Our borrowings consist of notes and bank loans. Since 2001, we have raised a total of $3.0 billion
offerings in the international capital markets, as well as ruble-denominated bonds totaling RUB 96 billion. Our bank loans consist of U.S. dollar-, euro- and ruble-denominated borrowings totaling approximately RUB 116.4 billion as of December 31, 2013. We repaid approximately RUB 45,191 million of indebtedness in 2013. As of December 31, 2013, the total amount available to us under our credit facilities amounted to RUB 5.0 billion. We had total indebtedness of approximately RUB 219.1 billion as of December 31, 2013, including capital lease obligations, compared to approximately RUB 232.1 billion as of December 31, 2012. Our total interest expense for the years ended December 31, 2012 and 2013, was RUB 17,673 million and RUB 15,498 million, net of amounts capitalized, respectively. See Note 15 to our audited consolidated financial statements for a description of our indebtedness.
Capital Requirements
We need capital to finance the following:
• capital expenditures, consisting of purchases of property, plant and equipment and intangible assets;
• acquisitions;
• repayment of debt and related interest payments;
• changes in working capital; and
• general corporate activities, including dividends.
We anticipate that capital expenditures, acquisitions, repayment of long-term debt and dividends will represent the most significant uses of funds for several years to come.
Our cash outlays for capital expenditures in 2011, 2012 and 2013 were RUB 72,802 million, 87,783 million and RUB 81,575 million, respectively. We expect to continue to finance most of our capital expenditure needs through our operating cash flows, and to the extent required, to incur additional indebtedness through borrowings or additional capital raising activities. Historically, a significant portion of our capital expenditures have been related to the installation and build-out of our network and expansion into new license areas. We expect that capital expenditures will remain a large portion of our cash outflows in connection with the continued installation and build-out of our network.
We expect our total capital expenditures in 2014 to be approximately 21% of our total 2014 revenue.
These investments are required to support the growth in our subscriber base (i.e., to improve network capacity), to maintain and modernize our mobile and fixed line networks, to develop our network in the regions and to continue with the roll out of LTE networks throughout Russia as well as the development of our proprietary retail chain in Russia. We expect that the development of LTE
networks will be among our most significant capital expenditures and require considerable management resources. See ‘‘Item 4. Information on Our Company—B. Business Overview—Mobile Operations—
Services Offered—3G Technology’’ for additional information. Our actual capital expenditures may vary significantly from our estimates.
In addition to capital expenditures, RUB 33,086 million and RUB 2,198 million (net of cash acquired) in 2011 and 2012, respectively, was spent to acquire businesses. Part of the consideration was paid in connection with our acquisition of Comstar and MGTS. See ‘‘Item 3. Key Information—A. Selected Financial Data’’ and Note 3 to our audited consolidated financial statements. In 2013 we bought a
25.0945% stake in MTS Bank for RUB 5,089 million. We also used cash provided by operating activities as well as external credit facilities to finance our capital expenditures. We plan to finance future acquisitions through operating cash flows and additional borrowings. We may continue to expand our business through acquisitions. Our cash requirements relating to potential acquisitions can vary significantly based on market opportunities.
We expect to refinance our existing debt when it becomes due. Of our notes outstanding as of December 31, 2013, RUB 17,462 million are due in 2014, RUB 22,558 million are due in 2015 and RUB 1,800 million are due in 2016. Of our bank loans outstanding as of December 31, 2013,
RUB 7,564 million is due in 2014, RUB 11,669 million is due in 2015 and RUB 26,590 million is due in 2016. We generally use the proceeds from our financing activities for our corporate purposes and refinancing existing indebtedness.
Sistema, which currently controls 51.46% of our total charter capital (53.47% excluding treasury shares) and consolidates our results in its financial statements, has a significant amount of outstanding debt and requires funds for debt service. These funds may come, in part, from dividends paid by its subsidiaries, including us. Our shareholders approved cash dividends in the amount of RUB 30,046 million (including dividends on treasury shares of RUB 1,127 million) for the year 2010, of which RUB 6 million remained payable as of December 31, 2011, RUB 30,397 million (including dividends on treasury shares of RUB 1,140 million) for 2011, of which RUB 4 million remained payable as of December 31, 2012, and RUB 30,168 million (including dividends on treasury shares of RUB 1,131 million) for 2012. In 2013, MTS started to pay out dividends on a semi-annual basis using interim 6 months and full-year financial results as a foundation, and the amount of semi-annual dividends for 2013 approved by our shareholders was RUB 10,786 million (including dividends on treasury shares of RUB 405 million). Dividends payable to our shareholders as of December 31, 2013, amounted to RUB 1 million.
We generally intend to finance our dividend requirements through operating cash flows, and accordingly, our payment of dividends may make us more reliant on external sources of capital to finance our capital expenditures and acquisitions.
Capital Resources
We plan to finance our capital requirements through a mix of operating cash flows and financing activities, as described above. Our major sources of cash have been cash provided by operations and the proceeds of our U.S. dollar-denominated and ruble-denominated note issuances and loans. We expect that these sources will continue to be our principal sources of cash in the future.
The availability of financing is influenced by many factors, including our profitability, operating cash flows, debt levels, credit ratings, contractual restrictions and market conditions. We cannot assure you that we will be able to continue to obtain large amounts of financing in the future through debt or equity offerings, bank financings or otherwise.
As of December 31, 2013, our outstanding indebtedness consisted of the following notes and bank loans:
Notes
As of December 31, 2013, our notes consisted of the following:
Annual interest rate (actual rate at
Currency December 31, 2013) Amount
MTS International Notes due 2020 . . . USD 8.625% 24,547 MTS International Notes due 2023 . . . USD 5.00% 16,365 MTS OJSC Notes due 2020 . . . RUB 8.15% 15,000 MTS OJSC Notes due 2014 . . . RUB 7.60% 13,619 MTS OJSC Notes due 2017 . . . RUB 8.70% 10,000 MTS OJSC Notes due 2023 . . . RUB 8.25% 10,000 MTS OJSC Notes due 2015 . . . RUB 7.75% 7,537 MTS OJSC Notes due 2018 . . . RUB 7.50% 3,844 MTS OJSC Notes due 2016 . . . RUB 8.75% 1,788 MTS OJSC Notes due 2015 (A series) . . . RUB 10.0% 12 MTS OJSC Notes due 2016 (B series) . . . RUB 8.0% 12 MTS OJSC Notes due 2022 (V series) . . . RUB 5.0% 12
Plus: unamortized premium . . . 8
Total notes . . . 102,744 Less: current portion . . . (17,462) Total notes, long-term . . . 85,282
The Group has an unconditional obligation to repurchase certain MTS OJSC Notes at par value if claimed by the noteholders subsequent to the announcement of the sequential coupon. The dates of the announcement for each particular note issue are as follows:
MTS OJSC Notes due 2018 . . . December 2014 MTS OJSC Notes due 2020 . . . November 2015 MTS OJSC Notes due 2023 . . . March 2018 Subject to certain exceptions and qualifications, the indentures governing our U.S. dollar-denominated notes due 2020 contain covenants limiting our ability to incur debt, create liens, sell or transfer lease properties, enter into loan transactions with affiliates, merge or consolidate or convey our properties and assets to another person, as well as our ability to sell or transfer any of our GSM licenses for the Moscow, St. Petersburg, Krasnodar and Ukraine license areas. In addition, if we experience a change in control, noteholders will have the right to require us to redeem the notes at 101% of their principal amount, plus accrued interest. We are required to take all commercially reasonable steps necessary to maintain a rating of the notes from Moody’s or Standard & Poor’s. We are also prohibited from having any judgment, decree or order for payment of money in an amount
$15.0 million (RUB 491 million as of December 31, 2013) for MTS International Notes 2020 and
$75.0 million (RUB 2,455 million as of December 31, 2013) for MTS International Notes due 2023 unsatisfied for more than 60 days without being appealed, discharged or waived. If we fail to comply with these and the other covenants contained in the indentures, after certain notice and cure periods, the noteholders can accelerate the debt to be immediately due and payable.
Our ruble-denominated notes contain certain covenants limiting our ability to delist the notes from the quotation lists and delay coupon payments. We may from time to time seek to repurchase or redeem our outstanding notes through cash purchases and/or exchanges for new debt securities in open market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will depend on market conditions, our liquidity requirements, contractual restrictions and other factors.
We were in compliance with all our note covenants as of December 31, 2013.
Bank loans
As of December 31, 2013, our loans from banks and other financial institutions consisted of the following:
Interest rate (actual at December 31,
Maturity December 31, 2013) 2013
USD-denominated:
Calyon, ING Bank N.V, Nordea Bank AB, Raiffeisen
Zentralbank Osterreich AG . . . . 2013 - 2020 LIBOR +1.15% (1.50%) 26,132 Skandinavska Enskilda Banken AB . . . . 2013 - 2017 LIBOR+0.23% - 1.8% (0.57% - 2.15%) 4,238 HSBC Bank plc and ING BHF Bank AG . . . . 2013 - 2014 LIBOR+0.3% (0.65%) 394 Other . . . . 2013 - 2014 Various 258 31,022 EUR-denominated:
Bank of China . . . . 2013 - 2016 EURIBOR+1.95% (2.34%) 2,435 Credit Agricole Corporate Bank and BNP Paribas . . . 2013 - 2018 EURIBOR+1.65% (2.04%) 1,557 LBBW . . . . 2013 - 2017 EURIBOR+0.75% (1.14%) 839 4,831 RUB-denominated:
Sberbank(1). . . . 2020 8.45% 80,000 Other . . . . 2013 - 2023 Various 395 80,395 AMD-denominated:
ASHIB . . . . 2014 13.45% 108
108
Total bank loans . . . . 116,356
Less: current portion . . . . (7,564)
Total bank loans, long-term . . . . 108,792
(1) Each of our ruble-denominated Sberbank loan facilities provides that Sberbank may unilaterally change the interest rate including, without limitation, in the event of an increase in the CBR refinance rate. An increase in the interest rate is subject to a minimum 60-day prior notice from Sberbank, and a decrease in the interest rate is subject to a 30-day notice.
See also Note 15 to our audited consolidated financial statements.
Our loans are subject to certain restrictive covenants, including, but not limited to, negative pledges, certain financial ratios, limitations on dispositions of assets and limitations on transactions with associates, requirements to maintain ownership in certain subsidiaries, maintain certain contracts or licenses, maintain assets of certain value and to maintain a certain level of deposits in accounts at our creditor banks. In addition, there are restrictions on the granting of loans and guarantees and the incurrence of debt the purpose of which is to facilitate us paying or making any dividend or other payment or distribution of any kind on or in respect of any of our shares or to undertake any form of capital reduction. Most of the loans also include an event of default involving an unsatisfied judgment against us in excess of $10.0 million (RUB 327 million as of December 31, 2013) for a period of over 60 consecutive calendar days. We were in compliance with our loan covenants as of December 31, 2013.
The following table presents the aggregate scheduled maturities of debt principal outstanding as of December 31, 2013:
Notes Bank loans
Payments due in the year ending December 31,
2014 . . . 17,462 7,564 2015 . . . 22,558 11,669 2016 . . . 1,800 26,590 2017 . . . 10,000 20,264 2018 . . . 10,000 19,420 Thereafter . . . 40,924 30,849 Total . . . . 102,744 116,356 In addition, we had capital lease obligations in the amount of RUB 48 million and RUB 212 million as of December 31, 2013 and 2012, respectively. The terms of our material debt obligations are described in Note 15 to our audited consolidated financial statements.
Subsequent to December 31, 2013, we repaid approximately RUB 2,608 million (based on USD and Euro exchange rates as of the payment dates) in short-term indebtedness.
In addition, Sistema, which currently controls 51.46% of our total charter capital (53.47%
excluding treasury shares) and consolidates our results in its financial statements, is subject to various covenants in certain of its credit facilities which impose restrictions on Sistema and its restricted subsidiaries, including us, with respect to, among others, incurrence of indebtedness and liens. See
‘‘Item 3. Key Information—D. Risk Factors—Risks Relating to Our Financial Condition—Indentures relating to some of our notes contain, and some of our loan agreements and Sistema’s loan agreements contain, restrictive covenants, which limit our ability to incur debt and to engage in various activities.’’
Consolidated Cash Flow Summary
A summary of our cash flows and cash outlays for capital expenditures and acquisitions of subsidiaries follows:
Years Ended December 31,
2011 2012 2013
(in millions of RUB)
Cash flows from:
Net cash provided by operating activities—continuing operations . . . 107,019 134,856 159,924 Net cash provided by/(used in) operating activities—discontinued
operations . . . 6,543 (2,733) (547) Net cash used in investing activities—continuing operations . . . (72,658) (91,322) (96,786) Net cash used in/(provided by) investing activities—discontinued
operations . . . (4,552) (2,045) 115 Net cash used in financing activities—continuing operations(1). . . (5,630) (75,346) (55,145) Effect of exchange rate changes on cash and cash equivalents . . . 594 (985) 1,037 Net increase/(decrease) in cash and cash equivalents . . . 31,316 (37,575) 8,598 Cash outlays from continuing operations for:
Capital expenditures(2) . . . (72,802) (87,783) (81,575) Acquisition of subsidiaries, net of cash acquired . . . (6,569) (1,937) — Cash payments for the acquisition of subsidiaries from related party and
non-controlling interests . . . (26,517) (261) —
(1) There were no cash flows/inflows provided by financing activities related to discontinued operations (2) Includes acquisitions of property, plant and equipment and intangible assets.
For the year ended December 31, 2013, net cash provided by operating activities from continuing operations was RUB 159,924 million, an increase of 18.6% from the year ended December 31, 2012.
This increase was primarily attributable to an increase in total revenues due to the increased usage of value added services by our subscribers as well as one off cash inflow recognized on settlement of Bitel litigation in amount of RUB 4,093 million.
Net cash from continuing operations used in investing activities in the year ended December 31, 2013 was RUB 96,786 million, an increase of 6.0% from the year ended December 31, 2012. Net cash used on purchases of property, plant and equipment and intangible assets in the year ended
December 31, 2013, decreased by RUB 6,208 million. The cash outflow relating to short term and other investments in the form of deposits and loans increased by RUB 8,544 million. The amount of cash paid for acquisition of subsidiaries, net of cash acquired, decreased by RUB 1,937 million. At the same time investments in associates increased by RUB 5,088 million due to acquisition of 25.0945%
stake in MTS Bank.
Net cash from continuing operations used in financing activities in the year ended December 31, 2013 was RUB 55,145 million, compared to RUB 75,346 million used in the year ended December 31, 2012. The decrease was mainly attributable to our repayments of loans and debt, which were by RUB 17,764 million lower than in 2013. In addition, the amount of funds raised by us in the year ended December 31, 2013 increased by RUB 8,049 million, as compared to the year ended
December 31, 2012. The effect of change in cash flows related to debt activities was partially offset by an increase in dividends paid (by RUB 10,080 million) resulting from change in our dividend policy (starting from 2013 we pay dividends on a semi-annual basis). Additional cash inflows were generated from the sale of MGTS’s subsidiary—‘‘Business Real Estate’’—to AFK Sistema for RUB 3,215 million (RUB 3,068 million net of cash disposed), as well as reimbursement of debt issuance costs paid for insurance premium of not used credit facilities in amount of RUB 959 million.
For the year ended December 31, 2012, net cash from continuing operations provided by operating activities was RUB 134,856 million, an increase of 26.0% from the year ended December 31, 2011. This increase was primarily attributable to an increase in total revenues due to the increased usage of value added services by our subscribers.
Net cash from continuing operations used in investing activities in the year ended December 31, 2012 was RUB 91,322 million, an increase of 25.7% from the year ended December 31, 2011. Net cash used on purchases of property, plant and equipment and intangible assets in the year ended
December 31, 2012, increased by RUB 14,981 million. The cash outflow relating to short term and other investments in the form of deposits and loans increased by RUB 7,957 million. The amount of cash paid for acquisition of subsidiaries, net of cash acquired, decreased by RUB 4,632 million.
Net cash used in financing activities in the year ended December 31, 2012 was RUB 75,346 million, compared to RUB 5,630 million used in the year ended December 31, 2011. The increase was mainly attributable to our repayments of loans and debt, which were by RUB 52,915 million greater than in 2011 (of which RUB 29,200 million was due to the voluntary early repayment of Gazprombank and Moscow Bank facilities. In addition, the amount of funds raised by us in the year ended
December 31, 2012 decreased by RUB 50,220 million, as compared to the year ended December 31, 2011. The effect of change in cash flows related to debt activities was partially offset by decrease in cash payments for acquisitions of subsidiaries from related parties and non-controlling interests (by RUB 26,256 million), dividends paid (by RUB 5,157 million) and notes and debt issuance costs (by RUB 2,171 million).
Liquidity
As of December 31, 2013, we had total cash and cash equivalents of RUB 30,612 million
manat, RUB 531 million in euros, RUB 363 million in Ukrainian hryvnias, RUB 67 million in
Armenian dram). In addition, as of December 31, 2013, we had short-term investments of RUB 14,633 million, mostly in deposits in various banks as well as money market funds. We also had RUB 5,000 million available under existing credit facilities as of December 31, 2013. For a description of our outstanding external financing, see Note 15 to our audited consolidated financial statements.
As of December 31, 2013, we had a working capital surplus of RUB 14,814 million compared to a deficit of RUB 21,043 million as of December 31, 2012. The increase in working capital was mainly attributable to an increase in our total cash and cash equivalents by RUB 8,598 million, in short term investments by RUB 10,599 million, in trade receivables by RUB 1,182 million as well as in other assets by RUB 1,317 million and the decrease in accrued liabilities and other payables by RUB 12,981 million (of which RUB 8,031 related to provision for claims in Uzbekistan and RUB 6,718 related to the Bitel liability). We expect to repay all long-term debts as they become due from our operating cash flows or through re-financings. We believe that our working capital, together with our plans for external financing, will provide us with sufficient funds for our present requirements.
Russian law requires that dividends can only be paid in an amount not exceeding net profits as determined under Russian accounting standards, denominated in rubles, after certain deductions. In addition, dividends may only be paid if the value of the company’s net assets is not less than the sum of the company’s charter capital, the company’s reserve fund and the difference between the liquidation value and the par value of the issued and outstanding preferred stock of the company, if any, as
determined under Russian accounting standards. Our net income under Russian accounting standards for the years ended December 31, 2011, 2012 and 2013 that was distributable under Russian legislation amounted to RUB 54,129 million, RUB 42,949 and RUB 55,999 million, respectively.
Credit Rating Discussion
Our credit ratings impact our ability to obtain short- and long-term financing, and the cost of such financing, and credit rating downgrades may require us to prepay certain loans. In determining our credit ratings, the rating agencies consider a number of factors, including our operating cash flows, total debt outstanding, commitments, interest requirements, liquidity needs and availability of liquidity. Other factors considered may include our business strategy, the condition of our industry and our position within the industry and the strategy, activity and/or credit rating of Sistema. Although we understand that these and other factors are among those considered by the rating agencies, each agency might calculate and weigh each factor differently. See ‘‘Item 3. Key Information—D. Risk Factors—Risks
Our credit ratings impact our ability to obtain short- and long-term financing, and the cost of such financing, and credit rating downgrades may require us to prepay certain loans. In determining our credit ratings, the rating agencies consider a number of factors, including our operating cash flows, total debt outstanding, commitments, interest requirements, liquidity needs and availability of liquidity. Other factors considered may include our business strategy, the condition of our industry and our position within the industry and the strategy, activity and/or credit rating of Sistema. Although we understand that these and other factors are among those considered by the rating agencies, each agency might calculate and weigh each factor differently. See ‘‘Item 3. Key Information—D. Risk Factors—Risks