanding shares, with LetterOneshareholder, beneficially owning approximately 47.9% of our issued and outstanding shares and Telenor East beneficially owning approximately 23.7%as of ourMarch 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.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 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 shareholders’shareholders' or similar agreement impacting the composition of our supervisory board. A new supervisory board could take corporate actions or block corporate decisions by VEON Ltd. with respect to capital structure, financings, dispositions, acquisitions and commercial transactions that might not be in the best interest of the minority shareholders or other security holders. For more information on our largest shareholders, see “Item 7—Major Shareholders and Related Party Transactions—A. Major Shareholders.”
At various times from 2005-2012, 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, in Pakistan and Bangladesh, our subsidiaries directly compete with subsidiaries of Telenor ASA (“Telenor���). See “Item 5—Operating and Financial Review and Prospects—Key Developments and Trends—Pakistan Merger.” We understand that LetterOne has an indirect minority interest in companies that compete with our subsidiaries in Ukraine, Kazakhstan and Georgia. It is possible that we will compete with Telenor and/or LetterOne in other markets in the future.
We cannot assure you that our relationship with LetterOne and Telenor 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, financial condition, results of operations, cash flows or prospects.
Litigation and disputes among our two largest shareholders and us could materially affect our business.
In the past, our two largest shareholders, LetterOne and Telenor East, have been involved in disputes and litigation regarding our group companies, against one another and VEON Ltd. Further disputes among our two largest shareholders and us could harm our business, financial condition, results of operations, cash flows or prospects. For more information on our two largest shareholders, see “Item 7—Major Shareholders and Related Party Transactions—A. Major Shareholders” below.
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 may 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.
e-accounts. For a description of the key trends with respect to our business, see “Item 5—Operating and Financial Review and Prospects—Key Developments and Trends.”
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. Further,In addition, we conduct, as appropriate, training of our employees and assessments of, and due diligence on, our employees, 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.
Further, Furthermore, our brandreputation 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’sgroup's stated purpose and values. This reputationreputational risk may arise in many different ways, including:
conduct other policies and internal standards;
failure to comply with internal standards and policies;
association with controversialclients, transactions, projects, countries or governments;
Our MFS and digital financial services (“DFS”)DFS offerings are complex and increase our exposure to fraud, money laundering and reputational risk.
The provision of MFS and DFS included as part of our new VEON personal internet platform, is complex and involves regulatory and compliance requirements. It may involve cash handling, exposing us to risk of fraud andthat our customers engage in fraudulent activities, money laundering or terrorism financing, which in turn could result in potential liability and potential reputational damage if these were to occur.damage. Any violation of anti-money laundering laws or regulations on our MFS or DFS networks could have a material adverse effect on our financial condition and results of 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, please see “—Our brand,"—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 financial condition,practices that may adversely affect our 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 MFS and 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’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.
We 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 performance transformation programcontinued strategy could result in employee dissatisfaction. For example, in February 2016, Banglalink Digital Communications Limited (“BDCL”) experienced labor disruptions in connection with the implementation of our announced performance transformation program. 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, please see “Item"Item 6—Directors, Senior Management and Employees—D. Employees.”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 more of our customers or suppliers, experience a labor dispute or disruption, it could result in increased costs, negative media attention and political controversy, and harm our business, financial condition, results of operations, cash flows or prospects.
Our majority stake in an Egyptian public company and 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 (“GTH”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 sharebuy-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. UponFollowing ratification by the Egyptian Financial Supervisory Authority of the board minutes for the cancellation of the GDR program, our shareholding in GTH will increaseincreased 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, 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. See “Item 5—Operating and Financial Review and Prospects—Key Developments and Trends—"Item 4—Information on the Company—Overview—Recent Developments—VEON Holdings B.V. submits cash tender offer in relation to GTH ShareBuy-Back." and Cancellation
Table of GDR Program.”Contents
GTH is the holding company for a number of our assets in Africa and Asia, including Algeria, Bangladesh and Pakistan. GTH is exposedhas experienced and expects to continue to experience the risk of unpredictable and adverse government action and severe delays in obtaining necessary
government approvals stemming from unrestthe political and economic conditions in Egypt during recent years.Egypt. Furthermore, GTH is, and may in the future be, subject to significant tax claims under existing or new Egyptian tax law and this could expose GTH to increased tax liability. For more information on tax claims of the Egyptian authorities, please see “—Legal and Regulatory Risks—We could be subject to tax claims that could harm our business” and Note 2726 to our audited consolidated financial statements included elsewhere in this Annual Report on Form20-F.statements.
Adoption of new accounting standards could affect reported results and financial position.
Our accounting policies and methods are fundamental to how we record and report our financial condition and results of 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.
For details of the implementation of new standards and interpretations issued, see Notes 3 and 4 to our audited consolidated financial statements included elsewhere in this Annual Report on Form20-F. In particular, VEON Ltd. iswe are required to adopt the new accounting standards IFRS 9Financial Instruments and IFRS 15Revenue from Contracts with Customers,, each effective from January 1, 2018, and IFRS 16Leases,, effective for the financial years from January 1, 2019. These changes couldThe 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 ayet to assess the impact of IFRS 16, which may be material, impact on ourto the consolidated income statement and consolidated financial statements.position upon adoption in 2019. Such impact is under analysis as of the date of this Annual Report on Form20-F. For more information on the implementation of new standards and interpretations issued, see Notes 2 and 3 to our audited consolidated financial statements.
The telecommunications industry is highly capital intensive and requires substantial and ongoing expenditures of capital.
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, cash 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. For instance, in the year ended December 31, 2016, over 87% of our customers in each of the jurisdictions in whichwho we operate, which excludes the Italy Joint Venture, were prepaid customers. 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, pursuant to the contract terms and/or applicable legislation. The loss of a larger number of customers than anticipated could result in a loss of a significant amount of expected revenue.penalty. Because we incur costs based on our expectations of future revenue, the 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 developments with respect to our business, see "Item 5—Operating and Financial Review and Prospects—Key Developments and Trends."
We operate 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. For example, the French operator Iliad is expectedOur financial performance has been and will continue to launchbe significantly determined by our success in adding, retaining and engaging our customers. As penetration rates increase in the Italian marketmarkets in 2017 aswhich 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 new mobile operator and as a beneficiarynumber of other competitors in each of the remedy packagemarkets in which we agreed withoperate 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 European Commission forcompetition in our markets, see "Item 4—Information on the completion of the Italy Joint Venture.Company."
Each of the items discussed immediately below regarding increased competition could materially harm our business, financial condition, results of operations, cash flows or prospects:
in markets where we are limited in the growth of our customer base, 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;
competitors may reach customers more effectively through a better use of digital and physical distribution channels;
For more information on the competition in our markets, see “Item 4—Information on the Company.”
We may be unable to develop 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 Tajikistan and Italy have each reached mobile penetration rates exceeding 100.0%100%, according to Analysys Mason. Increasing competition, market saturation and technological development lead to the increased importance of data services in the Russian market and, to a lesser extent, the markets of other Commonwealth of Independent States (“CIS”("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 growth strategy in these markets will be to increase our share of the high-value customer market, increase usage of data and improve customer loyalty. If we fail to develop these additional sources of revenue, it could harm our business, financial condition, results of operations, cash 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.
Further, we operate or are developing 3G, networks, 4G/LTE networks and networks beyond 4G/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 other 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, 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”("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, including the appointment of a Director of Cyber Security in 2015, we could still experienceremain 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 Form20-F, we have suffered minor direct and indirect cybersecurity incidents targeting our internal infrastructure that have been promptly contained by the response teams, generating limited or negligible impacts. However, suchimpacts, 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 andor may developbe persistent over long periods of time during which theydamage 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.
Furthermore, we are subject to data protection laws and regulations of state authorities regarding information security in jurisdictions in which we operate. For example, data protection laws and regulations in Russia establish two categories of information with corresponding levels of protection – state secret and other data (personal data of customers, correspondence privacy and information on rendered telecommunication services), and operators must implement the required level of data protection. See “Exhibit 99.2—Regulation of Telecommunications—Regulation of Telecommunications in Russia—Data Protection.” 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. Violation of data protection lawsIn some jurisdictions in which we operate, such as Russia, legislation is being implemented to establish a criminal offense in some countries, and individuals can be imprisoned or fined.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.
We may have to expend significant resources to protect against security breaches.
Regulatory authorities around the world are considering a number of legislative and regulatory proposals concerning data protection, including measures to ensure that our encryption of users’ data does not hinder law enforcement agencies’ access to that data. In addition, the interpretation and application of consumer and data protection laws in the United States, the European Union and elsewhere are often uncertain and in flux. It is possible that these laws may be interpreted and applied in a manner that is inconsistent with our data practices. 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. Complying with these various laws could cause us to incur substantial costs or require us to change our business practices in a manner adverse to our business.
Our ability to profitably provide telecommunications services depends in part on the commercial terms of our interconnection agreements.
Our ability to secure and maintain interconnection 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 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, cash flows or prospects. See “ItemFor more information, see "Item 4—Information on the Company—Interconnection Agreements.”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. Our technological infrastructure is vulnerable to damage or disruptions from other 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, such as breaches of our network or information technology security. WeFor example, due to a severe monsoon
season, 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 and a possibleterrorism. An attack on or near our premises, equipment or points of sale could result in causalities, property damage, business interruption, legal liability and/orand damage to our brand or reputation.
In addition, our Our business may also be disrupted by computer viruses or other technical or operational issues. We cannot be sure that our network systemand information technology systems will not be the target of a virus or subject to other technical or operationalsuch issues, or, if it is,they are, that we will be able to maintain the integrity of our customers’customers' data or that a virus or other technical or operational issues will not disrupt our network causingor systems and cause significant harm to our operations. Also,For example, in recent years, during installations of new software, we have experienced network service interruptions.
interruptions during installations of 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 addition, the potential liabilities associated with these events could exceed the business interruption insurance 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 core number of suppliers, principally Ericsson, Huawei, Nokia Solutions and Networks, Cisco Systems and ZTE Corporation (“ZTE”("ZTE") although some of the equipment that we use is available from other suppliers. The successfulbuild-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. For example, in March 2016, the U.S. Department of Commerce’s Bureau of Industry and Security imposed restrictions on exports and re-exports of U.S. products, software and technology to ZTE and three of its affiliates. These restrictions were lifted in March 2017, however, there can be no assurance that third parties suppliers will not be subject to similar programs in the future. OurIn addition, our business could be materially harmed if export andre-export restrictions impact our suppliers’suppliers' ability to procure products, technology, or software from the United States that is necessary for the production and timely and satisfactory delivery of the supplies and equipment that we source from thesethird-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, such as Russia and Kazakhstan. The Italy Joint Venture also outsources a portion of its networks. See “ItemFor more information, see "Item 4—Information on the Company—Property, Plant and Equipment—Mobile Telecommunications EquipmentEquipment." As a result, the implementation of such initiatives, including our digital stack and Operations—Site Procurement and Maintenance” and “Item 5—Operating and Financial Review and Prospects—Key Developments and Trends—Disposal ofNon-Core Assets and Network and Tower Sharing Agreements.” Furthermore, in June 2016, we entered into a US$1 billion long-term global software agreement with Ericsson to develop, implement and service over a seven year period, new software and cloud technologies across our customer-facing IT infrastructure. See “Item 4—Informationdata management platform, is dependent on the Company—Property, Plant and Equipment—Information Technology.”third parties.
Our business could be materially harmed if our agreements with these or other third parties were to terminate or if negative developments (financial, legal, regulatory or otherwise) regarding such parties, or a dispute between us and such parties, causes the parties to no longer be able to deliver the required services on a timely basis or at all or otherwise fulfill their obligations under our agreements with them. If 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 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 equipment used on our networks. In addition, many of our mobile products and services are sold to customers through third 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 dealers that can generate the same level of revenue. Any negative developments regarding the third parties on which we depend could materially harm our business, financial condition, results of operations, cash 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 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”"Beeline" (Russia, Kazakhstan, Uzbekistan, Armenia, Tajikistan, Georgia, Laos and Kyrgyzstan), “Kyivstar”"Kyivstar" (Ukraine), “Mobilink” (now “Jazz” in Pakistan)"Jazz" (Pakistan), “Djezzy”"Djezzy" (Algeria), “banglalink” and "banglalink" (Bangladesh), our historical business in Italy’s logo, (“WIND”) 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. 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 are in the process of registering the VEON name, logo and certain taglines as a trademarktrademarks in the jurisdictions in which we operate.operate and other key territories. As of the date of this Annual Report on Form20-F, we have achieved registration of the VEON name and logo in severaleight of the seventeen jurisdictions sought, with the remainder pending, and have applied for registrationthe taglines still pending grant in severalfifteen jurisdictions for which our application is still outstanding.(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 sometwo 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 personal internet 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 personal internet platform is beingwas 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 intellectuallyintellectual 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, results of 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 highly skilled personnel, and, if we are unable to retain or motivate key 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, and on the talents and efforts of highly skilled personnel includingand the local management teamslevel of our subsidiaries.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.
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 any key personnel or an inability to attract, train, retain and motivate qualified members 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 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’spersonnel'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 markets, we are subject to different laws and regulations in each of the jurisdictions in which we provide services. Mobile, 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 market position (Ukraine Kazakhstan, Tajikistan and Uzbekistan), a dominant market position (Russia and Armenia)Kazakhstan) or are considered a dominant company (Kyrgyzstan). Our operations in Pakistan and Algeria previously held significant market player positions. In Pakistan, this designation has been suspended while the courts consider an appeal by PMCL. In Algeria, the regulator withdrew this designation in September 2016. For further information on our market designations, see “Exhibit 99.2—Regulation of Telecommunications.” As we expandaddition, certain areas of our business and provide new services, such as MFS, wepractices may bebecome subject to additional laws and regulations. Regulatory complianceregulatory scrutiny from competition or data protection authorities, which may be costly and involve a significant expenditure of resources, thus negatively affecting our financial condition and results of operations.result in fines or other administrative penalties.
Certain regulations may require us to reduce roaming prices and mobile and/or fixed-line 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 proposed regulation in the European Union may abolishhas 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.
Data privacy laws and regulations apply broadly 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 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 and may conflict with other laws we are subject to, exposing us to regulatory risk. For more information, see “Exhibit 99.2—Regulation of Telecommunications.” As a data controller headquartered in the Netherlands and offering services to customers worldwide, including within the European Union, we are subject to the European data protection regime. The Italy Joint Venture is also subject to this regime.
In recent years, U.S. and European lawmakers and regulators have expressed concern over the retention and interception of telecommunications data. The European Commission proposed a draft of the new ePrivacy Regulation on January 10, 2017, which is targeted to apply from May 25, 2018. It will 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. The draft proposal 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. Unlike the current ePrivacy Directive, restrictions on the use of traffic and location data for value added services and the requirements on data retention and interception will likely apply toover-the-top service providers as well as traditional telecommunications service providers, which could broaden our exposure to data protection liability, restrict our ability to leverage our data and increase the costs of running our local companies. The draft also extends the strictopt-in marketing rules with limited exceptions to business to business communications, and significantly increases penalties.
The EU Data Protection Directive, as implemented into national laws by the EU member states, imposes strict obligations and restrictions on the processing of personal data. The newEU-wide General Data Protection Regulation (GDPR) will become effective on May 25, 2018 (alongside the ePrivacy Regulation), replacing the current EU data protection laws, and will implement more stringent operational requirements for processors and controllers of personal data. These rules affect services offered by our EU entities and may conflict with the laws and guidance in other markets in which we operate. We are also subject to evolving EU laws on data export, as we may transfer personal data from the European Union to other jurisdictions. This could limit our ability to use and share personal data or could cause us to incur costs or require us to change our business practices in a manner adverse to our business.
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 of our services in the relevant market, 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), litigation and/or adverse publicity, which could have an adverse effect on our reputation and business. 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 some countries, we are required to obtain approval for offers and advertising campaigns, which can delay our 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 further information, see “Exhibit 99.2—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 Telecommunications.”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.
Adverse We face risks and costs in each of the markets in which we operate and may be subject to additional regulations. Any failure 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, could result in fines orsignificant liabilities, third party civil claims and other penalties and couldor otherwise harm our business, financial condition, results of operations, cash flows or prospects.
For more information on the regulatory environment in which we operate, see “Exhibit"Exhibit 99.2—Regulation of Telecommunications.”Telecommunications."
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 frequency 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 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, in Russia, we have in the pastpreviously been unable to obtain frequency allocations necessary to test or expand our networks in Russiaan assigned frequency band for LTE
network development and, in Bangladesh, currently are one of the largest operators, in Bangladesh, but holduntil 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 frequency 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 condition, results of operations, cash flows or 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, 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 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 the anti-corruption 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, cash 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 harm our business, financial condition, results of operations, cash flows or prospects. Investigations of any actual or alleged violations of such laws or policies related to us could harm our business, financial condition, results of operations, cash flows or prospects.
Please see also “Risks Related to Our Business—We have incurred and are continuing to incur costs and related management oversight obligations in connection with our obligations under the DPA, the SEC Judgment and the Dutch Settlement Agreement, which may be significant,” “—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” and “Item 8—Financial Information—A. Consolidated Statements and Other Financial Information—A.7. Legal Proceedings” and Notes25 and 27 to our audited consolidated financial statements included elsewhere in this Annual Report on Form20-F.
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 changes 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 Pakistan, new regulationssome of the markets in which we operate SIM verification and draft lawsre-verification initiatives have been proposed that could separately (i) require any mobile operator with over a 25% market share, such asimplemented. In Pakistan, our subsidiary in Pakistan,had to seek approval from the Pakistan Telecommunication Authority (“PTA”) before changing its tariffs; and (ii) introduce obligations on telecommunications operators requiring them to upgrade systems and security as well as maintain backups and retain mobile data for a sufficient period of time as well as allow for real time recording of data for extended periods.
Following various terrorist attacks, the Government of Pakistan introduced Standard Operating Procedures (“SOP”) requiring all mobile operators tore-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 our subsidiary in Pakistan, this involved there-verification of more than 38 million SIM cards andin 2016, with operators blocking all SIM cards that could not be verified, had to be blocked by the operators. Asand which resulted in a resultloss of there-verification, the Mobilink brand (now Jazz) lost customers retaining 87%representing approximately 13% of its subscribercustomer base. In Bangladesh, the regulator initiated similar SIMre-verification requirements from December 16, 2015,in 2016, which resulted in 3.8 million SIM cards being blocked by Banglalink, and for which we may incur additional fees, orand which may require additional time and/or resources from management at VEON Ltd. and/or BDCL.Banglalink. Similar actions were recentlyhave been introduced, or are being contemplated, in Algeria, andother markets in which we anticipate that they will be introduced in Ukraine in 2017. See “Exhibit 99.2—Regulation of Telecommunications.” Such requirements could result inoperate. In addition to customer losses, andsuch requirements can result in claims from legitimate customers that are incorrectly blocked, as well as fines, license suspensions and other liabilities for failure to comply with the requirements. To the extentre-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. For more information about the effect ofre-verification on our results of operations, see “Item 5—Operating and Financial Review and Prospects—Results of Operations.”
In addition, many jurisdictions in which we operate including Federal Law No374-FZ in Russia, have adopted data processing laws, which prohibit the collection and storage of personal data on servers located outside of the respective jurisdictions. Violation of these laws by an operator may lead to a seizure of the operator’soperator's database and equipment, and/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 “—Risks Related"—We are subject to the Industry—Our brand,an increasing amount of data privacy laws and regulations that may require us to incur substantial costs and implement certain changes to our business financial condition,practices that may adversely affect our 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.”operations."
In certain jurisdictions in which we operate, the relevant regulators setregulator sets MTRs. If any such regulator setsets MTRs that are lower for us than the MTRs of our competitors, our interconnection costs may be higher and our interconnection revenues may be lower, relative to our competitors. In Algeria, for example, the MTRs set by the regulator in 2017 are significantly lower for Optimum Telecom Algeria S.p.A. (“Optimum”("Optimum") than for ourone of its competitors. For a discussion of developments in the regulation of MTRs, and other important government regulations impacting our business, see “Exhibit 99.2—Regulation of Telecommunications.”
In addition, we are 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 materially 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 embargo 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 the financing arrangements, as well as mandatory prepayment requirements in the event of a breach thereof. See “—Risks Related to Our Business—Substantial amounts
For a discussion of indebtednesscertain regulatory developments and debt service obligations could materially decrease our cash flow, adversely affecttrends and the impact on our business, and financial condition and prevent us from raising additional capital.”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 conduct business, and engage in various online activities.
The law relating to the liability of providers of these online services and products for the activities of their users is still unsettled in 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 theoriesgrounds 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.
Recent anti-terrorAnti-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 No374-FZ, dated July 6, 2016, (“Federal Law No374-FZ”) 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 No374-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"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. ThisFailure 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.
Most of the provisions of Federal Law No374-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 No374-FZ are still unclear, since subordinateimplementing 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 by 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’smanagement's attention and resources, could materially adversely affect our business and operations. We expect operators to compensate 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 management 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 emerging market countries where we operate, the application of the 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 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, cash flows or prospects.
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, 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 Russia'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 a change of 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 networkbuild-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. Such regulatory actions could adversely impact our ability to carry out divestitures in the 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 “ItemItem 4—Information on the Company—Licenses.”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 there can be no assurance that any license will be renewed upon expiration. Some of our licenses will expire in the near term,term. For more information about our licenses, including a license in Algeria that expired in 2016 and for which we are waiting for an official confirmation of renewal. See also, “Itemtheir expiration dates, see "Item 4—Information on the Company—Licenses.”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 we 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 about spectrum allocations and our licenses, including their expiration dates, please see the section of this Annual Report on Form20-F entitled “Item 4—Information on the Company.”
It may not be possible for us to procure in a timely manner, or at all, the permissions and registrations required for our 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, which could harm our business, financial condition, results of operations, cash 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 or antitrust proceedings and commercial disputes, the final outcome of which is 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 “Item 8—Financial Information—A. Consolidated Statements and Other Financial Information—A.7. Legal Proceedings” and Notes25 and 27 to our audited consolidated financial statements included elsewhere in this Annual Report on Form20-F.An adverse outcome in, or any disposition of, these or other proceedings (including any that may be asserted in the future) could harm our reputation and harm our business, financial condition, results of operations, cash 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, Algeria, Egypt, Pakistan, Bangladesh, Ukraine, Kazakhstan, Armenia, Georgia, Uzbekistan, Kyrgyzstan, Tajikistan and Italy. These claims have resulted, and future claims may result, in additional payments, including interest, fines and other penalties, to the tax authorities.
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 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 and/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 “Item 8—Financial Information—A. Consolidated Statements and Other Financial Information—A.7. Legal Proceedings” and Notes 25 and 2726 to our audited consolidated financial statements included elsewhere in this Annual Report on Form20-F.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.
On January 1, 2016, a new tax law became effective For example, in Uzbekistan, pursuant to which mobile telecommunications companies are subject to income tax rates based on profitability levels (7.5% tax for profitability levels up to 20%, and 50% tax for profitability levels exceeding 20%) and the tax per subscriber was increased by 100%, resulting in an increase in the statutory tax rate from 7.5% for the year ended December 31, 2015 to 50.0% for the year ended December 31, 2016 and an effective tax rate of 53.3% for the year ended December 31, 2016, which negatively impacted our results in Uzbekistan. In Bangladesh, supplementary duty has been increased due to additional subnational tax from 3% to 5% with effect from June 2016 and a 1% surcharge was implemented on mobile services from March 9, 2016. The minimum tax rate has also been increased in Bangladesh from 0.5% to 0.75% with effect from January 2015. 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.
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 result of the 2016 U.S. election and ongoing activity in the U.S. Congress relating to tax reform proposals, there is in particular a heightened possibility of significant changes to U.S. federal tax laws, which could affect our limited operations in the United States.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.
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, 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 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. In addition, in recent years, the Russian tax authorities have aggressively brought tax evasion claims relating to Russian companies’companies' use oftax-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. For further information on tax audits, see “Item 8—Financial Information—A. Consolidated Statements and Other Financial Information—A.7. Legal Proceedings” and Notes25 and 27Kyrgyzstan which, in some instances, have resulted in payments made under protest pending legal challenges and/or to our audited consolidated financial statements included elsewhere in this Annual Report on Form20-F.avoid the initiation or continuation of associated criminal proceedings.
Adverse 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 EconomicCo-operation and Development (“OECD”("OECD") there is an initiative aimed at avoiding base erosion and profit shifting (“BEPS”("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 EUAnti-Tax Avoidance Directive (“ATAD”("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 which 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 an increase of our tax liabilities as certain interest costs could no longer be deductible. Another development is the recently published proposal for a Council Directive on a Common Corporate Tax Base (“CCTB”("CCTB") and there-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 comparison to the Dutch regime because a minimum of a 10% shareholding would be required, as compared to the current 5% under the Dutch regime. On the other hand, the CCTB potentially introduces a notional interest deduction on equity, which the current Dutch rules do not make available. As a result, it is difficult to assess the impact of the enactment of these directives on our business.business, but such impact could have a material adverse effect on our business, financial condition or results of operations.
The Italy Joint Venture may be subject to a deferral or to a limitation of the deduction of interest expenses in Italy.
For taxpayers like the 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. The
amount of unused interest expense deduction may be carried forward to future years. Based on these rules, the Italy Joint Venture currently 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 may have an adverse impact on the deductibility of interest expenses for the Italy Joint Venture which, in turn, could harm our business, financial condition, results of operations or prospects.
We operate
Risks Related to Our Markets
The international economic environment could cause our business to decline.
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 uncertain judicialglobal markets has contributed to a challenging global economic environment in which to operate. As future developments are dependent upon a number of political and regulatory environments.
In many ofeconomic factors, we cannot accurately predict how long challenging conditions will exist or the emerging market countries where we operate,extent to which 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 environmentsmarkets in which we operate couldmay 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, in:
restrictionsit may be more difficult for us to attract new customers, more likely that customers will downgrade or delays in obtaining additional numbering capacity, receiving new licensesdisconnect their services and frequencies, receiving regulatory approvalsmore difficult for rolling out our networksus to maintain ARPUs at existing levels. The difficult economic environment and any future downturns in the regions foreconomies of markets in which we have licenses, receiving regulatory approvals for changingoperate or may operate in the future could also increase our frequency plans and importing and certifyingcosts, prevent us from executing our equipment;
difficulty in complying with newstrategies, hurt our liquidity, impair our ability to take advantage of future opportunities or to respond to competitive pressures, to refinance existing legislation and the terms of any noticesindebtedness or warnings received from the regulatory authorities in a timely manner;
adverse rulings by courts or government authorities resulting from a change in interpretation or inconsistent application of existing law;
significant additional costs and delays in implementing our global strategies and operating or business plans; and
a more challenging operating environment.
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, anymeet unexpected financial requirements, all of which could harm our business, financial condition, results of operations, cash flows or prospects.
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, Kazakhstan or other markets in which we operate. See “Exhibit 99.2—Regulation of Telecommunications.”
For example, in Russia, 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 “Vimpel-Communications” (“PJSC VimpelCom”) is deemed to be a strategic enterprise under the Russian Foreign Investment Law. As a result, any acquisitionglobal telecommunications company with operations in multiple markets, we may be adversely affected by a foreign investorbroad range 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 Government Commission on Control of Foreign Investment in the Russian Federation pursuant to the Russian Foreign Investment Law. 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. In Kazakhstan, according to the national security law, a foreign company cannot directly or indirectly own more than a 49% stake in a fixed-line
business operator without the consent of the Kazakhstani 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.
Furthermore the Federal Assembly, as the national legislature of the Russian Federation, is currently considering a draft bill which would introduce restrictions on the ability of foreign investors to control audiovisual service providers operating in Russia. In particular, foreign ownership would be restricted to 20%, subject to certain exemptions, including that the restrictions would not apply to audiovisual service providers that qualify as a strategic enterprise under the Russian Foreign Investment Law. It is not yet certain if this draft bill will be adopted and, if adopted, which specific restrictions on foreign investments could apply to the audiovisual industry and the company itself. If adopted, and depending on the final terms, the bill may affect ourPay-TV and VEON messenger projects by imposing additional costs and/or jeopardizing revenue projections.
Risks Related to Our Markets
The international economic environment could cause our business to decline.
After late 2008,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. In addition, because Russia, Kazakhstan and Algeria 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 falling and are currently at relatively low levels. 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 crisisOur operations may also be affected by the ongoing issues in Europe relating to risks of deflation, sovereign debt levels and low oil prices continue to pose potentially significant macroeconomic risks to our group.the suitability and stability of the euro.
Low Adverse economic developments specific to a particular market in which we operate may also affect our operations. For example, in Russia, low oil prices, together with the impact of economic sanctions—including those promulgated by the United States, which restrict certain financial transactions and dealings, even bynon-U.S. persons, involving certain industries and parties in Russia—sanctions and the significant devaluation of the Russian ruble, have negatively impacted and continue to have an adverse effect on the Russian economy and economic outlook and may also negatively impact our ability to raise external financing, particularly if the sanctions are broadened. The current difficult economic environmentFor more on sanctions affecting Russia and any future downturnshow it affects our operations, see "—Our operations may be adversely affected by ongoing developments in the economies of markets in which we operate or may operate in the future could diminish demand for our services, increase our costs, constrain our ability to retain existing customersRussia and collect payments from them and prevent us from executing our strategies. Adverse economic conditions could also hurt our liquidity and prevent us from obtaining financing needed to fund our development strategy, to take advantage 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, cash flows or prospects.Ukraine."
Deterioration of 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 recorded for tangible and intangible assets lowering their book values could impact certain covenants under our debt agreements, which could result in a deterioration of our financial condition, results of
operations or cash flows. For further information on the impairment of tangible and intangible assets and recoverable amounts (particularly key assumptions and sensitivities), see Note 10 to our audited consolidated financial statements included elsewhere in this Annual Report on Form20-F.statements.
Our operations may be adversely affected by ongoing developments in Russia and Ukraine.
The current situation in Russia and Ukraine, and the related responses of 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 where we have significant operations, which in turn could materially harm our financial condition, results of operations, cash flows or prospects.
In connection with the 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 businesses, organizations and 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, evennon-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 United States and the European Union have implemented certain export control restrictions related to Russia’sRussia's energy sector and military capabilities. Ukraine has also enacted sanctions with respect to certain Russian entities and individuals. Russia has responded with 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, imposing visa bans on certain persons, and imposing restrictions on the ability of Russian companies to comply with sanctions imposed by other countries. Russia announced sanctions against Turkey in response to an incident involving Russian and Turkish military aircraft in November 2015, including imposing a ban on Russian companies hiring Turkish workers and the imposition of visa requirements, as of January 1, 2016.
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"temporary occupied territories”territories" status to Crimea and an “anti-terrorist"anti-terrorist operation zone”zone" status to certain Eastern Ukraine regions which are currently not under the Ukrainian government’sgovernment's control, and has imposed certain restrictions and prohibitions on trade in goods and services in such territories. Our Ukrainian subsidiary, “Kyivstar”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” JSCKyivstar is obliged to provide services throughout Ukraine. “Kyivstar” JSCKyivstar has notified the regulatory authorities that “Kyivstar” JSC 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, whichincluding 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 situation in Crimea and Eastern Ukraine has resulted, and may in the future result, in damage or loss of assets, disruption of services, and regulatory issues which has, and may in the future, adversely impact our group. In addition, if there were an extended continuation or further 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 harm our business, financial condition, results of operations, cash flows or prospects. In particular, we could be materially adversely impacted by a continued decline of the Russian ruble against the U.S. dollar or the euro 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 are often complex and have resulted, and may in the future result, in conflicts, which could materially harm our business, financial condition, results of 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 greatgreater 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 2016, our subsidiary in Pakistan wasis ordered to shut down parts of its mobile network and services on a regular basisfrom time to time due to the security situation in the 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 in conflict zones or disputed territories and/or force us to broadcast propaganda or illegal instructions to our customers or others (or face consequences for failure to do so). Forced shutdowns, inappropriate use of our network, and/or compelling us to operate our network, and/or broadcast propaganda or illegal instructions could materially harm our business, financial condition, results of operations, cash flows or prospects.
Investors should fully appreciate the significance of the risks involved in investing in an emerging markets company and are urged to consult with their own legal, financial and tax advisors.
Social instability in the countries in 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 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, 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 we 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. Such banking risk cannot be completely eliminated by diversified borrowing and conducting 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 exchange controls or other currency restrictions, which could prevent us from making payments, including the repatriation of dividends and payments to third party suppliers, particularly in Uzbekistan, Ukraine, Bangladesh and Pakistan. For more information on currency restrictions, see “Item"Item 5—Operating and Financial Review and Prospects—Certain Ongoing Factors Affecting OurComparability of Financial Position and Results of Operations—Foreign Currency Controls and Currency Restrictions.”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 our business, financial condition, cash flows, results of 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 stock market in general has experienced extreme volatility that has often been unrelated to the operating performance of particular 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:
The sale of shares could adversely affect the market price of our ADSs.
Telenor East’sEast's issuance of exchangeable bonds, and subsequent exchanges of the existing and any futurethese exchangeable bonds for VEON Ltd.’s's ADSs, as well as our filing of a registration statement registering resale of VEON Ltd.’s's ADSs deliverable upon exchange of the exchangeable bonds and/or any additional divestures by Telenor may negatively affect the market for VEON Ltd.’s's ADSs. The sale of any of the VEON Ltd.’s'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, VEON Ltd.’s's ADSs.
Various factors may hinder the declaration and payment of dividends.
The payment of dividends is subject to the discretion of VEON Ltd.’s's supervisory board and VEON Ltd.’s's assets consist primarily of investments in its operating subsidiaries. For the financial year ended December 31, 2016,2017, we intend to paypaid a dividend in the aggregate amount of US$23 cents per share, comprised of US$3.5 cents per share paid as an interim dividend in December 2016 and US$19.528 cents per share, with a record date of March 30, 2017 and which is intended to be paid5, 2018, on April 12, 2017.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 VEON Ltd.’s's financial condition, its earnings and equity free cash flow, its leverage, its capital requirements, contractual restrictions, legal proceedings and such other factors as VEON Ltd.’s's supervisory board may consider relevant. For more information on our policy regarding dividends, see “Item 5—Operating and Financial Review and Prospects—Key Developments and Trends—New dividend policy,” “Item"Item 8—Financial Information—A. Consolidated Statements and Other Financial Information—A.8. Policy on Dividend Distributions” “—,""—Risks Related to Our Business—As a holding company, VEON Ltd. depends on the ability of its subsidiaries to pay dividends and therefore on the performance of its subsidiaries and istheir 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 “—Risks Related to Our Business—Our strategic partnerships and relationships carry inherent business risks.”operate."
Holders 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.
VEON Ltd. is a Bermuda exempted company. As a result, the rights of VEON Ltd.’s's shareholders are governed by Bermuda law and by VEON Ltd.’s'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 VEON Ltd.’s's bye-laws as registered holders of VEON Ltd.’s'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 VEON 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.
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 Form10-Q or provide current reports on Form8-K disclosing significant events within four business days of their occurrence. In addition, we are exempt from the SEC’sSEC's proxy rules, and proxy statements that we distribute will not be subject to review by the 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 Nasdaq must have a majority of independent directors, as defined in the NASDAQ rules. Bermuda 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 werequirement. Accordingly, VEON's shareholders do not have a majority of independent directors, as defined in the NASDAQ rules. Accordingly, VEON Ltd.’s shareholders 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 “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’sholder's ADSs. At our request,
the depositary will mail to holders any notice of shareholders’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’sholder'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 15, 2017 100%1, 2018, 69.9% of our issued and outstanding common shares were held of record by BNY (Nominees) Limited in the United Kingdom as agentcustodian 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 15, 2017, 231, 2018, 22 record holders of VEON Ltd.’s's ADRs, holding an aggregate of 353,454,732498,849,387 common shares (20.12%)(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 is rebranding to VEON and has changed its name to VEON, effective as of March 30, 2017. VEON is an international communicationsa leading global provider of connectivity and technology company, headquartered in Amsterdam, and driven by a vision to unlock new opportunities for customers as they navigate the digital world.internet services. Present in some of the world’sworld's most dynamic markets, VEON provides more than 200240 million customers (including the Italy Joint Venture) with voice, fixed broadband, data and digital services. VEON currently offers services to customers in 12 countries includingcountries: Russia, Italy (through our Italy Joint Venture), Pakistan, Algeria, Uzbekistan, Ukraine, Bangladesh, Kazakhstan, Kyrgyzstan, Tajikistan, Armenia Georgia and Laos.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, Tajikistan, Armenia and Georgia). We provide services under the “Beeline,” “Kyivstar,” “banglalink,” “Jazz”"Beeline," "Kyivstar," "banglalink," "Jazz" and “Djezzy”"Djezzy" brands. As of December 31, 2016,2017, we had 207.5 million mobile customers and 41,99439,938 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.”
TheProspects." In addition, the Italy Joint Venture offersprovides services to customers in Italy. It provides servicesItaly under the “WIND”"WIND" and “3”"3" brands and had 31.329.5 million customers and 9,3567,090 employees as of December 31, 2016.
Our rebranding In 2017, we rebranded from VimpelCom to VEON, seeksand launched the VEON platform in Russia, Ukraine, Georgia and Pakistan, after launching in Italy in 2016, to reflect our aimstrategy to move from being considered solely a telecommunications company to being considered more broadly as a company leveraging new technology company. VEON is being used as the branding name for both the company and its new personal internet platform.platforms with an asset-light business model. Technology is continuing to revolutionize the way users communicate, travel, bank, shop, consume and are entertained. While otherWe are focused on digitalizing our core telecommunications companies have triedbusiness model to respondensure that our customers can transact with us online on all dimensions, with the aim of ultimately leading to the digital challenge through acquiring technology companies, merging with media players or setting up incubators to host innovation, we have instead createdincreased customer satisfaction and a potentially lower cost structure for our business. Furthermore, our new VEON personal internet platform. It is built onplatform leverages there-engineering of our legacy systems
and data architecture, which will enableand 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 itthese revenue-share relationships, particularly those with local businesses in each of the countries in which we operate, will ultimately eliminate or greatly reduce the comparatively inefficientbricks-and-mortar service model and replace it with a smooth, easy, fun, contextual and intuitive experience.help grow business in those regions.
As part of our VEON rebranding,initiative to digitalize the core telecommunications business, we aimintend to implement a digital vision and strategy, moving towards a technology company with an asset-light business model in comparison to the capital-intensive traditional telecommunications model. We aim to reducecontinue focusing on increasing our capital expenditureinvestment efficiency, including with respect to revenue ratio and reduce our IT, capital expenditurenetwork, and distribution costs. We have secured network sharing agreements and aimintend to reduce the assetsmaintain our focus on our balance sheet. In the future,achieving an asset-light business model, where we anticipate that we will own only the core assets needed to operate our business. For further information on our strategic disposal of assets see “Item 5—Operating and Financial Review and Prospects—Key Developments and Trends—Disposal of
Non-Core Assets and Network and Tower Sharing Agreements.” We anticipate that we will investcombined operational expenditure and capital expenditure of approximately US$100 million per annum over the next fivefour years as part of the rollout of ourthe VEON brand, in the context of our group capital expenditure budget of over US$1.5 billion per year.platform. For further information on our capital expenditures, please see “Item"Item 5—Operating and Financial Review and Prospects—Liquidity and Capital Resources—FurtherFuture Liquidity and Capital Requirements.”Requirements." We anticipate that we will finance the investments (or the VEON personal internet platform) with operational cash flow, cash on our balance sheet and external financing that we currently have in place.
The VEON personal internet platform integrates data analytics and artificial intelligence, with the aim of putting the user in control. Withzero-rating as a fundamental component, as currently envisioned, VEON users will be able to use the VEON platform to stay connected for free, even when they are out of credit. We intend to work with music, transport, banking,e-commerce and other businesses, all of which will be integrated into a single personalized internet platform, VEON. We believe that these relationships, particularly those with local businesses in each of the countries in which we operate, will help grow those regional economies. We are also working through our technology landscape to deploy a fully digitalend-to-end solution to benefit our customers. The digital stack and data management platform will be the core of our IT, while our network will become software defined, intelligent and dynamic. In addition, we have announced partnerships with STUDIO+, Deezer and MasterCard, which will integrate new services into the platform for VEON users.
VEON Ltd. is an exempted company limited by shares registered under the Companies Act 1981 of Bermuda, as amended (the “Companies Act”"Companies Act"), on June 5, 2009, and our registered office is located at Victoria Place, 31 Victoria Street, Hamilton HM 10, Bermuda. The VEON Group’sOur headquarters are located at Claude Debussylaan 88, 1082 MD, Amsterdam, the Netherlands. Our telephone number is +31 20 797 7200. VEON 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 “Vimpel-Communications”"Vimpel-Communications") was founded in 1992. Since then, VEON has a rich history of adapting to shifts in the marketplace. Prior to 2014, VEON 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, VEON 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 PJSC VimpelCom became the first Russian company since 1903 to list shares on the New York Stock Exchange;
Exchange, where we remained listed until 2013 when we switched our listing to
Telenor, Norway’s leading telecommunications company became a strategic partner in PJSC VimpelCom in December 1998 and Table of Contents
the Alfa Group Consortium (“Alfa Group”) acquired strategic ownership interests in 2001;
VEONNASDAQ 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. combined their ownership of PJSC VimpelCom and Ukrainian mobile operator, “Kyivstar” underKyivstar, combined to create a new company, called VimpelCom Ltd. The newLtd, and established its headquarters were established in Amsterdam;Amsterdam.
More recently, our expansion efforts have included transactions involving operations outside of CIS. In 2011, VEONwe completed the acquisition of Wind Telecom S.p.A., an international provider of mobile and fixed-line telecommunications and internet services with operations in a number of countries including Italy, Algeria, Bangladesh and Pakistan;
Pakistan. On September 10, 2013, VEON Ltd. switchedJuly 1, 2016, Pakistan Mobile Communications Limited ("PMCL") merged with Warid Telecom Pakistan LLC ("Warid"), which resulted in the listingmerger of its ADSsour telecommunications businesses in Pakistan (a transaction we refer to as the NASDAQ Global Select Market from the New York Stock Exchange;
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In March 2015, WIND Telecomunicazioni S.p.A. (“WIND”) sold 90% of the shares of its wholly owned tower subsidiary, Galata S.p.A. (“Galata”) to Cellnex Telecom Terrestre SA, formerly named Abertis Telecom Terrestre SAU (“Cellnex”) and entered into tower services agreements with Galata; these agreements are now held by the Italy Joint Venture;
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In September 2016, Telenor East sold 163,875,000 of VEON Ltd.’s ADSs pursuant to an underwritten offering and also announced its intention to divest the remainder of its stake"Pakistan Merger" in VEON Ltd. In addition, Telenor East issued a US$1,000,000,000 0.25% bond due 2019, which is exchangeable for VEON Ltd.’s ADSs. See “Item 5—Operating and Financial Review and Prospects—Key Developments and Trends—Telenor Share Sale and Exchangeable Bond Issuance;”
this Annual Report on Form 20-F). On November 5, 2016, we formed a joint venture holding companythe Italy Joint Venture with Hutchison, through which we jointly own and operate our historicalHistorical WIND Business and Hutchison’s historical 3 Italia telecommunications businessesH3G S.p.A. in Italy. The companies were then merged in January 2017 (see “Item 5—Operating andSee "Explanatory Note—Presentation of Financial Review and Prospects—Key Developments and Trends—Information of the Italy Joint Venture”Venture" and Notes 6, 135, 14 and 2625 to our audited consolidated financial statements included elsewhere in this Annual Report on Form20-F);statements).
In February 2017, GTH completed a sharebuy-back for 10% of the total issued share capital of that company. In conjunction with the sharebuy-back, GTH cancelled listing of the global depositary
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On February 27, 2017, we announced our new name “VEON,”"VEON," which was approved by theour shareholders on March 30, 2017;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 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 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 owned by VEON (up to 1,997,639,608 shares, representing 42.31% of GTH's total shares). The MTO follows a share buyback in February 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 second listingmaterial impact on our business. The decision also grants tech neutrality in the 900 and 1800 MHz bands.
Liberalization of our common sharescurrency exchange rules 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.
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 Euronext Amsterdam,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 broaden our European investor base,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 3G network capacity. Banglalink purchased the spectrum for US$308.6 million, excluding VAT, with potential inclusionan upfront payment of 60% payable in European indices30 days and extended stock coverage. Such listingthe 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 become effectivebe 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
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 second quarterfirst half of 2017.2018.
Leadership changes
VEON has We have made changes in itsour management and board composition to focus on significant experience and expertise in compliance, transformation and digital.
During 20162017 and 2017,2018, as of the date of this Annual Report on Form 20-F, VEON made a number of strategic managementnew appointments to lead the company in its next phase of development. New appointments included:
Kjell Morten Johnsen as Head of Major Markets and Chief Executive Officer of PJSC VimpelCom;
Mark MacGannhave included Trond Westlie as Group Chief External Affairs Officer; and
Joshua DrewFinancial Officer, Ursula Burns as ActingChairman of the Supervisory Board, Guy Laurence as director of the Supervisory Board, Jacky Simmonds as Group Chief Compliance Officer.
People Officer and Alexander Pertsovsky as an alternate director for Alexey Reznikovich. The following people also transitioned to new roles from existing positions within VEON:
Aamir Hafeez Ibrahim Joshua Drew as Group Chief Compliance Officer; Jeffrey Hedberg as Chief Executive Officer of Pakistan;
Jeffrey Hedberg as Group Chief People Officer;
Matthieu GalvaniItaly; and Vasyl Latsanych as Chief Executive Officer of Algeria; and
Enrique Aznar as Chief Values and Culture Transformation Officer.
In March 2017, Joshua Drew was appointed as Acting Group Chief Compliance Officer following the resignation of Daniel Chapman. He will report directly to Scott Dresser, Group General Counsel. Mr. Drew has been a key member of the legal team since July 2016, when he joined us from Hewlett-Packard Enterprise, where he spent over five years in global roles with responsibility for anti-corruption compliance and investigations. He is also a former federal prosecutor in the U.S., including time with the U.S. Department of Justice’s Fraud section, which has responsibility for FCPA enforcement. This appointment has been discussed with the Audit Committee (which oversees compliance with the DPA, the SEC Judgment and the Dutch Settlement Agreement), the independent compliance monitor, the DOJ and the SEC. We are currently in the process of appointing a permanent Group Chief Compliance Officer.
Russia. In addition, Stan Chudnovskyon February 15, 2018, Aamir Hafeez Ibrahim, Chief Executive Officer of Pakistan, and Jørn P. Jensen joined the supervisory board,Peter Chernyshov, Chief Executive Officer of Ukraine, will now also serve as Head of Emerging Markets and Jørn Jensen replaced Trond Ø Westlie as chairmanHead of the audit committee.
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 StructureBusiness Units and Reportable Segments
VEON Ltd. is the holding company for a number of operating subsidiaries and holding companies in various jurisdictions. In the third quarter of 2015, we adopted a new regional structure, consisting of the three following business units, all of which report to our headquarters in Amsterdam:
Major Markets (Russia(which includes our operations in Russia and the Italy Joint Venture);
Emerging Markets (which includes our operations in Pakistan, Algeria, Bangladesh and Bangladesh)Laos); and
Eurasia (which includes our operations in Ukraine, Kazakhstan, Uzbekistan, Kyrgyzstan, Armenia, Tajikistan and Georgia).
Notwithstanding our new regional structure described above, we currently operate and manage VEON Ltd. on a geographical basis. In accordance with IFRS rules, this results in seveneight reportable segments. These segments are based on the different economic environments and varied stages of development across the geographical markets we serve, each of which requires different investment and marketing strategies.
Our reportable segments currently consist of the seven following eight segments:
Russia;
Pakistan (which was split out of the former “Africa & Asia” reportable segment);
Italy Joint Venture; Pakistan; Algeria;
Bangladesh (which was split out of the former “Africa & Asia” reportable segment);
Bangladesh; Ukraine;
Uzbekistan (which was split out of the former “CIS” reportable segment); Uzbekistan; and
HQ (transactions related to management activities within the group)group in Amsterdam and London).
As of January 1, 2017, management has included the Italy is no longerJoint Venture as a reportable segment following the completion of the Italy Joint Venture. For more information, please see Notes 6, 13 and 26due to its increased contribution to our audited consolidatedoverall financial statements included elsewhere in this Annual Report on Form20-F, “Item 5—Operatingresults and Financial Review and Prospects—Key Developments and Trends—Italy Joint Venture” and “Explanatory Note—Accounting Treatment of our Historical WIND Business and the new Italy Joint Venture.”
We also provide customer numbers for “Others,” which includes all results ofposition. "Others" represents our operations in Kazakhstan, Kyrgyzstan, Armenia, Tajikistan, Georgia and Laos.
From January 1, 2015 through June 30, 2016, management organizedLaos as well as intercompany eliminations and costs relating to centrally managed operations monitored outside of VEON's headquarters. For more information on our business in eight reportable segments, consisting ofsee "Item 5—Operating and Financial Review and Prospects—Reportable Segments" and Notes 7 and 14 to our seven current reporting segments and Kazakhstan. In the second quarter of 2016, management decided to no longer include Kazakhstan as a separate reportable segment due to the decreasing impact of operations in Kazakhstan on the overall business. As a result, the activities in Kazakhstan have been integrated into our Others category in this Annual Report on Form20-F. Our annualaudited consolidated financial statements for the years ended December 31, 2015 and December 31, 2014 included in this Annual Report on Form20-F have been restated for this organizational change.statements.
Subsidiaries
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 December 31, 2016.2017. Unless otherwise indicated, our percentage ownership interest is identical to our voting power in each of the subsidiaries.
Subsidiary* | Country of Incorporation | Percentage Ownership Interest (Direct and Indirect) | |||||||||||
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| Netherlands | % | |||||||||||
| Netherlands | %(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) | ||||||||||
Wind | Italy | % | |||||||||||
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Wind Tre S.p.A.* | Italy | 50.0 | % | ||||||||||
Corporate Governance
VEON Ltd. is governed by a supervisory board, which generally delegates management of the company to the management board. For more information, see "Item 6—Directors, Senior Management and Employees—C. Board Practices."
Description of 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.
Our Mobile Telecommunications Businesses
The table below presents the primary mobile telecommunications services we offer to our customers and a breakdown of prepaid and postpaid subscriptions as of December 31, 2016.2017.
Mobile Service Description | 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 | (3) | ||||||||||||||||||||||||||||||||||||||||||
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Mobile Business in Russia
Description—Mobile Business in Russia
In Russia, through our operating company PJSC VimpelCom and our “Beeline”"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, 2016,2017, approximately 89.1%88.6% of our customers in Russia were on prepaid plans, representing 19%79.4% of our revenue in Russia, and approximately 10.9%11.4% of our customers in Russia were on postpaid plans, representing 81%20.6% of our revenue in Russia.
The table below presents the primary mobile telecommunications services we offer in Russia.
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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, 3G/HSPA and 4G/LTE and special wireless "Plug&Play" USB modems. | |||||||
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| Roaming | As of December 31, | |||||||
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 | ||||||
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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 toe-mails), and mobile instant | |||||||
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| Content/infotainment | Voice services (including referral services); content downloadable to telephone (including music, pictures, games and video); | |||||||
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| Mobile financial services | Mobile payment, banking card, trusted payment, banks notification and mobile | |||||||
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Mobile Bundles.bundles
Tiered data-plans provide smartphone customers with data, voice and SMS packages. In 2016,2017, we focused on a new simplified tariff portfolio with competitive prices in combination with transparent services. In addition to Shared Data Services andWe provide a Shared Everything Bundle Service, offering the option of multiple SIM cards for one account, and an "all in 2016 we launched theone" FMC proposal “All in one” for B2C prepaid subscriberscustomers, combining FTTB internet, IPTV and IPTV 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.
Distribution.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 18%25.9% of the channel mix as of December 31, 2016.2017. The number of owned retail monobrand stores was 1,4991,605 as of December 31, 2016,2017, as compared to 1,4551,499 owned retail monobrand stores as of December 31, 2015.
In the second quarter of 2016, we stopped the closure of certain franchise stores, which were due to close as a result of the difficult economic situation in Russia. In addition, a new franchise model was developed and launched. The “Plug&Play” franchise model represents a fully packaged solution, with a store opening process managed by PJSC VimpelCom.
2016. As of December 31, 2016,2017, the number of franchise stores was 2,069,2,084, compared to 2,0442,041 as of December 31, 2015.2016. As of December 31, 2016,2017, we had 144 “Know How”142 "Know How" stores, and 56 “Know How” stores in a new format of multibrand stores with regional dealers, compared to 117 “Know How” stores and 34 stores in a new format of multibrand144 "Know How" stores as of December 31, 2015.2016.
Additionally, in 2016, In 2017, we reached an agreementincreased 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. B2B agents were shifted to the B2C segment, creating a separate multibrand channel along with regional dealers and alternative retail. We also increased the number of regional dealers to manage this channel. Sales of tariff packagesbundle price plans increased for all channelsB2C sales by 4%23%, reaching 11%82% in the sales mix.
We also reevaluated trade conditions in all channels in order to stimulate high quality sales in In 2017, we significantly increased the B2C segment. Fixed salaries were shifted to trade commission arrangements, to motivate partners and salespeople through increased revenue-sharing. Additionally, we launched the “Need for sales 2.0” program, aimed at stimulating upsell (based on the value-based index).
Specialized customer care.
The Beeline brand continued to enhance customer service to improve its NPS and reduce the numberavailability of calls to call centers in 2016. The NPS is an indicator that correlates loyalty and growth levels. We implemented “clever customer segmentation” for B2C mobile clients in call centers, which allowed us to focus on the main customer segments from a business and service perspective. In addition, we carried out a root cause analysis of the reasons for callscenter live agents to our call centers, which helped us to implement more than 100 initiatives in all our businesses (B2C, B2B and FTTB and IPTV) with the aim of providing our clients with better service.clients. Several incentives were taken to transfer requests of our customers from traditional voice channels to digitalized text and self-service channels. The successfulOur mobile self-service application for iOS Android and WindowsPhone, which allows customers to manage all charged Beeline services,Android has been downloaded over 109.6 million times in 2017, and the monthly active base doubled during 2016, reachingreached over 33.9 million active customers per month, as of December 31, 2016.2017. The launch in March 2017 of a chat function with a customer service agent in our mobile application tripled our requests received through chat, to 450, 000 requests per month as of December 2016. Further steps towards digitalization include pilots of Visual IVR, a platform that guides inbound smartphone callers to aweb-based support experience, thus personalizing the support journey for customers already on their way to an operator at a call center, and Bots,ChatBot, a software robot that converses in natural language, provides necessary information and answers clients’clients' questions like a call center operator. Apart from these pilots, all products go through usabilityoperator in our mobile application and user acceptance tests (“UAT”) during the “analysis-design” stage before launch,website, and helped us to address any design or IT changes, which ensuresreduce 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 quality, transparencyretail joint venture, Euroset. The transaction closed on February 22, 2018. See "Item 7—Major Shareholders and functionality.Related Party Transactions—B. Related Party Transactions—Joint Ventures and Associates—Euroset."
Competition
The customer experience team is involved in designing customer journeys and product notifications within the Business Support System scope, which is expected to be launched in 2017. Customer care tools (such as “Voice of Customer,” which is currently gathering feedback from clients in various channels) are being used in order to develop the Beeline network by highlighting “white spots” (areas with considerable amount of complaints on network quality and where tower construction is in demand). All these measures helped to raise NPS in 2015 and 2016 and increase the gap between usfollowing table shows our and our nearest competitorprimary mobile competitors' respective customer numbers in Russia.Russia as of December 31, 2017:
Operator | Customers (in millions) | |||
|---|---|---|---|---|
MTS | 77.7 | |||
MegaFon | 75.8 | |||
PJSC VimpelCom | 58.2 | |||
Tele2 | 40.6 | |||
Competition—Mobile Business in RussiaSource: Analysys Mason.
According to Analysys Mason, there were approximately 257254.3 million mobile customers in Russia as of December 31, 2016,2017, compared to 251.4255.6 million mobile customers as of December 31, 2015, 2016,
representing a mobile penetration rate of approximately 177.2%, an increase from 172.4%173.8% as of December 31, 2015.
The following table shows our and our primary2017, compared to a mobile competitors’ respective customer numbers in Russiapenetration rate of approximately 174.5% as of December 31, 2016:
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Source: Analysys Mason.2016.
Mobile Business in Pakistan
Description—Mobile Services in Pakistan
Pakistan is mainly a 2G market; however, 3G is growing following its launch in 2014.2014, as well as 4G following its launch in 2017. We operate in Pakistan through our operating company, Pakistan Mobile Communications Limited (“PMCL”)PMCL and our brand, “Jazz,”"Jazz," which is the historic Mobilink brand together with the newly merged Warid brand. See “Item 5—Operating and Financial Review and Prospects—Key Developments and Trends—Pakistan Merger.” In 2016,2017, PMCL had launched 3G services in over 350300 towns and cities and 4G/LTE services in 3040 cities.
In Pakistan, we offer our customers mobile telecommunications services under postpaid and prepaid plans. As of December 31, 2016,2017, approximately 98.3%96.9% of our customers in Pakistan were on prepaid plans and approximately 1.7%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 | |||||||
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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 | ||||||||
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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.bundles
We offer bundled offers on 4G/LTE, 3G and 2G networks. In 2016, we focusedWe 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.
Distribution.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 includeon-net minutes, variable discounts for closed user groups andfollow-up minutes based on bundle commitment. As of December 31, 2016,2017, our sales channels in Pakistan include eightincluded one company stores, 21store, 24 business centers, a direct sales force of 208870 employees, 350406 exclusive franchise stores, 230 contractual direct-selling representatives, and over 212,000
220,000 non-exclusive third party retailers. Fortop-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 30,00036,000 retailers, supported by biometric verification devices.
Biometric verification.verification
Following various terrorist attacks, the Government of Pakistan introduced Standard Operating Procedures (“SOP”) in 2015 requiring all mobile operators tore-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 our subsidiary in Pakistan,PMCL, this involved there-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 there-verification, the Mobilink brand (now Jazz) lost customers, retaining 87%88% of its subscribercustomer base.
Competition—Mobile Business in PakistanCompetition
The following table shows our and our competitors’competitors' respective customer numbers in Pakistan as of December 31, 2016:2017:
Operator | Customers in Pakistan (in millions) | ||||||||
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PMCL | |||||||||
Telenor Pakistan | |||||||||
Zong | |||||||||
Ufone | |||||||||
Source: The Pakistan TelecommunicationTelecommunications Authority for all companies except PMCL.
According to the PTA, there were approximately 136.5144.5 million mobile customers in Pakistan as of December 31, 2016,2017, compared to 125.9133.2 million mobile customers as of December 31, 2015,2016, representing a mobile teledensitypenetration rate of approximately 69.8%70.8% (Analysys Mason), an increase from 65.3%68.6% (Analysys Mason) as of December 31, 2015.2016.
Mobile Business in Algeria
Description—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.”"Djezzy." In October 2016, Optimum launched 4G/LTE services in Algeria and, by the end of 2016,2017, had expanded these services to 2028 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, 2016,2017, prepaid, postpaid and hybrid (a monthly fee with recharge possibility) customers represented approximately 92.2%93%, 3.0%2% and 4.8%5%, respectively, of our customers in Algeria.
OTA Omnium Telecom Algérie S.p.A. ("OTA") is owned 45.6%45.57% by our subsidiary, GTH, and 51% in anon-controlling interest by theGTH. The Algerian National Investment Fund.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’sOTA'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 2016,2015, 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 Form20-F.
The table below presents the primary mobile telecommunications services we offer in Algeria.
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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 | |||||||
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| Provided through GPRS, EDGE, 3G and 4G/LTE technology. Customers can use data services both aspay-per-use and through a | |||||||
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| 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 | |||||||
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 | |||||||
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| Messaging | SMS, MMS (which allows customers to send pictures, audio and video to mobile phones and toe-mail), and mobile instant | ||||||
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| Content/infotainment | Sports related services, religious content, taxi applications, RBT ande-learning for | ||||||
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| 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”Djezzy branded shops, with a totaltotalling 71,735 own “Djezzy”Djezzy shops and indirect points of sales of 2,098sale as of December 31, 2016,2017, of which 95 are146 were monobrand own shops rented, equipped, staffed and managed
by Optimum, including 1,102146 shops equipped with IT material and sales applications. Our nineseven exclusive national distributors cover all 48 wilayas (provinces) of Algeria and are distributing our products through over 70,00071,589 points of sale, of which 57,00062,116 are authorized to sell airtime and 13,00012,473 of which are authorized to sell SIMs. As of December 31, 2016,2017, we also had a pool of more than 100140 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 2016,2017, 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—Mobile Business in AlgeriaCompetition
The following table shows our and our competitors’ respective customer numbers Growth in Algeria as of December 31, 2016:
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Source: Analysys Mason.
According to Analysys Mason, there were approximately 45.5 million mobile customers in Algeria as of December 31, 2016, compared to 44.4 million mobile customers as of December 31, 2015, representing a mobile penetration rate of approximately 110.8%, an increase from 110.1% as of December 31, 2015.
Customer growth in Algeria’sAlgeria's mobile market is expected to slow, and attention is expected to shift to maintaining or improving the average revenue per user,ARPU, supported by data revenue growth after the commercial launch of 3G and 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) | |||
|---|---|---|---|---|
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
Description—Mobile Business We operate through our operating company, Banglalink Digital Communications Limited ("BDCL") and our brand "banglalink" in Bangladesh
Bangladesh is still primarily a 2G market; however, 3G is growing rapidly followingBangladesh. Following the launch of 3G services in Bangladesh in October 2013.2013, 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 expanding 3Grollout 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.
We operate through our operating company, Banglalink Digital Communications Limited and our brand “banglalink” in Bangladesh. Recent revenue growth is mainly driven by data, while voice revenue has started to decline in Bangladesh.
The telecommunications market in Bangladesh is largely comprised of prepaid customers. As of December 31, 2016,2017, approximately 93.0%93% of our customers in Bangladesh were on prepaid plans and approximately 7.0%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 | ||||||||
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| Provided through GPRS, EDGE and 3G technology. Customers can use data services both aspay-per-use and through a | |||||||||
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| 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 | ||||||||
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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 | |||||||
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Distribution.As
As of December 31, 2016,2017, our sales and distribution channels in Bangladesh included 10 company105 monobrand stores, a direct sales force of 7661 enterprise sales managers and 88121 zonal sales managers for mass market retail sales channels, 43 monobrand stores, 33,46546,971 retail SIM outlets, 209,553249,432 top-up selling outlets, online sales channels, and 6001,915 banglalink brand service points. BDCL provides an i-top upa top-up service through mobile financial services.services, ATMs, recharge kiosks, international top-up services, SMS top-up and Banglalink online recharge. The banglalink brand provides customer support through its callcontact center, which is open 24 hours a day and seven days a week. The banglalink brand also provides digitalcontact center caters to a number of after-sales services to all customer care support through the banglalinksegments with a special focus on a "self-care" app to empower customers and the “banglalink mela” Facebook page. Theavoid customer reliance on call center also includes a corporate customer service team that focuses on corporate customers and SMEs. Expansion of the call center is underway to ensure a high level of customer service as the customer base grows. BDCL has established credit control and collection teams to improve invoice recovery rates.
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’partners' channels.
Competition—Mobile Business in BangladeshCompetition
The following table shows our and our competitors’ respective customer numbers in Bangladesh as of December 31, 2016.
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Source: Analysys Mason.
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) | |||
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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, BDCL (“banglalink”)banglalink and Robi, collectively held approximately 91.2%96.9% of the mobile market where the market consisted of approximately 145.1 million customers in Bangladesh as of OctoberDecember 31, 2017, compared to 126.4 million customers in 2016, according to the Bangladesh TelecommunicationsTelecommunication Regulatory Commission. According to Analysys Mason, as of December 31, 2016, there were approximately 124.8 million customers in Bangladesh, representing2017, a mobile penetration rate ofcomprised approximately 75.7%86.8% compared to 133.2 million customers and a mobile penetration rate of 82.0%76.7% in 2015.2016.
Mobile Business in Ukraine
Description—Mobile Business in Ukraine
We operate in Ukraine with our operating company “Kyivstar”"Kyivstar" JSC and our brand, “Kyivstar.”"Kyivstar." The Ukrainian mobile market operates on a 2G and 3G basis.
As of December 31, 2016,2017, approximately 90.0%90% of our customers in Ukraine were on prepaid plans and approximately 10.0%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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| 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 | |||||||
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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 | |||||||
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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 | ||||||
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| Mobile financial services | Mobile payment; banking card; trusted payment; banks notification and mobile | |||||||
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Distribution.Mobile bundles“Kyivstar” JSC’s
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 (43%(41% of all connections), local chains (17%(20%), national chains (16%(11%), monobrand stores (11%(17%), direct sales (7%) and active sales (6%(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, 2016,2017, the number of owned retail monobrand stores was 393417 as compared to 366393 stores as of December 31, 2015.2016.
Mobile Bundles. “Kyivstar” JSC offers bundles including combinations of voice, SMS and MMS, mobile data and OTT services.
Competition—Mobile Business in UkraineCompetition
The following table shows our and our primary mobile competitors’competitors' respective customer numbers in Ukraine as of December 31, 2016:2017:
Operator | Customers (in millions) | ||||||||
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Source: Analysys Mason.
“Kyivstar” JSC Kyivstar competes primarily with MTS Ukraine,"VF Ukraine" JSC, operating under the Vodafone brand, which is 100% owned by MTS and operates a GSM900/1800 network in Ukraine. “Kyivstar” JSCKyivstar also competes with Lifecell,"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, 2016,2017, there were approximately 59.258.2 million customers in Ukraine, representing a mobile penetration rate of approximately 136.5%137.4% compared to 59.259.0 million customers and a mobile penetration rate of 138.3%138.7% in 2015.2016.
Mobile Business in Uzbekistan
Description of Mobile Business in Uzbekistan
In Uzbekistan, we operate through our operating company, LLC “Unitel,”"Unitel," and our brand, “Beeline.”"Beeline." We offer our customers mobile telecommunications services under postpaid and prepaid plans. As of December 31, 2016,2017, approximately 97.6%98.4% of our customers in Uzbekistan were on prepaid plans and approximately 2.4%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 | |||||||||
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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 | ||||||||
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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.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.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. We have ownAs of December 31, 2017, our sales channels in Uzbekistan include 672 offices and monobrand own stores, in an amount of 28 points of sale,644 exclusive stores in amount of 707 points of sale and 1,125 multibrand stores in an amount of 1,348 points of sales.stores.
Competition—Mobile Business in UzbekistanCompetition
The following table shows our and our primary mobile competitors’competitors' respective customers in Uzbekistan as of December 31, 2016:2017:
Operator | Customers (in millions) | ||||||||
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LLC | |||||||||
Ucell | |||||||||
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UzMobile | |||||||||
Perfectum | 0.3 | ||||||||
Source: Analysys Mason.
According to Analysys Mason, as of December 31, 2016,2017, there were approximately 21.221.3 million mobile customers in Uzbekistan, representing a mobile penetration rate of approximately 66.5%65.5% compared to 20.6 million customers and a mobile penetration rate of 65.4%64.3% in 2015.2016. The relatively low mobile penetration rate is primarily caused by thesingle-SIM profile of most Uzbek mobile subscribers.customers.
Mobile Business in Others
Description of Mobile Services in Others
In the countries in Others,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, 2016,2017, we had the following percentages of prepaid and postpaid customers:
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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 Completioncompletion and VAS.VAS
In the countries in Others,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 Others,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 the Othersour "Others" category.
Country | Roaming Agreements (as of December 31, | ||||
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Kazakhstan | Voice roaming on GPRS roaming on 487networks in 171countries CAMEL roaming on 301networks in 113countries | ||||
Kyrgyzstan | |||||
Voice roaming on 424networks in 132countries GPRS roaming on CAMEL roaming on 185networks in 83countries | |||||
Armenia | |||||
Voice roaming on 435networks in 179countries GPRS roaming on 344networks in 139countries CAMEL roaming on | |||||
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| 3G roaming on Voice roaming on 193networks in 93countries GPRS roaming on171 networks in 92countries CAMEL roaming on 123networks in 72countries | ||||
Georgia | Voice roaming on GPRS roaming on 180networks in 70countries CAMEL roaming on 123networks in 59countries | ||||
Laos | Voice roaming on 415networks in 140countries GPRS roaming on | ||||
CAMEL roaming on | |||||
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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.
Wireless Internet Servicesinternet services
We have promotionalzero-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.
Distribution—Mobile Business in OthersDistribution
We distribute our products in Othersthe countries in our "Others" category through owned monobranded stores, franchises and other distribution channels. As of December 31, 2016,2017, we had 227200 total stores (monobranded, franchised and other distribution channels such as modules, multibrand, direct-delivery and electronic stores) in Kazakhstan 67(inlcuding 14,707 other points of sale), 6,487 stores in Kyrgyzstan, 7677 stores in Armenia, 57112 monobranded stores in Tajikistan (25 own shops and 87 franchises), 36 stores in Georgia and 516 stores in Laos.
Competition—Mobile Business in OthersLaos (including approximately 3,200 other points of sale).
KazakhstanCompetition
Kazakhstan
According to Analysys Mason, as of December 31, 2016,2017, there were approximately 25.625.5 million customers in Kazakhstan, representing a mobile penetration rate of approximately 143.0%141.2%, compared to 25.925.4 million customers and a mobile penetration rate of approximately 147.1%142.5% in 2015.2016. We held the second position in the market in 2016,2017, according to Analysys Mason.
Kyrgyzstan
According to Analysys Mason, as of December 31, 2016,2017, there were approximately 7.87.1 million customers in Kyrgyzstan, representing a mobile penetration rate of approximately 134.5%116.5%, compared to 7.67.1 million customers and a mobile penetration rate of approximately 132.7%117.6% in 2015.2016. We held the secondfirst position in the market in 2016,2017, according to Analysys Mason.
Armenia
According to Analysys Mason, as of December 31, 2016,2017, there were approximately 3.6 million customers in Armenia, representing a mobile penetration rate of approximately 119.4%119.1%, compared to 3.6 million customers and a mobile penetration rate of approximately 120.0%117.5% in 2015.2016. We held the second position in the market in 2016,2017, according to Analysys Mason.
Tajikistan
According to Analysys Mason, as of December 31, 2016,2017, there were approximately 9.88.6 million customers in Tajikistan, representing a mobile penetration rate of approximately 110.1%96.7%, compared to 10.59.3 million customers and a mobile penetration rate of approximately 120.5%106.7% in 2015.2016. We held the fourth position in the market in 2016,2017, according to Analysys Mason.
Georgia
According to Analysys Mason, as of December 31, 2016,2017, there were approximately 5.45.6 million customers in Georgia, representing a mobile penetration rate of approximately 134.8%140.7%, compared to 5.4 million customers and a mobile penetration rate of approximately 136.1%135.9% in 2015.2016. We held the third position in the market in 2016,2017, according to Analysys Mason.
Laos
The Lao telecommunication market is strictly regulated by fixed price floors and limited promotion periods. The impact of these regulations has primarily been on VimpelCom Lao’s ability to offer customer-friendly priced services, such as promotions and discounts, in comparison to local competitors.
According to Analysys Mason, as of December 31, 2016,2017, there were approximately 4.65.6 million customers in Laos, representing a mobile penetration rate of approximately 64.4%78.4%, compared to 4.75.2 million customers and a mobile penetration rate of approximately 66.4%74.7% in 2015.2016. We held the fourththird position in the market in 2016,2017, according to Analysys Mason.
Description of Our Fixed-line Telecommunications and Our Fixed-line Internet BusinessBusinesses
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 throughout Russia, Ukraine and Uzbekistan. In our fixed-line/mobile integrated business structure in Russia, Ukraine and Uzbekistan,cities. Our fixed-line telecommunications use inter-city fiber optic and satellite-based networks.
In Armenia, our fixed-line business offers a wide range of services, including PSTN-fixed and IP telephony, internet, data transmission and network access, domestic and international voice termination and TCP/IP international transit, over our national networks. In Kazakhstan, the fixed-line business offers range of services for B2O, B2B and B2C segments.
In Pakistan, we offer internet and value added services (“VAS”) over a wide range of access media, covering major cities of Pakistan butPakistan. 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.
We do not offer In Armenia and Kazakhstan, the fixed-line business offers range of services in Algeria, Bangladesh, Kyrgyzstan, Tajikistan, Laos or Georgia.
The table below presents the primaryfor B2O, B2B and B2C segments. In Armenia, our fixed-line telecommunicationsbusiness further offers a range of services, we offer toincluding PSTN-fixed and IP telephony, internet, data transmission and network access, domestic and international voice termination, IPLC and TCP/IP international transit, over our customers as of December 31, 2016.national networks.
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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, 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 smallSMEs and medium enterprises andhigh-end residential buildings in major cities throughout Russia.
The table below presents We provide local access services by connecting the primary fixed-line telecommunicationscustomers' premises to our own fiber network, international and domestic long distance services weand 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 in Russia asIPTV 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, 2016.2017, 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, internet and data transmission over our own networks and roaming services.
Voice Services.For international operators, Within the VEON group, we provide call termination to fixed-line and mobile destinations in Russia, Ukraine, Kazakhstan, Uzbekistan and Baltic states. For operators in Ukraine, Kazakhstan, Uzbekistan, 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 aone-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.
Fixed-line Broadband Internet Access.Distribution
In Russia, we offer fixed-line broadband internet access. One of our strategic goals is to develop broadband services based on the mostup-to-date engineering solutions.
In 2016, we launched FMC product services in all branches in Russia. As of December 31, 2016 we had more than 500,000 FMC customers. FMC greatly increased MNP portations and decreased churn.
FTTB Operations
Currently the Beeline FTTB IPTV product is run in seven out of eight super-regions of Russia. We provide IPTV services in 135 cities in 35 regions of Russia, and as of December 31, 2016, we had more than 1.0 million IPTV customers.
Fixed-Line Residential Operations
xDSL Services. For xDSL services, we offer an unlimited tariff plan, and tariff plans that depend on connection speed.
Pay TV (cable TV) Services. We offer two tariff plans: “Social” for customers who need basic TV channels, which includes10-15 TV channels, and “Commercial,” which includes45-55 TV channels. As of December 31, 2016, we had more than 44,000 customers including both “Social” and “Commercial” customers.
Distribution—Fixed-Line Business in Russia
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 andend-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—Fixed-Line Business in RussiaCompetition
Business Operations
Our fixed-line telecommunications business marketed as “Beeline Business”"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 regional cities in Russia;
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; and
MegaFon, which provides convergent mobile and fixed-line services.
Wholesale Operations
providers. For voice services, our main competitors are the long distance carriers Rostelecom, TransTelecom and OJSC “Multiregional"Multiregional TransitTelecom.”" For voicedata services, our main competitors are the long distance carriers Rostelecom, TransTelecom and OJSC “Multiregional TransitTelecom.”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.
Residential and Fiber–To–The–Building (FTTB) Operations
In terms ofend-user internet penetration, the consumer internet access business in Russia is already saturated andend-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, Avado,Err-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.
Fixed-line Business in Pakistan
Description of Fixed-Line Services in Pakistan
Our fixed-line business in Pakistan includes internetdata, 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 long distance services,point-to-pointcarriers, which include domestic and international leased lines, dedicated internetdomestic and international MPLS, and IP transit services through our access network, VPN services, VAS, 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, Rawalpindi and Islamabad), and P2P radios for connecting to our network. Our long-haul fiber optic network covers more than 6,5009,000 kilometers and, supplemented by wired and wireless networks, over 100is spread across the major cities acrossof 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—Fixed-line Business in PakistanDistribution
In Pakistan, we We utilize a direct sales force in Pakistan for corporateenterprise customers. WeThis 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 three 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 and account managers. For consumer DSL, we use direct sales channels, indirect sales channels and telesales. Our telesalesfor customers that are conductedengaged in Lahore in the 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 offer services throughreselling our franchise network. Our telesales channel also offers WiMax services.
Competition—Fixed-line Business in PakistanCompetition
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 Corporation,Company Limited, or “PTCL,”"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
Description of Fixed-line Services in In Ukraine,
Business Operations
We have constructed we offer fixed-line and own, as of December 31, 2016, a 43,822 kilometer fiber optic network, including 20,068 kilometers between cities, 14,848 kilometers inside cities, and 8,906 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 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 30many of Ukraine's major citiescities.
In November 2016, we launched FMC for an increasing range of Ukraine.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.
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.
Consumer OperationsDistribution
In Ukraine, we offer fixed-line and wireless internet services. We began providing fixed-line broadband services in Ukraine in 2008 and, as of December 31, 2016, 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 40,070 residential buildings in 116 cities, providing over 55,066 access points.
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 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.
Fixed-line services have significant potential considering our existing market share in the B2B market and our ability to provide integrated solutions with mobile services, which creates brand preference. Fixed-line services are used as an effective tool to acquire, develop and retain corporate large accounts, especially in financial, agricultural and retail sectors.
Wholesale Operations
For voice and data services, our main competitors are Datagroup, Ukrtelecom, and Farlep-Invest (Ucomline LLC).
Consumer Operations
Our residential marketing strategy is focused on attracting new customers. We offer several tariff plans, each one targeted at a different type of customer. During 2016, our consumer fixed-line internet services business was supported by below the line advertising, including a leaflets distribution, in areas where the service is provided.
In November 2016, we launched FMC (Fixed Mobile Convergence—charging subscribers who use both mobile and fixed fiber connect from a single account) for an increasing rangeTable of mobile users in our fixed-line broadband internet base.
We also offer a wide range of FTTB services tariffs for fixed-line broadband internet access targeted at different customer segments. We currently have four 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.
Competition—Fixed-line Business in UkraineContents
Business OperationsCompetition
In the voice services market for business customers, we compete with Ukrtelecom, Datagroup, Vega,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, 2016,2017, according to management’smanagement's estimates. There is a high level of competition with more than 400 ISPsinternet service providers in Ukraine. Our main competitors in the corporate market for data services are also Ukrtelecom, VegaFarlep-Invest (Vega) and Datagroup.
Wholesale Operations
In Ukraine, Our competitors for both the carrier and operator services and the voice and data services market competitors include Datagroup, Ukrtelecom, and Vega.
Consumer Operations
Farlep-Invest (Vega). Our main competitors for the provision of consumer internet services in Ukraine are Volia and Ukrtelecom. From December 31, 20152016 to December 31, 2016,2017, we increased the number of our broadband customers in Ukraine (excluding customers in the ATO zone) by 0.4%1% from 808,477811,910 to 811,910.823,840.
Fixed-line Business in Uzbekistan
Description of Fixed-line Services in Uzbekistan
Business Operations
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.
Currently, the most popular services on the Uzbek telecommunications market are internet services.
Residential and FTTB Operations
In Uzbekistan, we offer the samesimilar fixed-line broadband and wireless internet services as in Russia. For more information, see “—See "—Fixed-line Business in Russia.”Russia."
Distribution—Fixed-line Business in UzbekistanDistribution
One of our priorities in Uzbekistan is the development of ICT,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—Fixed-line Business in UzbekistanCompetition
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 OthersArmenia
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.
Description of Fixed-line Services in OthersDistribution
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 certaina 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 and Armenia.
Business Operations
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 (more than 25,000(approximately 20,715 buildings are covered by our FTTB network), wireless technologies, satellite technologies, and theTV-Everywhere platform (which is provided through the vendor, Computer Telephony Integration).
Armenia. Our subsidiary ArmenTel 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 and fiber optic lines); and VoIP services.
Wholesale Operations
Armenia. Our subsidiary ArmenTel 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 operators and service providers.
Residential and FTTB Operations
Kazakhstan.We In Kazakhstan, we offer the samesimilar fixed-line broadband and wireless internet services as in Russia. For more information, see “—See "—Fixed-line Business in Russia.”Russia
." In 2017, we continued to increase our coverage and completed FTTB roll-out for an additional 459 buildings. We have launched new products for Beeline subscribers, including OTT TV, which is available on smart phones, TVs, tabletsalso updated the FMC product, by adding additional mobile bundles and PCs.video content from Amediateka. In addition, in October 2017 we have launched VAS such as “Forsage” (to allow FTTB subscribers to restore initial speeds according to their tariff plans), “Turbo” (to allow subscribers to exceed the speeds in their tariff plans), “Invite your friend” (to attract and retain subscribers by providing bonusesan additional parental control service, which can be used to make broadband payments) and “Moving” (to keep login and password details). We also update our offers to reflect seasonal campaigns.
Armenia. In Armenia, we offer PSTN-fixed and IP telephony services, as well as fixed-line broadband internet access based on ADSL and FTTB technologies,dial-upenables location services, and wirelesscan limit access to internet access based on CDMA technology. In the fourth quarter of 2015, we launched FMC servicessites and currently offer FMC bundles to subscribers (for example, fixed internet plus mobile voice plus mobile data).browsing time.
Distribution—Fixed-line Business in OthersDistribution
Kazakhstan.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 developingand enhancing our sales efforts and data services.
Armenia.In Armenia, 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—Fixed-line Business in OthersCompetition
Kazakhstan.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.
Armenia. We offer a broad spectrum of fixed-line services to government, corporate and private customers. There are more than 10 active operators in Armenia. We believe that the largest operators are U!Com and Rostelecom.
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.Russia
We have several interconnection agreements with mobile and fixed-line operators in Russia under which we provide traffic termination services. During 2016, we had the following2017, our MTRs in Russia: average cost per minute of national traffic 0.9413 RUB (approximately US$0.0155) and average price per minute of national traffic 0.9571 RUB (approximately US$0.0158), which wasRussia were broadly stable as compared to the 20142016 and 2015 historical periods.
Pakistan.Pakistan
We have several interconnection agreements with mobile and fixed-line operators in Pakistan and in the territories of Azad Jammu and Kashmir (“AJK”("AJK") and Gilgit-Baltistan, (“GB”), under which we provide traffic termination services. Our MTRMTRs in 2016 was PKR 0.90/min (US$0.00865), which was2017 in Pakistan were broadly stable as compared to the 20142015 and 20152016 historical periods.
Algeria.Algeria
We have several interconnection agreements with mobile, VoIP and fixed-line operators in Algeria under which we provide traffic termination services. In 2016, we had MTRs of 1 DZDex-VAT/min (US$0.01) for voice termination and 2 DZDex-VAT/SMS (US$0.02) for SMS termination. The national incoming interconnect rate increaseddecreased for the year ended December 31, 20162017 as compared to the year ended December 31, 2015, while2016, and the outgoing interconnect rate also decreased over the same period. The movements in the historical MTRs for 20152017, 2016 and 20142015 have been favorable to our business, however, asymmetry continuedcontinues to exist between OTA and one other operators.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. OurFor international incoming calls, MTR in 2016 was BDT 0.22/min (US$0.003), which2017 was broadly stable as compared to the 20142016 and 2015 historical periods.
Ukraine.Ukraine
We have several interconnection agreements with mobile and fixed-line operators in Ukraine under which we provide traffic termination services. The following rates were effective in 20162017 for termination of national traffic to a (regulated), which were broadly stable asmobile network and a fixed network on an intercity level decreased compared to the 20142016 and 2015 historical periods:periods.
Uzbekistan
mobile network: 0.23 UAH/min (US$0.0085)
fixed network on intercity level: 0.23 UAH/min (US$0.0085)
fixed network on local level: 0.11 UAH/min (US$0.0040)
fixed network on city level: 0.02 UAH/min (US$0.0007)
Uzbekistan.We have several interconnection agreements with mobile and fixed-line operators in Uzbekistan under which we provide traffic termination services. The MTR for the 90% state owned mobile operator Uzbektelecom JSC Perfectum Mobile was 0.05 sums (local Uzbek currency, US$0.0000154)During 2017, our MTRs in 2016, which wasUzbekistan were broadly stable as compared to the 20142016 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"Others" category under which we provide traffic termination services.
Licenses
We hold the following licenses in each of the countries in which we operate for mobile and fixed-line services. For a description of the risks associated with our licenses, please see “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 “Item 3—Key Information—D. Risk Factors—Legal and Regulatory Risks—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 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.”
Mobile Telecommunications Licenses in Russia
GSM Licenses
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 September 2017April 2018 and April 2018,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 2021,2022, 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’sRussia's population.
3G Licenses
PJSC VimpelCom holds one of three 3G licenses in Russia. PJSC VimpelCom has extended its license which was due to expire in May 2017, until May 2022.
4G/LTE 2600 Licenses:
PJSC VimpelCom holds 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.
4G/LTE License
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 certain organizational technical measures including, among others, radio frequency bands releasing spectrum conversion, refarming and reallocation between operators.measure field tests. The roll outrollout of the 4G/LTE network is using a phased approach based on apre-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 License
PMCL was awarded a15-year 2G license in 1992. In 2007, PMCL renewed its 2G license for a further term of 15 years. As of December 31, 2016,2017, PMCL had a balance of US$43.6543.5 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. This 2G license does not entitle PMCL to providehas two 15-year licenses for provision of cellular mobile services in AJK and GB.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 License
In 2014, following a competitive auctionbidding process, PMCL was awarded a15-year license to operate a nationwide 3G telecommunications network in Pakistan for an aggregate initial spectrum fee of US$300.9300.1 million, which was paid at the time PMCL acquired the license. This 3G license does not entitle PMCL to provide services in AJK and GB. In 2006, PMCL was awarded a15-year license to provide mobile telecommunications services in AJK and GB.
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 was to be paid in ten equal annual installments starting with a four year grace period.
In addition, PMCL and its subsidiaries have other licenses, including LDI, WLL, local loop licenses, licenses to providenon-voice communication services, and licenses to provide class VAS in Pakistan, AJK and GB.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’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 3G4G/LTE licenses, as well as its license for services in AJK and GB,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’sPMCL's annual gross revenues (less certain allowed deductions) for such services, supplemental to spectrum administrative fees.
PMCL’s PMCL's total license fees (annual license fees plus revenue sharing) in Pakistan (excluding the yearly installments noted above) were US$27.126.7 million, US$21.127.1 million and US$20.721.1 million for the years ended December 31, 2017, 2016 and 2015, and 2014, respectively. PMCL’sPMCL'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, and 2014.which excludes Warid's spectrum.
Mobile Telecommunications Licenses in Algeria
2G License
In 2001, OTA was awarded a15-year license to operate a 2G telecommunications network for an aggregate fee of approximately US$737 million. The license expired in 2016; however, renewal is automatic if the holder has satisfied all2016, but was renewed for a five-year period at no additional cost (Decree 17-195 of the obligations under the license, which we have. TheAutorité de Régulation de la Poste et des Télécommunications(“ARPT”) must provide the holder with a notice ofJune 11, 2017).
VSAT License
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 License
In 2013, OTA was awarded a15-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 License
In 2016, Optimum was awarded a15-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:
Thefor the universal service fund (3% of revenues less interconnection costs);
Management management of the numbering plan (0.2% of revenues less interconnection costs); and
Research, research, training and standardization (0.3% of revenues less interconnection costs).
OTA’s OTA's total license fees (spectrum charges plus revenue sharing) in Algeria were US$62.161.8 million, US$64.362.1 million and US$85.469.4 million for the years ended December 31, 2017, 2016 2015 and 2014,2015, respectively, of which US$25.928.1 million, US$29.225.9 million and US$30.925.7 million was related to spectrum charges, and US$36.233.7 million, US$35.136.2 million and US$54.543.7 million waswere related mainly to revenue sharing, respectively,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 License
In November 1996, BDCL was awarded a15-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 further15-year term.
3G License
In September 19, 2013, following a competitive auction process, BDCL was awarded a15-year license to use 5 MHz of technology neutral spectrum in 2100MHz band for 15 years and was also awarded a 3G spectrum,license, for which it paid a total cost of BDT 8,677.4 million (inclusive of 5% VAT) (US$111.6105 million equivalent)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 3G4G mobile licenses, BDCL is required to pay to the Bangladesh Telecommunication Regulatory Commission (“BTRC”) (i) an annual license fee of BDT 50.0 million (equivalent to US$(US$0.6 million)million as of December 31, 2017) for each mobile license; (ii) 5.5% of BDCL’sBDCL's annual audited gross revenue, as adjusted pursuant to the applicable guidelines; and (iii) 1% of its annual audited gross revenue (payable to Bangladesh’sBangladesh'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 BDCL's total license fees (annual license fees plus revenue sharing) in Bangladesh were equivalent to US$41.6834.7 million, US$40.641.7 million and US$37.140.6 million for the years ended December 31, 2017, 2016 2015 and 2014,2015, respectively.
In addition to license fees, BDCL pays annual spectrum charges to the BTRC, calculated according to the size of BDCL’sBDCL'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’sBDCL's annual spectrum charges were equivalent to US$9.89.0 million, US$9.99.8 million and US$9.19.9 million for the years ended December 31, 2017, 2016 2015 and 2014,2015, respectively.
Mobile Telecommunications Licenses in Ukraine
GSM Licenses
In Ukraine, “Kyivstar” JSCKyivstar 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 Licenses
On February 25, 2015, after an auction process, “Kyivstar” JSCKyivstar 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—RRLradio-relay and WiMax.
Our network covers approximately 98% of Ukraine’s populationcoverage is (except the Anti-Terrorist Operation (“ATO”) zone where “Kyivstar” JSCKyivstar 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
GSM900/1800, 3G and 4G/LTE
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 the countries in Others
| Country | Licenses (as of December 31, | License Expiration | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
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| Unlimited term | ||||||||||||||
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| Kyrgyzstan |
| September 28, 2025 | |||||||||||||
December 27, 2026 | |||||||||||||||
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 | March 3, 2028 | |||||||||||||
National licenses to use radio spectrum of 900 MHz, 1800 MHz | |||||||||||||||
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| 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 | December 9, 2020 | |||||||||||
International call services | August 11, 2021 | |||||||||||
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| 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, | 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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Licenses for Fixed-line Business Licenses 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, includes FMC), Local Communications Services using multiple access facilities (includes FMC), Leased Communications Circuits Services, Voice Communications Services in Data Transmission Networks (includes FMC), Telematic Services (includes FMC), Intra-zonal Communications Services, Data Transmission Services and Communications Services for the Purposes of Cable Broadcasting (includes FMC) in the main cities of Moscow, St. Petersburg, Ekaterinburg, Nizhny Novgorod, Khabarovsk, Novosibirsk,Rostov-on-Don and Krasnodar.Russia. These licenses will expire between October 4, 2017April 17, 2018 and February 16, 2021.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.
The following licenses expire in 2017:
Leased Communications Circuits Services in St. Petersburg (October 4, 2017); and
Data Transmission Services licenses in St. Petersburg, Nizhny Novgorod, Novosibirsk,Rostov-on-Don and Krasnodar (August 01, 2017).
We have filed, or will file, applications for renewal for all of our licenses that expire in 2017.
Licenses for 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
The table below sets forth the principal terms 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 which are important to our fixed-line business invalid throughout Ukraine.
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Licenses for 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.
Licenses for Fixed-line Business Licenses in OthersArmenia
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.
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
As of November 5, 2016, VEON Ltd. owns a 50.0% share of We do not control the Italy Joint Venture. WeVenture and therefore account for the Italy Joint Venture using the equity method. Wemethod and do not control the Italy Joint Venture. All information related tofully consolidate its results into our financial statements. We own a
50.0% share of the Italy Joint Venture iswith our joint venture partner, Hutchison. We include the sole responsibility offollowing operational information for the Italy Joint Venture’s management, and no information contained herein, including, but not limited to, the Italy Joint Venture’s financial and industry data, market projections and strategy, has been prepared by or on behalf of, or approved by, our management. VEON Ltd. is not making, and has not made, any written or oral representation or warranty, express or implied, of any nature whatsoever, with respect to any Italy Joint Venture information included in this Annual Report on Form20-F other than the financial information that is derived directly from our financial statements. For further information on because we consider the Italy Joint Venture and its accounting treatment,to be a significant part of our business. For more information, see “Item 5—Operating and"Explanatory Note—Presentation of Financial Review and Prospects—Key Developments and Trends—Information of the Italy Joint Venture” “Explanatory Note—Accounting Treatment of our Historical WIND BusinessVenture" and the new Italy Joint Venture”notes 5, 14 and Note 625 to our audited consolidated financial statements included elsewhere in this Annual Report on Form20-F.for further information.
Mobile Business in Italy
Mobile Telecommunications Services
The Italy Joint Venture primarily offers mobile telecommunications services under two types of payment plans: postpaid and prepaid, and markets its mobile, internet, fixed-line voice and data offerings by employing a multibrand strategy for the “WIND”"WIND" and “3”"3" brands in their respective markets.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.
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Distribution—Mobile Business in Italybundles
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’scustomer's business. For large corporate customers and SMEs, the Italy Joint Venture’sVenture'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 useuses airport billboards.
The Italy Joint Venture sells consumer mobile products and services, including SIM cards, scratch cards and handsets through a significant numberseries of points of sale. Asexclusive outlets, which as of December 31, 2016, the2017 consisted of 1,635 total sales points (689 WIND brand sales points and 946 "3" brand sales points). The non-exclusive Italy Joint Venture had 153 owned stores and 496 exclusive franchised outlets both operating undersales network consists of 3,715 multi-brand dealers spread throughout the WIND name as well as 486 flagship stores and 717 franchising operating under the “3” name. During 2016, the Italy Joint Venture has also utilized 3,037non-exclusive points of sale and 804 electronic chain store outlets both coming from the WIND point of sales infrastructure, as well as 5,350 other point of sale coming from the “3” point of sales infrastructure.country. The Italy Joint Venture also sells a portion of its consumer services online through its websites.
Customer experience is a strategic element of differentiation in the market for the Italy Joint Venture. Through the Customer Experience Development Function, the Italy Joint Venture aims to ensure the continuous improvement of customer satisfaction, developing a customer experience model with the fundamental support of all business functions. The model development is carried out using the Net Promoter System methodology. The NPS is an indicator that correlates loyalty and growth levels. NPS is now central to the Italy Joint Venture’s strategy; in addition to being measured periodically through market research, NPS is also used as a tool for continuous monitoring of customer perception when interacting with all of the Italy Joint Venture’s touch points. Using this measurement and through the mapping of all the phases of the customer journey, the Italy Joint Venture can better assess the level of customer satisfaction and implement improvement actions.
Competition—Mobile Business in ItalyCompetition
The mobile telecommunicationtelecommunications market in Italy in which the Italy Joint Venture operates is characterized by high levels of competition among service providers. TheCompetition 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 secondfirst half of 2017,2018, the French operator Iliad is expected to launch in the Italian market as a new mobile operator and as a beneficiary of the remedy package agreed with the European Commission for the completion of the Italy Joint Venture. In the Italian mobile telecommunications market,
The following table shows the Italy Joint Venture’s main competitors areVenture's and its principal competitors' respective mobile customer numbers in Italy as of 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, operating under the “TIM” brand name,Italy Joint Venture and Vodafone Italy operating under the “Vodafone” brand name. Telecom Italia and Vodafone Italy have well established positions in the Italian mobile market. During 2016, Italian operators have continued to develop voice and data services offers with promotions, discounts, bundle upgrades and complementary services, with the intention of attracting new customers and maintaining established customers with advantages and/or discounts. The traffic cap in bundle offerings continued to increase over time, particularly in relation to internet navigation, while new value-added digital services were launched for both consumer (e.g. media) and professional users (e.g. business software and cloud services). The 4G/LTE network continued to be the core of the offerings of the major players and is frequently included in promotions. Innovative value added services continued to play an important role in operator strategies and were included in multimedia services offers, with a focus on M2M applications and IoT.
Telecom Italia, as the incumbent in the market, has the advantage of longstanding relationships with Italian customers. Vodafone Italy is well positioned in the market and is perceived as having a technologically advanced and reliable network in the market. According to Analysys Mason, the network operators in Italy offered mobile telecommunications services to approximately 85.972.9 million registered customers as of December 31, 2016,2017, representing a mobile penetration rate of approximately 143.7%122.0% of the Italian population compared to 87.181.7 million customers and a mobile penetration rate of approximately 145.7%136.6% in 2015.
The following table shows the Italy Joint Venture’s and its principal competitors’ respective mobile customer numbers in Italy as of December 31, 2016:
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Source: Analysys Mason.2016.
Mobile Telecommunications Licenses in Italy
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 license
Both WIND and 3 Italia (now comprising the Italy Joint Venture)"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”("MISE") regarding the transfer of spectrum rights of use from WIND and 3 Italia to the French operator, Iliad as remedy taker in the completion of the Italy Joint Venture (7 blocks of 2x5MHz each 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 Italia"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. BelowThe following is a list of the mobile access spectrum blocks, on a band by bandband-by-band basis, thatwhich will be held by the Italy Joint Venture once the spectrum release of spectrum to Iliad has been completed, which the Italy Joint Venture anticipates will be by 2019:
is completed: 800 Band—2 blocks of 2x5 MHz
MHz; 900 Band—2 blocks of 2x5 MHz
MHz; 1800 Band—4 blocks of 2x5 MHz
MHz; 2000 TDD Band 5+5 MHz
MHz; 2100 Band—4 blocks of 2x5 MHz
MHz; 2600 Band—4 blocks of 2x5 MHz
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 Italy
Description of Fixed-line Services in Italy
In Italy, the Italy Joint Venture offers a wide range of fixed-line voice and internet broadband services. The Italy Joint Venture offers these services to both consumer and corporate customers under the Infostrada brand (our fixed-line voice, broadband and data services brand in Italy).
The Italy Joint Venture’sVenture's fixed-line voice customer base in Italy consisted of approximately 2.7 million customers as of December 31, 2016. Its direct customers mainly comprise LLU customers.2017.
The Italy Joint Venture offers voiceboth DSL and broadband internet services to directFiber through bundled offerings. For LLU customers by renting from Telecom Italia the “last mile” of the access network, which is disconnected from Telecom Italia equipment and connected to the Italy Joint Venture’s equipment in telephone exchanges. In the areas whereonly, the Italy Joint Venture does not have direct accesscontinues to offer the network via LLU,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, can request wholesale services though the Italy Joint Venture though the Italy Joint Venture no longer actively markets such wholesale services. In April 2016, WIND signedoffers a strategicnew fixed portfolio "Office", which offers mono and commercial partnership with Enel Open Fiber (“EOF”) for the nationwide development of the ultra-broadband fixed-line networkmulti-lines, in Italy. In May 2016, the first customers were connected in Perugia throughout the EOF infrastructure with the possibility to reach up to 250 municipalities in the future.
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Distribution—Fixed-line Business in Italy
In Italy, the Italy Joint Venture markets itsprovides PSTN, ISDN and VoIP fixed-line voice broadband andservices, data services, primarily through its “Infostrada” brand.VAS and connectivity services to corporate customers, including large corporate customers, SMEs and 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
The main sales channels for fixed-line voice and broadband services are represented by the shops and the toll-free number “159.” In theinclude tariff plans with unlimited internet access, marketvoice calls on VoIP technology and a combined service for consumer customers,renting, running, and maintaining telephone switchboards.
Distribution
The distribution strategy is based on the “Infostrada”concept of omnichannel (shops, web portalor 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 an importantretail (mono-brand and growing distribution channel.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. In 2016, WIND, and subsequently the Italy Joint Venture, continued to adopt almost exclusively pull sales channels, which are more effective and efficient, in order to increase the fixed business marginality.
Competition—Fixed-line Business in ItalyCompetition
In the Italian fixed-line voice market, the incumbent operator, Telecom Italia, maintains a dominant market position. Telecom Italia benefits from cost efficiencies inherent in its existing telecommunications infrastructure over 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 result of the presence of international competitors, with the introduction and growth of new technologies, products and services. During the 2016 year, operators have announced increasing speed in bundles, including digital services such as streaming video for consumer profiles and solutions supporting the digitalization of enterprises. Operators have continued the extension of the fiber optic network, with direct investment and with different agreements and partnerships. According to our internal estimates, four service providers, Telecom Italia, the Italy Joint Venture (with its fixed-line voice, broadband and data services brand Infostrada), Vodafone Italy and Fastweb accounted for approximately 94.5% of the total broadband fixed services actually accessed in the Italian market as of December 31, 2016.
Based on the Italy Joint Venture’s internal estimates, as of December 31, 2016, Telecom Italia had approximately 7.2 million broadband customers in Italy, representing a market share of approximately 48.6% of broadband retail connections, followed by FastWeb with approximately 2.4 million broadband customers, representing a market share of approximately 15.9% of broadband retail connections, the Italy Joint Venture with approximately 2.3 million active broadband customers, representing a market share of approximately 15.6% of broadband retail connections and by Vodafone, with approximately 2.1 million broadband customers representing a market share of approximately 14.3% of broadband retail connections. All other fixed-line operators had in the aggregate approximately 0.8 million broadband customers, representing a market share of approximately 5.5% of broadband retail connections.
Licenses—Fixed-line Business in ItalyLicenses
In Italy, fixed-line Fixed-line services are provided pursuant to several20-year licenses obtained from the Italian Ministry of Economic Development in 1998. Such licenses expirewould have expired in 2018, and are renewable according to Code of Communication terms.
Research and Development—Italy
The Italy Joint Venture has been providing significant additional investment to drive development of Italy’s digital infrastructure, increasing reliability, coverage and speed. During 2016, WIND, and followingbut in December 2017, the Italy Joint Venture transaction,applied for the Italy Joint Venture continued to investrenewal of such licenses, and in research initiatives for new technologies and broadband services in both the fixed-line and mobile sectors, withJanuary 2018 was granted a particular focus on “green” aspects and opportunities from the big data approach. WIND established a Financed Projects team in 2008 to monitor, study and test technological and business trends from a medium/long-term perspective, in cooperation with internal business and technology divisions, 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. We do not separate our research and development spending in our accounts.renewal until 2038.
Mobile Telecommunications Equipment and Operations—Italyoperations
The Italy Joint Venture has a tower services agreement with Galata for an initial term of 15 years for the provision of a broad range of services on the sites. As of December 31, 2016, the Italy Joint Venture owned 287 radio centers (for all of which it owns the towers and equipment rooms, and for approximately 120 out of 287, it also owns the land where the radio centers are located), 586 towers, approximately 1,800 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. For information regarding the sale of a majority stake of WIND Italy’s tower subsidiary, Galata, see “Item 5—Operating and Financial Review and Prospects—Key Developments and Trends—Disposal ofNon-Core Assets and Network and Tower Sharing Agreements.”
Fixed-line Telecommunications Equipment and Operations—Italy
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 34,99735,926 kilometers of fiber optic cable backbone in Italy and 6,6566,786 kilometers of fiber optic cable MANs, as of December 31, 2016. This network in Italy uses a common system platform, which is referred to as the “intelligent network,” for both our mobile and fixed-line networks.
2017. As of December 31, 2016,2017, the Italy Joint Venture had 1,9381,958 LLU sites for direct customer connections (approximately 70% 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.
The Italy Joint Venture offers voice and broadband internet network access is implementedservices to direct customers by anall-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 61 BRAS for consumer services and 84 Edge Routers for Business application, located in POPs to ensure optimal coveragerenting from Telecom Italia the "last mile" of the national territory.
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 hassigned a strategic and commercial agreementpartnership with Metroweb andOpen Fiber ("OF") (formerly Enel Open Fiber to enable WIND to provide customersFiber) with access to “fiber to the home” technology. WIND beganaim of re-enforcing its ability to offer high-speedultra-broadband services in fiberthe fixed-line market. The Italy Joint Venture, during 2017, extended the original agreement, which was already active in 13 cities, to the home technologyadditional 258 Italian cities (for a total of 271). As of December 31, 2017, OF reached approximately 2.4 million of homes in Milan in 2013 under a contract with Metroweb, 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. During 2016, our “fiber to the home” service has been extended to Torino, Bologna and Perugia with the intent, in the next future, to cover other cities through leveraging on the agreement signed with Enel Open Fiber. In 2015, WIND also developed a commercial offer based on Fiber to the Cabinet technologies.Italy.
Regulatory
For a description of the material effects ofcertain laws and government regulations onto which our main telecommunications businesses are subject, see “Exhibit"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 tends to increase in the summer period.
Our fixed-line telecommunications business is also subject to certain seasonal effects. Among the influencing factors is the number of working days in 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 a period or a greater number of customers are on vacation, such as during the December holiday season and in the summer months.
Property, Plants and Equipment
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 network infrastructure
GSM, 3G and 4G/LTE Advanced technologies are based on open 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/3G/HSPA/4G/LTE/LTE Advanced networks, which use mainly Ericsson, Huawei, ZTE, Nokia, Cisco Systems, 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 benefit from the group's purchasing scale and monitor the commercial terms across the group. We select suppliers based mainly on compliance with technical and functional requirements and total cost.
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 such property to place our towers and equipment shelters. We are also party 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 base stations. In Russia, we have agreements 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 which the two operators will undertake joint planning of a combined 4G/LTE network in order to generate greater cost efficiencies and a significantly accelerated roll-out of 4G/LTE across the country.
Fixed-lined infrastructure
Our infrastructure in each of the countries in which we provide fixed-line services supports our mobile businesses as well as our fixed-line businesses.
In Russia, our fixed infrastructure consists of two primary parts—our transport network and fixed core network. Our transport network is designed and is continually developed to carry voice, data and internet traffic of mobile network, FTTB and our fixed-line customers, of which the main technologies are fiber optics and microwave links. Our fiber optics network consists of international lines, domestic main lines, zonal and local. All of the networks are connected and share resources where required. Our primary vendors of active optical equipment are Cisco, Juniper, Huawei, Ciena and ECI. 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 (voice) to ensure correct and efficient traffic management and answer business demands: local, zonal and federal. We are also rolling out FTTB 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' residences. As of December 31, 2017, we had more than 2.2 million customers connected to our FTTB network in Russia, operating in 144 cities across Russia.
In Ukraine, our transport network is designed to provide a full range of telecommunications services for corporate and enterprise customers, including private leasing channel, voice, IP voice, L2VPN, IP VPN, and internet access. Our transport network is based on our optical cable network utilizing DWDM, SDH and IP/MPLS equipment. The DWDM and SDH networks connect 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. Our core IP/MPLS network is fully mesh-protected and connects all the main regional cities of Ukraine. As of December 31, 2017, the total length of our fiber optic cables is 44,415 kilometers, including 20,301 kilometers between cities, 15,194 kilometers inside cities, and 8,920 kilometers of local FOL for FTTB, which is connected to the local PSTN in Kyiv, to other major metropolitan areas in Ukraine, and to our gateway.
In Uzbekistan, our joint venture's (Buzton) network provides international telephony and internet access through JSC Uzbektelecom. Buzton's network consists of 107 nodes situated throughout Uzbekistan. We have our own basic fiber optic digital network in the cities of Tashkent, Zarafshan, Samarqand, Bukhara, Navoiy and Uchkuduk, covering more than 426 kilometers with connection to 30,476 FTTB ports, and 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.
In Armenia, our fixed-line infrastructure covers all districts of Armenia with a full set of equipment, including international gateway, digital-analog exchanges, remote access telephone nodes, MSANs, internet protocol digital customer line access multiplexers, fiber and copper wire access networks, fiber optic backbone network and data access network. Our network consists of 210,000 ADSL ports, 10,656 VDSL ports, 2,033 buildings provided with FTTB fiber access and 167 Central Offices (telephone exchanges, MSANs, remote nodes), of which 141 are digital. VEON Armenia also provides interconnection with international operators and national mobile and fixed-line operators in Armenia. VEON Armenia's CDMA Wireless Local Loop network is used to provide fixed-line telephone services to rural customers but it will be replaced by a 4G/LTE solution on a 450 MHz spectrum.
In Kazakhstan, our subsidiaries TNS-Plus LLP and KaR-Tell LLP provide a wide range of fixed-line telecommunications services, including internet access, ADSL, FTTB, Wi-Fi, WiMax, VoIP, VPN and VSAT. TNS-Plus owns more than 13,671 kilometers of fiber optic main lines across Kazakhstan, which are based on Huawei SDH/DWDM equipment. As of December 31, 2017, we had 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 stakeholders 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 operate and continue to seek opportunities to leverage our technology, commercial expertise, and the commitment of our employees for the betterment of our communities.
Our approach to the identification, management and evaluation of corporate responsibility is guided by three main factors:
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.
We are accountable to our stakeholders and customers through the publication of our annual Corporate Responsibility report, which is published each year. We also share periodic updates with internal stakeholders, including members of management, to inform them about key corporate responsibility related developments.
Disclosure of Activities under Section 13(r) of the Exchange Act
Under Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012, which added Section 13(r) to 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—including non-U.S. entities that are not otherwise owned or controlled by U.S. entities or 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. VEON intends to continue these agreements.
Telenor
Telenor may be deemed an affiliate based on its indirect share ownership in us through Telenor East. Telenor 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 group 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 have entered into roaming agreements and interconnection agreements with Iranian telecommunications companies. Pursuant to those roaming agreements, the Telenor 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' network (inbound roaming). For outbound roaming, Telenor subsidiaries pay the relevant Iranian operator roaming fees for use of its network by Telenor subsidiaries' customers, and for inbound roaming the Iranian operator pays the relevant Telenor subsidiaries' roaming fees for use of its network by its customers.
Telenor subsidiaries were party to the following roaming agreements and interconnection agreements with Iranian telecommunications companies in 2017, which Telenor and its subsidiaries intend to continue:
ITEM 4A. UNRESOLVED STAFF COMMENTS
None.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The following discussion and analysis should be read in conjunction with our audited consolidated financial statements and the related notes included 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 3—Key Information—D. Risk Factors."
Basis of Presentation of Financial Results
Our audited consolidated financial statements set forth in this Annual Report on Form 20-F include the accounts of VEON 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 rights 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, certain expenses reported in the financial statements prepared under IFRS are not tax deductible under local legislation. As a consequence, our effective tax rate was different under IFRS 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 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 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 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 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 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 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 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 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."
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 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.
| | 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 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.
| | 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 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:
| | 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 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$5.1 in 2015, primarily as a result of foreign exchange effects. In functional currency terms, mobile ARPU in Russia decreased by 1%, due to lower voice and roaming revenue attributed to an average price per minute reduction as existing customers migrated to new price plans, partially offset by an increase in mobile data revenue.
As of December 31, 2016, we had approximately 36.6 million mobile data customers, representing an increase of 7% from approximately 34.3 million mobile data customers as of December 31, 2015. The increase was mainly due to the increased smartphone penetration in the customer base as a result of device promotions.
The fixed-line broadband customers are mainly represented by FTTB customers. As of December 31, 2016, we had approximately 2.2 million fixed-line customers in Russia, including 0.5 million FMC customers, compared to approximately 2.2 million fixed-line customers as of December 31, 2015.
Pakistan
On July 1, 2016, VEON Ltd., together with its subsidiary GTH, acquired 100% of the voting shares in Warid, a mobile telecommunications provider. VEON Ltd. consolidated Warid financials in the Pakistan segment starting from July 1, 2016, which affects comparability among the periods provided below. For more information regarding our acquisitions and dispositions, see Note 5 to our audited consolidated financial statements incorporated herein.
Results of operations in US$
| | 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 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):
| | 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 | ) | ||||
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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 | ) | |||||
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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$9.5 billion.
The following table provides a summary of our outstanding indebtedness with an outstanding principal balance as of December 31, 2017 and 2016.
| | | | | | | Principal amount outstanding (in millions of US$) | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
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 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.
| | 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) | 13,735 | 1,862 | 4,141 | 4,958 | 2,774 | |||||||||||
Non-cancellable lease obligations | 466 | 70 | 151 | 78 | 167 | |||||||||||
Purchase obligations(3) | 861 | 595 | 266 | — | — | |||||||||||
Total | 15,062 | 2,527 | 4,558 | 5,036 | 2,941 | |||||||||||
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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 DevelopmentIntellectual Property
We are workingrely on a combination of trademarks, service marks and domain name registrations, copyright protection and contractual restrictions to developestablish 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 interaction, andbusinesses in 2016, opened software development centers in Amsterdam and London. These centers are focused primarily on developingaccordance with the VEON internet platform. In addition, we are experimenting with a numberlaws of approaches to big data/analytics in order to facilitate data monetization across our operating companies.
We continue to move toward a high-speed broadband connection environment deploying new technologies Our registered trademarks and service marks include our brand name, logos and certain advertising features. Our copyrights are principally in fixed-line and mobile networks. We are also introducing new network technologies aiming to improve customer experience, optimize network usage and increase investment efficiency, such asstep-by-step migration to new Radio Access technologies and next generation architecture through NFV. We continue to implemented technologies to improve voice quality, such as TFO, TrFO, AMR, HD voice codecs and 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 a technology that dynamically adapts the coding rate to the radio conditions in order to deliver optimum voice quality. HD Voice is a set of high definition codecs that provides high-definition voice quality during the call. VoLTE is a technology that enables voice calls over 4G/LTE network with higher voice quality and lower call setup times. These technologies are being implemented in commercial networks in VEON Ltd.’s operational companies after testing to ensure the quality of the network. In addition, we are testing new technologies for Voice OverWi-Fi, which will enable better indoor coverage for voice (and data) communication in our customer’s home and offices.
In the area of data services, we have successfully migrated all mobile data trafficcomputer software for service applications developed in five countries to a virtualized technology, ZTE’s vEPC, which has proven to be a very stable technology that will bring substantial cost savings in operations and investments compared to legacy solutions for mobile data. For information on export andre-export controls on ZTE, see “Item 3—Key Information—D. Risk Factors—Risks Related to the Industry—We depend on third parties for certain services and products important to our business.” The introduction of network virtualization will continue in all countries of operation during 2017 based on procurement tender results achieved in 2016. It will then also include areas other than data services.
We are investing in radio access technologies that will ensure a high level of quality ofconnection with our mobile broadband services in the future, such as 3G/HSPA+ and 4G/LTE,fixed-line network platform, our VEON platform and we are rolling outSingle-RAN network technology to optimize our investments and support multiple mobile communications standards on a single network and set of equipment. 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, e.g. the 4G/LTE spectrum in 1800 MHz band in Russia, Algeria and other countries. We have also migrated old solutions for fixed wireless replacement to 4G/LTE solutions in the 450 MHz band in Armenia, which will give data services comparable to ADSL to customers that did not have the possibility to get internet connectivity before, in addition to provide superior 4G/LTE coverage at very low cost.
We have now launched 4G/LTE in all countries, except in Ukraine and Bangladesh where the regulators have not yet released any 4G/LTE spectrum. The 4G/LTE spectrum in those countries is expected to be released in 2017.
In Pakistan, we achieved 4G/LTE service to Jazz (previously Mobilink) customers through the acquisition of Warid and the subsequent merger of the networks. The merger also enabled 3G services to all Warid customers, who previously only had 2G and 4G/LTE service. The two networks, including all technologies (2G/3G/4G/LTE), were fully merged during 2016. With the merged network, we are now able to dismantle overlapping base stations and merge the core network nodes into a common network, achieving major savings in operational costs.
In Russia, we have signed a letter of intent with Huawei for the joint researchlanguage and testing of technologies underlying 5G networks. Our cooperation with Huawei is intended to define the steps for the development of 5G “Beeline” networks as part of VEON’s strategy of digital transformation. In addition, it will assist Huaweidesigns we use in creating solutions which fully meet market requirements. Under the agreement, we expect that in the first quarter of 2017, we will test innovativeLTE-U technology(LTE-Unlicensed)marketing andLTE-Advanced Pro features, designed to improve the user experience with respect to data transmission. These studies will help develop new technologies and standards, and assist PJSC VimpelCom in creating a next generation of network, improve service quality and launch new digital services to its customers.
We have also signed a management services agreement with Huawei for full network maintenance outsourcing in Russia for five years. In addition, we are in the advanced stages of negotiating an agreement concerning network management with Nokia in Russia, which we expect to execute in the near term.
We are also developing the IoT in Russia. Throughout 2017, several companies in Russia expect to develop and test IoT technology, computer interaction (M2M), virtual radio and solutions for public safety. In addition, the parties have agreed to test a number of features to increase network speed and reduce network latency during data transmission.
For a discussion of research and development for the Italy Joint Venture, please see “—Description of Operations of the Italy Joint Venture—Research and Development—Italy.”
advertising our communication services. For a discussion of the risks associated with new technology, please see the section of this Annual Report on Form"20-F entitled “ItemItem 3—Key Information—D. Risk Factors—Risks Related to the Industry—Our failureintellectual property rights are costly and difficult to keep pace with technological changesprotect, and evolving industry standards could harmwe cannot guarantee that the steps we have taken to protect our competitive positionintellectual property rights will be adequate" and in turn, materially harm our business.”"
Property, Plant and Equipment
Information Technology
In June 2016, we entered into a US$1 billion long-term global software agreement with Ericsson. Under the agreement, Ericsson has agreed to develop, implement, and service over a seven year period, new software and cloud technologies across VEON’s customer-facing IT infrastructure. We continue to work closely with Ericsson on the timing and rollout of the development and implementation across the group. For a discussion of the risks associated with our dependence on third parties for certain services and products important to our business,
please see the section of this Annual Report on Form 20-F entitled “ItemItem 3—Key Information—D. Risk Factors—Risks RelatedLegal and Regulatory Risks—New intellectual property laws or regulations may require us to the Industry— We depend on third parties for certain services and products important to our business.”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 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/3G/HSPA/4G/LTE/LTE Advanced networks, which use mainly Ericsson, Huawei, ZTE, Nokia, Solutions and Networks, Cisco Systems, and ZTE Corporation 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 benefit from the group’sgroup's purchasing scale and monitor the commercial terms across the group. We select suppliers based mainly on compliance with technical and functional requirements and total cost, 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 the 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.
During 2016, We are also party to certain network managed services agreements to maintain our networks and infrastructure. For example, in 2017, in Russia we entered into severalagreements 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 active sharing, where we also combine the operation of the radio equipment and/or share spectrum 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 base stations. In Russia, we have agreements with MTS and MegaFon in different regions and for different technology combinations, respectively. In August 2016,Kazakhstan, we have entered into a network sharing agreement with Kcell Joint Stock Company (“Kcell”) forpursuant to which the joint deployment of 4G/LTE services in Kazakhstan. The agreement aims to benefit customers without restricting competition between the two companies. The two mobile network operators will undertake joint planning of thea combined 4G/LTE network in order to generate greater cost efficiencies and a significantly acceleratedroll-out of 4G/LTE across the country. The shared network will be managed by combined teams from Beeline Kazakhstan and Kcell.
Fixed-lined infrastructure
For a discussion Our infrastructure in each of the countries in which we provide fixed-line services supports our mobile telecommunications equipment and operations for the Italy Joint Venture, please see “—Description of Operations of the Italy Joint Venture—Mobile Telecommunications Equipment and Operations—Italy.”businesses as well as our fixed-line businesses.
Fixed-line Telecommunications Equipment and Operations
In Russia,
Our our fixed infrastructure consists of two primary parts – parts—our transport network and fixed core network.
Our transport network is designed and is continually developed to carry voice, data and internet traffic of mobile network, FTTB and our fixed-line customers. Thecustomers, of which the main technologies in a transport network are fiber optics and microwave links. In some cases, satellites are used to provide connection with remote andhard-to-reach areas. Following and acquisition of fixed regional operators, we now have copper line connection, which we use in limited amounts for B2C services. Our fiber optics network consists of four parts designed for specific goals: international lines, domestic main lines, zonal and local.
International lines are located outside Russia and are designed to ensure connection with international operators and channels for our clients.
Main lines are the backbone of our fiber optics for Mobile, Fix and FTTB. Consisting of the Big European Ring (main fiber ring) and a few rings in the Central, Ural, Siberia and South and North Caucasus regions, the network connects 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 TransTelecom to reach theFar-Eastern part of Russia, and our network extends to Yakutsk, Vladivostok and Sakhalin. Two chords links provide additional protection and capacity for the Big European Ring. The total length of our Intercity optical cable network is 63,195 kilometers. 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 our connections to Kazakh, Uzbek and other Asian telecommunication operators. The active infrastructure of main lines is based on DWDM technology, with IP on top, and is organized into a single architecture called IP backbone. Zonal or intraregional transport networks connect our sites and sites in small towns and the countryside within each federal territory. We also have local fiber networks constructed in more than 220 cities, which are designed for multiservice traffic within city borders built on MEN technology. All of the networks are connected and share resources where required. The total length of our zonal and local fiber cables is 108,469 kilometers. Our primary vendors of active optical equipment are Cisco, Juniper, Huawei, Ciena and ECI. 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 telecommunicationtelecommunications vendors such as Ericsson, Huawei, Nec and Aviat.
We use a three tiered architecture for our fixed core network (voice) to ensure correct and efficient traffic management and answer business demands: local, zonal and federal. The local voice networksWe are mainly used to provide telephony services for B2B customers and are in 189 cities. In an effort to minimize payments to incumbent local operators for voice transit and reduce traffic loop by direct connection with external mobile and fixed operators, we introduced zonal switches in 57 Russian regions (regional level).
Our federal transit network consists of six international transit exchanges, eight intercity communications transit exchanges installed in each of the federal districts of Russia, and connection points (access nodes) located in each region of Russia. We use this network to optimize our investments for serving of interregional and international traffic and to simplify architecture management, as well as realize our fixed operator federal license.
Ukraine
Our transport network is designed to provide a full range of telecommunications services for corporate and enterprise customers, including: Private Leasing Channel, voice, IP voice, L2VPN, IP VPN, and internet access. The information provided below does not include the Donetsk and Lugansk regions of Eastern Ukraine.
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 andmid-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 prevent downtime of the transmission network. 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. It connects all the main regional cities of Ukraine. The total length of our fiber optic cables is 20,068 kilometers.
Our interregional 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 116 cities of Ukraine. The total length of fiber cables constructed within cities is 23,754 kilometers.
As of December 31, 2016, we had constructed and owned a 43,822 kilometer fiber optic network, including 20,068 kilometers between cities, 14,848 kilometers inside cities, and 8,906 kilometers of local FOL for FTTB, which is connected to the local PSTN in Kyiv, to other major metropolitan areas in Ukraine, and to our gateway.
Uzbekistan
In Uzbekistan, we provide a wide range of fixed-line services, such as network access and hardware and software solutions, including configuration and maintenance. Our joint venture’s (Buzton) network provides international telephony and internet access through JSC Uzbektelecom. Buzton’s network consists of 95 nodes situated throughout Uzbekistan. We have our own basic fiber optic digital network in the cities of Tashkent, Zarafshan, and Uchkuduk, covering more than 485 kilometers with connection to 30,456 FTTB ports, and copper cables, providing services through 14,848 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.
Armenia
ArmenTel’s fixed-line infrastructure covers all districts of Armenia with a full set of equipment (international gateway, digital-analog exchanges, remote access telephone nodes, MSANs, internet protocol digital customer line access multiplexers, fiber and copper wire access networks, fiber optic backbone network and data access network). Its network consists of 221,008 ADSL ports, 2,015 buildings provided with FTTB fiber access and 167 Central Offices (telephone exchanges, MSANs, remote nodes), of which 130 are digital. ArmenTel also provides interconnection with international operators and national mobile operators in Armenia. ArmenTel’s CDMA Wireless Local Loop network is used to provide fixed-line telephone services to rural customers but it will be replaced by a 4G/LTE solution on a 450 MHz spectrum. After successful trials, the replacement launched during 2016.
Kazakhstan
Our subsidiariesTNS-Plus LLP and KaR-Tell LLP provide a wide range of fixed-line telecommunications services, including internet access, ADSL, FTTB,Wi-Fi, WiMax, VoIP, VPN and VSAT.TNS-Plus owns more than 13,000 kilometers of fiber optic main lines across Kazakhstan, which are based on Huawei SDH/DWDM equipment. As of December 31, 2016, we had approximately 260,000 customers connected via FTTB technology in Kazakhstan.
FTTB
Our company is rolling out FTTB networks in Russia, Ukraine and Kazakhstan. Technically, FTTB offers higher transmission speed, more bandwidth and better security compared to all existing xDSL and other quasi-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’customers' residences.
As of December 31, 2016,2017, we had more than 2.12.2 million customers connected to our FTTB network in Russia. The network operatesRussia, operating in 147144 cities across Russia, 32Russia.
In Ukraine, our transport network is designed to provide a full range of telecommunications services for corporate and enterprise customers, including private leasing channel, voice, IP voice, L2VPN, IP VPN, and internet access. Our transport network is based on our optical cable network utilizing DWDM, SDH and IP/MPLS equipment. The DWDM and SDH networks connect 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. Our core IP/MPLS network is fully mesh-protected and connects all the main regional cities of Ukraine. As of December 31, 2017, the total length of our fiber optic cables is 44,415 kilometers, including 20,301 kilometers between cities, 15,194 kilometers inside cities, and 8,920 kilometers of local FOL for FTTB, which is connected to the local PSTN in Kyiv, to other major metropolitan areas in Ukraine, and to our gateway.
In Uzbekistan, our joint venture's (Buzton) network provides international telephony and internet access through JSC Uzbektelecom. Buzton's network consists of 107 nodes situated throughout Uzbekistan. We have our own basic fiber optic digital network in the cities of Tashkent, Zarafshan, Samarqand, Bukhara, Navoiy and Uchkuduk, covering more than 426 kilometers with connection to 30,476 FTTB ports, and 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.
In Armenia, our fixed-line infrastructure covers all districts of Armenia with a full set of equipment, including international gateway, digital-analog exchanges, remote access telephone nodes, MSANs, internet protocol digital customer line access multiplexers, fiber and copper wire access networks, fiber optic backbone network and data access network. Our network consists of 210,000 ADSL ports, 10,656 VDSL ports, 2,033 buildings provided with FTTB fiber access and 167 Central Offices (telephone exchanges, MSANs, remote nodes), of which 141 are digital. VEON Armenia also provides interconnection with international operators and national mobile and fixed-line operators in Armenia. VEON Armenia's CDMA Wireless Local Loop network is used to provide fixed-line telephone services to rural customers but it will be replaced by a 4G/LTE solution on a 450 MHz spectrum.
In Kazakhstan, our subsidiaries TNS-Plus LLP and KaR-Tell LLP provide a wide range of fixed-line telecommunications services, including internet access, ADSL, FTTB, Wi-Fi, WiMax, VoIP, VPN and VSAT. TNS-Plus owns more than 13,671 kilometers of fiber optic main lines across Kazakhstan, and threewhich are based on Huawei SDH/DWDM equipment. As of December 31, 2017, we had approximately 660,854 customers connected via FTTB technology across Uzbekistan.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 stakeholders 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 operate and continue to seek opportunities to leverage our technology, commercial expertise, and the commitment of our employees for the betterment of our communities.
Our approach to the identification, management and evaluation of corporate responsibility is guided by three main factors:
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.
We are accountable to our stakeholders and customers through the publication of our annual Corporate Responsibility report, which is published each year. We also share periodic updates with internal stakeholders, including members of management, to inform them about key corporate responsibility related developments.
Disclosure of Activities under Section 13(r) of the Exchange Act
Italy Joint VentureUnder Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012, which added Section 13(r) to 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—including non-U.S. entities that are not otherwise owned or controlled by U.S. entities or 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. VEON intends to continue these agreements.
Telenor
Telenor may be deemed an affiliate based on its indirect share ownership in us through Telenor East. Telenor 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 group 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 have entered into roaming agreements and interconnection agreements with Iranian telecommunications companies. Pursuant to those roaming agreements, the Telenor 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' network (inbound roaming). For outbound roaming, Telenor subsidiaries pay the relevant Iranian operator roaming fees for use of its network by Telenor subsidiaries' customers, and for inbound roaming the Iranian operator pays the relevant Telenor subsidiaries' roaming fees for use of its network by its customers.
Telenor subsidiaries were party to the following roaming agreements and interconnection agreements with Iranian telecommunications companies in 2017, which Telenor and its subsidiaries intend to continue:
ITEM 4A. UNRESOLVED STAFF COMMENTS
None.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The following discussion and analysis should be read in conjunction with our audited consolidated financial statements and the related notes included 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 3—Key Information—D. Risk Factors."
Basis of Presentation of Financial Results
Our audited consolidated financial statements set forth in this Annual Report on Form 20-F include the accounts of VEON 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 rights 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, certain expenses reported in the financial statements prepared under IFRS are not tax deductible under local legislation. As a consequence, our effective tax rate was different under IFRS 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 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 fixed-line telecommunications equipmentcompany.
Reportable Segments
We present our reportable segments based on economic environments and operationsstages 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 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 please see “—Descriptionusing 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—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 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 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 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 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 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 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."
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 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.
| | 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 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.
| | 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 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:
| | 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 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$5.1 in 2015, primarily as a result of foreign exchange effects. In functional currency terms, mobile ARPU in Russia decreased by 1%, due to lower voice and roaming revenue attributed to an average price per minute reduction as existing customers migrated to new price plans, partially offset by an increase in mobile data revenue.
As of December 31, 2016, we had approximately 36.6 million mobile data customers, representing an increase of 7% from approximately 34.3 million mobile data customers as of December 31, 2015. The increase was mainly due to the increased smartphone penetration in the customer base as a result of device promotions.
The fixed-line broadband customers are mainly represented by FTTB customers. As of December 31, 2016, we had approximately 2.2 million fixed-line customers in Russia, including 0.5 million FMC customers, compared to approximately 2.2 million fixed-line customers as of December 31, 2015.
Pakistan
On July 1, 2016, VEON Ltd., together with its subsidiary GTH, acquired 100% of the voting shares in Warid, a mobile telecommunications provider. VEON Ltd. consolidated Warid financials in the Pakistan segment starting from July 1, 2016, which affects comparability among the periods provided below. For more information regarding our acquisitions and dispositions, see Note 5 to our audited consolidated financial statements incorporated herein.
Results of operations in US$
| | 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 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):
| | 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 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$9.5 billion.
The following table provides a summary of our outstanding indebtedness with an outstanding principal balance as of December 31, 2017 and 2016.
| | | | | | | Principal amount outstanding (in millions of US$) | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
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 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 Equipmentservice providers require significant amounts of capital to construct networks and Operations—Italy.”
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.
| | 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) | 13,735 | 1,862 | 4,141 | 4,958 | 2,774 | |||||||||||
Non-cancellable lease obligations | 466 | 70 | 151 | 78 | 167 | |||||||||||
Purchase obligations(3) | 861 | 595 | 266 | — | — | |||||||||||
Total | 15,062 | 2,527 | 4,558 | 5,036 | 2,941 | |||||||||||
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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.
Intellectual PropertyWe 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 mobile telecommunications businesses. We have also registered and applied to register certain trademarks and service marksdigital businesses in accordance with the World Intellectual Property Organization in order to protect them.
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 mobilecommunication services.
For a discussion of the risks associated with new technology, please see the section of this Annual Report on Form"20-F entitled “ItemItem 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”adequate" and “Item"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.”unclear."
Buildings
The primary elements of our material tangible fixed assets are our networks, as discussed above at “in "—Mobile Telecommunications Equipment and Operations”Operations" and “—"—Fixed-line Telecommunications Equipment and Operations.”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 fivea number of buildings consisting of approximately 26,000in Moscow, including 26,517 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 five buildings14,984 square meters on Lesnoryadsky Pereulok, in Moscow, constituting approximately 15,360 square meters, which are used as ana leased 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 officesbuilding at 4, Krasnoproletarskaya Street in the center of Moscow. These consist of two leased administrative buildings of approximately 30,000 square meters. We ownand a portion of a building in the center of Moscow on Ulitsa 1st Tverskaya Yamskaya consistingYamskaya. We use these buildings for a variety of approximately 3,000 square meters that we use as a customer service center,functions, including administrative officers, technical centers, warehouses, operating facilities, main switches for our networks and sales office.IT centers. We also own office buildings in some of our regional license areas and lease space on anas-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’sPMCL'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 GB,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 MSCs,master switching centers, technical installations and data centers.
In Algeria, our subsidiary Optimum leases its headquarters, call center, transmission towers, sites for mobile switching centers and data centers and owns a small parcel of land used for a cable station in Ain Benian.
In Bangladesh, our subsidiary Banglalink does not own any material real property. Banglalink leases properties across Bangladesh, including its headquarters, call centers, towers, mobile switching centers and data centers.
In Ukraine, our subsidiary, “Kyivstar”"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, datedata centers and storage units.
In Uzbekistan, we own 1113 buildings consisting of approximately 25,95127,052 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 network infrastructure
GSM, 3G and 4G/LTE Advanced technologies are based on open 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/3G/HSPA/4G/LTE/LTE Advanced networks, which use mainly Ericsson, Huawei, ZTE, Nokia, Cisco Systems, 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 benefit from the group's purchasing scale and monitor the commercial terms across the group. We select suppliers based mainly on compliance with technical and functional requirements and total cost.
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 such property to place our towers and equipment shelters. We are also party 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 base stations. In Russia, we have agreements 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 which the two operators will undertake joint planning of a combined 4G/LTE network in order to generate greater cost efficiencies and a significantly accelerated roll-out of 4G/LTE across the country.
Fixed-lined infrastructure
Our infrastructure in each of the countries in which we provide fixed-line services supports our mobile businesses as well as our fixed-line businesses.
In Russia, our fixed infrastructure consists of two primary parts—our transport network and fixed core network. Our transport network is designed and is continually developed to carry voice, data and internet traffic of mobile network, FTTB and our fixed-line customers, of which the main technologies are fiber optics and microwave links. Our fiber optics network consists of international lines, domestic main lines, zonal and local. All of the networks are connected and share resources where required. Our primary vendors of active optical equipment are Cisco, Juniper, Huawei, Ciena and ECI. 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 (voice) to ensure correct and efficient traffic management and answer business demands: local, zonal and federal. We are also rolling out FTTB 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' residences. As of December 31, 2017, we had more than 2.2 million customers connected to our FTTB network in Russia, operating in 144 cities across Russia.
In Ukraine, our transport network is designed to provide a full range of telecommunications services for corporate and enterprise customers, including private leasing channel, voice, IP voice, L2VPN, IP VPN, and internet access. Our transport network is based on our optical cable network utilizing DWDM, SDH and IP/MPLS equipment. The DWDM and SDH networks connect 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. Our core IP/MPLS network is fully mesh-protected and connects all the main regional cities of Ukraine. As of December 31, 2017, the total length of our fiber optic cables is 44,415 kilometers, including 20,301 kilometers between cities, 15,194 kilometers inside cities, and 8,920 kilometers of local FOL for FTTB, which is connected to the local PSTN in Kyiv, to other major metropolitan areas in Ukraine, and to our gateway.
In Uzbekistan, our joint venture's (Buzton) network provides international telephony and internet access through JSC Uzbektelecom. Buzton's network consists of 107 nodes situated throughout Uzbekistan. We have our own basic fiber optic digital network in the cities of Tashkent, Zarafshan, Samarqand, Bukhara, Navoiy and Uchkuduk, covering more than 426 kilometers with connection to 30,476 FTTB ports, and 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.
In Armenia, our fixed-line infrastructure covers all districts of Armenia with a full set of equipment, including international gateway, digital-analog exchanges, remote access telephone nodes, MSANs, internet protocol digital customer line access multiplexers, fiber and copper wire access networks, fiber optic backbone network and data access network. Our network consists of 210,000 ADSL ports, 10,656 VDSL ports, 2,033 buildings provided with FTTB fiber access and 167 Central Offices (telephone exchanges, MSANs, remote nodes), of which 141 are digital. VEON Armenia also provides interconnection with international operators and national mobile and fixed-line operators in Armenia. VEON Armenia's CDMA Wireless Local Loop network is used to provide fixed-line telephone services to rural customers but it will be replaced by a 4G/LTE solution on a 450 MHz spectrum.
In Kazakhstan, our subsidiaries TNS-Plus LLP and KaR-Tell LLP provide a wide range of fixed-line telecommunications services, including internet access, ADSL, FTTB, Wi-Fi, WiMax, VoIP, VPN and VSAT. TNS-Plus owns more than 13,671 kilometers of fiber optic main lines across Kazakhstan, which are based on Huawei SDH/DWDM equipment. As of December 31, 2017, we had 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 stakeholders by behaving in a responsible and sustainable way, which is keyrepresents our "license to securingoperate" initiatives; and creating shared value in our “licensecommunities through our products and services, which represents our "license to operate;”grow" initiatives. We are committed to investing in the markets in which we operate and adding tangible valuecontinue to society through products, services and social investments, by recognizing theseek opportunities to leverage our technology, our commercial expertise, and the commitment of our employees. To furtheremployees for the betterment of our goals, we launched our, “Make Your Mark” corporate responsibility program in 2014.communities.
Our approach to the identification, management and evaluation of corporate responsibility is guided by three main factors:
Our corporate responsibility program is overseen by our corporate responsibility team, which reports to our Group Chief ExternalCorporate & 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.
issue-by-issue decisions.Table of Contents
We are accountable to our stakeholders and customers through the publication of our annual Corporate Responsibility report, which is published each year.
We also share periodic updates with internal stakeholders, including members of management, to inform them about key corporate responsibility related developments.
Disclosure of Activities under Section 13(r) of the Exchange Act
Under Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012, which added Section 13(r) to 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—including non-U.S. entities that are not otherwise owned or controlled by U.S. entities or 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 sent direct traffic to TCI and TCI sent both direct and transit traffic to ArmenTel. We (including ArmenTel) did not provide any telecommunications equipment or technology to TCI. However, in 2013 ArmenTel discontinued providing voice services under the agreement. During 2016, ArmenTel received traffic from TCI under the 2003 contract for voice services. The gross revenue received from these activities involving TCI was approximately US$370,407 and net profits were approximately US$275,537. During 2016, ArmenTel provided telecommunications services to the Embassy of Iran in Yerevan. The gross revenue for these services in 2016 was approximately US$28,000 and net profits were approximately US$24,000. ArmenTel VEON intends to continue the services to the Embassy of Iran.
During 2001, our Russian subsidiary, PJSC 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 2016 was approximately US$8,684 and net profits were approximately US$6,252. PJSC VimpelCom intends to continue the services to the Embassy of Iran.agreements.
During 2008, our Tajikistan subsidiary, LLC Tacom, began providing telecommunications services to the Embassy of Iran in Dushanbe. The gross revenue for these services in 2016 was approximately US$9,318 and net profits were approximately US$8,477. LLC Tacom intends to continue the services to the Embassy of Iran.
During 2014, our Kyrgyzstan subsidiary, Sky Mobile LLC, began providing mobile telecommunications services to the Embassy of Iran in Bishkek. The gross revenue for these services in 2016 was approximately US$1,140 and net profits were approximately US$524. Sky Mobile LLC intends to continue the services to the Embassy of Iran.
During 2016, our Algerian subsidiary, OTA and subsequently its wholly owned subsidiary, Optimum Telecom Algeria S.p.A. (“Optimum”), provided telecommunications services to the Embassy of Iran in Algiers. The gross revenue for these services in 2016 was approximately US$956 with net profits of approximately US$1,119. Optimum intends to continue the services to the Embassy of Iran.
Telenor
Telenor may be deemed an affiliate based on its indirect share ownership in us through Telenor East and the officers of theEast. Telenor 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 group 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 have 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 Iranian operator pays the relevant Telenor subsidiaries’subsidiaries' roaming fees for use of its network by its customers.
Telenor subsidiaries were party to the following roaming agreements and interconnection agreements with Iranian telecommunicationtelecommunications companies in 2016:
(1)2017, which Telenor Norge AS, a Norwegian subsidiary, has roaming agreements with Mobile Telecommunication Company of Iran (“MCI”) and MTN Irancell. During 2016, Telenor Norge AS recorded net revenue relatedits subsidiaries intend to these roaming agreements of US$8,319.45 to MCI and net expenses of US$249,335.76 to MTN Irancell.continue:
(2) Telenor Sverige AB, a Swedish subsidiary, has roaming agreements with MCI, MTN Irancell and Taliya Mobile. During 2016, Telenor Sverige AB recorded net revenues related to its roaming agreement with MCI of US$27,552.27, net expenses related to its roaming agreement with MTN Irancell of US$41,558.97 and net expenses related to its roaming agreement with Taliya Mobile of US$19,379.55.
(3) Telenor A/S, a Danish subsidiary, has roaming agreements with MCI and MTN Irancell. During 2016, Telenor A/S recorded net expenses related to its roaming agreement with MCI of US$35,434 and net expenses related to its roaming agreement with MTN Irancell of US$100,279.
(4) Telenor d.o.o. Beograd Omladinskih brigada 90, a Serbian subsidiary, has a roaming agreement with MCI. During 2016, Telenor d.o.o. Beograd Omladinskih brigada 90 recorded net revenues of US$1,584.27 related to this roaming agreement.
(5) Telenor Hungary Plc, a Hungarian subsidiary, has a roaming agreement with MCI. During 2016, Telenor Hungary Plc, recorded net revenues of US$23,066.44 related to this roaming agreement.
(6) Telenor Bulgaria EAD, a Bulgarian subsidiary, has a roaming agreement with MCI. During 2016, Telenor Bulgaria EAD recorded net revenues of US$12,541.30 related to this roaming agreement.
(7) DiGi.Com Bhd, a Malaysian subsidiary, has a roaming agreement with MCI. During 2016, DiGi.Com Bhd recorded net revenues of US$23,055.68 related to this roaming agreement.
(8) Telenor Pakistan (Private) Ltd., a Pakistani subsidiary, has roaming agreements with MCI, MTN Irancell and Taliya. During 2016, Telenor Pakistan (Private) Ltd. recorded net expenses of US$892.69 related to the roaming agreement with MCI and net revenue of US$21,225.52 related to the roaming agreement with MTN Irancell.
(9) Total Access Communications Plc. (“dtac”), a Thai subsidiary, has roaming agreements with MCI and MTN Irancell. During 2016, dtac recorded net expenses related to these roaming agreements of US$39.63 to MCI and US$11.17 to MTN Irancell.
(10)
ITEM 4A. UNRESOLVED STAFF COMMENTS
None.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
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 Form20-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."
Basis of Presentation of Financial Results
Our audited consolidated financial statements set forth elsewhere in this Annual Report on Form20-F include the accounts of VEON 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, such as the Italy Joint Venture.influence. Generally, this represents voting rights of at least 20.0% and not more than 50.0%.
From January 1, 2016 to November 5, 2016, we classified our Italian business unit as an asset held for sale and discontinued operation in our consolidated financial statements. In connection with this classification, VEON Ltd. no longer accounted for depreciation and amortization expenses of the Italian operation. The financial data for 2015 and 2014 reflects the classification of Italy as an asset held for sale and a discontinued operation. The intercompany positions were disclosed as related party transactions and balances. On November 5, 2016, the balance sheet of Italy was deconsolidated and an investment in a joint venture, in which VEON Ltd. has joint control, was recorded. Please refer to Notes 6, 13 and 26 to our audited consolidated financial statements included elsewhere in this Annual Report on Form20-F for further information.
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 rate was different under IFRS from the statutory rate.
CriticalRecent Accounting PoliciesPronouncements
Please refer VEON Ltd. is required to Notesadopt 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 and 4 to our audited consolidated financial statements included elsewhere in this Annual Report on Form20-F.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, 2016,2017, our reportable segments consist of the seveneight following segments:
Russia;
Pakistan;
Algeria;
Bangladesh;
Ukraine;
Uzbekistan; Russia, Pakistan, Algeria, Bangladesh, Ukraine, Uzbekistan, the Italy Joint Venture and
HQ (transactions related to management activities within the group)group in Amsterdam and London).
Since January 1, 2017, management has also included the Italy is no longerJoint Venture as a reportable segment followingdue to its increased contribution to our overall financial results and position. We do not control the completionItaly 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.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 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 pleaseon the financial presentation of the Italy Joint Venture, see Notes 6, 13"Explanatory Note—Presentation of Financial Information of the Italy Joint Venture" and 26notes 5, 14 and 25 to our audited consolidated financial statements included elsewhere in this Annual Report on Form20-F, “—Key Developments and Trends—Italy Joint Venture” and “Explanatory Note—Accounting Treatment of our Historical WIND Business and the new Italy Joint Venture.”statements.
For historical periods prior to the year ended December 31, 2016, we reported an “HQ and Others” segment, comprised of our current “HQ” segment and our current “Others” The "Others" category (which includes customer numbers in Kazakhstan, Kyrgyzstan, Armenia, Tajikistan, Georgia and Laos). As of December 31, 2016, “Others” is no longernot a reportable segment but only a reconciling column in our financial statements and therefore, we report revenue and Adjusted EBITDA for “Others” only as a reconciling line item between our seveneight reportable segments and our total revenue and Adjusted EBITDA. For comparability purposes, the financial data for the years ended December 31, 2015 and 2014 has been represented to show"Others" represents our revenue and Adjusted EBITDA in each of HQ and Others on a stand-alone basis, with Others including Kazakhstan, as discussed further below. We also include herein customer numbers for the “Others” category, which includes our customersoperations in Kazakhstan, Kyrgyzstan, Armenia, Tajikistan, Georgia and Laos.
From January 1, 2015 through June 30, 2016, management organized our businessLaos 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 eight reportable segments consisting of our seven current reporting segments, taking into account the change described above from “HQ and Others” to solely “HQ,” and Kazakhstan. In the second quarter of 2016, management decided to no longer include Kazakhstan as a separate reportable segment dueLaos to the decreasing impactGovernment of the Lao People's Democratic Republic. Transfer of ownership of VEON's operations in Kazakhstan onLaos is subject to the overall businesssatisfaction of certain conditions, including receipt of necessary corporate and therefore we included Kazakhstanregulatory approvals, and is expected to complete in the “Others” category for the year ended December 31, 2016, which is now reported separately from “HQ”. Our annual consolidated financial statements for the years ended December 31, 2015 and December 31, 2014 included in this Annual Report on Form20-F have been restated for this organizational change such that Kazakhstan is included in the “Others” reconciling column for those years. Customer numbers for Kazakhstan are included in our “Others” category presented herein.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
The In 2017, our total operating revenue excluding currency impact increased by 4% while our mobile marketscustomer 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 Russia, Algeria, Ukraine, Kazakhstan, Kyrgyzstan, Armenia, Georgia, Tajikistan and Italy have each reached mobileintense competition in our markets. Nonetheless, despite very high penetration rates exceeding 100.0%. As a result,throughout our markets, we will focus less on customer market sharecontinue to see opportunities for revenue growth and more on revenue market share growth in each of these markets. The key components ofto expand our growth strategy in these markets will be to increase our share of the high-value customer market, increasebase from increasing usage of data, improve customer loyaltycontent and retain our customers.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 remaining mobile marketscompletion 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 we operate, including Pakistan and Bangladesh, are stillrepresented 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 phaseforeign currency exchange loss of customer growth with mobile penetration rates substantially lower than inapproximately 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 other markets. In these markets, ourboard and to the group's key management expects revenue growthroles.
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 come primarilystep down from customer growth in the short-termhis role after four successful years. Mr. Westlie is an experienced financial executive having been CFO of AP Moller-Maersk from 2010 to 2016 and increasing usageCFO of voice and data traffic in the medium term.
Our management expects revenue growth in our mobile businessTelenor ASA from 2005 to come primarily from an increase in data revenue and the ability to upsell our customers, and in our fixed-line business from broadband,2009. He previously served as well as business and corporate services.
New dividend policy
Oura member of VEON's supervisory board approvedand 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 new dividend policy following the completionboard member of the Italy Joint Venture, improved cash flowsVenture.
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 stabilizationMarketing, 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 macroeconomic environment. For the financial year ended December 31, 2016, we intend to pay a dividend in the aggregate amount of US$23 cents per share, comprised of US$3.5 cents per share paid as an interim dividend in December 2016 and US$19.5 cents per share, with a record date of March 30, 2017 and which is intended to be paid on April 12, 2017. Thereafter, we aim to pay a sustainable and progressive dividend based on the evolution of our equity free cash flow, which is defined as net cash flow from operating activities less net cash used in investing activities, as reported in our consolidated financial statements.
Strong competition in Russia
In Russia, we see continued signs of strong competition in the market, with pricing pressure on devices and increased data allowances, while the macro environment remains challenging. We are aiming to improve the customer proposition in Russia by focusing on customer service, offering integrated bundles including voice, text, and data, and introducing innovative products and services.
Italy Joint Venture
On August 6, 2015, VEON Ltd., which indirectly owned 100% of Wind Telecomunicazioni S.p.A. (“WIND”), together with its subsidiary VimpelCom Amsterdam B.V., and Hutchison, together with certain of its subsidiaries,company, entered into a contributionsale and frameworkpurchase agreement for the sale of its operations in Laos to form an equal joint venture holding company, the “Italy Joint Venture,” that would own and operate their telecommunications businessesGovernment of Laos. Under the agreement, VimpelCom Laos will transfer its 78% interest in Italy. On September 1, 2016,VimpelCom Lao Co. Limited to the European Commission approvedGovernment of Laos, the 50/50 Italy Joint Ventureminority shareholder, in exchange for purchase consideration of WIND and 3 Italia, and the French operator Iliad as an appropriate remedy taker. On October 24, 2016, VEON and Hutchison also received final approval from the Ministry of Economic Development (Ministero dello Sviluppo Economico) (“MISE”) in Italy for their 50/50 Italy Joint Venture to merge their mobile businesses.US$22 million. The transaction was completed on November 5, 2016.
Each of Hutchisonis subject to customary closing conditions and VEON Ltd. indirectly holds 50% of the shares in the Italy Joint Venture, and therefore, as a consequence of the completion, VEON no longer owns a majority interest or has control over the operations of WIND. Pursuant to the terms of a shareholders’ deed, no party may reduce its aggregate indirect holding in the Italy Joint Venture below 50% for the first year following completion. After the first year, either party may sell its shares in the Italy Joint Venture to third parties after offering a right of first offer to the other party. Once three years following the completion of the Italy Joint Venture have elapsed, each shareholder can invoke a buy/sell mechanism at any time.
The scale and financial strength of the combined business, characterized by strong spectrum assets, will enable the Italy Joint Venture to improve coverage, accelerate 4G/LTE mobile broadband rollout and provide greater reliability and enhanced download speeds to its customers. The Italy Joint Venture benefits from scale and synergies which are expected to unlock investment in Italy’s digital infrastructure. Further, its delivery of mobile broadband is expected to play an important partbe completed in supporting the Italian government’s goal in its Digital Italy Plan, which aims to achieve 85%take-upfirst half of 100 megabytes broadband coverage by 2020. The investment will also complement the Enel Open Fibre project, which is already supported by WIND. As of December 31, 2016, the Italy Joint Venture had 31.3 million mobile customers.2018.
We account for the Italy Joint Venture using the equity method. We do not control the Italy Joint Venture. For further information on the basis of finance treatment of the Italy operations see Notes 6, 13 and 26 to our audited consolidated financial statements included elsewhere in this Annual Report on Form20-F and “Explanatory Note—Accounting Treatment of our Historical WIND Business and the new Italy Joint Venture.”
Pakistan Merger
On November 26, 2015, WTPL (the parent company and majority shareholder of Warid), Bank Alfalah, International Wireless Communications Pakistan Limited (a wholly owned subsidiary of GTH) and Pakistan Mobile Communications Ltd (an indirect subsidiary of VEON, “PMCL”) entered into an agreement to merge their telecommunications businesses in Pakistan (the “Pakistan Merger”). WTPL and Bank Alfalah (together the “Dhabi Group Shareholders”) agreed to acquire approximately 15% of the shares of PMCL in exchange for the acquisition of 100% of the shares of Warid by PMCL.
On July 1, 2016, the transaction to merge PMCL and Warid was completed. Accordingly, PMCL holds 100% of Warid’s shares, and the Dhabi Group Shareholders have acquired 15% of the shares of PMCL, subject to potential post-completion adjustments against apre-agreed formula.
Historically, Warid was in competition in Pakistan with subsidiaries of our shareholder, Telenor. Due to the structural and economic links between Telenor and VEON, the Competition Commission of Pakistan issued an order in 2011 and strengthened the order in 2016 following the merger, placing certain restrictions on the trading and sharing agreements between Telenor and the newly merged entity.
The historical Mobilink and Warid brands now operate on a joint basis under the “Jazz” brand. The combined entity now has a single board and management structure.
Over 50 million customers in Pakistan now benefit from high-speed mobile telecommunications and abest-in-class digital mobile network from the combined PMCL and Warid entity. It is expected that the combined entity will be the leading telecommunications provider of 2G, 3G and 4G/LTE services in Pakistan, providing higher quality national voice and data coverage, faster downloads, and a wider portfolio of products and services.
Disposal ofNon-Core Assets and Network and Tower Sharing Agreements
As part of our strategy under our new VEON brand, we aim to move towards an asset-light network model through the disposal ofnon-core assets, potential sales of tower businesses and the sharing of networks.
On November 30, 2016, we exited the telecommunications market in Zimbabwe through the sale by GTH of Telecel International Limited to ZARNet (Private) Limited (“ZARNet”).
In March 2015, our wholly owned subsidiary, WIND Italy, sold 90% of the shares of its wholly owned towers subsidiary, Galata, to Cellnex. WIND Italy has a put option, and Cellnex has a call option, over the 10% of the share capital of Galata retained by WIND Italy. Through the historical WIND agreement, the Italy Joint Venture now has a tower services agreement with Galata for an initial term of 15 years for the provision of a broad range of services on the sites contributed to Galata by WIND Italy and the sites subsequently built by Galata hosting WIND Italy’s equipment.
In December 2014, our wholly owned subsidiary, PJSC VimpelCom, entered into an agreement with MTS for the joint planning, development and operation of 4G/LTE networks in 36 regions of Russia with an agreed extension of up to 41 regions. In December 2015, PJSC VimpelCom and MTS signed an amendment to the December 2014 agreement that provides for the sharing of 2600 MHz 4G/LTE frequencies in 20 of the 36 regions of Russia that were covered by the original 2014 agreement. In each of these regions, PJSC VimpelCom and MTS plan to share airwaves and radio frequency channels across all base stations that they jointly use pursuant to the 2014 agreement, and the amendment allows for further expansion of the list of regions covered by the agreement.
Similarly, in December 2015, PJSC VimpelCom entered into an agreement with MegaFon for the joint planning, development and operation of 4G/LTE networks in ten regions of Russia.
In August 2016, we have entered into a network sharing agreement with Kcell for the joint deployment of 4G/LTE services in Kazakhstan. For further information, see “Item 4—Information on the Company—Property, Plant and Equipment—Mobile Telecommunications Equipment and Operations—Site Procurement and Maintenance.”
Multi-Currency Term Loan and Revolving Facilities Agreement
On February 16, 2017, VEON Ltd. entered into a new multi-currency term loan and revolving facilities agreement (the “TL/RCF”) of up to US$2.25 billion for VimpelCom Holdings B.V. (“VIP Holdings”). The TL/RCF replaced the now cancelled US$1.8 billion revolving credit facility signed in 2014. The term loan facility has a five-year tenor and the revolving credit facility has an initial tenor of three years, with VIP Holdings having the right to request twoone-year extensions to the tenor of the revolving credit facility, subject
to lender consent. Several international banks have committed to the TL/RCF in an aggregate amount of US$2.108 billion. The TL/RCF includes an option to increase the amount of the facility up to the full amount of US$2.25 billion, which would consist of a term loan facility of US$562,500,000 and a revolving credit facility of US$1,687,500,000. VIP Holdings will have the option to make each drawdown under the facilities in either U.S. dollars or euros.
Telenor Share Sale and Exchangeable Bond Issuance
In September 2016, Telenor East sold 163,875,000 of VEON Ltd.’s ADSs pursuant to an underwritten offering. We did not receive any proceeds from the offering, and Telenor East’s sale of the ADSs did not result in dilution of our issued and outstanding shares. The ADSs were offered only by means of a prospectus and an accompanying prospectus supplement forming a part of the effective Registration Statement.
In addition, in a transaction outside the United States tonon-US persons pursuant to Regulation S under the Securities Act, Telenor East 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.
Telenor East has announced its intention to divest the remainder of its stake in VEON Ltd.
Management Changes in Operating Companies
In 2016, we had management changes in key roles at several operating companies. On September 5, 2016 VEON accepted the resignation of Mikhail Slobodin as CEO of PJSC VimpelCom and appointed Kjell Johnsen, who leads VEON’s Major Markets, as Head of Russia. We also appointed a new CEO in Algeria and Aamir Ibrahim succeeded Jeffrey Hedberg as CEO in Pakistan following the Pakistan Merger and Mr. Hedberg’s new appointment as Group Chief People Officer. While we anticipate an integration period for these management changes, we believe that the new appointments will continue to drive the company’s transformation.
Biometric SIM verification in Bangladesh
In December 2015, the government of Bangladesh introduced biometric SIM verification, which is a mandated initiative that requires mobile phone operators to verify each customer using fingerprints in order to ensure authentic registration, proper accountability and increased security. This verification initiative has impacted revenue dynamics and customer growth across the market, resulted in 3.8 million SIM cards being blocked by Banglalink and may require additional funds and/or focus and resources on the part of BDCL’s or VEON Ltd.’s management.
GTH ShareBuy-Back and Cancellation of GDR Program
In February 2017, our owned Egyptian subsidiary, GTH, completed a fixed pricebuy-back program to acquire up to 10% of the total issued share capital of GTH at a price per share of Egyptian pounds 7.90 and for a total consideration of up to Egyptian pounds 4.1 billion (the “ShareBuy-Back”). GTH launched the ShareBuy-Back primarily to maximize shareholder value, to reduce GTH’s share capital and as a supportive action to the cancellation of the listing of its GDRs on the Official List of the Financial Conduct Authority and the trading of GDRs on the Main Market for Listed Securities of the London Stock Exchange (the “GDR Listing”), in order to provide the holders of GDRs in GTH an opportunity to dispose of all or some of their GDRs prior to the cancellation of the GDR Listing, which was approved during the extraordinary general assembly meeting of the shareholders on February 6, 2017. As a result, the GDR Listing ceased on March 20, 2017. GTH will keep its single listing on the Egyptian Stock Exchange in Cairo. Upon ratification by the Egyptian Financial Supervisory Authority of the board minutes for the cancellation of the GDR program, our shareholding in GTH will increase to 57.7% from 51.9%.
Factors Affecting Comparability of Our 2016, 2015 and 2014 Financial Position and Results of Operations
Our The comparability betweenof our financial position and results among the periods presented below wasis affected by a number of factors. Our financial position and results of operations for the classification of Italythree years ended December 31, 2017 as an asset held for sale and a discontinued operation from January 1, 2016 to November 5, 2016 and its subsequent deconsolidation and the acquisition of an investmentreflected in a joint venture. For more information, please see Note 6 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 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 our results of operation for the current financial year, see "20-F, “——Key Developments and Trends—Italy Joint Venture”Trends." We may also be subject to certain fines or compliance costs that are paid and “Explanatory Note—Accounting Treatment of our Historical WIND Business and the new Italy Joint Venture.”
On July 1, 2016, VEON Ltd., togetheraccounted for in a particular fiscal year in connection 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 with previous periods.certain legal or administrative proceedings. For more information regarding our acquisitionson the regulatory environment in which we operate, see "Exhibit 99.2—Regulation of Telecommunications."
Pakistan Merger and dispositions, see “—Key DevelopmentsOther Acquisitions and Trends—Pakistan Merger” and Note 6 to our audited consolidated financial statements incorporated herein.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 applied by VEON Ltd.
IFRS. In general, our selected operating and financial data, audited consolidated financial statements and related notes included elsewhere in this Annual Report on Form20-F 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.
In 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 we reached resolutions with the SEC, the DOJhas a particularly strong impact on comparability. For more information regarding our acquisitions and the OM relating to previously disclosed investigations under the FCPA and relevant Dutch laws and paid fines and disgorgements to the SEC, the DOJ and the OM. All fines are paid and accounted for in 2016, though we anticipate some ongoing compliance costs going forward. For further details related to these agreements, pleasedispositions, see “Item 8—Financial Information—A. Consolidated Statements and Other Financial Information—A.7. Legal Proceedings,” Notes25 and 27Note 5 to our audited consolidated financial statements included elsewhere in this Annual Report on Form20-F, “Item 3—Key Information—D. Risk Factors—Risks Related to Our Business—We have incurred and are continuing to incur costs and related management oversight obligations in connection with our obligations under the DPA, the SEC Judgment and the Dutch Settlement Agreement, which may be significant” and “Item 3—Key Information—D. Risk Factors—Risks Related to Our Business—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” in this Annual Report on Form20-F.
Certain Ongoing Factors Affecting Our Financial Position and Results of Operations
Our financial position and results of operations for the three years ended December 31, 2016 as reflected in our audited consolidated financial statements included elsewhere in this Annual Report on Form20-F have been influenced by the factors listed below. For a discussion of the key developments 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.”incorporated herein.
Economic trendsTrends
Our financial position and results As a global telecommunications company with operations in a number of operationsmarkets, we are affected by thea 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 countrieseconomies of markets in which we operate including a macroeconomic slowdown in Russia, Ukraine and other countries in 2014 and 2015. Low oil prices, together with the impact of economic sanctions – including those promulgated by the United States, which restrict certain financial transactions and dealings, even bynon-U.S. persons, involving certain industries and parties in Russia and resulting from the current situation in Ukraine – and the significant
devaluation of the ruble, negatively impacted the Russian economy and economic outlook. In both 2014 and 2015, 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 and 2015. In addition, the significant devaluation of the Ukrainian hryvnia in 2015 (partly due to the National Bank of Ukraine’s decision in February 2015 to suspend its interventions to support the currency), the Algerian dinar in 2015, and the Kazakh tenge in 2015 (in the absence of a currency stabilization policy in Kazakhstan) negatively impacted revenues in our Ukraine and Algeria segments, and our historical Kazakhstan segment, respectively, and our results of operations in 2015. However, we have seen stabilization of most of the currencies and macroeconomic conditionsor may operate in the countries in which we operate during 2016.
Inflation
Inflation affects the purchasing power offuture could also, among other things, increase our mass market customers, as well as corporate clients. The values of the Russian, Ukrainian, Kazakhcosts, prevent us from executing our strategies, hurt our liquidity or to meet unexpected financial requirements. For more information regarding economic trends and Algerian currencies, for example, have declined significantly in response to political and economic issues since December 31, 2013, and, although the rates appeared to stabilize in some countries in 2016,how they may continue to decline.
The table below shows the inflation rates for the years ended December 31, 2016, 2015 and 2014, and the source of the inflation rates.
| December 31, | ||||||||||||||
Country | 2016 | 2015 | 2014 | Source | ||||||||||
Russia | 5.4 | % | 12.9 | % | 11.4 | % | The Russian Federal State Statistics Service | |||||||
Pakistan | 3.7 | % | 3.2 | % | 4.3 | % | The Pakistan Bureau of Statistics | |||||||
Algeria | 5.2 | %(1) | 4.4 | % | 5.3 | % | The Central Bank of Algeria | |||||||
Bangladesh | 5.0 | % | 6.1 | % | 6.1 | % | The Central Bank of Bangladesh | |||||||
Ukraine | 12.4 | % | 43.3 | % | 24.9 | % | The State Statistics Committee of Ukraine | |||||||
Uzbekistan | 8.0 | % | 9.1 | % | 9.8 | % | The International Monetary Fund | |||||||
Kyrgyzstan | (0.5 | )%(2) | 4.9 | %(3) | 10.5 | % | The International Monetary Fund | |||||||
Armenia | (1.1 | )% | (0.1 | )% | 4.6 | % | The National Statistical Service of the Republic of Armenia | |||||||
Tajikistan | 7.0 | % | 11.7 | % | 7.4 | % | The International Monetary Fund | |||||||
Georgia | 1.8 | % | 4.9 | % | 2.0 | % | The Ministry of Economic Development of the Republic of Georgia | |||||||
Laos | 2.5 | % | 0.9 | % | 2.4 | % | The Bank of the Lao People’s Democratic Republic | |||||||
Kazakhstan | 8.5 | % | 13.6 | % | 7.4 | % | The Agency of Statistics of the Republic of Kazakhstan | |||||||
For a discussion of the inflation rates for the Italy Joint Venture, pleaseaffect our operations, see “—Italy—Inflation.”
Please also 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 convertibility translation risks,” and “Item"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 | ||||
Foreign Currency Translation
Our audited consolidated financial statements included elsewhere in this Annual Report on Form20-F are presented in U.S. dollars. Amounts included in these financial statements were presented in accordance with IAS 21, The Effects of Changes in Foreign Exchange Rates, using the current rate method of currency translation with the U.S. dollar as the reporting currency. The current rate method assumes that assets and liabilities measuredfunctional currencies of our
group are the Russian ruble in Russia, the functional currency are translated into U.S. dollars at exchange rates prevailing onPakistani rupee in Pakistan, 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.
Our results of operations are affected by increases or decreases in the value of the U.S. dollar or our functionfunctional 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 2015 and 2014.2015. 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.
Russia
The national currency of Russia is the Russian ruble. We have determined that thetable below shows functional currency for Russia is the Russian ruble. Ascurrencies and official exchange rates as of December 31, 2017, 2016 and 2015 and 2014, the official Central Bankas well as comparison of Russia Russianruble-U.S. dollaraverage exchange rates were 60.66, 72.88for 2017 versus 2016 and 56.26 Russian rubles per U.S. dollar, respectively. During 2016 the average Russian ruble to U.S. dollar exchange rate was 10.0% higher than the average Russian ruble to U.S. dollar exchange rate duringversus 2015. During 2015, the average Russianruble-U.S. dollar exchange rate was 58.7% higher than the average Russianruble-U.S. dollar exchange rate during 2014.
Pakistan
The national currency of Pakistan is the Pakistani rupee. We have determined that the functional currency for Pakistan is the Pakistani rupee. As of December 31, 2016, 2015 and 2014, the Pakistanirupee-U.S. dollar exchange rates were 104.37, 104.73 and 100.52 Pakistani rupee per U.S. dollar respectively, as provided by Bloomberg Finance L.P. During the 2016, the average Pakistani rupee to U.S. dollar exchange rate was 1.9% higher than the average Pakistani rupee to U.S. dollar exchange rate during 2015. During 2015, the average Pakistanirupee-U.S. dollar exchange rate was 1.7% higher than the average Pakistanirupee-U.S. dollar exchange rate during 2014.
Algeria
The national currency of Algeria is the Algerian dinar. We have determined that the functional currency for Algeria is the Algerian dinar. As of December 31, 2016, 2015 and 2014, the Algeriandinar-U.S. dollar exchange rates were 110.40, 107.10 and 87.92 Algerian dinar per U.S. dollar respectively, as provided by Bloomberg Finance L.P. During 2016, the average Algerian dinar to U.S. dollar exchange rate was 9.0% higher than the average Algerian dinar to U.S. dollar exchange rate during 2015. During 2015, the average Algeriandinar-U.S. dollar exchange rate was 24.5% higher than the average Algeriandinar-U.S. dollar exchange rate during 2014.
Bangladesh
The national currency of Bangladesh is the Bangladeshi taka. We have determined that the functional currency for Bangladesh is the Bangladeshi taka. As of December 31, 2016, 2015 and 2014, the Bangladeshitaka-U.S. dollar exchange rates were 78.92, 78.25 and 77.93 Bangladeshi taka per U.S. dollar respectively, as provided by Bloomberg Finance L.P. During 2016, the average Bangladeshi taka to U.S. dollar exchange rate was 0.6% higher than the average Bangladeshi taka to U.S. dollar exchange rate during 2015. During 2015, the average Bangladeshitaka-U.S. dollar exchange rate was 0.5% higher than the average Bangladeshitaka-U.S. dollar exchange rate during 2014.
Ukraine
The national currency of Ukraine is the Ukrainian hryvnia. We have determined that the functional currency of our subsidiary in Ukraine is the Ukrainian hryvnia, as it reflects the economic substance of the underlying events and circumstances of the company. The Ukrainian hryvnia is not a convertible currency outside Ukraine. As of December 31, 2016, 2015 and 2014, the official National Bank of Ukraine (NBU) hryvnia-U.S. dollar
exchange rates were 27.19, 24.00 and 15.77 Ukrainian hryvnia per U.S. dollar, respectively. During 2016, the average Ukrainian hryvnia to U.S. dollar exchange rate was 17.0% higher than the average Ukrainian hryvnia to U.S. dollar exchange rate during 2015. During 2015, the average Ukrainian hryvnia-U.S. dollar NBU exchange rate was 83.3% higher than the average Ukrainian hryvnia-U.S. dollar NBU exchange rate during 2014.
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, 2016, 2015 and 2014, the official Central Bank of the Republic of Uzbekistan som-U.S. dollar exchange rates were 3,231.48, 2,809.98 and 2,422.4 Uzbek som per U.S. dollar, respectively. During 2016, the average Uzbek som to U.S. dollar exchange rate was 15.5% higher than the average Uzbek som to U.S. dollar exchange rate during 2015. During 2015, the average Uzbek som-U.S. dollar exchange rate was 11.1% higher than the average Uzbek som-U.S. dollar exchange rate during 2014.
Other Countries
Kazakhstan
The national currency of the Republic of Kazakhstan is the Kazakh tenge. We have determined that the functional currency of our 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, 2016, 2015 and 2014, the official National Bank of Kazakhstan tenge-U.S. dollar exchange rates were 333.29, 339.47 and 182.35 Kazakh tenge per U.S. dollar, respectively. During 2016, the average Kazakh tenge to U.S. dollar exchange rate was 53.8% higher than the average Kazakh tenge to U.S. dollar exchange rate during 2015. During 2015, the average Kazakh tenge-U.S. dollar exchange rate was 24.1% higher than the average Kazakh tenge-U.S. dollar exchange rate during 2014.
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, 2016, 2015 and 2014, the official National Bank of the Kyrgyz Republic Kyrgyz som-U.S. dollar exchange rates were 69.23, 75.90 and 58.89 Kyrgyz som per U.S. dollar, respectively. During 2016, the average Kyrgyz som to U.S. dollar exchange rate was 8.4% higher than the average Kyrgyz som to U.S. dollar exchange rate during 2015. During 2015, the average Kyrgyz som-U.S. dollar exchange rate was 20.2% higher than the average Kyrgyz som-U.S. dollar exchange rate during 2014.
Armenia
The national currency of Armenia is the Armenian dram. We have determined that the functional currency of our subsidiary in Armenia 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, 2016, 2015 and 2014, the official Central Bank of Armenia Armeniandram-U.S. dollar exchange rates were 483.94, 483.75 and 474.97 Armenian drams per U.S. dollar, respectively. During 2016, the average Armenian dram to U.S. dollar exchange rate was 0.6% higher than the average Armenian dram to U.S. dollar exchange rate during 2015. During 2015, the average Armeniandram-U.S. dollar exchange rate was 14.9% higher than the average Armeniandram-U.S. dollar exchange rate during 2014.
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 because the company generates most of its revenue from international traffic termination which is priced and paid in the U.S. dollars. In addition, a substantial part of capital expenditures is purchased from international suppliers and priced and paid in the U.S. dollars.
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, 2016, 2015 and 2014, the official National Bank of Georgia Georgian lari-U.S. dollar exchange rates were 2.65, 2.39, and 1.86 Georgian lari per U.S. dollar, respectively. During 2016, the average Georgian lari to U.S. dollar exchange rate was 4.3% higher than the average Georgian lari to U.S. dollar exchange rate during 2015. During 2015, the average Georgian lari-U.S. dollar exchange rate was 28.6% higher than the average Georgian lari-U.S. dollar exchange rate during 2014.
Laos
The national currency of Laos is the Lao kip. We have determined that the functional currency of our subsidiary in Laos is the Lao kip, as it reflects the economic substance of the underlying events and circumstances of the company. The Lao kip is not a convertible currency outside Laos. As of December 31, 2016, 2015 and 2014, Laokip-U.S. dollar exchange rates were 8,184.00, 8,148.00 and 8,099.05 Lao kip per U.S. dollar respectively, as provided by Bloomberg Finance L.P. During 2016, the average Lao kip to U.S. dollar exchange rate was 0.1% lower than the average Lao kip to U.S. dollar exchange rate during 2015. During 2015, the average Laokip-U.S. dollar exchange rate was 1.0% higher than the average Laokip-U.S. dollar exchange rate during 2014.
Italy Joint Venture
For a discussion of foreign currency translation for the Italy Joint Venture, please see “—Italy—Foreign Currency Translation.”
We have implemented a number of risk management activities to minimize currency risk and exposure in certain of the countries in which we, or the Italy Joint Venture operates, as further described in the section of this Annual Report on Form20-F entitled “Item 11—Quantitative and Qualitative Disclosures About Market Risk.”
| | | 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 faceare subject to certain currency restrictions orand local regulations that impact our ability to extract cash from some of our operating companies.
The official currency For example, in Uzbekistan, is not convertible outside Uzbekistan due to localin September 2017, the 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 buildingliberalized the country's currency exchange rules and maintainingreset the company’s telecommunications network. In December 2016,official exchange rate at 8,100 Uzbek som per U.S. dollar, which represented nearly a draft Resolutionhalving of the Presidentvalue 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, was introduced outlining reforms in currency control planned in 2017, including gradual introduction of free conversion of currency. However, it isbut we do not yet clear what the changes will be, and whenexpect that they will be introduced.
In Ukraine, “Kyivstar” JSC cannotKyivstar 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, in June 2016, severalcertain 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, only dividends accrued in 2014-2015 may be distributed; the monthly amount subject to repatriation is limited to US$5.0 million (in equivalent); there is a detailed examination by the National Banksome of Ukraine of allour markets, strict foreign exchange regulations are in place and foreign currency purchases at the inter-bank currency market forfinancing 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 than US$50,000 equivalent; the purchase of currency (not to exceed US$50,000 equivalent) cannotinformation on how our operations can be made earlier than on the third working day; there is a ban on the purchaseaffected 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 if a client has a US$25,000 equivalent existing already on its accounts; and there is an obligatory sale of 65% of incomingscontrol requirements restrict activities in a foreign currency.certain markets in which we have operations."
For more information about risks related to currency exchange rate fluctuations, see “Item"Item 11—Quantitative and Qualitative Disclosures About Market Risk”Risk" and Notes 54 and 1817 to our audited consolidated financial statements included elsewhere in this Annual Report on Form20-F.statements.
The banking system in Algeria is still in a period of improvement. The Central Bank has increased the controls on banks, imports (including the implementation of specific licenses for some products), and on the international transfers of funds. From October 2013, a special dispensation from the Bank of Algeria was required for importing 3G equipment and systems. The dispensation was granted in October 2013 and required prior approval from the ARPT and the MPTIC of the detailed lists of equipment and systems to be imported. In addition, there was a ban in place for ournon-3G equipment and systems, which, together with the approval procedure for 3G equipment and systems, caused delays in our procurement process. However, the ban was lifted on January 28, 2015, and from that date, Optimum has been able to import equipment and exchange foreign currency.
In Bangladesh, strict foreign exchange regulations require regulatory approval before a company can engage in certain foreign exchange transactions.
Similarly, in Pakistan, foreign currency financing agreements must be registered with the State Bank of Pakistan, and if there is a default, any default interest payment may require regulatory approval. In addition, the State Bank of Pakistan’s approval is also required for hedging loans denominated in foreign currencies.
Tax
In Our results of operations are also impacted by changes with respect to the future,tax regimes to which we are subject. For example, we expect that our results of operations mayto be affected byby: (i) a new finance law in Algeria comingthat came into effect in 2017 which will increasethat increased VAT from 7% to 19% on data services and from 17% to 19% on voice services, and additionally, will increaseincreased taxes on recharges from 5% to 7%.
For more information on; (ii) an increase in the regulatory environmentcorporate income tax rate in which we operate, see Exhibit 99.2—RegulationUzbekistan up to 48%; and (iii) revised interpretations of Telecommunications.SIM tax regulations in Bangladesh and Pakistan.
Certain Performance Indicators
The following discussion analyzes certain operating data, including Adjusted EBITDA, mobile customers, mobile MOU, 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 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 Adjusted EBITDA, customers, mobile MOU, mobile ARPU and mobile data customers is useful 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 marginto (loss)/profit before tax, the most directly comparable IFRS financial measure, for the years ended December 31, 2017, 2016 2015 and 2014. Adjusted EBITDA and Adjusted EBITDA margin arenon-IFRS financial measures.2015.
| Year ended December 31, | ||||||||||||
| 2016 | 2015(1) | 2014(1) | ||||||||||
| (in millions of U.S. dollars) | ||||||||||||
Other data: | ||||||||||||
Adjusted EBITDA(1) | 3,232 | 2,875 | 5,560 | |||||||||
Adjusted EBITDA margin(1) | 36.4 | % | 29.9 | % | 41.2 | % | ||||||
A reconciliation of Adjusted EBITDA to profit/(loss) before tax for the years ended December 31, 2016, 2015 and 2014, is presented below.
| Year ended December 31, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| (in millions of U.S. dollars) | ||||||||||||
Adjusted EBITDA | 3,232 | 2,875 | 5,560 | |||||||||
Depreciation | (1,439 | ) | (1,550 | ) | (1,996 | ) | ||||||
Amortization | (497 | ) | (517 | ) | (647 | ) | ||||||
Impairment loss | (192 | ) | (245 | ) | (976 | ) | ||||||
Loss on disposals ofnon-current assets | (20 | ) | (39 | ) | (68 | ) | ||||||
Finance costs | (830 | ) | (829 | ) | (1,077 | ) | ||||||
Finance income | 69 | 52 | 52 | |||||||||
Othernon-operating losses/(gains) | (82 | ) | (42 | ) | 121 | |||||||
Shares of (loss)/profit of associates and joint ventures accounted for using the equity method | 48 | 14 | (38 | ) | ||||||||
Impairment of associates and joint ventures accounted for using the equity method | (99 | ) | — | — | ||||||||
Net foreign exchange gain/(loss) | 157 | (314 | ) | (556 | ) | |||||||
Profit/(loss) before tax | 347 | (595 | ) | 375 | ||||||||
The following table shows our cash flows as of and for the years ended December 31, 2016, 2015 and 2014.
| As of and for the year ended December 31, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| (in millions of U.S. dollars) | ||||||||||||
Cash flow data: | ||||||||||||
Net cash from/(used in) operating activities | 1,875 | 2,033 | 5,279 | |||||||||
from continued operations | 1,192 | 1,104 | 4,613 | |||||||||
from discontinued operations | 683 | 929 | 666 | |||||||||
Net cash from/(used in) investing activities | (2,671 | ) | (2,634 | ) | (3,977 | ) | ||||||
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from continued operations | (2,022 | ) | (2,494 | ) | (2,993 | ) | ||||||
from discontinued operations | (649 | ) | (140 | ) | (984 | ) | ||||||
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Net cash from/(used in) before financing activities | (796 | ) | (601 | ) | 1,302 | |||||||
Net cash from/(used in) financing activities | (126 | ) | (1,439 | ) | 1,329 | |||||||
from continued operations | (106 | ) | (732 | ) | 2,007 | |||||||
from discontinued operations | (20 | ) | (707 | ) | (678 | ) | ||||||
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| | 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
We offer both postpaid and prepaid services to mobile customers. As of December 31, 2016, the number of our mobile customers reached 207.5 million. 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.modems and FMC.
The following table indicates our mobile customer figures in millions for the periods indicated:
| As of December 31, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
Russia | 58.3 | 59.8 | 57.2 | |||||||||
Pakistan | 51.6 | 36.2 | 38.5 | |||||||||
Algeria | 16.3 | 17.0 | 17.7 | |||||||||
Bangladesh | 30.4 | 32.3 | 30.8 | |||||||||
Ukraine | 26.1 | 25.4 | 26.2 | |||||||||
Uzbekistan | 9.5 | 9.9 | 10.6 | |||||||||
Others(1) | 15.3 | 15.7 | 16.1 | |||||||||
Total number of mobile customers(2) | 207.5 | 196.3 | 197.1 | |||||||||
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| | 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 | |||||||
| | | | | | | | | | | |
MOU
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 usage 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.
The Algeria, Pakistan and Bangladesh segments for the years ended December 31, 2013 and 2012 measured mobile MOU based on billed minutes, which is calculated by the total number of minutes of usage for outgoing calls (and for Pakistan also includes minutes of usage generated from incoming revenue). This definition differs from the definition of MOU above. Mobile MOU in the Algeria, Pakistan and Bangladesh segments has been restated to use the group definition for the years ended December 31, 2016, 2015 and 2014.
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 othernon-service revenue, 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. Our historical WIND business measures mobile data customers based on
the number of active contracts signed and includes customers who have performed at least one mobile Internet event during the previous month. 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 andWi-Fi technologies.
Recent Accounting Pronouncements 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 | |||||||
| | | | | | | | | | | |
Please refer to Note 3 to our audited consolidated financial statements included elsewhere in this Annual Report on Form20-F for a discussionTable of new accounting pronouncements not yet adopted by the company.Contents
Results of Operations
OverviewConsolidated results
Our total operating revenue was US$8,885 million for the year ended December 31, 2016, compared to US$9,606 million for the year ended December 31, 2015. Our operating profit was US$1,084 million for the year ended December 31, 2016, compared to US$524 million for the year ended December 31, 2015. The profit for the year attributable to the owners of the parent was US$2,328 million for the year ended December 31, 2016, compared to a loss of US$655 million for the year ended December 31, 2015. For a discussion of the material changes between periods, see “—Consolidated Results—Year Ended December 31, 2016 Compared to Year Ended December 31, 2015.”
We use the U.S. dollar as our 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 Kazakh tenge in the Republic of Kazakhstan, the Uzbek som in Uzbekistan, the Kyrgyz som in Kyrgyzstan, the Armenian dram in the Republic of Armenia, the U.S. dollar in Tajikistan, the Georgian lari in Georgia and the Lao kip in Laos. The functional currency of the Italy Joint Venture is the euro.
Due to the significant fluctuation of thenon-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 both reporting and 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 Ongoing Factors Affecting Our Financial Position and Results of Operations—Foreign Currency Translation” below.
Consolidated results
The financial results for 2015 and 2014 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.
| Year ended December 31, | ||||||||||||
| 2016 | 2015(1) | 2014(1) | ||||||||||
| (in millions of U.S. dollars, except per share amounts and as indicated) | ||||||||||||
Consolidated income statements data: | ||||||||||||
Service revenue | 8,553 | 9,313 | 13,200 | |||||||||
Sale of equipment and accessories | 184 | 190 | 218 | |||||||||
Other revenue | 148 | 103 | 68 | |||||||||
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Total operating revenue | 8,885 | 9,606 | 13,486 | |||||||||
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Operating expenses | ||||||||||||
Service costs | 1,769 | 1,937 | 2,931 | |||||||||
Cost of equipment and accessories | 216 | 231 | 252 | |||||||||
Selling, general and administrative expenses | 3,668 | 4,563 | 4,743 | |||||||||
Depreciation | 1,439 | 1,550 | 1,996 | |||||||||
Amortization | 497 | 517 | 647 | |||||||||
Impairment loss | 192 | 245 | 976 | |||||||||
Loss on disposals ofnon-current assets | 20 | 39 | 68 | |||||||||
Total operating expenses | 7,801 | 9,082 | 11,613 | |||||||||
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Operating profit | 1,084 | 524 | 1,873 | |||||||||
Finance costs | 830 | 829 | 1,077 | |||||||||
Finance income | (69 | ) | (52 | ) | (52 | ) | ||||||
Othernon-operating losses/(gains) | 82 | 42 | (121 | ) | ||||||||
Share of (profit) / loss of associates and joint ventures accounted for using the equity method | (48 | ) | (14 | ) | 38 | |||||||
Impairment of associates and joint ventures accounted for using the equity method | 99 | — | — | |||||||||
Net foreign exchange (gain)/ loss | (157 | ) | 314 | 556 | ||||||||
Profit/(loss) before tax | 347 | (595 | ) | 375 | ||||||||
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Income tax expense | 635 | 220 | 598 | |||||||||
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(Loss)/profit for the year from continuing operations | (288 | ) | (815 | ) | (223 | ) | ||||||
|
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|
|
|
| |||||||
Profit/(loss) after tax for the period from discontinued operations | 920 | 262 | (680 | ) | ||||||||
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 | ) | ||||||||
Profit/(loss) for the year | 2,420 | (553 | ) | (903 | ) | |||||||
Attributable to: | ||||||||||||
The owners of the parent (continuing operations) | (380 | ) | (917 | ) | 33 | |||||||
The owners of the parent (discontinued operations) | 2,708 | 262 | (680 | ) | ||||||||
Non-controlling interest | 92 | 102 | (256 | ) | ||||||||
|
|
|
|
|
| |||||||
| 2,420 | (553 | ) | (903 | ) | ||||||||
|
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| |||||||
Earnings/(loss) per share from continuing operations | ||||||||||||
Basic, (loss)/profit for the year attributable to ordinary equity holders of the parent | (0.22 | ) | (0.52 | ) | 0.02 | |||||||
Diluted, (loss)/profit for the year attributable to ordinary equity holders of the parent | (0.22 | ) | (0.52 | ) | 0.02 | |||||||
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 | ) | ||||||||
Diluted, (loss)/profit for the year attributable to ordinary equity holders of the parent | 1.55 | 0.15 | (0.39 | ) | ||||||||
Weighted average number of common shares (millions) | 1,749 | 1,748 | 1,748 | |||||||||
Dividends declared per share | 0.23 | 0.035 | 0.035 | |||||||||
The tables below show for the periods indicated selected information about the results of operations in each of our reportable segments. For more information regarding our segments, see Note 7 to our audited consolidated financial statements included elsewhere in this Annual Report on Form20-F.
Segmentation of Total Operating Revenue (in millions of U.S. dollars)
| Year ended December 31, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| in millions of U.S. dollars | ||||||||||||
Russia(1) | 4,097 | 4,583 | 7,428 | |||||||||
Pakistan | 1,295 | 1,014 | 1,010 | |||||||||
Algeria | 1,040 | 1,273 | 1,692 | |||||||||
Bangladesh | 621 | 604 | 563 | |||||||||
Ukraine | 586 | 622 | 1,062 | |||||||||
Uzbekistan | 663 | 711 | 718 | |||||||||
HQ(2) | 10 | — | — | |||||||||
Others(3) | 573 | 799 | 1,013 | |||||||||
|
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| |||||||
Total | 8,885 | 9,606 | 13,486 | |||||||||
|
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| |||||||
Segmentation of Total Operating Revenue (as a percentage of total operating revenue)
| Year ended December 31, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
(percentage of total operating revenue) | ||||||||||||
Russia(1) | 46 | % | 48 | % | 55 | % | ||||||
Pakistan | 15 | % | 11 | % | 7 | % | ||||||
Algeria | 12 | % | 13 | % | 13 | % | ||||||
Bangladesh | 7 | % | 6 | % | 4 | % | ||||||
Ukraine | 7 | % | 6 | % | 8 | % | ||||||
Uzbekistan | 7 | % | 7 | % | 5 | % | ||||||
HQ(2) | 0 | % | — | — | ||||||||
Others(3) | 6 | % | 8 | % | 8 | % | ||||||
|
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| |||||||
Segmentation of Adjusted EBITDA(1)
| Year ended December 31, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| (in millions of U.S. dollars) | ||||||||||||
Russia(2) | 1,574 | 1,825 | 2,980 | |||||||||
Pakistan | 507 | 409 | 386 | |||||||||
Algeria | 547 | 684 | 857 | |||||||||
Bangladesh | 267 | 242 | 219 | |||||||||
Ukraine | 306 | 292 | 484 | |||||||||
Uzbekistan | 395 | 437 | 461 | |||||||||
HQ(3) | (421 | ) | (1,291 | ) | (233 | ) | ||||||
Others(4) | 57 | 277 | 406 | |||||||||
|
|
|
|
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| |||||||
Total | 3,232 | 2,875 | 5,560 | |||||||||
|
|
|
|
|
| |||||||
Year Ended December 31, 2016 Compared to Year Ended December 31, 20152017, 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, due to 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 due to the depreciation of functional currencies against the U.S. dollar in Algeria, Ukraine and Uzbekistan,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, each as described in greater detail below.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 a decreasedecreases in service costs and cost of equipment and accessories of US$183 million, a decrease 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 December 31, 2015.
Adjusted EBITDA
Our consolidated 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 the year ended December 31, 2015, that was not included in our consolidated total operating expenses for 2016, which was partially offset by a decrease in revenue during 2016. Adjusted EBITDA is anon-IFRS financial measure. Please see “ExplanatoryNote—Non-IFRS Financial Measures” for more information on how we calculate Adjusted EBITDA. For the reconciliation of Adjusted EBITDA to profit for the year, the most directly comparable IFRS financial measure, in “Item 5—Certain Performance Indicators—Adjusted EBITDA” and Note 7 to our audited consolidated financial statements included herein.2015.
Depreciation and Amortization Expensesexpenses
Our consolidated depreciation and amortizationexpenses 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 6%7% to US$1,9361,439 million in 2016 compared to US$2,0671,550 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.
Impairment LossAmortization expenses
Our consolidated impairment lossamortization 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 22%4% to US$192497 million in 2016 compared to US$245517 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 aan asset impairment of US$30 million impairment in connection with our transformation strategy and commitment to network modernization, including our plans forre-evaluating our existing 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, please see Note 10 of our audited consolidated financial statements included elsewhere in this Annual Report on Form20-F.statements.
Loss on Disposalsdisposals ofNon-current Assets non-current assets
Our consolidated loss on disposals ofnon-current assets decreased by 49%amounted to US$24 million in 2017 compared to US$20 million during 2016 comparedin 2016. Our consolidated loss on disposals of non-current assets amounted to US$39 million during 2015, mainly duein 2015. The disposal of non-current assets relates to relatively higher cash considerations received for assets sold.the ongoing maintenance of network and ongoing network modernization projects.
Operating Profit
Our consolidated operating profit increased by 39% to US$ 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 the decrease of aone-off provision recorded 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, and lower operating expenses, partially offset by overall decrease in revenue.2015.
Non-operating Profits and Losses
Finance Costs and Finance Incomecosts
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.
OtherNon-operating Losses/(Gains) 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 othernon-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)(loss)/profit of Associatesassociates and Joint Ventures Accounted for Using the Equity Methodjoint 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, an increase of 243%.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 Associatesassociates and Joint Ventures Accounted for Using the Equity Methodjoint ventures
During 2016, an We recorded US$110 million in impairment of associates and joint ventures during 2017 compared to US$99 million wasduring 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 (Gain)foreign exchange (loss)/Lossgain
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 for each country in which we operate 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.
| Year ended December 31, | ||||||||
| 2016 | 2015 | |||||||
Russia | 20.0 | % | 20.0 | % | ||||
Pakistan | 31.0 | % | 32.0 | % | ||||
Algeria | 26.0 | % | 26.0 | % | ||||
Bangladesh | 45.0 | % | 45.0 | % | ||||
Ukraine | 18.0 | % | 18.0 | % | ||||
Uzbekistan* | 50.0 | % | 7.5 | % | ||||
Kazakhstan | 20.0 | % | 20.0 | % | ||||
Kyrgyzstan | 10.0 | % | 10.0 | % | ||||
Armenia | 10.0 | % | 20.0 | % | ||||
Georgia | 15.0 | % | 15.0 | % | ||||
Luxembourg | 22.47 | % | 22.47 | % | ||||
Netherlands | 25.0 | % | 25.0 | % | ||||
Tajikistan | 24.0 | % | 24.0 | % | ||||
Laos | 20.0 | % | 20.0 | % | ||||
Italy | 27.5 | % | 27.5 | % | ||||
Italy regional tax | 3.9 | % | 4.8 | % | ||||
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, the historicalour Historical WIND businessBusiness 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 1112 to our audited consolidated financial statements included elsewhere in this Annual Report on Form20-F.statements.
(Loss)/profitLoss 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 the year ended December 31, 2015, that was not included in our consolidated total operating expenses for 2016, and for the other reasons described above. See “—Factors Affecting Comparability of Our 2016, 2015 and 2014 Financial Position and Results of Operations.”
Profit/(loss)Profit for the year from discontinued operations
In 2016, our consolidated profit after tax for the period from discontinued operations, which iswas comprised primarily of our historicalHistorical WIND operations in Italy,Business, was US$2,708 million, compared to US$262 million of profit for the year ended December 31,in 2015. The completion of the Italy Joint Venture transaction resulted in anon-cash gain on disposal of US$1,788 million, which iswas 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.
Profit(Loss)/profit for the Year Attributable
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 Ownersgain recognized in 2016 on the disposal of the Parentdiscontinued operation and other factors as discussed above.
In 2016, the consolidated profit for the period attributable to the owners of the parent 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.
Profit(Loss)/profit for the Year Attributable toNon-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 tonon-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 Global Telecom Holding Group.
Year Ended December 31, 2015 Compared to Year Ended December 31, 2014
Total Operating Revenue
Our consolidated total operating revenue decreased by 29% to US$9,606 million during 2015 compared to US$13,486 million during 2014 primarily due to decreases of total operating revenue of 38% in Russia, 25% in Algeria and 41% in Ukraine, largely related to the depreciation of functional currencies against the U.S. dollar in 2015, as described in greater detail below. 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 22% to US$9,082 million during 2015 compared to US$11,613 million during 2014, and represented 95% and 86% of total operating revenue in 2015 and 2014, respectively. The decrease in absolute terms was primarily due to a decrease in service costs and cost of
equipment and accessories of US$1,015 million, lower impairment losses by US$731 million and a decrease in depreciation and amortization expenses of US$576 million. Our service costs and cost of equipment and accessories was reclassified for the year ended December 31, 2015 to conform to the current period’s presentation. For more information, please refer to Note 8 of our audited consolidated financial statements included elsewhere in this Annual Report on Form20-F. Such decreases in 2015 compared to 2014, were largely related to depreciation of functional currencies against the U.S. dollar in 2015, partially offset by recognized exceptional items in a total amount of US$1,051 million in 2015, including 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, and transformation costs of US$138 million related to our performance transformation program. In 2014, we recognized exceptional items in a total amount of US$65 million, mainly related to the closing of the sale by GTH, of anon-controlling 51% interest in OTA to theFonds National d’Investissement.
Service Costs
Our consolidated service costs decreased by 34% to US$1,937 million during 2015 compared to US$2,931 million during 2014. As a percentage of consolidated total operating revenue, our service costs decreased to 20% during 2015 compared to 22% during 2014. The decrease in absolute terms was primarily due to decreased revenues related to currency devaluations of functional currencies against the U.S. dollar.
Cost of Equipment and Accessories
Our consolidated cost of equipment and accessories decreased by 8% to US$231 million in 2015 compared to US$252 million in 2014. This decrease was primarily due to a devaluation of functional currencies against the U.S. dollar.
Selling, General and Administrative Expenses
Our consolidated selling, general and administrative expenses decreased by 4% to US$4,563 million during 2015 compared to US$4,743 million during 2014. This decrease was primarily due to the depreciation of functional currencies against the U.S. dollar, partially offset by recognized exceptional items in a total amount of US$1,051 million in 2015, including the US$900 million Uzbekistan provision in connection with the investigations by the SEC, DOJ and OM and transformation costs of US$138 million related to our performance transformation program. In 2014, we recognized exceptional items in a total amount of US$65 million, mainly related to the closing of the Algeria Transaction. For more information about our provisions, see Note 25 to our audited consolidated financial statements included elsewhere in this Annual Report on Form20-F. As a percentage of consolidated total operating revenue, our consolidated selling, general and administrative expenses increased to 47% in 2015 compared to 35% in 2014, mainly due to the exceptional items mentioned above.
Adjusted EBITDA
Our consolidated adjusted EBITDA decreased by 48% to US$2,875 million during 2015 compared to US$5,560 million during 2014, primarily due to decreased revenues related to currency devaluations and the exceptional items mentioned above. Adjusted EBITDA is anon-IFRS financial measure. Please see “ExplanatoryNote—Non-IFRS Financial Measures” for more information on how we calculate Adjusted EBITDA. For the reconciliation of Adjusted EBITDA to profit for the year, the most directly comparable IFRS financial measure, in “Item 5—Certain Performance Indicators—Adjusted EBITDA” and Note 7 to our audited consolidated financial statements included herein.
Depreciation and Amortization Expenses
Our consolidated depreciation and amortization expenses decreased by 22% to US$2,067 million in 2015 compared to US$2,643 million in 2014. The decrease was primarily the result of depreciation of our functional currencies against the U.S. dollar.
Impairment Loss
Our consolidated impairment loss was US$245 million in 2015 compared to US$976 million in 2014. The impairment loss in 2015 primarily related to impairment of obsolete network equipment in Pakistan of US$52 million, in Russia of US$28 million, obsolete network equipment and goodwill in Ukraine of US$66 million and impairment of goodwill in Armenia of US$44 million. The impairment loss in 2014 primarily related to impairment of goodwill and other assets 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 partially offset by an impairment release as a result of the sale of our debt and equity interest in Wind Canada of US$110 million.
Loss on Disposals ofNon-current Assets
Our consolidated loss on disposals ofnon-current assets decreased by 43% to US$39 million during 2015 compared to US$68 million during 2014, primarily due to depreciation of our functional currencies against the U.S. dollar.
Operating Profit
Our consolidated operating profit decreased to US$524 million in 2015 compared to US$1,873 million in 2014 due to an overall decrease in revenue and the exceptional items mentioned above, offset by lower impairment. Our consolidated operating profit as a percentage of total operating revenue in 2015 decreased to 5% compared to 14% in 2014.
Non-operating Profits and Losses
Finance Costs and Finance Income
Our consolidated finance costs decreased by 23% to US$829 million in 2015 compared to US$1,077 million in 2014, primarily due to a decrease in interest expense as a result of the redemption of certain bonds in April 2015 through a cash tender offer by VimpelCom Amsterdam B.V. that resulted in the repurchase of US$1,838 million of bonds, as well as lower U.S. dollar equivalents of ruble-denominated interest expenses as a result of the ruble depreciation. Our consolidated finance income remained at US$52 million in 2015.
OtherNon-operating Losses/(Gains)
We recorded US$42 million in othernon-operating losses during 2015 compared to US$121 million in gains during 2014. The change was primarily due to the positive movement in fair value of other derivatives of US$114 million recorded in 2014.
Shares of Loss/(Profit) of Associates and Joint Ventures Accounted for Using the Equity Method
We recorded a profit of US$14 million from our equity in associates and joint ventures in 2015 compared to a loss of US$38 million in 2014. The change was primarily due to the improved results of Euroset and the loss recorded on the sale of Wind Canada in 2014.
Net Foreign Exchange (Gain)/Loss
We recorded a loss of US$314 million from foreign currency exchange in 2015 compared to a loss of US$556 million from foreign currency exchange in 2014. The loss in 2015 was primarily due to a revaluation of our U.S. dollar net financial liabilities in both Russia and Ukraine primarily due to depreciation of the Russian ruble and the Ukrainian hryvnia against the U.S. dollar in 2015. The loss in 2014 was primarily due to revaluation of our U.S. dollar net financial liabilities in Russia due to depreciation of the Russian ruble against the U.S. dollar in 2014.
Income Tax Expense
The statutory income tax rates during the years ended December 31, 2015 and 2014 for each country in which we operate were as follows:
| Year ended December 31, | ||||||||
| 2015 | 2014 | |||||||
Russia | 20.0 | % | 20.0 | % | ||||
Pakistan | 32.0 | % | 33.0 | % | ||||
Algeria | 26.0 | % | 23.0 | % | ||||
Bangladesh | 45.0 | % | 45.0 | % | ||||
Ukraine | 18.0 | % | 18.0 | % | ||||
Uzbekistan | 7.5 | % | 8.0 | % | ||||
Kazakhstan | 20.0 | % | 20.0 | % | ||||
Kyrgyzstan | 10.0 | % | 10.0 | % | ||||
Armenia | 20.0 | % | 20.0 | % | ||||
Georgia | 15.0 | % | 15.0 | % | ||||
Luxembourg | 22.47 | % | 22.47 | % | ||||
Netherlands | 25.0 | % | 25.0 | % | ||||
Tajikistan | 24.0 | % | 25.0 | % | ||||
Laos | 20.0 | % | 20.0 | % | ||||
Italy | 27.5 | % | 27.5 | % | ||||
Italy regional tax | 4.82 | % | 4.55 | % | ||||
Our consolidated income tax expense decreased by 63% to US$220 million in 2015 compared to US$598 million in 2014. The decrease in income taxes was primarily due to a decrease in provisions for future withholding taxes on intercompany dividends booked in 2015. In addition, our income tax expenses were higher in 2014 due to the tax consequences relating to the sale by GTH of anon-controlling 51% interest in OTA to theFonds National d’Investissement that were recorded in 2014.
For more information regarding income tax expenses please refer to Note 11 of our audited consolidated financial statements included herein.
(Loss)/profit for the year from continuing operations
In 2015, our consolidated loss for the year from continuing operations was US$815 million, compared to US$223 million of loss for 2014. The loss for the year ended December 31, 2015 was primarily attributable to exceptional items in total amount of US$1,051 million described above. See “—Key Developments and Trends—Investigations” and Note 25 to our audited consolidated financial statements included elsewhere in this Annual Report on Form20-F.
(Loss)/profit after tax for the year from discontinued operations
In 2015, our consolidated profit after tax for the year from discontinued operations, which is comprised primarily of our historical WIND operations in Italy, was US$262 million, compared to US$680 million of loss for 2014. In functional currency terms, total operating revenue for WIND in Italy decreased by 4% in 2015 compared to 2014, primarily due to a decrease in our mobile revenues and a decrease in fixed-line revenues, attributable to a decline in voice volumes and a decrease in indirect customer base (subscribers who access WIND’s network through Telecom Italia’s network but who are managed commercially by WIND, including both corporate and consumer subscribers). The 2015 results were positively influenced by the net effect of WIND’s sale of 90% of the shares of its towers subsidiary, Galata, to Cellnex in the first quarter 2015 and a reduction in financial expenses resulting from refinancing activities carried out in 2014 and 2015.
Profit for the Year Attributable to the Owners of the Parent
In 2015, the consolidated loss for the year attributable to the owners of the parent was US$655 million compared to a loss of US$647 million in 2014. The movement was mainly due to an overall decrease in revenue and the exceptional items mentioned above.
Profit for the Year Attributable toNon-controlling Interest
Our profit for the year attributable tonon-controlling interest was US$102 million in 2015 compared to a loss of US$256 million in 2014, mainly due to the profit recorded at the GTH level. This primarily relates to the Algerian results and the change in ownership that occurred during 2015.GTH.
Russia
Results of operations in US$
| Year ended December 31, | ‘15 – ‘16 | ‘14 – ‘15 | ||||||||||||||||||
| 2016 | 2015(1) | 2014(1) | % change | |||||||||||||||||
| in millions of U.S. dollars (except as indicated) | ||||||||||||||||||||
Total operating revenue | 4,097 | 4,583 | 7,428 | (11 | )% | (38 | )% | |||||||||||||
Mobile service revenue | 3,276 | 3,624 | 5,845 | (10 | )% | (38 | )% | |||||||||||||
—of which FMC | 23 | — | — | — | — | |||||||||||||||
—of which mobile data | 778 | 719 | 1,003 | 8 | % | (28 | )% | |||||||||||||
Fixed-line service revenue | 665 | 789 | 1,373 | (16 | )% | (42 | )% | |||||||||||||
Sales of equipment, accessories and other | 156 | 170 | 210 | (8 | )% | (20 | )% | |||||||||||||
Operating expenses | 2,523 | 2,758 | 4,448 | (9 | )% | (38 | )% | |||||||||||||
Adjusted EBITDA | 1,574 | 1,825 | 2,980 | (14 | )% | (39 | )% | |||||||||||||
Adjusted EBITDA margin | 38 | % | 40 | % | 40 | % | (1.4p.p. | ) | (0.3p.p. | ) | ||||||||||
| | 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, | ‘15 – ‘16 | ‘14 – ‘15 | ||||||||||||||||||
| 2016 | 2015(1) | 2014(1) | % change | |||||||||||||||||
| in millions of RUB (except as indicated) | ||||||||||||||||||||
Total operating revenue | 273,003 | 277,241 | 280,765 | (2 | )% | (1 | )% | |||||||||||||
Mobile service revenue | 218,192 | 219,031 | 220,305 | 0 | % | (1 | )% | |||||||||||||
—of which FMC | 1,496 | — | — | — | — | |||||||||||||||
—of which mobile data | 51,773 | 43,581 | 38,065 | 19 | % | 14 | % | |||||||||||||
Fixed-line service revenue | 44,418 | 47,748 | 52,064 | (7 | )% | (8 | )% | |||||||||||||
Sales of equipment, accessories and other | 10,393 | 10,462 | 8,396 | (1 | )% | 25 | % | |||||||||||||
Operating expenses | 168,213 | 167,096 | 168,830 | 1 | % | (1 | )% | |||||||||||||
Adjusted EBITDA | 104,790 | 110,145 | 111,935 | (5 | )% | (2 | )% | |||||||||||||
Adjusted EBITDA margin | 38 | % | 40 | % | 40 | % | (1.3p.p. | ) | (0.1p.p. | ) | ||||||||||
| | 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$4,097 million in 2016 due to the strengthening of the Russian ruble.
| Year ended December 31, | ||||||||||||
| 2016 | 2015(1) | 2014(1) | ||||||||||
Mobile | ||||||||||||
Customers in millions | 58.3 | 59.8 | 57.2 | |||||||||
ARPU in US$ | 4.6 | 5.1 | 8.6 | |||||||||
ARPU in RUB | 306 | 310 | 323 | |||||||||
MOU in minutes | 326 | 310 | 304 | |||||||||
Mobile data customers | 36.6 | 34.3 | 31.9 | |||||||||
Fixed-Line | ||||||||||||
Broadband customers in millions | 2.2 | 2.2 | 2.3 | |||||||||
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 smart phonesmartphone 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
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. Adjusted EBITDA is anon-IFRS financial measure. Please see “ExplanatoryNote—Non-IFRS Financial Measures” for more information on how we calculate Adjusted EBITDA.
Certain Performance Indicatorsperformance 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.
In 2016, our mobile MOU in Russia increased by 5% to 326 minutes from 310 minutes in 2015, primarily as a result ofon-net traffic growth caused by migration of customers to new offers and bundles.
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.
Year Ended December 31, 2015 Compared to Year Ended December 31, 2014
Our total operating revenue in Russia decreased by 38% to US$4,583 million in 2015 compared to US$7,428 million in 2014 mainly due to depreciation of the ruble against the U.S. dollar, as nearly all revenue generated by our operations in Russia are denominated in rubles. In functional currency terms, total operating revenue in Russia decreased by 1% due to a targeted shift away from lower margin traffic-termination revenue. Despite the macroeconomic slowdown in Russia, mobile data revenue increased by 14% due to the trend of increased data use. Our Russia total operating revenue consists of both mobile and fixed-line services.
Mobile Revenue
Our total mobile operating revenue in Russia decreased by 38% to US$3,624 million in 2015 compared to US$5,845 million in 2014. In functional currency terms, total mobile operating revenue increased by 1.2%.
During 2015, we generated US$1,817 million of our Russia segment service revenue from mobile voice services (i.e., 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 47.4% of the total mobile operating revenue in our Russia segment, compared to US$3,095 million, or 51.0% of the total mobile operating revenue in 2014. In U.S. dollars terms, our mobile voice services revenue in Russia decreased by 41.3%. In functional currency terms, it decreased by 5.7% due to a reduction in APPM, as existing customers migrated to new price plans.
During 2015, we generated US$1,224 million of our Russia segment service revenue from VAS, including data revenue, or 32.4% of the total mobile operating revenue in our Russia segment, compared to US$1,789 million, or 30.0% of the total mobile operating revenue in our Russia segment, in 2014. In U.S. dollars terms, the decrease was 31.7%, while in functional currency terms, our Russia segment service revenue from VAS, including data revenue, increased by 9.3% during 2015 compared to 2014, primarily due to increased data usage in line with the trend seen in 2015.
During 2015, we generated US$611 million of our Russia segment service revenue from interconnect fees, or 15.9% of the total mobile operating revenue in our Russia segment, compared to US$961 million, or 15.8% of the total mobile operating revenue in our Russia segment, in 2014. In U.S. dollars terms, the decrease was 36.4%, while in functional currency terms, our Russia segment service revenue from interconnect fees increased by 1.9% during 2015 compared to 2014, primarily due to the favorable impact of the ruble/U.S. dollar exchange rate in interconnection agreements with international operators based on U.S. dollar terms partially offset by a decline in local incoming traffic.
Our total mobile operating revenue in our Russia segment also included revenue from sales of equipment and accessories and other revenue. During 2015, revenue from sales of equipment and accessories and other revenue in Russia decreased by 19.1% to US$170 million, or 4.7% of the total mobile operating revenue in our Russia segment in 2015, from US$210 million, or 3.6% of the total mobile operating revenue in our Russia segment, in 2014. In functional currency terms, our Russia segment sales of equipment and accessories and other revenue increased by 29.8% during 2015 compared to 2014, primarily as a result of the active promotion of device sales.
Fixed-line Revenue
In 2015, our total operating revenue from our fixed-line services in Russia decreased by 44.8% to US$766 million compared to US$1,388 million in 2014. Our total operating revenue from fixed-line services in Russia in 2015 consisted of US$317 million generated from business operations, US$246 million generated from wholesale operations and US$203 million generated from residential and FTTB operations. In functional currency terms, our total operating revenue from our Russia fixed-line services decreased by 12.8% during 2015 compared to 2014, primarily due to a targeted shift away from lower margin traffic and the macroeconomic slowdown.
Adjusted EBITDA
Our Russia adjusted EBITDA decreased by 38.8% to US$1,825 million in 2015 compared to US$2,980 million in 2014. In functional currency terms, our Russia adjusted EBITDA decreased by 1.5%, primarily as a result of negative foreign exchange effect on roaming and interconnect costs. In functional currency terms, adjusted EBITDA margin in 2015 in our Russia segment was 39.6%, which is 0.1 percentage points below adjusted EBITDA margin in 2014. The decrease was primarily due to the negative effect of the depreciation of the ruble against the U.S. dollar. Please see “ExplanatoryNote—Non-IFRS Financial Measures” for more information on how we calculate Adjusted EBITDA.
Certain Performance Indicators
As of December 31, 2015, we had approximately 59.8 million mobile customers in Russia, representing an increase of 4.5% compared to approximately 57.2 million mobile customers as of December 31, 2014. Our mobile customer growth in Russia in 2015 was mainly due to improved customer retention linked to product improvements, loyalty program developments and the promotion of new bundled price plans. We also strengthened our distribution channels through the roll out of owned monobranded stores, the acquisition of franchise stores and the growth of sales through Svyaznoy (a large independent handset retailer in Russia).
In 2015, our mobile ARPU in Russia decreased by 40.0% to US$5.1 compared to US$8.6 in 2014, primarily as a result of foreign exchange effects. In functional currency terms, mobile ARPU in Russia decreased by 4% in 2015 compared to 2014, due to lower voice and roaming revenue attributed to an APPM reduction as existing customers migrated to new price plans.
In 2015, our mobile MOU in Russia increased by 2% to 310 compared to 304 in 2014, primarily as a result ofon-net traffic growth caused by migration of customers to the new offers and bundles.
The fixed-line broadband customers are mainly represented by FTTB customers. As of December 31, 2015, we had approximately 2.2 million fixed-line customers in Russia, compared to approximately 2.3 million fixed-line customers as of December 31, 2014. The decrease was primarily due to our strategy of focusing on profitable customers and therefore maximizing cash flow.
As of December 31, 2015, we had approximately 34.3 million mobile data customers in Russia, representing an increase of approximately 7.6% from the approximately 31.9 million mobile data customers as of December 31, 2014. The increase was mainly due to an improved churn rate.
Pakistan
Results of operations in US$
| Year ended December 31, | ‘15 – ‘16 | ‘14 – ‘15 | ||||||||||||||||||
| 2016 | 2015 | 2014 | % change | |||||||||||||||||
| in millions of U.S. dollars (except as indicated) | ||||||||||||||||||||
Total operating revenue | 1,295 | 1,014 | 1,010 | 28 | % | 0 | % | |||||||||||||
Mobile service revenue | 1,217 | 960 | 966 | 27 | % | (1 | )% | |||||||||||||
—of which mobile data | 155 | 86 | 49 | 81 | % | 76 | % | |||||||||||||
Sales of equipment, accessories and other | 78 | 54 | 44 | 45 | % | 22 | % | |||||||||||||
Operating expenses | 788 | 605 | 624 | 30 | % | (3 | )% | |||||||||||||
Adjusted EBITDA | 507 | 409 | 386 | 24 | % | 6 | % | |||||||||||||
Adjusted EBITDA margin | 39 | % | 40 | % | 38 | % | (1.2p.p. | ) | 2.1p.p. | |||||||||||
Results of operations in PKR
| Year ended December 31, | ‘15 – ‘16 | ‘14 – ‘15 | ||||||||||||||||||
| 2016 | 2015 | 2014 | % change | |||||||||||||||||
| in billions of PKR (except as indicated) | ||||||||||||||||||||
Total operating revenue | 136 | 104 | 102 | 30 | % | 2 | % | |||||||||||||
Mobile service revenue | 127 | 99 | 98 | 29 | % | 1 | % | |||||||||||||
—of which mobile data | — | — | — | — | — | |||||||||||||||
Sales of equipment, accessories and other | 8 | 6 | 4 | 48 | % | 24 | % | |||||||||||||
Operating expenses | 83 | 62 | 63 | 33 | % | (1 | )% | |||||||||||||
Adjusted EBITDA | 53 | 42 | 39 | 26 | % | 8 | % | |||||||||||||
Adjusted EBITDA margin | 39 | % | 40 | % | 38 | % | (1.2p.p. | ) | 2.1p.p. | |||||||||||
Certain Performance Indicators
| Year ended December 31 | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
Mobile | ||||||||||||
Customers in millions | 51.6 | 36.2 | 38.5 | |||||||||
ARPU in US$ | 2.3 | 2.1 | 2.1 | |||||||||
ARPU in PKR | 241 | 219 | 214 | |||||||||
MOU in minutes | 628 | 623 | 433 | |||||||||
Mobile data customers in millions | 25.1 | 16.8 | 14.4 | |||||||||
Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
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 with previous periods.among the periods provided below. For more information regarding our acquisitions and dispositions, see “—Key Developments and Trends—Pakistan Merger” and Note 65 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 Revenuerevenue
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. Please see “ExplanatoryNote—Non-IFRS Financial Measures” for more information on how we calculate Adjusted EBITDA.
Certain Performance Indicatorsperformance 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.
In 2016, our mobile MOU in Pakistan increased 1% to 628 minutes from 623 minutes in 2015 as a result of the decrease in dual SIMs in the market following aSIM-verification process in Pakistan.
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.
Year Ended December 31, 2015 Compared to Year Ended December 31, 2014Table of Contents
Our Pakistan total operating revenue increased by 0.3% to US$1,014 million in 2015 compared to US$1,010 million in 2014. In functional currency terms, total operating revenue in Pakistan increased by 2.1% due to data revenue growth and higher MFS revenue, which was partially offset by a decline in voice revenue caused by changes to hybrid offerings with decreased voice content. Our Pakistan total operating revenue consists of revenue from providing mobile services.
Mobile Revenue
In 2015, we generated US$614 million of our Pakistan segment service revenue from mobile voice services (i.e., airtime charges from mobile contract and prepaid customers, including monthly contract fees and roaming fees, as well as roaming fees received from other mobile service operators for providing roaming services to their customers), or 60.5% of the total operating revenue in our Pakistan segment, compared to US$653 million, or 64.7% of the total operating revenue in our Pakistan segment, in 2014. In U.S. dollar terms, our mobile voice services revenue in Pakistan decreased by 6.0%. In functional currency terms, it decreased by 4.3%, primarily due to a decline in voice revenue caused by changes to hybrid offerings with decreased voice content.
In 2015, we generated US$132 million of our Pakistan segment service revenue from interconnect fees, or 13.0% of the total operating revenue in our Pakistan segment, compared to US$135 million, or 13.4% of the total operating revenue in our Pakistan segment, in 2014. In U.S. dollar terms, our Pakistan segment service revenue from interconnect fees decreased by 2.5%, while in functional currency terms, it decreased by 0.8%, due to lower local incoming traffic.
In 2015, we generated US$214 million of our Pakistan segment service revenue from VAS, including data revenue, or 21.1% of the total operating revenue in our Pakistan segment, compared to US$178 million, or 17.6% of the total operating revenue in our Pakistan segment, in 2014. In U.S. dollar terms, our Pakistan segment service revenue from VAS, including data revenue, increased by 20.2%, while in functional currency terms, it increased by 22.4%, due to data and MFS revenues growth, as a result of successful retail promotions and an increased footprint for our MFS agents in Pakistan.
Our total operating revenue in our Pakistan segment also includes revenue from sales of equipment and accessories and other revenue. In 2015, revenue from sales of equipment and accessories and other revenue in Pakistan was US$54 million compared to US$44 million in 2014. In functional currency terms, our Pakistan segment sales of equipment and accessories and other revenue increased by 24.1%, primarily as a result of an increase in revenues from site sharing and other services such as leasing lines, DSL and wireless internet.
Adjusted EBITDA
Our Pakistan adjusted EBITDA increased by 5.9% to US$409 million in 2015 compared to US$386 million in 2014. In functional currency terms, our Pakistan adjusted EBITDA increased by 7.7% in 2015, primarily due to slightly higher revenue and lower service costs as a result of cost efficiency initiatives, mainly in procurement and utilities. In functional currency terms, adjusted EBITDA margin in 2015 in our Pakistan segment was 40.4%, which is 2.1 percentage points higher than adjusted EBITDA margin in 2014. Please see “ExplanatoryNote—Non-IFRS Financial Measures” for more information on how we calculate Adjusted EBITDA.
Certain Performance Indicators
As of December 31, 2015, we had approximately 36.2 million customers in Pakistan, representing a decrease from 38.5 million customers as of December 31, 2014, primarily due to the required disconnection of approximately 5.6 million customers in May 2015 resulting from the implementation of the regulator’s SIM cardre-verification procedures (see “Item 3—Key Information—D. Risk Factors—Legal and Regulatory Risks—New or proposed changes to laws or new interpretations of existing laws in the markets in which we operate may harm our business”).
In 2015, our mobile ARPU in Pakistan remained stable at US$2.1 (equal to 2014). In functional currency terms, mobile ARPU in Pakistan increased in 2015 by 3% compared to 2014 mainly due to the successful completion of the SIMre-verification process, which resulted in the disconnection of lower revenue customers.
In 2015, our mobile MOU in Pakistan increased 44.0% to 623 from 433 in 2014 as a result of the success of our bundle offers and network modernization completed in 2014, which substantially increased network capacity.
As of December 31, 2015, we had approximately 16.8 million mobile data customers in Pakistan, representing an increase of approximately 16.6% from the approximately 14.4 million mobile data customers as of December 31, 2014. The increase was mainly due to the 3G expansion and increased smartphone penetration in the customer base.
Algeria
Results of operations in US$
| Year ended December 31, | ‘15 – ‘16 | ‘14 – ‘15 | ||||||||||||||||||
| 2016 | 2015 | 2014 | % change | |||||||||||||||||
| in millions of U.S. dollars (except as indicated) | ||||||||||||||||||||
Total operating revenue | 1,040 | 1,273 | 1,692 | (18 | )% | (25 | )% | |||||||||||||
Mobile service revenue | 1,031 | 1,259 | 1,678 | (18 | )% | (25 | )% | |||||||||||||
—of which mobile data | 76 | 46 | 20 | 65 | % | 131 | % | |||||||||||||
Sales of equipment, accessories and other | 9 | 14 | 14 | (36 | )% | 2 | % | |||||||||||||
Operating expenses | 493 | 589 | 835 | (16 | )% | (29 | )% | |||||||||||||
Adjusted EBITDA | 547 | 684 | 857 | (20 | )% | (20 | )% | |||||||||||||
Adjusted EBITDA margin | 53 | % | 54 | % | 51 | % | (1.1p.p. | ) | 3.0p.p. | |||||||||||
| | 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, | ‘15 – ‘16 | ‘14 – ‘15 | ||||||||||||||||||
| 2016 | 2015 | 2014 | % change | |||||||||||||||||
| in billions of DZD (except as indicated) | ||||||||||||||||||||
Total operating revenue | 114 | 128 | 136 | (11 | )% | (6 | )% | |||||||||||||
Mobile service revenue | 113 | 127 | 135 | (11 | )% | (7 | )% | |||||||||||||
—of which mobile data | 8 | 5 | 2 | 78 | % | 185 | % | |||||||||||||
Sales of equipment, accessories and other | 1 | 1 | 1 | (31 | )% | 28 | % | |||||||||||||
Operating expenses | 54 | 59 | 68 | (9 | )% | (13 | )% | |||||||||||||
Adjusted EBITDA | 60 | 69 | 69 | (13 | )% | 0 | % | |||||||||||||
Adjusted EBITDA margin | 53 | % | 54 | % | 50 | % | (1.2p.p. | ) | 3.4p.p. | |||||||||||
| | 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$1,040 million in 2016 due to a difficult macroeconomic environment and strong competitive environment. Total operating revenue for the full year 2017 was also affected by a new finance law, effective from January 2017, which increased VAT from 7% to 19% on data services and from 17% to 19% on voice services, and increased taxes on recharges from 5% to 7%. These taxes and recharges were not passed on to customers. In addition, revenue was negatively affected by customer churn, caused by competitive pressure in the market. The competitive pressure also resulted in a rate decrease by Djezzy. Data revenue growth, however, remained strong due to higher usage and an increase in data customers as a result of the rollout of 3G and 4G/LTE networks.
| Year ended December 31 | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
Mobile | ||||||||||||
Customers in millions | 16.3 | 17.0 | 17.7 | |||||||||
ARPU in US$ | 5.1 | 6.0 | 7.9 | |||||||||
ARPU in DZD | 562 | 603 | 639 | |||||||||
MOU in minutes | 332 | 369 | 371 | |||||||||
Mobile data customers | 7.0 | 4.1 | 1.3 | |||||||||
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 forcedrequired 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 3Groll-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. For a description of the risks associated with the current operating conditions in Algeria, see “Item 3—Key Information—D. Risk Factors—Legal and Regulatory Risks—We operate in a highly regulated industry and are subject to a large variety of laws and extensive regulatory requirements” and “Item 3—Key Information—D. Risk Factors—Legal and Regulatory Risks—Unpredictable tax systems give rise to significant uncertainties and risks that could complicate our tax planning and business decisions.”
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 monobrandroll-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. Please see “ExplanatoryNote—Non-IFRS Financial Measures” for more information on how we calculate Adjusted EBITDA.
Certain Performance Indicatorsperformance 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, forcedrequired migration and distribution challenges.
In 2016, our mobile ARPU in Algeria decreased by 15% to US$5.1 compared to US$6.0 in 2015. In functional currency terms, our mobile ARPU in Algeria decreased by 7%, mainly due to aggressive price competition and high-value customer churn.
In 2016, our mobile MOU in Algeria decreased by 10% to 332 minutes compared to 369 minutes in 2015. This decrease was due to high-value customer churn.
As of December 31, 2016, we had approximately 7.0 million mobile data customers in Algeria, representing an increase of approximately 69% from the approximately 4.1 million mobile data customers in Algeria as of December 31, 2015. The increase was mainly due to the rapid 3G expansion during the last twelve months.
Bangladesh
Results of operations in US$
| | 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, 20152017 Compared to Year Ended December 31, 20142016
Mobile revenue
Our AlgeriaBangladesh total operating revenue decreased by 24.7%7% to US$1,273574 million in 20152017 compared to US$1,692621 million in 2014 mainly due to2016. The main operational focus in 2017 was on restoring network availability and addressing the depreciation3G gap vis-à-vis the competition, and on customer acquisition following the completion of the Algerian dinar againstgovernment-mandated SIM re-verification program. In 2017, total operating revenue in Bangladesh was impacted by aggressive price competition in the U.S. dollar.market and network availability.
In functional currency terms, total operating revenue in AlgeriaBangladesh decreased by 6%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 aggressive price competition, device promotionlower revenue, as discussed above, and higher network costs, partially offset by competitors and delays in the launch of OTA’s 3G network. Our Algeria total operating revenue consists of revenue from providing mobile services.lower personnel costs.
Mobile Revenue
In 2015, we generated US$1,041 million of our Algeria segment service revenue from mobile voice services (i.e., airtime charges from mobile contract and prepaid customers, including monthly contract fees and roaming fees, as well as roaming fees received from other mobile service operators for providing roaming services to their customers), or 81.7% of our total operating revenue in our Algeria segment, compared to US$1,442 million, or 85.2% of the total operating revenue in our Algeria segment, in 2014. In U.S. dollar terms, our mobile voice services revenue in Algeria decreased by 27.8% as a result of the depreciation of the Algerian dinar against the U.S. dollar. In functional currency terms, it decreased by 10.2% due to decreased voice ARPU resulting primarily from aggressive price competition.
In 2015, we generated US$99 million of our Algeria segment service revenue from interconnect fees, or 7.8% of the total operating revenue in our Algeria segment, compared to US$120 million, or 7.1% of the total operating revenue in our Algeria segment, in 2014. In U.S. dollar terms, our Algeria segment service revenue
from interconnect fees decreased by 17.6%, while in functional currency terms, it increased by 3.1%, due to an increase in the MTRs set by the regulator in Algeria for Optimum from DZD 0.96 per minute to DZD 1.1 (approximately US$0.01 to US$0.011 as of December 31, 2015) per minute.
In 2015, we generated US$108 million of our Algeria segment service revenue from VAS, including data revenue, or 8.4% of the total operating revenue in our Algeria segment, compared to US$102 million, or 6.0% of the total operating revenue in our Algeria segment, in 2014. In U.S. dollar terms, our Algeria segment service revenue from VAS, including data revenue, increased by 5.1%, while in functional currency terms, it increased by 31.3%, due to increased data usage in terms of amount ofmegabytes used and number of data users (2.9 million users in 2015 compared with 0.8 million users in 2014).
Our total operating revenue in our Algeria segment also includes revenue from sales of equipment and accessories and other revenue. During 2015, revenue from sales of equipment and accessories and other revenue in Algeria was US$14 million, whereas in 2014 revenue from sales of equipment and accessories and other revenue was US$14 million. In functional currency terms, our Algeria segment sales of equipment and accessories and other revenue increased by 28.3%, primarily as a result of subsidies offered and device promotions launched during 2015.
Bangladesh Adjusted EBITDA
Our Algeria adjusted EBITDA decreased by 20.2% to US$684 million in 2015 compared to US$857 million in 2014. In functional currency terms, our Algeria adjusted EBITDA remained stable in 2015, primarily due to a decrease in total revenues (DZD 8,600 million (approximately US$86 million)), offset by a decrease in operating expenses (DZD 8,700 million (approximately US$87 million)) due to aone-off charge recorded in 2014 related to a provision for Cevital litigation of DZD 4,300 million (approximately US$53 million)10%. In 2015, we recorded aone-off charge of DZD 120 million (approximately US$12 million) related to the performance transformation program, as well as a decrease in certain expenses such as personnel costs, security and billing in relation to operational improvements. Please see “ExplanatoryNote—Non-IFRS Financial Measures” for more information on how we calculate Adjusted EBITDA.
Certain Performance Indicatorsperformance indicators
As Customers in our Bangladesh segment increased to 31.3 million as of December 31, 2015, we had approximately 17.0 million customers in our Algeria segment, in comparison with 17.72017 compared to 30.4 million customers as of December 31, 2014.2016. The 3.9% decrease3% increase was mainly due to a reduction of high-value customers.intensive acquisition and retention campaigns.
In 2015,2017, our mobile ARPU in AlgeriaBangladesh decreased by 23.8%7% to US$6.01.5 as compared to US$7.9 in 2014.2016. In functional currency terms, our mobile ARPU in AlgeriaBangladesh decreased in 2017 by 5.7%,4% mainly due to aggressive price competition.
In 2015, our mobile MOUpricing in Algeria was mostly stable, slightly decreasing by 0.7% to 369 from 371 in 2014. This decrease wasthe market and lower traffic due to a slight decrease in total traffic (78.8 billion minutes in 2014 compared to 76.6 billion minutes in 2015) coupled with a slight decrease in average customer base (17.6network availability.
As of December 31, 2017, we had 16.9 million in 2014 compared to 17.3 million in 2015).
We did not have broadbandmobile data customers in AlgeriaBangladesh, representing an increase of 13% from the 14.9 million mobile data customers as of December 31, 2015.
Bangladesh2016, mainly due to increased smart-phone penetration.
Results of operations in US$
| Year ended December 31, | ‘15 – ‘16 | ‘14 – ‘15 | ||||||||||||||||||
| 2016 | 2015 | 2014 | % change | |||||||||||||||||
| in millions of U.S. dollars (except as indicated) | ||||||||||||||||||||
Total operating revenue | 621 | 604 | 563 | 3 | % | 7 | % | |||||||||||||
Mobile service revenue | 606 | 596 | 556 | 2 | % | 7 | % | |||||||||||||
of which mobile data | 63 | 42 | 23 | 50 | % | 80 | % | |||||||||||||
Sales of equipment, accessories and other | 15 | 8 | 7 | 76 | % | 18 | % | |||||||||||||
Operating expenses | 354 | 362 | 344 | (2 | )% | 5 | % | |||||||||||||
Adjusted EBITDA | 267 | 242 | 219 | 10 | % | 10 | % | |||||||||||||
Adjusted EBITDA margin | 43 | % | 40 | % | 39 | % | 3.0p.p. | 1.1p.p. | ||||||||||||
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Results of operations in BDT
| Year ended December 31, | ‘15 – ‘16 | ‘14 – ‘15 | ||||||||||||||||||
| 2016 | 2015 | 2014 | % change | |||||||||||||||||
| in billions of BDT (except as indicated) | ||||||||||||||||||||
Total operating revenue | 49 | 47 | 44 | 3 | % | 8 | % | |||||||||||||
Mobile service revenue | 48 | 46 | 43 | 2 | % | 8 | % | |||||||||||||
—of which mobile data | 5 | 3 | 2 | 51 | % | 81 | % | |||||||||||||
Sales of equipment, accessories and other | 1 | 1 | 1 | 77 | % | 19 | % | |||||||||||||
Operating expenses | 28 | 28 | 27 | (2 | )% | 6 | % | |||||||||||||
Adjusted EBITDA | 21 | 19 | 17 | 11 | % | 11 | % | |||||||||||||
Adjusted EBITDA margin | 43 | % | 40 | % | 39 | % | 3.0p.p. | 1.1p.p. | ||||||||||||
Certain Performance Indicators
| Year ended December 31, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
Mobile | ||||||||||||
Customers in millions | 30.4 | 32.3 | 30.8 | |||||||||
ARPU in US$ | 1.6 | 1.6 | 1.6 | |||||||||
ARPU in BDT | 126 | 122 | 120 | |||||||||
MOU in minutes | 312 | 306 | 197 | |||||||||
Mobile data customers in million | 14.9 | 14.0 | 12.2 | |||||||||
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 SIMre-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. Please see “ExplanatoryNote—Non-IFRS Financial Measures” for more information on how we calculate Adjusted EBITDA.
Certain Performance Indicatorsperformance 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 atof the end of 2015, which resulted in a slowdown of customer growth across the market and the blocking of unverified SIMs in 2016. For further information on the risks associated with SIMre-verification, see “Item 3—Key Information—D. Risk Factors—Legal and Regulatory Risks—New or proposed changes to laws or new interpretations of existing laws in the markets in which we operate may harm our business.”
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.
In 2016, our mobile MOU in Bangladesh increased 2% to 312 minutes from 306 minutes in 2015 mainly due to lower average price per minute, driven by aggressive competition.
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.
Year Ended December 31, 2015 Compared to Year Ended December 31, 2014
Our Bangladesh total operating revenue increased by 7.3% to US$604 million in 2015 compared to US$563 million in 2014. In functional currency terms, total operating revenue in Bangladesh increased by 7.9% due to a 4.9% increase in the number of mobile customers and an increase in data usage in 2015, which was partially offset by the impact of intensified price competition and the negative impact of supplementary duties imposed in the third quarter of 2015. Our Bangladesh total operating revenue consists of revenue from providing mobile services.
Mobile Revenue
In 2015, we generated US$450 million of our Bangladesh segment service revenue from mobile voice services (i.e., airtime charges from mobile contract and prepaid customers, including monthly contract fees and roaming fees, as well as roaming fees received from other mobile service operators for providing roaming services to their customers), or 74.5% of our total operating revenue in our Bangladesh segment, compared to US$440 million, or 78.1% of the total operating revenue in our Bangladesh segment, in 2014. In U.S. dollar terms, our mobile voice services revenue in Bangladesh increased by 2.3%. In functional currency terms, it increased by 2.9%, primarily due to an increase in customer base and higher ARPU.
In 2015, we generated US$57 million of our Bangladesh segment service revenue from interconnect fees, or 9.4% of the total operating revenue in our Bangladesh segment, compared to US$53 million, or 9.4% of the total
operating revenue in our Bangladesh segment, in 2014. In U.S. dollar terms, our Bangladesh segment service revenue from interconnect fees increased by 7%. In functional currency terms, it increased by 7.5%, primarily due to an increase in our customer base, as well as higher MOU.
In 2015, we generated US$86 million of our Bangladesh segment service revenue from VAS, including data revenue, or 14.2% of the total operating revenue in our Bangladesh segment, compared to US$60 million, or 10.6% of the total operating revenue in our Bangladesh segment, in 2014. In U.S. dollar terms, our Bangladesh segment service revenue from VAS, including data and messaging revenue, increased by 43.6%. In functional currency terms, it increased by 44.4%, primarily due to increased data usage derived from the banglalink brand’s 3G network, as our network coverage expanded in 2015.
Our total operating revenue in our Bangladesh segment also includes revenue from sales of equipment and accessories and other revenue. In 2015, revenue from sales of equipment and accessories and other revenue in Bangladesh was US$9 million, compared to US$7 million in 2014. In U.S. dollar terms, our Bangladesh segment sales of equipment and accessories and other revenue increased by 17.9% primarily as a result of higher handset sales and an increase in revenues from site sharing.
Adjusted EBITDA
Our Bangladesh adjusted EBITDA increased by 10.5% to US$242 million in 2015 compared to US$219 million in 2014. In functional currency terms, our Bangladesh adjusted EBITDA increased by 11% in 2015, primarily due to increased revenue and reduced SIM tax from BDT 300 (approximately US$3.8) to BDT 100 (approximately US$1.3) per connection, which was partially offset by a provision of US$12 million for a disputed SIM replacement tax with the tax authorities, a bad debt provision of US$6 million mainly for Bangladesh Telecommunications Company Limited (government owned PSTN) and a provision of US$4 million related to the performance transformation program. In functional currency terms, the adjusted EBITDA margin in 2015 in our Bangladesh segment was 40.1%, which was 1.1 percentage points higher than the adjusted EBITDA margin in 2014. Please see “ExplanatoryNote—Non-IFRS Financial Measures” for more information on how we calculate Adjusted EBITDA.
Certain Performance Indicators
As of December 31, 2015, we had approximately 32.3 million customers in Bangladesh, representing an increase from 30.8 million customers as of December 31, 2014, which was primarily due to our aggressive customer acquisition campaigns supported by competitivestart-up offers.
In 2015, our mobile ARPU in Bangladesh was stable at US$1.6 compared to 2014. In functional currency terms, mobile ARPU in Bangladesh increased in 2015 by 1.6% compared to 2014 mainly due to high growth in data revenue.
In 2015, our mobile MOU in Bangladesh increased 56% to 306 from 197 in 2014 mainly due to the price elasticity impact of lower APPM driven by aggressive competition.
As of December 31, 2015, we had approximately 14.0 million mobile data customers in Bangladesh, representing an increase of approximately 14.6% from the approximately 12.2 million mobile data customers as of December 31, 2014. The increase was mainly due to the 3G expansion and increased smartphone penetration in the customer base.
Ukraine
Results of operations in US$
| | 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. | |||||
| Year ended December 31, | ‘15 – ‘16 | ‘14 – ‘15 | ||||||||||||||||||
| 2016 | 2015 | 2014 | % change | |||||||||||||||||
| in millions of U.S. dollars (except as indicated) | ||||||||||||||||||||
Total operating revenue | 586 | 622 | 1,062 | (6 | )% | (41 | )% | |||||||||||||
Mobile service revenue | 542 | 576 | 970 | (6 | )% | (41 | )% | |||||||||||||
—of which mobile data | 99 | 66 | 85 | 49 | % | (22 | )% | |||||||||||||
Fixed-line service revenue | 41 | 45 | 89 | (8 | )% | (50 | )% | |||||||||||||
Sales of equipment, accessories and other | 3 | 1 | 3 | 46 | % | (28 | )% | |||||||||||||
Operating expenses | 280 | 330 | 578 | (15 | )% | (43 | )% | |||||||||||||
Adjusted EBITDA | 306 | 292 | 484 | 5 | % | (40 | )% | |||||||||||||
Adjusted EBITDA margin | 52 | % | 47 | % | 46 | % | 5.3p.p. | 1.4p.p. | ||||||||||||
Results of operations in UAH
| Year ended December 31, | ‘15 – ‘16 | ‘14 – ‘15 | ||||||||||||||||||
| 2016 | 2015 | 2014 | % change | |||||||||||||||||
| in millions of UAH (except as indicated) | ||||||||||||||||||||
Total operating revenue | 14,960 | 13,475 | 12,231 | 11 | % | 10 | % | |||||||||||||
Mobile service revenue | 13,851 | 12,475 | 11,190 | 11 | % | 11 | % | |||||||||||||
—of which mobile data | 2,522 | 1,442 | 984 | 75 | % | 47 | % | |||||||||||||
Fixed-line service revenue | 1,052 | 967 | 1,017 | 9 | % | (5 | )% | |||||||||||||
Sales of equipment, accessories and other | 57 | 33 | 24 | 71 | % | 35 | % | |||||||||||||
Operating expenses | 7,149 | 7,143 | 6,705 | 0 | % | 7 | % | |||||||||||||
Adjusted EBITDA | 7,811 | 6,332 | 5,526 | 23 | % | 15 | % | |||||||||||||
Adjusted EBITDA margin | 52 | % | 47 | % | 45 | % | 5.2p.p. | 1.8p.p. | ||||||||||||
| | 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$586 million in 2016. The increase was primarily due to strong growth in mobile service revenue, driven by successful commercial activities stimulated by the continued 3G roll-out and increased penetration of data-centric tariffs, continued strong growth of mobile data customers and data consumption. The increase was partially decreased by devaluation of Ukrainian hryvnia during 2017.
| Year ended December 31, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
Mobile | ||||||||||||
Customers in millions | 26.1 | 25.4 | 26.2 | |||||||||
ARPU in US$ | 1.7 | 1.8 | 3.1 | |||||||||
ARPU in UAH | 44 | 40 | 36 | |||||||||
MOU in minutes | 559 | 543 | 508 | |||||||||
Mobile data customers (million) | 11.2 | 12.0 | 11.1 | |||||||||
Fixed-line | ||||||||||||
Broadband customers (millions) | 0.8 | 0.8 | 0.8 | |||||||||
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 3Groll-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. Please see “ExplanatoryNote—Non-IFRS Financial Measures” for more information on how we calculate Adjusted EBITDA.
Certain Performance Indicatorsperformance 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.
In 2016, our mobile MOU in Ukraine increased by 3% to 559 from 543 in 2015, mainly due to higheron-net traffic.
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.
Year Ended December 31, 2015 Compared to Year Ended December 31, 2014
Our Ukraine total operating revenue decreased by 41.4% to US$622 million in 2015 compared to US$1,062 million in 2014, primarily due to the depreciationTable of the Ukrainian hryvnia against the U.S. dollar. In functional currency terms, our Ukraine total operating revenue in 2015 was 10.2% higher compared to 2014, primarily due to increased international incoming call revenue and strong growth in mobile data revenue as a result of the launch of 3G, despite ongoing social unrest and the shutdown of networks in the ATO zone. Our Ukraine total operating revenue consists of revenue from providing mobile services as well as fixed-line services.
Mobile RevenueContents
In 2015, our revenue from mobile services in our Ukraine segment decreased by 40.6% to US$578 million compared to US$972 million during 2014, primarily due to the devaluation of the hryvnia by 52.2%.
In 2015, we generated US$290 million of our Ukraine segment service revenue from mobile voice services (i.e. 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 50.2% of the total mobile operating revenue in our Ukraine segment, compared to US$539 million, or 55.5% of the total mobile operating revenue in 2014. In U.S. dollar terms, service revenue from airtime charges decreased by 46.3%, while in functional currency terms, it increased by 1.2%. The decrease in U.S. dollar terms was primarily due to weakening of the hryvnia. The increase in functional currency was due to there-pricing of tariffs and 3G launch along with new tariff portfolio, and positive effect of currency devaluation on guest roaming revenues.
In 2015, we generated US$139 million of our Ukraine segment service revenue from VAS including data revenue, or 24.1% of the total mobile operating revenue in our Ukraine segment, compared to US$211 million, or 21.7% of the total mobile operating revenue, in 2014. The 33.8% decrease in U.S. dollar terms in our service revenue from VAS including data revenue was primarily due to depreciation of the functional currency. In
functional currency terms, our Ukraine segment service revenue from VAS including data revenue increased by 25.3% mainly due to strong growth in mobile data revenue as a result of 3Groll-out, active promotions of smartphones and data-oriented tariff plans.
In 2015, we generated US$147 million of our Ukraine segment service revenue from interconnect fees, or 25.4% of the total mobile operating revenue in our Ukraine segment, compared to US$218 million, or 22.4% of the total mobile operating revenue in our Ukraine segment, in 2014. In U.S. dollar terms, our Ukraine segment service revenue from interconnect fees decreased by 32.8% primarily due to weakening of the hryvnia. In functional currency terms, our Ukraine segment service revenue from interconnect revenue increased by 24.2% due to positive currency devaluation effect on revenue from traffic from international operators.
In 2015, we generated US$0.1 million of other service revenue, or 0.0% of the total mobile operating revenue in our Ukraine segment in 2015, compared to US$2 million generated in 2014, or 0.2% of the total mobile operating revenue in 2014. In U.S. dollar terms, our other service revenue decreased by 93.6%, while in functional currency terms it decreased by 87.9%.
Our Ukraine total mobile operating revenue also included revenue from sales of equipment and accessories and other revenue. During 2015, revenue from sales of equipment and accessories and other revenue comprised US$2 million, or 0.3% of the total mobile operating revenue in our Ukraine segment, compared to US$2 million, or 0.2% of the total mobile operating revenue in our Ukraine segment, in 2014. In functional currency terms, our Ukraine segment revenue from sales of equipment and accessories and other revenue increased by 53.2% mainly due to higher revenue fromsub-rent of premises driven by increase of floor spaces and rent rates.
Fixed-line Revenue
Our revenue from fixed-line services in Ukraine decreased by 50.1% to US$45 million in 2015 compared to US$89 million in 2014, primarily due to depreciation of national currency. In functional currency terms, our revenue from fixed-line services in Ukraine decreased by 5.2% mainly as a result of reduction in wholesale revenue.
Our revenue from fixed-line services in Ukraine in 2015 consisted of US$17 million generated from business operations, US$3 million generated from wholesale operations and US$24 million generated from residential and FTTB operations. Revenue from business operations decreased by 49.3% compared to US$34 million in 2014, revenue from wholesale operations decreased by 82.0% compared to US$16 million in 2014, and revenue from residential and FTTB operations decreased by 37.8% compared to US$39 million in 2014. In U.S. dollar terms the decrease was primarily due to national currency devaluation. In terms of functional currency, our revenue from business operations decreased by 4.1% driven by lower subscribers base. Revenue from wholesale operations decreased by 65.3% in terms of functional currency, primarily due to planned reduction in low margin transit traffic. Residential and FTTB performance increased by 17.7% in terms of functional currency, primarily due to a favorable FTTBre-pricing.
Adjusted EBITDA
Our Ukraine adjusted EBITDA decreased by 39.6% to US$292 million in 2015 compared to US$484 million in 2014. In functional currency terms, our Ukraine adjusted EBITDA increased by 14.6% in 2015 primarily due to higher revenues, mainly data and interconnect revenues, and lower interconnect costs, which was partially offset by an increase in frequency fees due to the 3G license, higher utility and rental costs, and a negative currency devaluation effect. In functional currency terms, adjusted EBITDA margin in our Ukraine segment in 2015 was 47.0%, which is 1.8 percentage points higher than in 2014. Please see “ExplanatoryNote—Non-IFRS Financial Measures” for more information on how we calculate Adjusted EBITDA.
Certain Performance Indicators
As of December 31, 2015, we had approximately 25.4 million mobile customers in Ukraine, in comparison with approximately 26.2 million mobile customers as of December 31, 2014. The decrease of our customer base by 3.1% was mainly due to customer losses in the ATO zone.
In 2015, our mobile ARPU in Ukraine decreased by 41.0% to US$1.8 compared to US$3.1 in 2014 primarily due to national currency devaluation. In functional currency terms, mobile ARPU in Ukraine increased in 2015 by 10.8% compared to 2014 mainly due to mobile data revenue growth.
In 2015, our mobile MOU in Ukraine increased by 7.0% to 543 from 508 in 2014, mainly due to the decrease in number of subscribers with lower MOU predominantly in the Eastern part of the country.
As of December 31, 2015, we had approximately 0.8 million fixed-line broadband customers in Ukraine, compared to approximately 0.8 million as of December 31, 2014.
Uzbekistan
Results of operations in US$
| Year ended December 31, | ‘15 – ‘16 | ‘14 – ‘15 | ||||||||||||||||||
| 2016 | 2015 | 2014 | % change | |||||||||||||||||
| in millions of U.S. dollars (except as indicated) | ||||||||||||||||||||
Total operating revenue | 663 | 711 | 718 | (7 | )% | (1 | )% | |||||||||||||
Mobile service revenue | 659 | 704 | 710 | (6 | )% | (1 | )% | |||||||||||||
—of which mobile data | 129 | 136 | 132 | (6 | )% | 3 | % | |||||||||||||
Fixed-line service revenue | 4 | 5 | 7 | (15 | )% | (22 | )% | |||||||||||||
Sales of equipment, accessories and other | — | 2 | 1 | (86 | )% | 19 | % | |||||||||||||
Operating expenses | 268 | 274 | 257 | (2 | )% | 7 | % | |||||||||||||
Adjusted EBITDA | 395 | 437 | 461 | (10 | )% | (5 | )% | |||||||||||||
Adjusted EBITDA margin | 60 | % | 61 | % | 64 | % | (1.9p.p. | ) | (2.7p.p. | ) | ||||||||||
| | 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, | ‘15 – ‘16 | ‘14 – ‘15 | ||||||||||||||||||
| 2016 | 2015 | 2014 | % change | |||||||||||||||||
| in billions of UZS (except as indicated) | ||||||||||||||||||||
Total operating revenue | 1,967 | 1,829 | 1,662 | 8 | % | 10 | % | |||||||||||||
Mobile service revenue | 1,953 | 1,811 | 1,643 | 8 | % | 10 | % | |||||||||||||
—of which mobile data | 381 | 350 | 306 | 9 | % | 14 | % | |||||||||||||
Fixed-line service revenue | 13 | 13 | 16 | (2 | )% | (14 | )% | |||||||||||||
Sales of equipment, accessories and other | 1 | 4 | 3 | (84 | )% | 36 | % | |||||||||||||
Operating expenses | 794 | 705 | 596 | 13 | % | 18 | % | |||||||||||||
Adjusted EBITDA | 1,173 | 1,124 | 1,066 | 4 | % | 5 | % | |||||||||||||
Adjusted EBITDA margin | 60 | % | 61 | % | 64 | % | (1.8p.p. | ) | (2.7p.p. | ) | ||||||||||
| | 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$663 million in 2016. In Uzbekistan, our tariff plans were pegged to the U.S. dollar until September 5, 2017. Since September 5, 2017, our tariff plans are denominated in UZS, which negatively impacted our total operating revenue. For further information, see "—Key Developments and Trends—Impact of currency regime developments in Uzbekistan."
In functional currency terms, our Uzbekistan total operating revenue increased by 19%, mainly as a result of the increased tariffs in Uzbek som resulting from the appreciation of U.S. dollar against the local currency and successful marketing activities, together with increased mobile data revenue, interconnect services and value added services. Mobile data revenue increased by 29% during the
| Year ended December 31, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
Mobile | ||||||||||||
Customers in millions | 9.5 | 9.9 | 10.5 | |||||||||
ARPU in US$ | 5.6 | 5.7 | 5.6 | |||||||||
ARPU in UZS | 16,664 | 14,709 | 13,038 | |||||||||
MOU in minutes | 615 | 528 | 522 | |||||||||
Mobile data customers in millions | 4.6 | 4.7 | 5.4 | |||||||||
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’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. Please see “ExplanatoryNote—Non-IFRS Financial Measures” for more information on how we calculate Adjusted EBITDA.
Certain Performance Indicatorsperformance 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 ofin mobile data ARPU,revenue, driven by a higher data usage driven by increased smartphone penetration and promotions.
In 2016, our mobile MOU in Uzbekistan increased by 17% to 615 from 528 in 2015.
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% mainlyprimarily due to the reentry of MTS to the market and the entry of, UzMobile.
Year Ended December 31, 2015 ComparedHQ
Our HQ Adjusted EBITDA increased by 23% to Year Ended December 31, 2014
Our Uzbekistan total operating revenue decreased by 1.0% tonegative US$711325 million in 2015 from2017, compared to negative US$718421 million in 2014. In functional currency terms, our Uzbekistan total operating revenue increased by 10.0%. Our Uzbekistan total operating revenue consists of revenue from providing mobile services as well as fixed-line services.
Mobile Revenue
In our Uzbekistan segment, revenue from mobile services decreased by 0.8% to US$704 million in 2015 from US$710 million in 2014, due to the reentry of MTS to the market and the entry of a new operator UzMobile. In functional currency terms, our revenue from mobile services for the Uzbekistan segment increased by 9.3% due to Beeline Uzbekistan price plans denominated in U.S. dollars.
In 2015, we generated US$515 million of our service revenue from airtime charges in the Uzbekistan 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 73.0% of the total mobile operating revenue in our Uzbekistan segment, compared to US$535 million, or 75.2% of the total mobile operating revenue, in 2014. The 3.8% decrease in U.S. dollar terms during 2015 compared to 2014 was attributable to the reentry of MTS to the market and the entry of a new operator UzMobile. While 6.9% increase in functional currency terms due to Beeline Uzbekistan price plans denominated in U.S. dollars.
In 2015, we generated US$33 million of our mobile service revenue from interconnect fees in our Uzbekistan segment, or 4.6% of the total mobile operating revenue in our Uzbekistan segment, compared to US$25 million, or 3.6% of the total mobile operating revenue in our Uzbekistan segment, in 2014. The 32% increase in U.S. dollar terms in 2015 compared to 2014 was due to the entry of one new mobile operator and there-entry of another. Additionally, 30.2% increase in functional currency terms also due to Beeline Uzbekistan price plans denominated in U.S. dollars.
In 2015, we generated US$156 million of our mobile service revenue in our Uzbekistan segment from VAS, including data revenue, or 22.1% of the total mobile operating revenue in our Uzbekistan segment, compared to US$149 million, or 21% of the total mobile operating revenue in the Uzbekistan segment, in 2014. In 2015 compared to 2014, this increased by 4.6% in U.S. dollar terms2016, primarily due to focusing on increasing the numberlower performance transformation costs and a one-off gain of regular smartphone data users. Additionally, 16.1% increase in functional currency terms also due to Beeline Uzbekistan price plans denominated in U.S. dollars.
Our Uzbekistan total mobile operating revenue also included revenue from sales of equipment and accessories and other revenue. In 2015, revenue from sales of equipment and accessories and other revenue in our Uzbekistan segment increased to US$1.3$106 million from US$1.1 million during 2014. The 26.8% increase in U.S. dollar terms and 45.4% increase in functional currency terms was mainly due to the promotion of smartphones sales.
Fixed-line Revenue
Our Uzbekistan total operating revenue from fixed-line services decreased by 22.2% to US$5.3 million in 2015 from US$6.8 million in 2014. The decrease was primarily due to price competition from the main operator UzbekTelecom, resulting in decreased fixed-line customers for Beeline.
Adjusted EBITDA
Our Uzbekistan adjusted EBITDA decreased by 5.1% to US$437 million in 2015 compared to US$461 million in 2014. In functional currency terms, our Uzbekistan adjusted EBITDA increased by 5.4% in 2015 primarilyrecognized due to an increase of revenue, which was attributableadjustment to the fact that Beeline Uzbekistan price plans were denominated in U.S. dollars. In functional currency terms, our Uzbekistan adjusted EBITDA margin was 61.5% in 2015, which was 2.7 percentage points lower than in 2014 primarily due to increase in tax per customer and legal costs. Please see “ExplanatoryNote—Non-IFRS Financial Measures” for more information on how we calculate Adjusted EBITDA.a vendor agreement.
Certain Performance Indicators
As of December 31, 2015, we had approximately 9.9 million mobile customers in our Uzbekistan segment, representing a decrease of 5.5% from approximately 10.6 million mobile customers as of December 31, 2014. The decrease in our customer base in Uzbekistan was a result of the entry of one new mobile operator and there-entry of another.
In 2015, our mobile ARPU in Uzbekistan increased by 1.5% to US$5.7 compared to 2014, while in functional currency terms, mobile ARPU in Uzbekistan increased in 2015 by 12.8% compared to 2014 mainly due to growth of data ARPU driven by a higher usage of data.
In 2015, our mobile MOU in Uzbekistan increased by 1.1% to 528 from 522 in 2014 primarily due to the launch of offers with free traffic in exchange fortop-up commitment.
As of December 31, 2015, we had approximately 4.7 million data customers in Uzbekistan, consisting of approximately 4.7 million mobile data customers and an insignificant number of fixed-line data customers, compared to approximately 5.4 million mobile broadband customers and an insignificant number of fixed-line data customers as of December 31, 2014. The decrease was mainly due to the entry of one new mobile operator and there-entry of another.
HQ
For historical periods prior to the year ended December 31, 2016, we reported an “HQ and Others” segment, comprised of our current “HQ” segment and the results of our current “Others” category. As of December 31, 2016, “Others” is no longer a reportable segment in our financial statements. Therefore, we have restated our results and analysis for the years ended December 31, 2015 and 2014 to reflect our new HQ segment.
Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
Our HQ Adjusted EBITDA increased by US$870 million for the year ended December 31, 2016 compared to 2015 to negative US$421 million fromin 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. Please see “Explanatory
Note—Non-IFRSFurther Information Regarding the Results of Operations of the Italy Joint Venture Financial Measures” for
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 how we calculate Adjusted EBITDA.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.
Year Ended 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, 2015 Compared2017 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 Year EndedRule 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, 20142017 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.
Our HQ AdjustedResults 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 US$1,0588% 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, 2015 compared2016 to the year ended December 31, 2014 to negative US$1,291EUR 3,357 million in 2015, from negative US$233 million, primarily due to the US$900 million Uzbekistan 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 included2017 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 our consolidated total operating expenses for 2014. Please see “Explanatory2016.
Note—Non-IFRS Financial Measures” for more information on how we calculate Adjusted EBITDA.
ItalyTable of Contents
Accounting TreatmentFinance Income
On November 5, 2016, we completed a transaction to form a joint venture holding company with Hutchison, through which we jointly own and operate our historical WIND and Hutchison’s historical 3 Italia telecommunications businesses in Italy. Italy is no longer a reportable segment. We account Finance income decreased from EUR 489 million for the Italy Joint Venture using the equity method. However, financial and operational information for Italy is included in this Annual Report on Form20-F because completion of the Italy Joint Venture occurred ten months into the 2016 financial year and because the Italy Joint Venture is a significant part of our business.
All information related to the Italy Joint Venture is the sole responsibility of the Italy Joint Venture’s management, and no information contained herein, including, but not limited to, the Italy Joint Venture’s financial and industry data, market projections and strategy, has been prepared by or on behalf of, or approved by, our management. VEON Ltd. is not making, and has not made, any written or oral representation or warranty, express or implied, of any nature whatsoever, with respect to any Italy Joint Venture information included in this Annual Report on Form20-F, other than the financial information that is derived directly from our financial statements.
From January 1, 2016 to November 5, 2016, we classified our Italian business unit as an asset held for sale and discontinued operation in our consolidated financial statements. In connection with this classification, VEON Ltd. no longer accounted for depreciation and amortization expenses of the Italian assets. The financial data for 2015 and 2014 reflects the classification of Italy as an asset held for sale and a discontinued operation. The intercompany positions were disclosed as related party transactions and balances. Under the transaction, VEON Ltd. contributed its entire shareholding in the operations in Italy, in exchange for a 50% interest in the newly formed Italy Joint Venture. As a result, the company does not control the Italy Joint Venture’s operations in Italy. Please refer to Notes 6, 13 and 26 to our audited consolidated financial statements included elsewhere in this Annual Report on Form20-F for further information.
Included below is a comparison of the 10 months ended October 31, 2016 and 2015 and a comparison of the years ended December 31, 2015 and 2014, each accounting for WIND as a discontinued operation. For the effect of the two months ended December 31, 2016 to EUR 121 million for which we accounted the Italy Joint Venture as an equity investment, please see “—Consolidated results—Year Ended Decemberyear ended 31, 2016 Compared to Year Ended December 31,2015—Non-operating Profits and Losses—Shares of Loss/(Profit) of Associates and Joint Ventures Accounted for Using the Equity Method.” For more information, please see “—Key Developments and Trends—Italy Joint Venture” and Note 6 to our audited consolidated financial statements included elsewhere in this Annual Report on Form20-F.
The Italy Joint Venture does not have any impact on VEON Ltd.’s current liquidity, as liquidity available at the level of the Italy Joint Venture is not available to VEON Ltd.2017 primarily due to covenants in debt agreements applicabledecreased positive derivatives fair market valuations as compared to our historical WIND business, and now applicable to the Italy Joint Venture. The Italy Joint Venture results in a reduction of our net debt to Adjusted EBITDA, as neither the earnings nor the net debt of the Italy Joint Venture are included in the calculations or the determination of the covenant ratios.2016.
InflationFinance expenses
The inflation rates in Italy Finance expenses increased from EUR 619 million for the yearsyear ended December 31, 2016 2015 and 2014, were 0.4%, 0.0% and (0.1)%, respectively.
Foreign Currency Translation
The functional currency ofto EUR 1,412 million for the Italy Joint Venture is the euro. Asyear ended December 31, 2017, primarily due to accrued interest on financial liabilities outstanding as of December 31, 2016, 20152017 and 2014, theeuro-U.S. dollar exchange rates used by VEON Ltd. to translate our historic WIND results were 0.95, 0.92expenses incurred in connection with a refinancing transaction, consisting of call premia and 0.83 euro per U.S. dollar respectively, as provided by Bloomberg Finance L.P. During 2016, the average euro to U.S. dollar exchange rate was 0.3% higher than the average euro to U.S. dollar exchange rate during 2015. During 2015, the averageeuro-U.S. dollar exchange rate was 19.5% higher than the averageEuro-U.S. dollar exchange rate during 2014.
From November 5, 2016, the Italy Joint Venture has been deconsolidated and may use different exchange rates to report its results than those used by VEON Ltd.
Contractual Restrictions
The Italy Joint Venture is restricted from making dividend distributions and certain other payments to VEON Ltd. by existing covenants in the financing documents governing WIND’s secured debt, which restrictions now apply to the successor entity, the Italy Joint Venture.
Results of operations in US$
| 10 months ended October 31, | Year ended December 31, | 10 months ended October 31, 2015-2016 | Year ended December 31, 2014-2015 | |||||||||||||||||||||
| 2016 | 2015 | 2015 | 2014 | % change | ||||||||||||||||||||
| in millions of U.S. dollars (except as indicated) | ||||||||||||||||||||||||
Total operating revenue | 4,135 | 4,034 | 4,913 | 6,155 | 2.5 | % | (20.2 | )% | ||||||||||||||||
Service revenue | 3,701 | 3,726 | 4,450 | 5,537 | (0.7 | )% | (19.6 | )% | ||||||||||||||||
Sales of equipment, accessories and other | 434 | 308 | 463 | 618 | 41.2 | % | (25.1 | )% | ||||||||||||||||
Operating expenses | 2,511 | 2,504 | 3,035 | 3,739 | 0.3 | % | (18.8 | )% | ||||||||||||||||
Adjusted EBITDA | 1,624 | 1,530 | 1,878 | 2,416 | 6.1 | % | (22.3 | )% | ||||||||||||||||
Adjusted EBITDA margin | 39 | % | 38 | % | 38 | % | 39 | % | 1 p.p. | (1.1 p.p. | ) | |||||||||||||
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Results of operations in EUR
| 10 months ended October 31, | Year ended December 31, | 10 months ended October 31, 2015-2016 | Year ended December 31, 2014-2015 | |||||||||||||||||||||
| 2016 | 2015 | 2015 | 2014 | % change | ||||||||||||||||||||
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Total operating revenue | 3,708 | 3,616 | 4,428 | 4,633 | 2.6 | % | (4.4 | )% | ||||||||||||||||
Service revenue | 3,319 | 3,339 | 4,008 | 4,167 | (0.6 | )% | (3.8 | )% | ||||||||||||||||
Sales of equipment, accessories and other | 389 | 277 | 420 | 466 | 40.6 | % | (10.0 | )% | ||||||||||||||||
Operating expenses | 2,251 | 2,244 | 2,735 | 2,813 | 0.3 | % | (2.8 | )% | ||||||||||||||||
Adjusted EBITDA | 1,457 | 1,372 | 1,693 | 1,820 | 6.2 | % | (7.0 | )% | ||||||||||||||||
Adjusted EBITDA margin | 39 | % | 38 | % | 38 | % | 39 | % | 1 p.p. | (1.1 p.p. | ) | |||||||||||||
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Certain Performance Indicators
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Mobile | ||||||||||||||||
Customers in millions | 20.6 | 21.3 | 21.1 | 21.6 | ||||||||||||
ARPU in US$(1) | 12.8 | 12.5 | 12.5 | 14.6 | ||||||||||||
ARPU in EUR(1) | 11.5 | 11.2 | 11.3 | 11.3 | ||||||||||||
MOU in minutes(2) | 278 | 273 | 269 | 264 | ||||||||||||
Mobile data customers in millions(3) | 11.7 | 11.4 | 11.6 | 10.2 | ||||||||||||
Fixed-line | ||||||||||||||||
Broadband customers in millions(4) | 2.3 | 2.3 | 2.3 | 2.2 | ||||||||||||
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Ten Months Ended October 31, 2016 Compared to 10 Months ended October 31, 2015 for our Historical WIND Business
WIND’s total operating revenue in Italy increased by 2.5% to US$4,135 million in the ten months ended October 31, 2016 compared to US$4,034 million in the ten months ended October 31, 2015 (in functional currency terms, the increase was 2.6%), mainly due to the increase in the sale of mobile telephone handsets of high-range terminals and increased interconnection traffic revenue mainly due to the increase in the incoming volume of mobile termination traffic, only partially offset by the general reduction of volume and unit tariffs of SMS and MMS based on market trends.
WIND’s total operating revenue from services was US$3,701 million in the ten months ended October 31, 2016, representing a decrease of 1% compared to US$3,726 million in the ten months ended October 31, 2015 (in functional currency terms, the decrease was 1%). The decrease was mainly due to the 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.
Adjusted EBITDA
WIND’s Adjusted EBITDA increased by 6.1% to US$1,624 million in the ten months ended October 31, 2016 compared to US$1,530 million in the ten months ended October 31, 2015 (in functional currency terms, the increase was 6.2%). In addition to the effects described on total operating revenues, the increase is the result of the solid performance in mobile coupled with cost control activities during the period, including savings initiatives in relation to commercial and human resources costs.derivatives unwinding.
Certain Performance Indicators
As of October 31, 2016, we had approximately 20.6 million The Italy Joint Venture's total mobile customers in Italy in our historical WIND business, representing a decrease of 3.0% from approximately 21.3 million mobile customers as of October 31, 2015. The customer base decrease was in line with the overall market contraction and mainly due to a more rational approach to promotions offered in the period by the main three operators.
In the ten months ended October 31, 2016, WIND’s mobile ARPU in Italy increased by 3% in U.S. dollar terms as well as in functional currency terms.
In the ten months ended October 31, 2016, WIND’s mobile MOU in Italy increased by 1.8% to 278 minutes from 273 minutes in the ten months ended October 31, 2015, primarily as a result of the increased diffusion in the market of bundles including free minutes for a fixed fee.
As of October 31, 2016, WIND had approximately 11.7 million mobile data customers, representing an increase of 2.7% from approximately 11.4 million mobile data customers as of October 31, 2015. The increase was mainly due to the increased demand for data in mobility coupled with a higher diffusion of smartphones in the market.
The fixed-line broadband customers for WIND as of October 31, 2016, were approximately 2.3 million in Italy, which was stable as compared to October 31, 2015. The increase was primarily due to the increased demand in Italy for broadband connections.
Year Ended December 31, 2015 Compared to Year Ended December 31, 2014 for our Historical WIND Business
WIND’s Italy total operating revenue was US$4,913 million during 2015, representing a decrease of 20.2% compared to US$6,155 million in 2014. In functional currency terms, the total operating revenue decreased by 4.4%.
WIND’s total operating revenue5.8% from services was US$4,45031.3 million in 2015, representing a decrease of 19.6% compared to US$5,537 million in 2014 (in functional currency terms, decreased by 3.8%). The decrease in service revenue was mainly due to a decrease in voice services as a result of the difficult macroeconomic situation and the contraction of the market.
In 2015, we generated US$3,847 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 86.5% of our service revenue, which decreased by 20.5% from US$4,837 million of revenue in 2014, or 87.4% of our service revenue, in 2014 (in functional currency terms, decreased by 4.8%). The decrease was mainly due to the 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.
In 2015, we generated US$422 million of our service revenue from interconnection traffic, relating to incoming calls from other operators’ networks to our mobile and fixed-line networks, or 9.5% of our service revenue, representing a decrease of 16.7% compared to US$506 million of revenue in 2014, or 9.1% of the total operating revenue from services in 2014 (in functional currency terms, decreased by 0.3%). The decrease was due to the effect of the reduction of unit tariffs only partially offset by an increase in mobile traffic volume and by an increase in interconnection traffic from VAS.
In 2015, we generated US$138 million of our service revenue from other types of services, which mainly relate to leased lines and access fees charged to telecommunications operators and penalties charged to mobile and fixed-line customers, or 3.1% of our service revenue, representing a decrease of 4.7% compared to US$145 million in 2014, or 2.6% of our service revenue. The decrease compared to 2014 is mainly due to the exchange rate impact.
In functional currency terms, service revenue from other types of services increased by 15.7% over 2014 mainly due to services provided to MVNOs.
WIND’s total operating revenue also included revenue from sales of equipment, mainly relating to the sale of SIM cards, mobile and fixed-line phones and related accessories. In 2015, revenue from sales of equipment was US$327 million, representing an increase of 8.9% from US$301 million in 2014, which was primarily due to the increase in the sale of high-range terminals. In functional currency terms, revenue from sales of equipment increased by 30.4%.
In 2015, WIND generated US$136 million from the settlement of commercial disputes and penalties charged to suppliers, representing a decrease of 57.3% from US$318 million in 2014. In functional currency terms, the decrease of 48.2% was mainly due to higher proceeds from a settlement recognized in 2014.
Adjusted EBITDA
WIND’s adjusted EBITDA decreased by 22.3% to US$1,878 million in 2015 from US$2,416 million in 2014 (in functional currency terms, the decrease was 7.0%); in addition to the effects described on total operating revenues, the decrease was due to higher costs 2015 related to the tower services agreement with Galata
(following the sale by WIND of 90% of the shares of Galata in 2015 and to certain restructuring costs related to organizational streamlining and optimization). In functional currency terms, adjusted EBITDA margin in 2015 was 37.9%, which is 1.1 percentage points lower than the adjusted EBITDA margin in 2014.
Certain Performance Indicators
As of December 31, 2015, WIND had approximately 21.1 million mobile customers in Italy representing a decrease of 2.2% from approximately 21.6 million customers as of December 31, 2014. Our mobile customer base decrease in 2015 was in line with overall market contraction and mainly due2016 to lower gross additions in the market coming from the more rational approach to promotions offered in 2015 by the main three operators.
In 2015, mobile ARPU in Italy decreased to US$12.5 from US$14.6. The decrease was mainly a result of the depreciation of functional currency against US$. In functional currency terms ARPU was stable at EUR11.3.
In 2015, mobile MOU in Italy increased by 1.9% to 269 from 264 in 2014, primarily due to the increased diffusion in the market of bundles including free minutes for a fixed fee.
As of December 31, 2015, WIND had approximately 11.629.5 million mobile data customers in Italy, representing an increase of approximately 14.3% over the approximately 10.2 million mobile data customers as of December 31, 2014. The increase was mainly2017 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 the increased demand for databroadband high value customer base growth.
Mobile ARPU and our fixed-line customer base were broadly stable in mobility coupled with a higher diffusion of smartphones in the market.
As of December 31, 2015, WIND had approximately 2.3 million fixed-line broadband customers in Italy, representing an increase of approximately 3.1% over the approximately 2.2 million mobile broadband customers2017 as of December 31, 2014. The increase was mainly driven by the increased demand in Italy for broadband connections.compared to 2016.
Liquidity and Capital Resources
The data for 2015 and 2014 reflects the classification of WIND as a discontinued operation. The data for 2016 reflects 10 months of WIND classified as a discontinued operation and two months of WIND classified as an equity investment. For more information, please see “Explanatory Note—Accounting Treatment of our Historical WIND Business and the new Italy Joint Venture” and Note 6 to our audited consolidated financial statements included elsewhere in this Annual Report on Form20-F.
The Italy Joint Venture does not have any impact on VEON Ltd.’s current liquidity, as liquidity available at the level of the Italy Joint Venture is not available to VEON Ltd. due to covenants in debt agreements. The Italy Joint Venture results in a reduction of our net debt to Adjusted EBITDA ratio, as neither the earnings nor the net debt of the Italy Joint Venture are included in the calculations or the determination of the covenant ratios.
Working Capital
As of December 31, 2016, we had negative We define working capital of US$2,007 million, compared to negative working capital of US$156 million as of December 31, 2015. Working capital is defined as current assets less current liabilities. 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 in banks; decreased cash and cash equivalents, mainly due to investments in property and equipment, and 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.
As of December 31, 2015, we had negative working capital of US$156 million, compared to negative working capital of US$938 million as of December 31, 2014. The change in our working capital as of December 31, 2015 compared to December 31, 2014 was mainly due to the classification of Italy as an asset held for sale and the additional provisions with respect to the agreements with the SEC, DOJ and OM and other legal costs.
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 2015 and 20142015 (in millions of U.S. dollars):
| | As of and for the year ended December 31, | |||||||||
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| | 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 | ) | ||||
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from continued operations | (3,016 | ) | (2,022 | ) | (2,494 | ) | ||||
from discontinued operations | — | (649 | ) | (140 | ) | |||||
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Net cash from/(used in) financing activities | (733 | ) | (126 | ) | (1,439 | ) | ||||
from continued operations | (733 | ) | (106 | ) | (732 | ) | ||||
from discontinued operations | — | (20 | ) | (707 | ) | |||||
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Operating activities
| As of and for the year ended December 31, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| (in millions of U.S. dollars) | ||||||||||||
Cash flow data: | ||||||||||||
Net cash from/(used in) operating activities | 1,875 | 2,033 | 5,279 | |||||||||
from continued operations | 1,192 | 1,104 | 4,613 | |||||||||
from discontinued operations | 683 | 929 | 666 | |||||||||
Net cash from/(used in) investing activities | (2,671 | ) | (2,634 | ) | (3,977 | ) | ||||||
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from continued operations | (2,022 | ) | (2,494 | ) | (2,993 | ) | ||||||
from discontinued operations | (649 | ) | (140 | ) | (984 | ) | ||||||
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Net cash from/(used in) before financing activities | (796 | ) | (601 | ) | 1,302 | |||||||
Net cash from/(used in) financing activities | (126 | ) | (1,439 | ) | 1,329 | |||||||
from continued operations | (106 | ) | (732 | ) | 2,007 | |||||||
from discontinued operations | (20 | ) | (707 | ) | (678 | ) | ||||||
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During the years ended December 31, 2016, 20152017, 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 2014, we generatedincreased operating profit, partially offset by no cash inflow from discontinued operations in 2017 as compared to positive cash flow from our operating activities and negative cash flow from investing activities. Cash flow useddiscontinued operations in financing activities was negative during 2016 and 2015 and positive during 2014. The negative cash flow from financing activities during 2016 was mainly due to dividends paid tonon-controlling interests and dividends paid to equity holders of the parent. The negative cash flow from financing activities during 2015 was mostly due to repayment of existing borrowings during 2015, partially offset by cash flows from new loans and bonds issued during 2015 and proceeds received from the completion of the sale by GTH of anon-controlling 51% interest in OTA to theFonds National d’Investissement. 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 andnon-controlling interest.2016.
Operating Activities
During 2016, net cash flows from operating activities decreased to US$1,875 million from US$2,033 million of net cash flows from operating activities duringin 2015 to US$1,875 million in 2016. 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.
During 2015, net cash flows from operating activities were US$2,033 million, a 61% decrease from the US$5,279 million of net cash flows from operating activities during 2014. The decrease in net cash flows from operating activities was primarily due to lower cash generated by our operations impacted by local currencies devaluation partially offset by lower interest paid during 2015. The cash flow from our operating activities in 2015 was impacted by the completion of the sale by GTH of anon-controlling 51% interest in OTA to theFonds National d’Investissement,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.
pre-closing dividend.Investing activities
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, increased bank deposit accounts and cash receipts from investments in financial assets. During 2015, the cash flow from investing activities in the discontinued operations was positive due to net proceeds from the saleassets, a deposit of towers in Italy.
During 2015, our total payments for purchases of property and equipment, intangible assets, software and other assets were approximately US$2,207361 million compared to US$3,501 million during 2014. The decrease was primarily due to the local currencies’ devaluations against the U.S. dollar as the majority of the purchases are performed in local currencies. In addition, we have placed on deposit with financial institutions US$361 million and recorded US$140 million of cash outflows from discontinued operations during 2015. See also “—Acquisitions and Dispositions” below.operations.
Acquisitions and DispositionsFinancing activities
For information regarding 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 acquisitionsexternal indebtedness for bank loans, bonds, equipment financing and dispositions, see Note 6loans 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 audited consolidated financial statements included elsewhere in this Annual Report on Form20-F.external indebtedness is mainly the result of foreign exchange revaluation, GTH share buyback and premiums paid to repurchase our bonds.
Financing Activities
During 2016, we repaid approximately US$1,816 million of indebtedness and raised approximately US$1,882 million, which amounts exclude the financing activities in relation to our historical WIND operations in Italy.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, which amounts exclude the financing activities in relation to our historical WIND operations in Italy, following the classification of WIND as a discontinued operation in connection with the Italy Joint Venture.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, compared to US$26.4 billionbillion.
The following table provides a summary of our outstanding indebtedness with an outstanding principal balance as of December 31, 2014. The decrease of the principal amounts of our external indebtedness is mainly the result of classifying our Italian operations as discontinued operations, the net repayment of indebtedness2017 and foreign exchange revaluations.2016.
| | | | | | | Principal amount outstanding (in millions of US$) | |||||||||||
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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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During 2014, we repaid approximately US$3,765 million of indebtedness and raised approximately US$5,859 million, which amounts exclude the financing activities in relation to our historical WIND operations in Italy following the classification of WIND as a discontinued operation in connection with the Italy Joint Venture.
Information about our indebtedness is presented below. 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, subject to agreed exceptions.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 includingnon-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"change of control”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’sborrower's voting share capital.
On February 16, 2017, we entered into a new multi-currency term loan and revolving facilities agreement for up to US$2.25 billion for VimpelCom Holdings B.V., see “Item 5—Key Developments andTrends—Multi-Currency Term Loan And Revolving Facilities Agreement and Exhibit 2.6 to this Annual Report on Form 20-F.” For additional information on our outstanding indebtedness, please refer to the notessee Note 17 to our audited consolidated financial statements included elsewhere in this Annual Report on Form20-F.statements. For information relating to our financing activities in 2016,2017, and the period subsequent to December 31, 2016,2017, see Note 1817 and Note 28,27, respectively, to our audited consolidated financial statements included elsewhere in this Annual Report on Form20-F.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 Formsee "20-F entitled “ItemItem 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,” “Item 3—Key Information—D. Risk Factors—Risks Related to Our Business—We may not be able to raise additional capital,” and “Item 3—Key Information—D. Risk Factors—Risks Related to Our Business—A disposition by one or bothcapital."
The following table provides a summary of our outstanding indebtedness with an outstanding principal balance exceeding US$30.0 million as of December 31, 2016, excluding indebtedness of the Italy Joint Venture.
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Cash and deposits subjectDeposits Subject to currencyCurrency and contractual restrictionsContractual Restrictions
As of December 31, 2016, the2017, our cash and deposit balances of VEON Group were equal to US$3,3271,374 million. US$1,715444 million (52%(32% of total group cash and deposits) were denominated in U.S. dollars and approximately 80%55% of the U.S. dollar denominated cash iswas held in VEON GroupVEON's headquarter entities.
As In addition, as of December 31, 2016, the cash and deposits balances in Uzbekistan of2017, funds worth US$727 million and Ukraine of US$3987 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 repatriation due to local government or central bank regulations. As partSeptember 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 closingvalue of the transaction and settlement withUzbek som to the Algerian Government on January 30, 2015, the foreign exchange and import restrictions put in place by the BankU.S. dollar. On December 22, 2017, VEON announced that its subsidiary, PJSC VimpelCom, had successfully repatriated a net amount of Algeria against OTA on April 15, 2010 prohibiting the repatriation of cash balances in Algeria were lifted. Algerian foreign exchange regulations continue, however, to require strict regulatory approval before a company can engage in certain foreign exchange transactions. Bangladesh has similar requirements.approximately US$200 million from Unitel.
For more information about the currency restrictions in our countries of operation, see “—Certain Ongoing "—Factors Affecting OurComparability of Financial Position and Results of Operations—Foreign
Currency Controls and Currency Restrictions” “Item" 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 convertibilitytranslation risks” “Item," "Item 3—Key Information—D. Risk Factors—Risks Related to Our Business—As a holding company, VEON Ltd. depends on the ability of its subsidiaries to pay dividends and therefore on the performance of its subsidiaries and istheir 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”operate" and “Item"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” as well as Notes 21 and 26 to our audited consolidated financial statements included elsewhere in this Annual Report on Form20-F.
Certain of the agreements relating to our indebtedness subject our subsidiaries to restrictions on their ability to pay dividends, make loans or repay debts to us. For additional information on our indebtedness, please see “—Financing Activities” and the notes to our audited consolidated financial statements included elsewhere in this Annual Report on Form20-F. For a description of some of the risks associated with certain of our indebtedness, please 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.”."
Earnings subjectSubject to indefinite investmentIndefinite Investment
During 2016,2017, we recorded a deferred tax liability of US$73116 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$8,4956,833 million as of December 31, 2016.2017. For more information, please see Note 1112 to our audited consolidated financial statements included elsewhere in this Annual Report on Form20-F.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 approximately US$1,741 million compared to approximately 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.
During 2015, our capital expenditures were approximately US$2,034 million compared to approximately US$3,229 million during 2014, excluding capital expenditures in Italy. The decrease in capital expenditures in 2015 compared to 2014 was primarily due to depreciation of functional currency against U.S. dollar.
The following is a reconciliation of capital expenditures (excluding licenses) to cash paid for purchase of property, plant and equipment and intangible assets for the periods presented.
| Year ended December 31, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
Cash paid for purchase of property, plant and equipment and intangible assets | 1,651 | 2,207 | 3,501 | |||||||||
Net difference between timing of recognition and payments for purchase of property, plant and equipment and intangible assets | 90 | (173 | ) | (272 | ) | |||||||
Capital expenditures | 1,741 | 2,034 | 3,229 | |||||||||
Less capital expenditures in licenses | (148 | ) | (255 | ) | (396 | ) | ||||||
Capital expenditures (excluding licenses) | 1,593 | 1,779 | 2,833 | |||||||||
We expect that our capital expenditures in 20172018 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 AlgeriaPakistan, Bangladesh and integration expenditures due to the Pakistan Merger. For a discussion of our spending on researchUkraine and development and our development of new technologies including our VEON personal internet platform, see “Item 4—Information on the Company—Research and Development” and “Item 4—Information on the Company—Overview.”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.
As of the date of this Annual Report on Form20-F, we had an undrawn amount of US$2,417 million under existing credit facilities (excluding credit facilities in Italy). For more information on our existing undrawn credit facilities, please see Note 5 to our audited consolidated financial statements included elsewhere in this Annual Report on Form20-F.
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. For related risks, see “ItemSee "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"Item 3—Key Information—D. Risk Factors—Risks Related to Our Business—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 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, and we expect to have material cash outflows in the short-term for our performance transformation program.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, 2016,2017, 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 undernon-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, 2016,2017, see Note 2827 to our audited consolidated financial statements included elsewhere in this Annual Reportstatements.
| | 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) | 13,735 | 1,862 | 4,141 | 4,958 | 2,774 | |||||||||||
Non-cancellable lease obligations | 466 | 70 | 151 | 78 | 167 | |||||||||||
Purchase obligations(3) | 861 | 595 | 266 | — | — | |||||||||||
Total | 15,062 | 2,527 | 4,558 | 5,036 | 2,941 | |||||||||||
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| 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) | 11,984 | 3,330 | 3,578 | 1,821 | 3,255 | |||||||||||||||
Equipment financing(2) | 770 | 199 | 319 | 197 | 55 | |||||||||||||||
Non-cancellable lease obligations | 637 | 121 | 236 | 132 | 148 | |||||||||||||||
Purchase obligations(3) | 1,187 | 721 | 466 | — | — | |||||||||||||||
Total | 14,578 | 4,371 | 4,599 | 2,150 | 3,458 | |||||||||||||||
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Other than the debt obligations described under “—in "—Consolidated Cash Flow Summary—Financing Activities”Activities" and in Note 2827 to our audited consolidated financial statements, included elsewhere in this Annual Report on Form20-F, 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 anyoff-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. Please see the section of this Annual Report on FormSee "20-F entitled “ItemItem 7—Major Shareholders and Related Party Transactions—B. Related Party Transactions”Transactions" and Note 2625 to our audited consolidated financial statements included elsewhere in this Annual Report on Form20-F.statements.
A. Directors and Senior Management
As of March 15, 2017,1, 2018, the members of our supervisory board were as follows:
Name | Age(1) | Position | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 59 | Chairman of supervisory board | ||||||||
Stan Chudnovsky | 47 | Director | ||||||||
Mikhail M. Fridman | ||||||||||
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| 53 | Director | ||||||||
| 53 | Director | ||||||||
Andrei Gusev | 45 | Director | |||
Gunnar Holt | 63 | Director | |||
Sir Julian Horn-Smith | 69 | Director | |||
Jørn P. Jensen | 53 | Director | |||
Guy Laurence | 56 | Director | |||
Alexey Reznikovich | 49 | Director | |||
Alexander Pertsovsky | 49 | Alternate Director (Alexey Reznikovich) |
The members of our current supervisory board were elected at the August 5, 2016July 24, 2017 annual general meeting of shareholders in accordance with ourbye-laws and will serve until the next annual general meeting, unless any members are removed from office or their offices are vacated in accordance with ourbye-laws.
As of March 31, 2017,1, 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 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|
Jean-Yves Charlier | 54 | Group Chief Executive Officer | ||||||||
| 56 | Group Chief Financial Officer | ||||||||
Scott Dresser | 50 | Group General Counsel | ||||||||
| 45 | Group Chief | ||||||||
| 47 | Group Chief Corporate & Public Affairs Officer | ||||||||
Christopher Schlaeffer | 48 | Group Chief Digital Officer | ||||||||
Jacky Simmonds | 54 | Group Chief People Officer | ||||||||
| 50 | Group Chief | ||||||||
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| 50 | Head of | ||||||||
| Major Markets | ||||||||||
Peter Chernyshov | ||||||||||
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| 49 | Head of | ||||||||
| Ukraine | ||||||||||
| 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 VEON Ltd. supervisory board since December 2012 and a director of VEON Ltd. since April 2010. He also serves asJuly 2017. Ms. Burns is chairman of VEON Ltd.’sour compensation committee. Mr. Reznikovich was a member ofMs. Burns brings extensive international experience to the board of directors of PJSC 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 & Investments Ltd.Xerox 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 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 graduated2015-2016 after service as vice chair 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.2010-2015.
Stan Chudnovsky has been a director of VEON 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 Special Operations at PayPal after a company heco-founded, IronPearl, was acquired. Prior to this, Mr. Chudnovsky was involved in the establishment of Tickle Inc., one of the first social media companies, and grew it to become one of the largest websites in the world by 2003. Mr. Chudnovsky has a strong background as an entrepreneur, havingco-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 Moscow, Mr. Chudnovsky earned engineering degrees in Russia.
Mikhail M. Fridman has been a director of VEON Ltd. since April 2010. Mr. Fridman was a member of the board of directors of PJSCOJSC 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. Fridmanco-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 ofNon-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 VEON Ltd. since October 2014 and a director of VEON Ltd. since June 2015. Mr. Gazin is serving as a chairman of VEON Ltd.’s's nominating and corporate governance committee and as a member of its financeour audit and strategy committee and auditrisk 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 until its dissolution on August 3, 2016. Mr. Gazin currently serves as Directoran Affiliate Partner at Interpipe,Lindsay Goldberg, a producer of pipes and railroad wheels;New York based private equity firm; Director at GeoAlliance, an oil and gas production 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 & Company’sCompany'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 M.B.A. from the Wharton School of Business at the University of Pennsylvania in 1993.
Andrei Gusevhas been a director of VEON Ltd. since April 2014. Mr. Gusev is serving as a chairman of VEON Ltd.’s's finance and strategy 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 1994.
Gunnar Holthas been a director of VEON Ltd. since June 2015. Mr. Holt is serving as a member of VEON Ltd.’s finance's audit and strategyrisk committee and auditof its nominating and corporate governance committee. Mr. Holt has beenwas a Senior Advisor at Telenor ASA sincefrom 2006 to 2017 and previously served as a 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 MBAM.B.A. from the University of Queensland in Australia, and an M.B.A. in finance from the University of 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 VEON Ltd. since July 2014. Sir Julian served as a member of VEON Ltd.’s's special committee overseeing the internal investigation and the company’scompany's response to the inquiries by various authorities until its dissolution on August 3, 2016. Sir Julian is active in the global telecommunications sector as a 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. He currently serves as a member of the board of Digicel, a Caribbean and Pacific operator. Sir Julian is also Chairman of 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 the Founder andCo-Chair of The TATLIDiL Conference (British and Turkish Conference). During his career in international telecommunications, Sir Julian has served 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 in 1970 and a Master of Science from University of Bath in the United Kingdom in 1979.
Jørn P. Jensen has been a director of VEON Ltd. since August 2016. Mr. Jensen is chairman of our audit and risk committee. In September 2017, Mr. Jensen was appointed as Chief Financial Officer of Dyson Ltd., and as a Director of various entities forming part of the Dyson Group. Mr. Jensen has been a Director of Danske Bank A/S since March 2012, and 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 Member of 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., Lauritzen
Fonden/Vesterhavet A/S, and Royal Scandinavia A/S. Mr. Jensen received a Bachelor of Science in Economics from Copenhagen Business School in 1986, and a Master of Science in Economics and Business Administration from Copenhagen Business School in 1988.
Nils KatlaGuy Laurence has been a director of VEON Ltd. since June 2015.July 2017. Mr. KatlaLaurence is serving as a member of VEON Ltd.’s nominating and corporate governance's compensation committee and compensationof its finance committee. Mr. Katla isLaurence brings more than 30 years of global experience in telecommunications, media and pay television. Mr. Laurence was previously CEO at Rogers, a CDN$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 Vodafone UK, operating in one of the most competitive and mature communications markets in the world, and CEO of Vodafone Netherlands. Mr. Laurence holds a number of directorships, including of Vodafone UK Ltd., Maple Leaf Sports & Entertainment, Chelsea FC plc and 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. Reznikovich was a member of the board of directors of PJSC VimpelCom from May 2002 until April 2010. Mr Reznikovich has been a Member of the Board of Directors for Telenor Hungary.at Qvantel Oy from November 2017. Mr. Katla joined the Telenor Group in 2001Reznikovich served as Managing Partner of LetterOne Technology from June 2014 to September 2017. Prior to joining LetterOne Technology, he was Chief Executive Officer of LLC Altimo from April 2005 to May 2014 and Chief Executive Officer of Altimo Holdings & Investments Ltd. from June 2006 to May 2014. He has been responsible for growing Telenor’s Nordic and European positions, resulting in a number of acquisitions. He is currently serving as the Senior Vice President of Mergers & Acquisitions for Telenor ASA. From 2004 to 2007, he was a member of the Management Boardsupervisory board of Telenor Norway.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 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 Pertsovskyhas servedbeen 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 a number1 January 2018 from Bank of BoardsAmerica Merrill Lynch. At Bank of Directors for Telenor Group companies. Before joining Telenor,America Merrill Lynch, Mr. KatlaPertsovsky served as the Country Executive Vice Presidentfor 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. Pertsovsky holds an MS degree in Applied Mathematics from the Consumer Division at Enitel from 2000 to 2001.Moscow Institute of Radio, Engineering and Automation. He also headed the consumer division of TeliaSonera as the Senior Vice President from 1997 to 1999. He has also worked for McKinsey & Company from 1995 to 1997 and Arthur Andersen & Company (later Accenture) from 1990 to 1993. Mr. Katla holds a Master of Science degree in Computer Science and Telematics from the Norwegian Institute of Technology andreceived an M.B.A. from INSEAD.Columbia University in 2002.
Management Board
Jean-Yves Charlier was appointed as Chief Executive Officer of VEON Ltd. by the VEON Ltd. supervisory board in April 2015. Prior to his appointment as Chief Executive Officer of VEON 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 Bachelor of Arts in international business administration from the American College in Paris, France.
Andrew DaviesTrond Odegard Westlie joined VEON Ltd. in November 2013 as Chief Financial Officer. From November 2010 toon October 2013, Mr. Davies was the Chief Financial Officer at Verizon Wireless. Prior to2, 2017 and assumed his appointment at Verizon Wireless, Mr. Davies held a number of senior financial roles within Vodafone Group, most recentlyduties as Chief Financial Officer following the release of Vodafone India and Vodafone Turkey as well as positions in Vodafone UK and Vodafone Japan, from 2003 until 2010. Prior to joining Vodafone in 2003,quarterly results on November 9, 2017. Mr. Davies wasWestlie is an experienced financial executive having been Chief Financial Officer of Singlepoint (4U)AP Moller-Maersk from 2001, which was acquired by Vodafone in 2003,2010 through 2016 and also held positions with Honeywell Inc. and General Electric after starting his career with KPMG in 1987.Chief Financial Officer of Telenor from 2005 through 2009. Mr. Davies servesWestlie previously served as a member of the VEON supervisory board and chairman of various subsidiaries of VEON Ltd. Mr. Davies earned a Bachelor of Science degree in mathematics from Imperial College in London in 1987, is an Associate of the Royal College of Scienceour audit and is a Fellow of the Institute of Chartered Accountants in Englandrisk committee between July 2014 and Wales.August 2016.
Scott Dresser was appointed as Group General Counsel, with effect from September 1, 2014. Mr. Dresser was also appointed a member of the Group Executive Board and the Group Management Board. Mr. Dresser was most recently 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 VEON Ltd.’sVirgin Media's Board of Directors, as well as being a member of its Executive Management Team. He also previously held positions in the United 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 Associate 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 Morgan, Lewis & Bockius LLP and at Lord Day & Lord, Barrett Smith. Mr. Dresser studied at the Vanderbilt University School of Law and University of New Hampshire, and was admitted to the Bar, in New York and Connecticut, in 1993. Mr. Dresser is on the advisory boardsboard of BirdLife International and the Caucasus Nature Fund.
Enrique Aznar has been our Chief Values and Culture Transformation Officer since July 2016, prior to which he was our Group Chief Compliance Officer since August 2013, and he was appointed to the Management Board in October 2014. Prior to joining our company, Mr. Aznar was Head of Corporate Governance & Compliance—Chief Integrity Officer at Millicom International Cellular S.A., based in Luxembourg from 2011 until 2013; Chief Ethics & Compliance Officer at Nokia Siemens Networks, based in Helsinki from 2009 until 2011; Deputy General Counsel & Chief Compliance Officer for Europe, Middle East, and Africa for Tyco International from 2005 until 2009 and held different legal roles with Dell, Inc from 2000 to 2005, Freshfields from 1997 to 2000, Price Waterhouse from 1994 to 1997 and Arthur Andersen from 1989 to 1992. Enrique is a qualified lawyer in Spain, England and Wales. Mr. Aznar attended a Leadership Program at Stanford University in the United States in 2012. He earned a Business Management Program certificate (PDD Guildhall University (currently London Metropolitan University)) at IESE Business School in 2003, a Master of Arts in International & Comparative Business Law from London in 1993 and a Licenciatura en Derecho (Law Degree) from the University of Barcelona in 1988.International.
Jeffrey Hedberghas been Group Chief People Officer since November 2016 and Chief Executive Officer of Pakistan Mobile Communications Limited in Pakistan since July 2014. Previously, 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 a Private Equity Advisor from 2013 until 2014 and the Chief Operating Officer of Altech from 2011 to 2012. Mr. Hedberg served as CEO of Telekom South Africa from 2010 to 2011 and as CEO of Telkom’s Nigerian subsidiary, Multi-Links Nigeria in 2010. From 2006 to 2009, Mr. Hedberg was CEO of Cell C in South Africa. Mr. Hedberg was appointed CEO and Chairman of Deutsche Telekom USA in 2002 and from 1999 to 2002, he was Executive Vice President and Member of the Board of Management of Deutsche Telekom AG where he developed the strategy for the International Division. Prior to that, Mr. Hedberg served as Executive Vice President of Swisscom International from 1997 to 1998 and as Deputy Director from 1996 to 1997. Mr. Hedberg currently serves as a member of the board of directors of various subsidiaries of VEON 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.
Yogesh Malikhas served as Group Chief Technology Officer of VEON 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 Head of Technology & Sourcing at Telenor Group headquarters in Norway, CTO of “Kyivstar”"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 the VEON Group and helped implement innovative technology to overhaul the group’sgroup'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.
Alexander MatuschkaMark MacGann has served as was appointed Group Chief PerformanceCorporate & Public Affairs Officer since July 2015.in November 2017. Mr. Matuschka cameMacGann was most 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 VEON from Nokia Networks, where he was Chief Transformation Officer from 2014 to 2015Uber's pioneering development in dozens of countries and previously, Chief Restructuring Officer from 2011 until 2014. Prior to joining Nokia,hundreds of cities internationally. In prior roles, Mr. Matuschka gained extensive experience inMacGann led government affairs and public policy for the New York Stock Exchange in the automotiveaftermath 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 machining industries with P&L responsibilityregional government affairs functions at Alcatel, the global telecom technology provider; and during his tenure as Associate Partner in multiple areas, including restructuring,re-organization, procurement, logistics, supply chain managementNew York, London and lean manufacturing/assembly, including serving asParis offices of the Interim Chief Operations Officer for ATU GmbHleading 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 2010 until 2011the Institut d'Etudes Politiques, France and Chief Executive Officer of EUROPART Holding GmbH from 2007 to 2009. Mr. Matuschka holds a business degree (Diplom-Kaufmann) in International Business Economy from International Business School Lippstadt in Germany and West VirginiaKingston University, USA.London.
Christopher Schlaeffer has served as Chief Commercial and Digital Officer since January 2016, with responsibility for the development of new digital services and telecommunications propositions and for leading the Group’sour global
brand and commercial functions.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 2015.today. Prior to that, Mr. Schlaeffer was with Deutsche Telekom for 12 years as the group’sgroup's Chief Product and Innovation Officer, Corporate Development Officer (with responsibility for Technology, IT, Innovation, R&D, and Venture Capital), Chief Strategy Officer and Chief Marketing Officer of the mobile division forT-Mobile International. He also served as a Member of the Executive Operating Board and played a key role in Deutsche Telekom’sTelekom's transformation. Mr. Schlaeffer holds a Master’sMaster's degree from the Vienna University of Economics and is recognized as a “Young"Young Global Leader”Leader" by the World Economic Forum.
Jacky Simmonds was appointed as VEON's Group Chief People Officer in October 2017. Ms. Simmonds has experience across a number of sectors including travel, tourism and aviation in over 25 years working as an 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 top 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 build a world-class HR function across the group. Prior to joining VEON, Ms. Simmonds was Group People Director at easyJet 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 TUI Group for over five years. Ms. Simmonds is also a Non-Executive Director at Ferguson Plc, where she chairs the Remuneration Committee, and is a member of the Nominations and Audit Committee.
Erik AasJoshua Drewhas been HeadVEON'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 Bangladesh since December 2015.compliance professionals across all of VEON's operating markets to establish and implement an effective compliance program, while also advising senior management and the Supervisory Board on core compliance, risk and governance issues. Prior to joining VEON, Mr. AasDrew 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 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 Vice 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 Norsk Hydro in France and Ukraine, and Scandsea International in Norway and Russia. Mr. Johnsen, has an M.B.A. from the Norwegian School of Economics and 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 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 the Board of Grameenphone. Mr. Aas is the Chairman and Managing 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.
Peter Chernyshov has been Head of Ukraine since June 2014.2014 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’sMaster's degree in mathematics from Ural State University in 1990 and an M.B.A. from Kingston University Business School in 2001.
Jon EddyAamir Hafeez Ibrahimhas been the Chief Executive Officer of our operations in Pakistan since July 2016 and Head of Emerging Markets since January 2016.March 2018. Prior to his position as CEO, Mr. EddyIbrahim 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 leadership positionsstrategic 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 telecommunications industryUniversity of Texas and an MBA from IMD in emerging markets, especially in Asia. He joined VEONSwitzerland. In 2012, he received an Advanced Management Program diploma from dtac, Thailand’s second largest mobile operator, where he was Chief Executive Officer from 2011 until 2014. JonHarvard Business School. Mr. Ibrahim has previously beenlived and worked across multiple cultures and countries including Thailand, Pakistan, the United Kingdom, the United Arab Emirates, Switzerland and the United States.
Vasyl Latsanych has served as Chief Executive Officer of Telenor PakistanPJSC VimpelCom since January 10, 2018. Mr. Latsanych came to VEON from 2008 to 2011, Chief Operating Officer at Maxis Mobile in Malaysia from 2007 until 2008,the MTS Group, where he held a number of senior roles, the most recent being Group Vice President for Strategy and Chief Technology Officer at Digi Telecom in Malaysia from 2002 until 2007.Marketing. Mr. Eddy currently serves as chairman ofLatsanych also served on the board of directors of various subsidiaries of VEON Ltd. He holds a Bachelor of Science degreeSitronics Kasu, NVision Group, Medsi, SMM and several other MTS subsidiaries. Mr. Latsanych graduated from Lviv State Lysenko Institute in Electrical Engineering1995, and received an Executive M.B.A. from Montana State University.the London Business School in 2001.
Matthieu Galvanihas been Chief Executive Officer of VEON’sVEON's operations in Algeria, under the Djezzy brand since January 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. HeMr. Galvani was previously Chief Commercial Officer for VEON’sVEON's emerging markets, which serves 95 million customers in Algeria, Bangladesh and Pakistan. His previous roles include Chief Marketing & Communication 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’sMaster's degree in Econometrics, and a post graduate degree in economics and energyEnergy Economics from the University of Paris X.X and the French Atomic Energy Agency (CEA).
Mikhail GerchukErik Aas has been Head of EurasiaBangladesh since OctoberDecember 2015. HeMr. Aas previously served as Group Chief Commercial and Strategy Officer from July 2012 until October 2015, Acting Head of the former CIS Business Unit from February 2014 to January 2015, and Group Chief Commercial Officer from October 2011 to July 2012. 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 as the Group Marketing Director. At MTS, he also served on the
boards of directors of Comstar, MGTS, MTS Ukraine and several other MTS subsidiaries. Prior to joining MTS, Mr. Gerchuk was Chief Commercial Officer at Vodafone Malta from 2006 to 2007. He held senior marketing positions at Vodafone Group, UK between 2002 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 Marketing Manager at Mars, Inc. Mr. Gerchuk has been recognized as a leading commercial director and a leading young figure in telecommunications. Mr. Gerchuk received an M.B.A. from INSEAD in 1999 and an M.A. in Economic Geography and English from Moscow State University in 1994.
Aamir Hafeez Ibrahimhas been the Chief Executive Officer of our operationsPt AXIS Telekom from 2007 until 2014. From 1997 to 2007, Mr. Aas served in Pakistan since July 2016. 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 avarious senior executive across multiple industries and continents. Prior to joining Mobilink, he wasroles for 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 is a Pakistani native, with an undergraduate degree in Accounting fromincluding as the University of Texas and an MBA from IMD in Switzerland. In 2012, he received an Advanced Management Program diploma from Harvard Business School. Mr. Ibrahim has lived and worked across multiple cultures and countries including Thailand, Pakistan, the UK, the United Arab Emirates, Switzerland and the United States.
Kjell Morten Johnsen has been VEON’s Head of Major Markets and Chief Executive Officer and Director of VEON Russia (PJSC VimpelCom), with responsibility for the Group’s 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 Vice 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 Grameenphone. Mr. Aas is the Chairman and Managing Director of Lakeview Invest AS and Lakeview Trading AS since September 2014. Mr. Aas attended the International Directors Programme from 2007INSEAD from 2012 to 2013. Prior to entering the telecommunications industryMr. Aas received an Executive M.B.A. from IMD, Switzerland in 2000, Mr. Johnsen worked2001 and graduated with a Master of Science degree for Norsk Hydro in France and Ukraine, and Scandsea International in Norway and Russia. Mr. Johnsen, has an MBACivil Engineering from the Norwegian School of Economics and Business Administration, and has attended the University of Oslo, Norwegian School of Management,Science and Nord University Business School.Technology in 1991.
Oleksandr Komarovhas been Head of Kazakhstan since January 2016. Mr. Komarov served as the Chief Commercial Officer at BeelineKazakhstan from July 2013 until 2016. Previously, Mr. Komarov served as the Chief Executive Officer of GroupM from 2007 to 2013, Acting ChiefExecutive Officer of MediaCom from 2009 to 2010, the Chief Executive Officer of Video International Advertising Group Kiev from 2006 to 2007 andthe Chief Executive Officer of Adell Saatchi & Saatchi from 2004 to 2006. Mr. Komarov received an Executive M.B.A. from the Stockholm School ofEconomics in 2006 as well as a Postgraduate Diploma in Marketing from the Chartered Institute of Marketing in 2001.
Mr. Komarov received adegree in electronic devices engineering from the National Technical University of Ukraine ‘Kyiv'Kyiv Polytechnic Institute’Institute' in 1995.
B. Compensation
B.Compensation
We paid our directors and senior managers an aggregate amount of approximately US$7545 million for services provided during 2016,2017, including approximately US$3742 million for short-term employee benefits and approximately US$341 million for 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 26 to our audited consolidated financial statements included elsewhere in this Annual Report on Form20-F.
Pursuant to ourbye-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 thebye-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
VEON Ltd. is governed by our supervisory board, currently consisting of nineten directors. Ourbye-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 whichsub-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.
Audit and risk committee
Ourbye-laws provide that each member of the audit and risk committee is required to satisfy the requirements of Rule10A-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 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 to accounting orguidelines, including the Code of Conduct; VEON Ltd.'s systems of enterprise risk management and internal controls; and VEON Ltd.'s compliance program. The audit matters and engaging necessary advisors. The auditrisk committee also supervises activities related to the DPA, the SEC Judgment and the Dutch Settlement Agreement.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, Jørn Jensen (chairman), Gennady Gazin and Gunnar Holt, are expected to serve until our next annual general meeting.
For details related to the agreements related to the investigations by the SEC, the DOJ and the OM, see Note 22 to our audited consolidated financial statements.
Compensation committee
Our compensation committee is responsible for approving the compensation of the directors, officers and employees of VEON Ltd. and its subsidiaries, our employee benefit plans, any equity compensation plans of VEON Ltd. and its subsidiaries, and any contract relating to a director, officer or shareholder of VEON Ltd. or any of our subsidiaries or their respective family members or affiliates. The current members of our compensation committee, Alexey ReznikovichUrsula Burns (chairman), Andrei Gusev, Nils Katla,Alexander 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, Nils Katla, are expected to serve until our next annual general meeting.
Finance committee
Our finance and strategy committee is responsible for reviewing financial transactions, policies, strategies and the capital structure of VEON Ltd. and its subsidiaries. The current members of our finance and strategy committee, Andrei Gusev (chairman), Gennady Gazin, Gunnar Holt, and Guy Laurence, are expected to serve until our next annual general meeting.
D. Employees
The following chart sets forth the number 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 | |||||||
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| As of December 31, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
Russia | 23,622 | 29,255 | 27,935 | |||||||||
Pakistan | 4,589 | 6,361 | 8,959 | |||||||||
Algeria | 2,815 | 3,669 | 3,732 | |||||||||
Bangladesh | 1,319 | 2,194 | 2,428 | |||||||||
Ukraine | 2,484 | 2,945 | 4,116 | |||||||||
Uzbekistan | 1,234 | 1,241 | 1,388 | |||||||||
HQ | 709 | 345 | 149 | |||||||||
Others(1) | 5,222 | 6,311 | 6,500 | |||||||||
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Total(2) | 41,994 | 52,321 | 55,207 | |||||||||
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From time to time, we also employ external staff, who fulfill a position at the company for a temporary period of less than twelve months. We do not consider these employees to constitute a significant percentage of our employee totals and have not included them above.
The following chart sets forth the number of our employees as of December 31, 2016,2017, according to geographic location and our estimates 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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| As of December 31, 2016 | ||||||||||||||||||||||||
Category of activity(1) | Russia | Pakistan | Algeria | Bangladesh | Ukraine | Uzbekistan | ||||||||||||||||||
Executive and senior management | 10 | 10 | 8 | 9 | 11 | 11 | ||||||||||||||||||
Engineering, construction and information technology | 4,529 | 948 | 789 | 498 | 1,001 | 300 | ||||||||||||||||||
Sales, marketing and other commercial operations | 10,172 | 1,551 | 955 | 516 | 733 | 295 | ||||||||||||||||||
Finance, administration and legal | 979 | 205 | 166 | 61 | 283 | 62 | ||||||||||||||||||
Customer service | 5,658 | 812 | 465 | 115 | 138 | 291 | ||||||||||||||||||
Procurement and logistics | 588 | 95 | 110 | 29 | 102 | 31 | ||||||||||||||||||
Other support functions | 1,686 | 968 | 322 | 91 | 216 | 244 | ||||||||||||||||||
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Total | 23,622 | 4,589 | 2,815 | 1,319 | 2,484 | 1,234 | ||||||||||||||||||
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Our employees are represented by Unionsunions or operate collective bargaining arrangements in Armenia, Algeria, Kyrgyzstan, Ukraine, as are the Italy Joint Venture’sVenture's employees. We consider relations with our employees to be generally good. In February 2016, BDCL experienced labor disruptions in connection with the implementation 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 government authorities. A consequent notification has been made by UNI Global Union to the Dutch NCP and a process is ongoing. Please see “ItemSee "Item 3—Key Information—D. Risk Factors—Risks Related to Our Business—We may be adversely impacted by work stoppages and other labor matters.”matters."
E. Share Ownership
To our knowledge, as of March 15, 2016,1, 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 L1T VIP Holdings S.à r.l. (“("L1T VIP Holdings”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 L1T VIP Holdings. See the section of this Annual Report on Form 20-F entitled “Item"Item 7—Major Shareholders and Related Party Transactions—A. Major Shareholders.”Shareholders."
To our knowledge, as of March 15, 2017,1, 2018, Jean-Yves Charlier owned 497,756 of the Company’sour ADSs, Jon EddyUrsula Burns owned 620,000231,353 of the Company’sour ADSs and Erik Aas owned 100,000 of the Company’sour ADSs.
To our knowledge, as of March 15, 2017,1, 2018, none of the other supervisory or management board members held any Common Shares or ADSs. To our knowledge, as of March 15, 2017,1, 2018, none of our directors or senior managers held any options on the Company’scompany's common shares.
For more information regarding share ownership, including a description of applicable stock based plans and options, see Note 2625 to our audited consolidated financial statements included elsewhere in this Annual Report on Formstatements.
20-F. ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. Major Shareholders
The following table sets forth information with respect to the beneficial ownership of VEON Ltd. as of March 15, 20171, 2018, by each person who is known by us to beneficially own 5.0% or more of our issued and outstanding shares. As of March 15, 2017,1, 2018, we had 1,756,731,135 issued and outstanding common shares and zero convertible preferred shares issued and outstanding. None of our shareholders has different voting rights.
Shareholder | 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 | 47.9 | % | |||||
Telenor East Holding II AS(2) | 416,703,840 | 23.7 | % | |||||
Stichting Administratiekantoor Mobile Telecommunications Investor(3) | 145,947,562 | 8.3 | % | |||||
Please For a discussion of certain risks associated with our major shareholders, see the sections of this Annual Report on Form"20-F entitled “ItemItem 3—Key Information—D. Risk Factors—Risks Related to Our Business—A disposition by one or both of our largest shareholdersshareholder of their respective stakesits stake in VEON Ltd. or a change in control of VEON Ltd. could harm our business” and “Item 3—Key Information—D. Risk Factors—Risks Related to Our Business—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 | % | ||||
The common shares held by Telenor East represent approximately 14.61% of VEON Ltd.'s issued and outstanding shares.
As reported on Schedule 13D, Amendment No. 16, filed on December 18, 2014 by Altimo Coöperatief U.A. with the SEC, on December 16, 2014, Roniju Holdings Limited completed an internal reorganization, and as part of that reorganization, the shares in Letterone Holdings S.A. owned by Roniju Holdings Limited (which constituted a controlling interest in Letterone Overseas Investments Limited and the indirect ownership of the 986,572,563 VEON Ltd.'s issued and outstanding shares.
Based on a review of our register of members maintained in Bermuda, as of March 1, 2018, a total of 1,228,276,403 common shares)shares representing approximately 69.92% of VEON Ltd.'s issued and outstanding shares were transferred to three separate entities.held of record by BNY (Nominees) Limited in the United Kingdom as custodian of The Bank of New York Mellon for the purposes of our ADS program and a total of 510,912,045 common shares representing approximately 29.08% of VEON Ltd.'s issued and outstanding 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, and a total 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 VEON 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 S.à r.l. and Letterone Investment Holdings S.A. with the SEC, L1T VIP Holdings S.à r.l. transferred 145,947,562 of ADSs, representing rights with respect to 145,947,562 of VEON Ltd.’s'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.
BasedTable of Contents
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 reviewseries of our registerofferings to divest its holdings of members maintained in Bermuda, as of March 15,VEON's ADSs. Telenor has indicated that the September 2017 100% of our issued common shares were held of record by BNY (Nominees) Limited in the United Kingdom, as agent of The Bank of New York Mellon, for the purposes of our ADS program. As of March 15, 2017, 23 record holderssale of VEON Ltd.’s ADRs, holding an aggregate's ADSs was the final divestment by Telenor, as Telenor expects to use the balance of 353,454,732 common shares (20.12%), were listed as having addresses inits remaining ADSs to exchange and redeem the United States.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, VEON Ltd. has also entered into transactions with related parties as part of the ordinary course of business. These mainly relate to ordinary course telecommunications operations, such as interconnection, roaming, retail and management advisory services. Their terms vary according to the nature of the services provided thereunder. VEON Ltd. and certain of its subsidiaries may, from time to time, also enter into general services agreements relating to the conduct of business and financing transactions within the VEON Group.group.
For more information on our related party transactions, see Note 26 to our audited consolidated financial statements included elsewhere in this Annual Report on Form20-F.
Related Party Transactions with Major Shareholders and their Affiliatesstatements.
Related Party Transactions with Telenor East and its Affiliates
Offering of ADSs and Exchangeable Bond
In September 2016, Telenor East sold 163,875,000 of VEON Ltd.’s ADSs pursuant to an underwritten offering and further, announced its intention to divest the remainder of its stake in VEON Ltd. In addition,
in a transaction outside the United States tonon-US persons pursuant to Regulation S under the Securities Act, Telenor East 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. See “Item 5—Operating and Financial Review and Prospects—Key Developments and Trends—Telenor Share Sale and Exchangeable Bond Issuance.”
Redemption of Telenor East Convertible Preferred Shares
As at April 1, 2016, pursuant to the terms of ourbye-laws, the 305,000,000 preferred shares previously held by Telenor were compulsorily redeemed by VEON Ltd. at a redemption price of US$0.001 per share and are no longer outstanding.
Service Agreements
VEON Ltd. is a party to a service agreement with Telenor East, dated as of March 8, 2011, under which Telenor East renders to VEON Ltd. or 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 Telenor East and VEON Ltd. VEON Ltd. pays Telenor East US$1.5 million annually for the services.
A number of our operating companies have roaming agreements with the following mobile operators that are Telenor East affiliates: Grameenphone Limited (Bangladesh), Telenor Norge AS (Denmark), 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) and Total Access Communication Public Company Limited (dtac) (Thailand).
Related Party Transactions with LetterOne and its Affiliates
Service Agreements
VEON Ltd. is a party to a General Services Agreement with L1HS Corporate Advisor Limited, dated December 1, 2010, under which L1HS Corporate Advisor Limited renders to VEON Ltd. 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 L1HS Corporate Advisor Limited and VEON Ltd. VEON Ltd. pays L1HS Corporate Advisor Limited annually US$1.5 million for the services. VEON is also party to a Consultancy Deed with L1HS Corporate Advisor Limited, dated August 21, 2013, under which L1HS Corporate Advisor Limited provides additional consultancy services to VEON Ltd. for which VEON Ltd. pays annually US$3.5 million. The General Services Agreement and Consultancy Deed were originally entered into by VEON Ltd. and Altimo Management Services Ltd., but the latter was replaced first by LetterOne Corporate Advisor Limited pursuant to a Deed of Assignment and Novation dated June 3, 2014, and later by LIHS Corporate Advisor Limited pursuant to a Deed of Novation and Amendment dated January 14, 2016.
Related Party Transactions with Alfa Group and its Affiliates
Credit Facilities
Please see the section of this Annual Report on Form20-F entitled “Item 5—Operating and Financial Review and Prospects—Liquidity and Capital Resources—Financing Activities” for information regarding two credit facilities between VimpelCom Amsterdam and 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 PJSC 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.
VEON Ltd. 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 order to facilitate the sale and distribution of such securities. Pursuant to the Registration Rights Agreement, we have filed a registration statement on FormF-3 with the SEC using a “shelf”"shelf" registration process. Under this shelf registration process, a selling shareholder may from time to time sell VEON Ltd. common shares, which may be represented by ADSs,
Separately, 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.
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”"Bonds") that are exchangeable under certain conditions for up to a total at issuance of 204,081,633 of VEON Ltd.’s's ADSs (subject to adjustment) tonon-US persons pursuant to Regulation S under the Securities Act, VEON Ltd. entered into a registration rights agreement, dated September 21, 2016 (the “New"New Registration Rights Agreement”Agreement") for the benefit of holders of the Bonds. Pursuant to the New Registration Rights Agreement, we filed a registration statement on FormF-3 with the SEC on September 30, 2016 using a “shelf”"shelf" registration process, which FormF-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.commonLtd. 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 TransactionsMajor Shareholders and their Affiliates
Telenor East
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 rendered to VEON Ltd. and its affiliates services related to telecommunications 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 VEON Ltd. VEON Ltd. paid Telenor US$1.5 million annually for the services. The agreement was terminated December 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: 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); Telenor Bulgaria 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).
LetterOne
From December 2010 until March 2018, VEON Ltd. was a party to a General Services Agreement with L1HS Corporate Advisor Limited, part of the LetterOne Group, under which L1HS Corporate Advisor Limited rendered to VEON Ltd. and its affiliates services related to telecommunications 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 L1HS Corporate Advisor Limited and VEON Ltd. VEON Ltd. paid L1HS Corporate Advisor Limited annually US$1.5 million for the services. The 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 L1HS Corporate Advisor Limited, under which L1HS Corporate Advisor Limited provided additional consultancy services to VEON Ltd. for which VEON Ltd. paid US$3.5 million annually. The agreement was terminated on December 12, 2017 with effect from March 12, 2018.
Joint Ventures and Associates
Euroset
Euroset
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 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 transaction, PJSC VimpelCom has commercial contractsfully disposed of its interest in Euroset with Euroset, which became an associate in October 2008. In 2016, PJSC VimpelCom recognized US$4.1 millionall of revenue from Euroset primarily for mobileits rights and fixed-line services and from the sale of equipment and accessories. PJSC VimpelCom accrued to Euroset certain expenses totaling US$18.7 million in 2016, primarily dealer commissions and bonuses for services for acquisition of new customers, customer care and receipt of customers’ payments.
We are evaluating our options in relation to Euroset, and we are in discussions with our joint venture partner, MegaFon, in this regard. There can be no assurance that any transaction will occur.obligations.
WIND
Following the classification of our operations in Italy as an asset held for sale and a discontinued 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 the contribution and framework agreement entered into to form the Italy Joint Venture and the Shareholders’Shareholders' Deed and FinCo Shareholders’Shareholders' Deed setting out the terms through which the Italy Joint Venture and its subsidiaries are owned, controlled, managed and financed, please see “Item"Item 10—Additional Information —Material Contacts.”Information—C. Material Contracts."
Related Party Transactions with supervisory boardSupervisory Board and management board membersManagement Board Members
Compensation paid to the supervisory board and management board members is disclosed in “Item"Item 6—Directors, Senior Management and Employees—B. Compensation.” During 2016Compensation."
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.
A. ITEM 8. FINANCIAL INFORMATION
Consolidated Statements and Other Financial Information
See “Item"Item 18—Financial Statements”Statements" and the financial statements referred to therein.
A.7. Legal Proceedings
For a discussion of legal or arbitration proceedings which may have, or have had in the recent past, significant effects on our financial position or profitability, see Notes 2522 (Provisions) and 2726 (Risks, commitments, contingencies and uncertainties) to our audited consolidated financial statements included elsewhere in this Annual Report on Form 20-F.
20-F.Table of Contents
We cannot predict the outcome of the various claims and legal actions in which we are involved beyond the information included in our financial statements, including any fines or penalties that may be imposed, and such 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—LegalFactors" and, Regulatory Risks.” Please also see “Item 3—Key Information—D. Risk Factors—Risks Related to Our Business—We have incurred and are continuing to incur costs and related management oversight obligations in connection with our obligations under the DPA, the SEC Judgment and the Dutch Settlement Agreement, which may be significant” and “Itemparticular, "Item 3—Key Information—D. Risk Factors—Risks Related to Our Business—We could 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 and OM, including additional investigations and litigation.”"
A.8. Policy on Dividend Distributions
In February 2017,2018, our supervisory board approved a final dividend policy pursuant to which for the financial year ending December 31, 2016, we intend to pay a dividend in the aggregate amount of US$2317 cents per share, comprised ofbringing total 2017 dividend to US$3.528 cents per share paid as an interimshare. The dividend, in December 2016 and US$19.5 cents per share, with a record date of March 30, 2017 and which is intended to be5, 2018, was paid on April 12, 2017.March 13, 2018. The record date for our shareholders entitled to receive the final dividend payment has been set for March 30, 2017. Wecompany will make appropriate tax withholdings of up to 15% when the dividend is paid to ourthe company's share depositary, The Bank of New York Mellon. Thereafter, we areFor 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 ourcompany's equity free cash flow. Equity free cash flow shall be defined as net cash flow from operating activities less net cash used in investing activities, as reported in our consolidated financial statements.
The precise amount and timing of dividends for a particular year is subject to the approval of our supervisory board and compliance with the Companies Act and other applicable law.
Pursuant to Bermuda law, we are prohibited 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 ourbye-laws and in accordance with 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 ourbye-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. Convertible preferred shares, when and if issued, have no entitlement to dividends.
We cannot assure you we will continue to pay dividends on our common shares and ADSs in the future and any decision by VEON 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, VEON Ltd. depends on the ability of its subsidiaries to pay dividends and therefore on the performance of its subsidiaries and istheir 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”operate" and “Item"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 Form20-F, there have not been any significant changes since the date of the audited consolidated financial statements included as part of this Annual Report on Form 20-F.
A.4. A. Offer and Listing Details
Price History
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 New York Stock Exchange for periods prior to September 10, 2013, when we switched the listing of our ADSs to the NASDAQ Global Select Market. Subsequent periods are based on NASDAQ Global Select 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
| High | Low | |||||||
Monthly | ||||||||
September 2016 | US$ | 3.25 | US$ | 3.33 | ||||
October 2016 | US$ | 3.51 | US$ | 3.14 | ||||
November 2016 | US$ | 3.47 | US$ | 3.23 | ||||
December 2016 | US$ | 3.98 | US$ | 3.39 | ||||
January 2017 | US$ | 4.28 | US$ | 3.93 | ||||
February 2017 | US$ | 4.39 | US$ | 3.98 | ||||
Quarterly | ||||||||
First Quarter 2015 | US$ | 5.61 | US$ | 3.43 | ||||
Second Quarter 2015 | US$ | 6.37 | US$ | 4.95 | ||||
Third Quarter 2015 | US$ | 5.97 | US$ | 4.09 | ||||
Fourth Quarter 2015 | US$ | 4.30 | US$ | 3.01 | ||||
First Quarter 2016 | US$ | 4.26 | US$ | 2.90 | ||||
Second Quarter 2016 | US$ | 4.22 | US$ | 3.35 | ||||
Third Quarter 2016 | US$ | 4.48 | US$ | 3.33 | ||||
Fourth Quarter 2016 | US$ | 3.98 | US$ | 3.14 | ||||
Annually | ||||||||
2012 | US$ | 12.50 | US$ | 7.23 | ||||
2013 | US$ | 14.55 | US$ | 9.65 | ||||
2014 | US$ | 12.80 | US$ | 3.29 | ||||
2015 | US$ | 6.37 | US$ | 3.01 | ||||
2016 | US$ | 4.48 | US$ | 2.90 | ||||
Not required.
C. Markets
Our ADSs are listed and traded on NASDAQ Global Select Market under the symbol “VEON.”"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.
F. Expenses of the Issue
Not required.
ITEM 10. ADDITIONAL INFORMATION
Not required.
B. Memorandum and Articles of Association
We describe below the material provisions of our memorandum of association andbye-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, our currentbye-laws, 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 andbye-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, ourbye-laws and applicable Bermuda law. All references to ourbye-laws herein, unless otherwise noted, are to Section B of ourbye-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, and on March 30, 2017.
The affirmative vote of at least 75.0% of the shares voted at a shareholders meeting is required to approve amendments to our bye-laws.
bye-laws.General
General
VEON Ltd. is an exempted company limited by shares registered under 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, VEON 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.
Ourbye-laws are split into two distinctsub-sets: Section A and Section B. Section A of ourbye-laws were in effect until the October 4, 2009 shareholders agreement among VEON Ltd., Altimo Coöperatief U.A. and Telenor East Holding II AS in relation to VEON Ltd. (the “VEON"VEON Shareholders Agreement”Agreement") terminated on December 10, 2011. Termination of the VEON Shareholders Agreement caused Section B of ourbye-laws to automatically come into force to the exclusion of Section A of ourbye-laws. References to ourbye-laws in the following sections of this Item 10 are to Section B of our bye-laws.
bye-laws.Table of Contents
Issued Share Capital
As atof December 31, 2016,2017, the authorized share capital was US$3,064,171.83, divided into 2,759,171,830 common shares, par value US$0.001, and 305,000,000 convertible preferred shares, par value US$0.001, of which 1,756,731,135 common shares were issued and outstanding and zero convertible preferred shares were issued and outstanding. All issued and outstanding shares are fully paid.
Subject to ourbye-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.
We may increase, divide, consolidate, change the currency or denomination of or reduce our share capital with the approval of our shareholders.
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.
We may, under ourbye-laws, at any time request any person we have cause to believe is interested in our shares to confirm details of our shares in which that person holds an interest.
Common Sharesshares
The holders of common shares are, subject to ourbye-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:
Convertible Preferred Sharespreferred shares
Except for treasury shares, each fully paid convertible preferred share, when and if issued, entitles its holder to:
As of the date of this Annual Report on Form20-F, we have zero convertible preferred shares issued and outstanding. There are no sinking fund provisions attached to any of our shares. Holders of fully paid shares have no further liability to VEON 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 VEON Ltd. in treasury.
Shareholders’Shareholders' Meetings
Shareholders’ Shareholders' meetings are convened and held in accordance with ourbye-laws and Bermuda law. Registered holders of shares as of the record date for the shareholder meeting may attend and vote.
Annual General Meetinggeneral meeting
Ourbye-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.
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 Meetinggeneral 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’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.
Ourbye-laws state that notice for all shareholders’shareholders' meetings may be given by:
Shorter Noticenotice for General Meetingsgeneral 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. The accidental omission to give notice of a general meeting to, or thenon-receipt of notice of a general meeting by, any shareholder entitled to receive notice shall not invalidate the proceedings at that meeting.
Postponement or Cancellationcancellation of General Meetinggeneral meeting
The supervisory board may postpone or cancel any general meeting called in accordance with thebye-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 ourbye-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 share of our total issued and 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 ourbye-laws and, in certain circumstances, the Companies Act.
Subject to Bermuda law and ourbye-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:
Ourbye-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 ourbye-laws, are entitled to one vote per common share, except where cumulative voting applies when electing directors.
Voting Rightsrights of Convertible Preferred Sharesconvertible preferred shares
The provisions of ourbye-laws entitle the holders of convertible preferred shares (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, ourbye-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
Foreign Shareholders
Ourbye-laws have no requirements or restrictions with respect to foreign ownership of our shares.
Supervisory Board and Management Board
VEON Ltd. is governed by our supervisory board, currently consisting of nineten directors.
The supervisory board generally delegatesday-to-day management of our company to the management board whichsub-delegates management to the CEO, subject Subject to certain material business decisions that are reserved to the supervisory board.board, the supervisory board generally delegates day-to-day management of our company to the management board which sub-delegates management to the CEO, other 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 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 ourbye-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 VEON Ltd.’s's behalf and delegates that authority to the management board, subject to the restrictions set forth in ourbye-laws, which require including that financing transactions, incurrence of indebtedness, guarantee or provision of security in excess ofthat (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 ourbye-laws establish any mandatory retirement age for our directors or executive officers.
Dividends and Dividend Rights
Pursuant to Bermuda law, we are prohibited 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 ourbye-laws and in accordance with 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 ourbye-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. Convertible preferred shares (if and when issued) have no entitlement to dividends.
Dividends unclaimed for a period of seven years from the date of payment may be forfeited.
Ourbye-laws and Bermuda law do not provide forpre-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, ourbye-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 shares which, taken together with 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 shares, must, within 30 days of acquiring such shares, make a general offer to all holders of 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 ourbye-laws.
Liquidation Rights
If VEON 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 ourwinding-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. Convertible preferred shares (if and when issued) do not entitle the holders thereof to any payment or distribution of surplus assets in the event of ourwinding-up or dissolution.
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
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 telecommunicationtelecommunications businesses in Italy. A copy of this agreement is includedincorporated by reference as Exhibit 4.4 to this Annual Report on Form20-F.
The Shareholders’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 includedincorporated by reference as Exhibit 4.5 to this Annual Report on Form20-F. For more information regarding these agreements and the Italy Joint Venture, see “Item 5—Operating and Financial Review and Prospects—Key Developments and Trends—Italy Joint Venture.”
The FinCo Shareholders’Shareholders' Deed, dated as of November 5, 2016, by and amongVIP-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 whichVIP-CKH Ireland Limited is owned, controlled, managed and financed following the completion of the Italy Joint Venture. A copy of this agreement is includedincorporated by reference as Exhibit 4.6 to this Annual Report on Form 20-F.
20-F. For more information regarding the Italy Joint Venture, see “Item 5—Operating and"Explanatory Note—Presentation of Financial Review and Prospects—Key Developments and Trends—Information of the Italy Joint Venture.”Venture."
D. Exchange Controls
We have been designated by the Bermuda Monetary Authority asnon-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 othernon-Bermuda residents who are holders of our common 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 or our ADSs representing common shares to and betweennon-residents of Bermuda for exchange control purposes. Certain issues and transfers of shares involving persons deemed resident in Bermuda for exchange control purposes may require the specific prior consent of the Bermuda Monetary Authority.
E. Taxation
United States Federal Income Tax Considerations
The following summary describes certain material U.S. federal income tax consequences to U.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 ADSs or common shares as 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 the Internal Revenue Code of 1986, as amended (the “Code”"Code"), existing and, in some cases, proposedapplicable U.S. Treasury regulations, as well as judicial and administrative interpretations thereof, all as of the date of this Annual Report.Report on Form 20-F. All of the foregoing authorities are subject to change or differing interpretation, which change or differing interpretation could apply retroactively and could affect the tax consequences described below. The statements in this Annual Report on Form 20-F are not binding on the U.S. Internal Revenue Service (the “IRS”"IRS") or any court, and thus we can provide no assurance that the U.S. federal income tax consequences discussed below will not be challenged by the IRS or will be sustained by a court if challenged by the IRS. Furthermore, this summary does not address any estate or gift tax consequences, any state, local ornon-U.S. tax consequences or any other tax consequences other than U.S. federal income tax consequences.
The following discussion does not describe all the tax consequences that may be relevant to any particular investor or to persons in special tax situations such as:
stock by vote or value;
U.S. Holders of our ADSs or common shares are urged to consult their tax advisors about the application of the U.S. federal tax rules to their particular circumstances as well as the state, local andnon-U.S. tax consequences to them of the purchase, ownership and disposition of our 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, for U.S. federal income tax purposes, is or is treated as:
The tax treatment of a partner (or other owner) in an entity treated as a partnership for U.S. federal income tax purposes that holds our ADSs or common shares generally will depend on such partner’spartner's (or other owner’s)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 complied with in accordance with their terms. 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 complied with in accordance with their terms. Generally, a holder of an ADS should be treated for U.S. federal income tax purposes 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. Treasury has expressed concerns that intermediaries in the chain of ownership 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 creditabilitiescreditability of foreign taxes, if any, as described below, could be affected by actions taken by intermediaries in the chain of ownership between the holder of an ADS and us if as a result of such actions the holder of an ADS is not properly treated as the beneficial owner of underlying common shares.
Dividends and Other Distributionsother distributions
Subject to the passive foreign investment company rules discussed below, the gross amount of distributions made by us with respect to the ADSs or common shares (including the amount ofnon-U.S. taxes withheld therefrom, if any) generally will be includible as dividend income in a U.S. Holder’sHolder'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. corporations with respect to dividends received from other U.S. corporations.
Dividends received by certainnon-corporate U.S. Holders (including individuals) may be “qualified"qualified dividend income,”" which is taxed at the lower applicable capital gains rate, provided that (1) either (a) the ADSs or common shares, as 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 such with respect to the U.S. Holder for theour taxable year in which the dividend is paid andor 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 U.S. exchange for trading purposes. If we are treated as a resident of The Netherlands for purposes of Dutch tax law, we may be eligible for the benefits of the income tax treaty between the United States and The Netherlands. U.S. Holders should consult their own tax advisors regarding the availability of the lower rate for dividends paid with respect to the ADSs or common shares.
The amount of any distribution paid in foreign currency will be equal to the U.S. dollar value of such currency, translated at the spot rate of exchange on the date such distribution is received by the depositary, in the case of ADSs, or by you,the U.S. Holder, in the case of common shares, regardless of whether the payment is in fact converted into U.S. dollars at 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 U.S. source ordinary income or loss.
The dividends will generally be foreign source and considered “passive category”"passive category" income, andnon-U.S. taxes withheld therefrom, if any, may be creditable against the U.S. Holder’sHolder's U.S. federal income tax liability, subject to applicable limitations. If the dividends constitute qualified dividend income as discussed above, the amount of the dividend taken into account for purposes of calculating the foreign tax credit 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. The rules relating to the determination of the U.S. foreign tax credit are complex, and U.S. Holders should consult their tax advisors regarding the availability of a foreign 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 withheld.
Sale or Other Taxable Dispositionother taxable disposition of the ADSs or Common Sharescommon shares
Subject to the passive foreign investment company rules discussed below, upon a sale or other taxable disposition of the ADSs or common shares, a U.S. Holder generally will recognize capital gain or loss for U.S. federal income tax purposes in an amount equal to the difference between the amount realized and the U.S. Holder’sHolder's adjusted tax basis in such ADSs or common shares. Any such gain or loss generally will be treated aslong-term capital gain or loss if the U.S. Holder’sHolder'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 be the U.S. dollar value of the payment received, translated 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, such U.S. Holder will recognize foreign currency gain or loss to 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’sHolder'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 the 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, 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 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 by translating the amount paid at the spot rate of exchange on the settlement date of the purchase.
Passive Foreign Investment Company Rulesrules
We will be classified as a passive foreign investment company (a “PFIC”"PFIC") for any taxable year if either: (1) at least 75% of our gross income is “passive income”"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 own, directly or indirectly, 25% or more (by value) of the stock.Understock. 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 be treated as a PFIC with respect to such investment unless (1) we cease to be a PFIC and (2) the U.S. Holder has made a “deemed sale”"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 each taxable year and is subject to uncertainty in several respects. Therefore, there can be no assurance that we will not be classified as a PFIC for the current taxable year or for any future taxable year.
If we are considered a PFIC at any time that a U.S. Holder holds our ADSs or common shares, any 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”"excess distribution" (defined below) received by the U.S. Holder, would be allocated ratably over the U.S. Holder’sHolder's holding period for our ADSs or common shares. The amounts allocated to the taxable year of the sale or other disposition (or the taxable year of receipt, in the case of an excess distribution) and to any year before we became a PFIC would be taxed as ordinary income. The amount allocated to each other taxable year would be subject to tax at the highest rate in effect for individuals or corporations, as appropriate, for that taxable year, and an interest charge would be imposed. For the purposes of these rules, an excess distribution is the amount by 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 preceding three years or the U.S. Holder’sHolder's holding period, whichever is shorter. Certain elections may be
available that would result in alternative treatments (such asmark-to-market treatment) of our ADSs or common shares if VEON Ltd. is considered a PFIC. We do not intend to provide the information necessary for U.S. Holders of our ADSs or common shares to make qualified electing fund elections, which, if available, would result in tax treatment different from the general tax treatment for an investment in a PFIC described above. If we are treated as a PFIC with respect to a U.S. Holder for any taxable year, the U.S. Holder will be deemed to own shares in 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, a U.S. Holder will also be subject to annual information reporting requirements. U.S. Holders should consult their tax advisors about the potential application of the PFIC rules to an investment in our ADSs or common shares.
U.S. Information Reportinginformation reporting and Backup Withholdingbackup withholding
Dividend payments with respect to our ADSs or common shares and proceeds from the sale, exchange or redemption of our ADSs or common shares may be subject to information reporting to the IRS and possible U.S. backup withholding. A U.S. Holder may be eligible for an exemption from backup withholding if the U.S. Holder furnishes a correct U.S. federal taxpayer identification number and makes any other required certification or is otherwise exempt from backup withholding. U.S. Holders who are required to establish their exempt status may be required to provide such certification on IRS FormW-9. U.S. Holders should consult their tax advisors regarding the 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’sHolder'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 Requirementsinformation 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 requirements 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’SINVESTOR'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
This summary solely addresses the principal Dutch tax consequences of the acquisition, ownership and disposal of our ADSs or our common shares and does not purport to describe every aspect of taxation that may be relevant to a particular holder. Tax matters are complex, and the tax consequences of the acquisition, ownership and disposal to a particular holder of ADSs or common shares will depend in part on such holder’sholder's circumstances. Accordingly, you are urged to consult your own tax advisor for a full understanding of the tax consequences of the acquisition, ownership and disposal to you, including the applicability and effect of Dutch tax laws.
Where in this summary English terms and expressions are used to refer to Dutch concepts, the meaning 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 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 assumes that VEON Ltd. is organized, and that its business will be conducted, in the manner outlined in this Annual Report andon Form20-F. A change to such organizational structure or to the manner in which VEON Ltd. conducts its business may invalidate the contents of this summary, which will not be updated to reflect any such change.
This summary is based on the tax law of the Netherlands (unpublished case law not included) as it stands at the date of this Annual Report andon Form20-F. The tax law upon which this summary is based, is subject to changes, possibly with retroactive effect. Any such change may invalidate the contents of this summary, which will not be updated to reflect such change.
The summary in this Dutch tax considerations paragraph does not address your Dutch tax consequences if you are a holder of ADSs or common shares who:
Taxes on income and capital gains
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, you will not be subject to Dutch income tax in respect of any benefits derived or deemed to be derived from or in connection with your ADSs or common shares, except if:
Non-resident corporate entities
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 or in connection with ADSs or common shares, except if:
General
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 performance by VEON Ltd. of its obligations under such documents or under the ADSs.ADSs or common shares.
Dividend withholding tax
General
VEON Ltd. is generally required to withhold Dutch dividend withholding tax 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’ADSs' or common shares individual circumstances.
The concept “dividends"dividends distributed by VEON Ltd.”" as used in this Dutch tax considerations paragraph includes, but is not limited to, the following:
Gift and inheritance taxes
No Dutch gift tax or Dutch inheritance tax will arise with respect to an acquisition or deemed acquisition of ADSs or common shares by way of gift by, or upon the death of, a holder of ADSs or common shares who is neither resident nor deemed to be resident in the Netherlands for purposes of Dutch gift tax or Dutch inheritance
tax except 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 or common shares becomes a resident or a deemed resident in the Netherlands and dies within 180 days after the date of the gift.
For purposes of Dutch gift tax and Dutch inheritance tax, a gift of ADSs or common shares made under a condition precedent 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 100 F Street, NE, Washington, D.C. 20549. We file our annual reports on Form20-F and submit our quarterly results and other current reports on Form 6-K.
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, 20162017 and 2015,2016, the largest currency exposure risks for the group were in relation to the Bangladeshi taka, the Russian ruble, the euro,Georgian lari, the Pakistani rupee, the Uzbek som, the Algerian dinar, the Bangladeshi taka, the Ukrainian hryvnia, the Kazakh tenge and the Uzbek som,euro, because the majority of our cash flows from operating activities in Bangladesh, Russia, Georgia, Pakistan, Uzbekistan, Algeria, Bangladesh, Ukraine, and UzbekistanKazakhstan and the Italy Joint Venture’sVenture'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 approximately 52%60% of our readily available cash (inand bank deposits in U.S. dollars) atdollars (including the group leveldeposit 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 other currencies to manage part of this risk.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 VEON Ltd.’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 “ItemItem 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, 2016, 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$) | 212 | 137 | 75 | — | — | — | 218 | |||||||||||||
Average interest rate | 3.7 | % | 3.7 | % | 3.7 | % | — | — | — | — | ||||||||||
Variable Rate (EUR) | 752 | 752 | 752 | 481 | 60 | — | 781 | |||||||||||||
Average interest rate | 2.6 | % | 2.6 | % | 2.6 | % | 2.5 | % | 1.9 | % | — | — | ||||||||
TOTAL | 4,563 | 4,108 | 3,725 | 2,870 | 858 | — | 4,779 | |||||||||||||
| Aggregate nominal amount of total debt denominated in foreign currency outstanding as of December 31, | More than 5 years | Fair Value as of December 31, 2016 | ||||||||||||||||||||||||||
| 2017 | 2018 | 2019 | 2020 | 2021 | ||||||||||||||||||||||||
Total debt: | ||||||||||||||||||||||||||||
Fixed Rate (US$) | 1,639 | 1,090 | 726 | 652 | 1 | — | 1,830 | |||||||||||||||||||||
Average interest rate | 7.8 | % | 7.4 | % | 7.3 | % | 7.7 | % | 0.0 | % | — | |||||||||||||||||
Fixed Rate (RUB) | 198 | — | — | — | — | — | 196 | |||||||||||||||||||||
Average interest rate | 9.0 | % | — | — | — | — | — | |||||||||||||||||||||
Fixed Rate (other currencies) | 27 | 27 | 19 | 11 | — | — | 21 | |||||||||||||||||||||
Average interest rate | 5.7 | % | 5.7 | % | 5.7 | % | 5.7 | % | — | — | ||||||||||||||||||
Variable Rate (US$) | — | — | — | — | — | — | ||||||||||||||||||||||
Average interest rate | — | — | — | — | — | — | ||||||||||||||||||||||
Variable Rate (other currencies) | — | — | — | — | — | — | ||||||||||||||||||||||
Average interest rate | — | — | — | — | — | — | ||||||||||||||||||||||
| 1,864 | 1,116 | 745 | 663 | 1 | — | 2,047 | ||||||||||||||||||||||
In accordance with our policies, we do not enter into any treasury management transactions of a speculative nature.
As of December 31, 2016,2017, the variable interest rate risk on the financing of our group was limited as 81%80% of the group’sgroup's total debt was fixed rate debt.debt (taking into account the effect of interest rate swaps).
For more information on our market risks and financial risk management for derivatives and other financial instruments, see Notes 54 and 1817 to our audited consolidated financial statements included elsewhere in this Annual Report on Formstatements.
20-F. 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
The Bank of New York Mellon is the depositary for our ADSs. Our depositary collects its fees for delivery and surrender of ADSs directly from investors (or their intermediaries) depositing shares or surrendering ADSs 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 ADSs 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 ADS holders 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 ADSs (or portion of 100 ADSs) | ||||
Cancellation of ADSs for the purpose of withdrawal, including if the deposit agreement terminates | US$5.00 (or less) per 100 ADSs (or portion of 100 ADSs) | ||||
Any cash distribution to ADS holders | US$ | ||||
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 ADS or share underlying an ADS, for example, stock transfer taxes, stamp duty or withholding taxes | As necessary | ||||
Any charges incurred by the ADS depositary or its agents for servicing the deposited securities | As necessary | ||||
Fees Payable by the Depositary to Us
Our depositary has agreed to reimburse us or pay us for:
In certain instances, our depositary has agreed to provide additional payments to us based on changes in certain conditions relating to the ADS facility and to waive certain fees and expenses.
From January 1, 20162017 to December 31, 2016,2017, the depositary reimbursed us or paid on our behalf approximately US$2.512.5 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
None.
ITEM 15. CONTROLS AND PROCEDURES
(a) 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 Form20-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, 2016,2017, 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 Rules13a-15(f) and15d-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 VEON Ltd.’s'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, 2016.2017. 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, 2016,2017, management concluded that our internal control over financial reporting was effective.
(c) Attestation report Independent Registered Public Accounting Firm
PricewaterhouseCoopers Accountants N.V. (“PwC”("PwC"), VEON Ltd.’s's independent registered public accounting firm, has audited and issued an attestation report on the effectiveness of VEON Ltd.’s's internal controls over financial reporting as of December 31, 2016,2017, a copy of which appears in Item 18.
(d) Changes in Internal Control Over Financial Reporting
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 Form20-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 Jørn P. Jensen, a member of our audit and risk committee, is a “financial"financial expert,”" as defined in Item 16A of Form20-F. Mr. Jensen is “independent,”"independent," as defined in Rule10A-3 under the Exchange Act. For a description of Mr. Jensen’sJensen's experience, please see “Item"Item 6—Directors, Senior Management and Employees—A. Directors and Senior Management—Supervisory Board—Jørn P. Jensen.”Jensen."
Our group-wide Code of Conduct ("Code") applies to all of VEON’sVEON employees, officers and directors, including its principal executive officer, principal financial officer, and principal accounting officer. The Code of Conduct includes a code of ethics, as defined in Item 16B of Form20-F under the Exchange Act, that providesestablishes group-wide standardsprinciples 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.Code. Our Code of Conduct is available on our website at http://www.veon.com (information appearing on the website is not incorporated by reference into this annual report)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 years ended December 31, 20162017 and December 31, 2015,2016, for which audited financial statements appear in this Annual Report on Form20-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 20162017 and 2015.2016.
| Year ended December 31, | ||||||||
| 2016 | 2015 | |||||||
| (in millions of U.S. dollars) | ||||||||
Audit Fees | 10.3 | 9.7 | ||||||
Audit-Related Fees | 0.7 | 1.0 | ||||||
Tax Fees | 0.3 | 0.2 | ||||||
All Other Fees | 0.2 | 0.1 | ||||||
|
|
|
| |||||
Total | 11.5 | 11.0 | ||||||
|
|
|
| |||||
| | 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 Fees
Audit Fees mainly consisted of fees for the audit of the consolidated financial statements as of and for the years ended December 31, 20162017 and 2015,2016, 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 Fees
Audit-Related Fees are fees for assurance and related services which are reasonably related to the performance of audit or review and generally include audit and assurance services related to transactional offerings and reporting procedures and other agreed-upon services related to accounting and billing records.
Tax Fees
Tax Fees consisted of fees for permissible review of tax compliance, services for preparation of corporate and personal income tax returns for statutory tax purposes andtax-related surveys.
All Other FeesServices
All Other Feesservices include fees for 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 CommitteePre-Approval Policies and Procedures
The Sarbanes-Oxley Act of 2002 required VEON Ltd. to implement apre-approval process for all engagements with its independent public accountants. In compliance with Sarbanes-Oxley requirements pertaining to auditor independence, VEON Ltd.’s's audit and risk committeepre-approves the engagement terms and fees of VEON Ltd.’s's independent public accountant for audit andnon-audit services, including tax services. VEON Ltd.’s's audit and risk committeepre-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, 2016.2017.
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
None.
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
None.
None.
None.
ITEM 16G. CORPORATE GOVERNANCE
We comply with the corporate governance rules applicable to foreign private issuers listed on the NASDAQ Global 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’sperson'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 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 law does not impose any such requirement on 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 law does not impose any such requirement on 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 law does not impose any such requirements on 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 VEON Ltd. and its subsidiaries, our employee benefit plans, any equity compensation plans of VEON Ltd. and its subsidiaries, and any contract relating to a director, officer or shareholder of VEON 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 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 law does not impose any such requirement on 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. However, our audit and risk committee currently comprises three directors, all of whom meet the criteria for independence set forth in Rule10A-3 under the Exchange Act. The audit and risk committee is primarily responsible for 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 law does not impose any such requirement on 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.
ITEM 16H MINE SAFETY DISCLOSURE
Not required.
We have responded to Item 18 in lieu of this Item.
| ITEM 18. |
INDEX TO FINANCIAL STATEMENTS OF VEON LTD.
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.
List
| Incorporated by Reference | ||||||||||||||||||||
Number | Description of Exhibit | Form | File No. | Exhibit | Date | Filed | ||||||||||||||
| 1.1 | Bye-laws of VEON Ltd. adopted on April 20, 2010 and Amended and Restated on March 30, 2017 | * | ||||||||||||||||||
| 1.2 | Certificate of Incorporation, as amended, and Memorandum of Association | * | ||||||||||||||||||
| 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 | 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 | |||||||||||||||
| 2.3 | 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 | |||||||||||||||
| 2.4 | Assignment, Assumption and Second Amendment Agreement to the Registration Rights Agreement, dated as of September 21, 2016, by and among VimpelCom Ltd., Altimo Holdings & Investments Ltd., Altimo Coöperatief U.A., Letterone Investment Holdings S.A., L1T VIP Holdings S.à r.l., Telenor Mobile Communications AS and Telenor East Holding II AS | 6-K | 001-34694 | 4.1 | 26/9/2016 | |||||||||||||||
| 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 | 22/9/2016 | |||||||||||||||
Number Description of Exhibit Form File No. Exhibit Date Filed Incorporated by Reference
Herewith2.6 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 * 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 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) * 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 * 4.6 FINCO Shareholders’ Deed, dated as of November 5, 2016, by and amongVIP-CKH Ireland Limited, VimpelCom Luxembourg Holdings S.à r.l, Hutchison Europe Telecommunications S.à r.l, VimpelCom Ltd and CK Hutchison Holdings Limited * 8 List of Subsidiaries * 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. * 99.1 Glossary of Telecommunications Terms * 99.2 Regulation of Telecommunications *
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 Form20-F and that it has duly caused and authorized the undersigned to sign this Annual Report on Form20-F on its behalf.
| VEON LTD. | ||||||
By: | /s/ JEAN-YVES CHARLIER | |||||
| Name: | Jean-Yves Charlier | |||||
| Title: | Chief Executive Officer | |||||
| Date: | ||||||
Consolidated financial statements
VEON Ltd.
(formerly VimpelCom Ltd.)
As atof December 31, 2017 and 2016 and 2015 and
For the three years ended
December 31, 20162017
Report of Independent Registered Public Accounting FirmREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To: the Supervisory Board and Shareholders of VEON Ltd. (formerly VimpelCom Ltd.) (“("the Company”Company")
In our opinion,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 statementsincome statement, statement of income, 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of VEON Ltd.the Company as of December 31, 2017 and its subsidiaries at 31 December 2016, and 31 December 2015, and the resultresults of their operationsoperation and their cash flows for each of the three years in the period ended December 31, December 20162017 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, December 2016,2017, based on criteria established inInternal Control–Control—Integrated Framework2013 (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 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 audits in accordance with the standards of the Public Company Accounting Oversight Board (United Stated).PCAOB. Those standards require that we plan and perform the audits 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 audits 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 anand 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 audits 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 statementstatements 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 anand 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 the 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 limitation,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, 3 April 2017
March 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.
VEON Ltd.
for the years ended December 31
| Note | 2016 | 2015 | 2014 | |||||||||||||
| (In millions of U.S. dollars, except amounts per share) | ||||||||||||||||
Service revenues** | 8,553 | 9,313 | 13,200 | |||||||||||||
Sale of equipment and accessories | 184 | 190 | 218 | |||||||||||||
Other revenues / other income | 148 | 103 | 68 | |||||||||||||
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| |||||||||||
Total operating revenues | 8 | 8,885 | 9,606 | 13,486 | ||||||||||||
|
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|
|
| |||||||||||
Service costs** | 1,769 | 1,937 | 2,931 | |||||||||||||
Cost of equipment and accessories | 216 | 231 | 252 | |||||||||||||
Selling, general and administrative expenses* | 9 | 3,668 | 4,563 | 4,743 | ||||||||||||
Depreciation | 16 | 1,439 | 1,550 | 1,996 | ||||||||||||
Amortization | 17 | 497 | 517 | 647 | ||||||||||||
Impairment loss | 10 | 192 | 245 | 976 | ||||||||||||
Loss on disposals ofnon-current assets | 20 | 39 | 68 | |||||||||||||
|
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|
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| |||||||||||
Total operating expenses | 7,801 | 9,082 | 11,613 | |||||||||||||
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| |||||||||||
Operating profit | 1,084 | 524 | 1,873 | |||||||||||||
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| |||||||||||
Finance costs | 830 | 829 | 1,077 | |||||||||||||
Finance income | (69 | ) | (52 | ) | (52 | ) | ||||||||||
Othernon-operating losses / (gains) | 14 | 82 | 42 | (121 | ) | |||||||||||
Share of (profit) / loss of associates and joint ventures accounted for using the equity method | 13 | (48 | ) | (14 | ) | 38 | ||||||||||
Impairment of associates and joint ventures accounted for using the equity method | 13 | 99 | — | — | ||||||||||||
Net foreign exchange (gain) / loss | (157 | ) | 314 | 556 | ||||||||||||
|
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| |||||||||||
Profit / (loss) before tax | 347 | (595 | ) | 375 | ||||||||||||
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| |||||||||||
Income tax expense | 11 | 635 | 220 | 598 | ||||||||||||
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| |||||||||||
Loss for the period from continuing operations | (288 | ) | (815 | ) | (223 | ) | ||||||||||
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| |||||||||||
Profit / (loss) after tax for the period from discontinued operations | 6 | 920 | 262 | (680 | ) | |||||||||||
Gain on disposal of discontinued operations, net of tax | 6 | 1,788 | — | — | ||||||||||||
|
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|
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| |||||||||||
Profit / (loss) for the period from discontinued operations | 2,708 | 262 | (680 | ) | ||||||||||||
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| |||||||||||
Profit / (loss) for the period | 2,420 | (553 | ) | (903 | ) | |||||||||||
|
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|
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| |||||||||||
Attributable to: | ||||||||||||||||
The owners of the parent (continuing operations) | (380 | ) | (917 | ) | 33 | |||||||||||
The owners of the parent (discontinued operations) | 2,708 | 262 | (680 | ) | ||||||||||||
Non-controlling interest | 12 | 92 | 102 | (256 | ) | |||||||||||
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| |||||||||||
| 2,420 | (553 | ) | (903 | ) | ||||||||||||
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| |||||||||||
Earnings / (loss) per share from continued operations | ||||||||||||||||
Basic and diluted, (loss) / profit for the period attributable to ordinary equity holders of the parent | 15 | ($ | 0.22 | ) | ($ | 0.52 | ) | $ | 0.02 | |||||||
Earnings / (loss) per share from discontinued operations | ||||||||||||||||
Basic and diluted, profit / (loss) for the period attributable to ordinary equity holders of the parent | 15 | $ | 1.55 | $ | 0.15 | ($ | 0.39 | ) | ||||||||
Total earnings / loss per share | ||||||||||||||||
Basic and diluted, profit / (loss) for the period attributable to ordinary equity holders of the parent | $ | 1.33 | ($ | 0.37 | ) | ($ | 0.37 | ) | ||||||||
| F-41 | ||||||
10 | Impairment | F-43 | ||||
11 | Other non-operating losses, net | F-50 | ||||
12 | Income taxes | F-51 | ||||
13 | Investments in subsidiaries | F-60 | ||||
14 | Investments in joint ventures and associates | F-63 | ||||
15 | Property and equipment | F-68 | ||||
16 | Intangible assets | F-71 | ||||
17 | Financial assets and liabilities | F-73 | ||||
18 | Cash and cash equivalents | F-84 | ||||
19 | Other assets and liabilities | F-85 | ||||
20 | Trade and other receivables | F-86 | ||||
21 | Inventories | F-87 | ||||
22 | Provisions | F-88 | ||||
23 | Issued capital and reserves | F-93 | ||||
24 | Dividends paid and proposed | F-95 | ||||
25 | Related parties | F-96 | ||||
26 | Risks, commitments, contingencies and uncertainties | F-104 | ||||
27 | Events after the | F-110 |
Amounts for 2014 have beenre-presented to reflect the reclassification of Italy as discontinued operations.
CONSOLIDATED INCOME STATEMENT
for the year ended December 31
| (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 | ) | |||||||||
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
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 | ) | ||||
| | | | | | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
Consolidated statement of comprehensive income
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
for the yearsyear ended December 31
| Note | 2016 | 2015 | 2014 | |||||||||||||
| (In millions of U.S. dollars) | ||||||||||||||||
Profit / (loss) for the period | 2,420 | (553 | ) | (903 | ) | |||||||||||
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Other comprehensive income | ||||||||||||||||
Items that may be reclassified to profit or loss | ||||||||||||||||
Net movement on cash flow hedges (net of tax of US$5, US$5 and US$5 for 2016, 2015 and 2014 respectively) | 18 | 7 | 13 | 145 | ||||||||||||
Foreign currency translation | 23 | 85 | (1,836 | ) | (4,228 | ) | ||||||||||
Other | 6 | 31 | 5 | |||||||||||||
Items reclassified to profit or loss | ||||||||||||||||
Reclassification of accumulated foreign currency translation reserve to profit or loss on disposal of discontinued operation (net of tax US$0) | 6 | (259 | ) | — | — | |||||||||||
Reclassification of accumulated cash flow hedge reserve to profit or loss on disposal of discontinued operation (net of tax of US$7) | 6 | 53 | — | — | ||||||||||||
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Other comprehensive loss for the period, net of tax | (108 | ) | (1,792 | ) | (4,078 | ) | ||||||||||
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Total comprehensive profit / (loss) for the period | 2,312 | (2,345 | ) | (4,981 | ) | |||||||||||
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Attributable to: | ||||||||||||||||
The owners of the parent | 2,233 | (1,727 | ) | (4,633 | ) | |||||||||||
Non-controlling interests | 79 | (618 | ) | (348 | ) | |||||||||||
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| 2,312 | (2,345 | ) | (4,981 | ) | ||||||||||||
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| (In millions of U.S. dollars) | Note | 2017 | 2016 | 2015 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
(Loss) / profit for the period | (496 | ) | 2,420 | (553 | ) | |||||||
Items that may be reclassified to profit or loss (net of tax, see Note 11) |
| |||||||||||
Net movement on cash flow hedges | 17 | 4 | 7 | 13 | ||||||||
Share of other comprehensive loss of joint ventures | 14 | (12 | ) | — | — | |||||||
Foreign currency translation* | 23 | (638 | ) | 85 | (1,836 | ) | ||||||
Other | (11 | ) | 6 | 31 | ||||||||
Items reclassified to profit or loss (net of tax) |
| |||||||||||
Reclassification of accumulated foreign currency translation reserve to profit or loss on disposal of discontinued operation (net of tax of US$ 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 statement
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
as of financial positionDecember 31
| (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 | |||||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
as at December 31
| Note | 2016 | 2015 | ||||||||||
| (In millions of U.S. dollars) | ||||||||||||
Assets | ||||||||||||
Non-current assets | ||||||||||||
Property and equipment | 16 | 6,719 | 6,239 | |||||||||
Intangible assets | 17 | 2,257 | 2,224 | |||||||||
Goodwill | 10 | 4,696 | 4,223 | |||||||||
Investments in associates and joint ventures | 13 | 2,179 | 201 | |||||||||
Deferred tax assets | 11 | 343 | 150 | |||||||||
Non-current income tax advance | 11 | 25 | 28 | |||||||||
Other financial assets | 18 | 306 | 164 | |||||||||
Other assets | 19 | 118 | 105 | |||||||||
|
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|
| |||||||||
Totalnon-current assets | 16,643 | 13,334 | ||||||||||
|
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| |||||||||
Current assets | ||||||||||||
Inventories | 20 | 125 | 104 | |||||||||
Trade and other receivables | 21 | 685 | 677 | |||||||||
Other assets | 19 | 439 | 334 | |||||||||
Current income tax assets | 11 | 169 | 259 | |||||||||
Other financial assets | 18 | 190 | 395 | |||||||||
Cash and cash equivalents | 22 | 2,942 | 3,614 | |||||||||
|
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| |||||||||
Total current assets | 4,550 | 5,383 | ||||||||||
|
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| |||||||||
Assets classified as held for sale | 6 | — | 15,137 | |||||||||
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|
| |||||||||
Total assets | 21,193 | 33,854 | ||||||||||
|
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| |||||||||
Equity and liabilities | ||||||||||||
Equity | ||||||||||||
Equity attributable to equity owners of the parent | 23,24 | 5,960 | 3,765 | |||||||||
Non-controlling interests | 12 | 83 | 129 | |||||||||
|
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| |||||||||
Total equity | 6,043 | 3,894 | ||||||||||
|
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| |||||||||
Non-current liabilities | ||||||||||||
Financial liabilities | 18 | 8,070 | 8,095 | |||||||||
Provisions | 25 | 148 | 350 | |||||||||
Other liabilities | 19 | 44 | 95 | |||||||||
Deferred tax liabilities | 11 | 331 | 404 | |||||||||
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|
| |||||||||
Totalnon-current liabilities | 8,593 | 8,944 | ||||||||||
|
|
|
| |||||||||
Current liabilities | ||||||||||||
Trade and other payables | 1,744 | 1,768 | ||||||||||
Other liabilities | 19 | 1,236 | 1,039 | |||||||||
Other financial liabilities | 18 | 3,046 | 1,693 | |||||||||
Current income tax payables | 11 | 57 | 19 | |||||||||
Provisions | 25 | 474 | 1,020 | |||||||||
|
|
|
| |||||||||
Total current liabilities | 6,557 | 5,539 | ||||||||||
|
|
|
| |||||||||
Liabilities associated with assets held for sale | 6 | — | 15,477 | |||||||||
|
|
|
| |||||||||
Total equity and liabilities | 21,193 | 33,854 | ||||||||||
|
|
|
| |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
Consolidated statement of changes in equity
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 31, 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 | |||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Attributable to equity owners of the parent | ||||||||||||||||||||||||||||||||||||
| (In millions of U.S. dollars, except for share amounts) | Number of shares outstanding | Issued capital | Capital Surplus* | Other capital reserves* | Retained earnings | Foreign currency translation* | Total | Non- controlling interests | Total equity | |||||||||||||||||||||||||||
As at January 1, 2016 | 1,749,004,648 | 2 | 12,753 | 667 | (2,706 | ) | (6,951 | ) | 3,765 | 129 | 3,894 | |||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
Profit / (loss) for the period | — | — | — | 2,328 | — | 2,328 | 92 | 2,420 | ||||||||||||||||||||||||||||
Other comprehensive income | — | — | 63 | — | (158 | ) | (95 | ) | (13 | ) | (108 | ) | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
Total comprehensive income | — | — | 63 | 2,328 | (158 | ) | 2,233 | 79 | 2,312 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
Dividends declared (Note 24) | — | — | — | (61 | ) | — | (61 | ) | (106 | ) | (167 | ) | ||||||||||||||||||||||||
Changes in a parent’s ownership interest in a subsidiary that do not result in a loss of control | — | — | 23 | — | — | 23 | (19 | ) | 4 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
As at December 31, 2016 | 1,749,004,648 | 2 | 12,753 | 753 | (439 | ) | (7,109 | ) | 5,960 | 83 | 6,043 | |||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
| Attributable to equity owners of the parent | ||||||||||||||||||||||||||||||||||||
| (In millions of U.S. dollars, except for share amounts) | Number of shares outstanding | Issued capital | Capital Surplus* | Other capital reserves* | Retained earnings | Foreign currency translation* | Total | Non- controlling interests | Total equity | |||||||||||||||||||||||||||
As at January 1, 2015 | 1,748,598,146 | 2 | 12,746 | 84 | (1,990 | ) | (5,836 | ) | 5,006 | (1,030 | ) | 3,976 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
Profit / (loss) for the period | — | — | — | (655 | ) | — | (655 | ) | 102 | (553 | ) | |||||||||||||||||||||||||
Other comprehensive income | — | — | 43 | — | (1,115 | ) | (1,072 | ) | (720 | ) | (1,792 | ) | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
Total comprehensive income | — | — | 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 (Note 6) | — | — | 644 | — | — | 644 | 1,607 | 2,251 | ||||||||||||||||||||||||||||
Share-based payment transactions and exercise of stock options | 406,502 | — | 7 | (6 | ) | — | — | 1 | — | 1 | ||||||||||||||||||||||||||
Restructuring of the Company’s ownership in LLC “Sky Mobile” and LLP“KaR-Tel” (Note 6) | — | — | (98 | ) | — | — | (98 | ) | 358 | 260 | ||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
As at December 31, 2015 | 1,749,004,648 | 2 | 12,753 | 667 | (2,706 | ) | (6,951 | ) | 3,765 | 129 | 3,894 | |||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
Consolidated statementTable of changes in equity (continued)Contents
| Attributable to equity owners of the parent | ||||||||||||||||||||||||||||||||||||
| (In millions of U.S. dollars, except for share amounts) | Number of shares outstanding | Issued capital | Capital Surplus* | Other capital reserves* | Retained earnings | Foreign currency translation* | Total | Non- controlling interests | Total equity | |||||||||||||||||||||||||||
As at January 1, 2014 | 1,748,243,739 | 2 | 12,732 | (42 | ) | (1,286 | ) | (1,673 | ) | 9,733 | (655 | ) | 9,078 | |||||||||||||||||||||||
Profit / (loss) for the period | — | — | — | (647 | ) | — | (647 | ) | (256 | ) | (903 | ) | ||||||||||||||||||||||||
Other comprehensive income | — | — | 138 | — | (4,124 | ) | (3,986 | ) | (92 | ) | (4,078 | ) | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
Total comprehensive income | — | — | 138 | (647 | ) | (4,124 | ) | (4,633 | ) | (348 | ) | (4,981 | ) | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
Dividends declared | — | — | — | (58 | ) | — | (58 | ) | (21 | ) | (79 | ) | ||||||||||||||||||||||||
Changes in a parent’s ownership interest in a subsidiary that do not result in a loss of control | — | — | (7 | ) | — | (39 | ) | (46 | ) | (10 | ) | (56 | ) | |||||||||||||||||||||||
Exercise of stock options | 354,407 | — | 7 | (4 | ) | — | — | 3 | — | 3 | ||||||||||||||||||||||||||
Share-based payment transactions | — | 7 | (1 | ) | 1 | — | 7 | — | 7 | |||||||||||||||||||||||||||
Acquisition ofnon-controlling interest | — | — | — | — | — | — | 4 | 4 | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
As at December 31, 2014 | 1,748,598,146 | 2 | 12,746 | 84 | (1,990 | ) | (5,836 | ) | 5,006 | (1,030 | ) | 3,976 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
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 |
| |||||||||||
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 | ) | ||||||
| | | | | | | | | | | | | |
Net cash flow from operating activities | 2,475 | 1,875 | 2,033 | |||||||||
| | | | | | | | | | | | | |
Net cash flow used in investing activities | (3,016 | ) | (2,671 | ) | (2,634 | ) | ||||||
| | | | | | | | | | | | | |
Financing activities |
| |||||||||||
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 | |||||||||
| | | | | | | | | | | | | |
Cash and cash equivalents at end of period** | 18 | 1,304 | 2,942 | 3,614 | ||||||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
Consolidated statement of cash flows
for the years ended December 31
| (In millions of U.S. dollars) | Note | 2016 | 2015 | 2014 | ||||||||||||
Operating activities | ||||||||||||||||
(Loss) for the year from continuing operations | (288 | ) | (815 | ) | (223 | ) | ||||||||||
Tax expense | 11 | 635 | 220 | 598 | ||||||||||||
Profit / (loss) before tax | 347 | (595 | ) | 375 | ||||||||||||
|
|
|
|
|
| |||||||||||
Non-cash adjustment to reconcile profit before tax to net cash flows: |
| |||||||||||||||
Depreciation | 16 | 1,439 | 1,550 | 1,996 | ||||||||||||
Amortization | 17 | 497 | 517 | 647 | ||||||||||||
Impairment loss | 10 | 192 | 245 | 976 | ||||||||||||
Loss on disposals ofnon-current assets | 20 | 39 | 68 | |||||||||||||
Finance income | (69 | ) | (52 | ) | (52 | ) | ||||||||||
Finance costs | 830 | 829 | 1,077 | |||||||||||||
Othernon-operating losses / (gains) | 14 | 82 | 42 | (121 | ) | |||||||||||
Share of loss / (profit) of associates and joint ventures accounted for using the equity method | 13 | (48 | ) | (14 | ) | 38 | ||||||||||
Impairment of associates and joint ventures accounted for using the equity method | 13 | 99 | — | — | ||||||||||||
Net foreign exchange (gain) / loss | (157 | ) | 314 | 556 | ||||||||||||
Movements in provisions and pensions | (645 | ) | (185 | ) | 110 | |||||||||||
Working capital adjustments: | ||||||||||||||||
Changes in trade and other receivables and prepayments | (129 | ) | (287 | ) | (2 | ) | ||||||||||
Changes in inventories | (13 | ) | (43 | ) | 15 | |||||||||||
Changes in trade and other payables | (107 | ) | 173 | 327 | ||||||||||||
Interest paid | (789 | ) | (807 | ) | (1,002 | ) | ||||||||||
Interest received | 63 | 49 | 47 | |||||||||||||
Income tax paid | (420 | ) | (671 | ) | (442 | ) | ||||||||||
Net cash flows from operating activities of discontinued operations | 683 | 929 | 666 | |||||||||||||
|
|
|
|
|
| |||||||||||
Net cash flows from operating activities | 1,875 | 2,033 | 5,279 | |||||||||||||
|
|
|
|
|
| |||||||||||
Investing activities | ||||||||||||||||
Proceeds from sale of property, plant and equipment and intangible assets | 15 | 18 | 22 | |||||||||||||
Purchase of property, plant and equipment and intangible assets | (1,651 | ) | (2,207 | ) | (3,501 | ) | ||||||||||
Loans granted | — | (102 | ) | (23 | ) | |||||||||||
Repayment of loans granted | — | 101 | 110 | |||||||||||||
Receipts from / (payments on) deposits | 19 | (361 | ) | 290 | ||||||||||||
(Payments for) / receipts from investments in financial assets | (87 | ) | 74 | 38 | ||||||||||||
Acquisition of subsidiaries, net of cash acquired | 6 | 7 | (17 | ) | — | |||||||||||
Proceeds from sale of shares in subsidiaries, net of cash disposed | 6 | (325 | ) | — | 69 | |||||||||||
Receipt of dividends | — | — | 2 | |||||||||||||
Net cash flow used in investing activities of discontinued operations | (649 | ) | (140 | ) | (984 | ) | ||||||||||
|
|
|
|
|
| |||||||||||
Net cash flows used in investing activities | (2,671 | ) | (2,634 | ) | (3,977 | ) | ||||||||||
|
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|
|
| |||||||||||
Financing activities | ||||||||||||||||
Net proceeds from exercise of share options and purchase of treasury shares | — | 2 | 3 | |||||||||||||
Acquisition ofnon-controlling interest | (5 | ) | (4 | ) | — | |||||||||||
Proceeds from borrowings, net of fees paid* | 1,882 | 2,052 | 5,859 | |||||||||||||
Repayment of borrowings | (1,816 | ) | (4,840 | ) | (3,765 | ) | ||||||||||
Proceeds from sale ofnon-controlling interest, net of fees paid | — | 2,307 | — | |||||||||||||
Dividends paid to equity owners of the parent | 24 | (61 | ) | (61 | ) | (71 | ) | |||||||||
Dividends paid tonon-controlling interests | 24 | (106 | ) | (188 | ) | (19 | ) | |||||||||
Net cash flow used in financing activities of discontinued operations | (20 | ) | (707 | ) | (678 | ) | ||||||||||
|
|
|
|
|
| |||||||||||
Net cash flows generated from/(used in) financing activities | (126 | ) | (1,439 | ) | 1,329 | |||||||||||
|
|
|
|
|
| |||||||||||
Net (decrease) / increase in cash and cash equivalents | (922 | ) | (2,040 | ) | 2,631 | |||||||||||
Net foreign exchange difference | (64 | ) | (374 | ) | (743 | ) | ||||||||||
Opening balance of cash and cash equivalents of disposal group classified as held for sale | 314 | — | — | |||||||||||||
Cash and cash equivalents classified as held for sale | — | (314 | ) | — | ||||||||||||
Cash and cash equivalents at beginning of period | 22 | 3,614 | 6,342 | 4,454 | ||||||||||||
|
|
|
|
|
| |||||||||||
Cash and cash equivalents at end of period** | 22 | 2,942 | 3,614 | 6,342 | ||||||||||||
|
|
|
|
|
| |||||||||||
Amounts for 2014 have beenre-presented
Notes to reflect the classification of Italy as held for sale and discontinued operation.
The accompanying notes are an integral part of these consolidated financial statements.
1 General informationstatements
(in millions of U.S. dollars unless otherwise stated)
1GENERAL INFORMATION
VEON Ltd. (“VEON”("VEON", the “Company”"Company", and together with its consolidated subsidiaries, the “Group” or “we”"Group") was incorporated in Bermuda on June 5, 2009. The registered office of VEON is Victoria Place, 31 Victoria Street, Hamilton HM 10, Bermuda. VEON’sVEON's headquarters and the principal place of business isare located at Claude Debussylaan 88, 1082 MD Amsterdam, the Netherlands.
The Company has 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 “"US$”"). In these notes, U.S. dollar amounts are presented in millions, except for share and per share (or American Depository Share (“ADS”Shares ("ADS")) amounts and as otherwise indicated.
VEON’s VEON's ADSs are listed on the NASDAQ Global Select Market (“NASDAQ”("NASDAQ"). From April 4, 2017, VEON's common shares are listed on Euronext Amsterdam, the regulated market of Euronext Amsterdam N.V. ("Euronext Amsterdam").
Share information
As atof December 31, 2016,2017, the Company’sCompany's largest shareholders and the 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”) | 416,703,840 | 23.7 | % | |||||
Stichting Administratiekantoor Mobile Telecommunications Investor (“Stichting”) | 145,947,562 | 8.3 | % | |||||
Free Float | 353,454,732 | 20.1 | % | |||||
|
|
|
| |||||
Total outstanding common shares | 1,756,731,135 | 100 | % | |||||
|
|
|
| |||||
Of which: | ||||||||
Shares held by the Company or its subsidiaries (“Treasury shares”) | 7,726,487 | 0.4 | % | |||||
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 | % | ||||
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Shares held by the Company or its subsidiaries ("Treasury shares") | 7,603,731 | 0.4 | % | ||||
On September 21, 2016 and September 27, 2016, Telenor completed the sale of 142,500,000 and 21,375,000 American Depositary Shares, respectively, in total representing approximately 9.3% of VEON’s total outstanding common shares. Further, on September 21, 2016, Telenor also issued a US$1 billion 0.25%3-year bond that is guaranteed by the ultimate parent company of Telenor, Telenor ASA, and exchangeable under certain circumstances for up to a total of 204,081,633 ADS of VEON.
On March 31, 2016, LetterOne announced the transfer of 145,947,562 VEON ADS (representing approximately 8.3% of VEON’s total outstanding common shares) to Stichting Administratiekantoor Mobile Telecommunications Investor. However, LetterOne istherefore entitled to the economic benefits (dividend payments, other distributions and sale proceeds) of such depositary receipts and, indirectly, of the 145,947,562 common shares.shares represented by the depositary receipts. According to the conditions of administration entered into between Stichting and LetterOne ("Conditions of Administration") in connection with the transfer of 145,947,562 ADSs from LetterOne to Stichting on March 29, 2016, Stichting has the power to vote and direct the voting 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 related
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 sold, respectively, 70,000,000 and 90,000,000 common shares of VEON please referLtd. in the form of ADSs listed on NASDAQ and common shares listed on Euronext Amsterdam pursuant to Notesan 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 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, 242014, as amended and 26.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.
Nature of operations and principal activities
VEON earns revenues by providing voice and data telecommunication services through a range of traditional and broadband mobile and fixed-line technologies.
As atof December 31, 2016,2017, the Company operated telecommunications services in Russia, Pakistan, Algeria, Bangladesh, Ukraine, Uzbekistan, Kazakhstan, Armenia, Tajikistan, Georgia, Kyrgyzstan and Laos, and in Italy via a 50/50 joint venture.
On November 5, 2016 VEON finalized the transaction of combining the operations in Italy into a new 50/50 joint venture with 3 Italia S.p.A. (“3 Italia”). Please refer to Note 6 for further details in respect of this transaction, as well as significant transactions affecting Pakistan and Zimbabwe.
During the year 2016,2017, several local currencies demonstrated significant volatility against the U.S. dollar, which impacted the Group’sCompany's financial position and results of operations uponfollowing the translation ofnon-U.S. currency amounts into U.S. dollars for consolidation purposes. In particular, in U.S. dollar terms, the devaluationfluctuations of local currencies caused a 8% decrease3% increase in total revenue for the Group during 20162017, as compared with 2015. Please refer to Note 5 for further details regarding foreign currency sensitivities.2016.
In addition, on September 2, 2017, the foreignGovernment of Uzbekistan announced the liberalization of currency exchange rate used to translate the local currency in Uzbekistan into U.S. dollars for consolidation purposes is an official rate published by therules, effective from September 5, 2017. The Central Bank of Uzbekistan set the Republic of Uzbekistan. However, thisofficial exchange rate is not achievableat 8,100 Uzbek som ("UZS") per U.S dollar, a depreciation of 92%, resulting in expatriating funds outa decrease in the value of the country due to restrictions imposed by the local government. The net assets of our business inthe Uzbekistan represented US$910 of the net assets in the Company’s statement of financial position as at December 31, 2016 (US$891 as at December 31, 2015). However, if the Company applied the exchange rate implied by market transactions, rather than the exchange rate used to translate the local currency into U.S. dollars, the assets held in Uzbekistan would decrease significantlyoperations 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.
2 Basis of preparation of
Notes to 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 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 (Note 3 and Note 4).circumstances. The use of these judgments,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.
Certain comparative amounts have been reclassified to conform to the current period presentation.
Basis The sources 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 12 for a list of significant subsidiaries.
Intercompany transactions, balances and unrealized gains or losses on transactions between Group companies are eliminated. When necessary, amounts reporteduncertainty identified 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 isre-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 indescribed together with the Group determines its own functional currency and amounts included in the financial statementsapplicable 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 |
Table 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. The income statement amounts are translated 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 other comprehensive income, a separate component of equity (i.e. cumulative translation adjustment).Contents
3 Significant accounting policies that relate
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 financial instrument will fluctuate because of changes 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 value 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 and 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 7.
Notes to the consolidated financial statements (Continued)
(in millions of U.S. dollars unless otherwise stated)
4FINANCIAL RISK MANAGEMENT (Continued)
Further, this ratio is included as a wholefinancial 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)
Accounting policies(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 shareholders 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 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 agreement 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 deductible for income tax purposes.
Notes to the 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 been 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 be US$47 using a discounted cash flow technique. There were no changes to the fair 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 call, 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 non-controlling interest of PMCL are accounted for as a put-option redemption liability which is classified as a financial liability in the Company's consolidated financial statements (Note 17). The put-option redemption liability is measured at the discounted 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 non-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 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.
The transaction closed on November 30, 2016, resulting in a gain of US$21.
ACCOUNTING POLICIES
Transactions with 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.
Non-current assets (or disposal groups) held for sale and discontinued operations
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 lower of their carrying amount and fair value less costs to sell.
Non-current assets (including those that are part of a 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 other assets and liabilities in the statement of financial position.
Notes to 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.
| | 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 | |||||||||||||
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Notes to 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 | ) | |||||
| | | | | | | | | | | |
(Loss) / profit before tax | (24 | ) | 347 | (595 | ) | |||||
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
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 relevant notesassets, is shown in the following 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 | |||||
| | | | | | | | |
Total segments | 15,113 | 16,643 | |||||
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Notes to the consolidated financial statements.
New accounting pronouncements not yet adopted by the Company
The following are 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:
|
|
|
4 Significant accounting judgments, estimates and assumptions(Continued)
(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.
The following table provides a breakdown of total operating revenue from external customers by mobile and fixed line for the years ended December 31:
| | 2017 | 2016 | 2015 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
Mobile services | 8,688 | 8,089 | 8,797 | |||||||
Fixed line services | 786 | 796 | 809 | |||||||
| | | | | | | | | | | |
Total revenue | 9,474 | 8,885 | 9,606 | |||||||
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
ACCOUNTING POLICIES
The following accounting policies have been applied for the Group for 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 upon transfer of the associated risks and rewards, and revenue for services is recorded when the services are rendered. Revenue recognitionfor bundled packages is recorded based on the relative fair value allocation of each component in the bundle.
Mobile 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 includes short messages, multimedia messages, 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.
Notes to the consolidated financial statements (Continued)
(in millions of 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.
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 and zonal revenue are recorded gross or net depending on the contractual arrangements with the end-users.
Connection fees
VEON defers upfront telecommunications connection fees. The Group’sdeferral 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 are agreements under which VEON provides more than one service. Services / products may be provided or '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'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.
Notes to the consolidated financial statements (Continued)
(in millions of U.S. dollars unless otherwise stated)
8REVENUE (Continued)
SOURCE OF ESTIMATION UNCERTAINTY
The Group's revenue consists primarily of revenue from sale of telecommunications services and periodic subscriptions. The Group offers customers, via multiple element agreements (‘bundles’('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 partythird-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 thereafter recognized in the income statement over a future period, 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.
Notes to the consolidated financial statements (Continued)
(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 822 for further informationdetails).
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 payments to the Company.
Total operating lease expense recognized in the consolidated income statement amounted to US$444 (2016: US$408, 2015: US$385). Please refer to Note 26 for details regarding revenue recognizedoperating lease commitments.
ACCOUNTING POLICIES
Dealer commissions
Dealer commissions are expensed in the consolidated income statement when the services are provided 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 Company.Group will change upon adoption of IFRS 15 on January 1, 2018, refer to Note 3 for further details.
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 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.
Impairment ofnon-current assets
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 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 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 asset 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 adverse developments that could have negatively impacted the valuations.
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 fourth 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 existing 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 as 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 individually identified and separately recognized.
Goodwill is not amortized but is tested for impairment annually and as necessary when circumstances indicate that the carrying value may be impaired.
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 prepared for a period of five years. For longer periods, a long-term growth rate is applied to project future cash flows after the fifth year.
SOURCE OF ESTIMATION UNCERTAINTY
The Group has significant investments in property and equipment, intangible assets, goodwill and other investments.
Notes to the consolidated financial statements (Continued)
(in millions of U.S. dollars unless otherwise stated)
10IMPAIRMENT (Continued)
Estimating recoverable amounts of assets and cash generating units (“CGUs”) must, in part, be based on management’smanagement's evaluations, including the determination of the appropriate CGUs, the relevant discount rate, estimation of future performance, the revenue-generating capacity of assets, timing and amount of future purchases of property and equipment, assumptions of 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, average revenue per user (“ARPU”("ARPU"), market share and similar parameters, resulting in differences in operating margins. The future development of operating margins is 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.
See Note 10 for further information regarding the resultsTable of impairment testing for goodwill and othernon-current assets.Contents
Investment in Italy Joint Venture
Notes to the consolidated financial statements (Continued)
On August 6, 2015, VEON entered into an agreement with CK Hutchison Holdings to establish a joint venture under which they would jointly own and operate the 3 Italia and WIND businesses (in Italy. The completionmillions of U.S. dollars unless otherwise stated)
11OTHER NON-OPERATING LOSSES, NET
Other non-operating (losses) / gains consisted of the transaction resulted infollowing for the Company contributingyears 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 entire Wind Acquisition Holding Finance (“WAHF”) Group intoVIP-CKH Luxembourg S.à.r.l in exchange for:
50%settlement of the issued share capital ofVIP-CKH Luxembourg S.à.r.l and its subsidiaries (which hold the combined businesses of WIND and 3 Italia and includes a EUR 5,114 million Shareholder Loan payable); and
a 50% investment in newly incorporated financing entity,VIP-CKH Ireland Limited (which includes the EUR 5,114 million Shareholder Loan receivable).
(together, the “Italy Joint Venture”).
Both joint arrangements are classified as joint ventures in accordance with IFRS 11 ‘Joint Arrangements’, based on the following:
The legal structure of the arrangement and the legal rights and obligations arise from the limited liability company, which grant equal shareholdings and profit rights to the shareholders;
The activities relevantcash tender offer for the purposes of determining control require unanimous consent from both shareholders, and the decisions to be made by the Board are deemed to be operational in nature to ensure smooth daily decisions.
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 6 and Note 13 for more details regarding the Company’s investment in the Italy Joint Venture.
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%. See Note 12 for further information regarding the Company’s subsidiaries.
Depreciation and amortization ofnon-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 new technologies. Significant estimates in the evaluation 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 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. The actual economic lives of intangible assets may be different than estimated useful lives, thereby resulting in a different carrying value of 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 Note 16 andoutstanding debt securities, see Note 17 for further information regarding propertydetails.
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 equipmentdivestments' is a net gain of US$45 pertaining to indemnification from a past business acquisition, and intangible assets respectively.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’sGroup'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’smanagement'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 11 and Note 2726 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 bank 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 cost 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 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 new technologies.
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 evaluation 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 actual economic lives of intangible assets may be different than estimated useful lives, thereby resulting in a different carrying value of 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.
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 | |||||||||||
Notes to the consolidated financial statements (Continued)
(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 consolidated 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 put option has expired or been satisfied.
Notes to the consolidated 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 hedging instrument (generally a derivative) are initially recorded in other comprehensive income. The amount included in other comprehensive income is the lesser of the fair value of the hedging instrument and the hedged item. Where the hedging instrument's change in fair value is greater than that of the hedged 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. The portion of the gain or loss on the hedging instrument that is determined to be an effective 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 been recognized in other comprehensive income shall be reclassified from equity to profit or loss as a reclassification adjustment on the disposal or partial disposal of the foreign operation.
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 portion of its derivative contracts, which mainly relate to hedging the interest 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 derivative instruments for which hedge accounting is applied 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 maturity date at agreed redemption prices. These embedded derivatives are accounted for as financial assets at fair value through profit or loss.
Notes to the consolidated financial statements (Continued)
(in millions of U.S. dollars unless otherwise stated)
17FINANCIAL ASSETS AND LIABILITIES (Continued)
Net investment hedge in foreign operations
During the month of June 2017, the Group entered into several cross-currency swaps with several different banks, by exchanging a notional amount of US$600 for EUR 537 million for 4 years. The swaps mature June 16, 2021. These derivatives were subsequently designated as hedging instruments in a hedge of net investment in foreign operations in which the Italy joint-venture is the hedged item.
Additionally, the Company designated term loans drawn during 2017, maturing in 2022, and with 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 the 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 receives 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 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 18 for further information regarding financial assets and liabilities.
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 Note 25 and Note 27 for further information.
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, the 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 financial instrument will fluctuate because of changes 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 by having a balanced portfolio of fixed and variable rate loans and borrowings and through hedging activities.
At December 31, 2016, after taking into account the effect of interest rate swaps, approximately 81% of the Company’s borrowings are at a fixed rate of interest (2015: 77%).
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 on the fair value of derivatives to which cash flow hedge accounting is applied as follows:
| Increase / decrease in basis points | Effect on profit / (loss) before tax | Effect on other components of equity | ||||||||||
2016 | ||||||||||||
Algerian Dinar (“DZD”) | +100 | (1 | ) | — | ||||||||
Uzbek Som | +100 | 7 | — | |||||||||
Pakistani Rupee (“PKR”) | +100 | — | 2 | |||||||||
Ukrainian Hryvnia | +100 | 1 | — | |||||||||
Other currencies | +100 | 2 | — | |||||||||
Algerian Dinar | -100 | 1 | — | |||||||||
Uzbek Som | -100 | (7 | ) | — | ||||||||
Pakistani Rupee | -100 | — | (2 | ) | ||||||||
Ukrainian Hryvnia | -100 | (1 | ) | — | ||||||||
Other currencies | -100 | (2 | ) | — | ||||||||
2015 | ||||||||||||
US Dollar | +100 | 12 | — | |||||||||
Algerian Dinar | +100 | (1 | ) | — | ||||||||
Uzbek Som | +100 | 8 | — | |||||||||
Pakistani Rupee | +100 | (1 | ) | 3 | ||||||||
Other currencies | +100 | 1 | — | |||||||||
US Dollar | -100 | (12 | ) | — | ||||||||
Algerian Dinar | -100 | 1 | — | |||||||||
Uzbek Som | -100 | (8 | ) | — | ||||||||
Pakistani Rupee | -100 | 1 | (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 maximum18-month period.
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 value of monetary assets and liabilities, includingnon-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.FAIR VALUE HIERARCHY
Change in foreign exchange rate | Effect on profit / (loss) before tax | Effect on other components of equity | ||||||||
2016 | ||||||||||
Russian Ruble (“RUB”) | 10% depreciation | (80 | ) | 30 | ||||||
Bangladeshi Taka | 10% depreciation | (68 | ) | — | ||||||
Pakistani Rupee | 10% depreciation | (30 | ) | — | ||||||
Kazakh Tenge (“KZT”) | 10% depreciation | 5 | — | |||||||
Uzbek Som | 10% depreciation | (4 | ) | (27 | ) | |||||
Georgian Lari (“GEL”) | 10% depreciation | (30 | ) | — | ||||||
Armenian dram | 10% depreciation | 18 | — | |||||||
Euro (“EUR”) | 10% depreciation | (9 | ) | — | ||||||
Algerian Dinar | 10% depreciation | (3 | ) | — | ||||||
Other currencies | 10% depreciation | (5 | ) | — | ||||||
Russian Ruble | 10% appreciation | 84 | (33 | ) | ||||||
Bangladeshi Taka | 10% appreciation | 75 | — | |||||||
Pakistani Rupee | 10% appreciation | 33 | — | |||||||
Kazakh Tenge | 10% appreciation | (5 | ) | — | ||||||
Uzbek Som | 10% appreciation | 4 | 30 | |||||||
Georgian Lari | 10% appreciation | 33 | — | |||||||
Armenian dram | 10% appreciation | (20 | ) | — | ||||||
Euro | 10% appreciation | 10 | — | |||||||
Algerian Dinar | 10% appreciation | 4 | — | |||||||
Other currencies | 10% appreciation | 5 | — | |||||||
2015 | ||||||||||
Russian Ruble | 10% depreciation | (61 | ) | 27 | ||||||
Bangladeshi Taka | 10% depreciation | (66 | ) | — | ||||||
Kazakh Tenge | 10% depreciation | 17 | — | |||||||
Uzbek Som | 10% depreciation | (0 | ) | (27 | ) | |||||
Georgian Lari | 10% depreciation | (26 | ) | — | ||||||
Algerian Dinar | 10% depreciation | — | — | |||||||
Other currencies | 10% depreciation | 11 | — | |||||||
Russian Ruble | 10% appreciation | 67 | (30 | ) | ||||||
Bangladeshi Taka | 10% appreciation | 72 | — | |||||||
Kazakh Tenge | 10% appreciation | (19 | ) | — | ||||||
Uzbek Som | 10% appreciation | 0 | 30 | |||||||
Georgian Lari | 10% appreciation | 29 | — | |||||||
Algerian Dinar | 10% appreciation | — | — | |||||||
Other currencies | 10% appreciation | (9 | ) | — | ||||||
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 22 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 no less than 87.9% of its active customers being subscribed to a prepaid service asAs of December 31, 2016 (2015: 94%)2017 and accordingly, not giving rise to credit risk.
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 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. 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, 2016 and 2015 is the carrying amount as illustrated in Note 18 and Note 21.
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. As at December 31, 2016, 27% (2015:
16%) of the Company’s debt 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.
The Company had the following available Facilities as at the dates indicated below:
At December 31, 2016 | Amounts in millions of transaction currency | US$ equivalent amounts | ||||||||||||||||||||||||||
Facility | Final availability period | Facility amount | Utilized | Available | Facility amount | Utilized | Available | |||||||||||||||||||||
VimpelCom Amsterdam B.V.—Revolving Credit Facility* | March 2017 | US$1,800 | — | US$1,800 | 1,800 | — | 1,800 | |||||||||||||||||||||
VimpelCom Holdings B.V.—Vendor Financing Facility China Development Bank | September 2018 | | RMB700 million | | | RMB149 million | | | RMB551 million | | 101 | 21 | 80 | |||||||||||||||
PSJC Vimpel Communications (“PJSC VimpelCom”)—Revolving Credit Facility Sberbank | May 2017 | | RUB15,000 million | | — | | RUB15,000 million | | 247 | — | 247 | |||||||||||||||||
Optimum Telecom Algérie SpA—Term Loan Facility | December 2017 | | DZD32,000 million | | — | | DZD32,000 million | | 290 | — | 290 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total | 2,438 | 21 | 2,417 | |||||||||||||||||||||||||
At December 31, 2015 | Amounts in millions of transaction currency | US$ equivalent amounts | ||||||||||||||||||||||||||
Facility | Final availability period | Facility amount | Utilized | Available | Facility amount | Utilized | Available | |||||||||||||||||||||
VimpelCom Amsterdam B.V.— Revolving Credit Facility | March 2017 | US$1,800 | — | US$1,800 | 1,800 | — | 1,800 | |||||||||||||||||||||
VimpelCom Holdings B.V.— Vendor Financing Facility China Development Bank | September 2018 | | RMB700 million | | — | | RMB700 million |
| 108 | — | 108 | |||||||||||||||||
PJSC VimpelCom—Revolving Credit Facility Sberbank | May 2017 | | RUB15,000 million |
| — | | RUB15,000 million |
| 206 | — | 206 | |||||||||||||||||
PJSC VimpelCom—Credit Facility Sberbank | March 2016 | | RUB30,000 million |
| — | | RUB30,000 million |
| 412 | — | 412 | |||||||||||||||||
Pakistan Mobile Communications Limited—Islamic financing facility | December 2016 | | PKR16,000 million |
| | PKR1,000 million |
| | PKR15,000 million |
| 153 | 10 | 143 | |||||||||||||||
Pakistan Mobile Communications Limited—Credit facility Habib Bank Limited | June 2016 | | PKR4,000 million |
| | PKR500 million |
| | PKR3,500 million |
| 38 | 5 | 33 | |||||||||||||||
Optimum Telecom Algérie SpA —Term Loan Facility | December 2017 | | DZD32,000 million |
| — | | DZD32,000 million |
| 299 | — | 299 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total | 3,016 | 15 | 3,001 | |||||||||||||||||||||||||
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|
|
|
| |||||||||||||||||||||||
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 applicable as at December 31, 2016 and December 31, 2015, respectively. The total amounts in the table differ from the carrying amounts as stated in Note 18 as the below table includes both notional amounts and interest while the carrying amounts are based on amongst others notional amounts, fair value adjustments and unamortized fees.
| Less than 1 year | 1-3 years | 3-5 years | More than 5 years | Total | ||||||||||||||||
At December 31, 2016 | ||||||||||||||||||||
Bank loans and bonds | 3,330 | 3,578 | 1,821 | 3,255 | 11,984 | |||||||||||||||
Equipment financing | 199 | 319 | 197 | 55 | 770 | |||||||||||||||
Derivative financial instruments—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 | |||||||||||||||
Waridnon-controlling interest put option liability | — | — | 290 | — | 290 | |||||||||||||||
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| |||||||||||
Total financial liabilities | 5,346 | 3,943 | 2,308 | 3,310 | 14,907 | |||||||||||||||
Related derivatives financial instruments—assets | ||||||||||||||||||||
—Gross cash inflows | (29 | ) | — | — | — | (29 | ) | |||||||||||||
—Gross cash outflows | 27 | — | — | — | 27 | |||||||||||||||
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Related derivative financial instruments—assets | (2 | ) | — | — | — | (2 | ) | |||||||||||||
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Total financial liabilities net of derivative assets | 5,344 | 3,943 | 2,308 | 3,310 | 14,905 | |||||||||||||||
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| |||||||||||
| Less than 1 year | 1-3 years | 3-5 years | More than 5 years | Total | ||||||||||||||||
At December 31, 2015 | ||||||||||||||||||||
Bank loans and bonds | 1,970 | 4,242 | 1,520 | 3,254 | 10,986 | |||||||||||||||
Equipment financing | 206 | 321 | 248 | 65 | 840 | |||||||||||||||
Derivative financial instruments—liabilities | ||||||||||||||||||||
—Gross cash inflows | — | — | — | — | — | |||||||||||||||
—Gross cash outflows | 3 | 4 | 1 | — | 8 | |||||||||||||||
Trade and other payables and dividend payables | 1,768 | — | — | — | 1,768 | |||||||||||||||
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Total financial liabilities | 3,947 | 4,567 | 1,769 | 3,319 | 13,602 | |||||||||||||||
Related derivatives financial instruments—assets | ||||||||||||||||||||
—Gross cash inflows | (558 | ) | (23 | ) | — | — | (581 | ) | ||||||||||||
—Gross cash outflows | 531 | 22 | — | — | 553 | |||||||||||||||
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Related derivative financial instruments—assets | (27 | ) | (1 | ) | — | — | (28 | ) | ||||||||||||
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Total financial liabilities net of derivative assets | 3,920 | 4,566 | 1,769 | 3,319 | 13,574 | |||||||||||||||
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Capital management
The primary objective of the Company’s capital management is to ensure that it maintains at least aBB-/Ba3 credit rating, with an aim to improve this further, and to maintain 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. 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 December 31, 2016 and December 31, 2015. In February 2017, our Supervisory Board approved a dividend policy pursuant to which from 2016 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.
The Net Debt to Adjusted EBITDA ratio is an important measure used by the Company to assess its capital structure in light of maintaining a strong credit rating. Further, this ratio is included as a financial covenant in the credit facilities of VimpelCom Amsterdam B.V. and VimpelCom Holdings B.V.. Net Debt represents the amount of interest-bearing debt at amortized costs and guarantees given less cash and cash equivalents and current andnon-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 ofnon-current assets, othernon-operating losses and share of profit / (loss) of joint ventures. For reconciliation of Adjusted EBITDA to Profit before tax please refer to Note 7.
For most facilities entered into by VimpelCom Amsterdam B.V. and VimpelCom Holdings B.V., Net Debt will be calculated as Total Debt of VEON Ltd., VimpelCom Amsterdam B.V. and VimpelCom Holdings B.V. and its consolidated subsidiaries minus Cash and Cash Equivalent Investments of VimpelCom Holdings B.V. on a consolidated basis.
Adjusted EBITDA will be calculated at the VimpelCom Holdings B.V. on a consolidated basis and“pro-forma” adjusted for acquisitions and divestments of any business bought or sold during the relevant period. The required Net Debt to Adjusted EBITDA ratio is 3.5x. As at December 31, 2016 and 2015 the Net Debt to Adjusted EBITDA ratio was 2.1x and 1.4x, respectively.
For a discussion on how the Net Debt to Adjusted EBITDA ratio is calculated under the new multi-currency term and revolving facilities of up to US$2,250, entered into subsequent to the reporting date, please refer to Note 28.
Certain of the credit facilities of VimpelCom Amsterdam B.V. and VimpelCom Holdings B.V. also contain financial covenants with respect to the Net Debt to Adjusted EBITDA ratio relevant to the Company’s Russian subsidiary PJSC VimpelCom, which holds and/or guarantees a major part of the debt of the Company. The required ratio for PJSC VimpelCom is <3.5x (2015: <3.5x) in the relevant financings of VimpelCom Amsterdam B.V. and VimpelCom Holdings B.V.. As at December 31, 2016 and 2015 the Net Debt to Adjusted EBITDA ratio for PJSC VimpelCom was 3.1x and 2.6x, respectively. The ratio is calculated based on the consolidated financial statements of PJSC VimpelCom prepared under IFRS in Russian rubles as translated into U.S. Dollars.
Accounting policies
Business combinations
Business combinations are accounted for using the acquisition method. The cost of the acquisition is measured as the aggregate of the fair values at the date of exchange of assets given, liabilities incurred or assumed and equity instruments issued by the Group.
The acquiree’s identifiable assets and liabilities are recognized at their fair values at the acquisition date. Determining the fair value of assets acquired and liabilities assumed requires the use of significant estimates and assumptions, among other items, including assumptions with respect to future cash inflows and outflows, discount rates and other characteristics of the asset or liability that a market participant would take into account when pricing the asset or liability at measurement date. The results of operations of acquired businesses are included in the consolidated financial statements from the date of acquisition.
For each business combination, VEON elects whether to measure thenon-controlling interest in the acquiree at fair value or at the proportionate share in the recognized amounts of the acquiree’s identifiable net assets. Acquisition costs are expensed as incurred in the income statement.
Goodwill is measured as the excess of the sum of the consideration transferred, the amount of anynon-controlling interests in the acquiree and the fair value of the Group’s previously held equity interest in the acquiree, if any, over the net amounts of identifiable assets acquired and liabilities assumed at the acquisition date.
The Group may enter into business combinations which include options (call, put, or a combination of both) over the shares of thenon-controlling interest. The Group considers such options to assess possible implications on control, if any.
Transactions withnon-controlling interests that do not result in loss of control
Transactions withnon-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 tonon-controlling interests are also recorded in equity.
Non-current assets (or disposal groups) held for sale and discontinued operations
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 lower of their carrying amount and fair value less costs to sell.
Non-current assets (including those that are part of a 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 other assets and liabilities in the statement of financial position.
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.
Transactions during 2016
Joint venture in Italy
The Company signed an agreement with Hutchison Europe Telecommunications Sarl, 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 shareholders 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.
On completion of the transaction, the assets and liabilities of Italy were deconsolidated and an investment in joint venture, in which the Company has 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 assumptions used in the discounted cash flow model are as follows:
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| ||||
The investment in the Italy Joint Venture is equity accounted from November 5, 2016, refer to Note 13 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 | 13 | 2,113 | ||||||
Cash consideration receivable* | 28 | |||||||
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| |||||||
Total consideration on disposal | 2,141 | |||||||
Derecognition of assets classified as held for sale | 15,974 | |||||||
Derecognition of liabilities classified as held for sale | (15,414 | ) | ||||||
Release cumulative other comprehensive income related to Italy | (207 | ) | ||||||
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| |||||||
Gain on disposal of discontinued operations, net of tax | 1,788 | |||||||
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| |||||||
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 26).
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 years 2015 and 2014.
| Note | 2016 | 2015 | 2014 | |||||||||||||
Total operating revenues | 4,135 | 4,913 | 6,155 | |||||||||||||
Total operating expenses | (2,556 | ) | (3,765 | ) | (5,440 | ) | ||||||||||
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| |||||||||||
Operating profit | 1,579 | 1,148 | 715 | |||||||||||||
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Other (expenses) / income | (217 | ) | (722 | ) | (1,272 | ) | ||||||||||
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Profit / (loss) before tax | 1,362 | 426 | (557 | ) | ||||||||||||
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Income tax (expense) / benefit | (442 | ) | (164 | ) | (123 | ) | ||||||||||
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Profit / (loss) after tax for the period from discontinued operations | 920 | 262 | (680 | ) | ||||||||||||
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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 agreement 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.
VEON elected to measure thenon-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:
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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 deductible for income tax purposes.
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% percent terminal growth rate.
As part of the share purchase agreement, anearn-out payment has been agreed in the event that a tower transaction is effected by PMCL within four years from the acquisition date. Theearn-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 be US$47 using a discounted cash flow technique.
There were no changes to the fair value of the contingent consideration since the acquisition date, other than the unwinding of discount.
The fair value of thenon-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 agreedput-call options over the entirenon-controlling interest, whereby the Company has the ability to call, and thenon-controlling interest has the ability to put the entirenon-controlling interest of PMCL. The options are exercisable four years from the acquisition date at the fair market value of the PMCL shares.
Theput-call options over thenon-controlling interest of PMCL are accounted for as aput-option redemption liability which is classified as a financial liability in the Company’s consolidated financial statements (Note 18). Theput-option redemption liability is measured at the discounted redemption amount with a value of US$274 at the acquisition date. Interest over theput-option redemption liability will accrue until the options have been exercised or are expired. As a result, nonon-controlling interest will be recognized over thenon-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 thenon-controlling interest of PMCL (Note 24), which has reduced theput-option redemption liability. As at December 31, 2016 the resulting carrying value ofput-option redemption liability was US$290 (Note 18).
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.
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 Global Telecom Holding S.A.E (“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 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.
The transaction closed on November 30, 2016, resulting in a gain of US$21.
Transactions of 2015
Sale of 51% shareholding in Omnium Telecom Algeria (OTA) and settlement of disputes with the Algerian State
On January 30, 2015, the Company and its subsidiary GTH completed the sale of anon-controlling 51% interests in Omnium Telecom Algeria S.p.A. (formerly known as Orascom Telecom Algérie S.p.A.) (“OTA”) to the Fonds National d’Investissement, the Algerian National Investment Fund (“FNI”), for a purchase consideration of US$2,643. The Company and the FNI have entered into a shareholders agreement which governs their relationship as shareholders in OTA going forward. The Company will continue to exercise operational control over OTA and, as a result, will continue to fully consolidate OTA.
Immediately prior to the transaction, the Company owned 50.12% of OTA’s share and the carrying amount of the existing 49.88%non-controlling interest in OTA was US$1,010. As the Company will retain control of OTA, the transaction was accounted for as an equity transaction and thenon-controlling interest was adjusted by US$1,607 to reflect the new ownership interest in OTA. Parent equity was adjusted for the difference between the fair value of the consideration received and the adjustment to thenon-controlling interest of US$644.
The capital gain tax payable amounted to US$428, of which US$350 was recorded directly in equity, and US$78 was expensed in the income statement. The transaction costs totaled US$42. An existing tax credit of US$130 was utilized against the capital gain tax payable. Net proceeds received, after deducting capital gains taxes and transaction costs were US$2,307.
At closing, 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. At the same time, the
foreign exchange and import restrictions put in place by the Bank of Algeria against OTA on April 15, 2010 were lifted, following the cash payment of the fine of DZD 99 billion (US$1,112) to the Algerian Treasury which resulted in a decrease of provisions in the current liabilities from December 31, 2014 by the same amount.
Prior to closing, OTA paid a dividend to its shareholders in the amount of US$1,862. Shortly prior to closing, OTA and its wholly-owned subsidiary Optimum Telecom Algerie S.p.A. established credit facilities with a syndicate of Algerian and international banks in an amount of DZD 82 billion (US$920), and immediately drew down DZD 50 billion (US$561). In addition to this, on June 11, 2015 OTA fully drew down under two new credit facilities with Credit Agricole Corporate and Investment Bank Algerie for an amount of DZD 2.2 billion (US$22) and with BNP Paribas El Djazair SPA and Natixis Algerie SPA for an amount of DZD 2.8 billion (US$29).
GTH and Cevital S.p.A. (“Cevital”), anon-controlling interest’s shareholder in OTA, amended their previously disclosed Framework Agreement. Pursuant to the amended Framework Agreement, following closing, Cevital continued to be a shareholder in OTA holding 3.43% of the share capital of OTA. At closing, 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 US$50 plus Cevital’s entitled share of the US$1,862pre-closing dividend paid by OTA to its shareholders.
Restructuring of the Company’s ownership in LLC “Sky Mobile” (Kyrgyzstan) and LLP “KaR-Tel” (Kazakhstan)
During Q2 2015 the Company completed the process of restructuring its ownership in LLC “Sky Mobile” (“Sky Mobile”) and LLP “KaR-Tel” (“KaR-Tel”). Key changes as a result of the restructuring included:
moving the ownership from Cyprus to Swiss holding companies;
increasing the Company’s ownership in KaR-Tel from 71.5% to 75% and decreasing the Company’s ownership in Sky Mobile from 71.5% to 50.2%;
termination of an existing put option liability of US$271, which was held by thenon-controlling interest holder and call option (value nil) held by the Company; and
No cash consideration was exchanged in connection with the above restructuring and the Company continues to control KaR-Tel and Sky Mobile subsequent to the transaction. The changes in ownership and termination of the put option were treated as an equity transaction with anon-controlling interest holder since VEON did not lose control of the subsidiaries, and resulted in a net decrease to parent equity of US$98 and increase tonon-controlling interest of US$358. Following the completion of the restructuring, the portion of the deferred tax liabilities amounting to US$75 was credited to the income tax expense for the period.
Management analyzes the Company’s operating segments separately due to the 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 operating segments.
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 ofnon-current assets, othernon-operating losses and shares of profit / (loss) of associates and joint ventures (“Adjusted EBITDA”).
Subsequent to the transaction disclosed in Note 6, Italy is no longer a reportable segment. The comparative information has been adjusted accordingly.
In the second quarter of 2016, management decided to no longer include Kazakhstan as a separate reportable segment due to the decreasing impact of operations in Kazakhstan on the overall business. As a result, the activities in Kazakhstan have been integrated into Other. The comparative figures for the 2015 and 2014 periods set out in the tables below have beenre-presented to reflect this change.
Reportable segments
Financial information by reportable segment for the three years ended December 31, 2016, is presented in the following tables. Inter-segment revenues 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.
| Year ended December 31, 2016 | ||||||||||||||||||||||||||||||||||||
| Russia | Algeria | Pakistan | Bangladesh | Ukraine | Uzbekistan | HQ | Other | Total Segments | ||||||||||||||||||||||||||||
Revenue | ||||||||||||||||||||||||||||||||||||
External customers | 4,059 | 1,040 | 1,293 | 621 | 566 | 662 | 10 | 634 | 8,885 | |||||||||||||||||||||||||||
Inter-segment | 38 | — | 2 | — | 20 | 1 | — | (61 | ) | — | ||||||||||||||||||||||||||
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Total revenue | 4,097 | 1,040 | 1,295 | 621 | 586 | 663 | 10 | 573 | 8,885 | |||||||||||||||||||||||||||
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Adjusted EBITDA | 1,574 | 547 | 507 | 267 | 306 | 395 | (421 | ) | 57 | 3,232 | ||||||||||||||||||||||||||
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Other disclosures | ||||||||||||||||||||||||||||||||||||
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Capital expenditures | 663 | 201 | 215 | 137 | 106 | 174 | 27 | �� | 218 | 1,741 | ||||||||||||||||||||||||||
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| Year ended December 31, 2015 | ||||||||||||||||||||||||||||||||||||
| Russia | Algeria | Pakistan | Bangladesh | Ukraine | Uzbekistan | HQ | Other | Total Segments | ||||||||||||||||||||||||||||
Revenue | ||||||||||||||||||||||||||||||||||||
External customers* | 4,528 | 1,273 | 1,014 | 604 | 592 | 710 | — | 885 | 9,606 | |||||||||||||||||||||||||||
Inter-segment | 55 | — | — | — | 30 | 1 | — | (86 | ) | — | ||||||||||||||||||||||||||
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Total revenue | 4,583 | 1,273 | 1,014 | 604 | 622 | 711 | — | 799 | 9,606 | |||||||||||||||||||||||||||
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Adjusted EBITDA | 1,825 | 684 | 409 | 242 | 292 | 437 | (1,291 | ) | 277 | 2,875 | ||||||||||||||||||||||||||
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Capital expenditures | 910 | 189 | 238 | 134 | 299 | 55 | 16 | 193 | 2,034 | |||||||||||||||||||||||||||
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Year ended December 31, 2014 |
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| Russia | Algeria | Pakistan | Bangladesh | Ukraine | Uzbekistan | HQ | Other | Total Segments | ||||||||||||||||||||||||||||
Revenue | ||||||||||||||||||||||||||||||||||||
External customers* | 7,338 | 1,692 | 1,010 | 563 | 1,008 | 717 | — | 1,158 | 13,486 | |||||||||||||||||||||||||||
Inter-segment | 90 | — | — | — | 54 | 1 | — | (145 | ) | — | ||||||||||||||||||||||||||
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Total revenue | 7,428 | 1,692 | 1,010 | 563 | 1,062 | 718 | — | 1,013 | 13,486 | |||||||||||||||||||||||||||
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Adjusted EBITDA | 2,980 | 857 | 386 | 219 | 484 | 461 | (233 | ) | 406 | 5,560 | ||||||||||||||||||||||||||
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Capital expenditures | 1,559 | 415 | 651 | 178 | 138 | 79 | 12 | 197 | 3,229 | |||||||||||||||||||||||||||
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The following table provides the reconciliation of consolidated Adjusted EBITDA to consolidated income statement before tax for the three years ended December 31:
| 2016 | 2015 | 2014 | ||||||||||
Total Segments Adjusted EBITDA | 3,232 | 2,875 | 5,560 | |||||||||
Depreciation | (1,439 | ) | (1,550 | ) | (1,996 | ) | ||||||
Amortization | (497 | ) | (517 | ) | (647 | ) | ||||||
Impairment loss | (192 | ) | (245 | ) | (976 | ) | ||||||
Loss on disposals ofnon-current assets | (20 | ) | (39 | ) | (68 | ) | ||||||
Finance costs | (830 | ) | (829 | ) | (1,077 | ) | ||||||
Finance income | 69 | 52 | 52 | |||||||||
Othernon-operating (losses) / gains | (82 | ) | (42 | ) | 121 | |||||||
Share of (loss) / profit of associates and joint ventures accounted for using the equity method | 48 | 14 | (38 | ) | ||||||||
Impairment of associates and joint ventures accounted for using the equity method | (99 | ) | — | — | ||||||||
Net foreign exchange gain / (loss) | 157 | (314 | ) | (556 | ) | |||||||
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Profit / (loss) before tax | 347 | (595 | ) | 375 | ||||||||
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Geographical information ofnon-current assets
The total ofnon-current assets (other than financial instruments and deferred tax assets, which are included in Other, along with consolidation eliminations), broken down by location of the assets, is shown in the following tables:
| December 31, 2016 | ||||||||||||||||||||||||||||||||||||
| Russia | Algeria | Pakistan | Bangladesh | Ukraine | Uzbekistan | HQ | Other | Total Segments | ||||||||||||||||||||||||||||
Non-current assets | 7,717 | 2,324 | 2,169 | 1,104 | 556 | 509 | 38 | 2,312 | 16,729 | |||||||||||||||||||||||||||
December 31, 2015 |
| |||||||||||||||||||||||||||||||||||
| Russia | Algeria | Pakistan | Bangladesh | Ukraine | Uzbekistan | HQ | Other | Total Segments | ||||||||||||||||||||||||||||
Non-current assets | 5,370 | 2,456 | 1,624 | 1,140 | 694 | 472 | 22 | 1,556 | 13,334 | |||||||||||||||||||||||||||
The following table provides a breakdown of total operating revenue from external customers by mobile and fixed line for the three years ended December 31:
| 2016 | 2015 | 2014 | ||||||||||
Mobile services | 8,089 | 8,797 | 12,133 | |||||||||
Fixed line services | 796 | 809 | 1,353 | |||||||||
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Total revenue | 8,885 | 9,606 | 13,486 | |||||||||
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Revenue recognition (accounting policy)
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.
Generally, revenue for products is recorded when the equipment is sold or upon transfer of the associated risks and rewards, and revenue for services is recorded when the services are rendered. Revenue for bundled packages is recorded based on the relative fair value allocation of each component in the bundle.
Mobile 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 includes short messages, multimedia messages, 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 has aligned its practices for content revenue across the group, andre-presented the comparative periods 2015 and 2014 reducing revenue and operating costs for the periods. The impact of this refinement in policy was not material for any periods presented, and reduced the revenue and the operating costs by US$20 in 2016, US$19 in 2015 and US$31 in 2014. 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.
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.
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 theend-users.
Connection fees
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 are agreements under which VEON provides more than one service. Services / products may be provided or ‘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’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.
9 Selling, general and administrative expenses
Selling, general and administrative expenses consist of the following:
| 2016 | 2015 | 2014 | ||||||||||
Network and IT costs | 1,043 | 1,017 | 1,402 | |||||||||
Personnel cost | 775 | 848 | 1,122 | |||||||||
Customer associated costs | 822 | 860 | 1,190 | |||||||||
Losses on receivables | 58 | 51 | 53 | |||||||||
Taxes, other than income taxes | 244 | 227 | 295 | |||||||||
Provisions related to the Algeria transaction | — | — | 50 | |||||||||
Other | 726 | 1,560 | 631 | |||||||||
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Total | 3,668 | 4,563 | 4,743 | |||||||||
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Included in Other for the period ended December 31, 2015, is the provision expense related to the Uzbekistan investigation (see Note 25 for further details).
Dealer commissions
Dealer commissions are expensed in the consolidated income statement when the services are provided unless they meet the definition of an asset. Dealer commissions are part of customer associated costs.
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 othernon-financial assets.
Total operating lease expense recognized in the consolidated income statement amounted to US$408 (2015: US$385, 2014: US$557). Please refer to Note 27 for details regarding operating lease commitments.
Accounting policies (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 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.
Finance leases
At the commencement of a finance lease term, VEON 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 VEON related to the lease are added to the amount recognized as an asset.
Operating leases
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 othernon-financial assets.
Accounting policies
Goodwill
Goodwill is recognized for the future economic benefits arising from net assets acquired that are not individually identified and separately recognized.
Goodwill is not amortized but is tested for impairment annually and as necessary when circumstances indicate that the carrying value may be impaired.
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 prepared for a period of five years. For longer periods, a long-term growth rate is applied in order to project future cash flows after the fifth year.
Impairment of assets
Property and equipment, and intangible assets 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.
Impairment losses of continuing operations are recognized in the income statement in a separate line item.
The impairment charge relates to the following:
| Note | 2016 | 2015 | 2014 | |||||||||||||
Property and equipment | 10,16 | 100 | 150 | — | ||||||||||||
Intangible assets | 10,17 | 14 | — | — | ||||||||||||
Goodwill | 10 | 78 | 95 | 976 | ||||||||||||
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| 192 | 245 | 976 | ||||||||||||||
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Carrying amount of goodwill and cash-generating units
Goodwill acquired through business combinations has been allocated to CGUs for impairment testing as follows:
| Year ended December 31, 2016 | ||||||||||||||||||||
CGU | 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 | ||||||||||||||
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Total | 4,696 | (78 | ) | 201 | 350 | 4,223 | ||||||||||||||
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| Year ended December 31, 2015 | ||||||||||||||||||||||||
CGU | 2015 | Impairment | Acquisition | Translation adjustment | Classification as held for sale | 2014** | ||||||||||||||||||
Italy* | — | — | — | (452 | ) | (4,381 | ) | 4,833 | ||||||||||||||||
Russia | 1,924 | — | 2 | (568 | ) | — | 2,490 | |||||||||||||||||
Ukraine | — | (51 | ) | — | (24 | ) | — | 75 | ||||||||||||||||
Algeria | 1,435 | — | — | (321 | ) | — | 1,756 | |||||||||||||||||
Pakistan | 295 | — | — | (12 | ) | — | 307 | |||||||||||||||||
Kazakhstan | 173 | — | — | (149 | ) | — | 322 | |||||||||||||||||
Kyrgyzstan | 177 | — | (51 | ) | — | 228 | ||||||||||||||||||
Uzbekistan | 131 | — | — | (12 | ) | — | 143 | |||||||||||||||||
Armenia | 59 | (44 | ) | — | (1 | ) | — | 104 | ||||||||||||||||
Tajikistan | 21 | — | — | — | — | 21 | ||||||||||||||||||
Others | 8 | — | — | 2 | — | 6 | ||||||||||||||||||
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Total | 4,223 | (95 | ) | 2 | (1,588 | ) | (4,381 | ) | 10,285 | |||||||||||||||
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There were no changes to the methodology of goodwill allocation to CGUs.
The Company performed its annual goodwill impairment test as at October 1, 2016. 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 at 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, 2016 for any adverse developments that could have negatively impacted the valuations.
The recoverable amounts of CGUs have been determined based on fair value less costs of disposal calculations, using cash flow projections from business plans approved in the first quarter of 2016 by the Group’s senior management. These plans were updated for subsequent changes in the actual performances as well as any changes in the existing networks, renewal of the telecom licenses, any restructurings and other business initiatives. 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
2016
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 rate of 10.3% and 14.5%, respectively.
For 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 as follows:
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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 allnon-current and current assets, including goodwill:
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Additionally, in connection with the rollout of the Company’s transformation strategy and commitment to network modernization, the Company hasre-evaluated the plans for its existing network, including equipment purchased but not installed, and consequently recorded an impairment loss of US$30.
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 higherpost-tax discount factors for the first two years in the explicit period of 27.1% in 2015 and 20.4% in 2016, followed by normalizedpost-tax discount rate of 17.8% as at March 31, 2015.
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 appliedpost-tax discount rate of 12.1% as at March 31, 2015.
Based on the annual goodwill impairment test as at October 1, 2015, there were no other impairment losses identified for these and other CGUs.
Several countries exhibited very limited headroom, and these are discussed in more details later in this Note.
Additionally, in connection with the rollout of the Company’s transformation strategy and commitment to network modernization, the Company hasre-evaluated the plans for its existing network, including equipment purchased but not installed, and consequently recorded an impairment loss of US$150.
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 US$767. The recoverable amount was determined based on a fair value less costs of disposal calculation using the latest cash flow projections including the awarded 3G license as well as cost optimization restructurings and necessity to renew 2G licenses in the future (Level 3 fair value). Due to the macroeconomic and geopolitical situation in the country, the Company applied higherpost-tax discount factors for the first two years in the explicit period of 26.1% in 2015 and 19.4% 2016 followed by normalizedpost-tax discount rate of 16.8%.
The Company also concluded an impairment pertaining to its operations in Pakistan in an amount of US$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). Thepost-tax discount rate applied was 16.6%.
Other impairment concluded related to goodwill in Laos of US$34. The recoverable amounts were determined based on the fair value less costs of disposal calculations using the latest cash flow projections and apost-tax discount rate of 16.2% for Laos and 13.1% for other CGUs (Level 3 fair value).
In addition, the Company recorded an impairment for othernon-current assets for the total amount of US$110, which was offset by an impairment reversal pertaining to the sale by VEON and GTH of all of our debt and equity interest in the Globalive group of companies in Canada in 2014.
Key assumptions
The key assumptions and inputs used by the Company in determining the recoverable amount are:
the discount rate,
average revenue growth rate (excluding perpetuity period),
terminal growth rate,
average operating margin and
average capital expenditure as a percentage of revenue.
The Company estimates operating margin calculated based on Adjusted EBITDA divided by Total Operating Revenue for each CGU and each future year.
Capital expenditure is defined as purchases of property and equipment and intangible assets other than goodwill.
The discount rates used in the impairment test were initially determined in US$ based on the risk free rate for20-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% (2015: 5.5%, 2014: 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 targetdebt-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. Due to the current macroeconomic situation in Russia and Ukraine, the Company applied higher discount rates for the last quarter of 2016 and the year 2017.
Discount rate (functional currency) | 2016 | 2015 | 2014 | |||||||||
Russia* | 9.7 | % | 11.2 | % | 11.2 | % | ||||||
Ukraine* | 17.2 | % | 18.2 | % | 16.8 | % | ||||||
Algeria | 9.8 | % | 11.4 | % | 10.8 | % | ||||||
Pakistan | 14.3 | % | 15.7 | % | 16.6 | % | ||||||
Bangladesh | 11.9 | % | 13.4 | % | 12.9 | % | ||||||
Kazakhstan | 12.4 | % | 12.3 | % | 11.4 | % | ||||||
Kyrgyzstan | 14.5 | % | 14.2 | % | 16.5 | % | ||||||
Uzbekistan | 15.4 | % | 18.4 | % | 10.2 | % | ||||||
Armenia | 12.0 | % | 12.9 | % | 11.7 | % | ||||||
Georgia | 10.3 | % | 12.6 | % | 13.1 | % | ||||||
Tajikistan | n.a. | 13.5 | % | 12.7 | % | |||||||
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.
Average annual revenue growth rate during forecast period (functional currency) | 2016 | 2015 | 2014 | |||||||||
Russia | 2.4 | % | 2.4 | % | 1.2 | % | ||||||
Ukraine | 3.6 | % | 3.9 | % | 4.6 | % | ||||||
Algeria | (0.8 | )% | (0.9 | %) | 6.0 | % | ||||||
Pakistan | 7.6 | % | 4.8 | % | 6.1 | % | ||||||
Bangladesh | 6.4 | % | 6.5 | % | 9.6 | % | ||||||
Kazakhstan | 4.4 | % | 3.5 | % | 2.9 | % | ||||||
Kyrgyzstan | (1.8 | )% | 2.4 | % | 2.7 | % | ||||||
Uzbekistan | 1.7 | % | 1.7 | % | (3.6 | %) | ||||||
Armenia | (2.8 | )% | (0.7 | %) | 2.1 | % | ||||||
Georgia | 6.4 | % | 6.5 | % | 5.8 | % | ||||||
Tajikistan | n.a. | (4.2 | %) | 6.4 | % | |||||||
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.
Terminal growth rate | 2016 | 2015 | 2014 | |||||||||
Russia | 1.0 | % | 1.0 | % | 1.0 | % | ||||||
Ukraine | 1.0 | % | 3.0 | % | 2.0 | % | ||||||
Algeria | 3.0 | % | 4.0 | % | 4.0 | % | ||||||
Pakistan | 4.0 | % | 5.0 | % | 6.0 | % | ||||||
Bangladesh | 4.7 | % | 5.9 | % | 5.7 | % | ||||||
Kazakhstan | 2.0 | % | 3.0 | % | 3.0 | % | ||||||
Kyrgyzstan | 2.5 | % | 2.5 | % | 3.0 | % | ||||||
Uzbekistan | 1.0 | % | 2.0 | % | 2.0 | % | ||||||
Armenia | 1.0 | % | 2.0 | % | 4.0 | % | ||||||
Georgia | 1.0 | % | 3.0 | % | 3.0 | % | ||||||
Tajikistan | n.a. | 2.0 | % | 2.0 | % | |||||||
The forecasted operating margin is based on the budget of the following year and assumes cost optimization initiatives which are part ofon-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 networkroll-out plans.
Average operating (EBITDA) margin | 2016 | 2015 | 2014 | |||||||||
Russia | 38.6 | % | 44.1 | % | 38.8 | % | ||||||
Ukraine | 44.9 | % | 44.9 | % | 45.1 | % | ||||||
Algeria | 50.8 | % | 48.7 | % | 52.3 | % | ||||||
Pakistan | 33.3 | % | 39.2 | % | 39.6 | % | ||||||
Bangladesh | 44.9 | % | 41.2 | % | 41.3 | % | ||||||
Kazakhstan | 43.6 | % | 52.3 | % | 47.1 | % | ||||||
Kyrgyzstan | 43.9 | % | 54.1 | % | 50.5 | % | ||||||
Uzbekistan | 58.2 | % | 61.2 | % | 56.3 | % | ||||||
Armenia | 37.8 | % | 35.5 | % | 35.9 | % | ||||||
Georgia | 25.7 | % | 32.2 | % | 22.8 | % | ||||||
Tajikistan | n.a. | 42.4 | % | 47.9 | % | |||||||
Average capital expenditure as a percentage of revenue Russia Ukraine Algeria Pakistan Bangladesh Kazakhstan Kyrgyzstan Uzbekistan Armenia Georgia Tajikistan 2016 2015 2014 15.9 % 16.5 % 17.5 % 17.0 % 19.1 % 22.6 % 15.8 % 16.3 % 13.6 % 14.3 % 14.1 % 20.9 % 14.6 % 15.8 % 17.8 % 18.8 % 20.3 % 13.0 % 17.0 % 12.3 % 14.1 % 18.2 % 16.3 % 20.0 % 14.1 % 11.8 % 15.7 % 17.3 % 16.4 % 18.9 % n.a. 13.6 % 12.9 %
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% | ||||||||||||||||||||||||
CGU | Headroom in USD | Discount Rate | Avg. growth rate | Avg. operating margin | Avg. CAPEX / Revenue | Terminal growth rate | ||||||||||||||||||
Armenia | — | 12 | 7 | 6 | 4 | 9 | ||||||||||||||||||
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 circumstances 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 25 and Note 27, 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’.
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.
Income tax expense
Income tax expense consisted of the following for the years ended December 31:
Current tax | 2016 | 2015 | 2014 | |||||||||
Current year | 615 | 712 | 601 | |||||||||
Adjustments in respect of previous years | (3 | ) | 38 | (40 | ) | |||||||
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| 612 | 750 | 561 | ||||||||||
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Deferred tax | ||||||||||||
Origination / (reversal) of temporary difference | (217 | ) | (782 | ) | (52 | ) | ||||||
Changes in tax rates | (7 | ) | 24 | (4 | ) | |||||||
Current year tax losses unrecognized | 172 | 207 | 72 | |||||||||
(De)recognition and utilization of previously unrecognized tax loss / tax credit | (15 | ) | (23 | ) | (12 | ) | ||||||
Expiration of tax losses | 2 | — | 5 | |||||||||
Derecognition of previously recognized tax losses | 95 | 32 | 20 | |||||||||
Write off / (reversal of write off) of deferred tax asset temporary differences | — | 7 | 14 | |||||||||
Adjustments of previous years | — | 6 | (15 | ) | ||||||||
(Un)recognized other carry forwards | (7 | ) | (1 | ) | 10 | |||||||
Other deferred tax effects | — | — | (1 | ) | ||||||||
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| 23 | (530 | ) | 37 | |||||||||
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Income tax expense | 635 | 220 | 598 | |||||||||
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Any penalties or interests relating to income tax claims or litigations are included in the income 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 December 31, 2016 | Year ended December 31, 2015 | Year ended December 31, 2014 | |||||||||
Profit / (loss) before tax from continued operations | 347 | (595 | ) | 375 | ||||||||
Income tax expense / (benefit) computed on profit before taxes at statutory tax rate | 87 | (148 | ) | 94 | ||||||||
Difference due to the effects of: | ||||||||||||
Different tax rates in different jurisdictions | 152 | (76 | ) | (150 | ) | |||||||
Non-deductible expenses | 89 | 320 | 481 | |||||||||
Non-taxable income | (81 | ) | (11 | ) | (106 | ) | ||||||
Prior year adjustments | (3 | ) | 44 | (54 | ) | |||||||
Change in recognition of deferred tax assets | 247 | 230 | 3 | |||||||||
Withholding taxes | 62 | (179 | ) | 262 | ||||||||
Tax claims | 59 | 5 | 97 | |||||||||
Change in Income tax rate | (7 | ) | 28 | (4 | ) | |||||||
Other | 30 | 7 | (25 | ) | ||||||||
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Income tax charge for the period | 635 | 220 | 598 | |||||||||
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The effective tax rate amounts to 183.0% in 2016 (2015: 37.0%, 2014: 159.5%).
Explanatory notes to the effective tax rate
Different tax rates
US$152 adjustment is due to different tax rates of countries that are higher compared to the Dutch statutory tax rate of 25%. The US$152 mainly relates to Uzbekistan which has a profit before tax of US$339 and a statutory tax rate of 50%.
Permanent differences
Thenon-deductible expenses have an increasing effect on the effective tax rate (US$89).
The 2016non-deductible expenses mainly relate to GTH (US$24), Pakistan (US$20) and Tajikistan (US$18). The main item of GTHnon-deductible expenses in the amount of US$24 represents a legal provision due to the Iraqna case (refer to Note 25). Thenon-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 asnon-deductible. For Tajikistan, thenon-deductible expenses mainly relate to on charged intercompany expenses.
The 2015non-deductible expenses mainly relate to the provision recognized regarding the Uzbekistan investigations (Note 25) beingnon-tax deductible (US$199 tax impact),non-deductible interest expenses recorded in Egypt andnon-deductible impairment losses.
Change in recognition of deferred tax assets
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 has tax losses for which a deferred tax assets 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 at 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 are-measurement of deferred tax asset on previous year tax losses in Luxembourg.
Withholding taxes
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).
Furthermore, the Company released the accrued withholding taxes on distribution of dividends from the former CIS region after the restructuring ofKar-tel andSky-Mobile (US$75). The Company also accrued for withholding taxes on future distributions resulting in a net impact of US$58.
Prior year adjustments
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.
Tax claims
The tax claims relate to provisions for uncertain income tax positions (see Note 25).
Changes in income tax rates
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).
Minimum taxes and other
US$30 mainly relates to recorded alternative minimum taxes (US$11) and tax credits (US$14) for Pakistan.
Deferred taxes
As at December 31, 2016 and December 31, 2015, the Group reported the following deferred tax assets and liabilities in the statement of financial position:
| December 31, 2016 | December 31, 2015 | |||||||
Deferred tax assets | 343 | 150 | ||||||
Deferred tax liabilities | (331 | ) | (404 | ) | ||||
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Net deferred tax position | 12 | (254 | ) | |||||
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The following table shows the movements of the deferred tax assets and liabilities in 2016:
| Movements in Deferred taxes | ||||||||||||||||||||||||||||
| Opening balance | Net income statement movement | Changes in composition of the group | Other comprehensive income & Other | Currency translation | Tax rate changes | Ending balance | ||||||||||||||||||||||
Property, plant and equipment, net | (499 | ) | 32 | 74 | 26 | (54 | ) | 1 | (420 | ) | ||||||||||||||||||
Intangible assets, net | (228 | ) | 32 | (3 | ) | 37 | (3 | ) | (1 | ) | (166 | ) | ||||||||||||||||
Trade accounts receivable | 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 undistributed earnings | (45 | ) | (26 | ) | — | — | (2 | ) | — | (73 | ) | |||||||||||||||||
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| (590 | ) | 82 | 73 | 62 | (37 | ) | — | (409 | ) | |||||||||||||||||||
Tax losses and other carry 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 | ) | |||||||||||||||||||
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Net deferred tax position | (254 | ) | (23 | ) | 306 | 4 | (21 | ) | — | 12 | ||||||||||||||||||
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The movement in net deferred tax position mainly relates to recognition of losses for Pakistan due to the acquisition of Warid Telecom.
As at December 31, 2016, the amount of deductible temporary differences for which no deferred tax asset is recognized amounts to US$27 for Georgia.
The following table shows the movements of the deferred tax assets and liabilities in 2015:
| Movements in Deferred taxes | ||||||||||||||||||||||||||||
| Opening balance | Net income statement movement | Changes in composition of the group | Other comprehensive income & Other | Currency translation | Tax rate changes | Ending balance | ||||||||||||||||||||||
Property, plant and equipment, net | (547 | ) | (9 | ) | (8 | ) | — | 95 | (30 | ) | (499 | ) | ||||||||||||||||
Intangible assets, net | (774 | ) | 73 | 401 | — | 80 | (8 | ) | (228 | ) | ||||||||||||||||||
Trade accounts receivable | 74 | 25 | (80 | ) | — | (6 | ) | 8 | 21 | |||||||||||||||||||
Other assets | 303 | (162 | ) | (131 | ) | — | (13 | ) | (2 | ) | (5 | ) | ||||||||||||||||
Provisions | 42 | (5 | ) | (21 | ) | — | (8 | ) | 1 | 9 | ||||||||||||||||||
Long-term debt | (19 | ) | 24 | 19 | — | (2 | ) | 1 | 23 | |||||||||||||||||||
Accounts payable | 69 | 37 | (18 | ) | — | (25 | ) | 8 | 71 | |||||||||||||||||||
Other liabilities | 84 | (32 | ) | — | — | (12 | ) | 5 | 45 | |||||||||||||||||||
Other movements and temporary differences | 7 | (3 | ) | — | 18 | (2 | ) | — | 20 | |||||||||||||||||||
Deferred subnational income taxes and other | (6 | ) | (10 | ) | 16 | — | (2 | ) | — | (2 | ) | |||||||||||||||||
Withholding tax on undistributed earnings | (599 | ) | 540 | — | — | 14 | — | (45 | ) | |||||||||||||||||||
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| (1,366 | ) | 478 | 178 | 18 | 119 | (17 | ) | (590 | ) | |||||||||||||||||||
Tax losses and other carry forwards* | 3,116 | (72 | ) | (384 | ) | (20 | ) | (20 | ) | (7 | ) | 2,613 | ||||||||||||||||
Non recognized deferred tax assets on losses and credits* | (2,646 | ) | — | 384 | — | (1 | ) | — | (2,263 | ) | ||||||||||||||||||
Non recognized deferred tax assets on temporary differences | (166 | ) | 153 | — | — | (1 | ) | — | (14 | ) | ||||||||||||||||||
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Net deferred tax position | (1,062 | ) | 559 | 178 | (2 | ) | 97 | (24 | ) | (254 | ) | |||||||||||||||||
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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 deductible temporary differences, unused tax losses and other carry forwards for which no deferred tax asset is recognized are as follows as at December 31, 2016:
Tax losses year of expiration | Recognized losses | Recognized DTA | Non-recognized losses | Non-recognized DTA | ||||||||||||
0 - 5 years | (47 | ) | — | (1,016 | ) | 237 | ||||||||||
6 - 10 years | — | 9 | (2,148 | ) | 537 | |||||||||||
> 10 years | — | — | — | — | ||||||||||||
Indefinitely | (1,223 | ) | 402 | (5,137 | ) | 1,003 | ||||||||||
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Total | (1,270 | ) | 411 | (8,301 | ) | 1,777 | ||||||||||
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Other carry forwards year of expiration | Recognized credits | Recognized DTA | Non-recognized other carry forwards | Non-recognized DTA | ||||||||||||
0 - 5 years | (37 | ) | 37 | — | — | |||||||||||
6 - 10 years | — | — | — | — | ||||||||||||
> 10 years | — | — | — | — | ||||||||||||
Indefinitely | — | — | (187 | ) | 45 | |||||||||||
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Total | (37 | ) | 37 | (187 | ) | 45 | ||||||||||
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The losses mainly relate to Luxembourg (US$5,126) and Dutch holding entities (US$2,148) of which US$80 of losses is recognized.
The following tables show the recognized and not recognized deferred income tax assets as at December 31, 2015 for comparison purposes:
Tax losses year of expiration | Recognized losses | Recognized DTA | Non-recognized losses | Non-recognized DTA | ||||||||||||
0 - 5 years | — | — | (2,217 | ) | 548 | |||||||||||
6 - 10 years | (32 | ) | 6 | (1,290 | ) | 322 | ||||||||||
> 10 years | — | — | — | — | ||||||||||||
Indefinitely | (907 | ) | 308 | (5,671 | ) | 1,340 | ||||||||||
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Total | (939 | ) | 314 | (9,178 | ) | 2,210 | ||||||||||
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Other carry forwards year of expiration | Recognized credits | Recognized DTA | Non-recognized other carry forwards | Non-recognized DTA | ||||||||||||
0 - 5 years | (35 | ) | 35 | — | — | |||||||||||
6 - 10 years | — | — | — | — | ||||||||||||
> 10 years | — | — | — | — | ||||||||||||
Indefinitely | — | — | (193 | ) | 53 | |||||||||||
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Total | (35 | ) | 35 | (193 | ) | 53 | ||||||||||
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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$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.
At December 31, 2016, 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$8,495 (2015: US$8,239). Accordingly, no deferred tax liability is recognized for this amount of undistributed profits.
Taxes recorded outside the income statement
In 2015, the amount of current and deferred taxes reported 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, out of which US$350 was recognized directly in equity (Note 6).
Non-current income tax assets
The Company reported both current andnon-current income tax assets, totaling US$194. This mainly relates to advanced tax payments in Pakistan, Bangladesh and Ukraine which can only be offset against income tax liabilities in fiscal periods subsequent to 2016.
12 Investments in subsidiaries
Information about significant subsidiaries
Name of significant subsidiaries | Country of incorporation | Nature of the subsidiary | Ownership held by the Group (%) | |||||||||
| 2016 | 2015 | |||||||||||
VimpelCom Amsterdam B.V. | Netherlands | Holding | 100 | % | 100 | % | ||||||
Wind Telecom S.p.A. | Italy | Holding | 100 | % | 100 | % | ||||||
VimpelCom Holdings B.V. | Netherlands | Holding | 100 | % | 100 | % | ||||||
PJSC VimpelCom | Russia | Operating | 100 | % | 100 | % | ||||||
“Kyivstar” PJSC | 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 “Mobitel” | Georgia | Operating | 80.0 | % | 80.0 | % | ||||||
CJSC “ArmenTel” | Armenia | Operating | 100 | % | 100 | % | ||||||
LLC “Sky Mobile” (see Note 6 for transaction description ) | Kyrgyzstan | Operating | 50.1 | % | 50.1 | % | ||||||
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 | Egypt | Holding | 51.9 | % | 51.9 | % | ||||||
Omnium Telecom Algérie S.p.A.* | Algeria | Operating | 23.7 | % | 23.7 | % | ||||||
Optimum Telecom Algeria S.p.A.* | Algeria | Operating | 23.7 | % | 23.7 | % | ||||||
Pakistan Mobile Communications Limited (see Note 6 for transaction description ) | Pakistan | Operating | 44.0 | % | 51.9 | % | ||||||
Banglalink Digital Communications Limited | Bangladesh | Operating | 51.9 | % | 51.9 | % | ||||||
WIND Acquisition Holdings Finance S.p.A** | Italy | Holding | n/a | 100 | % | |||||||
WIND Retail S.r.l.** | Italy | Operating | n/a | 100 | % | |||||||
WIND Telecomunicazioni S.p.A.** | Italy | Operating | n/a | 100 | % | |||||||
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 though its subsidiary Global Telecom Holding S.A.E. in which it holds a 51.9% interest as at December 31, 2016. The equity interest presented in the table above represents the economic rights available to the Company.
Material partly-owned subsidiaries
Financial information of subsidiaries that have materialnon-controlling interests is provided below:
Name of significant subsidiaries | Country of operation | Equity interest held by non-controlling interest in % | ||||||||
| 2016 | 2015 | |||||||||
LLP “KaR-Tel” | Kazakhstan | 25.0 | % | 25.0 | % | |||||
LLC “Sky Mobile” | Kyrgyzstan | 49.8 | % | 49.8 | % | |||||
Global Telecom Holding S.A.E. (comprising Pakistan, Bangladesh and Algeria) | Egypt | 48.1 | % | 48.1 | % | |||||
Omnium Telecom Algérie S.p.A.** | Algeria | 76.3 | % | 76.3 | % | |||||
Book values of materialnon-controlling interests | ||||||||||
LLP “KaR-Tel” | Kazakhstan | 253 | 241 | |||||||
LLC “Sky Mobile” | Kyrgyzstan | 164 | 225 | |||||||
Global Telecom Holding S.A.E. | Egypt | (219 | ) | (224 | ) | |||||
Omnium Telecom Algérie S.p.A.** | Algeria | 1,332 | 1,404 | |||||||
Profit/(loss) allocated to materialnon-controlling interests | ||||||||||
LLP “KaR-Tel” | Kazakhstan | 10 | 44 | |||||||
LLC “Sky Mobile” | Kyrgyzstan | (21 | ) | 40 | ||||||
Global Telecom Holding S.A.E. | Egypt | 116 | 26 | |||||||
Omnium Telecom Algérie S.p.A.** | Algeria | 141 | 132 | |||||||
The summarized financial information of these subsidiaries before inter-company eliminations is as follows:
Summarized income statement:
Year ended December 31, 2016 | LLP “KaR-Tel” | LLC “Sky Mobile” | Global Telecom Holding S.A.E. | Omnium Telecom Algérie S.p.A.** | ||||||||||||
Operating revenue | 308 | 136 | 2,955 | 1,040 | ||||||||||||
Operating expenses | (255 | ) | (162 | ) | (2,463 | ) | (753 | ) | ||||||||
Other costs / income | 2 | (12 | ) | (213 | ) | (33 | ) | |||||||||
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Profit / (loss) before tax | 55 | (38 | ) | 279 | 254 | |||||||||||
Income tax expense | (14 | ) | (5 | ) | (144 | ) | (69 | ) | ||||||||
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Profit / (loss) for the year | 41 | (43 | ) | 135 | 185 | |||||||||||
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Total comprehensive income | 41 | (43 | ) | 135 | 185 | |||||||||||
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Attributed tonon-controlling interest | 10 | (21 | ) | 116 | 141 | |||||||||||
Dividends paid tonon-controlling interest | — | — | — | — | ||||||||||||
Year ended December 31, 2015 Operating revenue Operating expenses Other costs / income Profit / (loss) before tax Income tax expense Profit / (loss) for the year Total comprehensive income Attributed tonon-controlling interest Dividends paid tonon-controlling interest LLP “KaR-Tel” LLC “Sky
Mobile” Global Telecom
Holding S.A.E. Omnium Telecom
Algérie S.p.A.** 534 164 2,894 1,273 (410 ) (93 ) (2,462 ) (922 ) 97 29 (364 ) (72 ) 221 100 68 279 (51 ) (10 ) (115 ) (106 ) 170 90 (47 ) 173 170 90 (47 ) 173 44 40 26 132 — — — (57 )
Year ended December 31, 2014 | LLP “KaR-Tel” | LLC “Sky Mobile” | Global Telecom Holding S.A.E. | Omnium Telecom Algérie S.p.A.** | ||||||||||||
Operating revenue | 690 | 178 | 3,331 | 1,692 | ||||||||||||
Operating expenses | (513 | ) | (109 | ) | (2,972 | ) | (1,211 | ) | ||||||||
Other costs / income | 25 | 22 | (758 | ) | (30 | ) | ||||||||||
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Profit / (loss) before tax | 202 | 91 | (399 | ) | 451 | |||||||||||
Income tax expense | (49 | ) | (10 | ) | (286 | ) | (60 | ) | ||||||||
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Profit / (loss) for the year | 153 | 81 | (685 | ) | 391 | |||||||||||
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Total comprehensive income | 153 | 81 | (685 | )�� | 391 | |||||||||||
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Attributed tonon-controlling interest | 49 | 23 | (324 | ) | 194 | |||||||||||
Dividends paid tonon-controlling interest | — | — | — | — | ||||||||||||
Summarized statement of financial position:
As at December 31, 2016 | LLP “KaR-Tel” | LLC “Sky Mobile” | Global Telecom Holding S.A.E. | Omnium Telecom Algérie S.p.A.** | ||||||||||||
Property and equipment | 203 | 80 | 2,314 | 531 | ||||||||||||
Intangible assets | 91 | 14 | 1,356 | 394 | ||||||||||||
Othernon-current assets | 205 | 147 | 2,268 | 1,417 | ||||||||||||
Trade and other receivables | 16 | 6 | 222 | 44 | ||||||||||||
Cash and cash equivalents | 29 | 33 | 606 | 309 | ||||||||||||
Other current assets | 64 | 3 | 337 | 84 | ||||||||||||
Financial liabilities | — | — | (2,903 | ) | (343 | ) | ||||||||||
Provisions | (7 | ) | (15 | ) | (396 | ) | (28 | ) | ||||||||
Other liabilities | (94 | ) | (29 | ) | (1,787 | ) | (492 | ) | ||||||||
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Total equity | 507 | 239 | 2,017 | 1,916 | ||||||||||||
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Attributed to equity holders of parent | 254 | 75 | 2,236 | 584 | ||||||||||||
Non-controlling interest | 253 | 164 | (219 | ) | 1,332 | |||||||||||
As at December 31, 2015 Property and equipment Intangible assets Othernon-current assets Trade and other receivables Cash and cash equivalents Other current assets Financial liabilities Provisions Other liabilities Total equity Attributed to equity holders of parent Non-controlling interest LLP “KaR-Tel” LLC “Sky
Mobile” Global Telecom
Holding S.A.E. Omnium Telecom
Algérie S.p.A.** 199 67 2,125 522 11 11 1,358 493 183 178 1,770 1,538 20 15 253 135 136 45 508 402 79 75 406 76 (13 ) — (2,490 ) (539 ) (7 ) — (374 ) (31 ) (84 ) (29 ) (1,548 ) (585 ) 524 362 2,008 2,011 283 137 2,232 607 241 225 (224 ) 1,404
Summarized cash flow statement:
Year ended December 31, 2016 | LLP “KaR-Tel” | LLC “Sky Mobile” | Global Telecom Holding S.A.E. | Omnium Telecom Algérie S.p.A.** | ||||||||||||
Operating | 99 | 58 | 1,077 | 446 | ||||||||||||
Investing | (124 | ) | 45 | (473 | ) | (238 | ) | |||||||||
Financing | (83 | ) | (115 | ) | (492 | ) | (288 | ) | ||||||||
Effect of exchange rate changes on cash and cash equivalents | 1 | (1 | ) | (14 | ) | (14 | ) | |||||||||
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Net increase / (decrease) in cash equivalents | (107 | ) | (12 | ) | 98 | (93 | ) | |||||||||
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Year ended December 31, 2015 | LLP “KaR-Tel” | LLC “Sky Mobile” | Global Telecom Holding S.A.E. | Omnium Telecom Algérie S.p.A.** | ||||||||||||
Operating | 137 | 81 | (339 | ) | (706 | ) | ||||||||||
Investing | (363 | ) | (65 | ) | (823 | ) | (201 | ) | ||||||||
Financing | (110 | ) | (88 | ) | (1,032 | ) | (1,270 | ) | ||||||||
Effect of exchange rate changes on cash and cash equivalents | (5 | ) | (3 | ) | (151 | ) | (153 | ) | ||||||||
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Net increase / (decrease) in cash equivalents | (341 | ) | (75 | ) | (2,345 | ) | (2,330 | ) | ||||||||
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Year ended December 31, 2014 | LLP “KaR-Tel” | LLC “Sky Mobile” | Global Telecom Holding S.A.E. | Omnium Telecom Algérie S.p.A.** | ||||||||||||
Operating | 255 | 82 | (362 | ) | 793 | |||||||||||
Investing | 45 | 21 | 252 | (393 | ) | |||||||||||
Financing | (72 | ) | — | 102 | — | |||||||||||
Effect of exchange rate changes on cash and cash equivalents | (14 | ) | (2 | ) | 1 | (317 | ) | |||||||||
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Net increase / (decrease) in cash equivalents | 214 | 101 | (7 | ) | 83 | |||||||||||
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13 Investments in associates and joint ventures
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 an associate or joint venture may be impaired. If there are such indicators (i.e. joint venture making losses), the Company estimates the recoverable amount of the joint venture after applying the equity method.
Significant joint ventures | Country of incorporation | Nature of entity | Ownership held by the Group (%) | |||||||||
| 2016 | 2015 | |||||||||||
VIP-CKH Luxembourg S.à.r.l.* | Luxembourg | Holding | 50 | % | — | |||||||
VIP-CKH Ireland Limited* | Ireland | Financing | 50 | % | — | |||||||
Euroset Holding N.V. (“Euroset”) | Russia | Operating | 50 | % | 50 | % | ||||||
Investments in associates and joint ventures | 2016 | 2015 | ||||||
Italy Joint Venture | 2,053 | — | ||||||
Euroset | 126 | 199 | ||||||
Other investments in associates and joint ventures | — | 2 | ||||||
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| 2,179 | 201 | |||||||
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Share of profit / (loss) of associates and joint ventures accounted for using the equity method | 2016 | 2015 | 2014 | |||||||||
Italy Joint Venture | 59 | — | — | |||||||||
Euroset | (10 | ) | 18 | (8 | ) | |||||||
Other associates and joint ventures | (1 | ) | (4 | ) | (30 | ) | ||||||
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| 48 | 14 | (38 | ) | |||||||||
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Italy Joint Venture
The Italy Joint Venture includesVIP-CKH Luxembourg S.à.r.l and its subsidiaries, which hold the combined businesses of Wind and 3 Italia, and the financing companyVIP-CKH Ireland Limited.
On November 5, 2016, the Company completed the transaction with CK Hutchison to form a joint venture in Italy, combining their respective businesses. Refer to Note 4 for significant judgments made and Note 6 for further details regarding this transaction.
The information of the Italy Joint Venture disclosed below reflects the amounts presented in the financial statements of the relevant joint venture’s and not the Group’s share of those amounts. 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.
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Included within operating expenses is US$290 of depreciation and amortization expense. Included within Other (expenses) / income is US$68 of interest expense.
There were no dividends received from the Italy Joint Venture in 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.
Impairment of Euroset
In Q4 2016, due to operational underperformance of Euroset, the Company recorded an impairment of US$99. The recoverable amount of Euroset has been determined based on fair value less costs of disposal calculations, using the most recent cash flow projections.
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14 Othernon-operating losses / (gains)
Othernon-operating losses / (gains) consisted of the following for the years ended December 31:
| 2016 | 2015 | 2014 | ||||||||||
Change of fair value of embedded derivative | (12 | ) | — | — | ||||||||
Change of fair value of other derivatives | 120 | 15 | (114 | ) | ||||||||
Ineffective portion of cash flow hedges | — | 6 | (7 | ) | ||||||||
Gain on sale of financial assets | (21 | ) | (4 | ) | (2 | ) | ||||||
Early debt redemption fees | (4 | ) | — | |||||||||
Other (gains) / losses | (5 | ) | 29 | 2 | ||||||||
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| 82 | 42 | (121 | ) | |||||||||
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The change in fair value of other derivatives mainly relates to derivatives in Russia (refer to Note 18).
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”):
| Year ended December 31 | ||||||||||||
Continuing operations | 2016 | 2015 | 2014 | |||||||||
| (In millions of U.S. dollars, except share amounts) | ||||||||||||
Numerator: | ||||||||||||
(Loss)/profit for the period attributable to the owners of the parent | (380 | ) | (917 | ) | 33 | |||||||
Denominator: | ||||||||||||
Denominator for basic earnings per share—weighted average common shares outstanding (millions) | 1,749 | 1,748 | 1,748 | |||||||||
Effect of dilutive securities: Employee stock options (millions) | — | 1 | 1 | |||||||||
Denominator for diluted earnings per share—assumed conversions (millions) | 1,749 | 1,749 | 1,749 | |||||||||
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Basic (loss) / earnings per share | ($ | 0.22 | ) | ($ | 0.52 | ) | $ | 0.02 | ||||
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Diluted (loss) / earnings per share | ($ | 0.22 | ) | ($ | 0.52 | ) | $ | 0.02 | ||||
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Employee stock options, representing 100,000 shares that are all out of the money as at December 31, 2016, were excluded in the computation of diluted EPS because inclusion of the options would have been antidilutive for the periods presented.
| Year ended December 31 | ||||||||||||
Discontinued operations | 2016 | 2015 | 2014 | |||||||||
| (In millions of U.S. dollars, except share amounts) | ||||||||||||
Numerator: | ||||||||||||
(Loss) / profit for the period attributable to the owners of the parent | 2,708 | 262 | (680 | ) | ||||||||
Denominator: | ||||||||||||
Denominator for basic earnings per share—weighted average common shares outstanding (millions) | 1,749 | 1,748 | 1,748 | |||||||||
Effect of dilutive securities: Employee stock options (millions) | — | 1 | 1 | |||||||||
Denominator for diluted earnings per share—assumed conversions (millions) | 1,749 | 1,749 | 1,749 | |||||||||
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Basic (loss) / earnings per share | $ | 1.55 | $ | 0.15 | ($ | 0.39 | ) | |||||
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Diluted (loss) / earnings per share | $ | 1.55 | $ | 0.15 | ($ | 0.39 | ) | |||||
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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 January 1, 2015 | 17,354 | 561 | 1,227 | 417 | 1,502 | 21,061 | ||||||||||||||||||
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Reclassification to AHFS* | (5,085 | ) | — | (163 | ) | (29 | ) | (233 | ) | (5,510 | ) | |||||||||||||
Additions | 342 | 9 | 40 | 2 | 1,486 | 1,879 | ||||||||||||||||||
Disposals | (1,126 | ) | (28 | ) | (148 | ) | (7 | ) | (8 | ) | (1,317 | ) | ||||||||||||
Transfer | 1,403 | 34 | 806 | (660 | ) | (1,583 | ) | — | ||||||||||||||||
Acquisitions | 1 | — | 2 | 1 | — | 4 | ||||||||||||||||||
Translation adjustment | (2,821 | ) | (153 | ) | (341 | ) | (34 | ) | (245 | ) | (3,594 | ) | ||||||||||||
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At December 31, 2015 | 10,068 | 423 | 1,423 | (310 | ) | 919 | 12,523 | |||||||||||||||||
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Acquisition (Note 6) | 116 | 10 | 39 | — | 34 | 199 | ||||||||||||||||||
Additions | 62 | 7 | 19 | 2 | 1,322 | 1,412 | ||||||||||||||||||
Disposals | (444 | ) | (9 | ) | (30 | ) | (3 | ) | (22 | ) | (508 | ) | ||||||||||||
Transfer | 1,153 | 9 | (603 | ) | 655 | (1,214 | ) | — | ||||||||||||||||
Translation adjustment | 1,137 | 21 | 109 | 18 | (53 | ) | 1,232 | |||||||||||||||||
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At December 31, 2016 | 12,092 | 461 | 957 | 362 | 986 | 14,858 | ||||||||||||||||||
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Depreciation and impairment | ||||||||||||||||||||||||
At January 1, 2015 | (7,976 | ) | (187 | ) | (761 | ) | (279 | ) | (9 | ) | (9,212 | ) | ||||||||||||
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Reclassification to AHFS* | 1,921 | — | 99 | 25 | — | 2,045 | ||||||||||||||||||
Transfer | 73 | (3 | ) | (680 | ) | 686 | (90 | ) | (14 | ) | ||||||||||||||
Depreciation charge for the year | (1,765 | ) | (35 | ) | (136 | ) | (30 | ) | — | (1,966 | ) | |||||||||||||
Disposals | 1,069 | 7 | 145 | 5 | — | 1,226 | ||||||||||||||||||
Impairment | (45 | ) | (7 | ) | — | (1 | ) | (97 | ) | (150 | ) | |||||||||||||
Translation adjustment | 1,502 | 46 | 241 | (2 | ) | — | 1,787 | |||||||||||||||||
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At December 31, 2015 | (5,221 | ) | (179 | ) | (1,092 | ) | 404 | (196 | ) | (6,284 | ) | |||||||||||||
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Divestment | ||||||||||||||||||||||||
Transfer | (17 | ) | (1 | ) | 658 | (637 | ) | (3 | ) | — | ||||||||||||||
Depreciation charge for the year | (1,266 | ) | (33 | ) | (116 | ) | (24 | ) | — | (1,439 | ) | |||||||||||||
Disposals | 415 | 6 | 27 | 2 | 14 | 464 | ||||||||||||||||||
Impairment | (65 | ) | (2 | ) | (4 | ) | (2 | ) | (27 | ) | (100 | ) | ||||||||||||
Translation adjustment | (772 | ) | (9 | ) | (71 | ) | (8 | ) | 80 | (780 | ) | |||||||||||||
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At December 31, 2016 | (6,926 | ) | (218 | ) | (598 | ) | (265 | ) | (132 | ) | (8,139 | ) | ||||||||||||
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Net book value | ||||||||||||||||||||||||
At January 1, 2015 | 9,378 | 374 | 466 | 138 | 1,493 | 11,849 | ||||||||||||||||||
At December 31, 2015 | 4,847 | 244 | 331 | 94 | 723 | 6,239 | ||||||||||||||||||
At December 31, 2016 | 5,166 | 243 | 359 | 97 | 854 | 6,719 | ||||||||||||||||||
Property and equipment pledged as security for bank borrowings amounts to US$1,029 as of December 31, 2016 (US$955 as of December 31, 2015) and primarily relate to securities for borrowings of PMCL (please refer to Note 18 for the details of borrowing).
Property and equipment is stated at cost, net of accumulated depreciation and accumulated impairment losses, if any.
Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets as follows:
Telecommunication equipment3-20 years;
Buildings and constructions10-50 years;
Office and measuring equipment3-10 years; and
Other equipment3-10 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.
Depreciation charge from Italy for comparative periods
The depreciation charge for 2015 includes depreciation charges from the Italy segment of US$416 before the segment was classified as held for sale and discontinued operations.
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 borrowing costs are expensed in the period incurred.
During 2016, VEON capitalized interest in the cost of property and equipment in the amount of US$5 (2015: US$9). In 2016, the capitalization rate was 10.3% (2015: 9.7%).
Change in estimate
During 2016 there were no other material change in estimates related to property and equipment other than the impairment described in Note 10 of US$100 (2015: US$150), and accelerated depreciation in Bangladesh, Pakistan and Ukraine pertaining to network modernization activities US$153 (2015: US$100 related to Pakistan network modernization activities).
Non-cash investing activities
In 2016, VEON acquired property and equipment in the amount of US$699 (2015: US$560), which was not paid for as at respective year end.
The total gross carrying value and accumulated amortization of VEON’s intangible assets consisted of the following:
| Telecommunications licenses, frequencies and permissions | Software | Brands and trademarks | Customer relationships | Telephone line capacity | Other intangible assets | Total | ||||||||||||||||||||||
Cost | ||||||||||||||||||||||||||||
At January 1, 2015 | 5,661 | 1,882 | 1,831 | 4,762 | 104 | 523 | 14,763 | |||||||||||||||||||||
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Acquisitions | 1 | — | — | — | — | 13 | 14 | |||||||||||||||||||||
Reclassification to AHFS* | (3,338 | ) | (530 | ) | (1,063 | ) | (2,370 | ) | — | (269 | ) | (7,570 | ) | |||||||||||||||
Additions | 235 | 288 | — | 38 | — | 78 | 639 | |||||||||||||||||||||
Disposals | (128 | ) | (478 | ) | (1 | ) | — | — | (34 | ) | (641 | ) | ||||||||||||||||
Transfer | 4 | 1 | — | — | — | (5 | ) | — | ||||||||||||||||||||
Translation adjustment | (674 | ) | (336 | ) | (203 | ) | (692 | ) | (21 | ) | (76 | ) | (2,002 | ) | ||||||||||||||
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At December 31, 2015 | 1,761 | 827 | 564 | 1,738 | 83 | 230 | 5,203 | |||||||||||||||||||||
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Acquisitions (Note 6) | 70 | 1 | 30 | 100 | — | — | 201 | |||||||||||||||||||||
Additions | 164 | 176 | — | — | — | (11 | ) | 329 | ||||||||||||||||||||
Disposals | (16 | ) | (63 | ) | — | (6 | ) | (13 | ) | (2 | ) | (100 | ) | |||||||||||||||
Transfer | — | 11 | — | — | (1 | ) | (10 | ) | — | |||||||||||||||||||
Translation adjustment | 38 | 86 | (17 | ) | 21 | 6 | (19 | ) | 115 | |||||||||||||||||||
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At December 31, 2016 | 2,017 | 1,038 | 577 | 1,853 | 75 | 188 | 5,748 | |||||||||||||||||||||
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Amortization and impairment | ||||||||||||||||||||||||||||
At January 1, 2015 | (1,571 | ) | (1,221 | ) | (397 | ) | (3,756 | ) | (88 | ) | (13 | ) | (7,046 | ) | ||||||||||||||
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Reclassification to AHFS* | 709 | 276 | 228 | 2,088 | — | (125 | ) | 3,176 | ||||||||||||||||||||
Amortization charge for the year | (269 | ) | (227 | ) | (70 | ) | (274 | ) | (6 | ) | (37 | ) | (883 | ) | ||||||||||||||
Disposals | 128 | 473 | 1 | — | — | 34 | 636 | |||||||||||||||||||||
Transfer | — | 18 | — | 14 | — | (32 | ) | — | ||||||||||||||||||||
Translation adjustment | 298 | 223 | 49 | 527 | 18 | 23 | 1,138 | |||||||||||||||||||||
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At December 31, 2015 | (705 | ) | (458 | ) | (189 | ) | (1,401 | ) | (76 | ) | (150 | ) | (2,979 | ) | ||||||||||||||
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Amortization charge for the year | (161 | ) | (187 | ) | (37 | ) | (97 | ) | (4 | ) | (11 | ) | (497 | ) | ||||||||||||||
Disposals | 16 | 60 | — | 6 | 13 | — | 95 | |||||||||||||||||||||
Impairment | (12 | ) | (2 | ) | — | — | — | — | (14 | ) | ||||||||||||||||||
Translation adjustment | (27 | ) | (71 | ) | 7 | (24 | ) | (4 | ) | 23 | (96 | ) | ||||||||||||||||
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At December 31, 2016 | (889 | ) | (658 | ) | (219 | ) | (1,516 | ) | (71 | ) | (138 | ) | (3,491 | ) | ||||||||||||||
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Net book value | ||||||||||||||||||||||||||||
At January 1, 2015 | 4,090 | 661 | 1,434 | 1,006 | 16 | 510 | 7,717 | |||||||||||||||||||||
At December 31, 2015 | 1,056 | 369 | 375 | 337 | 7 | 80 | 2,224 | |||||||||||||||||||||
At December 31, 2016 | 1,128 | 380 | 358 | 337 | 4 | 50 | 2,257 | |||||||||||||||||||||
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.
Additional information
As at December 31, 2016, no intangible assets were pledged as collateral and no assets have restrictions on title.
During 2016 and 2015, VEON did not capitalize any interest within the cost of intangible assets.
Non-cash investing activities
During 2016, VEON acquired intangible assets in the amount of US$194 (2015: US$105), which was not paid for as at respective year end.
Amortization charge from Italy for comparative periods
The amortization charge for 2015 includes amortization charges from the Italy segment of US$365 before the segment was classified as held for sale and discontinued operations.
18 Financial assets and liabilities
Financial assets
The Company holds the following financial assets as at December 31:
| 2016 | 2015 | |||||||
Financial instruments at fair value through profit or loss | ||||||||
Derivatives not designated as hedges | ||||||||
Cross-currency interest rate exchange contracts | — | 1 | ||||||
Foreign exchange contracts | 2 | 15 | ||||||
Embedded derivatives in notes | 12 | — | ||||||
Financial instruments at fair value | ||||||||
Derivatives designated as cash flow hedges | ||||||||
Foreign exchange contracts | — | 17 | ||||||
Available for sale financial instruments | 71 | 45 | ||||||
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Total financial instruments at fair value | 85 | 78 | ||||||
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Loans granted, deposits and other financial assets at amortized cost | ||||||||
Bank deposits | 383 | 432 | ||||||
Interest receivable | 2 | 1 | ||||||
Other investment | 24 | 46 | ||||||
Other loans granted | 2 | 2 | ||||||
Total loans granted, deposits and other financial assets | 411 | 481 | ||||||
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Total other financial assets | 496 | 559 | ||||||
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Totalnon-current | 306 | 164 | ||||||
Total current | 190 | 395 | ||||||
Financial liabilities
The Company has the following financial liabilities as at December 31:
| 2016 | 2015 | |||||||
Financial instruments at fair value | ||||||||
Derivatives not designated as hedges | ||||||||
Foreign exchange contracts | 29 | 1 | ||||||
Derivatives designated as cash flow hedges | ||||||||
Foreign exchange contracts | 4 | — | ||||||
Interest rate exchange contracts | 3 | 3 | ||||||
Contingent consideration | 47 | — | ||||||
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Total financial instruments at fair value | 83 | 4 | ||||||
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Other financial liabilities at amortized cost | ||||||||
Bank loans and bonds | ||||||||
Bank loans and bonds, principal | 9,786 | 8,784 | ||||||
Interest accrued | 169 | 176 | ||||||
Discounts, unamortized fees | 66 | 83 | ||||||
Equipment financing | ||||||||
Equipment financing principal | 703 | 760 | ||||||
Discounts, unamortized fees on equipment financing | (26 | ) | (23 | ) | ||||
Interest accrued on equipment financing | 4 | 4 | ||||||
Put-option liability overnon-controlling interest | 290 | — | ||||||
Other financial liabilities | 41 | — | ||||||
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Total other financial liabilities at amortized cost | 11,033 | 9,784 | ||||||
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Total other financial liabilities | 11,116 | 9,788 | ||||||
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Totalnon-current | 8,070 | 8,095 | ||||||
Total current | 3,046 | 1,693 | ||||||
Bank loans and bonds
The Company has the following principal amounts outstanding for interest-bearing loans and bonds as at December 31:
Borrower | Type of Debt | Interest rate | Maturity | Currency | 2016 | 2015 | Guarantor | |||||||||||||
VIP Finance Ireland | Eurobonds | 6.5-9.1% | 2016-2021 | US$ | 1,150 | 1,680 | None | |||||||||||||
PJSC VimpelCom | Sberbank | 12.75% | 2017-2018 | RUB | 1,021 | 831 | None | |||||||||||||
PJSC VimpelCom | Ruble Bonds | 10.0-11.9% | 2017 | RUB | 660 | 550 | None | |||||||||||||
VimpelCom Holdings B.V. | Notes | 5.2-7.5% | 2017-2023 | US$ | 3,183 | 3,183 | PJSC VimpelCom | |||||||||||||
VimpelCom Holdings B.V. | Notes | 9.0% | 2018 | RUB | 198 | 165 | PJSC VimpelCom | |||||||||||||
VimpelCom Amsterdam B.V. | Alfa Bank | 1mLibor + 3.3% | 2017 | US$ | 1,000 | 1,000 | None | |||||||||||||
GTH Finance B.V. | Notes | 6.25%-7,25% | 2020-2023 | US$ | 1,200 | — | VimpelCom Holdings B.V. | |||||||||||||
Banglalink Digital Communications Ltd. | Senior Notes | 8.6% | 2019 | US$ | 300 | 300 | None | |||||||||||||
Omnium Telecom Algeria SpA | Syndicated loan (Algeria) | Bank of Algeriare-discount rate + 2.0% | 2019 | DZD | 340 | 467 | None | |||||||||||||
| Other loans | 734 | 608 | ||||||||||||||||||
Total bank loans and bonds | 9,786 | 8,784 | ||||||||||||||||||
|
|
|
| |||||||||||||||||
Less current portion | (2,683 | ) | (1,342 | ) | ||||||||||||||||
Long-term portion of bank loans and bonds | 7,103 | 7,442 | ||||||||||||||||||
Treasury events during 2016
Facility agreement with ING Bank N.V.
On January 29, 2016, VimpelCom Amsterdam B.V. signed a committed facility agreement with ING Bank N.V. for a U.S. dollar denominated Swedish export credit facility supported by Exportkreditnämnden (“EKN”), for a total principal amount of US$200. On March 7, 2016, the total principal amount available under the facility was partially cancelled in an amount of US$110. The purpose of the facility is to finance equipment and services provided to PJSC Kyivstar and PJSC “Vimpel-Communications” by Ericsson AB and its affiliates on a reimbursement basis. The committed facility bears interest at a rate of 6m LIBOR plus 1.08% per annum. The facility must be repaid in substantially equal semi-annual installments, with the final repayment on October 15, 2023. VimpelCom Holdings B.V. has guaranteed VimpelCom Amsterdam B.V.’s payment obligations under this facility.
On April 6, 2016, VimpelCom Amsterdam B.V. drew down the credit facility for the full remaining total principal amount of US$90. The total outstanding amount as at December 31, 2016 is US$78.
Draw down credit facility agreement with Sberbank of Russia
On December 30, 2015, PJSC VimpelCom entered into a credit facility agreement with Sberbank of Russia for the amount of RUB 30 billion (US$414) with an availability period until March 31, 2016. This facility bears interest at a rate of 11.55% per annum and matures on June 29, 2018.
The facility was fully drawn on March 31, 2016. The total outstanding amount as at December 31, 2016 is RUB 30 billion (US$495).
Senior Notes issued by GTH Finance B.V., guaranteed by VimpelCom Holdings B.V.
On April 26, 2016, GTH Finance B.V., a wholly owned subsidiary of the Company, issued US$500 6.25% Senior Notes due 2020 and US$700 7.25% Senior Notes due 2023, guaranteed by VimpelCom Holdings B.V. The proceeds of the offering were loaned to and used by GTH to repay, in part, the shareholder loan from VimpelCom Amsterdam B.V., and used by VimpelCom Amsterdam B.V. for general corporate purposes.
The total outstanding amount as at December 31, 2016 is US$1,200.
Pakistan Mobile Communications Ltd. financing
On June 30, 2016, PMCL drew down PKR 4 billion (US$38) under the syndicated facility with several banks entered into on December 3, 2015 for the amount of PKR 16 billion (US$152 as at December 3, 2015). This facility bears interest at 6 month Karachi Inter Bank Offer Rates (“KIBOR”) plus 0.8% per annum. Repayment will take place through periodic instalments between June 23, 2018 and December 23, 2020. The total outstanding amount as at December 31, 2016 is PKR 5 billion (US$48).
On June 29, 2016, PMCL drew down PKR 1.5 billion (US$14 as at June 29, 2016) under the credit facility with Habib Bank Limited entered into on December 7, 2015 for the total amount of PKR 4 billion (US$38 as at December 7, 2015). This facility bears interest at 6 month KIBOR plus 0.9% per annum. Repayment will take place through periodic instalments between June 22, 2018 and December 23, 2020. The total outstanding amount as at December 31, 2016 is PKR 2 billion (US$19).
On June 30, 2016 PMCL provided a loan to Warid Telecom Private Limited in the amount of PKR 8,545 million (US$82) to repay its external debt as part of the acquisition in Pakistan (Note 6). This facility bears interest at 6 month KIBOR plus 0.7% per annum. As at July 1, 2016 the loan became the intercompany and was eliminated upon consolidation of Warid (Note 6).
Warid debt
On July 1, 2016, the Group assumed the following debt facilities resulting from the acquisition of Warid (Note 6):
| 2016 | ||||||||||||||||||||
Lender | Type of Debt | Interest rate | Maturity | Currency | July 1 | December 31 | ||||||||||||||
ING Bank N.V. | EKN vendor financing | 6m Libor+1.9% | 2020 | US$ | 250 | 231 | ||||||||||||||
Habib Bank Limited | Syndicated term facilities | 6.0%, 6m Kibor+1.0% | 2023 | PKR | 110 | 107 | ||||||||||||||
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| |||||||||||||||||
| 360 | 338 | |||||||||||||||||||
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| |||||||||||||||||
Hedging activities and derivatives
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 hedging instrument (generally a
derivative) are initially recorded in other comprehensive income. The amount included in other comprehensive income is the lesser of the fair value of the hedging instrument and the hedged item. Where the hedging instrument has a fair value greater than the hedged 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.
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 portion 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 at fair value through profit or loss, except for derivative instruments for which hedge accounting is applied. 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.
Put options overnon-controlling interest of a subsidiary are accounted for as financial liabilities in the Company’s consolidated financial statements. Theput-option redemption liability is measured at the discounted redemption amount. Interest over theput-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 maturity date at agreed redemption prices. These embedded derivatives are accounted for as financial assets at fair value through profit or loss.
Foreign exchange contracts
VEON enters into short-term forward agreements with several banks in order to protect cash flows of its short-term financial andnon-financial obligations denominated in US$ from adverse US$-RUB movements. As at December 31, 2016, the notional amount outstanding of these derivative contracts was US$451 (2015: US$490) with an average FX rate 66.11 (2015: 69.02).
Cross currency interest rate exchange contracts
The Company’s Pakistan subsidiary, PMCL, entered into several Cross-Currency Interest Rate Swap Agreements to reduce the volatility of cash flows on US$ denominated debt with current outstanding balances of US$7 (2015: US$14) to PKR 697 (2015: PKR 1,455), 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 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 receives KIBOR three- orsix-month floating
rate on an outstanding notional amount of PKR 16,483 as at December 31, 2016 (2015: PKR 19,400) , 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 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.
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 or fair value hedges and are entered into for periods up to the maturity date of the hedged loans and borrowings.
The company applies cash flow hedge accounting to hedge the risk on future foreign currency cash flows and floating interest rate cash flows.
The Company’s hedge accounting is summarized below:
| At December 31, 2016 | At December 31, 2015 | |||||||||||||||||||||||||||
| Risk being hedged | Nominal value | Fair value assets | Fair value liabilities | Nominal value | Fair value assets | Fair value liabilities | ||||||||||||||||||||||
Cash flow hedge accounting | ||||||||||||||||||||||||||||
Cross currency interest rate exchange contracts | Currency | — | — | — | — | — | — | |||||||||||||||||||||
Interest rate exchange contracts | Interest | 158 | — | 3 | 185 | — | 3 | |||||||||||||||||||||
Foreign exchange contracts | Currency | 73 | 4 | 298 | 17 | — | ||||||||||||||||||||||
No hedge accounting | ||||||||||||||||||||||||||||
Cross currency interest rate exchange contracts | Currency | 7 | — | — | 14 | 1 | — | |||||||||||||||||||||
Foreign exchange contracts | Currency | 407 | 2 | 29 | 266 | 15 | 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 December 31, 2016 | ||||||||||||||||||||
Cash flows | (9 | ) | (2 | ) | — | — | (11 | ) | ||||||||||||
Cash flow hedge reserve* | (— | ) | ||||||||||||||||||
At December 31, 2015 Cash flows Cash flow hedge reserve Less than
1 year 1-3
years 3-5 years More
than
5 years Total 13 (4 ) (1 ) — 8 2
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 recognized in the consolidated financial statements as at December 31 (based on future cash flows discounted at current market rates), other than those with carrying amounts that are reasonable approximations of fair values:
| Carrying value | Fair value | |||||||||||||||
| 2016 | 2015 | 2016 | 2015 | |||||||||||||
Financial assets | ||||||||||||||||
Financial instruments at fair value through profit or loss | ||||||||||||||||
Derivatives not designated as hedges | ||||||||||||||||
Cross-currency interest rate exchange contracts | — | 1 | — | 1 | ||||||||||||
Foreign exchange contracts | 2 | 15 | 2 | 15 | ||||||||||||
Embedded derivatives in notes | 12 | — | 12 | — | ||||||||||||
Financial instruments at fair value | ||||||||||||||||
Derivatives designated as cash-flow hedges | ||||||||||||||||
Foreign exchange contracts | — | 17 | — | 17 | ||||||||||||
Available for sale financial instruments | 71 | 45 | 71 | 45 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total financial instruments at fair value, assets | 85 | 78 | 85 | 78 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Loans granted, deposits and other financial assets | ||||||||||||||||
Bank deposits | 383 | 432 | 383 | 432 | ||||||||||||
Interest receivable | 2 | 1 | 2 | 1 | ||||||||||||
Other investment | 24 | 46 | 24 | 46 | ||||||||||||
Other loans granted | 2 | 2 | 2 | 2 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total loans granted, deposits and other financial assets | 410 | 481 | 410 | 481 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total financial assets | 496 | 559 | 496 | 559 | ||||||||||||
|
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|
|
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| |||||||||
Financial instruments at fair value | ||||||||||||||||
Derivatives not designated as hedges | ||||||||||||||||
Foreign exchange contracts | 29 | 1 | 29 | 1 | ||||||||||||
Derivatives designated as cash flow hedges | ||||||||||||||||
Foreign exchange contracts | 4 | — | 4 | — | ||||||||||||
Interest rate exchange contracts | 3 | 3 | 3 | 3 | ||||||||||||
Contingent consideration | 47 | — | 47 | — | ||||||||||||
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| |||||||||
Total financial instruments at fair value, liabilities | 83 | 4 | 83 | 4 | ||||||||||||
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| |||||||||
Total other financial liabilities at amortized cost | 11,033 | 9,784 | 11,487 | 9,720 | ||||||||||||
|
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| |||||||||
Total financial liabilities | 11,116 | 9,788 | 11,570 | 9,724 | ||||||||||||
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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 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 values.
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 valuation of derivative. Observable inputs (Level 2) used in the valuation techniques includes LIBOR, EURIBOR, swap curves, basis swap spreads, foreign exchange rates and credit default spreads of both counterparties and our own entities.
The fair value of Available for Sale financial instruments 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.
Fair value hierarchy
As at December 31, 2016 and 2015, the Company recognized financial instruments at fair value in the statement of financial position.
The fair value hierarchy ranks fair value measurements based on the type of inputs used in the valuation; it does not depend on the type of valuation techniques used:
Notes to the consolidated financial statements (Continued)
(in millions of U.S. dollars unless otherwise stated)
17FINANCIAL ASSETS AND LIABILITIES (Continued)
The following table provides the disclosure of fair value measurements separately for each major class of assets and liabilities.
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 | |||||||||
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
As at December 31, 2016 Description | (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 instruments at fair value | — | |||||||||||||||
Available for sale financial instruments | — | 42 | 29 | 71 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total financial assets at fair value | — | 56 | 29 | 85 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Assets for which fair values are disclosed | ||||||||||||||||
Loans granted, deposits and other financial assets | ||||||||||||||||
Bank deposits | — | 383 | — | 383 | ||||||||||||
Interest receivable | — | 2 | — | 2 | ||||||||||||
Other investment | — | 24 | — | 24 | ||||||||||||
Other loans granted | — | 2 | — | 2 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total assets for which fair values are disclosed | — | 410 | — | 410 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
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 contract | — | 4 | — | 4 | ||||||||||||
Interest rate exchange contracts | — | 3 | — | 3 | ||||||||||||
Contingent consideration | — | — | 47 | 47 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total financial liabilities at fair value | — | 36 | 47 | 83 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Liabilities for which fair values are disclosed | ||||||||||||||||
Financial liabilities at amortized cost | 7,264 | 3,891 | 332 | 11,487 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total liabilities for which fair values are disclosed | 7,264 | 3,891 | 332 | 11,487 | ||||||||||||
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| |||||||||
As at December 31, 2015 Description Financial assets at fair value through profit or loss Derivatives not designated as hedges Cross-currency and Interest rate exchange contracts Foreign exchange contracts Financial assets at fair value Derivatives designated as cash flow hedges Foreign exchange contracts Available for sale financial instruments Total financial assets at fair value Assets for which fair values are disclosed Loans granted, deposits and other financial assets Bank deposits Interest receivable Other investment Other loans granted Total assets for which fair values are disclosed Financial liabilities at fair value through profit or loss Derivatives not designated as hedges Foreign exchange contracts Financial liabilities at fair value Derivatives designated as cash flow hedges Interest rate exchange contracts Total financial liabilities at fair value Liabilities for which fair values are disclosed Financial liabilities at amortized cost Total liabilities for which fair values are disclosed (Level 1) (Level 2) (Level 3) Total — 1 — 1 — 15 — 15 — 17 — 17 — 18 27 45 — 51 27 78 — 432 — 432 — 1 — 1 — 46 — 46 — 2 — 2 — 481 — 481 — 1 — 1 — 3 — 3 — 4 — 4 5,658 4,062 — 9,720 5,658 4,062 — 9,720
The reconciliation of movements relating to financial instruments classified in levelLevel 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 | |||||||||
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| As at Dec.31, 2015 | Currency translation adjustment | Change in fair value reported in earnings | Change in fair value reported in other comprehensive income | Purchased /incurred | As at Dec.31, 2016 | |||||||||||||||||||
Financial instruments at fair value | ||||||||||||||||||||||||
Available for sale financial instruments | 27 | (3 | ) | — | 5 | — | 29 | |||||||||||||||||
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| |||||||||||||
Total financial assets at fair value | 27 | (3 | ) | — | 5 | — | 29 | |||||||||||||||||
|
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| |||||||||||||
Financial instruments at fair value | ||||||||||||||||||||||||
Contingent consideration | — | — | — | — | 47 | 47 | ||||||||||||||||||
|
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|
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| |||||||||||||
Total financial liabilities at fair value | — | — | — | — | 47 | 47 | ||||||||||||||||||
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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 assets at fair value As at
Dec.31,
2014 Currency
translation
adjustment Change in
fair value
reported in
earnings Change in
fair value
reported in
other
comprehensive
income Purchased Transferred
to Level 2 As at
Dec.31,
2015 8 — — — — (8 ) — 22 (2 ) — 7 — — 27 30 (2 ) — 7 — (8 ) 27
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 the Level 2 and Level 3. This depends on how the Company is able to obtain the underlying input parameters when assessing the fair valuations.
Notes to the consolidated financial statements (Continued)
(in millions of U.S. dollars unless otherwise stated)
17FINANCIAL ASSETS AND LIABILITIES (Continued)
During the yearyears ended December 31, 2017 and December 31, 2016, there were no transfers between Level 1, Level 2 and Level 3 fair value measurements.
During the year ended December 31, 2015, embedded derivative fair value measurements were transferred from Level 3 to Level 2 as the primary calculations used in the valuation of these instruments are based on market observable inputs such as forward curve data, discount factors, swaption volatilities All impairment losses and credit spreads.
There were no other movements for financial instruments measured at the fair value using unobservable inputs (Level 3) other than change of fair value and currency translation adjustment.
Any changes in fair values of financial instruments are unrealized and are recorded in “Other"Other non-operating losses” losses" in the Statementconsolidated income statement or "Other" in the consolidated statement of comprehensive income.
OFFSETTING FINANCIAL ASSETS AND LIABILITIES
Offsetting 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 is it 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 December 31, 2016 | 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) | 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 | |||||||||||||||||
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| Related amounts not set off in the consolidated statement of financial position | ||||||||||||||||||||||||
As at December 31, 2015 | 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) | 164 | — | 164 | — | — | 164 | ||||||||||||||||||
Other financial liabilities(non-current) | 8,095 | — | 8,095 | — | — | 8,095 | ||||||||||||||||||
Other financial assets (current) | 395 | — | 395 | — | — | 395 | ||||||||||||||||||
Other financial liabilities (current) | 1,693 | — | 1,693 | — | — | 1,693 | ||||||||||||||||||
Trade and other receivables | 720 | (43 | ) | 677 | — | — | 677 | |||||||||||||||||
Trade and other payables | 1,811 | (43 | ) | 1,768 | — | — | 1,768 | |||||||||||||||||
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19 Other assets and liabilities
Other assets consisted of the following as at December 31:
| 2016 | 2015 | |||||||
Advances to suppliers | 21 | 3 | ||||||
Deferred costs related to connection fees | 11 | 10 | ||||||
Indemnification assets | 86 | 92 | ||||||
|
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| |||||
Other assets,non-current | 118 | 105 | ||||||
|
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| |||||
Advances to suppliers Input value added tax Prepaid taxes Deferred costs related to connection fees Other assets Other assets, current 2016 2015 203 162 179 129 26 21 12 8 19 14 439 334
Other liabilities consisted of the following as at December 31:
| 2016 | 2015 | |||||||
Long-term deferred revenue | 14 | 15 | ||||||
Provision for pensions and other post-employment benefits | 17 | 33 | ||||||
Other liabilities | 13 | 47 | ||||||
|
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| |||||
Other liabilities,non-current | 44 | 95 | ||||||
|
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| |||||
| 2016 | 2015 | |||||||
Customer advances | 234 | 231 | ||||||
Short-term deferred revenue | 163 | 146 | ||||||
Customer deposits | 156 | 80 | ||||||
Other taxes payable | 365 | 268 | ||||||
Other payments to authorities | 84 | 45 | ||||||
Due to employees | 136 | 168 | ||||||
Other liabilities | 98 | 101 | ||||||
|
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| |||||
Other liabilities, current | 1,236 | 1,039 | ||||||
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20 Inventoriesconsolidated financial statements (Continued)
Inventory is measured at the lower(in millions of cost andnet-realizable value and carried at the weighted average cost basis.U.S. dollars unless otherwise stated)
Inventories consisted of the following as at December 31:
18 CASH AND CASH EQUIVALENTS
| 2016 | 2015 | |||||||
Telephone handsets and accessories for sale | 117 | 96 | ||||||
SIM-Cards | 16 | 11 | ||||||
Other inventory | 18 | 20 | ||||||
Inventory write-offs | (26 | ) | (23 | ) | ||||
|
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| |||||
Total | 125 | 104 | ||||||
|
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| |||||
21 Trade and other receivables
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.
Trade and other receivables consisted of the following as at December 31:
| 2016 | 2015 | |||||||
Trade accounts receivable, gross | 769 | 724 | ||||||
Allowance for doubtful accounts | (160 | ) | (182 | ) | ||||
|
|
|
| |||||
Trade accounts receivable, net | 609 | 542 | ||||||
Other receivables | 76 | 135 | ||||||
|
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| |||||
| 685 | 677 | |||||||
|
|
|
| |||||
As at December 31, 2016, trade receivables with a value of US$160 (2015: US$182) were impaired and, thus, fully provided for. See below the movements in the allowance for the impairment of receivables:
| 2016 | 2015 | 2014 | ||||||||||
Balance as at January 1, | 182 | 582 | 795 | |||||||||
Acquisition of a subsidiary | 9 | 1 | — | |||||||||
Divestment of a subsidiary | (57 | ) | — | — | ||||||||
Classified as held for sale | — | (386 | ) | (4 | ) | |||||||
Allowance for doubtful debts | 73 | 72 | 208 | |||||||||
Recoveries | (5 | ) | — | (7 | ) | |||||||
Accounts receivable written off | (44 | ) | (24 | ) | (292 | ) | ||||||
Foreign currency translation adjustment | 2 | (63 | ) | (118 | ) | |||||||
|
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| |||||||
Balance as at December 31, | 160 | 182 | 582 | |||||||||
|
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| |||||||
As at December 31, 2016, 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 | ||||||||||||||||||
2016 | 609 | 371 | 86 | 81 | 71 | |||||||||||||||
2015 | 542 | 337 | 99 | 68 | 38 | |||||||||||||||
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 atof 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 | |||||
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| 2016 | 2015 | |||||||
Cash at bank and on hand | 1,707 | 1,644 | ||||||
Short-term deposits with original maturity of less than three months | 1,235 | 1,970 | ||||||
|
|
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| |||||
Total cash and cash equivalents | 2,942 | 3,614 | ||||||
|
|
|
| |||||
Cash at bank earns interest at floating rates based on bank deposit 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 balances as atand cash equivalent balances.
As of December 31, 2016, cash balances in Uzbekistan and Ukraine of US$347 (2015: US$495) and in Ukraine of US$3, (2015: US$4) arerespectively, were restricted due to local government or central bank regulations and were therefore cannot currentlyunable to be repatriated. In addition, US$372 (2015: US$255) of shortshort-term and long terms depositlong-term deposits at financial institutions in Uzbekistan areof US$372 as of December 31, 2016 were also subject to the same restrictions.
Cash balances as atof December 31, 20162017 include investments in money market funds of US$578 (2015:91 (2016: US$1,174)578).
23 Issued capital and reserves
Notes to the consolidated financial statements (Continued)
The details(in millions of common sharesU.S. dollars unless otherwise stated)
19 OTHER ASSETS AND LIABILITIES
Other assets consisted of the Company arefollowing items as follows, as atof December 31:
| 2016 | 2015 | |||||||
Authorized common shares with a nominal value of US$0.001 per share | 2,759,171,830 | 2,759,171,830 | ||||||
Of which: | ||||||||
Issued shares (Note 1) | 1,756,731,135 | 1,756,731,135 | ||||||
Treasury shares | (7,726,487 | ) | (7,726,487 | ) | ||||
|
|
|
| |||||
Outstanding shares | 1,749,004,648 | 1,749,004,648 | ||||||
|
|
|
| |||||
The holders of common shares are, subject to ourby-laws and Bermuda law, generally entitled to enjoy all the rights attaching to common shares.
Each fully paid common share entitles its holder to:
participate in shareholder meetings;
| | 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 | |||||
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
have one vote on all issues voted upon at a shareholder meeting, except for the purposes of cumulative voting for the electionOther liabilities consisted of the Supervisory Board, in which case each common share shall have the same numberfollowing items as of votes as the total numberDecember 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 | |||||
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Table of members to be electedContents
Notes to the Supervisory Boardconsolidated financial statements (Continued)
(in millions of U.S. dollars unless otherwise stated)
20 TRADE AND OTHER RECEIVABLES
Trade and all such votes may be cast for a single candidate or may be distributed between or among two or more candidates;
receive dividends approved by the Supervisory Board;
in the event of our liquidation, receive a pro rata share of our surplus assets; and
exercise any other rights of a common shareholder set forth in ourbye-laws and Bermuda law.
Share options exercised in each respective year have been settled using the Treasury sharesreceivables consisted of the Company. The reduction in the Treasury 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 Treasury shares is recorded in capital surplus.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 atof December 31, 2016, there were no (2015: 305,000,000) VEON convertible preferred shares authorized and outstanding,2017, trade receivables with a nominal value of US$0.001 per share.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 preference shares were convertible into VEON common sharesaging 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 the option of the shareholder (Telenor) any time between October 15, 2013amortized cost and April 15, 2016 at a priceinclude invoiced amounts less appropriate allowances for estimated uncollectible amounts.
Estimated uncollectible amounts are calculated based on the NASDAQ price of VEON ADSs. The redemption value of convertible preference shares were reflected in other financial liabilities in 2015. Each convertible preference share entitled its holder to one vote per convertible preferred share, voting together with the common shares as a single class, except where cumulative voting applied when electing directors. Convertible preferred shares did not have dividend rights. The holders of convertible preferred shares, in the event of ourwinding-up or dissolution, were not entitled to any payment or distribution in respect of our surplus assets.
As at April 15, 2016, pursuant to the termsageing of the Company’sbye-laws, the 305,000,000 preferred shares held by Telenor had been redeemed by the Company at a redemption pricereceivable balances, payment history and other evidence of US$0.001 per share andcollectability. Receivable balances are no longer outstanding.written off when management deems them not to be collectible.
Nature and purposeTable of reservesContents
Other capital reserves
Notes to the consolidated financial statements (Continued)
Other capital reserves are mainly used to recognize(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.
Foreign currency translation reserve
The foreign currency translation reserve is used
Notes to record exchange differences arising from the translation of theconsolidated financial statements of foreign subsidiaries. The decrease in the foreign currency reserve relates mainly to the strengthening of the US Dollar and the depreciation of emerging markets currencies in which VEON operates.
24 Dividends paid and proposed
Pursuant to Bermuda law, VEON is restricted from declaring or paying a dividend if there are reasonable grounds for believing that (a) VEON is, or would after the payment be, unable to pay its liabilities as they become due, or (b) the realizable value of VEON assets would, as a result of the dividend, be less than the aggregate of VEON liabilities.
On November 2, 2016, the Supervisory Board has 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.
Subsequent to year end, VEON announced that the VEON Supervisory Board has approved a new dividend policy, refer Note 28 for further details.
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 23 cents per common share.
On November 6, 2015 the Company announced that the Supervisory Board authorized the payment of a dividend of US 3.5 cents per ADS. The dividend was paid on December 7, 2015.
On November 11, 2014, the Supervisory Board authorized the payment of a dividend of US$3.5 cents per ADS. The dividend was paid on December 8, 2014.
The Company made appropriate tax withholdings of up to 15% when the dividends is paid to the Company’s ADS depositary, The Bank of New York Mellon.
Dividends declared tonon-controlling interests
On June 22, 2016, Omnium Telecom Algeria S.p.A, a subsidiary of the Company, declared dividends to its shareholders which were paid on September 1, on September 2 and on September 6, 2016. The portion of dividends paid to the minority shareholders amounted to US$69.
On July 28, 2016, VimpelCom Kazakhstan Holding AG, a subsidiary of the Company, declared dividends to its shareholders which were paid on August 2, 2016. The portion of dividends paid to the minority shareholder amounted to US$18.
On September 1, 2016, TNS Plus LLP, a subsidiary of the Company, declared dividends to its shareholders which were paid on September 2, 2016. The portion of dividends paid to the minority shareholder amounted to US$18.
On November 18, 2016, PMCL, a subsidiary of the Company, declared divides to its shareholders. The portion of dividends paid to the minority shareholder amounted to US$7. At December 31, 2016, the dividends payable to minority interest is included in Trade and Other Payables.
On July 17, 2015 and August 17, 2015, VimpelCom Kazakhstan Holding AG and VimpelCom Kyrgyzstan Holding AG paid dividends to its shareholders whereby the portions paid to the minority shareholder amounted to US$104 and US$23 respectfully.
Provisions are recognized when the Group has a present obligation (legal or constructive) as a result(in millions 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 currentpre-tax rate if the time value of money is significant.U.S. dollars unless otherwise stated)
22 PROVISIONS
The following table summarizes the movement in provisions for the years ended December 31, 2016 and 2015:31:
| | 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 | |||||||||||||
| Income taxes provisions | Tax provisions other than for income tax | Provision for decommissioning | Legal provisions | Other provisions | Total provisions | |||||||||||||||||||
At January 1, 2015 | 353 | 60 | 190 | 44 | 1,248 | 1,895 | ||||||||||||||||||
Arising during the year | 92 | 31 | 15 | 945 | 37 | 1,120 | ||||||||||||||||||
Utilized | (28 | ) | — | (1 | ) | (4 | ) | (1,170 | ) | (1,203 | ) | |||||||||||||
Reclassification to HFS | (46 | ) | — | (41 | ) | (27 | ) | (41 | ) | (155 | ) | |||||||||||||
Reclassification | 21 | (9 | ) | 1 | 3 | (16 | ) | — | ||||||||||||||||
Unused amounts reversed | (67 | ) | (13 | ) | (55 | ) | (36 | ) | (16 | ) | (187 | ) | ||||||||||||
Discount rate adjustment and imputed interest (change in estimates) | — | — | 6 | — | — | 6 | ||||||||||||||||||
Translation adjustments and other | (43 | ) | (4 | ) | (28 | ) | (6 | ) | (25 | ) | (106 | ) | ||||||||||||
At December 31, 2015 | 282 | 65 | 87 | 919 | 17 | 1,370 | ||||||||||||||||||
Totalnon-current | 164 | 29 | 87 | 70 | — | 350 | ||||||||||||||||||
Total current | 118 | 36 | — | 849 | 17 | 1,020 | ||||||||||||||||||
At 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 estimates) | — | — | 1 | — | — | 1 | ||||||||||||||||||
Translation adjustments and other | (71 | ) | — | 5 | (1 | ) | (5 | ) | (72 | ) | ||||||||||||||
At December 31, 2016 | 244 | 96 | 98 | 157 | 27 | 622 | ||||||||||||||||||
Totalnon-current | 3 | — | 98 | 45 | 2 | 148 | ||||||||||||||||||
Total current | 241 | 96 | — | 112 | 25 | 474 | ||||||||||||||||||
At December 31, 2016,2017, legal provisions include the provision of US$6633 in connection with the investigations relating to our business in Uzbekistan and(2016: US$66 relating to GTH—Iraqna Litigation, as66). 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.cards, for which provisions remain at December 31, 2017.
The timing of payments in respect ofnon-current provisions is, with few exceptions, not contractually fixed and cannot be estimated with certainty. KeySee "Sources of estimation uncertainty" below, in this Note 22, for assumptions and sources of uncertainty are discussed in Note 4.uncertainty.
Significant tax and legal proceedings are discussed in Note 27.26. Given the uncertainties inherent in such proceedings, there can be no guarantee that the ultimate outcome will be in line with VEON’sVEON'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/SEC / DOJ / OM
During the first quarter of 2016, the Company reached resolutions through agreements with the U.S. Securities and Exchange Commission (“SEC”("SEC"), the U.S. Department of Justice (“DOJ”("DOJ"), and the Dutch Public Prosecution Service (Openbaar Ministerie) (“OM”("OM") relating to the previously disclosed investigations under the U.S. Foreign Corrupt Practices Act (the “FCPA”"FCPA") and relevant Dutch laws, pertaining to the Company’sCompany'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”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”"DPA"), entered into by VEON and the DOJ and a guilty plea by Unitel, LLC (“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”Agreement") related to anti-bribery and falsebooks-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”Judgment"), which was approved by the District Court on February 22, 2016, relating to the SEC’sSEC'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’sCompany'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. As of December 31,In 2016, the Company had 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$1619, resulting in thea remaining balance of the provision of US$66.33 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—IraqnaIRAQNA Litigation
On November 19, 2012, Atheer Telecom Iraq Limited (“Atheer”("Atheer"), an affiliate of the Zain Group)Group, initiated English High Court proceedings in London against Orascom Telecom Iraq Ltd. (“OTIL”("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’sAtheer's claim is founded on the tax covenants in the underlying share purchase agreement (“("Iraqna SPA” 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”("IQD") 219 billion (US$198)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$87)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’sAtheer's amendments included withdrawing its claim for unjust enrichment in the amount of IQD 219 billion (US$198)183) and conceding that its contractual claims are capped at a total possible recovery of US$60.
The trial was heard November14-18, 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’sGTH's and OTIL’sOTIL'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’sCourt's judgment including the related legal fees.
As at December 31, 2016, the Company is primarily owned by two major shareholders, being LetterOne and Telenor. The Company has no ultimate controlling shareholder. See also Note 1 for details regarding changes in the ownership structure.
The following table provides the total amount of transactions that have been entered into with related parties and balances of accounts with them for the relevant financial periods:
| December 31, 2016 | December 31, 2015 | |||||||
Revenue from LetterOne | — | 2 | ||||||
Revenue from Telenor | 60 | 51 | ||||||
Revenue from discontinued operations | 68 | 60 | ||||||
Revenue from associates and joint ventures | 19 | 6 | ||||||
Revenue from other related parties | — | 6 | ||||||
Finance income from related parties | — | 1 | ||||||
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| 148 | 126 | |||||||
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Services from LetterOne | 8 | 8 | ||||||
Services from Telenor | 64 | 44 | ||||||
Services from discontinued operations | 6 | 5 | ||||||
Services from associates and joint ventures | 19 | 20 | ||||||
Services from other related parties | — | 5 | ||||||
Finance costs to other related parties | — | 1 | ||||||
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| 97 | 83 | |||||||
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Accounts receivable from Telenor | 13 | 10 | ||||||
Accounts receivable from associates and joint ventures | 24 | 8 | ||||||
Accounts receivable due from discontinued operations | — | 84 | ||||||
Other assets due from RP | 3 | 1 | ||||||
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| 40 | 103 | |||||||
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Accounts payable to LetterOne | 1 | — | ||||||
Accounts payable to Telenor | 9 | 8 | ||||||
Accounts payable due to discontinued operations | — | 146 | ||||||
Accounts payable due to associates and joint ventures | 5 | 2 | ||||||
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| 15 | 156 | |||||||
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Related Party Transactions with Major Shareholders and their Affiliates
Related Party Transactions with Telenor and its Affiliates
Service Agreements
VEON is a party to a service agreement with Telenor, dated March 8, 2011, under which Telenor renders to VEON or 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 Telenor and VEON. VEON pays Telenor annually US$1.5 forOn June 6, 2017, the services.
A number of our operating companies have roaming agreements with the following mobile operators that are Telenor affiliates: Grameenphone Limited (Bangladesh), Telenor Norge AS (Denmark), 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) and Total Access Communication Public Company Limited (dtac) (Thailand).
Related Party Transactions with LetterOne and its Affiliates
Service Agreements
VEON is a party to a General Services Agreement with LetterOne Corporate Advisor Limited, dated December 1, 2010, under which LetterOne Corporate Advisor Limited renders to VEON 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 VEON. VEON pays LetterOne Corporate Advisor Limited annually US$1.5 for the services. VEON is also party to a Consultancy Deed with LetterOne Corporate Advisor Limited, dated August 21, 2013, under which LetterOne Corporate Advisor Limited provides additional consultancy services to VEON for which VEON pays annually US$3.5. The General Services Agreement and Consultancy Deed were originally entered into by VEON and Altimo Management Services Ltd., but the latter was replaced first by LetterOne Corporate Advisor Limited pursuant to a Deed of Assignment and Novation dated June 3, 2014, and later by LIHS Corporate Advisor Limited pursuant to a Deed of Novation and Amendment dated January 14, 2016.
Related Party Transactions with Joint Ventures
Italy Joint Venture
VEON has commercial contracts with the newly established joint venture in Italy, largely relating to roaming and interconnect which are transacted at arm’s length and presented in the table above.
Euroset
PJSC VimpelCom has commercial contracts with Euroset, which became an associate in October 2008. In 2016 PJSC VimpelCom recognized US$4 (2015: US$5) of revenue from 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$19 (2015: US$20) in 2016, primarily dealer commissions and bonuses for services for acquisition of new customers, customer care and receipt of customers’ payments.
Balances and transactions from discontinued operations (Note 6)
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 are treated as Related Party mainly representing regular business activities, i.e. roaming and interconnect.
Prior to classification as held for sale and discontinued operations, on February 27, 2015, the Company’s fully owned subsidiary in Italy, WIND Telecomunicazioni S.p.A. (“WIND Italy”), entered into a definitive agreement for the sale of 90% of the shares of WIND Italy’s fully owned subsidiary Galata S.p.A. to Abertis Telecom Terrestre SAU. Following the closing of this transaction in March 2015, Galata S.p.A. is treated in Italy as an Investment in Associate, and therefore it continues to be presented as a Related Party transactions in the Company’s IFRS consolidated financial statements.
Compensation of key management personnel of the Company
Under the Company’sbye-laws, the Supervisory Board of the Company established the Compensation Committee (the“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.
The Compensation Committee’s rules and competences are set forth in the Company’s Compensation Committee Charter, which forms part of the Company’sbye-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 adjusted as a result of mergers or other corporate activities. The relative size of the Company and the group 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 calculation and composition of the remuneration 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.
The Company’s Short Term Incentive Scheme (the “STI Scheme”) provides cashpay-outs to participating employees based on the achievement of established Key Performance Indicators (“KPI”) 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 performance of the Company (or the affiliated entity employing the employee) and partially based on the performance of the individual. The target pay range is between 15% and 100% of the participant’s annual gross base salary.
To stimulate and reward leadership efforts that result in sustainable success, the Value-Growth Cash Based Long-Term Incentive Plan (the “LTI Plan”) has been designed for members of our recognized leadership community. The participants in the LTI Plan may receive cash payouts after the LTI Plan cycle, which is currently 42 months (e.g. January 1, 2014 to June 30, 2017 with a potential payout by Q4 of 2017 at the latest). The target pay aims at 50% to 100% of a participant’s annual gross base salary and since 2016 is based on the Total Shareholder Return (“TSR”) of the Company compared to peer companies in the markets in which we operate. The KPIs are based on the TSR evolution compared to peer companies in the markets in which we operate. This pay structure enables the Company to attract, incentivize and retain highly skilled senior management with highly valuable experience and backgrounds.
The Company furthermore considers from time to time new long term incentive plans, which may result in additional payouts not described above.
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.
Members of the Supervisory Board and Management Board of the Company are the key management personnel. The following table sets forth the total compensation paid to key management personnel:
| 2016 | 2015 | 2014 | ||||||||||
Short-term employee benefits | 37 | 36 | 26 | |||||||||
Long-term employee benefits | 34 | 27 | 19 | |||||||||
Share-based payment transactions | — | 3 | 2 | |||||||||
Termination benefits | 4 | 2 | 1 | |||||||||
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Total compensation paid to key management personnel | 75 | 68 | 48 | |||||||||
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Each of our unaffiliated directors currently receives an annual retainer of EUR 150,000 (US$163 thousand). Each affiliated director receives an annual retainer of EUR 40,000 (US$43 thousand), and our current chairman of the Supervisory Board receives an additional annual retainer of EUR 4,000 (US$4 thousand). In addition, each unaffiliated director who serves on any official committees of our Supervisory Board receives additional annual compensation of EUR 30,000 (US$33 thousand) per committee (for serving as the head of any such committee) or EUR 25,000 (US$27 thousand) committee (for serving as a member of any such committee). In 2016 the chairman of the Nominating and Corporate Governance Committee was awarded an additionalone-off discretionary compensation of EUR 345,000 (US$372 thousand). All of our directors are reimbursed for expenses incurred in connection with service as a member of our Supervisory Board. Currently, five of the Company’s directors are considered “affiliated directors” (as defined in the Company’sbye-laws) because they are affiliated with LetterOne or Telenor (or their affiliates). The remaining four directors are considered “unaffiliated directors”.
Members of our senior Management and Supervisory Board are eligible to participate in cash based long term incentive plans discussed below.
The following table sets forth the total compensation paid to the key management board members in 2016 (gross amounts in EUR and US$ equivalent):
| Group CEO Jean-Yves Charlier | Group CFO Andrew Davies | Group General Counsel Scott Dresser | ||||||||||||||||||||||
| EUR | US$ | EUR | US$ | EUR | US$ | |||||||||||||||||||
Base salary (incl. holiday pay) | 2,500,000 | 2,750,000 | 1,100,000 | 1,210,000 | 750,000 | 825,000 | ||||||||||||||||||
Bonus 2015 (STI) | 2,130,000 | 2,343,000 | 850,000 | 935,000 | 460,000 | 506,000 | ||||||||||||||||||
Other | 26,000 | 28,600 | 20,000 | 22,000 | ||||||||||||||||||||
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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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2013-2015 Cash-based Long Term Incentive Plan
In 2013, a cash based long term incentive plan (“LTI Plan 2013”) was adopted for members of our recognized leadership team. Under the LTI Plan 2013, the target amount that can be earned during the three year performance period (2013-2015) was determined at the time of the grant. The actual amount that can be earned is subject to the attainment of KPIs, which KPIs were set at the grant date for the duration of the three year performance period and looked at business and strategic objectives such as EBITDA market share and revenue market share. The award vested in three annual tranches (2013, 2014 and 2015), assuming a full time participation in the plan as of January 1, 2013 up to and including 2015. All unvested tranches lapsed if the employment was terminated before the end of the performance period.
In 2015, EUR 3.6 million (US$4) was banked / paid in relation to amounts vested under the 2014 tranche. The total of target bonus amounts for the 2015 tranches was US$ nil, as the 2013-2015 Cash Based Long Term Incentive Plan was discontinued from January 1, 2015 and replaced by the Value Growth Cash Based Long Term Incentive Plan discussed below.
2014 - 2016 and 2015 - 2017 Value Growth Cash Based Long Term Incentive Plan
The 2014 - 2016 LTI award
In January 2015, a new cash based long term incentive plan was adopted for senior management, replacing the LTI Plan 2013. The first award that was launched under this new plan was the 2014 LTI award. Under the new LTI Plan, the 2014 awards are granted annually, the vesting of which is subject to the attainment of KPIs over a three and a half year (42 months) performance period (January 1, 2014 to June 30, 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 subject to continued employment (except in limited “good leaver” circumstances) and to the Committee’s determination of the attainment of set KPIs after the relevant performance period (in the third quarter of 2017). 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 TSR evolution compared to peer companies in the markets in which we operate for our OpCos. For our HQ, the amount of the award was based on TSR evolution compared to selected peer companies. In the course of 2016, the plan was modified in such way that also for our OpCos, the amount of the award also entirely depended on TSR. For participants joining after the start of a performance period and for participants leaving during the first three years of the performance period (in the LTI Plan referred to as“Qualifying Period”), vested awards will be subject topro-rata reduction in accordance with the actual period of employment during this Qualifying Period. Awards may vest early upon the occurrence of certain corporate events relating to VEON Ltd., subject to the Committee’s determination of the attainment of KPIs at the time of the relevant event and a potentialpro-rata reduction to reflect the early vesting.
The 2015 - 2017 LTI award
In January 2015, a new award was launched for senior management under the Value Growth Cash Based Long Term Incentive Plan, 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 for the first awards). 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. The same principles as for the 2014-2016 LTI Plan apply. Thepay-out is based on TSR evolution in the markets in which we operate.
As at December 31, 2016, the total target amount (all unvested) granted under the 2014 and 2015 awards of the 2014-2016 Cash Based Long Term Incentive Plan was US$22.
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 and, January 1, 2015 to June 30, 2018 for the second awards). 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 tranches of the Cash Based Long Term Incentive Plan (discussed above). For participants leaving before the end, or joining after the start, of a performance period, vested awards will be subject topro-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 VEON Ltd., subject to the compensation committee’s determination of the attainment of KPIs at the time of the relevant event and a potentialpro-rata reduction to reflect the early vesting.
As at December 31, 2016, the total amount granted under the 2014 and 2015 awards of the Director LTI Plan was EUR 0.9 million (US$1).
Short Term Incentive Plan
The Compensation Committee has approved the following key objectives for the STI Plan in 2017:
The Company’s Short Term Incentive Scheme (the “STI Scheme”) provides that the participating employees may receive cash payouts based on achievement of set 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 performance of the Company and partially based on the performance by the individual and look at business and strategic objectives of the Company. The KPIs relate to the financial and operational results of the Company (such as EBITDA and total operating revenue) as well as to 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. The target pay ranges between 15% and 100% of the annual gross base salary.
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 apro-rata reduction) and is also subject to apro-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.
27 Risks, commitments, contingencies and uncertainties
Risks
Currency control risks
The imposition of currency exchange controls or other similar restrictions on currency convertibility in the countries in which VEON operates, including Ukraine and Uzbekistan, 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 22 for further information regarding restricted cash.
Domestic and global economy risks
The Company has significant operations in Russia and Ukraine, which represents 52% and 36% of the Group’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 VEON’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.
Change in law and compliance risks
In the ordinary course of business, VEON 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 VEON operates, competition law and anti-bribery and corruption laws, including the U.S. Foreign Corrupt Practices Act (“FCPA”).Non-compliance with such rules and laws may cause VEON to be subject to claims, some of which may relate to the developing markets and evolving fiscal and regulatory environments in which VEON operates. In the opinion of management, VEON’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 VEON.
Tax risks
The tax legislation in the markets in which VEON operates is unpredictable and gives rise to significant uncertainties, which could complicate our tax planning and business decisions. Tax laws in many of the emerging markets in which we 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 our 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’ 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, Controlled Foreign Operation (“CFC”) legislation and more strict tax residency rules).
Management believes that VEON has paid or accrued all taxes that are applicable. Where uncertainty exists, VEON has accrued tax liabilities based on management’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.
Commitments
Capital commitments for the future purchase of equipment and intangible assets are as follows as at December 31:
| 2016 | 2015 | 2014* | ||||||||||
Property, plant and equipment | ||||||||||||
Less than 1 year | 689 | 382 | 290 | |||||||||
Between 1 and 3 years | 448 | 463 | 448 | |||||||||
Between 3 and 5 years | — | 224 | 448 | |||||||||
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Less than 1 year | 32 | 1 | 9 | |||||||||
Between 1 and 3 years | 18 | 11 | — | |||||||||
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Total | 1,187 | 1,081 | 1,195 | |||||||||
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Telecom Licenses 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 underGSM-900/1800 and “3G” (UMTS / WCDMA) mobile radiotelephony communications services and “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. 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, PJSC 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. Theroll-out of the LTE network will occur through a phased approach based on apre-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 must be extended to a specific number of additional regions each year through to December 1, 2019 by when services must cover all of Russia. PJSC VimpelCom is required to comply with the following conditions among others under the terms of the license: (i) invest at least RUB 15 billion (US$224) in each calendar year, for which the Company continues to comply with to date in the construction of its federal LTE network until the network is completed, which must occur before December 1, 2019; (ii) provide certain data transmission services in all secondary and higher educational institutions in specified 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, 2016. The latter requirement was fulfilled by PJSC VimpelCom within the required time.
Operating lease commitments
Operating lease commitments are as follows as at December 31:
| 2016 | 2015 | 2014 | ||||||||||
Less than 1 year | 121 | 60 | 209 | |||||||||
Between 1 and 5 years | 368 | 153 | 365 | |||||||||
More than 5 years | 148 | 66 | 200 | |||||||||
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Total | 637 | 279 | 774 | |||||||||
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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
VEON—Securities Class Action
On November 4, 2015, a class action lawsuit was filed in the United States against VEON and certain of its current and former officers by CharlesKux-Kardos, on behalf of himself and other investors in the Company alleging certain violations of the United States federal securities laws in connection with the Company’s public disclosures relating to its operations in Uzbekistan. On December 4, 2015, a second complaint was filed by Westway Alliance Corp. that asserts essentially the same claims in connection with essentially the same 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 will be completed by May 2017. No date has been set for any hearing, and the timing of the court’s resolution of the motion is unknown.
GTH—Licence Fees Tax Litigation
The Egyptian Tax Authority (“ETA”) conducted a review of GTH’s tax filings for the years 2000-2004. Following the review, in May 2010, the Internal Committee of the ETA assessed additional tax liabilities in the amount of approximately Egyptian pound (“EGP”) 2 billion (US$256) against GTH for these years. The basis for the assessment was that, according to the ETA, GTH’s investments in Algeria, Syria, Iraq, Tunisia andSub-Saharan Africa during these years were actually license fees paid to foreign governments for which Egyptian withholding tax was due according to Egyptian tax laws.
GTH challenged the Internal Committee’s ETA’s assessment before the Appellate Committee of the ETA. On May 14, 2012, the Appellate Committee cancelled the Internal Committee’s assessment of EGP 2 billion (US$256) in part and reduced the assessed amount to EGP 323 million (US$41).
GTH agreed to pay the assessed amount of EGP 323 million (US$41) in instalments on a without prejudice basis, which it has satisfied, and also appealed the Appellate Committee’s decision to the North CairoEnglish Court of First Instance. The ETA also challengedAppeal denied GTH's application for leave to appeal. With no further venue for appeal, the Appellate Committee’s decisionmatter is now concluded and is seeking to reinstitute its original assessment of EGP 2 billion (US$256) plus late payment interest. The proceedings remain ongoing before the 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$55) in late payment interest on the Appellate Committee’s assessment of EGP 323 million (US$41). The demand threatened administrative seizure of GTH’s assets in the event ofnon-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.
GTH—Iraqi Profits and Dividends Tax Litigation
Tax year 2005
In March 2011, the ETA conducted an audit of GTH’s tax filings for the year 2005. Following its review, the ETA 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 of EGP 235 million (US$30).
GTH challenged the ETA’s claim before the Internal Committee of the ETA arguing that the OTIL-Iraqna Income should be fully exempt from Egyptian corporate income tax pursuant to the Iraq-Egypt double taxation treaty.
On October 2, 2011, the Internal Committee ruled that the OTIL-Iraqna Income should be taxed at 20% in the amount of EGP 235 million (US$30) but that credit should be given for taxes paid by OTIL in Iraq. GTH’s appeal to the Appellate Committee of the ETA was dismissed on August 1, 2015.
On November 11, 2015, GTH appealed the Appellate Committee’s decision to the Administrative Court where proceedings are ongoing.
Separately, on January 18, 2016, GTH, through its tax advisors, received a demand from the ETA claiming an amount of EGP 235 million (US$30) assessed by the Appellate Committee togetherfinal, with late payment interest of EGP 258 million (US$33). The demand threatened administrative seizure of GTH’s assets in the event ofnon-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.no remaining provision recorded.
Tax year 2007
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 EGP 282 million (US$36) in respect of dividends distributed by Iraqna to OTIL in 2007. After GTH disputed the claim on the basis of the 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.
VAT on Replacement SIMs
June 2009 to December 2011
On April 1, 2012, the National Board of Revenue (“NBR”("NBR") issued a demand to Banglalink for BDT 7.74 billion (US$98 as of December 31, 2016)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”("LTU"), Bangladesh Telecommunication Regulatory Commission (“BTRC”("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’sCommittee'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’operators' representative agreed that the BTRC would prepare further guidelines for verification of SIM users. Although the BTRC submitted its guidelines (under which Bangalink’sBangalink'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’sBTRC's guidelines and assessed Banglalink’sBanglalink's liability for SIM tax to be BDT 7.62 billion (US$97 as of December 31, 2016)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$67 as of December 31, 2016)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.together
The Bangladesh Appellate Tribunal has yet to make its decision, which decision can be appealed torejected 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.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).
CatalystACCOUNTING 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.
Notes to the consolidated financial statements (Continued)
(in millions of 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 as of 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 by-laws and Bermuda law, generally entitled to enjoy all the rights attaching to common shares.
Each fully paid common share entitles its holder to:
Share options exercised in each respective year have been settled using the Treasury shares of the Company. The reduction in the Treasury 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 Treasury shares is recorded in capital surplus.
As of December 31, 2017 and 2016, there were no remaining VEON convertible preferred shares authorized and outstanding. The preferred shares, with a nominal value of US$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
Other capital reserves are mainly used to record the accumulated impact of derivatives designated as cash flow hedges (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).
Notes to the consolidated financial statements (Continued)
(in millions of U.S. dollars unless otherwise stated)
24DIVIDENDS PAID AND PROPOSED
Pursuant to Bermuda law, VEON is restricted from declaring or paying a dividend if there are reasonable grounds for believing that (a) VEON is, or would after the payment be, unable to pay its liabilities as they become due, or (b) the realizable value of VEON assets would, as a result of the dividend, be less than the aggregate of VEON 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 November 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 US 3.5 cents per ADS. The dividend was paid on December 7, 2015.
The Company made appropriate tax withholdings of up to 15% when the dividends are paid to the Company's ADS depositary, The Bank of New York Mellon.
DIVIDENDS DECLARED TO NON-CONTROLLING INTERESTS
During the 2017 and 2016 years, certain subsidiaries of the 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 | |||||
In 2017, PMCL, a subsidiary of the Company, declared dividends to its shareholders, of which US$54 (2016: US$7) was declared to the non-controlling interest holders of PMCL. Dividends declared to non-controlling interests reduces the principal amount of the put-option liability over non-controlling interest on the date of declaration. As of balance sheet date, an amount of US$26 (2016: US$7) remained payable to non-controlling interests.
Notes to the consolidated financial statements (Continued)
(in millions of U.S. dollars unless otherwise stated)
25RELATED PARTIES
The following table provides the total amount of transactions that have been entered into with related parties and their 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 related parties and their affiliates at the end of the relevant 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
A number of our operating companies have roaming agreements with Telenor and its affiliates.
Notes to the 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 is no longer represented on VEON's Supervisory Board, and as such, Telenor and its affiliates are no longer considered to be a related party.
RELATED PARTY TRANSACTIONS WITH LETTERONE AND ITS AFFILIATES
VEON was a party to a General Services Agreement with LetterOne Corporate Advisor Limited, dated December 1, 2010, under which LetterOne Corporate Advisor Limited renders to VEON and its affiliates services related to telecommunication operations. The General Services Agreement and Consultancy Deed were originally entered into by VEON and Altimo Management Services Ltd., but the latter was replaced first by LIHS Corporate Advisor Limited pursuant to a Deed of Novation and Amendment dated January 14, 2016.
On December 12, 2017 VEON received a notice confirming termination of the agreement.
RELATED 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 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 set 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 adjusted as a result of mergers or other corporate activities. The relative size of the Company and the group 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 calculation and composition of the remuneration 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.
Key Management Personnel ("KMPs") include members of the Supervisory Board and the Management Board of the Company. The following table sets forth the total 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 | |||||||
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Notes to the consolidated financial statements (Continued)
(in millions of U.S. dollars unless otherwise stated)
25RELATED PARTIES (Continued)
Members of our Supervisory Board and Management Board are eligible to participate in cash-based long-term incentive plans discussed below.
Compensation of Key Management 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):
| | 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 | |||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
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 | |||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
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 (the"LTI Plan") has been designed for members of our recognized leadership community. The participants in the LTI Plan may receive cash payouts after the end of each relevant award performance period. The vesting of each award is subject to continued employment (except in limited "good leaver" circumstances) of a specific Qualifying Period). For participants joining after the start, or leaving before the end of a Qualifying Period, vested awards will be subject to pro-rata reduction in accordance with the actual period of employment during this Qualifying Period. Awards may vest early upon the occurrence of certain corporate events relating to VEON Ltd., subject to the Committee's determination of the attainment of Key Performance Indicators ("KPIs") at the time of the relevant event and a potential pro-rata reduction to reflect the early vesting.
The Company furthermore considers from time to time new long-term incentive plans, which may result in additional payouts not described above. The awards launched under the LTI Plan are detailed below.
As of December 31, 2017, the total target amount (all unvested) granted for awards launched under the LTI Plan was equal to US$127 (2016: US$22). The carrying value of obligations under the LTI Plan as of December 31, 2017, was equal to US$58 (2016: US$3). Included within 'Selling, general and administrative expenses' for 2017 is an amount of US$55 (2016: US$3) relating to share-based payment expense under the LTI Plan.
2014 tranche
In January 2015, a new award was launched for senior management under the LTI Plan ("2014 tranche"), the vesting of which is subject to the attainment of KPIs over a three and a half year (42 months) performance period (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 and, January 1, 2015 to June 30, 2018 for the second awards). 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 tranches of the Cash Based Long Term Incentive 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 VEON 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.
Notes to the consolidated financial statements (Continued)
(in millions of U.S. dollars unless otherwise stated)
25 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
In the ordinary course of business, VEON 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 VEON operates, competition law and anti-bribery and corruption laws, including the U.S. Foreign Corrupt Practices Act ("FCPA"). Non-compliance with such rules and laws may cause VEON to be subject to claims, some of which may relate to the developing markets and evolving fiscal and regulatory environments in which VEON operates. In the opinion of management, VEON'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 VEON.
Tax risks
The tax legislation in the markets in which VEON operates is unpredictable and gives rise to significant uncertainties, which could complicate our tax planning and business decisions. Tax laws in many of the emerging markets in which we 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 our 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' 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, Controlled Foreign Operation ("CFC") legislation and more strict tax residency rules).
Management believes that VEON has paid or accrued all taxes that are applicable. Where uncertainty exists, VEON has accrued tax liabilities based on management'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.
Notes to the consolidated financial statements (Continued)
(in millions of U.S. dollars unless otherwise stated)
26 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" (UMTS / WCDMA) mobile radiotelephony communications services and "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, PJSC 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 must be extended to a specific number of additional regions each year through to December 1, 2019 by when services must cover all of Russia. PJSC VimpelCom is required to comply with the following conditions among others under the terms of the license: (i) invest at least RUB 15 billion (US$260) in each calendar year, for which the Company continues to comply with to date in the construction of its federal LTE network until the network is completed, which must occur before December 1, 2019; (ii) provide certain data transmission services in all secondary and higher educational institutions in specified 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, 2016. The latter requirement was fulfilled by PJSC VimpelCom within the required time.
Notes to the consolidated financial statements (Continued)
(in millions of U.S. dollars unless otherwise stated)
26 RISKS, COMMITMENTS, CONTINGENCIES AND UNCERTAINTIES (Continued)
Operating lease commitments
Operating lease commitments are as 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 | |||||
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
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.
CONTINGENT LIABILITIES
VEON—Securities Class Action
On November 4, 2015, a class action lawsuit was filed in the United States against VEON and certain of its current and former officers by Charles Kux-Kardos, on behalf of himself and other investors in the Company alleging certain violations of the United States federal securities laws in connection with the Company's public disclosures relating to its operations in Uzbekistan. On December 4, 2015, a second complaint was filed by Westway Alliance Corp. that asserts essentially the same claims in connection with essentially the same 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 the 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 Individual Defendants intend to vigorously defend the action at all phases moving forward.
Notes to the consolidated financial statements (Continued)
(in millions of U.S. dollars unless otherwise stated)
26 RISKS, COMMITMENTS, CONTINGENCIES AND UNCERTAINTIES (Continued)
GTH—License Fees Tax Litigation
The Egyptian Tax Authority ("ETA") conducted a review of GTH's tax filings for the years 2000-2004. Following the review, in May 2010, the Internal Committee of the ETA assessed additional tax liabilities in the amount of approximately Egyptian pound ("EGP") 2 billion (US$113) against GTH for these years. The basis for the assessment was that, according to the ETA, GTH's investments in Algeria, Syria, Iraq, Tunisia and Sub-Saharan Africa during these years were actually license fees paid to foreign governments for which Egyptian withholding tax was due according to Egyptian tax laws.
GTH challenged the Internal Committee's ETA's assessment before the Appellate Committee of the ETA. On May 14, 2012, the Appellate Committee cancelled the Internal Committee's assessment of EGP 2 billion (US$113) in part and reduced the assessed amount to EGP 323 million (US$18).
GTH agreed to pay the assessed amount of EGP 323 million (US$18) in instalments on a without prejudice basis, which it has satisfied, and also appealed the Appellate Committee's decision to the North Cairo Court of First Instance. The ETA also challenged the Appellate Committee's decision and is seeking to reinstitute its original assessment of EGP 2 billion (US$113) plus late payment interest. The proceedings remain ongoing before the 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 Litigation
2005 Tax Year
In March 2011, the ETA conducted an audit of GTH's tax filings for the year 2005. Following its review, the ETA 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 of EGP 235 million (US$13). GTH challenged the ETA's claim before the Internal Committee of the ETA arguing that the OTIL-Iraqna Income should be fully exempt from Egyptian corporate income tax pursuant to the Iraq-Egypt double taxation treaty.
On October 2, 2011, the Internal Committee ruled that the OTIL-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 the Appellate Committee of the ETA was dismissed on August 1, 2015.
On November 11, 2015, GTH appealed the Appellate Committee's decision to 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 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 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.
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 EGP 282 million (US$16) in respect of dividends distributed by Iraqna to OTIL in 2007. After GTH disputed the claim on the basis of the 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 the Catalyst Capital group Inc.
VEON Ltd. (the “Company”) is a defendant in an action brought in 2016 by The Catalyst Capital Group Inc. (“Catalyst”("Catalyst") for CAD$750 millionCAD 1.3 billion (US$1,034) alleging breach of contract in the Superior Court of Justice in Ontario, Canada (the “Court”).Canada. In 2014, Catalyst and the Companycompany entered into an exclusivity agreement in connection with negotiations for the sale of the Company’scompany's WIND Mobile business. Catalyst alleges that the Companycompany and its financial advisor, 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 and all co-defendants have filed motions to dismiss the claim, and those motions are scheduled to be heard in August 2017 and therefore remain pending with the Court. In addition, the Company has company filed a Statement of DefenceDefense 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 motion to dismiss is not expected before Q2 2018.
KaR-Tel—Turkish Savings Deposit Insurance Fund LitigationTable of Contents
In 2005, the Savings Deposit Insurance Fund (the “SDIF”), a Turkish state agency responsible for collecting state claims arising from bank insolvencies, issued a payment order against KaR-Tel for Turkish Lira (“TRY”) 7.55 billion (US$2,588). The Payment Order was based on the SDIF’s claim against the Turkish Uzan Group, which the SDIF 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 June 6, 2003, which was confirmed by the Kazakhstan Supreme Court on July 23, 2003 (the “Kazakh Judgment”).
On October 20, 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 January 30, 2013, the Supreme Court upheld earlier court decisions and confirmed the recognition of the Kazakh Judgment in Turkey.
On October 20, 2009, KaR-Tel also filed with the 4th Administrative Court of Istanbul (the “4th Administrative Court”) 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
Notes to the Order to Pay. On October 25, 2010, the 4th Administrative Court ruled that the Order to Pay was illegal and annulled it. The Court’s decision was appealed by the SDIF.consolidated financial statements (Continued)
On March 22, 2012, the SDIF’s appeal(in millions of the decision of the 4th Administrative Court was reviewed by the Prosecution Office of the Council of StateU.S. dollars unless otherwise stated)
26 RISKS, COMMITMENTS, CONTINGENCIES AND UNCERTAINTIES (Continued)
Other contingencies and sent to the 13th Chamber of the Council of State (the “Chamber”) for review on the merits.uncertainties
On April 10, 2015, the Chamber upheld the decision of the 4th Administrative Court and ruled in KaR-Tel’s favor. The SDIF filed a claim for correction of the Chamber’s decision on June 8, 2015.
On April 26, 2016, the Chamber rejected the SDIF’s claim for correction and ruled in favor of KaR-Tel. No further appellate rights are available so the case is now fully concluded.
Contingent tax liabilities
Multinational groups of the size of VEON are exposed to varying degrees of uncertainty related to tax planning changes in tax law and periodic tax audits. VEON accounts for its income taxes on the basis of its own internal analyses, supported by external advice. VEON continually monitors its global tax position, and whenever uncertainties arise, VEON assesses the potential consequences and either accrues the liability or discloses a contingent liability in its financial statements, depending on the strength of the Company’s position and the resulting risk of loss.
Contingencies and uncertainties
In addition to the individual matters mentioned above, the Company is involved in other disputes, litigation and regulatory inquiries and investigations, both pending and threatened, in the ordinary course of its business. The total value of all other individual contingencies above US$5 other than disclosed above amounts to US$29.107 (2016: US$29). The Company does not expect any liability arising from these contingencies 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.
28 Events after
Notes to the reporting periodconsolidated financial statements (Continued)
GTH share buyback(in millions of U.S. dollars unless otherwise stated)
GTH bought back 524,569,062 ordinary shares from
27 EVENTS AFTER THE REPORTING PERIOD
Acquisition of spectrum in Ukraine
On January 31, 2018, the Company announced that its shareholderswholly-owned subsidiary in Ukraine, Kyivstar, secured one of three licenses to provide nationwide 4G/LTE services, subject to final regulatory approvals. Kyivstar will pay UAH 0.9 billion (US$32) for EGP 4.1 billion (US$258), for which the transaction settled on February 21, 2017. VEON did not take part2x15 MHz of contiguous frequency in the share buyback. As a result of2600 MHz band.
In addition, on March 6, 2018, the share buyback,Company announced that Kyivstar acquired the Company’s interest in GTH will increase from 51.92% to 57.69% following the cancellation of the shares purchasedspectrum in the share buyback.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 bands.
Banglalink will pay a total of US$308.6 for the spectrum excluding VAT. An upfront payment of 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 cancellation of the 524,569,062 ordinary shares was approved at an extraordinary general meeting of GTH’s shareholders on March 19, 2017investment will be funded through locally available cash and will take effect pending ratification by the Egyptian Financial Supervisory AuthorityBDT-denominated facility signed by Banglalink in December 2017, refer to Note 4 for further details.
Final 2017 Dividend of the minutes of the March 19, 2017 extraordinary general meeting. The increase of the Company’s interest in GTH will be accounted for directly in equity in the Q1 2017 interim financial statements.
New GTH Loan facility
GTH entered into an unsecured short-term loan agreement with Citi and ING Bank for a principal amount of US$200, on February 5, 2017. The loan agreement has an initial term of six months (the “Initial Term”), which is capable of being extended until December 15, 2017, and carries interest at a rate of LIBOR plus 4.00%US 17 cents per annum during the Initial Term (rising to LIBOR plus 5.00% per annum for the period from the expiry of the Initial Term to December 15, 2017 in the event the term of the loan agreement is extended), with two of the GTH’s fully owned subsidiaries (International Wireless Communications Pakistan Limited and Telecom Ventures Limited) acting as guarantors. Subject to the terms of the loan agreement, the loan amount will be used for funding the share buyback of GTH.
New dividend policy approved by supervisory board; final 2016 dividend of US 19.5 cents per ADSSupervisory Board
On February 28, 2017,22, 2018, the Company announced that the VEON Supervisory Board approved a newfinal dividend policy following the Company’s completion of the Italy transaction, improvement of its cash flows and stabilization of the macro-economic environment in markets where the Company operates. For the financial year ending December 31, 2016, VEON intends to pay a dividend in the aggregate amount of US 23.017 cents per share, comprised ofbringing total 2017 dividend to US 3.528 cents per share paid as an interimshare. The record date for the Company's shareholders entitled to receive the final dividend in December 2016payment was set for March 5, 2018 and US 19.5 cents per share as athe final dividend. It is expected that the dividend will bewas paid on or about April 12, 2017.March 13, 2018. The Company will makemade appropriate tax withholdings of up to 15% when the dividend iswas paid to the Company’s ADSCompany'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.
New multi-currency term and revolving facilities up to US$2,250Federal Antimonopoly Service in Russia
VimpelCom Holdings B.V. entered into a new multi-currency term and revolving facilities agreement (the “TL/RCF”) of up to US$2,250on February 16, 2017. The TL/RCF replaces the existing US$1,800 revolving credit facility signed in 2014. The term facility has a five-year tenor and the revolving credit facility has an initial tenor of three years, with VimpelCom Holdings B.V. having the right to request twoone-year extensions to the tenor of the revolving credit facility, All commercial policies, including roaming prices, are subject to lender consent. Several international banks have committed to the TL/RCF inantitrust monitoring and control on an aggregate amount of US$2,108. The TL/RCF includes an option to increase the amount of the facility up to the full amount US$2,250, which would consist of a term facility of US$562.5 and a revolving credit facility of US$1,687.5. VimpelCom Holdings B.V. will have the option to make each drawdown under the facilities in either US Dollars or Euros. Under this facilities agreement, 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.
Dividends declared tonon-controlling interests
ongoing basis. On February 13, 2017, VimpelCom Kyrgyzstan Holding AG, a subsidiary of the Company, declared dividends to its shareholders which were paid on February 16, 2017. The portion of dividends paid to the minority shareholder amounted to US$55.
Volatility of local currencies
As at March 23,July 14, 2017, the main developmentsFederal Antimonopoly Service in currenciesRussia ("FAS") issued an injunction requiring all telecom operators to abolish "intra-network roaming" surcharges. The surcharges are depreciationapplied by operators to subscribers making and receiving calls when travelling outside of GEL, RUB and KZT against US$ of 7.8%, 4.4% and 5.3% respectively and depreciation of UZS against US$ of 8.3%.
Redemption of Ruble bonds
their home regions. On March 2, 2017,12, 2018, the FAS opened an investigation into the intra-network roaming tariffs applied by PJSC VimpelCom. PJSC VimpelCom announced the reset of the coupon rate on its 10% Ruble bonds with a principal amount of RUB 15,052 million (US$258) maturing on March 8, 2022. The new coupon rate of 7.00% per annum will be applicable for the next six coupon periods (i.e. next three years) and will reset on March 3, 2020. Following the reset of the coupon rate, a number of bondholders exercised their put options with respect to the Ruble bondsis currently engaged in aggregate principal amounts of RUB14,459 million (US$248) which was repaid on March 17, 2017. Subsequent to the settlement, the total outstanding amount of 7% Ruble bonds was RUB 597 million (US$10).
Sberbank Drawdown
On March 16, 2017 PJSC VimpelCom drew down RUB 4,000 million under its revolving credit facility with Sberbank. The drawdown matures on May 29, 2017.
Alfa-Bank credit facility amendment and extension
On March 29, 2017, VimpelCom Amsterdam B.V., as original borrower, and VimpelCom Holdings B.V., as new borrower, entered into an amendment agreement with respect to a US$500 million facility agreement with AO “Alfa-Bank,” as the original lender and agent, dated April 2, 2014. Pursuant to the amendment agreement, the tenor of this facility has been extended until October 17, 2017. Further, VimpelCom Holdings B.V. has replaced VimpelCom Amsterdam B.V. as the borrower, and the guarantee from VimpelCom Holdings B.V. was terminated. In addition, VimpelCom Holdings B.V. granted AO “Alfa-Bank” the right to novate some of the principal amount of the facility to other lenders. On March 29, 2017, VimpelCom Holdings B.V. received confirmation that US$350 of the extended facility had been novated by AO “Alfa-Bank” to Sberbank.
29 Condensed separate financial information of VEON Ltd.
Certain of the consolidated entities by VEON Ltd are restricted from remitting funds in the form of cash dividends or loans by a variety of regulations, contractual or local statutory requirements. These restrictions are related to standard requirements to maintain debt service coverage ratios and currency control regulations imposed by local governments in some countries where the Company operates.
The Company performed a test on the restricted net assets of consolidated subsidiaries in accordance with Securities and Exchange Commission RegulationS-X Rule4- 08 (e) (3) “General Notes to Financial Statements” and Rule5-04 (c) “What schedules are to be filed” and concluded the restricted net assets exceed 25% of the consolidated net assets of the Company as at December 31, 2015. Therefore, separate condensed financial statements of VEON Ltd. are presented.
The Company follows the accounting policies as described in Note 2 to the consolidated financial statements of VEON Ltd. and its subsidiariesdiscussions with the exception ofFAS regarding compliance with its investments in subsidiaries for which the Company uses the equity method of accounting.
The separate financial statements should be read in conjunction with the Company’s consolidated financial statements and the accompanying notes thereto.
At December 31, 2016, VEON Ltd. had restricted net assets of US$1,840 (2015: US$2,731), or 29% (2015: 71%) of total net assets.
Condensed statement of financial position:injunction.
As at December 31
| 2016 | 2015 | 2014 | ||||||||||
Non-current assets | ||||||||||||
Property and equipment | 4 | 6 | 7 | |||||||||
Intangible assets | 39 | 16 | 9 | |||||||||
Investments | 6,499 | 5,270 | 5,575 | |||||||||
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Totalnon-current assets | 6,542 | 5,292 | 5,591 | |||||||||
Total current assets | 349 | 171 | 116 | |||||||||
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Total assets | 6,891 | 5,463 | 5,707 | |||||||||
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Equity | 5,960 | 3,765 | 5,006 | |||||||||
Non-current liabilities | 655 | 561 | 561 | |||||||||
Current liabilities | 276 | 1,137 | 140 | |||||||||
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Total equity and liabilities | 6,891 | 5,463 | 5,707 | |||||||||
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Condensed income statements:
for the years ended December 31
| 2016 | 2015 | 2014 | ||||||||||
Selling, general and administrative expenses | (264 | ) | (1,251 | ) | (213 | ) | ||||||
Depreciation and amortization | (7 | ) | (5 | ) | (4 | ) | ||||||
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Total operating expenses | (271 | ) | (1,256 | ) | (217 | ) | ||||||
Finance income and (costs) | (47 | ) | 8 | 5 | ||||||||
Othernon-operating income | 83 | 18 | 2 | |||||||||
Share in result of subsidiaries after tax | 2,563 | 575 | (437 | ) | ||||||||
Totalnon-operating income and expenses | 2,599 | 601 | (430 | ) | ||||||||
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Loss for the year | 2,328 | (655 | ) | (647 | ) | |||||||
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Condensed statements of comprehensive income:
for the years ended December 31
| 2016 | 2015 | 2014 | ||||||||||
Total comprehensive loss for the year, net of tax | 2,233 | (1,727 | ) | (4,633 | ) | |||||||
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Condensed statement of cash flows:
for the years ended December 31
| 2016 | 2015 | 2014 | ||||||||||
Net cash flows from operating activities | (1,182 | ) | (266 | ) | (149 | ) | ||||||
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Investing activities | ||||||||||||
Purchase of property, plant and equipment and intangible assets | (30 | ) | (11 | ) | (7 | ) | ||||||
Receipt of dividends | 362 | — | 75 | |||||||||
Repayments of share premiums | 900 | 309 | 134 | |||||||||
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Net cash flows used in investing activities | 1,232 | 298 | 202 | |||||||||
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Financing activities | ||||||||||||
Proceeds from borrowings net of fees paid | 290 | 87 | 23 | |||||||||
Repayment of borrowings | (290 | ) | (37 | ) | (10 | ) | ||||||
Dividends paid to equity owners of the parent | (61 | ) | (61 | ) | (71 | ) | ||||||
Share capital issued and paid | — | — | — | |||||||||
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Net cash flows generated from/(used in) financing activities | (61 | ) | (11 | ) | (58 | ) | ||||||
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Net increase (decrease) in cash and cash equivalents | (9 | ) | 21 | (5 | ) | |||||||
Net foreign exchange difference | (4 | ) | 1 | (1 | ) | |||||||
Cash and cash equivalents at beginning of period | 39 | 17 | 23 | |||||||||
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Cash and cash equivalents at end of period | 26 | 39 | 17 | |||||||||
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Amsterdam, March 31, 2017
15, 2018
VEON Ltd.
F-90