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UTK

May 30, 2005

Principles of UTK’S 2005 Investment Program formation

Krasnodar, April 25, 2005:  Southern Telecommunications Company (“UTK”) (RTS: KUBN, KUBNP; MICEX: UTEL, UTELP; ADR OTC: STJSY, KUE FRA), the principal fixed-line telecommunications provider for Russia’s Southern Federal District, reports the main principles of its 2005 Investment Program formation.

2005 Investment Program of "UTK" PJSC has been formed on the basis of the followingmain principlesof the investment planning and control procedures:

-          maximization of the investments’ economic efficiency — economic return on the investments is the basic efficiency factor and serves as a main criterion for investment decisions;

-          conformity to the Company’s strategic prioritiesinvestment projects should correspond with the Company’s strategic priorities determined by its Board of Directors and Management Board;

-          structural integrity of the investment program —integration of the investment projects within the uniform system of the Company’s business planning;

-          completion of projects— focus on putting the objects under construction into operation in the shortest possible time in order to reduce pay-back periods of the investment projects.

Active investment policy of the previous years allowed the Company to increase considerably its main competitive strengths due to usage of unique infra-structural resources and technique of a traditional telecom operator, thus providing its customers with a wide spectrum of telecommunications services.

Active investment policy of "UTK" PJSC in 2003-2004 was determined by:

·        significant unsatisfied demand for telecom services in the region,

·        necessity to extend and upgrade the Company ‘s telephone networks in order to raise competitive capacity of  the traditional telephone services,

·        tasks on building the Company’s positions in the fixed-line regional market (acquisition of the right of ownership of the «last mile»).

In order to stabilize the financial situation the Company’s 2005 budget sets the task of capex reduction by 3.8 times over 2004 to 3.25 billion rubles.The level of investment will remain enough to maintain the Company’s leading position in the fixed-line services market and build its position in the value-added services market.

Structure of 2005 Investment Program

2005 Investment Program of "UTK" PJSC is to amount to RUR 3, 248.5 mln, including:

- RUR 2, 692.2 mln or 83% of 2005 investments to be allocated for acquisition of telecom equipment;

- RUR 355.7 mln or 11% ?f 2005 capex to be spent on building and construction works;

- Other expenditures valued at RUR 200.5 mln or 6.1% ?f 2005 investments.

 

 

2005 Investment Program Analysis by investment lines

 

Amount, RUR mln

 % of total amount

Traditional telephony

1, 773.7

54.6

Value added services

515.7

15.8

Telecom channels for rendering services

24.7

0.8

Repairs and construction of buildings and facilities

13.2

0.4

Investments in IT

309.2

9.5

Data network and infrastructure

387.5

11.9

Other infrastructure

224.5

7

Total:

3, 248.5

100.0

 

Major part of the investments (60.4 %) will be spent on projects having pay-back periods from 5  to 10 years, some of which are objects of unfinished construction of the previous years being almost ready for putting into operation.The most promising regions in terms of financial efficiency of the Company’s investments are the Krasnodar kray, the Rostov region, the Volgograd region and the Stavropol kray.

 

2005 Investment Program Analysis by categories of investments return

Investments[1]

Volume of investments for 2005, RUR mln

Standard, %

Share, %

With a financial return

2 618,9

min75%

80,62

With a qualitative return

622,7

max20%

19,17

Social and special

6,8

max5%

0,21

Total

3 248,5

-

100%

 

Investment projects with a financial return account for major part (80.6 %) of the Company’s investments that will allow for favorable long-term improvements in financial performance going forward. UTK will also invest money in projects aimed at improvement of quality of rendered telecom services as well as in social project to be realized within the framework of the state programs on development of regions (0.21 % of the total volume of investments).

 

 

Financing of 2005 Investment Program

76 % of the Company’s 2005 capex will be financed from its own funds. "UTK" PJSC plans to acquire equipment under leasing for the sum of RUR 1,538.8 million (under the leasing contracts concluded in 2004; the Company  does not plan to conclude new leasing contracts).

2005 Investment Program of "UTK" PJSC provides for:

§         Increase in number of basic telephone sets ( by 54 ths sets);

§         Putting number capacity of 93.8 ths lines into service (including the replacement of 36.5 ths lines);

§         Further development of digital transportation networks  allowing to increase their carrying capacity and improve their operation (895.8 km of intra-zonal communication lines are to be put into operation);

§         Increase in the digitization rate of the Company’s local network from 59.4% to 61%;

§         Realization of the projects to increase broadband access to the Internet, increase the number of access hubs of the Company’s multi-service network, increase the number of wireless access points or Wi-Fi hotspots, develop cable TV and IP-TV (on the basis of HFC and Ethernet-to-home technologies), upgrade data transmission networks and  develop Call centers.

Local telephony

Execution of 2005 Investment Program will make it possible to raise the network digitization rate to 61 %. The Company’s installed capacity is expected to reach 4,176,850 access lines.

 

Branch/Company

Installed capacity, ths lines

Increase in number of basic telephones, ths sets

Digitization rate, %

2005  forecast

2005  forecast

2005  forecast

“Electrosvyaz of Adygeia Republic”

98 569

2 600

42.6%

“Svyazinform”  of the Astrakhan Region"

252 234

8 000

73.7%

“Volgogradelectrosvyaz”

670 174

6 500

62.1%

“KabBalktelecom”

175 014

2 300

61.9%

"Electrosvyaz of Kalmykia Republic"

71 962

1 000

42.6%

“Karachaevo-Cherkesskelectrosvyaz”

98 060

2 000

40.1%

“Kubanelectrosvyaz”

1 195 392

12 500

70.9%

“Rostovelectrosvyaz”

796 470

9 500

48.4%

“Sevosetinelectrosvyaz”

177 659

2 000

71.1%

“Electrosvyaz” of Stavropol Territory"

641 316

7 600

56.1%

Total, "UTK" PJSC   

4 176 850

54 000

61%

 

Fixed assets to be put into operation.

Description

Measure unit

2005 plan

Fixed lines to be put into operation

Lines

93840

 

Including for the replacement (of the total number capacity to be put into operation)

lines

36520

 

Including in rural telephone networks

lines

26824

 

Including for the replacement  in rural TNs

lines

11870

 

Including in urban telephone networks

lines

67016

 

Including for the replacement  in urban TNs

lines

24650

 

 

36.52 ths lines of analog ATEs are to be put out of service in 2005, including:

  • 14.0 ths lines of step-by-step telephone exchanges (or 20.7% of the total number capacity of the Company’s step-by-step ATEs);
  • 22.52 ths lines of crossbar telephone exchanges (or 1.7% of the total number capacity of the Company’s crossbar ATEs).

Long-distance telephony

At the beginning of 2005 12 Automatic long-distance telephone exchanges with total installed capacity of 125, 831 ths channels will operate in 12 cities of the Southern federal district. The Investment Program does not provide for the extension of Automatic long-distance telephone exchanges.

Development of new technologies and construction of intra-zonal networks are the priorities of the Company’s 2005 Investment Program.

Intra-zonal networks.

"UTK" PJSC continues the construction of fiber-optic lines (FOLs) (896 km long) using SDH equipment. Major launched objects of construction are:

-         FOLs in “Volgogradelectrosvyaz” 390 km long;

-         FOLs in “Rostovelectrosvyaz” 438 km long;

In 2005 the Company  plans to put  948.5 km of intra-zonal communication lines out of service, including:

  • 784.5 km of cable communication lines;
  • 40 km of aerial communication lines;
  • 124 km of radio-relay communication lines;

 

Value-added services

Reducing investment activity in toto, the Company continues to develop perspective technologies.Due to improvements in the population living standards (as in January 2005 active cash income per capita in the Southern federal district has grown 14.8% over 2004)and availability of new hi-tech services, demand for value-added services of the Company has been steadily growing. Major part of investments will be allocated to the development of multi-service and intelligent networks, cable TV networks, Call centers. Capital expenditures on local telephony and network infrastructure development will also contribute to  development of new higher-margin services, since increase in the network digitization rate and putting high-speed intra-zonal communication channels into service will allow to expand potential subscribers base as well as to increase volume and quality of provided services.

Cable TV.

Cable TV projects to be realized in UTK’s branches in 2005 will allow to provide customers with both digital TV of high quality and some other services such as: telephony, video upon request, video control, services of digital radio. In future the spectrum of services will be expanded by data network services: high-speed Internet, IP-telephony (including with direct city number), interactive TV.

At present cable TV networks are being developed in two branches: “Volgogradelectrosvyaz” and “Kubanelectrosvyaz”.  The Company  plans to extend the existing cable TV network in “Volgogradelectrosvyaz” using HF(P)C technology (volume of investments will amount to RUR 53.9 mln) as well as to start digital TV broadcasting through multi-service network in “Kubanelectrosvyaz” using Metro Ethernet technology (volume of investments will amount to RUR 350 mln).

Datanetworks.

In 2005 "UTK" PJSC plans to increase the carrying capacity and the number of access nodes of its existing multi-service networks. Data transmission networks will be upgraded and extended in all UTK’s branches. Special attention will be paid to the networks’ reliability. IP/MPLS technology has been determined as a priority technology for modernization of data transmission networks.

Due to a wide spectrum of offered services, networks built on the basis of IP/MPLS technology are expected to provide quick return on investments.

In 2005 the Company plans to continue introduction of broadband access focusing on ADSL 2+ technology that allows to transmit data to users through public telephone network at a speed of 12-24 Mbit/sec.11.2 thousand ports are to be installed in the branches in 2005.

"UTK" PJSC will continue to deploy wireless Internet access systems based on Wi-Fi technology in the most perspective regions – business centers – of “Rostovelectrosvyaz” and “Kubanelectrosvyaz”.

Call centers

The Investment Program provides for increase in the number of workplaces and broadening the spectrum of commercial services provided by Call centers, in compliance with the unfinished projects launched in 2004. Such services include first of all telemarketing: calling the target audience ordered by a customer and presenting statistical report in the set form. Using a special software program on intelligent routing of calls, it is possible both to improve the service quality of the Company’s VIP clients and organize provision of outsourcing services.

Integration of all existing Call-centers in a uniform infrastructure in compliance with “Main principles of creation of Call centers in mega-regional entities” approved by “Svyazinvest” OJSC is to be completed in the 4th quarter of 2005.

For optimal investment efficiency the Company’s branches carry out marketing researches aimed at determination of the priorities in Call-center services development which may differ in each region.

Intelligent networks.

Equipment of all Automatic long-distance telephone exchanges with SSP/IP functions in 2005 will allow to provide users with access to services of intelligent networks both at a regional and federal levels as well as to organize payment system for all telecom services through Uniform service card of "UTK" PJSC.

 

Information technologies

In2005 "Southern Telecommunications Company" PJSC plans to invest RUR 204.7 mln in the development of ERP and CRM systems, Call centers and introduction of  a unified automated billing system (ABS).

 

For any further information please contact:

UTK IR Team

phone + 7 861 253 20 30, fax + 7 861 253 19 69, e-mail: pmaleev@mail.stcompany.ru

UTK PR Team

phone + 7 861 259 56 99, fax + 7 861 259 56 99, e-mail: dali@mail.stcompany.ru

 


Southern Telecommunications Company PJSC, or UTK, is the principal provider of fixed line telecommunications for Russia’s Southern Federal District, a region covering 520 ths sq km with population of 18.7 million people. "UTK" PJSC  provides various telecom services of local and long-distance telephony, broad range of value-added services (VAS) (services of Internet, IP-telephony, ISDN, VPN, CTV and others).  Total revenue of "UTK" PJSC for the year 2004 is up 24% to RUR 16.8 bln, EBITDA is up 25%  to RUR 4.3  bln (RAS). Number of basic telephone sets operated by "UTK" PJSC makes 4 million units. During 2004 UTK increased its market share of local fixed- line services  to 83%, value-added services – to 44%.

 

UTK is a subsidiary of Svyazinvest holding which owns 38% of the Company’s authorized capital. UTK shares are traded in the Classic Market of NP “ FB RTS” (KUBN; KUBNP), the Russian Trading System (RTS) (KUBNG; KUBNPG)), in   the stock section of the Moscow Interbank Currency Exchange (MICEX) (UTEL; UTELP). One unit of American Depositary Receipt of "UTK" PJSC  represents 50 common shares of the Company. UTK ADRs are traded in the US over-the-counter market (STJSY), and quoted in the over-the counter market of Frankfort and Berlin Stock Exchanges (KUE) and NEWEX (KUE).

 

Additional information about the Company  can be accessed on the website atwww.stcompany.ru, in the Information Disclosure System  SKRIN Issuer, in KUBN_RU of the systems Bloomberg and Reuters as well as on the web-portal Rustocks.com.

 

 

 



[1]Investments with a financial return are the investments for which it is possible to well-define costs and income components used for calculation of financial efficiency. The decision on such investments is taken on the basis of comparison of their financial return .

Investments with a qualitative return are the investments for which it is difficult to calculate financial efficiency. The decision on such investments is taken on the basis of analysis of their qualitative indices.

Social investments  are the investments  which do not meet the requirements of economic efficiency but are necessitated by the Company’s social obligations. The decision on such investments is taken depending on minimization of  the costs of the Company’s social obligations.

 

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